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Plantronics Inc (POLY)
Q1Â 2021 Earnings Call
Jul 28, 2020, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Poly Quarterly Earnings Call. [Operator Instructions] I would now like to hand the conference over to Mike Iburg. Thank you, sir. Please go ahead.
Mike Iburg -- Vice President, Investor Relations
Thank you, operator. Welcome to Poly's financial results conference call for the first quarter of fiscal year 2021. My name is Mike Iburg, Head of Investor Relations. And joining me today are Bob Hagerty, Chairman of the Board and Interim 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. Throughout today's remarks, we will refer to specific slides from our Q1 FY '21 earnings presentation. Unless otherwise noted, all comparisons discussed today will be to the same quarter of the prior year.
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 the reconciliation of those measures to the nearest applicable GAAP measures. These non-GAAP measures are indicators that management uses to provide additional meaningful comparisons between current results and previously reported results, and as a basis for planning and forecasting future periods. All our earnings materials are posted on our Investor Relations website at investor.poly.com.
With that, I will now turn the call over to Bob.
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
Thanks, Mike, and thanks everyone for joining us today. We've spent the last two quarters focused on improvements needed to realize the benefits of the integrated company and return to profitable growth. We reviewed our systems, processes, resource allocation to ensure we focus on the customer in areas, we believe, will provide the best return. This last quarter, we modified our product roadmap as the market and demand has shifted, made progress on our internal systems and tools, improved communication with our channel partners, and strengthened relationships with several strategic partners.
While, now [Phonetic] is visible from the outside, step by step, we are making progress on the transformation necessary to become the endpoint provider of choice for the unified communications industry. The pandemic has created a series of challenges, but has also created opportunities for us and our industry. It's clear that the hybrid working trends are here to stay. Market research firms estimate 30% to 40% of employees around the world will continue to work from home with many adopting a flexible work schedule splitting their time between the office and home. As a result, the forecasted growth rate for headset and video markets has increased offsetting the impact to the voice market. The net effect of this hybrid work environment is in increased TAM and a long term growth opportunity for our company, which we are working aggressively to capitalize on.
Turning to the most recent quarter on Page 5. Headsets continue to sell well. Our new video bars are ramping and voice solutions remain challenged. Our operations team continues to work through supply chain challenges and backlog remains unusually high as new orders continue to flow in at a brisk pace. Revenue was slightly stronger than expected and aggressive cost controls and lower expenses allowed us to deliver earnings above the high end of our guidance range. We exited the June quarter with approximately five weeks of backlog and a very strong cash position. I'll let Chuck walk through the results in greater detail.
COVID-19 continues to impact our supply chain and overall business. While the lack of employees in offices is impacting voice demand, headset demands remain elevated. This has put additional pressure on our supply chain. Our factory in Mexico is capable of running at full capacity, but we are having to flex our production based on component availability. It is a similar situation to our contract manufacturers. However, our headset availability in the market continues to improve. Outside of manufacturing, we've begun moving a small number of employees back into certain offices. However, as of today, most employees continue to work from home.
I'd like to take a few minutes and discuss the progress we've made on our strategic partner front. Our relationship with Microsoft is strong and getting stronger. We recently completed Teams certification on our Studio X30 and X50 video bars and today, offer the largest portfolio of Teams certified solutions. In addition, in May, we launched a new family of Microsoft Teams Rooms, also known as MTR. These solutions bundle our audio and video endpoints with an enterprise class appliance to deliver a superior meeting experience for Microsoft Teams users.
Our Zoom relationship continues to strengthen. In June, we announced that the Studio X30, X50 and G7500 were the first appliances to receive Zoom certification. And in July we joined Zoom's Hardware-as-a-Service program where we represent more than half of the available endpoints.
Finally, last week, we expanded our relationship with LogMeIn. Our Studio X30 and X50 video bars are now available in a GoToRoom bundled solutions.
As you can see, many of these recent partnership enhancements involve the Studio X30 and X50. That is because the onboard compute capabilities allow users to run specific applications directly on our device without the need for a separate computer in the room, simplifying deployments and reducing cost.
Let me wrap up by saying, we have a lot more work to do, but each quarter we make progress. We continue to improve our go-to-market execution. We have an exciting product roadmap for the balance of the year and even in the current environment, we've been able to improve our financial condition. As we strengthen our partnerships and bring industry-leading products to market, we are positioned to capitalize on the accelerated growth opportunity the headset and video market presents.
Lastly, our Board continues to make progress on the CEO search and we look forward to providing you with an update in the future. I'll now turn the call over to Chuck to discuss our financial results.
Chuck Boynton -- Executive Vice President and Chief Financial Officer
Thanks, Bob. Although the business is down both sequentially and year-over-year, we performed largely as expected. We were particularly pleased with the strong operating cash flow ending the quarter with $263 million of cash, an increase of $37 million. As Bob mentioned, the concentrated nature of demand continues to be a supply chain challenge. We exited the quarter with approximately five weeks of backlog primarily in headsets. This was down from six weeks last quarter, but above our operating model. To address the elevated demand, we have added additional tooling capacity, increased our dual sourcing, and in-sourced some high-volume SKUs into our manufacturing facility in Mexico, where we have added additional production lines.
However, based on the inflow of new orders through the first several weeks of fiscal Q2, we do not expect to entirely clear the backlog by the end of this quarter. Overall, channel inventory declined again this quarter and remained below targeted levels for headsets. We expect this to normalize in Q2 and Q3 as additional supply comes online.
Turning to the financial guidance summary on Page 16. Revenue of $361 million was in the upper half of the guidance range. Gross margins were in line with expectations and operating expenses were lower than anticipated resulting in EBITDA and EPS above the top end of the guidance range.
Page 17 breaks down revenue by product category and region. Total headset revenue was up sequentially but down year-over-year. Within headsets, UC grew significantly, both year-over-year and sequentially, but was partially offset by declines in contact center. Video revenue increased both sequentially and year-over-year as our new video bars continue to ramp. Our voice business was down significantly as work-from-home impacted desktop phone and audio conferencing deployments. Services revenue declined modestly.
Turning to Page 18. We have included a new slide with trended sales-out data for our new video portfolio. This captures our new video offering including all three video bars, plus the G7500. Although not directly comparable to our reported revenue, sales-out of this next-gen portfolio is roughly one-third of our total video revenue.
On Page 19, similar to the prior quarter, gross margins were impacted by factory under-utilization and freight. In addition, this quarter, we had higher inventory provisions and warranty reserves. As our business stabilizes, we expect modest gross margin expansion. Operating expenses decreased $27 million from the prior year, primarily due to cost controls and lower expenses, while people worked from home. Lastly, we expect operating expenses to increase modestly from our Q1 results.
Moving to Page 21. Continued working capital improvements drove strong operating cash flow of $42 million in the quarter, pushing cash and short-term investments to $263 million. We have been accumulating cash over the past couple of quarters and an abundance of caution as the pandemic has impacted the global economy. Due to working capital requirements, we expect cash to decline in Q2. However, as the economy stabilizes and our business outlook improves, we expect to resume delevering.
On Page 22, you can see we posted EBITDA of $48 million in the quarter, resulting in a trailing 12-month EBITDA of $243 million.
Turning to guidance on Page 24. Before I walk through the numbers, I'd like to offer some context for our fiscal Q2 guidance. As you may have gathered, headset supply and voice demand are our primary issues. Our guidance is based on the current supply forecast for enterprise headsets from both our factory in Mexico and our contract manufacturers. With that understanding, we expect GAAP net revenues of $346 million to $386 million, non-GAAP net revenue of $350 million to $390 million. Total adjusted EBITDA is expected to be in the range of $45 million to $65 million and non-GAAP EPS is expected to be in the range of $0.25 to $0.65 per share. Finally, I'd like to mention that these guidance ranges assume our factory and supply chain remain in production for the balance of fiscal Q2.
With that, I'll turn the call over to the operator to begin the Q&A. Operator?
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open.
Meta Marshall -- Morgan Stanley -- Analyst
Great, thanks. Maybe the first question on the Zoom hardware as a sale opportunity, clearly that's a meaningful opportunity. How should we think about that for how you guys are thinking about that product ramping, the availability of being able to ramp the X-Series product that would go along with that and any margin impact we should be aware of?
Chuck Boynton -- Executive Vice President and Chief Financial Officer
Well, I guess, Bob, I'll take the margin part first. For us, it will be accounted for as a traditional sale, so cash upfront. And I would expect it to be margin-accretive to the company overall, because the new video products generally are above company average margin. And Bob can talk about the deeper relationship with Zoom.
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
I think the Zoom relationship's in good shape. We have, as we've said in the script, got both the X30, X50 and the G7500 certified. We've got a number of other products that are lining up for that offer. So I don't see -- because it's focused primarily in video and to some extent voice, don't see any supply constraints in how that will ramp up. But it's included in any forward guidance aggregated into the -- as this program ramps up.
Meta Marshall -- Morgan Stanley -- Analyst
Got it. And just -- and it may have just been from an older quarter, but I thought manufacturing of X30 and X50 products were fairly limited upfront. Just a sense of how we should be thinking of the ramp of a production capability on that throughout the year. Is there a set amount that can come on per quarter or are we past kind of supply constraints on that?
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
Yes. So we are past supply constraints. I mean, I think a couple of quarters ago, we talked about the normal ramp of equipment and so we have been on a pretty good clip of increasing production capacity of X30 and X50 as the product ramps to market. And so, at this point, we're not supply constrained. But we're ramping sort of just according to plan.
Meta Marshall -- Morgan Stanley -- Analyst
Okay, got it. That's helpful. Thanks, guys.
Mike Iburg -- Vice President, Investor Relations
Thanks, Meta. Operator, next question?
Operator
Sure, sir. Your next question comes from the line of Mike Latimore with Northland Capital Markets. Your line is now open.
Mike Latimore -- Northland Capital Markets -- Analyst
Great, thanks. Great profitability in the quarter there. In terms of the phone business, are you thinking about that improving when kind of people are up and look to go back to work? Is that the main lever there or is there something else that would help it?
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
I think that's the prime -- this is Bob, I think that's the primary driver. When people return to work, we expect that to move back up to where we were and potentially start to recapture the growth that we saw. Look, the business is certainly down and we've described it fairly carefully in our script. So I think it is definitely tied to how people come back to work.
Mike Latimore -- Northland Capital Markets -- Analyst
All right. And then on the video side, that's -- the Studio is growing nicely. Is that mostly in-office deployments or some of that's kind of home environment?
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
I think it depends on the region. So we have -- some of our products do work for home. One notable product, we have a product called the EagleEye Mini and it's up materially. It's a webcam, personal webcam but very professional-oriented one. So we are seeing the work-from-home and we are seeing that we are able to move product, both to enterprise where people are back to work or enterprise who're facilitating it for work-from-home employees and then we are seeing it also move one-off as individuals are buying it.
Mike Latimore -- Northland Capital Markets -- Analyst
Okay, and just last question on supply. In the June quarter, I think you had two weeks where your plants were actually, I believe, shutdown. How would you compare the supply constraint in the September quarter versus the second quarter? You're not going to have kind of the plants being shut down in the second -- in the September quarter.
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
Yeah. That's right, Mike. In the June quarter, unfortunately, our Mexico factory was offline for two, four weeks and then it took a while to ramp it back up. So effective production was less than three or four weeks of output -- about three or four weeks of output was impacted. So we've reconfigured the factory for the health and safety of all of our employees and we're running with the ability to run at full capacity right now, but we have component shortages. So we expect, as contemplated in our guidance, that the business will be up in the September quarter, assuming that there is no other disruptions.
But the bottleneck or constraint right now, as we talked about in the prepared remarks, is really component shortages. But otherwise we expect higher volumes this quarter, partially clear more of the backlog. We cleared a little bit of the backlog in the June quarter, we'll clear more of it in the September quarter. But we don't think that we'll be out of the woods entirely and that we'll still have more than model backlog going into the December quarter.
Mike Latimore -- Northland Capital Markets -- Analyst
Okay, thank you.
Mike Iburg -- Vice President, Investor Relations
Thank you, Mike. Operator, next question?
Operator
Sure, sir. Your next question comes from the line of Greg Burns with Sidoti & Company. Your line is now open.
Gregory Burns -- Sidoti & Company, LLC -- Analyst
Good afternoon. Just following up on the supply chain issues. Could you quantify what that -- what the impact that is to revenue in your guidance?
Chuck Boynton -- Executive Vice President and Chief Financial Officer
Well, I think you can -- we haven't sort of outlined the exact numbers, but we did indicate, last quarter we had effectively five weeks of backlog and this quarter we ended with about -- six weeks last quarter, and the June quarter, we ended with five weeks of backlog and we probably won't clear all that. So we haven't provided the exact numbers, but you can sort of do the math and get an idea of what the range is of backlog. And the backlog is primarily high runner, UC headset products that are -- that we're experiencing in backlog.
Gregory Burns -- Sidoti & Company, LLC -- Analyst
Okay. And would you characterize the component shortages as like an industrywide issue or is this specific to some of your headsets? I'm just trying to get a sense of, if you're missing some opportunity here or if this is more of an industry issue where everyone's kind of suffering the same supply chain constraints.
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
So we have a small number of single source components that are difficult to obtain in volumes. As the volumes shifted, those are the components that popped up. In some cases, they are parts that are used by others, but in some cases, they're not. So they're just -- it's just foundries being -- and suppliers being able to ramp as this demand shifted. And it shifted fairly dramatically. So we're working through it.
Gregory Burns -- Sidoti & Company, LLC -- Analyst
Okay. And lastly, you mentioned modifying your product roadmap, given the shifts you're seeing in the market. Could you just give us maybe a little bit more color on what you're doing in terms of your product portfolio? Thank you.
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
I mean in a 30,000 foot view, we slowed down some of the resources that we apply to large conference room work and applied them to work-from-home platforms. And it's primarily in video and in personal voice, not headsets.
Gregory Burns -- Sidoti & Company, LLC -- Analyst
Okay. So lower price point personal video endpoint...
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
No, more things that would apply to work-from-home.
Gregory Burns -- Sidoti & Company, LLC -- Analyst
Okay.
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
So kind of away from big conference room toward work-from-home. And it's voice and video, but voice -- it's personal voice not -- we have plenty of people working on headsets.
Gregory Burns -- Sidoti & Company, LLC -- Analyst
Great. All right, great. Thank you.
Mike Iburg -- Vice President, Investor Relations
Thanks, Greg.
Operator
[Operator Instructions] Your next question comes from the line of Paul Coster with J.P. Morgan. Your line is now open.
Paul Coster -- J.P. Morgan Securities -- Analyst
Yeah, thanks for taking the question. Well, it looks like you got another decent quarter ahead for the headset business. It's no other reason, because of the backlog. But, I mean, are you able yet to discern what is one-time in nature versus what is more enduring in nature as people return to the office? Are they taking their headset with them or are you expecting to see a sort of a second headset? I'm just sort of trying to figure out what is short term in nature here, and what's maybe longer as a trend.
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
Well, let's talk about what we know -- what we think we know about what the market is doing. In the near term, the knee jerk was everybody is out of the office, and that's clearly where we are for the most part right now. In the future, we expect that hybrid will become a large portion of the workforce. So people will work part-time at home and part-time in the office. At some level, people will carry their headset in, in some level they'll have two. I'd say that's a little unclear just yet, but we are seeing strong demand for headsets, and we don't see it abating in the short term.
Paul Coster -- J.P. Morgan Securities -- Analyst
Got you. And then on the video front, I mean, I'm just trying to understand the sort of oxymoron here that you got huddle rooms which are driving much of the Studio demand and well, human beings aren't really supposed to be huddling anywhere at the moment. So what's happening? What is it that the enterprise or SMB is doing to drive the demand for that product?
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
So, we're seeing two kinds of things happen. First off, we have some of the -- some of our products that are termed huddle room, which is just kind of a category that they've been put in, are capable of working in an office or working at in-a-home environment. Certainly, if you go to the telemedicine, or probably more so to distance learning, teachers, for example, might use some of our low-end video bars in that environment with a large screen. So they are applicable to work-from-home. I think video is going to be pervasive. It's pervasive now. It'll be pervasive in the future. So we don't see that shifting away from it.
Paul Coster -- J.P. Morgan Securities -- Analyst
Okay, got it, thanks.
Mike Iburg -- Vice President, Investor Relations
Thanks, Paul.
Operator
Your next question comes from the line of David Eller with Wells Fargo. Your line is now open.
David Eller -- Wells Fargo -- Analyst
Hey, good afternoon. Thanks for taking the questions. I had a follow-up on the Zoom Hardware-as-a-Service.They -- in their announcements, they talked about partnering with DTEN and with Neat to making an investment there. So could you just talk about -- are you guys positioned as their kind of enterprise partner and another one is kind of more focused on the home or like how are each of you -- what little niche are you carving out? And then back to the earlier question on any kind of revenue impact or anything like that, it sounds like you are still just selling those as you typically would, but who's the end buyer? Is Zoom the actual end buyer or who -- where does that reside?
Chuck Boynton -- Executive Vice President and Chief Financial Officer
Yeah, certainly, David. Thanks for the question. So I would not characterize our participation as a niche. I think Zoom is playing in a very large ecosystem. They have a lot of daily users. It's a significant opportunity and we have 50% of the SKUs available on their website in the Hardware-as-a-Service model are our SKUs. And so I think that we've got a big share of those. Certainly they did make an investment in Neat. And I think there is a -- it's a very large market and there will be lots of players and we think that we'll differentiate our technology with our great hardware and great designs, and more importantly, with the software layer interconnecting all of our applications together that we think will help drive companies and individuals to buy multiple products of ours, because they will work better together. And so I think that the Zoom opportunity is a great one. We're excited to work with them.
In terms of who takes the risk on that, for us it's through use of cash sale. I don't know if Zoom has a third-party who is providing the financing or if that's on their balance sheet. But for us it's going through -- it's a normal cash sale to us through our channel partners. And so it's -- we're excited to work with them and there's a lot of great opportunity.
David Eller -- Wells Fargo -- Analyst
Okay, great. And then for Neat that's obviously great -- a big IT investment, I presume, but I did wonder, is that something that you guys would consider as well. Have you had conversations with Zoom about any sort of deeper integration, maybe financial investment?
Chuck Boynton -- Executive Vice President and Chief Financial Officer
Well, we certainly had discussions around deeper integration and they're a great partner, as is Microsoft and LogMeIn and others. So in terms of taking investment, that's not something that we've talked to them about. And I think at today's share price, not something that we're looking for either.
David Eller -- Wells Fargo -- Analyst
Great. I got two more questions on the backlog. Can you just describe what's happening for the folks that can't get their hands on product from Plantronics? Are they going to other products or is backlog fairly consistent across the industry, it's just customers aren't able to source products from anybody?
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
Well, so there's two things that can happen. One, it can be on allocation, and they'll work through whether through a long lead time or a extended lead time. We have alternate products that are available, sometimes deals are shifted to a product that we do have availability on. And I can't speak to what's going on with our competitors. I think that certainly, anecdotally, it looks like everybody has been impacted because of the sudden up-shift in demand.
David Eller -- Wells Fargo -- Analyst
Okay, and then lastly, this one's for Chuck, if you could just talk about, obviously, you've only given one quarter of guidance, but as we think about this year and the potential cash flow generation for the year, is there any way you can help help us bracket where to drive our models? Are you expecting positive free cash flow or over $100 million or any way that you can help us to understand how to tie that together?
Chuck Boynton -- Executive Vice President and Chief Financial Officer
Certainly. We've said in the past that we expect this company should generate significant positive operating cash flow. We had a great cash quarter, over $40 million of operating cash flow this quarter. We guided that we expect that to be lower next quarter because just due to the working capital profile. But we do expect material operating cash flow throughout the year. We did talk about starting to delever once we have more confidence in the overall economy and the business outlook.
So in terms of a range that we gave, I think it was a couple of quarters ago, we set a $150 million to $200 million of operating cash flow for the year. I don't really see that changing in that range. But it's -- we have not sort of officially provided guidance for the year. But we do -- this is a really good business and we are optimistic that margins will tick up a little bit next quarter. Certainly that's helped with the headset demand where margins are above company average. And with the decline in voice, those margins are lower than company average. So that mix is helpful. And then opex, we've -- the employees of the company has done a phenomenal job reducing costs and keeping costs in check and that's really helped to drive profitability and importantly drive operating cash flow for the year.
David Eller -- Wells Fargo -- Analyst
Great, thank you so much.
Mike Iburg -- Vice President, Investor Relations
Thanks, David.
Operator
Your next question comes from the line of Liz Pate with Cowen and Company. Your line is now open.
Elizabeth Pate -- Cowen and Company -- Analyst
Hi, thanks for taking my question. Actually most of my questions have already been answered, but just talk a little bit on uses of cash going forward. You mentioned deleveraging, it sounds like that's going to be a wait-and-see dependent upon the macro environment. So maybe you can talk about any headroom on -- or any issues regarding your covenants or what kind of headroom you have there. Thanks.
Chuck Boynton -- Executive Vice President and Chief Financial Officer
Yeah. Thank you, Liz. We don't have concerns on the covenants right now. We've talked, I think, extensively about this in the past. And so those are -- there is -- we don't really have a concern there. In terms of [Technical Issues] less than $10 million a quarter on average. And so it's a level of EBITDA, as that we performed at, and we've guided at, there should be excess cash to use to delever. Q2 may be a little bit lower just because of the profile of working capital and how we ended Q1. But for the year, we expect the cash generation to be positive and the primary model for capital allocation will be to delever.
Elizabeth Pate -- Cowen and Company -- Analyst
Perfect, thank you.
Mike Iburg -- Vice President, Investor Relations
Thank you, Liz.
Operator
And you have a follow-up question from Paul Coster with J.P. Morgan. Your line is now open.
Paul Coster -- J.P. Morgan Securities -- Analyst
No, thanks. So, I think every question possible has been asked. Thank you.
Mike Iburg -- Vice President, Investor Relations
Thank you, Paul. Operator, I think that wraps it up. I don't see anybody else in the queue.
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
Great. Well, we'll take this moment to tell everyone thank you for calling in. Thank you for your time and look forward to updating you all next quarter. Thank you. Bye-bye.
Operator
[Operator Closing Remarks]
Duration: 32 minutes
Call participants:
Mike Iburg -- Vice President, Investor Relations
Robert C. Hagerty -- Interim Chief Executive Officer, Director and Chairman of the Board
Chuck Boynton -- Executive Vice President and Chief Financial Officer
Meta Marshall -- Morgan Stanley -- Analyst
Mike Latimore -- Northland Capital Markets -- Analyst
Gregory Burns -- Sidoti & Company, LLC -- Analyst
Paul Coster -- J.P. Morgan Securities -- Analyst
David Eller -- Wells Fargo -- Analyst
Elizabeth Pate -- Cowen and Company -- Analyst
