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Edited Transcript of PLT earnings conference call or presentation 4-Feb-20 10:00pm GMT

Q3 2020 Plantronics Inc Earnings Call

SANTA CRUZ Feb 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Plantronics Inc earnings conference call or presentation Tuesday, February 4, 2020 at 10:00:00pm 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

* Elizabeth Mary Pate

Cowen and Company, LLC, Research Division - Research Associate

* Erik Taylor Lapinski

Morgan Stanley, Research Division - Research Associate

* Gregory John Burns

Sidoti & Company, LLC - Senior Equity Research Analyst

* Michael James Latimore

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Paul Coster

JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies

* William Wendell Baker

GARP Research & Securities Co. - Founder & President

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Poly quarterly conference call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Mike Iburg. Thank you. Please go ahead, sir.

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

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Thank you, operator. Welcome to Poly's Financial Results Conference Call for the Third Quarter of Fiscal Year 2020. My name is Mike Iburg, Head of Investor Relations. And 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.

Throughout today's remarks, we will refer to specific slide pages from our Q3 FY '20 earnings presentation. This presentation is made available on the front page of our Investor Relations website at investor.poly.com. Unless otherwise noted, all comparisons discussed today will be to the same quarter in the prior year.

You should also refer to the materials we provide today for an explanation of the non-GAAP financial measures discussed on this call along with the reconciliation of those measures to the nearest applicable GAAP measures. These non-GAAP measures are indicators that management uses to provide additional meaningful comparisons between current results and previously reported results and as a basis for planning and forecasting future periods. 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. I'd like to begin on Slide 6. While the results and outlook posted today did not meet our expectations, we are implementing a series of plans across the business to address the underlying issues and return to growth.

A few quarters ago, we discussed sales integration and channel consolidation issues impacting revenue. In addition, we talked about the impacts of long existing product lines within our portfolio, the Skype to Teams transition, trade issues in China and volatility in the consumer gaming market. While the impact has been more severe than anticipated, we are aggressively working to address these issues. This quarter, we hired a new Head of Sales, launched our new product portfolio and today are announcing the divestiture of our Consumer Gaming business.

Looking at our Q3 financial results. Enterprise revenues fell short of our guidance expectations by approximately $5 million, with particular weakness in headsets, while Consumer was below expectations by approximately $13 million. Additionally, as we outlined last quarter, we reduced channel inventory by approximately $60 million. The decision to reduce channel inventory was driven by the previously mentioned product transitions, sales integration and channel consolidation. We've generally achieved the inventory reduction goals outlined last quarter.

To improve our sales execution, I'm pleased to announce that Carl Wiese has joined Poly as our new Head of Global Sales. Carl comes to Poly with an impressive track record in enterprise sales at a number of notable companies, including BlackBerry and Cisco. He will be a key architect of our efforts to drive profitable growth, and we're excited to have him onboard.

Next, we have signed a definitive agreement to sell our Consumer Gaming portfolio and expect this transaction to close in March. The balance of the Consumer portfolio will be reviewed and optimized over the next few quarters.

On the product side, we are now shipping nearly all of our recently announced next-generation portfolio, including the Studio X Series of video bars and the CCX line of Microsoft Teams phones. We anticipate revenue contribution from new products to be modest in Q4 and then ramp through FY '21.

Moving to Slide 8. This new portfolio is designed to make the transition to unified communications effortless with an intuitive and simple user experience. These products are designed to capture the opportunities created by the 3 major market transitions driving the unified communications industry today, specifically: the move from on-prem communications to the cloud; the move to open offices; and the rise of mobile workers. We are encouraged by the positive feedback and traction our new solutions are getting from both end users and our key alliance partners.

We continue to strengthen our offerings with these partners as our CCX 400 and 500 Microsoft Teams phones have completed certification and are now shipping for revenue. Additionally, we're now shipping a number of new headsets within our Savi, Voyager and EncorePro product families. Many of these have already been Microsoft Teams certified and most, along with our Studio, Trio and Calisto solutions, are now certified or supported by Zoom. Our Zoom certified voice, video and headset portfolio now represents the broadest set of endpoints that officially supports Zoom Meetings and Zoom Phone.

We've included a reference table on Slide 15 of our recently announced new products and their status as it relates to availability and certifications.

While the results have not been what we expected, with our new products shipping and our new Head of Sales onboard, we believe the pieces are now in place to drive the company forward and capitalize on the growth in unified communications as we progress through FY '21.

With that, I'll now turn the call over to Chuck to review the financials. Chuck?

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

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Thanks, Joe. A financial summary is provided on Slide 17. Non-GAAP revenue was $392 million and includes the reduction in channel inventory of approximately $60 million. This reduction affects all product categories, making comparisons to prior periods difficult.

As Joe noted, we have entered into a definitive agreement to sell our gaming product lines to NACON, a French strategic buyer. The sale is an all-cash transaction for certain assets and liabilities of the business. The overall cash proceeds are immaterial to our financials, and the specific terms are confidential. We expect this deal to close by the end of March. In addition, we are currently working to optimize the remaining parts of our Consumer business. As a result of these actions, we have taken GAAP charges for restructuring and consumer optimization, which we expect will improve our working capital and earnings over time.

Moving to Slide 19. As expected, gross margins were impacted by lower manufacturing volumes across our fixed cost base as we executed on our channel inventory reduction program. We expect to see a similar impact to gross margins in Q4 as seasonality impacts volumes and new product availability remains limited. We also saw incremental tariffs primarily related to Consumer products. The December quarter included the full impact of List 4A tariffs at 15%. In the coming quarters as we execute further product cost reductions and continue to optimize our consumer portfolio, we expect the tariff impact to be largely mitigated.

Operating expenses declined $18 million, primarily due to cost savings from previous restructuring activities and lower variable compensation. Operating margins declined 9.6 percentage points in the quarter to 8% or $31 million. This is due primarily to lower sales volume.

Adjusted EBITDA was $43 million, bringing our trailing 12 months to $336 million. Changes in FX rates negatively impacted revenue by approximately $4 million and partially offset by a benefit to operating expenses of $2 million.

Turning to Slide 20. GAAP operating expenses include $22 million of restructuring charges, of which approximately half are noncash or facility-related charges and approximately $5 million of severance charges related to the sale of our gaming portfolio and other consumer optimization activities. Non-GAAP diluted earnings per share was above the midpoint of our guidance range at $0.30, primarily due to a tax benefit, which increased EPS by $0.10.

Moving to Slide 22. Free cash flow was impacted in the quarter by the reduction in channel inventory. Now that we have materially reduced channel inventory, we will shift focus to reducing on-hand inventory to unlock working capital. Through working capital management, we expect to repay $50 million to $75 million in debt by the end of March. Additionally, we have freed up foreign trapped cash and can now operate the company at a lower level of cash, including using the excess cash to pay down debt.

Regarding our debt covenants. With the cash on hand and continued cost reductions, we remain confident in our plan going forward.

Turning to guidance on Page 24. For fiscal Q4, with the upcoming sale of gaming and optimization of consumer, we are providing additional information on revenue guidance. In total, we expect GAAP net revenues of $354 million to $394 million and non-GAAP revenues of $360 million to $400 million.

Slide 25 provides a breakdown of this range between Enterprise product lines and Consumer products being sold or optimized. If you adjust for the impact of the Q3 channel inventory reduction, Enterprise revenues are forecasted to decline sequentially. This is partially driven by seasonality from Q2 to Q4 -- Q3 to Q4, as Enterprise products sold through the channel historically declined approximately 10%. Finally, revenue was also impacted by our actions around the Consumer business.

Continuing with Q4 guidance. Total adjusted EBITDA is expected to be in the range of $20 million to $45 million, and non-GAAP EPS is expected to be in the range of a loss of $0.36 to a profit of $0.19.

Touching briefly on the coronavirus, which has been on news lately. Although much of our manufacturing has moved to Mexico, we still source many components and some products from China. Given this, we have contemplated the impact of component delays within our guidance ranges. We believe the guidance we are providing today can accommodate a modest delay in the supply chain of a few weeks. A more severe impact has not been contemplated at this point.

Finally, we're actively managing the business through the short-term transitional phase and expect to return to growth with our next-gen portfolio in fiscal '21.

With that, I will now turn the call back to the operator to begin Q&A. Operator?

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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.

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

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I guess just to start with, Joe, maybe for you on the revenue line, when I saw and look at the revenue declines are down like 25% in December, down low 20s, I think, in March, can you just talk about how much of this revenue decline you're seeing in December and baked in your guide is reflective of the channel inventory dynamics versus what the true end -- underlying end demand trends are? Just trying to get a sense of what the end market trends look like, especially as you get into the March quarter?

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

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Yes, you bet. I'll talk about it. And if Chuck has anything to add, feel -- he can feel free to jump in. So of course, as we mentioned, we did take out about the $60 million of channel inventory as expected. From the midpoint of our guide on the Enterprise revenues, meaning our B2B revenues in general, we were maybe $5 million off our midpoint with particular weakness in Enterprise headsets. And that actually corresponds to actual sell-out as well. On the Consumer side, no surprise, we were particularly weak, having announced that we were looking at strategic options for that business. So broadly, Enterprise, hung together, was about what we were looking for, except for a slightly disappointing headset number and then particularly weak on Consumer.

As we look to guide in -- as we look to guide Q4, a couple of things. First of all, as Chuck mentioned, in our Enterprise business, we always see a seasonal drop-off of our fiscal Q3 to our fiscal Q4 of as much as 10%. So we tried to guide very prudently on the Enterprise side. We guided the 10% drop-off that always happens quarter-on-quarter, plus a little bit of additional weakness related to product transition and sales integration. Of course, on the Consumer side, it's a bit more, but difficult to have compares with part of the business being sold. Hope that helps.

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

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Yes. No, that's helpful. And if I could just follow-up, on the inventory side, is it fair to think that the channel inventory at this point is in balance and largely speaking, where you want it to be? That's one part. And the second part, I guess, is how do you think about your own working capital metrics broadly and inventory within that? And how does that shake out as a free cash flow generative for you as you go through fiscal '21?

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

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Yes. Great questions, Amit. So first of all, on the channel inventory, we're satisfied with where our channel inventories are at this time. So we took the appropriate amount out, given the product transitions that we have coming up, and we feel that all that's very manageable. Internally, we're always looking to optimize our inventory management and our working capital. So we do see our internal inventories continuing to be managed even tighter as we go forward over the next few quarters. But we've got to be careful there too to make sure that we can do our product transitions correctly.

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Operator [6]

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Your next question comes from the line of Meta Marshall.

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Erik Taylor Lapinski, Morgan Stanley, Research Division - Research Associate [7]

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This is Erik on for Meta. Maybe just looking at that you've launched the new Microsoft Teams product, do you see pent-up demands for the -- pent-up demand for that product? And how should we think about the pace? I know that you said growth in 2021. But just as we're kind of looking and forecasting, how quickly that starts to ramp?

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

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Yes, you bet. This is Joe. I'll go ahead and talk about that. So first of all, it's been a long time coming, and I've got to say, in spite of the financial results, I could not be more pleased with our recent execution on the product side. We think our new headsets that we've brought to market for Microsoft, for Zoom and for others are spot on. The new Teams phones, the CCX 400 and 500 and the new Poly Studio X30 and X50 products are all really, really good products. So we see -- you asked about pent-up demand, we see strong demand for the products. They are selling well; however, we're in a normal product ramp on a new product introduction. So we are supply constrained, not because of any problems, but just because of the way they ramp. But we do expect those products to sell very well over both Q4 to the extent that we have product and then even more early in the next year as supply loosens up.

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Erik Taylor Lapinski, Morgan Stanley, Research Division - Research Associate [9]

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And then maybe just quick on the divestiture of the Consumer Gaming business. Will the proceeds of that sale be enough to go to some debt pay down? Or do you have other plans? Maybe if you could just rightsize the expectation there.

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

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Yes, Erik, this is Chuck. I'd say 2 things. One is the cash proceeds are fairly immaterial. But we are applying excess cash to delevering and paying down debt. Importantly, as Joe mentioned, we expect our inventory levels to come down over time, and that would be a source of cash to also help pay down debt. So the short answer is yes, but it's not that material.

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Operator [11]

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Your next question comes from the line of Greg Burns.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [12]

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Just to, I guess, follow-up on that last gaming question, could you just let us know how much revenue that gaming business accounts for and maybe what the margin profile of those products are?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [13]

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Sure, Greg. You're a little faint, but I think your question was the margin -- or the revenue profile of gaming and margins. So we've included some supplemental tables in the earnings materials to effectively help show the Consumer revenues that represent gaming as well as the other products that are being optimized. And so I'd point you to the supplemental deck that the revenue for the quarter for Q3 was $30 million and our expectation for that line in Q4 is $13 million. And so the -- that gives you a sense of how much is gaming plus the other Consumer businesses that we're optimizing.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [14]

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Okay. So the Q4 guide excludes gaming, as like a discontinued operation?

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

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The Q4 guide does have some gaming revenue built in because we expect the deal to close at the end of March. So there is some gaming. But as you'll note, with that industry specifically that the March quarter is typically the low point, given the holiday seasonal rush. So it's -- we've -- as we've been optimizing, we have been sort of reducing and taking various products and SKUs to make sure that we're optimizing the cash proceeds of those product lines that in the future we may decide to end-of-life or discontinue. So clearly, the gaming products we'll be selling to NACON, they'll be carrying those forward. And then the balance, we'll talk to you in a lot more detail next quarter once we have gotten through our optimization plan.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [16]

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Okay. And then in terms of the Q4 guide on the Enterprise side of the business, I understand there's a little bit of sequential seasonality on that side of the business. But this quarter, you also had a $60 million drawdown in your channel inventory. And I guess, you're guiding to a sequential decline off of that number, which includes that unusual drawdown of inventory. So I'm just trying to understand, I guess, the demand dynamics in the market. Why are we still seeing revenue declining in the fourth quarter, even though we had this kind of unusual channel inventory adjustment in the third quarter?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [17]

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Yes. I think I understood, Greg. You are coming and going a little bit. But it sounded like, generally, over and above the step down from Q3 to Q4, that's normal. It still sounds like a down guide. It still sounds like a down guide overall when you consider the channel inventory step down. I think as I mentioned a minute ago, the real key there is, it is a little bit of a guide down over and above. We're trying to be very cautious during this product transition, I almost said the wrong word, during these product transitions, as some of our older video and phone products that are still selling well are going to be in the market at the same time with some of our new products that we've announced, like the CCX phones, they're native for Microsoft Teams, the Studio X30 and X50 for Zoom and Microsoft and others. We're just trying to be appropriately cautious to make sure that we can manage through all of the mix around that, while we're also, frankly, finishing some of the sales integration issues that we talked about previously.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [18]

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Okay. And then just lastly on the debt covenants, could you maybe just give us a little bit more perspective on that, why you feel that you're still going to be in compliance with your debt covenants despite the lower than expected guidance?

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

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Certainly, Greg. So we have a number of tools available to us. And so we are actively managing the business. We can effectively pay down more debt with cash on hand. We're going to generate cash with working capital and driving inventory down. We'll obviously look at cost reduction, both on COGS and OpEx, and then notably, drive revenue to improve EBITDA and cash flow. And the other thing, I think, is that the loan covenants are part of the revolver and they have specific features of add backs. And so I think with the tools that we have and the debt agreement and our outlook on the business, we feel that we -- our plan is workable and that there's not an underlying issue.

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Operator [20]

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Your next question comes from the line of Paul Coster.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [21]

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Yes. I'd like to follow-up on the prior questions. And it feels a little bit like there's a tail wagging the dog here in terms of the inventory drawdown. Is it primarily to beef up the cash to manage the debt? Or is it to do with the product transition? I -- since both things you're trying to do at the same time, can you elaborate, please?

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

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This is Joe. So I'll talk to the first part of it. The product transition and the appropriate amounts of inventory to have out there during a product transition, and then I'll let Chuck talk to cash management. To be very clear, the reason for driving inventory down a bit in the channel over the last quarter was all about getting ready for the product transitions that we feel that we need to do in order to compete and win in this industry over the next year or 2. The old products, while very, very good, are different than the products that we need to be doing fantastic work with Microsoft, Zoom and the rest of the cloud-connected unified communications market. So we brought inventory down a bit to make sure we were in exactly the right spot as these new products are flowing in. It had nothing to do with cash management. I'll let Chuck talk about cash.

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [23]

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Yes. So Paul, if you go back and look at the companies historically, even individually, the inventory levels were much lower than where they are today. Our inventory levels are below 4 turns. And if you looked at best-in-class, it would be 8 turns. Our target, it would be between 6 and 8 turns. Today, we're less than 4. And the backdrop there is our ending inventory was $215 million. If you went back a little more than a year ago, it was below $150 million. And our belief is that by moving products from Southeast Asia to Mexico, by exiting part of our Consumer business that effectively we can drive inventory levels down, and that will generate a lot of cash. And so I -- my personal feeling is that our inventory levels have drifted up, and we need to get those back in check to where the appropriate level would be at north of 6 turns.

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

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Yes. So our internal inventory management, absolutely, the ability to thin that out a little bit as we've moved in internal, not a problem. I was talking to our channel inventory, sorry, if I misunderstood, Paul.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [25]

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No, that's okay. But I guess, I'm going to just sort of push back one more time on the channel inventory then. If, Joe, the old products have still got inertial momentum, strength there and the strong demand for the new products that are supply constrained, why wouldn't you be capitalizing upon this? And why wouldn't we be seeing the inflection starting now is kind of an end rather than or of those 2, of the old business and the new business?

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

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The old products -- or older products are still selling through well out in the channel. As we've talked about over the last couple of quarters, we've seen some slowdown with the Skype to Teams transition, frankly, with competition, and with some of our new products being announced. The idea was very much to make sure that we had thinned the channel out just a little bit, so there was plenty of room for the new products to go in. So as our sales engine starts executing a little better here, there's room for the new products in the channel along with the old. We didn't feel that the channel needed as many weeks of the old products out there once the new products were starting to flow in. However, those products still should sell for a while.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [27]

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Okay. Got it. All right. My last question is on the Enterprise side. The weakness there is pretty notable. It's, I think, the lowest revenue you've had in the headset space for a while, for a long time actually. And it sort of raises the question, if you're losing share, to whom are you losing it? Are you losing it to conventional headset -- Enterprise headsets? Or is this consumer substitution? Perhaps you can give us some color there.

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [28]

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Yes. Sure can, Paul. So the -- so on the headset side that make no question about it, the Enterprise headset side. As we have gone through our channel consolidation and our sales integration, we've missed a trick on the headset side. Our products are excellent. Our portfolio is still very strong. We should not be getting beat in the market. Our execution on go-to-market on headsets, frankly, has been poor for a couple of quarters. We're losing right now to normal competitors, and we're taking the steps right now with Carl Wiese, the new sales leader, and some of the folks he's bringing in, to go win that back pronto. So on the sales -- so fortunately, we see it as a sales problem, not a product problem. And it's not a massive shift of the headset industry to a consumer substitution or something that would be more difficult, right?

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Operator [29]

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Your next question comes from the line of Liz Pate.

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Elizabeth Mary Pate, Cowen and Company, LLC, Research Division - Research Associate [30]

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This is Liz calling in for Paul Silverstein. Most of my questions have been answered. Just a couple of quick ones. On OpEx, that was a positive surprise relative to our expectations. Can you talk about how we should think about that for the March quarter and on a go-forward basis? Or are we going to try to stay in this sort of level that we're at now?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [31]

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Certainly, Liz. OpEx, we -- the company has done a nice job on cost containment, and I appreciate all the employees' efforts to keep costs in check during this transitional period. So we did have some onetime benefits in Q3. Q4, we expect to drift up a little bit. And then for '21, we'll provide more guidance on the next earnings call, but we are very cost-focused right now in this transitional time. And I think I'll leave it at that.

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Elizabeth Mary Pate, Cowen and Company, LLC, Research Division - Research Associate [32]

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Okay. And just on your progress in the huddle room, are there more -- you've introduced a number, I think, at least 3 or 4 products to date. Are there more in the pipeline, or is that it for now? And then maybe you can help us size up the contribution? What has the contribution been to date from the huddle room opportunity?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [33]

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Yes. Yes, Liz, I'll start on that. So we announced the Poly Studio product coming up on a year ago now, I guess, which was really our first product as a joint company to go after the huddle room. So Poly Studio has been shipping for getting close to a year now and has been ramping nicely over the last couple of quarters. So that product is doing well. The new products that we have added that really bridge both the huddle room and the small- to medium-sized traditional conference room, which is the Poly Studio X30, the Poly Studio X50 with the TC8 controller as well as a couple of cameras, we really feel like we have what we need to go compete and win on the product side in the huddle room now. And we're doing quite well. I think with the help of Carl and others on the sales and go-to-market team, we've got to go make sure that we're winning not only in the traditional channel where Poly is very strong, but in some of the e-commerce channels that the -- that huddle room buyers also buy in some time. So we think we've got all the right ammunition now, products are ramping nicely, and we've got to go make sure that we're taking share in that market very shortly.

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Elizabeth Mary Pate, Cowen and Company, LLC, Research Division - Research Associate [34]

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Great. And just one final question on gross margins, as we look at the March quarter. I think, Chuck, you mentioned you may see some further underutilization, correct me if I'm wrong. But gross margins sequentially up, down, flat, if you can you help us on that, that would be great.

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [35]

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Yes. I would expect gross margins to be down a bit sequentially. Is the revenue outlook and build outlook in the factory and factory capacity? I think we're going to have additional underutilization charges carry into our Q4 quarter.

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Operator [36]

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Your next question comes from the line of David Eller.

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

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If you could help me just with the slide in the back, on the portion of the Consumer business that you're selling and optimizing. It looks like you're maybe winding down about 70% of that portfolio? Is that the right way to read it? And then, I guess, maybe -- I guess, the go-forward run rate, would it be something like $50 million, with gross margins above 25%? Is my back-of-the-envelope calculations for those in the ballpark?

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

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So David, we have not sort of unveiled our final plans for the Consumer business. In Slide 31, we do show a table that shows effectively the ongoing kind of Enterprise revenues and then the history of the Consumer revenues being sold or optimized. The great news is that the gaming business was our lowest margin business, that's being sold. And we are sort of optimizing and prioritizing the products that have the best margins and the best cash flow. So next quarter, we plan to talk holistically about our -- the optimization plan. And so we look forward to updating you in a quarter on that. The -- your revenue -- the margin profile, on average, has been 25%, it should be a little higher once we are out of the gaming business, though.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [39]

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Got it. And then can you update us a little bit on the relationship with Microsoft? I think maybe at the Investor Day, it sounded like they were pushing customers and integrators to sell other products until your new Teams portfolio was available. And so I just wanted to ask if they're still actively pushing customers towards other products? Or has that subsided as you've started to send products into the channel?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [40]

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Yes. First of all, I'd say that might be just a tad overstated, although I can understand why you got there. Microsoft has been very, very clear that when they were on Skype, they wanted people buying native Skype solutions. Now that they are advocating Teams, they want people buying native Teams solutions. Poly had a gap where we were, in particular on phones and video, headsets were always fine, but on phones and video, we were late to market with native Teams solutions. I got to say that our indications from all our partners at Microsoft right now is they could not be happier with the solutions that we have in market, the new CCX 400 and 500 native Teams phones, the new Studio X30 video bar, in particular, the EagleEye Cube camera that got Teams certification in the last few days, and of course, the Poly Studio with Teams certification. Microsoft is very satisfied with the partnership these days, and it feels like we're very much back on track together.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [41]

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Okay. And then as we think about some of your newer, larger product launches, X30, X50, CCX, it sounds like maybe the March quarter, we're still not going to have that great of a read. But by the time you report June quarter results in August, would we have a fairly concrete read on the longer-term kind of trajectory and success for those products?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [42]

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Yes, absolutely. I mean depending upon exactly how supply goes this quarter, we may or may not have some color to add next time we report. But you're exactly right. Those products are going to -- we expect to have a reasonably fast ramp. So by the time we get into the reporting on the summer quarters, we expect to have a strong understanding of how those are doing. But I've got to tell you, I've been in this industry for a long time, and I feel great about those products. I think they're on target, the right thing for the market, and they're what we've been working towards for the last 18 months.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [43]

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That's great. And then, Chuck, last question from me. I know -- I think in the past, you talked about preference for paying down term loan with -- for debt pay down as opposed to the bonds. And I wondered if you could kind of update us on -- if those are still your thoughts or if that's changed at all?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [44]

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No. No change. Our plan would be to pay the Term Loan B down. And this quarter, I mentioned that we plan to pay between $50 million and $75 million, primarily through cash that we've been generating from operations.

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Operator [45]

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Your next question comes from the line of Mike Latimore.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [46]

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Yes. Great. On the legacy headset, the UC headsets, I think you had done a promotion in the September quarter, and you see -- I think you stopped that promotion in the December quarter. Just wondering any change in sort of demand for those non-UC headsets, given those patterns?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [47]

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Mike, I think overall, frankly, the part that you're referring to, we certainly did watch our discounting on headsets and frankly, everything very carefully over the last quarter. However, both UC headsets and legacy headsets were not at the expectations that we had. You understand that business better than many, Mike. Legacy headsets are projected to be flat to down. They were a little more down than we projected. Frankly, UC headsets are supposed to grow and did not grow quite as much as they should have either. We strongly attribute that, as we go back and look at it, to overall not a product problem. You can always have one more product. But our product portfolio in headsets is quite strong. As I described earlier, in our sales integration and our channel consolidation, no question, we took a little step back on our ability to take those great headsets to market, and we're fixing that right now.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [48]

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Okay. And then services, they were flat sequentially. I guess, how should we think about the services business next few quarters or so?

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Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [49]

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Yes. We've really quite a nice quarter on services. Thank you to the team for doing a terrific job on renewals. Services will step down a little bit in Q4, in the March quarter, and it should be in a low single-digit decline this year.

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Operator [50]

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Your next question comes from the line of Bill Baker.

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William Wendell Baker, GARP Research & Securities Co. - Founder & President [51]

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As you now are getting closer to getting to market with your new voice and video products, if you look out 2 years from now, which chunk do you think is going to be a bigger contributor to your overall revenue? And in terms of the near-term momentum, which 1 of the 2 is going to have faster momentum, do you think?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [52]

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Bill, this is Joe. Maybe I'll start and Chuck can jump in. So certainly, we think about our business as voice, video and enterprise headsets, setting Consumer aside for a minute. We have some pretty exciting software stuff over time as well, but I'll restrict it to the hardware right now. The great news for Poly, in spite of disappointing results, is we're in 3 growing industries. So the video market, the voice market and the enterprise headset market are all large and growing over the next several years. Good news on this is, headsets are our biggest business still of the 3 and have a nice growth profile. So if we fix some of our sales integration and channel consolidation issues, that should grow nicely. I am going to answer your question. On the voice side, also a nice business growing, I think, 5% to 8% a year according to external sources over the next few years. We have a #1 or #2 market position there as well, depending upon how you count. And frankly, in video, we also have a business that is growing quite well going forward. So headsets, overall, 8% grower going forward, and we have a #1 market position. Phones, when you kind of blend it all together, meaning conferencing and SIP phones, maybe a 7% grower overall going forward, where we have a #1 market position. However, in desk phones, we're only down around 20% to 25% share. So a lot of room to go to beat the competition. Frankly, on video, video is interesting. Video going forward with the huddle room and the move to the cloud is projected to also be about a 7% grower. These are all the numbers that are out of our investor deck. But in the case of video, it's a very large market. So video is a $3 billion or $4 billion market that we're up fairly -- that we're a fairly small -- that we are the #2 player in. So frankly, Bill, going forward, we see a lot of room to grow in video, in phones and in headsets, but video has the most room to grow. We expect to execute extraordinarily well across all 3 of these and take share. But if I -- if we do it right across all 3, still if you go out 2 or 3 years, I'd like to see everything grow well, but video probably starting to pull ahead just because of the size of the market.

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Michael R. Iburg, Plantronics, Inc. - VP of IR [53]

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Okay. With that, we want to thank everyone for dialing in to the Poly Q3 earnings call and look forward to talking to everyone next quarter. Thank you very much.

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Operator [54]

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