Plantronics, Inc.

Good day and thank you for standing by and welcome to Poly Q1 fiscal year 2022 conference call. At this time, all participants line are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the call over to your speaker today, Mr. Mike Iberg, Head of Investor Relations.

Welcome to Polly's Financial Results Conference call for the first quarter of fiscal year 2022. My name is Mike Iberg, Head of Investor Relations, and joining me today are Dave Schull, Polly 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. You should also refer to the materials 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.

Thanks, Mike. Good afternoon from California, and thanks for joining us from wherever you work. Today, Chuck and I are calling in from our Santa Cruz office. Polly delivered strong financial results for the quarter. Chuck will provide more detail, but the headline numbers are as follows. Gap revenues of $431 million were above our guidance range of $410 to $430 million and up 21% year over year. Adjusted EBITDA of $61 million and non-gap EPS of $0.60 were also above the guidance ranges and represent year over year growth of 29%, and 82% respectively. Gross margins of 44.8% reflect temporary pressures created by global supply chain issues that we spoke about at length during our investor day, including volatile component supply and transportation costs. Polly moderated these issues with quick action managing both OPEX and investment spend during the quarter. Finally, as part of our strategic transformation, we recognized a one-time restructuring charge of $29 million. We are minimizing G&A costs, investing in sales and marketing, and reallocating R&D to areas of growth. On the product side, our launch of the Voyager Focus 2 headset at the very beginning of the quarter has been a huge success, shipping roughly 50,000 units. And we sold our 30 millionth Blackwire headset in the quarter. a product Frosted Sullivan recognized with their 2021 Global Product Leadership Award, citing unmatched audio quality and innovation that addresses customer needs. In July, Microsoft named Polly one of three finalists for the Device Partner of the Year Award due to our excellence in innovation and implementation of customer solutions for Teams. Finally, we entered into an OEM relationship with one of the top three global PC manufacturers to supply our high-quality professional headsets, making it even easier for end users to access our pro-grade communications gear and moving us one step closer to our goal of reclaiming the number one position in the headset market, all of which is to say we've been busy. But there is much more to do. We had said at the beginning of the year that anyone looking for a, quote, return to normal would be disappointed because there is no normal to return to. And so far, we've been spot on. First, the transformative shifts we see in enterprise communications, for example, every meeting moving to video, and the increasing complexities of managing communications infrastructure are intact and accelerating. Second, the aftershocks of the pandemic are still with us. as our customers grapple each day to manage highly distributed workforces, even as new uncertainties present themselves. Right now, for example, the worldwide surge in Delta variant cases continues to disrupt countries and economies. These uncertainties mean that more than ever, Poly is a critical partner for any business navigating the current environment, something that is reflected in each of our business segments and across all of our geographies. Remember that long term, we actually benefit from the return to the office. At the same time, as we detailed during our investor day, Polly's challenge as a business, a challenge shared by every company in the world that makes and ships products, is how to manage volatile global supply chain factors so that ultimately our customers get the gear they need. First, let's talk about the demand side of our business. Looking at our product lines, we again had strong growth in video. We saw a 94% increase in sales year over year, and that number would have been even bigger without supply chain pressures. We're pretty certain that we're taking share in the category. We're now the number one single codec provider in the world, measured by units, and according to research by Synergy, we gained 13 points of revenue market share year over year in USB conference cameras. the largest video category. And we think it still keeps growing. I can't think of a single company I've met with, large or small, that doesn't recognize the shift to video as inevitable. It's not just businesses. Our results this quarter were also boosted by strong sales in government and education. Voice delivered strong results this quarter with a 34% year-over-year gain and a slight sequential decline down 5% as a function of supply chain impact. As businesses around the world continue to transition to the cloud, it creates an opportunity for IT service providers to deliver upgraded equipment to their customers. Poly partners closely with many ITSPs to ensure our gear ends up on the desktop. In addition, businesses are preparing for return to office and we're seeing increased demand for conference room phones. Sales during the quarter were constrained by supply and we see continued growth thanks to the ongoing upgrade cycle. As we make progress managing supply shortages, we'll be able to catch up on our existing backlog. Finally, we see stable heads of demand as the tension between work from home and return to the office continues to be unresolved. Sales were roughly flat year over year, and the sequential drop of 16% suggests to us that, in part, buyers are pausing in anticipation of return to office. We see growing demands in our Bluetooth headsets, including the new Voyager Focus 2 and recently announced Voyager 4300. But looking ahead, we expect seasonal weakness for our USB-connected Blackwire headsets in Europe that will likely net out against demand upticks in the Americas and APAC. So let's take a look at our regions. In the Americas, we continue to see strong demand across all product categories. Every customer I talk to says the same thing. Every meeting is moving to video, and every meeting will always have at least one remote participant. Demand for video in the Americas is up 70% year-on-year in the market. We are also seeing strong demand for voice products as businesses prepare for a return to the office, and headset demand remains stable as professionals continue to make sure they are prepared for long-term hybrid work. Our expectation is that all these demand drivers will remain in place for the balance of the year and well into the future. Europe continues to be hampered by uneven vaccination rates, a fragmented and still evolving response to the COVID Delta variant, and general uncertainty surrounding when workforces will return to the office and what that return will look like. While our sales pipeline is growing, we see this caution reflected in delayed deployments for video even as its ultimate importance to communications is clear. Voice demand is strong in Europe, but component shortages are affecting Poly's ability to supply products. Headset demand is stabilizing, as last year's work-from-home surge has largely been satisfied. Near term, we're heading into a seasonally soft summer demand period in Europe, which right now is being compounded by jumps in the Delta variant clouding return-to-office plans. In Asia Pacific, we are seeing particularly strong demand in Australia, New Zealand, and China. While there have been some return to office delays, in general, APAC has returned, remained in the office more than in other regions. As a result, our video pipeline in Asia has been increasing rapidly with strong demand for pro-grade headsets and, to a lesser extent, phones as well. Taken together, all the demand drivers for PolyAnne are intact. and will be for some time to come. This is encouraging because it means the long-term growth targets we set for ourselves are achievable. Demand is strong, so let me now turn to our supply chain. Our current issues won't come as a surprise because first, we cataloged them in May, and second, they're being experienced by companies everywhere. Our front page news in the national press and even caught the attention of the president. Just two weeks ago, the Washington Post ran a front page story headlined, Biden targets high shipping costs as pandemic ravages global supply chains. Now, ravages is a pretty hyperbolic word. That said, our margins were pressured this quarter by price volatility in the spot market for certain components. As highlighted in the Washington Post article, shipping availability and costs are also both challenging. I'll repeat what I said last quarter about the supply chain issues. Our view is that these challenges are temporary. Right now, we think the right thing to do is to be conservative and assume that supply chain conditions will be unsettled for the balance of calendar year 2021. We've also made the decision to insulate our customers from these pressures rather than to increase the cost to them. That's necessarily going to create margin pressure, but that, again, represents a near-term, short-term strategic decision we have made. I will also say that we're seeing signs of stabilization with increasing commercial air traffic, and more space is opening up in air freight channels. In addition, Grant Hoffman, who runs our supply chain, has been able to move a number of our product lines to water, all of which will show up as cost savings. To be clear, we want to be able to build and ship more gear at a lower cost than we are doing today. As we detailed during investor day, we've been working not only to improve the whole of our supply chain, but also directly with our customers so we can help them manage order timing and deployments. Near term, like many, we're looking at a pretty significant collection of variables. Shipping and component costs and availabilities, uneven recovery from COVID, and the global spike in the Delta variant and related economic closures. We get new information every day. But as we look forward, we are encouraged. First, demand is strong. Chuck will provide more details, but we expect to have sequential quarter-over-quarter revenue growth. Second, the broad secular trends that support Polly's growth are intact. we still believe there is strong, underlined, double-digit growth in our markets. Third, we're working tirelessly on our supply chain. This means we expect to be able to deliver sequential revenue growth for our investors, even as, in the near term, our margins will continue to be under pressure. Last, before I turn the call over to Chuck so he can go through the numbers and give you a sense of how we're setting up for the second quarter, I do want to point out that over the course of the past few quarters, Chuck and his team have transformed our balance sheet. Our borrowing costs are down and leverage is decreasing. We're carefully managing our resources and investments, and at the same time, we remain committed to our long-term growth goals for our revenues and our margins. Yes, these goals are ambitious, but we believe we can attain them. We have the right gear, the right people, and the right technology to get there. Chuck, now over to you. Thanks, Dave.