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Making Markets EP25: Poly CEO Dave Shull on Q3, Supply Chain Strain, Service Pivots and The Future of Collaboration
by Daniel Newman | February 11, 2022

In this episode of Making Markets, Poly CEO Dave Shull joins the show once again to talk about the company’s most recent earnings result. He also dives into Poly’s supply chain issues and what it means for the short and long term for the company. We also explore a recent partnership announcement with Oracle Red Bull Racing, and more.

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Transcript:

Daniel Newman: A few hundred thousand dollars in chips costing tens of millions in revenue. Can this be true? It is. And Poly CEO, Dave Shull is here to talk about the company’s most recent earnings report while also diving into Poly’s, strategy, roadmap, and more. We also talk about a new partnership with Oracle Red Bull Racing and the company’s big pivot to more software and services. All this today and more, you’re tuned in to Making Markets.

Announcer: This is the Making Markets podcast, brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies. Bridging the gap between strategy, markets, innovation, and the company’s featured on the show. The Making Markets podcast is for information and entertainment purposes only. Please do not take anything reflected in this show as investment advice. Now, your host principal analyst and founding partner of Futurum Research, Daniel Newman.

Daniel Newman: Dave Shull, CEO of Poly. Welcome back to Making Markets.

Dave Shull: Thanks, Daniel. Great to be here.

Daniel Newman: It’s fun. I’m just starting to get back to seeing people more than one time here on the show, because I started the show the second half of 2021. And of course, rotating through guest. We’ve had a bunch of great CEOs that have come onto the show. Got a bunch of great ones coming up, but we’re starting to get the, hey, let’s come back. Let’s do this again.

Dave Shull: Well, hopefully you only bring the really good ones back, right? And so I’m glad we could be habit forming for you. It’s good.

Daniel Newman: Really interesting ones. Let’s say good. Good is relative because good doesn’t get as many views, but the really interesting ones certainly do draw a lot of eyeballs. But no, you’re doing some really great things and I’ve had a lot of fun engaging with you from the time that you took the role here at Poly. And the fun thing is I get you right after earnings. So, this is always fun because you got a lot you can say because you all know the week before there’s not a whole lot you can say. So, numbers are out.

Dave Shull: Yes.

Daniel Newman: Really good on the bottom line. I think a little bit soft on the top line in terms of what the Street was looking for, but just give me the quick rundown.

Dave Shull: So we did about $410 million in revenue. And as you said, that’s kind of down slightly from what we were hoping for. We actually didn’t guide for the quarter. So we’ve provided some and guidance for the fiscal year, which is one more quarter for us. And then also a little bit of guidance for next fiscal year. And it’s all tied to the supply chain. And how quickly does it bounce back? I mean, that’s really the storyline that matters here. And so, we’ve talked about just a couple $100,000 of parts is holding up many tens of millions of dollars of revenue. So if I could just break a few of them free. So any friends who have chip sets, they’re welcome to give me a call.

Daniel Newman: Noted. Hey, we’ve had the CEOs and leaders of a number of the big SMEs on this show. So, if you guys are out there listening, Dave’s calling for your help. But in all seriousness, I mean, you didn’t guide. So of course when you don’t guide the Street’s going to do its own guiding and they’re going to set the numbers for you. And then you’re going to be held accountable to them either way.

Dave Shull: That’s exactly right.

Daniel Newman: So, that’s kind of how it works, but crossing my fingers for you heading into the last quarter. You mentioned supply chain. So I’m not going to resist the chance to ask you a question about it. I’ve been on whether it’s been CNBC, Bloomberg, I’ve talked to all of them about this. I’m sure you have a little bit as well. Seems that the consensus is it’s softening a little bit from the worst. It’s getting a little bit better, but that also seems to be dependent on the size of the company, the volumes in which you’re purchasing, the specific process in which your nodes are being manufactured on. Right. One of things, Dave, I keep saying that I know we want to trim the balance sheet and we want to raise interest rates, but I keep saying we fixed the supply chain, I think we could do a lot for inflation.

Dave Shull: Yeah. And there’s a couple macro factors here. You just alluded to a lot of them, right? A lot of it’s really the size of the node. What processes are being used to create your chips and what’s the underlying capacity. Not just at the big chip set companies, but at the foundries that support them, at the fabs that support them. And so we’re redesigning about a dozen products to get to a node size that we know is going to be supported short term, medium term, and long term. And so that process is underway and we’ll do something by spring, summertime tied to that. In terms of the broader macro situation with supplies, is it getting better, is it getting worse? What we’ve said publicly is we had more than a dozen problems a few months ago. It’s now down to a handful, but boy, those handful have some components that we really need. And so it’s hard to kind of gauge exactly when that’s going to bounce back.

Daniel Newman: Yeah. It’s interesting for everyone out there that isn’t necessarily watching and just hearing the macro supply chain story. It’s kind of as simple as this, a single chip in a device that has hundreds and in some cases like a vehicle, it has maybe even 1,000 semiconductors can stop the entire manufacturing of that device and stop it from being put into final production. When you saw those picture on sites like Bloomberg of an entire field full of F150 pickup trucks that weren’t… It was literally, could have been one 30 plus nanometer node for a micro controller for an air conditioner. And that’s what people don’t realize. They think of a chip, they’re thinking of maybe the leading edge process that would go into their iPhone.

And we’ve done a pretty good job from the supply chain angle of turning that around because of the volume of the demand, the profitability. But some of those legacy nodes and things that were immediately pushed back in the very beginnings of the pandemic have never recovered. And there’s a lot of electronics in your space that have parts of the full build that are still running on those legacy nodes, which of course is redesigns and updates. And anyone that’s built or developed or designed technology knows you don’t update a product in a quarter. It takes several quarters or sometimes even longer, right? So the story’s pretty complex here, even though I know that the media tries to make it really simple.

Dave Shull: Well, I mean, from a consumer point of view, my kids keep growing and so I need to get a bit bigger vehicle. So I’m going to trade in a used car, which is great because you can get money for that. But now looking at new cars, it’s like, oh, you want one that actually has movable seats, right? Or you want one that has heated seats. Oh, I’m sorry, we don’t have the chip for that. So, they can ship the car, but it doesn’t have some little bit of computer intelligence that you might need to actually enjoy it the way you want to enjoy it.

And the same thing is true of our video devices, right? So we can get the imaging sensors, we can get the cameras, we can get the speakers. Oh, but you want to actually plug in the USB port. Well, that happens to be a different chip set size because who updates their USB ports all the time? And that’s the one component that’s keeping us from shipping that pretty good device. So it’s complex. It’s interesting in a theoretical sort of way. But right now I would love to see it released because the demand is off the charts and I want to get back to making sure we’re fulfilling our customers’ needs.

Daniel Newman: That’s why I keep saying the inflation relationship, I don’t want to hang the entire conversation on supply chain, but my gosh, if we could just free up inventory because the demand that’s being pent up. I mean, you guys among almost every other major manufacturer, OEM, device maker, you heard it from the PC makers. You’ve heard it from the phone makers, from the automobile.

Everyone’s got more demand. It’s not a demand problem, it’s a supply problem. And so what’s that demand problem create? Higher prices. You release that pressure valve a little bit, give more supply. And then all of a sudden prices of gaming consoles go down, prices of cars go down, prices of headsets go down. But you know what? I understand why there are definitely bigger factors and I’m not going to do… I’ve done a few of these more economic macro shows with some people that are in this space.

I won’t take you down that path, Dave. Let’s stay on Poly for a minute here. One of the things you guys are doing a lot of that’s been really interesting to me has been your focus on partnerships. Of course, I think the return to work thing is a little tired. The hybrid work conversation, because the context has gotten a little bit old, but in terms of how we actually are going to return to work and get back to work and continue to work. We’ve all learned that we can be extraordinarily productive with the right technology at our disposal. You guys aren’t trying to compete with a Microsoft or a Zoom. You guys are really aligning and partnering. And in this quarter you made more announcements, deepening those partnerships. You’re betting big on those things.

Dave Shull: We’re betting big. I mean, our view is our role here is to have intelligent devices sitting in your conference rooms or on top of your computer or over your head, right? We want to make sure we have the best possible intelligence at the edge, because we think that really changes the way you might experience Zoom or Teams or whatever else. And so we’re tripling down. Our view is the cloud partners, Microsoft Teams and Zoom, Google, RingCentral, GoToMeeting, probably the whole host of them are really, really important partnerships for us. And it’s a global phenomenon. It’s not just a US phenomenon.

And so it’s okay, in China, it’s a slightly different set of players, right? Teams and Zoom are definitely making some inroads there, but it’s a very different set of players. And so Tencent is a big player there. And so that was the partnership that we announced this quarter. And we’re excited about that market saying, “Hey, I want modern cloud based technology. And I want to have the flexibility that we’re all used to with Teams and Zoom. And I’m going to do it with Tencent.” And I think again, our devices work great regardless of what cloud provider is there.

Daniel Newman: Yeah. I think that’s really important. And that’s something the market I hope can appreciate about Poly. Is the fact that as the technology continues to evolve, as user sentiment might shift from one app to another app, you may see Teams now, what did they hit? 270 million. Don’t quote me on that. Or some odd monthly average users. Zoom had an extraordinary run, but then there’s others. There’s WebEx and there’s GoTos, and there’s all kinds of different technologies out there for people to meet. And Poly really believes in, hey, whatever platform you choose, we want to be a partner in terms of making those spaces more usable. And anyone that’s been, Dave, in a space when the video doesn’t work well, or the audio is not clear, or you’ve got echos or you’ve got grainy images. I mean, after two years, it’s sometimes just stunning to me that you go into meetings with people and you’re like, how are you a top exec at massive corporation and I can’t hear you? You can’t see me. How have we not gotten this together yet?

Dave Shull: I think pre pandemic we all candidly probably thought of video calls a little bit as an afterthought, right? It happened some, but maybe at least for my prior jobs, it was a couple times a week. It certainly wasn’t every day. Now we live by video. And so just making that experience rock solid and amazing and so easy to use. If it requires a button push, it’s one button push. I mean, that’s the magic that has to happen because we’re used to being able to do that now from our home, with our computer. And when we go back to the office, the experience has to be even better, right? Otherwise, why would I go to the office if I have to struggle to collaborate over video? It doesn’t make sense. And so that’s the opportunity for Poly, which is people are saying, “Okay, get rid of all the old gear we had. How do we redeploy these conference rooms so that they’re usable in this new video world?” That’s pretty cool.

Daniel Newman: Yeah. The other thing I think is key for Poly is going to be your service and software business.

Dave Shull: Yeah.

Daniel Newman: You’ve got your complete service. You’ve got Lens. I don’t think they’re talked about as much because I think Poly does have, as you’ve shifted to more and more enterprise and away from some of the consumer, with Plantronics, not being as much of a focal point of the company. I think people still often know you for the codecs. They know you for the, remember the old Polystar phone. I still think there’s a little bit of that identity. And part of the shift is going to be data. The shift is going to be utilization, productivity, user experience, employee productivity and satisfaction, wellness. You’re doing a lot of things with Lens. You’re doing a lot of things with your additional complete service solutions. How do you see that shift taking place for the company? When does it become a bigger and bigger part of that sort of revenue mix and what are some of the key trends that you’ve identified that is going to make this push become more front and center?

Dave Shull: So it kind of goes back to what do our CIO customers really want? And they’re looking at their whole real estate portfolio now with their heads of facilities, with their CEOs, right? They weren’t always having this conversation before. It used to be facilities would say, “Hey, we got a new building, right? We need to build it out.” Now it’s much more of an interactive dialogue saying, “Okay, do we need that much space? How do we reconfigure the floor so people are actually going to use it? How does the workspace mass to the workforce?” Which wasn’t always an interactive dialogue in the past. And so they’re looking for a real time feedback loop, which is, hey, Poly. You’ve got audio sensors, you’ve got imaging sensors in a lot of our rooms. Are those rooms actually being used?

Are they being used for Zoom or Microsoft or Google or RingCentral, whatever else? How many people are actually there? Do they feel engaged, right? I mean, all that can be figured out through the sensors. And the CIOs are saying, “We want that, not because we care about the expense necessarily.” They do, obviously. At least their finance team does, but because they want to make sure that what is being deployed is actually usable. And is generating this work equity so that people in the office and out of the office feel like they’re having a great experience. And so I think that’s really where Poly lands and it is becoming an increasingly part of our deployment. It’s an add-on, it can be part of an add-on services arrangement, or it could just be bundled into the hardware revenue. But it definitely with the world’s biggest retailers, world’s biggest manufacturers. It’s a really critical part of what we sell at the enterprise level.

Daniel Newman: Yeah. I kind of would be remiss or I’d be off my kilter to not say that that has to be a focus for you, Dave. I mean, look, the hardware always ends up becoming commoditized. It doesn’t even matter if it’s the best. And I think you guys built some of the best, so I’m going to pay you a compliment and then I’m going to challenge you. But I’m going to say getting those attach rates, one of the things like with the Zoom that’s been their biggest win, even though the share price is so repressed has been net revenue expansion. The ability to get customer to spend more. And so I think that metric, whether it’s service attachment rates, it’s add-on hardware attachment rates. If you get your equipment into every huddle room, every meeting space, and I think the personal space is going to be huge for you guys. Because I think that work from home, but with a headset, with a good adequate monitor with the right camera, lighting setup, that creates millions of opportunities for Poly.

Dave Shull: That’s right. And so I absolutely agree. And there is a regular cadence of conversations, as you might imagine, with our sales team on attach rates. There’s compensation tied to it, because it’s not just a nice to have from a revenue point of view. It’s strategic, right? It’s strategic to our CIO customers. And it changes the conversation, as you said, from what could be a commodity sell, right? I don’t think our hardware is a commodity, but it could become a commodity sell if we’re not careful.

Daniel Newman: No, I just want to clarify on you, Dave. I just want to say, I’m not saying your stuff… Yeah, I’m just have a little fun here. I’m not saying you’re all commoditized. I just mean eventually every next wave of technology becomes commoditized. So you have to keep innovating so fast with hardware, but software is so sticky.

Dave Shull: Yeah. And even, I guess where I was going to go is there’s the Poly Lens software platform, right? Which is interesting from an insights point of view and a monitoring point of view. But people don’t realize how much software is now inside of these camera bars. So I’m using a little P15 here. There is a ton of audio capability and image processing capability built into the chips, right? Going back to the supply chain issues. Built into the computer that’s basically sitting inside this little device. And then imagine a world where you have five of these around a conference room. Okay. How do you mix them together? How do you process them? I come out of the television industry, right? So I come from the weather channel. You think about the three or four different camera operators, and we’ve got a floor director creating this beautifully stitched together master signal that goes up to the satellites. How do we do that for enterprises, but in a way that’s completely seamless, right? That’s the magic and that’s pretty exciting.

Daniel Newman: Yeah. And by the way, you sound great, so the fact that…

Dave Shull: Oh, that’s good.

Daniel Newman: I have thousands of dollars here in studio equipment, and you’re able to use a piece of equipment that’s being made. It’s not inexpensive, but it’s able to offer a full slate of what people need to work in an office like you are: good video, good audio, sound crisp. I can’t even tell you how much audio impacts the conversation, but people don’t really realize it until the audio doesn’t work well.

Dave Shull: That’s right.

Daniel Newman: It’s like going to a movie, is the adage I always use. You go to a movie, if it’s got bad sound, it doesn’t matter. I laugh when the dubbings bad or the timing’s off and it’s like, I can’t stop watching the mouth be off from the words and it’s driving me crazy. And that’s kind of what sound is. It’s one of those things that’s always underappreciated until it’s not good. And then-

Dave Shull: I have young kids, and it’s interesting to watch their emotions change as they watch a movie and the sound gets scary, right? I think we all forget the emotional cues that it generates. Even outside of a movie, right? In a meeting that becomes annoying. And that changes the sentiment of how you’re engaging with that other person. It’s like really? You know what I mean?

Daniel Newman: Yeah. Some of the intelligence that you guys are building that can identify that you’re in a noisy space, for instance, and you’re putting in your devices. They can say, “Hey, you’re in a Starbucks.” Because some of us that’s the third place or the second place or whatever place it is that you’re working. We should be able to put on a headset, it should be able to use AI or some sort of algorithmic sensor technology and say, “Hey, you’re in a noisy space. I can discern your voice and when you’re talking from background noise.” And those are the kinds of technologies I know you guys are continuing to look at implementing and putting in.

Being able to track the way people move, being able to create more equity in meetings, by helping people be included. So for instance, you’re in a room of five or six people and you’re on a call with one person. How do you make sure that the five or six don’t feel like they’re getting one fifth of the person that’s one? And so these are all really important technologies. I know it’s a bit of a sidebar, but I’m glad that you go guys are addressing all these things. These are really important topics. I want to talk to you about something a little bit fun that you announced because I’m a car aficionado.

Dave Shull: Ah.

Daniel Newman: I happened to be a big fan. I was at the Austin GP. I live in Austin. Miami GP, and in fact I was in the booths of both McLaren and Red Bull. So I got to do the paddock, they call it. Fancy…

Dave Shull: Sure. Yeah.

Daniel Newman: But I saw you guys announce a partnership. Tell me about that because I might be hitting you up for some tickets.

Dave Shull: Yeah. So my first Formula 1 race was actually in Shanghai many years ago. And just an astonishing customer experience, right? At the time it was part of a corporate entertainment scheme and I was being sold and it was amazing, right? And I started watching a couple years ago. I started watching Drive to Survive when I came out on Netflix, and just kind of fell in love again with the sport. And I’ve been to see Formula E and a bunch of other different kind of races, but to see it kind of come to life from a story point of view, it’s like, wow. Okay, this is changing. It’s been popular overseas outside of the US for many, many years, right? But to see the storytelling start to hook the American audience, it’s like, okay, there’s something here. And so we talked to a couple of different teams and we were deep into negotiations and actually had just signed the Red Bull contract when they won.

So it’s like, okay, clearly we picked the winner, right? Because we knew exactly what was going to happen, but talk about an amazing last race and the excitement. And again, this goes back to who are we targeting? We’re targeting the Global 2000. And going back to my personal experience, the brand resonates from an innovation point of view and a technology point of view and talk about challenging noise suppression that you got to deal with, so I’m excited. Definitely look forward to getting into a race with you. And I think it’ll be a lot of fun.

Daniel Newman: Yeah. Well, I’m here in Austin. So when you come in for GP, let’s make sure we get together.

Dave Shull: That good.

Daniel Newman: I’m very, very excited to see you guys announce that partnership. So my favorite question to always ask my CEO guests is just a little bit of, I know you can’t guide more than you guide. But what’s a little bit of sort of the big opportunity that you think people are missing or where is Poly’s growth going to come from that you’re really excited about that you think the market’s maybe not fully appreciating right now?

Dave Shull: So I think I’m going to hit two things. I’m going to hit the strategic answer and then I’ll hit the financial answer. So the strategic answer is we have amazing cloud collaboration partners off the charts. But think about it from a customer point of view, right? What device is connected to that TV? What little screen is sitting on that conference table? And the strategic value of owning that last mile from a customer point of view is huge. And so what else can we do in collaboration with our customers to bring that real estate to life, right? It’s the biggest screen in a room? Again, I’m a media guy, right? I come out of the TV world. It’s a huge screen in a lot of these conference rooms and nothing is happening with them. And it’s hugely valuable real estate for CHROs and training managers and CEOs to get corporate messaging across.

And so I think there’s something really, really exciting that we can do there. We announced an Appspace deal. I think it’s the tip of the iceberg in terms of what we can do around that real estate that’s connected to our devices. And then from a financial point of view, we’d mentioned this on the earnings call. It’s all about spring loading. And there’s a couple things where that really makes sense, right? One is the supply chain issues. A couple $100,000 worth of parts is holding up tens of millions of dollars of revenue for all the automobile reasons that we just talked about. Two, we have pretty substantial operating leverage on top of that. So when we did 488 million a year ago, we had more than $100 million of EBITDA. And so that sort of connectivity between just a relatively small increase in revenue, the vast majority of it drops to the bottom line. And so I think there’s an exciting opportunity here for us, for investors, for our customers. Should be a fun run.

Daniel Newman: Yeah. I think that’s like elasticity and economies of scale, right? So if you go back to your MBA class or whatever you took in economics, you got to get that economy of scale where you start tipping and all of sudden everything you’re creating is just driving more and more profitability. Think we heard that from some of the big tech names that had killer earnings this quarter. But you know what that did tell me, Dave, just before I let you go, is seeing how these companies are guiding. Not so much how they perform, but how they’re guiding is that there’s a lot of confidence in big tech. You guys being attached to names like Microsoft and their Teams product, Zoom, which despite its share price fall has had extraordinary growth on growth. You guys are attached to some of the best companies on the planet. A lot to like, appreciate you coming on. I hope I see you again, Dave, next quarter.

Dave Shull: I’m trying not to scare you off, Daniel. It’s always my pleasure. Thank you very much. We’ll look forward to Austin together.

Daniel Newman: See you at the GP. Thanks again for joining Making Markets.

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About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio