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Edited Transcript of PLT.N earnings conference call or presentation 4-Feb-21 10:00pm GMT

·33 min read

Q3 2021 Plantronics Inc Earnings Call SANTA CRUZ Feb 4, 2021 (Thomson StreetEvents) -- Edited Transcript of Plantronics Inc earnings conference call or presentation Thursday, February 4, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Charles D. Boynton Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer * David M. Shull Plantronics, Inc. - President, CEO & Director * Michael R. Iburg Plantronics, Inc. - VP of IR ================================================================================ Conference Call Participants ================================================================================ * Amit Jawaharlaz Daryanani Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst * Elizabeth Mary Pate Cowen and Company, LLC, Research Division - Research Associate * Meta A. Marshall Morgan Stanley, Research Division - VP * Michael James Latimore Northland Capital Markets, Research Division - MD & Senior Research Analyst * Paul Coster JPMorgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Poly Q3 Fiscal Year 2021 Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mike Iburg, Head of Investor Relations. Thank you. Please go ahead, sir. -------------------------------------------------------------------------------- Michael R. Iburg, Plantronics, Inc. - VP of IR [2] -------------------------------------------------------------------------------- Welcome to Poly's financial results conference call for the third quarter of fiscal year 2021. My name is Mike Iburg, Head of Investor Relations. And joining me today are Dave Shull, President and CEO; and Chuck Boynton, Executive Vice President and CFO. The information presented and discussed today include 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. You should also refer to the materials we provided today for an explanation of the non-GAAP financial measures discussed on this call, along with a 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. All of our earnings materials are posted on our Investor Relations website at investor.poly.com. With that, I will now turn the call over to Dave. -------------------------------------------------------------------------------- David M. Shull, Plantronics, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Mike. First, let's get right to the numbers. I'm happy to report another strong quarter for Poly. We saw non-GAAP revenues of $488 million and adjusted EBITDA of $100 million, driven by record headset and video sales. This represents year-over-year growth of 25% and 133%, respectively. We protected our gross margins, which were 50.7% for the quarter, and we generated $31 million in operating cash flow. Finally, our order book continues to grow as customers recognize that the way work gets done has changed permanently. Backlog at the end of the December quarter increased again to a record level. Chuck will talk in more details about our financial results, but our performance will permit us to do 2 important things in parallel. Invest in our products and people for the future, while, at the same time, improve our strategic flexibility by continuing to eliminate debt. Let me step back and talk about the road ahead. In October, I made 2 key points on my first earnings call as Poly's CEO. First, I acknowledge that we are a company in turnaround mode. My first priority has been to fix operational issues. At Poly, we have to make sure the machinery of the company is working smoothly and efficiently for our customers, our partners and our shareholders. We've made rapid progress on this front, but we've also got a number of additional issues to tackle. I will talk about both results and ongoing areas of focus in a moment. Second, the working world has changed quite literally overnight. As I talk with customers, partners, analysts and investors, it is clear that there is an important debate underway about the nature and permanence of that change. In many businesses, there's a hopeful school of thought that the introduction of vaccines will usher in a "return to normal" and that commercial office utilization build-outs and related equipment orders, including Poly gear, will revert to some kind of mean. We do not believe there is a "normal" to return to. Even a vaccine won't return us to baseline because normal was already disappearing, thanks to step changes in data infrastructure capabilities: the ongoing digital transformation of enterprises and a corresponding increase in the volume and sophistication of communications, especially high-quality video and audio. COVID has been a critical catalyst to change working habits and a massive accelerant to the digital transformation already reshaping the working world. Zoom, Teams and Slack were not invented in response to the coronavirus. They were already there. Before COVID, companies were already committed to 5G infrastructure to handle distributed video data. Digital collaboration, remote work and the infrastructure necessary to support it were already spreading throughout the working world. The pandemic has just exponentially accelerated adoption and usage of these types of platforms. Yes, certain verticals may have seen some demand expansion, specifically tied to the pandemic, like education. This quarter, some of the biggest school districts in the United States have selected Poly's gears, so that teachers and students can seamlessly connect for virtual classes. But we believe other verticals like health care or professional services are experiencing a pandemic agnostic explosion and the adoption of next-generation communications tech. The data bear this out. Research by Gartner shows 74% of companies will permanently shift to hybrid or remote work. And by 2024, Gartner expects these remote workers will represent 30% of all employees worldwide, a total of approximately 600 million people. IDC analysis concluded that, thanks to coronavirus acting as an accelerant "in just 2 to 3 months," health care organizations have seen the equivalent of 2 years of digital transformation. And Fortune estimates that in 5 years, telehealth will be a market worth over $0.5 trillion. And companies everywhere, from small professional partnerships to Google are providing stipends to allow the remote employees to properly equip the remote work environments. Personally, I am a remote video convert. I've gone from abhorring remote working to fully embracing the work revolution. Video conferencing has become a way of life. Embracing video and the cloud transition will define the post COVID return to the office. Analysts estimate that of the roughly 50 million conference rooms in the world, less than 10% are video-enabled. They also estimate there are more than 400 million legacy phones in offices around the world that will be replaced with cloud-based audio devices and collaboration tools. The key challenge post COVID will be to facilitate hybrid meetings. Many professionals will return to the office. That's great for Poly because those offices will need for professional grade gear plus services and support to manage communications, and that's what we do better than anyone. But we fully expect those same professionals will also need and want to be prepared at a moment's notice to work from home or from anywhere else remotely, so long as they are connected and communicating. And that's also great for Poly because we're investing in that future as well. Seamlessly combining these teammates who are both in and out of the office, so they can do their work, whether that's informal brand storming or critical million-dollar, client-facing conversations via hybrid meetings, is a complex challenge and will be one of our biggest opportunities at Poly. All of which to say, we think that the massive structural change we've seen when it comes to work, where people work and how people work is indelible. The post COVID opportunity for Poly is significant, but we need to focus and execute every day to ensure that we are in the strongest possible position to serve it. Our 4 day-to-day key areas of focus are: one, supply chain management; two, innovation across our product portfolio; three, solidifying distribution channels and partnerships; and four, ongoing cost discipline and balance sheet management. I am generally pleased with the progress we've made on all fronts as it relates to operational improvements at every level of our organization. We've made a number of additions to ensure a strong leadership team is in place, including the recent appointment of Gloria Loredo as Chief Transformation Officer; Lisa Bodensteiner as EVP and Chief Legal Officer; and John Goodwin as SVP Public Affairs. We've also brought on board a new Chief Supply Chain Officer, Grant Hoffman, who started last week. As pleased as we are about growing our order book, I'll be even happier when Grant gets all those units shipped. With regard to our product portfolio, we have announced an entirely new family of sophisticated prosumer video tools, our Studio P Series, which are squarely aimed at professionals who need to work from anywhere using any platform and demand enterprise-grade gear and importantly, enterprise-grade support. We are also working to make sure we can sell our gear to those same professionals the way they want to buy them. If traditionally Poly sold to law firms, today we have to be ready to sell to lawyers. We are working to expand our e-tailing presence, while also continuing to strengthen our enterprise level distribution and support channels because they continue to be a competitive advantage for us as entire business verticals shift how they work. For example, we have many health care customers moving to telemedicine, and they often need significant support, and Poly and our partners are providing them. In addition to health care, we continue to see strong demand from governments, both domestically and internationally. For example, core systems at all levels are deploying Poly video equipment to facilitate remote arraignment and other critical conversations among judges, attorneys, plaintiffs and defendants. Let me put a finer point on the strength of the government, education and health care verticals. Our health care business is up 23% since the pandemic began. Government is up 46% and education is up 86% with K-12 growing almost 300%. We're excited that our products are finding their ways into the hands of customers with the greatest need for quality, ease of use and reliability. Finally, we are going to keep managing costs, defending our margins and deploying cash to reduce debt. Being disciplined about this creates flexibility for us and ensures we have the resources we need to invest in our future. Chuck will speak to this in more detail. As I said at the beginning of the call, for anyone wondering about the future of work, it's here. For Poly, COVID ripped the Band-Aid off what we already knew, work is work, whether or not there's a workplace. In order to get the job done, people need to connect reliably and clearly. That couldn't be a better market scenario for us. Poly's value proposition is stronger than ever because our products are tools, not toys, and they enable great work from anywhere on any platform. We make and service gear for the enterprise, whether or not that enterprise is in a building or distributed in thousands of individual workplaces around the globe. Before I turn the call over to Chuck, I want to say that I'm proud we've come as far as we have, as quickly as we have as a company, especially under current circumstances. I am also aware of how much work there is to do. But everyone at Poly has a clear picture of where we're headed and is excited about the potential before us. Now let me turn to Chuck. -------------------------------------------------------------------------------- Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [4] -------------------------------------------------------------------------------- Thanks, Dave. As Dave mentioned, it was a particularly strong quarter driven by remote work and video collaboration. Non-GAAP revenue was $488 million, a 25% increase from the prior year, driven primarily by professional headsets and video, which were up 74% and 60%, respectively. We also saw a rebound in voice, which, although down 15% year-over-year, had been down more than 50% in the prior quarters. This quarter, voice actually grew 53% sequentially. However, this trend is not likely to continue in the short term until more companies return to the office. Service revenue remained relatively stable at $67 million with strong margins of 68.5%. As we commented recently at the last several investor conferences, the demand environment for Poly products remains exceptionally strong. As a result, backlog grew sequentially in the December quarter. The composition of backlog continues to evolve as markets shift toward hybrid work. As a result, video now represents 1/3 of our order book. Although backlog has increased, lead times and product availability continue to improve. We also managed to recover and increase channel inventory in certain key markets, consistent with increased demand. Our next-gen video solutions continue to gain traction with sell-through increasing nearly 900% year-over-year. Due to supply constraints, we shipped approximately 40% of our video endpoint units in the last 3 weeks of fiscal Q3. This did impact sell-through in Q3. However, it bodes well for sell-through and market share growth in Q4. Gross margins improved 130 basis points year-over-year, driven primarily by volume. However, air freight continues to impact the business. We expect air freight rates to ease as we get deeper in the year. But as of today, they remain stubbornly high. And due to continued demand trends, we have not been able to put more products on the water, so we expect the air freight impact to continue for a few more quarters. Operating expenses increased to $157 million, primarily driven by variable comp due to higher revenue. Operating income of $90 million represents an increase of 187% year-over-year, driven by higher revenues and improved gross margins. Turning to cash. Operating cash flow was $31 million. We ended the quarter with $245 million of cash and short-term investments and retired $12 million of debt. Given our current cash balance and expected fiscal Q4 cash flow, we expect to make a more substantial debt repayment this quarter, potentially retiring more than $80 million, depending on market conditions. Turning to guidance. Similar to last quarter, our guidance is based on the current supply forecast for professional headsets, video and voice units from both our factory in Mexico and our contract manufacturers. The availability of that supply can change depending on many factors outside of our control, including the current pandemic. In addition, our fiscal Q4 is subject to normal enterprise seasonality, which is typically down 4% to 6%, and this quarter, we have a 14th week. With that understanding, we expect GAAP net revenues of $438 million to $468 million; non-GAAP net revenue of $440 million to $470 million; adjusted EBITDA is expected to be in the range of $70 million to $80 million; and non-GAAP EPS is expected to be in the range of $0.80 to $1 per share. Our non-GAAP tax rate is expected to be 12% to 14%, and shares outstanding should be approximately 43 million. As you've seen in the footnotes in our earnings materials, there are several discrete tax items that may be resolved this quarter, creating a favorable impact to our GAAP and non-GAAP tax rate. Since we don't know the timing or magnitude, the tax rate we are providing excludes this positive benefit. Before I turn the call to the operator to take questions, I want to extend a point that Dave made earlier. We've been clear that we understand that there were a set of near-term operational and execution issues that needed attention, and that those issues are being squarely addressed every day. At the same time, I want to make sure it's clear that Poly as a business is also looking ahead. We've made key additions to our management team. We're rolling out innovative new products, and we're improving our supply chain. We want to be certain that we're in the strongest position possible to capture the opportunities created by the fundamental shift in the way we, all of us, work. For Poly, this secular tailwind is one we think will remain in place and expand our markets for a long time to come. Now I'll turn the call over to the operator to begin Q&A. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from the line of Amit Daryanani with Evercore. -------------------------------------------------------------------------------- Amit Jawaharlaz Daryanani, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [2] -------------------------------------------------------------------------------- Two, I guess. First off, Chuck, maybe just touch on the March quarter EBITDA margins. I think the implication that's in the mid-16% range. So maybe just what is driving this 400 basis points or so drop on a sequential basis? Is that just all the sale deleverage? Or is there anything else you would call out for the March margins? -------------------------------------------------------------------------------- Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [3] -------------------------------------------------------------------------------- Certainly, Amit. Yes, thank you for the question. The March quarter, there's a lot of sort of one-timers. One is the kind of FICA reset adds several million dollars to the expense line. It also has 14 weeks, given our -- it's a 53-week year for the company. And so we have 1 extra week of expenses. And on the revenue side that week 1 was the Christmas, New Year's week, so there's not a lot of additional revenue that sort of offsets that. And then we mentioned some of the supply chain challenges. There are a number of issues, including freight and whatnot that impact on the margin side. But looking forward, beyond March, we expect those freight issues to be resolved. And clearly, as we move into next year, the FICA matches and those kind of things are capped, and so we should return back to the historical margins. -------------------------------------------------------------------------------- Amit Jawaharlaz Daryanani, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [4] -------------------------------------------------------------------------------- Got it. That's really helpful. And can we just follow up, I think one of the struggles everyone kind of has is trying to understand how much of the growth that you're seeing right now, especially in the video and the headset side, how much of that is really just structural in nature versus just the initial fulfillment by enterprises to get their workers up and running. So I'd love just understanding, when you look at those 2 buckets, video and the headset side, how do you think about those growth rates as you go forward in fiscal '21 and beyond on a structural basis? -------------------------------------------------------------------------------- David M. Shull, Plantronics, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Amit, this is Dave. Let me take a crack at that, and then Chuck can fill in whatever else he wants to. As I mentioned in the prepared remarks, I think some industries it's one-time. Education is probably a prime case of that. From what we're seeing and talking to customers that we think government health care, manufacturing, it's a much sort of longer-term trend that's really accelerated pretty fundamentally what was already underway. If I specifically look at headsets, we saw a decline in our contact center business, and we saw an increase in the UC business. And that's a pretty fundamental shift to work from home. We think that people initially did a pretty massive grab for consumer headsets or whatever they could find on the shelves. And so we continue to see very, very strong demand as people grows that they may want to upgrade to a more professional grade tool versus some of the consumer products that they had before. So I think that's a long-term trend. We don't see that changing. What's driving that on the headset side actually comes back to the phone business a little bit. The 400 million legacy lines that I referenced, I think a lot of those probably don't become desktop phones. I think a lot of those become soft phones with a headset device instead. And so I think that's a pretty good long-term bet as that transition occurs in the office, which has already been happening in the home. On the video business, I mean, we're thrilled with the uptick. Chuck mentioned this a little bit in his prepared remarks. We're seeing almost a 900% uptick in our new video products. That's massive. I think if anything, we have seen a few month delay in the addition of video products into the offices. And it varies quite a bit by geography, but especially in the Americas, we're seeing people say, hey, July is the new January or October is the new January. And so there's been a bit of a delay. But I think fundamentally, no one is disputing the fact that these 50 million conference rooms need to be converted to video. And everyone expects a post-COVID world to be primarily a video-based world, which was maybe 10% of that base prior. And so I think the long-term trends vary between video and headsets, but both of them are being driven by the 2 macro factors that we mentioned. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Your next question comes from the line of Paul Coster with JPMorgan. -------------------------------------------------------------------------------- Paul Coster, JPMorgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [7] -------------------------------------------------------------------------------- Perhaps you could just give us a little bit of color around what you're seeing in your partner ecosystem. Are there sort of surprises by region? Can you call out those where you're seeing accelerating growth? And how well are you positioning your inventory for the partner kind of growth? -------------------------------------------------------------------------------- Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [8] -------------------------------------------------------------------------------- Well, I wish we had more inventory, and that would certainly help us. This is Dave. EMEA is up almost 70%. So tremendous kudos to them in terms of the performance there. That's been driven really across the board by headsets and video both. We're seeing a lot of demand in EMEA for government-related installations, but also education. So we referenced specifically major school systems here in the states, where we're seeing quite a bit of that in EMEA as well. With regard to the Americas, that's kind of where there's been sort of a wait and see on the video side. So despite the massive uptick on video that I just mentioned, I think there's a lot more to go in the Americas. And then Asia Pac has returned back to the office more than some of the other areas. And so we're seeing kind of a broader-based rebound there, but not nearly at the same dollar volume as what we saw in the Americas and EMEA. -------------------------------------------------------------------------------- Paul Coster, JPMorgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [9] -------------------------------------------------------------------------------- So I was trying to actually get to what services are driving growth. And are you aligning your inventory with those service partners, the Microsoft Teams and Zoom, et cetera? Whether you can give us any color around what you're seeing out there at the moment. -------------------------------------------------------------------------------- David M. Shull, Plantronics, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- I would say they're both tripling down. They vary in terms of how broad they are. So I don't know if I want to characterize it any more than that. But I would say both of them from sort of a global perspective have jumped tremendously in terms of engagement. It obviously varies by territory in terms of who's selling into what verticals, and we're trying to make sure that we match that as much as possible. -------------------------------------------------------------------------------- Paul Coster, JPMorgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [11] -------------------------------------------------------------------------------- Okay. Last question. Services is somewhat flat. Is this sort of a long lead time adjustment to the new reality? I just wonder if we're going to see that slowly tail off as it's much easier to support products, frankly, deployed inside the enterprise and the enterprise comes to the end of prior generation contracts. -------------------------------------------------------------------------------- David M. Shull, Plantronics, Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- Yes. This is Dave. I'm going to give just a couple of high-level comments and then Chuck should add more detail because he's got more history than I do. So we traditionally have had our services business be primarily an adjunct or an add-on to our on-prem business. A lot of it has been professional services installation for sort of the complex on-prem products. When we made a shift to the cloud-based solutions into some of the cheaper, lower -- pro grade, but still kind of lower cost solutions, there was much less of a services attach rate. The Poly+ that we just announced is really our plan to sort of encapsulate that and simplify it, so that it's much easier to add to a headset or to a video bar in a manner that would be similar to more an on-prem approach. Our view, our bet, which I think is a good bet, is that as we come out of COVID, there's still going to be a pretty massive bring your own device, but the CIOs are going to want to make sure that that is a managed device and that the services packages that go with that allow them to manage it, to manage the warranties, to manage the data throughput. And so we think the combination of Poly+ and Poly Lens is sort of our bet on the future, but we've got to simplify what was a fairly complex offering in the past. -------------------------------------------------------------------------------- Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [13] -------------------------------------------------------------------------------- I'll just add, Paul, services are down 10% year-over-year. They're roughly flat with the prior quarter. We do expect services to continue to decline before they start to rebound with the services that Dave was mentioning. A couple of points when we were initially selling the new video products, they are much easier to install and easier to use. And service attach was optional, you would opt-in for service attach. Our Asia team did a phenomenal job of having that be sort of mandatory attached or opt out, and that worked quite well. We've used that model now and rolled that out across Americas and EMEA, where customers would opt out of service. That's a big strength, a big differentiation point for us over our competitors, is the fact that we have a global services organization that can take calls and deal with issues as they arise. And so we do expect, over time, with the services Dave was mentioning, plus just the core basic maintenance and support, that eventually we'll be able to turn our services business into a growth business. But over the next year, it's going to still continue to decline modestly. -------------------------------------------------------------------------------- David M. Shull, Plantronics, Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- One of the other reorders that we did, Paul, sorry to jump in -- that tied into that a little bit is we did combine our services business in the Poly Lens software platform because we think there's a real driver here to make sure that we're looking at all the usage information, the bandwidth information, the lighting information and reporting back on that for our CIO clients. And so that was a very recent combination, but I think that's how we kind of drive services. It has to be tied to AI and software insights long term. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from the line of Meta Marshall with Morgan Stanley. -------------------------------------------------------------------------------- Meta A. Marshall, Morgan Stanley, Research Division - VP [16] -------------------------------------------------------------------------------- You spoke to kind of about the progress that you're making on some of the improvements that you wanted to see. And just getting a sense on maybe both demand and supply, but just a sense of where you think you are kind of on-channel improvements and where changes could still be made. And then just on production capacity, do you -- you'd still like to have more inventory, but do you feel like you're at a run rate of production capacity or additional capacity still needs to be added? -------------------------------------------------------------------------------- David M. Shull, Plantronics, Inc. - President, CEO & Director [17] -------------------------------------------------------------------------------- This is Dave. Let me address the supply issues first, and then I'll hit demand, and then Chuck should add color again. So from a supply point of view, we spent a fair amount of money building out capacity in Tijuana and with some of our ODM and contract manufacturers. I think we've done a decent job of building up throughput capacity. It's coming online later than I would like in the quarter, so that's number one. Number two, we are seeing squeezes on the IC issues that have been a little bit endemic throughout the industry recently. And we're also seeing some issues with regard to things like camera glass, which was a bit of a surprise to me. So the net of all that is that we've got to get a lot better about forecasting out a couple more quarters. We're putting in place the systems and the team, I think, to do that. We're making quite a few rapid changes to address that. But I think that's going to be sort of the net tie through here is we now have the throughput in our own factory and in a lot of our manufacturers, but we've got to make sure that we match that up with the components as they're needed. On the demand side, we -- post merger, we had some issues with our headset business in the states primarily as part of the merger integration. We have taken some active steps to repair that. Still not an A plus. We've got a ways to go there, but the team is all over it and is executing very quickly. And then we also had a bit of a hiccup, which I think is well-known at this point with regard to Skype and Teams. We have been all over the Microsoft and Zoom relationships, and we'll continue to make that a strategic focus. I would say it's a BB+, but we have a ways to go, and I want to make sure we triple down. I think there's a real opportunity to sell a much more strategic, vertically oriented solution in combination with Zoom and with Teams and RingCentral and others. And I think there's a lot of enthusiasm around that. We need to go execute on it. -------------------------------------------------------------------------------- Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [18] -------------------------------------------------------------------------------- I would just add, Meta. I think we've done a good job on the supply chain, fixing the historical products. We have a whole suite of new products that we've launched. The Sync20 is a really phenomenal new product of speaker phone product. Two days ago, we announced a new series of personal communication devices. And a year ago, we -- or a little more, we started launching new video products. The reality is we can't make enough of those new products fast enough. And so we're actively working with our suppliers to increase capacity to meet the demand. But that's going to take a while to get to the production levels of where our customers want. But we're thrilled with the progress and the team. Dave mentioned some of the constraints earlier, but I would just add that, increasingly, we're looking toward our new portfolio of products. And there, I think it's going to take us a little while for production to meet the demand. -------------------------------------------------------------------------------- David M. Shull, Plantronics, Inc. - President, CEO & Director [19] -------------------------------------------------------------------------------- I'm excited about the potential for those new products through an e-commerce or e-tailing channel. We do very little business through there versus our competition. We've put a new team in place. They joined around the same time I did. We're executing on it. We've hired, but man, there's a lot of upside, but we've got to have the product and we've got to have the product ready to be sold with high-quality marketing and focus sort of SCO in that channel. So lots of upside there. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Your next question comes from the line of Mike Latimore with Northland Capital. -------------------------------------------------------------------------------- Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [21] -------------------------------------------------------------------------------- Congratulations on incredible quarter there. I guess on the government education, health care verticals, can you just, a little, bracket around how much they're contributing to revenue at this point? -------------------------------------------------------------------------------- Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [22] -------------------------------------------------------------------------------- We don't break out the specific verticals. It's not a majority. It's a fraction, less than a 25%. It's meaningful, but it's not a majority of our revenue. -------------------------------------------------------------------------------- Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [23] -------------------------------------------------------------------------------- Okay. So all 3 combined are under 25%? -------------------------------------------------------------------------------- Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [24] -------------------------------------------------------------------------------- I'm estimating. We're not getting exact numbers, but I would approximate it's about 25%, yes. -------------------------------------------------------------------------------- Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [25] -------------------------------------------------------------------------------- Got it. And then what kind of tax rate should we think about for fiscal '22? -------------------------------------------------------------------------------- Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [26] -------------------------------------------------------------------------------- We provided that in the prepared remarks. It's in the low teens. What's interesting is in Q4, specifically, there's a couple of discrete items that could provide a meaningful benefit that's not contemplated in the guidance. And I think as we look to the future, it should be in the mid- to low teens in '22 and beyond as we establish our global tax structure this last year. -------------------------------------------------------------------------------- Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [27] -------------------------------------------------------------------------------- Got it. And then you talked a little bit about the supply constraints. I guess is there a way to -- how much revenue did you sort of miss, I guess, because of the supply constraints? Or put another way, how much more revenue could you have without supply constraints? -------------------------------------------------------------------------------- Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [28] -------------------------------------------------------------------------------- So we don't break it out separately. There's -- I would say there's 2 -- there's a perishable demand where someone needs a product today. And that was very prevalent early in the pandemic, where people got whatever headset they could possibly get. And the other sort of flavor are the long-term customer relationships that are willing to wait for the right equipment or right gear. Our backlog is representative of demand that our customers want that we can't yet fulfill immediately. So I don't think we're losing a significant amount of perishable demand in the short term. There's some, but I wouldn't say that we're losing a lot of demand. It's -- a lot of it's being shifted and deferred. And we did catch up quite a bit in Q3, but we still have a lot of work to do to catch up in Q4 and beyond. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Your next question comes from the line of Liz Pate with Cowen & Company. -------------------------------------------------------------------------------- Elizabeth Mary Pate, Cowen and Company, LLC, Research Division - Research Associate [30] -------------------------------------------------------------------------------- Chuck, in terms of lead times, where would you say they are right now for your needs? -------------------------------------------------------------------------------- Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [31] -------------------------------------------------------------------------------- Well, some lead times could be 9 or 12 months. There are some products that many of us are competing for the same ICs as an example. We have a great supply chain. We've made a lot of improvements. There's more to go for sure. And we've been working with our suppliers to place orders well in advance. The challenge has been the demand has been much stronger than we had anticipated, and it's been increasing over the last year. And so when we think that we have the supply issue solved, demand yet is even stronger than we had anticipated. But I think as we sit here today, we -- some of the components, we just -- we can't get them, and it will take several quarters. Other ones, we're addressing and the lead times are in the normal kind of 7 to 8, 9 weeks. -------------------------------------------------------------------------------- Elizabeth Mary Pate, Cowen and Company, LLC, Research Division - Research Associate [32] -------------------------------------------------------------------------------- Okay. Great. And just on gross margins. It ticked up a bit this quarter even despite the freight costs. How should we think about gross margins over the next few quarters? -------------------------------------------------------------------------------- Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [33] -------------------------------------------------------------------------------- Well, I think I would expect that we should be in the low 50s as a run rate. It could be mid-50s when the pandemic is behind us. A lot of it does depend on product mix. As we look into this quarter and next quarter, product mix is driving a big portion of this plus the other items that we mentioned, like freight. But I would say long term in our business model, we would expect low 50s to mid-50s. In the next few quarters, it could be high 40s, low 50s. A lot of it just depends on product mix. And of course, Q4, we mentioned some of the one-timers that are hitting in our March quarter. But I think overall, the new products that we're producing have strong margins and we feel really good about defending our margins, as Dave mentioned earlier. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- There are no further questions at this time. I will turn the call back over to Mr. Shull. -------------------------------------------------------------------------------- David M. Shull, Plantronics, Inc. - President, CEO & Director [35] -------------------------------------------------------------------------------- Thanks again, everyone, for taking the time to join us. I really look forward to it and look forward to talking to you all again soon, one of these days, hopefully, it's in your office or from home or anywhere in between as the pandemic continues. Really appreciate it. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.