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Edited Transcript of PLT earnings conference call or presentation 6-Aug-19 9:00pm GMT

Q1 2020 Plantronics Inc Earnings Call

SANTA CRUZ Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Plantronics Inc earnings conference call or presentation Tuesday, August 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles D. Boynton

Plantronics, Inc. - Executive VP & CFO

* Joseph B. Burton

Plantronics, Inc. - President, CEO & Director

* Michael R. Iburg

Plantronics, Inc. - VP of IR

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Conference Call Participants

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* Amit Jawaharlaz Daryanani

Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst

* David Luke Eller

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Gregory John Burns

Sidoti & Company, LLC - Senior Equity Research Analyst

* Paul Jonas Silverstein

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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(technical difficulty)

And I'll be your conference operator for today. At this time, I would like to welcome everyone to the Poly earnings conference call. (Operator Instructions) Thank you.

It is now my pleasure to introduce the program over to Mr. Mike Iburg. Sir, the floor is yours.

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Michael R. Iburg, Plantronics, Inc. - VP of IR [2]

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Thank you, Jay. Welcome to Poly's financial results conference call for the first quarter of fiscal year 2020. My name is Mike Iburg, Head of Investor Relations. Joining me today are Joe Burton, President and CEO; and Chuck Boynton, Executive Vice President and CFO.

The information presented and discussed today includes forward-looking statements, which are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The risks and uncertainties related to such statements are detailed in our most recent 10-Q, 10-K and today's press release and earnings presentation. Unless otherwise noted, all comparisons discussed today will be to the same quarter and the prior year.

Throughout today's remarks, we will make reference to specific slides from our Q1 FY '20 earnings presentation. You should also refer to the materials we provided today for an explanation of the non-GAAP financial measures discussed in the call along with the reconciliations of those measures to the nearest applicable GAAP measure. These materials are posted on our Investor Relations website at investor.poly.com.

With that, I will now turn the call over to Joe.

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [3]

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Thanks, Mike, and thank you, everyone, for joining us today. Poly delivered strong bottom-line results in Q1 driven by synergy execution and cost discipline as we completed our 2-year $105 million cost synergy target several quarters ahead of schedule. We've also identified additional cost savings that underpin our reiterated full year guidance and our long-term financial model.

In the quarter, as we disclosed in June, we experienced several revenue challenges that were either macro or transitory in nature. At the macro level, we have -- at the macro level, we were impacted by trade tensions in China, a weaker gain in market and foreign currency headwinds, all of which Chuck will address in more detail.

Regarding transitory issues. As we completed our integration, sales channel and systems issues have impacted the quarter. However, with our systems and partners now in place, we've seen positive results. In addition, while we have Microsoft Teams products in the markets today, the acceleration of the Skype to Teams transition is putting focus on the need for Teams solutions. We expect to fully participate in this opportunity when new products are launched in the back half of the year.

As we move forward, the company is focused on the following 3 areas: first, increasing profitability and cash flow to achieve our delevering targets while achieving our full year profitability guidance; second, delivering our next-generation product road map; and third, leveraging the newly implemented go-to-market model to improve sales execution, customer focus and ease of doing business.

Moving to the highlights of the quarter. UC headsets continue to grow at double-digit rates with 12% growth in the quarter, leading to 4% growth in our headset category, while desktop phones had a solid quarter, growing 7%. Poly Studio revenues more than doubled sequentially as we continue to see strong market adoption of our first huddle room product. With the huddle room category, Poly was recognized by Synergy Research for quickly establishing itself as a top vendor in the USB conferencing market. Expanding further on our opportunity in the huddle room, Poly Studio was recently certified for Zoom Rooms. Zoom continues to see tremendous success in the huddle room space. We are incredibly pleased to expand our relationship with Zoom and help them deliver the best experience for their customers by leveraging Poly solutions. For the medium and large conference rooms, we also announced the Poly G7500 content sharing and videoconferencing solution, the first product built on our next-generation video architecture.

Looking forward, we have an exciting lineup of new products leveraging this new architecture in the pipeline.

With that, I'll turn the call over to Chuck to discuss the financial results in more detail.

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [4]

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Thanks, Joe. As I walk through the financials, I'll be referencing the specific page numbers in the earnings presentation deck, where you can find the details along with additional information.

As Joe outlined, we experienced lower-than-expected non-GAAP revenue this quarter of $460 million, up 108% on an as-reported basis but down 8% on a combined comparative basis.

Slide 18 shows the breakdown by product and geography. Consumer was lower than expected, driven by the upcoming console gaming refresh cycle. The strategic review of the Consumer business is progressing well. While we can't guarantee a sale will happen, we believe that if we consummate a transaction, it will close before the end of the calendar year.

As Joe mentioned, we also experienced a top line FX impact, which was directly offset by a benefit to operating expenses and neutral to the bottom line. Americas' results were up sequentially and roughly in line year-over-year. APAC results were directly impacted by trade tensions in China. Given that China this quarter was approximately $15 million of product sales, we see minimal incremental downside to the market. I will cover supply-side issues shortly.

Finally, while all geographies were affected by the channel and sales consolidation issues that Joe mentioned earlier, the largest impact was in Europe.

Turning to Slide 19. Gross margins were up 230 basis points to 55.8% as lower Consumer and China revenues provided a positive mix shift, and COGS synergies benefited our margin profile. Operating expenses were down $25 million primarily due to cost synergies of $16 million, favorable FX rates of $5 million and a $4 million benefit from nonrecurring items. We expect run rate operating expenses to be slightly above the results we saw this quarter, but as a percent of sales, should continue to decline.

Jumping ahead for a moment to Slide 25. As Joe mentioned, we have executed plans that will yield the entire 2-year cost synergy target of $105 million, significantly ahead of schedule. In today's results, we realized $20 million of actual savings in the P&L and expect actual savings to increase to $27 million per quarter by fiscal Q4. Now that we've completed the integration, the strategic advantage of bringing these 2 companies together is more apparent than ever. Having executed on the original 2-year synergy plan, we have now identified an additional $40 million of incremental cost saving opportunities, allowing us to reiterate fiscal year '20 earnings guidance and our long-term financial model. As a result of the improvements in gross margin and operating expenses, operating income climbed 19% to $86 million, and operating margins improved 420 basis points from 18.6% from 14.4%.

Moving to Slide 20. Adjusted EBITDA was $98 million in the quarter, up 14%, which brings our trailing 12 months adjusted EBITDA at $413 million, a record for the company. Earnings per share was $1.32, above the midpoint of the guidance range due to improved profitability and a favorable non-GAAP tax rate.

Moving to Slide 21. We ended the quarter with $206 million in cash and investments, roughly right on our corporate target of $300 million of liquidity, which includes our $100 million undrawn revolver. Cash flow from operations was $8 million in the quarter, and as expected, continued to be significantly impacted by integration and restructuring outflows, which were $41 million. In addition, working capital continues to impact cash flow. Inventory levels have increased due to lower-than-forecasted revenues and a temporary increase in inventory as we continue to optimize our supply chain.

As you can see on Slide 10, our upstream organization has a flexible manufacturing platform that provides us with a unique ability to shift production capacity quickly. We believe we can leverage our flexible manufacturing strategy to mitigate the recently announced tariffs on August 1 and do not expect a material financial impact. We see cash generation improving as integration and restructuring payments taper off and working capital stabilizes. In addition, the pending sale of our Consumer business may generate additional cash proceeds. We, therefore, continue to review our capital allocation strategy. And while we do not see the dividend as a critical element of our strategy, we believe it is appropriate to maintain it at this time. As outlined previously, we plan to direct excess cash to delever and are confident we can achieve 3 turns of leverage by the end of this fiscal year. However, with the current stock price dislocation, we may opportunistically repurchase shares using the 1.4 million shares currently authorized.

Moving to guidance on Slide 24 for Q2. We expect GAAP revenues of $456 million to $496 million. We expect non-GAAP revenues of $465 million to $505 million. Adjusted EBITDA is expected to be in the range of $94 million to $110 million. And non-GAAP EPS is expected to be in the range of $1.20 to $1.50. Looking at fiscal year 2020, we are lowering revenue guidance while reiterating our earnings and cash outlook. We expect GAAP revenues of $1.87 billion to $1.97 billion; non-GAAP revenue of $1.9 billion to $2 billion; we reiterate adjusted EBITDA of $410 million to $460 million; and non-GAAP EPS of $5.35 to $6.35.

With that, I'll turn the call back over to Joe. Joe?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [5]

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Before we open the call to Q&A, I'd like to speak to the 4 key industry trends we expect to drive long-term revenue growth for the company. First, the transition from proprietary PBX systems to cloud-based platforms is driving demand for next-generation endpoints. This transition is in its early stages and will generate increased demand for many years. As the cloud wins, Poly wins, too. Second, the open office increases opportunities as companies tear down walls and repurpose private offices in favor of communal desk and collaborative spaces. In the process, employees are experiencing greater and more numerous distractions. This creates fast-growing markets like the huddle room, but also drives long-term growth in existing markets like UC headsets where we offer the broadest portfolio of enterprise headsets equipped with noise cancellation. Third, companies have a more distributed and flexible workforce than ever before, creating a need for audio and video solutions that enable active collaboration between remote workers, which drives incremental endpoint demand.

Finally, analytics and remote management continue to be differentiators for us. Customers are demanding intelligent endpoints that can do more than simply connect their meetings. Poly products and services allow customers to leverage data to improve communications and generate key insights into their business processes.

Our end markets remain healthy. Next-generation product families such as Voyager and Blackwire headsets, VVX desk phones and Poly Studio continue to grow rapidly, and our key partners continue to recommend our products to their growing number of customers. Our cost and cash discipline, coupled with our innovative pipeline, positions us to create long-term value for our shareholders.

Thank you all for taking the time to attend today's earnings call. With that, I'll ask the operator to open the call for Q&A. Jay?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Amit Daryanani from Evercore ISI.

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Amit Jawaharlaz Daryanani, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [2]

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I have a couple. First one, I was hoping if you guys could just maybe elaborate a little bit on the transitory issues that you guys called out in terms of the revenue headwind. What's giving you the confidence that these issues are behind you and they've been fully resolved? What's the time line to get them resolved? Maybe can you just talk about the transitory issues? And then how much of the revenue curtailment for the full year of 500, 600 basis points as you guys are doing is related to that versus macro?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [3]

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Yes. Amit, this is Joe. I'll get started on that, and Chuck can chime in here and there as well. On the product side, really, what we were talking about was primarily the Microsoft Skype for Business to Teams transition. So at Poly, of course, we have products that work natively with Microsoft Teams and with Microsoft Skype for Business. We've been a great partner for theirs for years. Today, our products tend to be native with Skype for Business. Skype for Business is Microsoft's current generation platform. They've had that for several years. They sell Skype for Business. We sell the headsets, the phones and the videoconferencing endpoints that work with that.

Microsoft announced a year or so they were transitioning from Skype for Business to a new collaboration platform called Microsoft Teams. Microsoft Teams has a different user experience. And while our older products are compatible with Microsoft Teams, they don't fully support the native interface that Microsoft is going to have going forward. So frankly, we're seeing a little bit of a drop-off in revenues related to that transition until we come out with our native Teams products later in the year.

So to be real clear, headsets are already fully compatible and natively support both Skype for Business and Teams. On the phone and video sides, where we're seeing this little air of pocket, we have native products coming out over the next couple of quarters, and we expect this tailwind to actually turn around and become a headwind.

Overall, across the entire year, we expect this to be maybe as much as $70 million total across the products and FX that are related to this. Makes sense?

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Amit Jawaharlaz Daryanani, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [4]

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Yes. That's really helpful. And I guess just a couple more for me. In terms of the incremental $40 million in savings, perhaps I missed this, but what's the split between OpEx versus COGS for the new $40 million of savings? And when do you expect to fully realize that?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [5]

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Amit, it's Chuck. Thanks for the question. We haven't outlined the exact split between COGS and OpEx. It's probably a little more balanced to COGS versus OpEx, and that we'll get those savings over the next, call it, 18 months. And so that helps us bring our OpEx down. Just in terms of the overall run rate, as I mentioned in the prepared events, OpEx will be a little bit higher than it was this quarter due to some onetimers.

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Operator [6]

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Your next question comes from the line of Greg Burns from Sidoti.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [7]

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Can you just give us a little bit more color on the dynamic in Europe around your sales and channel reorganization kind of how that impacted the quarter from a revenue perspective? And your outlook for maybe the headwinds in that transition over the next few quarters?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [8]

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Yes. I mean -- thanks, Greg. Very shortly, as we put the 2 companies together, we, of course, had a set of distributors that distributed Plantronics. In some cases, a different set of distributors that distributed Polycom. And what we really needed to do was rationalize, come to a single distribution and set of channel partners that could sell headsets, phones and video in -- on a single contract to make it very, very easy to do business with customers. As we were rationalizing the distributors, rewriting contracts and putting the sales force together, frankly, we had a lot and a lot of systems issues that we went through. And we did have a little bit of a pocket where it was slow to take orders, slow to process orders and get that going.

This particular quarter, we actually thought that, that impacted us somewhere in the $10 million or $11 million range. We think that's broadly behind us, may impact us a couple of million bucks over the next quarter or so, and then we'll be really position to rock and roll going forward. So mostly already behind us.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [9]

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Okay. And the dynamic in China, how do you see that over the remainder of the year? I mean is this just a function of domestic companies not buying American? What's driving the decline in China specifically?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [10]

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Well, I think there is certainly the trade tensions in the political environment has been tough, I think, for a lot of American companies. We have great products in China, built in China for China, and we're bullish in this trend in the long-term value prop in China for our company. But this past quarter, we were off approximately $10 million in China. We did sort of hit maybe a low point as our product sales in China were about $15 million. So we think that there's -- things should get better from here, but it's hard to predict what will happen given the trade tensions.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [11]

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Okay. And then I just wanted to go back to the Teams transition. Was this something that accelerated or caught you off guard? Or it just moved faster than your product development road map? Was progressing as far as I kind of understand, why this has become an issue now?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [12]

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You bet. Combination of 2 of the things that you said, Greg. So first of all, the Skype to Teams transition somewhat to Microsoft's credit has actually gone faster and larger than many of us in the market predicted. So if you would have asked me when I would have expected that to really hit the mainstream, I would have said early next calendar year. And that's actually pulled in by about 6 months. People are really making that -- making the switch. Microsoft also announced very recently that Skype for Business is moving towards end of sale. That happened a little quicker than, I think, a lot of the people in the market had thought. So the transitions happening a quarter or 2 quicker than we thought.

Also, the decision was made by Polycom pre-integration that they were really going to take their time and do their Teams products right. They took a strategy and maybe not being first to market, but being best to market when they got there. We stayed on that strategy. We have fantastic products coming out over the next quarter or 2, and we think we're going to have some really nice growth in the Teams area when that happens. But we're out of sequence by a quarter or so.

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Operator [13]

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Your next question comes from the line of Paul Silverstein from Cowen and Company.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [14]

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2 or 3 questions, if I may. First off, and I apologize, (inaudible) just having the numbers yet. But your changed revenue guidance and reiterated EPS guidance for the year, is that all from -- the reiteration EPS with the lower revenue, is that due all to OpEx? Are you also expecting some incremental margin upside in order to maintain that EPS with a lower revenue?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [15]

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So Paul, it's Chuck. Thanks for the question. So basically, the -- for the year, we've taken from midpoint-to-midpoint revenue down $140 million. Of that, Consumer is [$40 million] and China is in the neighborhood of [$25 million to $30 million]. Because China and Consumer have lower margin, there's a mixed benefit that's helping us to effectively reiterate earnings and cash guidance.

In addition to that, we've pulled in the cost savings that we announced earlier, the $105 million. We pulled those in by a couple of quarters, and that's been a benefit to us. And then in addition, we've identified additional cost savings as we finished the first round and have found areas to have additional savings. So when you put all of those together with a mix shift, additional cost reduction, we're able to maintain bottom line.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [16]

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All right. But the summary of that is both expense reduction and some gross margin upside. I appreciate the details, but it's coming from both that's why [you changed your guidance in] EPS and that's up. All right. Secondly, you're entitled to make whatever assumptions you want in China. I'm not sure why you're not allowing for the possibility of China going to 0 given the nature of this trade war. But the simple question is in your guidance, are you not assuming China goes to 0? You are, in fact, assuming that China stabilizes at this level?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [17]

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Yes. In our guidance, we've assumed that China is at where it is today, roughly $15 million a quarter of product sales and growing a little bit. We have some new products being released that are built in China, made for China. And so we think those will have a decent market uptake. And we have a pretty good services business that is in backlog and deferred and that we have good revenue visibility on. So I think you're right, there is potential downside in China. But given the margin profile, we don't think it would have a material impact or a real adverse impact on our bottom line.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [18]

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Chuck, let me push you on that. So China did 0 in a worst-case scenario. You don't think it would have a meaningful adverse impact on EPS?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [19]

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It would have a -- it depends on the definition of meaningful. I think it would have an adverse impact. I'd -- we don't expect it to go to 0, so premature hypothetical. But yes, it would have an impact. But we think that at this level, we can manage it.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [20]

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All right. And third, if I could ask you all, by product line, if I think of your business in terms of video, headsets, desktop phones, what are you expecting for growth rates in those businesses as you look out through the year?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [21]

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So effectively, we've looked at industry growth, and the industry growth rates for headsets are going to be in the range of low double digits. And again, we break out legacy in UC. UC, we had really strong growth in Q1. We expect that strong growth to continue. As it relates to our video business, we see that being a couple of quarter of transition, as Joe mentioned, and having pretty strong growth in Q4 as the new products are out. On the voice side, we've seen pretty strong desk phone growth, and industry is growing at kind of 4% to 8%, 7%. We're growing sort of at industry rates on desktop, and audio conferencing will sort of fall in between video and voice. And so that gives you a broad -- I don't know, Joe, if you want to add any more color to the overall profile.

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [22]

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I think that's it. What we're actually seeing out there in the market is probably still a very, very healthy business. Voice, once again, being mid- to high single digits. Enterprise headsets blended between UC and legacy being probably mid- to high single digits. Video is really the interesting market and that we really see a tail of 2 videos, if you will. So the high-end kind of installed video that you might put in a boardroom is kind of a minus 2% to plus 2% grower, depending on the quarter, coupled with the huddle room that is absolutely explosive. So at the low end of the market, we're seeing market growth rates up in the 25% to 40%, depending on the quarter.

We're nascent in that business, but as we said in the opening remarks, we literally went from not in that market 2 quarters ago to releasing an award-winning product that's grabbed 7% share in less than 2 quarters. We expect that to continue ramping with more products to come. So bringing just that together, you get to a growth -- or video growth rate of kind of the low to mid-single digits.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [23]

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Got it. One more question, if I may. And I apologize if you already gave us the number. But given your commentary last quarter, your commentary this quarter in the video piece, you've now got your second product, I think, you set out in the market. I think you said you were in the single-digit million last quarter on the first platform. Can you tell us where you are from a revenue standpoint with respect to the new huddle room platforms?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [24]

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Yes. You want to cover the huddle room real quick and I'll talk about a little more about the...

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [25]

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Yes. We haven't provided exact details, but it was at low single-digit millions in our first quarter. It doubled last quarter, and we expect that growth to continue where it's meaningful in Q4. And so we're not quite at the double-digit millions in revenue in our -- in this past first quarter.

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [26]

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I think what's exciting about video in general, as we talk about this, I'm extremely bullish on this market. If we go back 2 quarters ago, we were not in the huddle room, and we had a well-respected but perhaps aging product line. At this point, we've released our first entry-level product into the huddle room, grabbed 7% market share in less than 2 quarters and continued to ramp rapidly.

On the other end of the video portfolio, we released our new flagship product at the very high end. The G7500 video and collaboration platform is the industry-leading product for large installed video like we go into a boardroom, and we expect that to be recognized pretty quickly. Now it's all about filling in between the book ends. So we started out with Studio. We got it in the market. We certified it with Microsoft. Over the last couple of weeks, we've certified it with Zoom. We've got it certified in all the other countries, so that should really ramp.

Now you'll see other products build on the same architecture that we build our new high-end platform on. So we really believe we'll have a compelling end-to-end video story, fully refreshed and rocking and rolling over the next quarter or so.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [27]

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I'm going to apologize to you and others on the call, but I'm hoping you can indulge me with one more question, which is given the breadth of the range on your guidance, it's a pretty broad range. And given the past quarter you just had, which is a reminder, not really a reminder but a forecast in my definition, is difficult in the best of times and that's more difficult in challenging times. Would that be wind up, that when you look out over this quarter and over the year? What is the greatest downside risk that will cause your model to come in either at the low end or below the guidance you provided us?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [28]

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So this is Chuck. I'll go first, and Joe can add some additional color. Certainly, there are some new products that are coming out, but they are primarily in Q4. So downside risk could be that products come out a little bit later than planned. But given we have modest expectations in Q4, I think primarily that, that is probably a lower downside risk. There's a -- the China question earlier, I think, is a fair one. But I think given where the model is and where we are from a guidance standpoint, we feel very comfortable with our expectations.

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [29]

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So I think that's right. Obviously, we got hit with a couple of things this quarter from a product transition that happened a little quicker than we expected with the Skype to Teams. There's not another thing out there that, that much of our revenue depends on -- that is likely to transition in the next couple of quarters. It would truly be the China thing, and I think we've appropriately modeled caution into that. I feel pretty good about all this at this point.

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Operator [30]

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We have another question, comes from the line of David Eller.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [31]

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Chuck, could you go back a second on the OpEx comments you made? You said it was lower this quarter, but you expect the run rate to be higher. I think you said due to some onetimers. Were you saying there were some benefits in this quarter that won't repeat? Or what exactly is going to cost that to be higher on a go-forward basis?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [32]

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Yes. That's right. We had a really strong OpEx quarter. Our teams really performed well across-the-board here at Poly. We did have a $4 million onetime benefit that helped our comparison. We also have had the traditional things like merit increases and some of those. So I think ultimately, I don't see it going up radically. But if I had to give you a range, I would say about $175 million a quarter would be a kind of leveling. And then over time, we think that there'll be some costs we can take out and some costs that we'll add. But I think you'll see in the next few quarters it leveling in that kind of that mid-$175 million range.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [33]

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Got it. And then you kind of talked about transitory issues from trade tensions. But as you talk to your customers, what are you hearing from them in terms of how that's going to affect their spending or deployment on kind of voice and audio equipment? I mean, I think as I think about the IT purchaser and their priorities maybe this equipment might fall, might be more somewhat discretionary, so maybe could be pushed or delayed further to the year. So if you're hearing any of that from your buyers?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [34]

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So this is Joe jumping in. Nothing meaningful on that. There's always puts and takes, right? There's a few people that are -- that maybe looking toward slight delays. The big however on this, though, is back to that major, major transition that really Poly is based on, the move from the proprietary PBX to the cloud. In many, many cases, there's proprietary PBXs are end of support, end of life, can't even get parts for them anymore. So the move to the cloud is very real, very broad and very deep.

So we're seeing it in mid-market. We're seeing it with big customers. No real back-off on that because they don't have much of a choice. Maybe many years into the future, when we're at steady state in the cloud and they're looking at going from one platform to another, maybe we'll see that. But at that moment, no meaningful softness, thankfully.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [35]

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Okay. And then could you just talk broadly if you're seeing any impact from Brexit to date? Or like what kind of preparations you're making there?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [36]

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We have seen an impact certainly. Obviously, FX rates, but that aside, we have definitely seen some issues in U.K. as it relates to ordering and volumes. We are hopeful that, that sort of at a moderate level, but U.K. is not a huge portion of our overall annual revenue. So it's probably not a material impact to the financials.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [37]

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Okay. And then kind of last question for me. Chuck, I didn't quite catch all of your comment on the dividend, but it did sound like you do have some thoughts there. Could you kind of give us a little bit more color on maybe your longer-term strategy there?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [38]

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Certainly. I think the -- on one hand, not many investors own our stock for the dividend payment. And given the current share price, I guess I'd prefer to be buying back stock versus paying dividends. But I think given kind of where the share price is and where we are as a company, we think it's appropriate to maintain the dividend for the foreseeable future. And we thought long and hard about that. That's been a point of buying back stock we think would make more sense. But I think signaling a change right now is probably not appropriate.

So as we look at our capital allocation strategy, we think that we'll have a lot of free cash flow coming in the next few quarters and into the future. And so our current priority is paying down debt. We're going to pay the dividend. It's not a very big number anyways. But then we may opportunistically buy back additional stock as well on top of paying down the debt. Again, that's just based on the current dislocation in our share price.

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Operator [39]

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Your next question comes from the line of [Fahad Desham].

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Unidentified Analyst, [40]

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You noted that you had some favorable benefit to your bottom line from FX. I was wondering if you could quantify it. And also, how much of the headwind to your revenue was from FX? And if you could quantify the other transitory headwinds, what -- how much of the contributed to the revenue headwind in the quarter?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [41]

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Certainly. So I guess first on the FX side. It really was neutral to the bottom line. It was about a $5 million reduction in revenue and a $5 million reduction in OpEx approximately. So it really didn't hurt or help the bottom line. The other transitory issues that we outlined were really Skype to Teams, which is sort of a product transition and the integration of the 2 systems where we had some sales and channel consolidation issues. Those were in the $20-ish million range together for the quarter.

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Unidentified Analyst, [42]

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Got it. Appreciate that. Regarding the transition to Teams, if I'm not mistaken, there has been a fundamental retooling of Microsoft's platform that have used new protocols, which previously may not have been something that you were open to. How much of a realistic time do you need in order to update your platform and your products to be fully compatible with the new Teams experience? And do you think it is realistic to expect that by fourth quarter -- by 4Q, calendar 4Q '19 that most of your products will incorporate those -- that full experience?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [43]

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It's a great question. Let me break that down a little further without going all the way down into total engineering space. So you're absolutely right that the Teams platform, which has a really great user experience, is fundamentally different than the Skype for Business platform that it replaces. They speak different languages between the Microsoft product and the endpoint that's provided by Poly. So if we used to speak Spanish to talk back and forth to Skype for Business, we got to speak Portuguese to talk to Teams.

Now to do that retooling in a quarter and a half would not happen. The real key here is to understand that we got started working very closely with Microsoft on these new products well over a year ago. So this has been going on for 1.5 years or so, building these products, co-creating, making sure that together, Microsoft plus Poly, would be able to deliver something really great. Those products have always been scheduled to deliver late Q3, by Q4 of this fiscal year.

So we're right on target with our plan from the beginning. The only reason we're seeing this little air pocket is because the transition on the customer side is happened a little quicker than we originally predicted. But nothing has slipped. No crash course to get this done early. Things are right on plan.

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Unidentified Analyst, [44]

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Appreciate that color. And if I may just add one more question regarding this new Teams product. What is the net upside opportunity for you to sell into the Teams given the new experience and the new platform? Is there any potential upside if I were to compare Skype for Business to Teams? On an average, I guess, spend value perspective, how much do you expect your customers up spend with you on Teams? Is there a potential up spend opportunity?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [45]

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There's a couple of things there, and I'm speaking strategically. I don't know that we have numbers ready to throw around on the potential upside here. But a couple of things that we find very exciting. First of all, an individual endpoint, so if we sold a phone for Skype for Business, if we sell a phone for Microsoft Teams, roughly the same price. So prices aren't going up. Prices aren't going down.

However, a few things: number one, the fact that customers are craving new native Teams devices, number one, obviously, implies a refresh cycle that could be quite significant; number two, looking at public Microsoft data, we see them announcing all the time, Teams is really taking off. The adoption of this product is pretty quick, pretty steep. So we see the opportunity to then voice and video enable Teams to be quite significant in the future. So a little bit of a headwind now turning into a very nice tailwind for us as we get into Q4 and then the next fiscal year.

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Operator [46]

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(Operator Instructions)

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [47]

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Thank you, operator. If there are no further questions, we'll go ahead and wrap up the call. I'd like to thank everyone for joining us this afternoon to review our fiscal Q1 financial results, and we look forward to our next earnings call after our Q2 concludes. Thank you very much. Bye.

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Operator [48]

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This concludes today's conference call. Thank you for your participation. You may now disconnect.