Poly Inc (Poly)

Today’s subject report Poly, also known as Plantronics, continues our current theme of the “working from home and office hybrid model” which we discussed most recently in our report on computer accessory maker Logitech. Unfortunately for Poly it also has connections to our previous stock report on Micron Technology, in the fact that its profits have been hampered this year by the global computer chip shortage which has affected all different types of companies, from washing machine makers to vehicle manufacturers, but has impacted on technology companies the most.

Poly has had a tough time of it over the last few years. The issues go back to 2018 when Plantronics, who made headsets for computers and telephone systems, purchased audio and videoconferencing company Polycom for approximately $2 billion in stock and cash. The union seemed obvious with their combined products ready to take on the global conference room market. Yet management failed to achieve the expected synergies and the cost savings didn’t materialise to the level investors were hoping. The result was a devastating free fall in the stock price, from the lofty heights of $76 down into the $30s in the space of 18 months.

Then, of course, the coronavirus came to life and spread across the world causing markets to nosedive and sending Poly’s share price into the teens. It only took a few months, however, to realise that Poly would be making products that the world now needed. Video conferencing equipment became crucial for workplaces that had some, if not all, of their employees working from home. As we have discussed previously, this has shown management the way of the future. It is now possible to have part of your workplace in the office and others working from home. All you need is the right equipment.

In our Logitech report, we discussed the following and it is relevant again here. “Even after we see some clear air from the virus most sociologists believe that the future of white-collar work will merge into a sort of hybrid model of working from home and working in an office. Many people, who aren’t in lockdown, are doing this already. A few days heading into the office bookended by a couple of days of working from home. Studies have shown there has been no downside to productivity levels, in fact, the opposite. And it keeps employees happy and cuts down costs for employers. It’s a win/win all around.”

Plantronics began life when two airline pilots set about to invent a smaller and lighter headset for the cockpit. Previous to this the headwear was heavy and cumbersome and inappropriate for longer flights. Many pilots had reverted back to using handheld radios to communicate. Their new design of two small hearing aid style earpieces attached to a headband hit the market in 1962 and was an instant hit. In the same year, NASA engaged Plantronics to design a similar headset for its astronaut’s spacesuits, and they are stilled used in the Apollo programme to this day. When Neil Armstong spoke those famous words “That’s one small step for man……..” it was through a Plantronics headset.

These days Poly specialise in headsets (we use them in the office when we’re not working from home), conference phones, business phones, video conferencing systems, as well as providing software and services to go with the hardware. They’ve done deals with Microsoft, Zoom, and Amazon to personalise the customer experience and get themselves into workplaces and homes everywhere. They estimate that hybrid meetings – a mix of in-person and virtual participants – is a huge untapped market with only 10% of 50 million conference rooms globally equipped for videoconferencing.

Importantly for Poly, it looks like the new management team is getting them back on track after the disastrous merger debacle. They have a new CEO Dave Shull, a technology veteran who was previously CEO of Polycom until 2010 and CEO of TiVo and The Weather Channel before that. There’s also a new supply-chain chief and a new legal officer amongst a few other changes, and they seem to be making some very sensible moves given the stroke of luck they have been given within the pandemic environment.

In their last earnings report, Poly beat estimates on revenue and profit but took a hard fall due to guidance. Revenue was up 18% from a year ago to $476 million, while adjusted earnings hit $1.23 per share when analysts were looking for $0.93c and revenue of $455 million. Unfortunately, the outlook disappointed investors as management put the blame on the chip shortage (that we discussed last week) for a lack of supply, “The global semiconductor chip shortage has impacted companies worldwide and we expect we will continue to experience ongoing tightness in our supply chain. End market demand remains strong for video and headsets, while voice demand is recovering.”

The shortage has had an impact right across the company’s product lines. Video product sales were up by a whopping 94% in the last quarter and that number would have been much larger had they not experienced a shortage in chip supplies. There is also an impact on margins, as the supply they do get their hands on becomes more expensive. While this is likely to continue for the next few quarters we know that the demand for the products is there and supply will slowly become plentiful again and Poly will be there to take advantage.

The good news is that while now is a tough time for the company – this time at least through little fault of their own – the share price has reacted accordingly. At its current share price, it is trading around 0.7 times the anticipated revenue, and eight times projected profits for its fiscal year-end in 2023. That’s a hugely discounted price for a company that has a great chance of surprising to the upside.

Logitech, our pick from a few weeks ago, has some overlap in its products and is just as set to profit in the years to come. However, its share price is now 3.2 times revenue and 22 times projected profits for the same period. Personally, I like both, and wouldn’t it be great to see a Logitech takeover at some stage. It’s a very likely possibility. If not Logitech, someone like Microsft, Dell, or Hewlett Packard could easily look to target the company at this cheap price.

After a 20% fall in May following the poor guidance advice, the share price recovered to around the $42 mark and I thought I had missed the boat. However, since then it has settled back down to $30 and I really like it at this price. So do company insiders who have been buying it up in large amounts. That’s always a good sign. I think I will join them.