Description

Investment Thesis: Plantronics (“PLT”) is a short at $14.00 or ~14x run-rate FQ4 ’20E EBITDA because the company has been losing market share across all of its segments due to both secular forces and poor execution. Additionally, the company sells IT hardware to office workers so it is likely that demand for that equipment will likely be much lower in the back half of calendar 2020. Finally, the company has $1.6bln of net debt at 12/31/19 and if the current run-rate EBITDA is the right earnings power of the business there is no equity value and they will be forced to restructure.

Short Catalyst

The hope is that PLT’s stock will pop on FQ4 2020 earnings as the company announces some stabilization in the business (they’ve already pre-announced a revenue and EBITDA beat vs. their previous guide) and guides to fairly robust FQ1 ’21 as they benefit from the industry-wide work-from-home tech hardware strength. We should then see weak earnings for the rest of the year as both the secular trends, competitive issues and likely macroeconomic weakness erode PLT’s earning power further.

Price Target

At 10 2021E EBITDA, including free cash flow of ~$100MM, PLT is a $3.50/share stock. I think it is more likely that the company would have to file for bankruptcy and restructure for a more appropriate capital structure given the run-rate earnings power of the business.

Investment Highlights

·       When Plantronics bought Polycom, they fired the majority of the legacy Plantronics sales force. The idea behind the move was that a sales team that could sell high-end video and phone equipment could easily transition into selling lower-priced, somewhat-commoditized headsets. For a short-term, that move had apparent impact on the legacy Plantronics. That changed dramatically starting FQ2 2020 when PLT’s enterprise headset went from growing 4% in Q1 ’20 to shrinking by (4)% and then shrinking by (27)% in Q3 ’20. Initial diligence points to an inability of the Poly salesforce to manage the headset channel, potential channel stuffing in late F2019 and early F2020 and then the old PLT reps finding homes at PLT’s competitors and taking share.

·       Poly has been losing share over the past few years in phones and video do to a combination of factors (went to war with Cisco on the telephonic side for no real reason). The market share loss or pressure on average selling price should begin to accelerate as the corporate world moves away from large, expensive video and phone systems to using cloud platforms in both voice (RingCentral, 8&8 etc.) and video (Zoom, Google Meet, Microsoft Teams) where the software sits in the cloud and the phone or video system is just commodity hardware (TRS Consulting that they would outfit a new conference room with a $600 camera vs. the $3,000 product that Poly is currently selling and the $10,000 product that they use to sell).

·       Plantronics and its peers are seeing a temporary step-up in demand for their products as companies big and small, order products for their employees to be able to work from home. One real example that we heard is Quicken Loans ordered 1,000 laptops, phones and headsets for their call center employees to ensure business continuity when work-from-home orders were issued. That demand is likely one-time in nature and corporate spending on IT should slow throughout the rest of 2020 as the economy likely gets worse.

Key Risks

·       The private equity firm, Seris Capital, which sold Polycom to Plantronics still owns 18% of the equity in Plantronics (they took most of their consideration in cash but took some equity). They have a history of buying legacy tech hardware companies squeezing costs out of them and then selling them. I’m not sure that playbook is relevant here given they’ve already executed that playbook at Polycom and then there were a lot of costs taken of the combined company when Plantronics bought Polycom 2018. It should be noted that Siris recently sold half of their equity stake in Plantronics in late August for a realized loss of $100MM.

·       Plantronics claims that Q3 revenue was so bad due to their desire to let $60MM of channel inventory clear out. If that is the case, then revenue would have “only” been down (15)% in the quarter. The counter to this reasoning (and why the stock sold off so aggressively on the Q3 earnings release) is that PLT guided to Q4 revenue growth of (22)% at the midpoint even after “cleaning up” the channel inventory. They pre-announced Q4 revenue and EBITDA guidance that were above the high end of the revised Q4 guidance but revenue was still  down (18)% YoY and was significantly helped growth in enterprise headsets (which was presumably boosted by stay-at-home buying)

·       Logitech, which is a competitor to Plantronics in video collaboration, reported a huge 3/31/2020 quarter, particularly in video collaboration which was up 60% YoY. PLT already reported their Q4 revenue (-18% growth) but the trend towards employees building out and upgrading their offices (which Logitech talked about on their call), could help Plantronics in the near term

Company and Segment Overview

Legacy Plantronics sold headsets to enterprise and consumers. It was steady but not spectacular business (LSD revenue growth, high teens EBITDA margins, and didn’t require a lot of capital). In 2018, they purchased Polycom with the idea that there were synergies in the sales force (both companies were selling telecom equipment to large IT departments). The largest miscalculation that the Plantronics management team made was to fire the legacy Plantronics salesforce with the idea that the Polycom could easily sell headset if they were used to selling high priced phones and video equipment to large enterprise clients. That turned out to be a bad decision (as discussed above) and now all of Plantronics segments face some type of headwind as outlined below:

Credit Overview

·       According to their 10Q, Poly is required to repay the term loan in $3MM increments per quarter

·       The credit facility has a covenant of net debt / EBITDA of 3.0x which Poly got waived for all of calendar 2020

Catalyst

• Continued share loss.
• Looming debt renegotiation
• Slowdown in demand for headsets from work from home phenomenon