Plantronics, Inc.

Good day and thank you for standing by. Welcome to the Poly Q2 fiscal year 2022 conference call. At this time, all participants 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. If you require any further assistance, press star 0. I would now like to turn the conference over to your speaker today, Mr. Mike Ibert. Please go ahead.

Thanks, Operator. Welcome to Polly's Financial Results Conference Call from the second quarter of fiscal year 2022. My name is Mike Iberg, Head of Investor Relations, and joining me today are Dave Scholl, President and CEO, Grant Hoffman, Executive Vice President and Chief Supply Chain Officer, 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 10Q, 10K, and today's press release and earnings presentation. 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 a reconciliation of those measures to the nearest applicable GAAP measures. Those 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.polly.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 joined by Grant Hoffman here in our Santa Cruz office. Polly delivered another quarter of solid financial results. Chuck will provide more detail, but the headline numbers are as follows. GAAP revenues of $419 million were up 2% year-over-year. Adjusted EBITDA of $62 million and non-GAAP EPS of 77 cents were above the guidance ranges, but represent a year-over-year decline of 11% and 17%, respectively. Gross margins of 47.2% represent a 240 basis point sequential improvement and reflect a favorable product mix, offset by the temporary but ongoing pressures created by global supply chain issues, primarily volatile component prices and transportation costs. Demand remains strong, and Poly gained significant market share from our competitors in key video markets. Stepping back, I should first say that everyone at Poly has done a tremendous job helping our business and our customers navigate one of the most difficult and uncertain business environments in memory. Second, what is encouraging is that from our perspective, the demand side of our business remains fully intact. Since the beginning of the pandemic, we've said that the way businesses and people communicate and the gear, infrastructure, and services they need to work productively and effectively has changed permanently. Demand for polygear is up substantially. Our sales pipeline has increased 64% year-over-year, mainly due to increasing demand for video collaboration solutions as companies prepare to return to office. This pipeline is also converting to tangible demand. Our order backlog increased by $60 million quarter-over-quarter. Based on conversations with dozens of our customers over the past couple of months, I am convinced that as companies return to the office, they are going to aggressively build out their meeting spaces, whether large boardrooms or small personal focus rooms with video and audio collaboration solutions. Our recent survey of over 7,000 hybrid workers from half a dozen European countries and the United Arab Emirates confirms this strong demand. 82% of respondents intend to spend at least one day a week working from home in the future, with 54% planning to split their time evenly between office and home. One of the drivers for this shift is the emergence of anytime working, whereby employees have greater autonomy over when they do their work. According to our research, more than two-thirds of employees Say the, quote, normal nine-to-five day has been replaced by any time working. Research from Accenture published earlier this year shows that 83% of employees prefer a hybrid work model, looking to work remotely between 25% to 75% of the time. This return to the office is beginning now. According to independent research from CASEL, since the start of the pandemic, office occupancy rates in the top 10 U.S. metro area markets have more than doubled since their pandemic lows in March of last year and currently stand at roughly 37%. What does this all mean? Employers need to prepare their workplace communications for an increasing return to the office, and they need to be prepared to manage more hybrid video meetings than ever. When it comes to on-premises infrastructure, the majority of our customers are first focused on refreshing meeting spaces, especially large rooms as they return to the office. And most are considering building out all of their spaces to ensure that they create the best hybrid meeting experiences available. because of the, quote, two truths that I've talked about before. Number one, every meeting is moving to video. Number two, at least one person in every meeting will be remote. I've been meeting regularly with our customers, both individually and in groups, and they have been clear. They understand that Polly intends to own hybrid work and the return to office, and they're looking for our guidance and expertise as they prepare their own businesses for the future of work. That's an advantage for us because as a company, Poly has always existed to serve the enterprise. We have sales teams and service pros in place that have spent years helping solve for the largest and most demanding communications and collaboration applications in the world, banking, healthcare, and governments, just to name a few. Our ability to provide insights and advice is a key differentiator. It puts us in a position of strength. I believe it's one of the key factors in Poly taking market share. Demand is strong for Poly, but right now is about as complicated a time to operate in as there has ever been. Three months. Knows that globally, supply chain pressures continue to have a disruptive impact. For some time now, we've been direct and detailed about the supply chain challenges we face, as well as the initiatives that we put in place to help manage them. And I can tell you that every single day I'm on the phone with our Chief Supply Chain Officer, Grant Hoffman. While I'm sure that Grant wouldn't mind a break, I will say that after these calls, I have renewed confidence that our supply modernization strategy, both in the near and long term, is working. And we expect that it will pay significant dividends going forward in terms of efficiencies and profit margins. Rather than speak for Grant, we're going to have him speak directly with you, which I think will offer valuable insights into how Poly is managing and adapting to component and logistics challenges and how we'll be positioned once these temporary pressures ease. Grant, over to you. Thanks, Dave.

Thanks, Dave. been a few months since our investor day in may when i had my first chance to speak directly with poly shareholders you may recall i'd been on the job for 100 days at that point and i was not only managing a hundred year supply chain storm in terms of a global pandemic transportation disruptions and the complete lack of semiconductors and electronic components but i was also responsible for transforming our supply chain operations to ensure that for Poly, a world-class supply chain would be a permanent competitive advantage. Since then, a lot's happened, and I want to give you a readout on our progress. First, let's talk about what's in the headlines. Every day, there's shifting speculation by companies and governments alike about when supply chain issues will be resolved. There remain, without question, issues with visibility regarding the supply of electronic components for anyone who makes hardware. Equally, as it relates to logistics, there are cost issues. For example, the price of shipping a container has roughly tripled, and that hurts anyone who's moving product down the water. Because of this uncertainty, our job at Poly is to be as responsive as possible to the unpredictable environment. Every day, my team, including recently onboarded industry experts in procurement, supply chain strategy, digital transformation, and new product introduction, are in the trenches fighting to make sure that, at minimum, we are receiving allocation and have the best possible information about supply chain pressures and that we minimize surprises. The result of this effort, which at this point represents thousands of hours of nonstop work, is that from an operational point of view, the number of potential supply chain issues we're facing is reducing. At the same time, the severity of the remaining issues remains stubbornly high, not just for Poly, but for businesses around the world. What this means is that we continue to face the same issues we talked about in detail earlier this year. One important initiative we've undertaken to respond to these problems is to attack them with updated designs. We have intensified our R&D efforts so that across our products, we are designing out components that today are causing problems and we think will create ongoing sourcing issues looking to either qualify alternative components with greater availability or move to entirely new designs. The result is that with every month that goes by, Poly is in an improved position to capitalize on components with greater availability, which is to say my team and our engineers are taking the approach that if we can't see light at the end of the tunnel, we're going to create light at the end of the tunnel. But as I said during Investor Day, the most important thing for our shareholders to understand is that while the issues we face right now are temporary, if painful, The fact is, Poly Supply Chain represents the single most underappreciated opportunity for our company to outperform in the years ahead. This is because we expect that the work we're doing and investments we're making now will translate into margin expansion that will benefit Poly over the long term. In May, I reported I had completed a comprehensive end-to-end review of our supply chain with a view to up-level every aspect of the process. Since then, we've made significant progress, and I'd like to update you on our progress. I talk about logistics opportunities, given our model was based on global distribution centers that then feed products into our sales channel. In particular, I noted that some of our products traveled over 10,000 miles before arriving at a customer's dock. As of right now, we've cut the number of units traveling that distance by about half. I talked about our need to build a stronger relationship with our key suppliers, and we have. We have forged closer relationships with key suppliers and aligned our long-term product and design strategies, and they are as excited as we are about the opportunities ahead. We are extending our relationships with suppliers, executing long-term strategic buys where appropriate, and refining our planning and sourcing strategies. And I should say, our suppliers are excited not only about the product roadmap, but our vision of what the future of work looks like. We have their attention, and that matters. I talked about design for manufacturing changes and capturing cost savings during the earliest phases of product development by incorporating advanced design for manufacturing concepts into our development cycles and factory operations. We're doing that. We're accelerating the migration of multiple product lines to newer technologies, and in partnership with Poly's highly experienced engineering organization, have developed a silicon strategy to guide us as we respond to changes in technology. I talked about opportunities for digital transformation and modernization within our operational systems and structures. We have completed our detailed supply chain transformation requirements with a heavy focus on improving supply planning and customer satisfaction. The investment consisted of thousands of hours and multiple key hires so that we can extract and analyze the data requirements at every node in our supply chain, from real-time customer order information to available to buy data. will have better information, more control, and a greater capacity to continuously improve. Everyone on my team is excited because in the near future, Poly will have tools and technology necessary to drive operational excellence. As both Dave and Chuck know, if there's one thing supply chain people don't like, it's surprises. Everyone in my organization spends every day, all day, making sure we're facing incrementally fewer surprises. We still face hurdles, but again, there's no question in my mind, these problems are temporary. At the same time, my team and I are making sure that the structural transformation of Poly's supply chain to global operationally excellent is permanent. In summary, that means world-class sourcing capabilities, a robust digital supply chain, and an infrastructure optimized to support our global customer base. Thanks for your time and attention. And now I'll turn the call over to Chuck.

Thank you, Grant, for both this overview and all the work you and the team are doing to address these supply chain issues. As Dave said at the top of the call, the demand side of our business is robust, and customer interest across multiple product lines far outstrips our available supply. While we came in just below the low end of our guidance on revenue, we clearly would have had a different quarter if we were able to convert the nearly $60 million in additional backlog that was added to our already elevated backlog from the prior quarter. And as Grant said, we don't know precisely when these pressures will ease, but we have high conviction they're temporary. We also have high conviction that the long-term demand drivers benefiting our business are durable and intact. Thus, Poly continues to make strategic investments in sales, marketing, and innovative product lines, so when the supply chain issues abate, we are in a strong position to execute and win in transition. Now on to the numbers. Our gap revenue of $419 million landed just below the bottom end of the guidance range and was impacted by component supply on our Studio X video bars, most VVX and CCX desktop phones, and both decked and Bluetooth headsets. The net result was backlog at quarter end increased significantly from the prior quarter to unprecedented levels. In spite of the backlog increase, Grant's team has made significant progress resolving specific component issues. As a result, we are generally no longer supply constrained on certain corded headsets, studio USB video bars, P-series personal video devices, and sync speaker phones. We clearly have more work to do, but we are making demonstrable progress on the supply chain. Non-GAAP revenue was $420 million, a 1% increase from the prior year, driven primarily by voice and video, which were up 36% and 15% respectively. Momentum around return to office continues to build, and so does demand for our solutions. Excluding services and discontinued consumer headsets, product revenue was up 6% year over year. Service revenue is $59 million, as expected, down 12% due to service contracts on legacy video systems being replaced with lower-cost contracts on our next-gen portfolio. As I mentioned last quarter, we expect this trend to continue over time and eventually change direction and start to grow again in the future. Gross margins rebounded sequentially, driven by favorable product mix, selling more wireless headsets and higher-end video solutions. However, we saw no material improvement in logistics costs or spot market purchases, and with desktop phones being an oversized portion of the backlog, we expect gross margins to trend lower over the next couple of quarters as we catch up on phone demand. Although gross margins may trend lower in the near term, we still expect significant margin expansion when both logistics costs and spot market prices normalize over time. Operating expenses were up slightly year over year at $145 million. Given the robust demand environment, we would expect operating expenses to increase modestly in the back half of the year to roughly $150 million per quarter as we continue to invest in areas of growth. Operating income of $53 million was down 11% year-over-year. Our gap earnings per share was $2.21. As we mentioned last quarter, we expected a significant one-time tax benefit in our September quarter. The tax benefit of approximately $2.50 per share is due to the intra-entity IP transfer enabled by our new Ireland R&D Center of Excellence in Galway. This new entity and team creates more certainty in our global tax structure and will remove some of the variability in international taxes going forward. Non-GAAP EPS was $0.77 and was not impacted by the one-time tax benefit. As I mentioned, backlog has grown significantly and is now more evenly split between voice, video, and headsets. Lastly, despite significant week 13 shipments, channel inventory declined compared to the prior quarter due to demand outstripping supply across many of our products. Turning to cash, operating cash flow was impacted by changes in working capital, cash payments for restructuring, and reduced profitability, resulting in slightly negative operating cash flow for the quarter. Looking forward, we expect positive cash flow for the back half of fiscal 22, but it seems likely that supply constraints will keep us from reaching our operating cash flow goals of $150 million this fiscal year. With $208 million of cash in short-term investments and no near-term debt maturities, we are comfortable with our cash position. Turning to guidance. After careful consideration and in light of the current supply uncertainty, we decided to move away from quarterly guidance and instead provide guidance for the full year of fiscal 22. Regarding the back half of the year guidance, we are assuming the second half of the year looks a lot like the first half in terms of supply of components. If the global supply situation improves, we would expect our results to improve as well. We expect GAAP revenues for the full fiscal year to be within the range of $1.675 to $1.725 billion. Adjusted EBITDA for the full fiscal year to be within the range of $220 to $240 million. Non-GAAP diluted EPS for the full fiscal year to be within the range of $2.30 to $2.70. Regarding seasonality, Q3 is typically our biggest quarter of the year. However, similar to Q1 and Q2, we have significant supply arriving at the end of the quarter, and with the last week of the quarter being a holiday week, we expect some of these revenue shipments to slip into January, into our fiscal Q4. We therefore expect Q4 revenue to be stronger than Q3. Lastly, we expect an effective non-GAAP tax rate of 7% to 9% and 44 million shares outstanding. I will now turn the call over to the operator to begin Q&A.

All right. So as a reminder, to ask a question, you will need to press star 1 on your telephone. To resolve your question, press the pound key. Please stand by while we compile the Q&A roster. First question comes from the line of Matt Marshall from Morgan Stanley. The line is now open. Hi, Tim.

This is Eric Antromeda. Thanks for taking our questions. And congrats on navigating what obviously has been a challenging environment. Maybe just on the video results you saw, understand supply chain's an issue, but also, you know, there was a pretty meaningful sequential step down in revenue there. Is that purely an element of supply chain? Is there some element of demand, you know, customers in the enterprise side taking longer to figure out return to office decisions? I guess just trying to fully understand that.

Eric, this is Dave. Thanks for the question. I guess the way I would characterize it is we're seeing still rapidly increasing demand on the video side. So to be specific, we gave an overall pipeline figure of 64% growth year over year. Within that, 88% growth on the video side. So I think there's very, very strong continued demand on video. And based on my conversations with customers, I think that continues for quite some time. We've recently launched what we think is going to be an amazing product for the larger conference rooms, the E70 and X70. And we're seeing a lot of interest in that. There have been some supply constraints on that. And we also had some supply constraints on our X50, X30 products. So to answer your question directly, it was supply related.

Got it. And so just to kind of parse that too, when we think about the incremental backlog increase, was that more skewed to video?

We've seen an increase in video substantially and then also in phones. And we've had some component issues on our VDX and CCX phones that Grant referenced. We're seeing a lot of demand for Teams phones and Zoom phones and RingCentral phones as people return to the office and they want to have a soft phone solution as opposed to a PSTM line.

Right. Okay. That makes sense.

Thank you very much. Thanks, Eric. Our question comes from... All right, so for the next question, we do have Greg Prince from Sudoti. Your line is now open.

Just to stick with the video side of the business, could you just talk about the market share gains you're seeing? You know, what are those, what data points are you looking at to give you confidence that you are gaining share? And can you just give us maybe a little bit more color specifically on what segments of the market you're getting sharing?

Yeah, so I think we're primarily, this is Dave again, Greg, we're primarily gaining in the, what we call the single codec market. So this is really a device that's intended for a conference room. Small, medium, large conference room, it doesn't matter. But it's something that has an embedded codec device with it. And we have our Studio X series that fits directly into that space. And that's where we're seeing a lot of enterprise demand as people return to the office. So I'm not characterizing it so much on the personal products, where obviously some of our competitors have very strong sort of low-end personal products. We're really focused on the enterprise space.

Okay, great. And the... You saw on the headset side of the business, I know last quarter you were talking about maybe some supply allocations on the Bluetooth side of the business, but the headset business was a little bit stronger than I was expecting, up more sequentially. Can you talk about the supply dynamics in that market and what you're seeing from a demand perspective?

Let me comment briefly and then Grant may kind of chime in a little bit on the supply side. So, in general, we're up, as you said, 10% on the headset business. The vast majority of that increase is coming through office headsets. So, contact center headsets remains pretty flat and we're seeing a pretty significant uptick in sort of the office headsets. The demand, sort of the unmet demand, so the portion of the backlog that's tied to headsets is really driven by our higher-end Bluetooth headsets. where people are saying, hey, I had a wired USB device, and now I really want to upgrade it to a high-end Bluetooth device. And that's where we do have some shortages. We also have some shortages on the DECT. As people go into a more dense office environment, they're more inclined to have some sort of high security capability, and DECT is a big driver there. And there's been some shortages on some of the DECT devices. chipsets as well. So, demand is very strong. There is a backlog, though, really tied to the Bluetooth in-deck piece.

I'd also add, Greg, it was a pleasant surprise that Europe actually recovered and had a pretty reasonable Q2 for headsets. As you recall, last quarter, we talked about a little softening in Europe. And so this quarter, the team did a great job, the sales team. We saw a nice revenue increase. U.S. led the way with the strongest increase, and Asia was roughly flat. But clearly, the supply issues are still holding us back from being able to realize our full potential there.

Okay. And then I guess video obviously is more of a reopening back to office trade, and the headset business benefited significantly. during the pandemic with remote work. So how do you think about the headset business from a demand perspective going forward as we kind of shift more to reopening and moving away from as much remote work?

So it's been interesting. This is Dave again. It's been interesting talking to customers where And walking through their office space, right, which we've all done in our own space, but we walk through a bunch of different customers' office spaces, you get another vibe for what's going on there. And the vast majority of employees, you know, maybe that 20% capacity now, the vast majority of employees are huddled away, pardon the pun, into a small focus room of some sort, trying to find the privacy. And so we're seeing a lot of demand. for employees saying i got to go back to the office i got to be able to do video calls i no longer have a dedicated office i have to do it in an open desk i want to make sure i have a high quality comfortable headset to do that and i don't want to be wired to the desk necessarily because i want to be able to stand up and move around a little bit and so that's that's really what's driving decked certainly because of the density issues but also bluetooth and so i think that's going to continue we've been a little bit pleasantly surprised by the phone uptick because we're kind of trying to balance, okay, how much of the soft phone clients being sold by Microsoft and Zoom are going to drive phones versus headsets, but there's clearly a macro demand where people are going to want new audio devices of some type as they come back into the office.

The other part on headsets, Greg, that's really, I think we talked about this theme last quarter, that during the pandemic, wired headsets were the dominant high runner. and that has really shifted to the office headsets, the wireless headsets, which is great for us for two reasons. One, the margins are better, and two, the ASPs are higher. And so, unfortunately, that's where the supply constraints are, but it's a favorable profile for us going into the back half of the year. Okay, great. Thank you.

Thanks, Greg.

Next question comes from the line of Amit Daryanani from Evercore ISI. Your lines are open.

Hey guys, this is Michael on for omits wanted to kind of get a sense, um, you know, to the extent that it's possible to kind of step back and say, we look at the quarterly EPS run rate. What do we need to see to get back to that kind of, let's say a dollar plus range?

Well, I mean, I think that's relatively straightforward. Um, if you just looked at the quarters that we posted a year ago, even with some supply constraints, We were posting much, much stronger quarters. And so, you know, to get, you know, back up north of a dollar, it doesn't take a lot of additional components. I mean, it's not a sales issue. It truly is a supply issue of getting additional supply. And I think we're really encouraged by the video, the single codec video and the new products we just released. The last two quarters, we've seen, you know, major supply constraints. These are brand new products. Grant and his team are doing a wonderful job getting supply for those. And now with X70 and E70 at a very high ASP and a very attractive margin, it won't take a lot of additional volume to really improve revenue and significantly improve EBITDA and EPS.

Okay, that makes sense. So if you could effectively in a normal supply situation, there's no constraints that prevent us from getting that back after the last year.

No, absolutely not. This is Dave. Absolutely not. From my point of view, it doesn't take a lot of movement on the revenue line, but more importantly, we talked about sort of 700 basis points of room on the gross margin line. We got that back as well. That all obviously dropped some pretty darn quickly to the EPS line. We think we're in a healthy spot from an optics point of view. Chuck talked about it going from 145 to 150. To be clear, this is a very, very targeted investment we're making in sales and products. I think we're being careful and responsible on the optics lines.

Okay. One more on seasonality for the December quarter. I mean, should we think about that as line kind of normal? I know you said it'll be worse than the fourth fiscal, but I'm just trying to get a sense of the magnitude of

Yeah, it's a little bit hard to tell because there's a lot of supply coming late in the quarter, and our week 13 is that week between Christmas and New Year's. And so I think we're being a little cautious in that I think our view is that normally without supply constraints, Q3 would be a peak quarter, and then Q4 would fall off a bit. However, we're seeing a different profile based on supply. We have a little more confidence in supply in Q4 than Q3, but just out of an abundance of caution, we're kind of thinking of the back half of the year looks a lot like the first half of the year with a little bit stronger Q4 than Q3. Great.

Thanks for taking my questions.

Thank you, Michael.

Next question comes from the line of Paul Silverstein from Cohen. The line is now open.

Paul Silverstein Hey, guys. I apologize if you've already answered this, but I'm hoping you'll do it crisply, which is can you quantify the impact on both margins and on revenue in the quarter, how much you would have been able to recognize, you think you would have been able to recognize both for the supply constraint and what margin would look like both for the supply constraint? Dave, I think you did a good recitation, but if I could ask you to rehash, what are the key metrics in terms of being able to rectify, or at least to the extent you can, to be able to better address the supply chain challenges? You said some things in terms of reducing travel times, et cetera, but what are the two, three key things, and how much of an impact can they have in what time frame?

So let me take that question first, and then I'll pass it to Grant, and then I think Grant should pass it to Chuck to answer your first question at the end, Paul, if you don't mind. So from my point of view, this is Dave, from my point of view, what Grant has brought to the table is a couple things. Number one is consolidated view of our demand signal to the suppliers. and doing that at the CEO level with the major suppliers. So there's a comprehensive view of the upside that Poly presents to these suppliers. We haven't always done that in the past. Number two, he alluded to this a little bit, has been some strategic views of our silicon strategy, which we also haven't done in the past. So we're comprehensive looking at, okay, what's going to be available three years, five years, seven years from now? from a silicon geometry point of view? And are we making sure that we're designing that coherently into all of our products? And so I think those have been sort of the two biggest immediate changes that he's put in place. And then there's a ton of sort of other work around logistics optimization, network optimization, ODM optimization. But in terms of getting this back to the 50 plus percent on gross profit, gross margin, those are the two things that come to mind for me.

Yeah, maybe just a high-edge grant offering. So just adding, you know, one of the major initiatives that we're undertaking here is moving to parts that have greater availability. So this is some products that are on some older technology nodes to newer nodes. And so it's a big opportunity for us in conjunction with engineering and suppliers who are very excited about our portfolio, about our future, that are working together with us to make sure that we're on those newer nodes that have better availability. We do expect that coming next year.

so you know paul on your your question of what would it have been i mean there's if we cleared all the backlog uh it would be significantly higher than what we posted but i don't think we're in a position where the backlog is going to get cleared in a quarter or two it's going to take multiple quarters it may even go up in the next couple quarters So, the hypothetical is, the backlog, as we said, increased $60 million from an already very high elevated level. And that's not normal. Our normal backlog is quite low, because a lot of it's book and ship. So, if we cleared all the backlog, it would have been our best quarter ever by a long shot. And that's not going to happen. It's going to take a while to work through the backlog. um you know so i'm not going to give you an exact number but it would be materially higher than what we've posted this quarter or have posted in the last you know couple years as far as the um the margin profile at analyst day we have went through the drivers of margin freight purchase price variance overhead absorption You know, with the quarter we posted, we're proud of the margins, but they're still way below what they should be. I think if this is a normalized quarter, you would have seen a low 50s between 50% and 55% gross margin without the one-timers or the logistics-driven issues. So, I think, you know, the I feel like we're set up for a really good place when supply chain abates. We don't know when that is, but I feel like the operating model is in a good place. We just need a little bit of a recovery on chip supply.

This is Dave. Paul, let me be a little bit hyperbolic as the CEO for just a minute here, and then Chuck can kick me and kind of pull me back down. So the backlog – is hundreds of millions of dollars. And so I feel very comfortable saying that we should be well north of half a billion dollars of revenue per quarter at this point. We should be in the mid-50s when it comes to gross margin, and we should be running still at roughly $150 million of OPEX. So you do the math on that, and you're well above the hard EPS, and you're well above 20% on the EBITDA line.

David, I appreciate that comment. I just want to make sure I heard you correctly. You think there should be well over $500 million mid-50s, and what was the OPEX number?

Well, in the 20s, in the low 20s.

Yeah, well, $150 million now. Now, I think when we see the market opening more, we'll spend a bit more on OPEX. We're constraining spend and focusing in those key areas. So I think when the market opens back up, we'll spend a little more, but we're intentionally – keeping our belt a little tighter on some of the G&A spend and things that aren't going to drive near-term revenue or near-term product development releases.

All right. A couple of related questions, if I may, Jay, that you anticipated. So I trust you just answered the better question I should have asked, which is, what would the second half of fiscal 22 or all of fiscal 22 have looked like but for supply chain constraints? I think you just answered that question. Correct me if I'm wrong. So let me ask you a related question. If I recall, not so long ago, before you took the reins as CEO, but not so long ago, Polly had done an end-to-end refresh or virtually an end-to-end refresh of all of its products. And I recognize that you, no one, could have anticipated this extraordinary period that you find yourselves in. Impossible. I get that. But I would have thought as part of a product refresh that you would have had the benefit of newer SKUs, and to the point you made, that those SKUs would have the benefit of newer process, newer technology, and would have the benefit of availability of relatively higher volume than whether it be logic capacitors or switching silicon, whatever it may be, that's of older vintage, which gets decommissioned and forces lower volume. Clearly, that's not the case. I mean, you're talking about having to do substantial work to redress this challenge. I was saying that you just did a big refresh and the average age of your product should be relatively low.

So, this is Dave. I hate to... speak ill of prior administrations, but I think it's obviously public record that I've made a lot of executive management changes, and that was done for a reason. I think in the past, there was an upgrade on some of our products, and kudos to the prior team. A lot of them are bearing fruit here with the Studio X series and Studio P series and sync and so on. That was much more of the prior focus than looking holistically across the headset business, for example. and putting a silicon strategy in place. And so I think one of the faults that we had in the past is we operated very much in a silo for individual products as opposed to thinking coherently across the whole company and making sure that what was designed was designed not just for value to our customers, but was designed for the sake of manufacturing as well.

David, Chuck, how serious do you guys are?

thousands thousands okay all right i'll i appreciate the response thank you thanks paul thank you paul all right next one on the queue is paul chung from jp morgan your line is now open hey guys uh thanks for taking my question so um as i think about the the video opportunity You know, how large in your view is the installed base of kind of the legacy conference rooms, kind of the larger on the larger side, you know, primarily some of your older equipment in Cisco. So how do you think about that overall opportunity versus some of these smaller huddle room opportunities? You know, our enterprise is kind of continuing to upgrade equipment there. Is there kind of like an average revenue and margin contribution we can think about per conference room? And then you mentioned some market share games. Who are you taking share from? And head-to-head, why are customers choosing your solution?

So let me give you a couple stats that hopefully start to frame the conversation a little bit. And I know you all have done some research in this space as well. So Wayne House published a report on October 11th that indicates there's 49.2 million conference rooms closed. with 8.4% video penetration. There was a following report, actually our earlier reports from Frost and Sullivan, that indicates there's 111 million conference rooms and classrooms. So it's a little bit of a different metric there with 6% video penetration. There's not a lot of detailed research in terms of the breakout of large, medium, small. But even if you assume that only 10% of that base is large conference rooms, which I think is conservative, You know, the numbers are pretty astonishing. When we look at our large conference room products, we're talking a few thousand dollars, roughly $3,000 per room of revenue opportunity. You go down to the smaller focus rooms and you're in the price sub, you know, $600 range for like a P15. So it gives you a sense for sort of the, you know, the P times Q in terms of the overall demand opportunity is pretty massive. You know, I think it's interesting. When we talk to our customers, yes, a larger percentage of the large conference rooms is built out than the overall base, without a doubt. And I think that's consistent with some of the other research out there. But the vast majority of the market share, well north of 50%, is held by a competitor of ours who is trying hard to maintain their market share. But I think there's such a preponderance of shifting going on with Teams and with Zoom and Google and RingCentral that their ability to hang on to that market share is diminishing rapidly based on the customers that we're seeing and based on the pipeline that I just referenced as well.

Gotcha.

Go ahead. No, go ahead. You would ask specifically about the competition?

Yeah, and, you know, when they're thinking about the, the solutions, how are you kind of winning on a head-to-head competition basis?

So the first thing is really a partnership with Microsoft and Zoom is really important as we go to market because the companies have already made a decision that they want to get off of their old on-premises gear. And the vast majority of their employee base right now is used to using Teams or Zoom or Google at this point, as opposed to what was in the office before. and so as soon as the cio or in many cases at this point the ceo of a fortune 500 companies made the decision to shift it really becomes a question on how quickly are they going to shift and how much gear do they have to remove to make that transition possible and so that's that's far and away the single biggest decision point that's happening we're one of the few companies that can provide video and voice and headsets completely certified on both teams And so that's a real competitive advantage. And so it drastically sort of reduces the selection set in terms of the hardware that they might be considering as part of it.

Gotcha. And then, you know, a follow-up is as we kind of move on to fiscal year, you know, 22 guidance, how good is your visibility there? I know you mentioned the backlog and whatnot, but, you know, are large video and enterprise purchases pretty well known in advance? You know, you've typically done kind of a book and ship business. So what kind of gives you the confidence in that fiscal year revenue estimate? And is there some, you know, conservatism kind of baked in there? Thanks.

Well, we always strive to be conservative, right, in terms of making sure that we put numbers out there that we're sure we can hit. We sometimes have surprises, as we had this quarter, obviously. And so, to be clear, our guidance philosophy, this is Dave speaking on behalf of Chuck and myself, has not changed. And so, I firmly believe that that's where we're at, and we're continuing to narrow down the number of supply chain issues that we have. We haven't solved them all, but we're definitely narrowing down the number of them, which helps kind of give us more guidance. On the confidence with regard to demand, it's talking directly to dozens of customers, and these are all Fortune 500 companies, and them being crystal clear on their priorities. They're saying, listen, the first people into the office right now tend to be senior executives. They're having meetings in large conference rooms. They are just desperate to get their hands onto some of these large conference room solutions that we have, like the E70 and X70 that we just announced and just released. And then the question becomes, okay, what do I do? How do I make sure that that boardroom is fully capable? So does it require multiple cameras or how do I structure together? And so the smart gallery solution that we announced with Zoom is very, very powerful because it provides a much more sort of equal hybrid meeting experience. And then once they sort out the large conference rooms, then that's really sort of the curve that we see for some of the smaller spaces over time.

And, you know, Paul, I'll just add on a bit. You know, when we reference backlog, Those are firm, non-cancellable orders. Pipeline is a hope and a dream in customers that we're talking to. Backlog is firm orders that they can't cancel. And so, the demand side, we have incredible competence over the back half of the year. We have no questions about the demand side. It's really on the supply side. And I think Grant is a bit more optimistic than I am, quite frankly, in terms of what he can deliver. But our view is there's so much media and noise on global supply chain issues, and it just doesn't feel like it's getting better. And so our view for back half guidance is it's not getting better. Now, if it does, that's upside. But our view is that we're in this issue today. And I think Grant has a lot more optimism around Q4 than I do. But our view is until we start seeing additional commitments above and beyond what we're getting today, we want to be, we think that we're kind of in this place until things let up.

Okay, great. Thanks. Hey, Paul, it's Grant. Hey, Paul, it's Grant. So just to add on to what Chuck said about the optimism, the suppliers that I talk to, they're very excited about Poly. They understand, you know, all the questions that you guys have asked on video and the opportunity there. They want to be a part of our story. They want to be a part of our long-term plans. So that's where some of my optimism comes from is the suppliers and the discussions I've had.

Thanks, guys.

Thanks, Paul.

Next one on the line is Sharon Kirubu from Northland Capital Markets. Your line is now open.

Hi, this is Sharon on behalf of Mike Latimore. My question is on regard to the prices. How has the prices been across your product line and will you be seeing an increase in price on the second half of this year?

Sure. This is Dave. We're looking at that carefully sort of on a product-by-product basis, and obviously we need to have both a shortage of supply from our competition and availability of supply on our side to be able to effectively get much out of the prices. But we are seeing some component increases. Clearly our customers are aware of that, and we'll continue to sort of evaluate on a product-by-product basis where we can and should be raising the prices.

In the short term, our plan has been to discount less. So we have a street price and a disty buy price, and we have discounts for many products. If you think about desk phones, which were significantly supply constrained, we are not raising ASPs at this point, although we may. But we have been discounting a lot less, which has been helpful to us to increase our overall realized ASP versus street ASP.

Okay, got it. So my second question is on the newer personal products such as P-Series, has it gone over 5% of the teams yet? And do you see a growing demand in the December quarter given the holiday period coming?

Definitely see a growing demand. I don't know that we've characterized what percentage of the business it is yet, Sharon, but I do see a growing demand. From a holiday point of view, we're not targeting the e-tail space as much. So a lot of the significant sales of those products are still going through our enterprise channels.

Okay. Thank you.

Thanks, Sharon. We do have a follow-up question from Paul Silverstein. Your line is now open.

Yeah, I appreciate you guys taking the question. Two quick items. One, you were just addressing pricing. I trust you're not seeing any meaningful ASP erosion, just the opposite, given that you're talking about raising prices and given this environment where you're shipping everything you can and you don't have enough supply. I trust pricing is not an issue in terms of competition, or is it?

That's right. I think so far, the industry participants have behaved rationally and have not been lowering prices. You know, we do, Paul, have a number of categories where we're not supply constrained. And in those markets, you know, so far, everyone is behaving rationally. Pricing and margins look to be intact.

What are those categories where you're not supply constrained?

I mentioned in the prepared remarks, but it would be some of our corded headsets, studio USB, and some of the P-series, the personal video products, webcams, and some of the personal video bars.

Same speakers, phones. Can you remind me, what are those as a percentage of revenues?

The personal video bar is a brand-new category, very, very exciting. It's still very early in the lifecycle, so it's early. So I'd say it's immaterial. Webcams are fairly immaterial. Black wire is pretty material. It's a big part of our headset business. A studio USB is a reasonable size. It's not the dominant category. I think the new X series and whatnot is quite a bit bigger.

All right, and one last question for me. I forget when you provide this. I don't think you do, but I'll ask. Beyond backlog, which you all have cited several times, what did orders look like in the quarter and what was booked for bill?

We don't disclose book-to-bill, primarily because it's not a relevant metric in a normal part of our business. This backlog issue is incredibly frustrating. We always have some backlog, but it's normally fairly minor. It's at a level that we've never seen before, and that's not healthy. Our customers don't like it. We don't like it. We prefer that we have product available to ship when our customers want it. um so we don't provide book to bill although it's um you know unfortunately it's very very high right now in your order growth well the order book effectively is what we've booked and sold and the uh the cumulative backlog and so that obviously is a number quite a bit higher than what the current quarter results were all right i'll leave it at that thanks

And there are no further questions on the queue. I will now turn the call over back to the presenters.

Thank you all very much for the time, and I really appreciate the healthy questions here. It's good. I remain very, very excited about the growth prospects for Poly, very excited about the demand that's out there, excited about the customer reception to all the new technology that we're developing and that we've released. And honestly, I remain impressed by the dedication of the team, by the commitment during the supply chain challenges, and so look forward to talking to you all soon with rapidly improving results. Thank you.

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