Will Zelver - Senior Analyst, IR Joe Burton - President and CEO Pam Strayer - SVP and CFO

Greg Burns - Sidoti & Company Dave King - ROTH Capital Partners Paul Coster - JPMorgan Mike Koban - Raymond James Nick Altmann - Northland Capital Markets Bill Baker - GARP Research

Good afternoon. My name is DeShawn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Plantronics Q3 Fiscal Year 2017 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Will Zelver, Senior Analyst, Investor Relations. The floor is yours.

Thanks, DeShawn. I will be filling in for Greg Klaben, our Vice President of Investor Relations, who unfortunately is out sick today. Joining me are Joe Burton, Plantronics' President and CEO; and Pam Strayer, Plantronics' Senior Vice President and CFO. The 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. A complete set of prepared remarks of today's conference call are available on the Investor Relations section of our Web site. For the remainder of today's call, we will be providing only non-GAAP metrics related to gross margin, operating expenses, operating income, net income, and earnings per share. We have reconciled these measures in our earnings press release and our quarterly analyst metric sheet, both of which are available on the Investor Relations page of our Web site. After the conclusion of today's call, the recording of the call will be available with information on our Web site. Plantronics' third quarter fiscal year 2017 net revenues were $232.9 million. Plantronics' GAAP diluted earnings per share for the third fiscal quarter were $0.68 compared with $0.49 in the prior year. Non-GAAP diluted earnings per share for the third fiscal quarter were $0.79 compared with $0.83 in the prior year. The difference between GAAP and non-GAAP earnings per share for the third quarter of fiscal year 2017 consists of charges for stock-based compensation, restructuring, and purchase accounting amortization, all net of the associated tax impacts, tax benefits from the release of tax reserves. Please refer to the full GAAP to non-GAAP reconciliation in our earnings release. With that, I will now open the call for questions.

[Operator Instructions] Your first question comes from the line of Greg Burns from Sidoti & Company. Your line is open.

Good afternoon. Just a question in regards to the gross margins on the consumer side of the business, could you just talk about some of the levers you have there to improve the gross margins of that business over the next 12 months?

Hi, Greg, this is Pam. Yes, I can talk about that a little bit. Consumer is going to be a focus of ours, and the profitability of consumer is going to be a focus of ours over the coming quarters. There are things that we can do there. We're going to be looking at our go-to-market channels and our product list. We're going to be focused on areas where we have higher margins. Now the depth [ph] of our stereo and console gaming products are doing well. We are gaining scale there, which means we're going to be able to get more volume discounts with our suppliers. So we will be doing a thorough review there and looking for ways to trim some of the lower margin channels and products.

Okay. And in terms of the Manager Pro service platform, could you give us an idea of what the average ASP is, or what a customer is -- average customer generates per month for that type of service, and how is that platform kind of changing the conversations with your customers? I know you already have very high market share, but is this a true differentiator where you think you could gain additional market share?

Yes. Hey there, Greg, Joe Burton jumping in on that one. To the first part of it, we are still in the very, very early days with Plantronics' Manager Pro. We are having a tremendous reception in the market. However, I think we've said we're really going to talk about selling price and how to think about that at our next call, if I understand that correctly. Pam, yes.

Yes. At our Q4 call we typically do an update of our long-term market model expectations, and we didn't do anything on staff last year when we did our market model. So, we will be updating that in May [ph].

Absolutely. However, on the second part of the question, how is it changing the conversation with people? I have to say we are absolutely trilled with that. When we go in and talk to people, I think we have always been known as obviously a premier provider of high-quality, precision audio products, primarily headsets. When we bring in the SaaS product, we are actually adding in a conversation, where we can really give people insight into their business, not only to the headsets, but how the unified communication system is sounding and running; insights into how the system is actually being used. We talk very much about our innovation ways. We've talked about before taming chaos, keeping people in the zone, smarter customer interactions. When we talk about that and we show people that Manager Pro coupled with our headsets are helping them tame that IT chaos, giving them better insights into the business, changing the conversations that they are having with their customers. It really does give us we think a unique conversation that's resonating very, very well with our customers. I won't speak to what we think that will do around share, it's still the early days, but it's a very welcome conversation that our customers are really embracing.

Okay, thanks. And lastly, if there's some kind of border tax implemented how would that affect your operations, particularly in Mexico, and do you have ways to address that?

Yes. On that in general you might imagine that that's something we are keeping eye on just like everybody else. Given that there are no actual proposals out there yet, it is simply too early to say. You might imagine going through a variety of scenario plans, as a company we think we can do what's needed to keep our business strong, but we are simply not going to comment on the exact -- on exactly what it's going to be, since we don't know what it's going to be. It's just too early. As we get more details, we'll continue tuning our plans, but we are very confident we can react to whatever comes out.

Okay, thank you.

And your next question comes from the line of Dave King with ROTH Capital Partners. Your line is open.

Thanks. Good afternoon, everyone. I guess first off, maybe following up a little bit on the gross margin question, and then just thinking about the 20% operating margin target that you've got for fiscal '18. I guess is that, the gross margin improvement within consumer is that sort of the primary driver of getting operating margins there, or are there other things that you can point to? And then I guess, just as we think about that 20% target, you know, what's assumed in that both from an FX perspective and then consumer as a percentage of the overall portfolio. I guess what are some of the puts and takes there? Thank you.

Sure. So, in terms of a 20% operating margin, increasing our consumer profitability will be part of that, part of that will be continuing to work on material cost savings for the enterprise business, on a [ph] continual basis. It also includes some strong OpEx discipline, while at the same time finding ways to invest in long-term growth opportunities. So we're trying to get all these pieces to fit, and we think we can do that next year. The assumptions built-in around FX are that there's not going to be significant movement -- negative movements in the currency, if it does move heavy towards a negative again that will be a challenge for us. Of course we have a hedge program and that tends to delay the impact. So we think FY'18 right now we've got some hedge gains that are going to offset some of the latest movements in currency. So, those are some of the assumptions that we're using. We're not giving any FY'18 guidance right now, we'll do that in the next quarter and earnings call.

Understood.

Pam, the one thing I'd add on there is certainly as we've worked with the team over the last several quarters and now we're just absolutely thrilled with what we're seeing around the reception to the new products, the critical mass that we're getting in the field, the ability to continue optimizing some of our processes and working on the economies of scale that we can get that Pam mentioned earlier. Assuming things are relatively the same on the macroeconomic level to what they are right now, we felt good putting that out there. We think it's a great business right now, and very achievable.

Okay, that's great color, both Joe and Pam there. And then maybe switching gears a little bit, the strength in UC this quarter, can you talk about what might have driven the acceleration there if there's anything to point to? And then is there anything to worry about in terms of potential disruptions from the recent bankruptcy of one of your UC partners? I would assume there is nothing to worry about in terms of inventory or credit risk, what have you, but anything in terms of disruptions to revenue, how should we be thinking about that? Thank you.

Yes, this is Joe. I'll start out; also if Pam has anything she can add on, but I'll take the Avaya piece first. Currently, any amounts that are due to us or that we owe to Avaya are not material. There's just nothing there that's material. We'll continue to monitor what's going on with Avaya's process in the bankruptcy proceedings, but we believe that the market they serve is still robust, both they and other vendors will continue selling, and even existing Avaya customers still have a strong need for both new and replacement headsets and we just don't see that as a big, big change to us. On UC, and really what's driving the relative strength that we've seen, there's a few things there; the UC growth has been driven very much by new product launches on our side, notably our Voyager Focus and the UC variant of the Voyager 5200. Voyager 5200 you might think of as an updated and enhanced version of our Voyager Legend product if you haven't experienced it yet. Also, our Blackwire family is up significantly in recent quarters, and we think this is really driven by an increase in large deals.

Okay, that's great color all around.

I would just add one additional thing, Dave, on UC growth simply that our market model expectations were that UC would be up five-year CAGR of around 13%. We were seeing some lower growth rates in past quarters, so I think this is returning closer to the growth that we expected.

Yes.

Great point. Great, thanks for the color, and I'll step back, and good luck with the rest of the year.

Thanks, Dave.

And your next question comes from the line of Paul Coster with JPMorgan. Your line is open.

Yes, thank you for taking the question. You've sort of proposed the potential CAGR of; I think it was about 6% to 8% over the next couple of years. And it looks like you're looking for about 10% growth in the Consumer segment. Now the Consumer segment has put up double-digit growth for calendar year here, but it was lapping easy comps as the Mono business kind of faded. What gives you the confidence you can continue at 10% [indiscernible] in this segment?

Hi, Paul, this is Joe. A couple of pieces on that, first of all, as you say, we're doing rather well in the mono arena although that is a flat-to-down market. On the stereo side, so stereo consumer, stereo Bluetooth in particular, and I'll come to gaming as well, but in the stereo we're obviously seeing a market that is growing adequately. So the stereo Bluetooth market I think we saw tremendous gains in the entire category last year. Now we're not performing quite at the level of the entire category, but that's on purpose. We're picking the areas of consumer stereo Bluetooth where we think we can be profitable, where we think performance audio matters. Nevertheless, we think that we can grow the stereo portion of the business, the gaming portion of the business considerably higher to offset any declines on the mono side. So we feel good about being in that growth rate over the next year.

And your brand, how are you positioning the brand amongst what's probably a slightly more useful demographic there?

So from a brand positioning I actually think we've been doing a lot of very nice work. Obviously a lot of our marketing has been updated substantially. We're doing an incredible amount of work with social marketing as well. Generally speaking though we're still positioning our brand, it's youthful, the designs are updated, the colors are updated, but we're still targeting people where performance matters. So we're after the active fitness segment where we're after athletes that want a product that really won't let them down, we're after gaming segments where performance matters in competitive gaming. We're after mobile communications and business travelers where performance audio really matters. And as we're targeting the brand in that direction we've actually seen a very, very good response, as you can see with this quarter's numbers. And we expect that to broadly continue on the Consumer side.

All right. So when the Consumer side and the Enterprise side are both working there's not much urgency in the question of synergies between the two, but perhaps you can just remind us what are the synergies between the two and the strategic importance of them on a relative basis?

Yes, so there's a couple of pieces to that, Paul. So first of all on the synergies side. Making a fantastic high-performance headset has a lot of proprietary expertise, we see that. There's a lot of cheap headsets out there that don't do so well. But when we actually talk about Plantronics' unique differentiators when we look at 50 years of acoustics background, 50 years of human factors for wearable technology, very small radios with batteries that last all-day long, those are clearly those areas of expertise are synergies that get applied equally to both markets. So the things you have to know to be great in consumer you have to know to be great in enterprise, and vice-versa. Now the other part of course is having the strong, broad consumer brand that is high volume also helps our brand on the enterprise side, so it helps make people know who we are, helps them understand what Plantronics is when they get to work. And the last and most crucial part of this in our mind is, in a world that is less locked down from IT than in the old days BYOD or bring your own device becomes increasingly important. You do have people bringing their laptop, their cell phone, and their headset from home to the office. Plantronics can provide a device where they can pick it up through a retail channel, and when they get to work IT is not going to be too upset because they know the brand and they know it will perform.

Very good, thank you.

And your next question comes from the line of Mike Koban with Raymond James. Your line is open.

Hi everyone. Thanks for taking my question. This is Mike Koban on for Tavis McCourt. Actually, a bunch of my questions have been answered. I just kind of had a couple of housekeeping items left. What are you guys expecting your tax rates to be for FY'17 and FY'18?

For FY'17 the tax rate is 25%. We're not giving out FY'18 guidance, the budget isn't finalized. But I think historically we've always kind of been in the 25% to 26.5% range.

Okay, great, thanks. And as far as the expenses related to the lawsuit, can you give us any update on where those sit right now and what you think they might be going forward?

Yes. So [indiscernible] ongoing legal fees are typically around $1 million to $2 million a quarter. In Q3 they were right around the $2 million mark, and that's what we expect for the most part going forward.

Generally speaking, that's the level we expect until the conclusion of the matter.

Great. And then as far as your consumer segment, can you just give us your best estimate of what the mono -- what percent of that is made up by the mono products -- mono Bluetooth products?

What percent of the entire consumer revenues are mono?

Correct, yes.

I got that here, just one minute. So, on the mono side it's roughly a little under 50% of our overall consumer. But I'm sure you know that that's varied over time as the mono category has dropped off and consumer or stereo have gained some growth. But mono still is our largest category in the consumer space.

Got you, great. And my last question is just around the enterprise segments. It's been roughly flat for a couple of years even though UC has been showing some pretty good growth. What gives you confidence that this should improve, and is there some levers and ASPs you can pull or anything like that?

Well, we look at our core enterprise revenues and track those carefully. We've gone back and looked at trends over time. It is generally been a flat market. The units have been very consistent over time. And so what we're seeing is variation around the mean. We tend to be kind of on the low end right now, but we do expect that to come back. I think it's been exaggerated by the fact that we've had a strong dollar. So that's also hurting us on the revenue growth side.

Yes, I think that's a lot of it, Pam. Really well done. Frankly speaking, as we're out there talking to our business partners across the world and our customers from a unit volume perspective we still see this as a flat to slightly up market in the core with substantial upside in UC. As Pam said, we get little fluctuations around dollar or lumpy big deals that cause it to move. But we're still very confident of what we're seeing; the best days are still in front of us in that business.

Great, thanks guys. That's all for me.

And your next question comes from the line of Mike Latimore with Northland Capital Markets. Your line is open.

Yes, hi guys. This is Nick Altmann filling in for Mike. Thanks for taking my questions. Just looking into next quarter, how should we be thinking about the mix between office and consumer revenue?

Yes. So, the mix in Q4 is going to shift back with less consumer revenue compared to Q3 as you know that's sort of high consumer quarter for us, because of the holiday period of time. I think we hit a high in Q3 of consumer on 32% of total revenues, and which I would expect that to go back down to 30%, which is more in line with where we've been historically outside of the Q3.

Okay, thanks. And then, can you guys just talking about are there any industry verticals that are performing better or worse than others?

I don't know that we're seeing any material shifts in vertical-to-vertical. I think we are seeing reasonable strength across all of them, no particular weakness; I know we've had some weakness here and there in the past, but in particular ones, but no, right now I think it was fairly broad across the board. One piece that we've been asked about a couple of times is in the past we occasionally have seen -- we have occasionally seen issues where the energy sector will bounce up and down, the financial sector will bounce up and down, although seem to be very normal at the moment.

Got it, got it. Okay, and then last one; are you guys seeing any areas of regional strength or weakness? And then if you could specifically touch on Europe, that would be great.

So, I think by region, our results have been fairly consistent with some real strong growth, and you see really nice consumer growth year-over-year. Those have been consistent themes across all the regions. For Europe in particular, I would say maybe the unusual thing that stands out there is the U.K. and Ireland is our largest region over there and that's been a little bit weak over the past couple of quarters. I think we said last time, we pointed that out also, and it's probably a result of Brexit and uncertainty happening in that region.

Yes, maybe a little weak, but nothing outrageous either, it's just something we are keeping an eye on.

Got it. Thanks, guys.

[Operator Instructions] Your next question comes from the line of Bill Baker with GARP Research. Your line is open.

Yes, thanks. Do you see any changes coming from Microsoft or Vantage [ph] or people like that who might be having some impact on the adoption of UC?

Yes, couple of pieces there; and thanks for the question. First of all, generally speaking, I mean we do UC hitting its stride. The big UC vendors -- and it will always be a little lumpy as deals come in, but the big UC vendors be it Cisco, Microsoft, Avaya, to some extent and others continue to do well. Also though we see -- let's might turn it up for a minute; as we see the cloud versions of the UC things beginning to take off soon, particular Cisco's, Microsoft's and some of the born-in-the-cloud UC solutions, we are seeing that begin to help UC pick up a little bit of steam.

Okay.

Are there any further questions on the line, Bill?

No, no. I'm sorry.

Oh. Thanks, Bill.

Sorry.

That's cool.

[Operator Instructions] And I currently see no questions over the phone. I will turn the call back over to the presenters.

Thanks, everyone. Thanks for joining the call, and if you need to get in contact with us, please call the Plantronics' mainline at 800 -- excuse me, I don't have it in front of me. You know, yes, 800-544-4660 and ask for Will Zelver. Thank you.

And this concludes today's conference call. You may now disconnect.