HP Inc

NYSE:HPQ

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Poly's Fourth Quarter Financial Results Conference Call. [Operator Instructions]

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

[Mike Iburg, Head, Investor Relations]

Thank you, Operator. Welcome to Poly's preliminary financial results conference call for the fourth quarter of fiscal year 2020. 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 preliminary unaudited information presented and discussed today includes forward-looking statements, which are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The risks and uncertainties related to such statements are detailed in our most recent 10-Q, 10-K and today's press release and earnings presentation.

Throughout today's remarks, we will refer to specific Slides from our Q4 earnings presentation. This presentation is available on the front page of our Investor Relations Web site at investor.poly.com. Unless otherwise noted, all comparisons discussed today will be to the same quarter in the prior year.

You should also refer to the materials we provide today for an explanation of the non-GAAP financial measures discussed on this call, along with the reconciliation of those measures to the nearest applicable GAAP measures. These non-GAAP measures are indicators that management uses to provide additional meaningful comparisons between current results and previously reported results and as a basis for planning and forecasting future periods. These materials are posted on our Investor Relations Web site at investor.poly.com.

With that, I will now turn the call over to Bob.

[Bob Hagerty, Chairman and Interim Chief Executive Officer]

Thanks Mike, and thanks everyone for joining us today.

Before I discuss our performance for the quarter, I'd like to make a few opening remarks.

Our strategy is to be the endpoint provider of choice as customers move their communication platforms to the cloud. For the past several months, the pandemic has forced businesses around the world to shift many of their employees to remote work. As businesses dealt with these work-from-home mandates, there was a rush to provide employees with the tools needed to stay engaged and productive.

For many companies that meant duplicating the home, many of the collaboration tools employees have grown accustomed to in the office. Another dynamic is the widespread adoption of video collaboration, which has moved beyond the corporate conference room into the mainstream.

Through platforms like Microsoft Teams, Zoom, and others, video collaboration has become a key tool to keep remote employees engaged and connected. In our view, the concept of office work is fundamentally shifting. Even after the work from home mandates are lifted, the number of remote workers will likely remain significantly higher than the past, and businesses will need to ensure these workers have a consistent set of manageable professional collaboration endpoints. The net result will be an expanding TAM and long-term growth opportunity for Poly and our industry.

Turning to our preliminary financial results on Page 5, Q4 was a strong finish to a challenging year. Our team overcame a series of supply chain disruptions and took aggressive steps to manage expenses, allowing us to deliver revenue and earnings above the high-end of our guidance range. We exited the March quarter with six weeks of backlog and a very strong cash position. Chuck will discuss the results in greater detail in just a moment.

Now, let me take a few minutes and provide a brief update on how COVID-19 has impacted the company.

Turning to Page 6, we saw historically high demand for enterprise headsets, which began in early March and continues today. On the other hand, as businesses around the world vacated their offices, we saw what we believe to be a somewhat temporary shift from audio and video solutions that require on-site personnel. From an operational perspective, our in-house manufacturing facility in Mexico has resumed production after the factory was reconfigured to implement COVID-19 safety protocols.

To provide a bit more color, the increase in headset demand was so strong in March and April, that it depleted both the on-hand inventory and the channel inventory of some of our most popular headsets. Our operations team is working aggressively with our key suppliers and contract manufacturers to fulfill the backlog as quickly as possible.

For example, we've expanded our dual sourcing of high-volume headsets, purchased additional tooling, and secured additional capacity at our contract manufacturers. These steps will allow us to increase the global production of specific headsets to help meet the current demand. However, even with these actions, we expect to exit the June quarter with an elevated backlog.

I'd also like to mention that while certain headsets are in short supply, our teams are taking steps to prioritize orders received from first responders, governments, and healthcare organizations to ensure they have the necessary tools to be safe and productive.

For example, our headsets are connecting over 350,000 dispatchers and 911 emergency call centers. Our video solutions are connecting world leaders around the globe, and our voice and video endpoints are supporting both telemedicine and remote education at many of the leading hospitals and universities around the world.

We have a long history of creating collaboration tools for remote work. It has been part of our DNA for the past 60 years and our employees have always been strong internal users of our technology. As a result, our employees were able to easily transition to work from home.

Moving on, I'd like to take a few minutes to discuss the overall business. In the past several months, we've taken actions to resolve the go-to-market issues we experienced late -- last year. While we still have a lot of work to do, we're beginning to see some early signs of improvement.

Our sales organization is gaining traction in specific markets even as we adjust to the new sales motion due to the pandemic. We've improved our communication with partners and customers which has led to additional opportunities. With increased demand for our headsets, we are capturing customers across a broad market, and we're working very hard to keep them. We've made progress with -- but have more work to do and we'll continue to focus in these areas.

Our strategic alliance partners are working closely with us to offer a combined portfolio that meets customers' needs. We are starting to see new opportunities emerge that are a direct result of our alliance strategy, in particular with Microsoft and Zoom, where we have the broadest portfolio of certified and supported devices. At the same time, we are strengthening our relationship with IT service providers like RingCentral, 8x8, LogMeIn, Google Voice, and Vonage.

Another key focus for the company has been our channel partners, where we continue to improve our systems and processes. Our new partner program brings everyone together under one global program with a goal of simplifying the interactions at all levels. We are making it easier for our partners to sell our portfolio. The new program rewards partners for the marketing and selling of our solutions, as well as for training and enablement.

Finally, last month, we launched our new corporate Web site which includes new partner portal to provide them with quick and easy access to product details, technical information, and local resources.

On the product front, our design teams remained busy bringing new products to the market. While many of those solutions are designed for the office, we have a broad range of endpoints that support remote work as well. Our work from any work -- anywhere portfolio includes the broadest range of enterprise headsets, both wired and wireless personal speaker phones, high quality cameras, and industry leading video bars.

As market conditions and customer demands evolve, our product teams are continuing to innovate solutions to market with relevant features and technology. We have an aggressive roadmap for fiscal '21 with new products scheduled to be launched in each quarter in each of our product categories.

In conclusion, we have a strong cash position and industry leading product portfolio addressing a large and growing market. Our large customer base and strong strategic alliances are further evidence of our leadership role in this market. We continue to see elevated demand for our enterprise headsets and expect the global return to the office to improve demand for our phone and video solutions.

In the past few months, we've seen a profound change in the way business is conducted around the world. As we continue our CEO search, I'm proud of the Poly team as we work together to provide our customers with collaboration endpoints they need today, and to capitalize on the market opportunities that work from anywhere presents tomorrow.

I'll now turn the call over to Chuck to discuss our financial results.

[Chuck Boynton]

Thanks, Bob.

I'd like to begin by reminding everyone of the business update we provided an April 15. In that communication, we discussed the steps we are taking to maximize financial flexibility and liquidity, including deferring a voluntary Q4 debt prepayment, suspending the dividend and aggressively managing our costs. These steps along with our quarter ending cash position of 226 million give us confidence while navigating the current economic environment.

Turning to our preliminary unaudited March quarter results as Bob mentioned, it was a strong finish to our fiscal 20 year. Demand for headsets drove our revenue above the guidance range, reduced on hand inventory, reduced channel inventory, improved our cash flow from operations and allowed us to enter April with six weeks of backlog.

As headset order flow continues to be strong, we will likely exit fiscal Q1 with an elevated backlog but should be back to standard delivery times for most products in fiscal Q2. Our focus on cost discipline this past year became a real benefit as we worked our way through the macro challenges of fiscal Q4.

Page 19 provides revenue by category and geography. As you can see headsets and voice sales remain strong in Q4, while our video business was in line with our expectations, our new video bars were supply constrained as we were ramping production through the quarter and our large legacy video systems slowed as offices closed due to the pandemic. Geographically, both EMEA and Americas saw a dramatic increase in headset demand related to the shelter in place mandates. However, our Asia Pac revenues were negatively impacted by COVID-19 as shelter in place policies were implemented earlier.

As expected, we closed the sale of our gaming assets in March, and we continue to streamline the balance of our consumer portfolio. I'd also like to mention that historically, we reported the mono premium product line in our consumer category. With today's earnings presentation, we have moved that product line into the enterprise headset category, which we feel is a better fit. This was reflected on the current page, and we also provided a restated eight quarter trend on Page 30.

Turning to Page 20 gross margins were impacted by factory under utilization and tariffs. And we also saw an increase in freight costs related to supply chain disruption during the quarter. Factory under utilization will continue to be a factor holding down gross margins next quarter, as our overall volumes are just now getting back to prior levels. We've been aggressively managing operating expenses as the COVID-19 economic impact unfolds.

Our March quarter saw a significant reduction in variable compensation, hiring and travel. For the full year fiscal '20, we reduced non-GAAP operating expenses over 11% on a combined comparative basis. We continue working to keep our cost structure aligned to revenue expectations. To that end, in our June quarter, we expect to book a restructuring charge of 25 million to 35 million that will cover office closures and headcount reductions. However, even with the latest cost reductions, we expect OpEx over fiscal '21 to be roughly consistent with the expense levels in our fiscal Q4 reported today.

EBITDA was 60 million in the quarter and we had earnings per share of $0.30 both above our forecast. Regarding our non-GAAP tax rate, we read domiciled our intellectual property during the quarter, which affected the tax rate pushing it up to 53% for the quarter and 19% for the full year fiscal '20. As we discussed in our business update, the company's preliminary financial results include a non-cash impairment charge, currently estimated to be $180 million related to the company's intangible assets and property, plant and equipment in the voice business, as well as a non-cash impairment charge currently estimated to be 468 million to goodwill related to an overall decline in the company's earnings and a sustained decrease in its share price.

Due to the complexity of the analysis resulting from the economic uncertainty of COVID-19, the company is still in the process of finalizing the impairment assessment, including the design and operation of internal controls, so actual results may differ materially from the preliminary unaudited results provided today. The company expects to complete the impairment analysis and finalize the amount of the impairment charges in connection with its filing of the company's Form 10-K, which is currently expected to be filed on or around June 3.

Turning to Page 23, a significant reduction in working capital primarily inventory contributed to strong operating cash flow in the quarter of $62 million. This is the highest cash flow the come for the company since the Polycom acquisition.

In addition, the deferral of debt prepayment helped to push our quarter end cash balance to the highest level and over a year. We have not yet decided on a prepayment in the June quarter, but on balance we prefer to maintain significant liquidity given the current market environment. Trailing 12 months EBITDA was $293 million as of fiscal year end, and our net debt position was 1.4 billion. We currently have significant headroom and the covenants related to our undrawn revolver. As we have stated in the past, we don't expect to have any covenant issues in fiscal '21. However, if for some reason, we have covenant constraints, we can terminate the revolver and the financial covenants go away.

Turning to guidance on Page 25. Before I walk through the numbers, I'd like to offer some context for our fiscal Q1 guidance. We entered April with very low headset inventory. We then experienced additional disruptions across our supply chain due to the pandemic. Today, our factory and suppliers are generally running at normal capacity, however, we remain supply constrained in specific products.

In addition, our other product categories are impacted by our customers not having staff in the office to receive shipments. With that context, our Q1 guidance is as follows. We expect GAAP net revenues of 330 million to 365 million and our non-GAAP net revenues of 335 million to 370 million. Total adjusted EBITDA is expected to be in the range of 25 million to 45 million. And non-GAAP EPS is expected to be in the range of a loss of $0.18 per share to a gain of $0.22 per share.

Finally, I'd like to mention that these guidance ranges include our estimates of the impact of factory overhead under utilization due to lower production volumes, incremental freight due to supply chain challenges, and the cost of factory reconfiguration.

With that, I'll turn the call over to the operator to begin the Q&A. Operator.

[Operator]

[Operator Instructions] Our first question comes from the line of Meta Marshall from Morgan Stanley. Your line is open.

[Meta Marshall, Morgan Stanley]

I wanted to see if you could talk a little bit more about some of the improvements on the enterprise headset channel and just some of the work to reconnect with some of kind of the previous Plantronics channel. And then maybe secondly on inventory, is that something where you feel if you worked through a lot of the Skype for Business or kind of older product inventory or just should we think of that as a source of cash over the next couple of quarters as well. Thank you.

[Bob Hagerty, Chairman and Interim Chief Executive Officer]

So this is Bob, and let me cover at least at a high level, some of the things that we addressed. So, coming into the quarter or coming into the company, I did in early February, we did find that we had to do some things around coverage and specifically in the headset business. So, we've been working hard to bring on some specific, I will call them overlay sales people, to focus just on the headset business.

We did have issues with visibility around our point of sale information, and that has been cleaned up. And we have shifted generally from being able to do a mix of how sales gets paid to primarily focusing sales in, sales out.

I don’t know if you really have specific questions about channels, but let me let me shift it over to Chuck to give you some more color and then and go over some of the more specific questions you have.

[Chuck Boynton]

So specifically, we had a really, really strong quarter on headsets and generally sold out of the high runners, both the channel and our hand-on inventory. Our legacy or contact center headsets increased from 50 million in Q3 to 66 million in Q4, and the UC headset business went from 76 million to 90 million, and that's our revenue, and so the channel had already -- we've already taken channel inventory down. And so, we found ourselves with effectively six weeks of backlog which the company never really had before.

As we sit here today, we're definitely focused on keeping our inventory levels down, but we need to increase the supply of our headset business, so our factories in Mexico are running at mostly full speed today. We were down for a couple of weeks, and we're focused on selling all the products that we have on hand, but certainly the short-term demand increase has been around headsets, secondarily around the new video collaboration tools, the Studio X series X30 and X50, which just started shipping last quarter. But the rest of the products in desk phones and whatnot have been a little bit more challenging because people are not in the office to receive those products.

[Meta Marshall, Morgan Stanley]

Got it. I think I guess I’m just trying to get a sense of, obviously I would expect kind of headsets to be sold out right now just given kind of current situation, but just like going forward, do you feel like all of those investments needed in overlay salespeople or kind of reconnecting with old channel partners has been done, is that work to be done? Just getting a sense on kind of some of the previous issues versus clearly an environment that is very, very conducive right now?

[Bob Hagerty, Chairman and Interim Chief Executive Officer]

Well, I think it gives us some great cover, because we're able to see all the customers that we have had, and then go find some new customers and new channels because the demand is quite high. So I think that it's been actually a quite a good opportunity for us to touch base with all those channels. There's always shifting demand and changes in the marketplaces, depending on what region you're in and how things are ebbing and flowing. But I can say that, the work is never done. But I think we're substantially through the difficult part of making those transitions, and we're fundamentally on the right road and we'll only see improvement from here.

[Operator]

Your next question comes from the line of Greg Burns from Sidoti & Company. Your line is open.

[Greg Burns, Sidoti & Company]

Just a follow-up on the channel inventory. So, can you quantify how -- like you took a 60 million charge or reduction in channel inventory quarter or two ago. Now that channel inventory has been depleted. Can you quantify what that is, and do we see that need to be replenished in Q2, Q3?

[Chuck Boynton]

So, we don't sort of disclose the channel inventories generally, but the channel inventories were down fairly significantly in Q4 and they're too low quite frankly and sold out in headsets. So, we definitely want to replenish that inventory, and that will take a while. As we said in prepared remarks, even through Q2, some of the high runners may not be fully caught up. There are other areas though against geographic, it's by channel and by customer. They're all a little bit different, but I'd say the aggregate number is probably on a lower side of where it should be.

So, it may come up a little bit, but it's -- where we went through a lot of pain and hard work last year to get channel inventories to the right level because we believe fundamentally that by reducing channel inventory, by reducing our on-hand inventory, that's a better financial equation for all of us in the -- across the supply chain. It reduces investment capital and will make everyone better off, and so we're not going to -- we're focused on keeping channel inventories at the appropriate level based on the product and the geography.

[Greg Burns, Sidoti & Company]

Okay. Relative to your revenue guidance, can you maybe give us a little color by segment on how you're thinking -- how you get to those ranges?

[Chuck Boynton]

Certainly, so it's a fairly simple equation. Here we are with, call it five or six weeks, five weeks to go in the quarter. And our main factory in Mexico was offline for two weeks to reconfigure for health and safety, and so to make it a safer place for all of our people to work, and we're proud of the work that team did, they did a phenomenal job.

We also had supply disruptions with some of our CMs and ODMs. And so, the guidance effectively takes into account the supply constraints that we have and how much how much we can build ourselves and how much we can receive from our channel partners, our CMs. The real constraint right now is on the high runners think of those as our professional webcams, the EagleEye, the EagleEye mini, our vast majority of our headset lines, these are in very high demand. And so, you know those we can sell as many as we can make, desk phones and video, we have plenty in inventory and we're actively selling those.

And so it's really a fairly simple equation of what orders do we have placed, what trends do we expect from a sales standpoint, and what are the supply constraints. So the guidance really the -- the real impact is the supply constraints that we're seeing for our high runner products.

[Greg Burns, Sidoti & Company]

Okay. But can you maybe give us a little bit of color on, your growth assumptions you're embedding for the enterprise headsets, voice and video?

[Chuck Boynton]

We're not breaking that out for Q1 because obviously, we're supply constrained and so, we're selling whatever we can make and so that they are real. I think for the year, it's a little more uncertain what's going to happen with these people return back to the office place. I think there's -- it's more uncertain for the year for both -- certainly for Q1, it's really a supply constraint equation. And then for the balance of the year, it's really geographic and what the return to the workplace looks like. And that is somewhat uncertain for us right now.

[Operator]

Your next question comes from the line of David Eller from Wells Fargo. Your line is open.

[David Eller, Wells Fargo]

I also had a couple questions on the headsets. I'm curious to hear a little bit more about what's going on in the headset market. If you could talk about the corded legacy business, maybe what you're seeing from contact centers, and like if there's been a big boost in demand there that, you've kind of already met like a surge need or whether that should continue throughout the year.

And then also on the UC business, could you talk about just the compatibility of your product set for work from home employee who may just be using, an iPhone or an Android instead of an open set phone or a VoIP service?

[Chuck Boynton]

Yes, certainly. So I'll start and Bob can add some color as well. On the contact center, we have seen a pretty strong increase in demand. It's hard to see the long-term trends, I think are things like contact centers will no longer be sharing headsets, they'll have their own headsets, they won't be repurposing them for new employees. So I think it bodes well long-term for the contact center business. And I think that the increase in demand is also people are working from home that are in contact centers doing remote work.

The bigger increase has been in the UC side as people work from home and they're using a Zoom call or a Team's call with their computer, it picks up all the background ambient noise of the household, whereas if they have one of our great UC products that will -- has things like active noise cancellation, sound fencing provides a professional environment as you work from home or in the coffee shop. And those are interoperable with the Bluetooth standard. We have deck. There's a whole series of technologies. And this is why, historically we've had such great success and ahead that business, is it just provides a way better user experience.

And there are any -- really constraints in terms of the platform you're using and certainly the proliferation of Teams and Zoom and those I think are increasing the demand profile for the for the UC headsets and as people return to the office, we think that will actually continue and possibly increase even more as people see the benefits of those that better experience.

[Bob Hagerty, Chairman and Interim Chief Executive Officer]

Just look just a little more context on it. One of the things I think that we need to understand is that the work from home is here for quite a while. And I think it migrates to a hybrid where people will work both from home or remotely and in the office and so I think the facilitation of those both the in office and the home are going to continue for a while. And so that is also upward pressure on demand.

And I think two things are going on. One, it's obviously a safety and health issue today, but what enterprises are finding is that it is also a cost savings and as they have to distance work spaces in their physical plant, this becomes a way to facilitate that. And that puts more demand on not only headsets, but there will be folks who bring home Voice over IP phone and there will be offices that are you going to need cameras and some of our huddle room products in some cases using them for people who have to be on conferences quite a bit.

[David Eller, Wells Fargo]

Great. And then could you also just remind us of the positioning of your headsets, so like where are the majority of your portfolio falls in terms of value price versus mid range versus high-end? And maybe if you could comment on whether business customers are primarily opting for kind of value priced headsets in the midst of belt tightening or maybe whether a lot of those models are sold out and they are being forced into higher price points, due to stock out and back orders?

[Chuck Boynton]

Yes. I mean I think us and in the competitive landscape are all seeing a strong increase in demand and many markets are buying whatever they can get their hands on. Our positioning is, there is really two main players. We're one of the top two players in this category. We have products that address the entire spectrum of headsets and so we've got everything from the high-end to the more value-priced. And I don't think the headsets are as price sensitive, because these are enterprise products as other categories.

One of the reasons we got out of the gaming business is it is very price sensitive and our headsets enjoy high margins and they are less price sensitive. It's more about quality and feature and functionality. We have a suite of products that address up and down the stack. And so I think that what you're seeing is people are buying whatever they can in certain markets, [indiscernible] people are sold out. And as the normal cycle replenishes, I think you'll see us and the other market participants at the top end having again, most of the share in this market.

[David Eller, Wells Fargo]

Okay. And then Chuck, I hope you could give a little bit more color, you kind of touched on your goal, which is to I guess maintain cash balances, I guess higher. It doesn't sound you're committing to near-term debt pay down and then you talked about covenants become an issue, you can terminate the revolver to deal with any covenant issues but I mean that's a strategy that obviously comes with some risk. So could you talk us through maybe how you might see the year unfold or I guess sort of probably more of a back up scenario.

[Chuck Boynton]

Yes. Well, I mean before we talked about, we needed a minimum of $100 million of cash to run the business and we are sitting here with 225 or 226. So we had not voluntarily prepaid the debt to maintain more flexibility. The revolver is currently undrawn and we're sitting on the highest cash position we've had in I think over a year and had our best operating cash flow quarter in over a year. And so while our pre-COVID plan was to aggressively delever, we would have been paying down $75 million, $100 million already. And so I think, we don't have a new -- we want X amount of cash is our new target. I would still say the minimum we need is $100 million and we don't really, we don't see a covenant issues that doesn't really weigh on us.

I just want to again recommunicate that we don't have a covenant issue and if we did, we could just terminate the revolver and it goes away, just to assuage any concerns. We expect to continue to drive material free cash flow throughout the year. So we think that we can generate a significant amount of free cash and then we will pay down debt. We're just not committing right now as to when and how much to give ourselves more flexibility.

[Operator]

Your next question comes from Mike Latimore from Northland Capital. Your line is open.

[Mike Latimore, Northland Capital]

Can you talk a little bit about, I think the headset demand was elevated starting in mid-March, remains elevated, what have you seen in terms of the voice and video demand patterns, kind of mid-March to the day? Did it drop a little bit and it's stable? Or is it sort of been stable or maybe just talking about the demand for those two areas since mid-March?

[Bob Hagerty, Chairman and Interim Chief Executive Officer]

Will certainly. I think I'd first say that we had a very strong desk phone quarter for Q4. Our desk phone business went from $48 million in Q3 to $68 million in Q4. So we had a really, really strong Q4. And we have, I think the leading desk phone that Team certified, the CCX line is a really awesome phone. And I think when people are back in the office, you'll see continued proliferation of the desk phones. Remember there still 400 million PBX connected phones out there that will get replaced at some point with either headset or a SIP phone.

On the video side, we are supply constrained on the new X series launch. And we knew we would be that was a little more challenging quarter were we went from $70 million to $62 million of revenue overall. We have seen the on-prem systems in APAC. We're still fairly strong in Q4.

As we sit here today in the demand environment, I think we're a bit more cautious on Q1 and Q2 because if people aren't in the office, they're not buying and receiving the goods. I think that the trends don't really change. And in fact, we're training, a whole new generation of people to do video conferencing. I think this bodes well long-term for the video solution and people realize that doing a Zoom call over your PC is sub-optimal and having a video bar like an X30 or Studio USB bar is a way better experience. But I think it's just unclear of when that demand will return to normal based on people working remotely.

[Mike Latimore, Northland Capital]

Great. And just -- can you give the desk phone number again quarter-to-quarter?

[Chuck Boynton]

The desk phone number was $48 million in Q3 and $68 million in Q4.

[Mike Latimore, Northland Capital]

Got it. Thanks. And then, you've launched a lot of new products including Teams, Zoom certifications, that sort of thing. Is there a way to break out what percent of the fourth quarter or the pipeline is kind of coming from these new products?

[Bob Hagerty, Chairman and Interim Chief Executive Officer]

We haven't done that yet. We've considered breaking out revenue from new products, but given the sort of pandemic, we shifted our approach because just things just change so quickly that we have not. I will say that earlier in the year, we had outlined that we thought the video business for Studio line would be material to our results by Q4 of this year. And we had quite a quite strong Q4 that we generated $40 million, sorry $20 million of revenue in the Studio line in Q4, which is a material number to our results. And so we're proud of that number, it could be higher if we had more supply. It's hard to say what will happen in Q1 and Q2, given the people are working from home.

[Mike Latimore, Northland Capital]

Okay. And just last one, what tax rate should we be using for fiscal '21?

[Bob Hagerty, Chairman and Interim Chief Executive Officer]

I would continue to use that kind of 18%, 19% range.

[Operator]

Your next question comes from the line of Paul Silverstein from Cowen. Your line is now open.

[Paul Silverstein, Cowen]

Thanks Bob and Chuck. I appreciate you all taking the questions and I apologize to you and everybody else on the call, if this is repetitive, we had our TMT conference today. So I missed part of this call, I do apologize. But I did hear quite a number of the questions, I want to try to tie together what I think I heard in particular if I've got the numbers right, your voice and video endpoints business is about $200 million this quarter, your headsets, I think we're about $183 million if I saw the numbers correctly, so they're about roughly the same size, if I take voice and video endpoints together relative to headsets.

And take a step back, in thinking about the current ongoing crisis and looking downstream, how it impacts, how we work and play over the next many years. The thought arises that many organizations, consistent with what we've announced we've heard from various organizations are going to shift workforce to sooner or later to home and it's obviously not binder, plenty of us will go back to our offices.

But my question to you is, given that likely shift to home, it helps, I would think it would help your enterprise headset business at the same time, on the one hand, you've got your new video endpoints in the market, it sounds like you're finally ramping aggressively. With that trend to work from home, I trust is not going to be a favorable trend for you and other companies for your products that are sold into enterprises for employees that are working on-prems. There will be relatively fewer employees on top of the fact that unfortunately due to the terrible economic cost of this crisis, there are few organizations that are going to be in the peak of health, just the opposite. Those organizations that survive this, obviously demand is less and number of employees are fewer.

And so as a general proposition, demand for on-premise infrastructure, whether you are talking about campus switching or in your case video endpoints and the desktop phones that are typically understand that some of us at our homes will use those for a better experience. But I would think for most of us who work at home, we're not going to be buying from you or anybody else or organizations are not to be buying from you or anybody else, those video endpoints and those desk set phones.

On the other hand, I would think it would be very good to your enterprise headset business. I'm hoping you can unpack that and tell me where I'm wrong in the thought process. Again, looking at I recognize, there are a lot of variables, things are as clear as mud today in terms of the pandemic and how this is unfolding. But if you could share insight for how you think this unfolds for your enterprise desk set phones and video endpoints business relative to that trend. Where do I have it wrong?

[Chuck Boynton]

Yes. Well, I think Paul, I mean, I think your general theme is not that far off. So generally I think you're correct, the headset business is about half of the product revenue and the other half would be video desk phones, conference phones, that's not too far off, of course, services is an important component. We're still seeing good bookings in Asia for our legacy video solutions and that obviously has a nice maintenance stream attached to it.

The desk phone market and conference phone market, I think you're right, is going to be down and if you saw our impairment discussion earlier that business has been, it took the brunt of the impairment or took all of the impairment. And so I think that you're right on that sort of thesis that still those 400 million to 450 million desk phones out there will get replaced by SIP phones or headsets and they're not going away, but I think you're right, in the short-term that's going to be more challenging.

On the other hand, we've talked about headsets over and over. I think that bodes well for headsets and video is really the one I think that I would challenge a little bit because we do have great technology, our web cams are very, very good technology and our video bars are basically can be definitely a work from home solution, especially for, I think of a CFO attending an earnings conference or a financial conference, you're using a PC camera and microphone and speakers is not a good solution and having a X30, our new Studio X30 video bar would be a way better experience both for the presenter and in the far end, receiving end.

And I think this whole shift of training hundreds of millions of people to use Zoom and Teams and whatnot bodes really well long-term for video anywhere not just video in the huddle room or the boardroom but video from home. And so, while I think that market is rapidly evolving and changing and I think this will unfold over probably years, but that market I think is will be quite strong in the future. And there is a real bull case on the video side. And so I think you're right on balance; I think it's a net positive for video and headsets and a net negative for desk phones and conference phones.

[Paul Silverstein, Cowen]

Again, if you already addressed it, I do apologize to you and everybody else. But I would think in your case if we look at the months of March, April, now May, three months of data in terms of how many of us, of employees who are obviously we're all working from home or virtually all of us are working from home, what did you see in terms of demand for your video endpoints and for your enterprise desk sets not headsets, but desk sets, what did you see in terms of demand that would suggest to what extent we're actually porting our normal workplace environment to a home workplace environment.

In one little wrinkle, I appreciate that you finally have out and congratulations, you finally have a broader suite of video endpoints and so you can now access in a more meaningful way and it sounds like you have with a $24 million number and it's growing and that's good to see. But I trust that makes, so the question I just asked makes it a little bit challenging since you're going to have a nice ramp for hopefully from here as you ship those new platforms. And so it may mask real end demand for that work from home, but I apologize again the direct question would be, what do you see in recent months that would suggest to what extent employees reporting or the employers reporting, the employee workplace environment to the home on the desk set in the video endpoint side?

[Chuck Boynton]

Well, the video, I think it's too early to tell how that all unfolds. And then I think it's too new of a phenomenon to see how the video unfolds in the work from home certainly a dramatic increase in headsets and our backlog is at a level, the highest I've ever seen in the company, I have only been here for a year, but it's incredibly on the headset side. I think it's too early to tell on video and desk phones at this point. Bob, I don't know if you have any color you want to share.

[Bob Hagerty, Chairman and Interim Chief Executive Officer]

Yes. I think look this is a trend that are undeniable. The first thing is this, this has hit pretty fast and pretty hard and the first thing people were reaching out to buy was headsets. And that drove demand through the roof and we basically stocked out, right? We are running in backlog. So it's clear people working from home have to talk and they want to talk on headsets, so that demand outstripped it. We had a small business in webcams things that go on top of monitors and that's sold out immediately too. So it's pretty clear that things that are associated or traditionally associated with the desktop are in super high demand right now.

Anecdotally, when Asia came back to work and maybe that profile is going to be different than Europe, which might be different than the Northern America and different in Southern America, but when they came back they switched to video.

I'll say another trend that's important to be thinking about. And we've seen this multiple times and it lasts a fairly long period maybe two years maybe 2.5 years. When these kind of things hit, whether it was 9/11 or financial crisis, airline gets decimated and it's currently decimated right now, people are not wanting to get on airplanes. There will be people in offices, they will need to coordinate with people outside of offices and people are generally very -- because it is really used to doing video first as a communication tool.

So we believe specifically some of the new line products we have will be implemented, are implemented and will be continuing to be implemented in the offices, so that people in offices can communicate out to those in remote and conferencing is going to be a normal and natural way to do business. That said, the trend on desktop phones, I think is TBD. I think that it will eventually come back around that people will install, they will have hoteling desks made, there will be regular desk made, and they will put telephones on them. That's been a long-standing event because especially if you're hoteling and you forgot your headset the phones right there I think there is a utility to it that's undeniable.

And so I think that in the longer term desktops will do well. I think in the near term, it's the office products that go to the desktop and will go home and to the hoteling spaces and I think video will be implemented, because you need to -- everything is going to be communicated with video as a primary especially when you're communicating in office to remote workers.

And I think the hybrid remote worker is here to stay. I mean, it is going to stay even after a vaccine because it's got a real utility for enterprise.

[Paul Silverstein, Cowen]

One last question for me, if I may. On the positive side or I think the indisputably positive side in terms of enterprise headsets where it's a rising tide, correct me if I'm wrong, but I think you all had some supply chain disruption in connection when you all did the combination between Poly and Plantronics which caused some share loss. I don't know if you regained that or if that was a permanent loss.

But more importantly, looking forward, I trust the customer relationship because these are enterprise not consumer side of your headset business which is de minimis now. But the enterprise portion as long as your technical specs are good enough, I trust these customer relationships are very sticky and it's more the relationship that matters than exactly how you compare to your primary competitors that these are long relationships and your management of that relationship in terms of delivering products in a timely way managing the inventory, et cetera are the dominant factors.

So as we look forward, the question is, it is now pretty settled out where your market share is what it is and you will ride the tide assuming that demand goes up would work from home, it's really a matter of the degree of demand as opposed to gaining or losing share?

[Chuck Boynton]

Well, I think, I guess the first part you mentioned Paul that it wasn't a supply issue, it was a channel consolidation issue that we mentioned earlier, it was not a supply issues.

[Paul Silverstein, Cowen]

My apologies. My bad. That's what I meant to say.

[Chuck Boynton]

I just want to make sure it was clear. And I don't think we're satisfied with the share loss that we took. I think it was self-inflicted and we want to get that share back. We've got a great sales force, we've got amazing products. To an extent some of those are commoditized, but to another extent they're not. We've got leading technology, we've got great employees and we want to fight to get that share back.

In this environment, I think all companies are doing well, but the normal market will return and we want to beat them on sales execution and technology and it's hard to say how that will play out, but I think we're not satisfied with what had happened last year.

[Bob Hagerty, Chairman and Interim Chief Executive Officer]

I'd say one thing that we mentioned earlier, I don't know if you're around or not, we are adding our headsets specialist back. One of the things when the channel consolidation came, there was an assumption that anybody can sell -- everybody can sell everything. And there is some specialty around headsets and we did get rid of that and we're bringing it back. And so this extraordinary demand situation allows us to go ahead and get that organized, get people trained, get them on the slots.

The good news is we had a bunch of people who were also in the company that have been shifted to other roles. The other thing that we have some -- a long legacy of selling multiple products. So one of the things this nice if you are an enterprise. We're really the only people that can deliver on headsets, desktop phones, video on the desktop, video in the huddle room and video in large conference room. So and we have strong alliances. I think Zoom and Microsoft and the long tail of others. Our ITSP partners like RingCentral and 8x8 and LogMeIn, Vonage, Google Voice and numbers of others, all add to that.

[Paul Silverstein, Cowen]

Thanks guys.

[Bob Hagerty, Chairman and Interim Chief Executive Officer]

Thank you very much, Paul. I appreciate it. We got time I think for one more question.

[Operator]

Your next question comes from the line of Amit Daryanani from Evercore. Your line is open.

[Michael Fisher, Evercore]

This is Michael Fisher on for Amit. I just wanted to dig into the inventory a little bit more. I'm just wondering, we're seeing it's about 170 in the quarter. So that's kind of getting toward the levels we saw last year. So I'm just wondering how much of this inventory drawdown, we saw was related to supply disruptions where you couldn't build up a normal level of inventory versus sustainably managing inventory level?

[Bob Hagerty, Chairman and Interim Chief Executive Officer]

Yes. That's a good question Michael, thank you. The way we think about this as we should be at six inventory turns and historically we were not, we were at four. And that we were disappointed. This past quarter, we got to five not still our target number and we got there primarily by selling out of enterprise headsets. But please recall, back in early Q3, we said that we're going to reduce channel inventory in Q3 and on-hand inventory in Q4, we reduced it more than we had expected quite frankly, because of the pandemic really accelerated the sales of headsets and to an extent had supply constraints.

I think inventories could go up a little bit in Q1 as we're rebuilding some of those inventories and as the mix moves but our expectation is by the end of this year, by the end of fiscal '21, we'll be at six turns. And that would be our target. We may hit eight again and that would be a best-in-class. But I think in the short-term, we're not going to get exactly to our target six. But our goal would be to be at that level by the end of the year, so even at 165 where we ended the quarter, it's still above our target working capital model and although huge improvement over the prior quarter not quite to the level that we had expected.

[Bob Hagerty, Chairman and Interim Chief Executive Officer]

So I think with that, we'll say thank you to everyone for calling in. We appreciate it and look forward to talking with all of you next quarter.

[Operator]

This concludes today's conference call. You may now disconnect.