Greg Klaben - VP, IR Joe Burton - President and CEO Pam Strayer - SVP and CFO

Paul Coster - JPMorgan Tavis McCourt - Raymond James Greg Burns - Sidoti & Company Dave King - Roth Capital Partners

Good afternoon. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Plantronics Q2 FY2017 Results 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. Greg Klaben, Vice President of Investor Relations. You may begin your conference.

Thanks very much, Amanda. Joining me today 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 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. The complete set of our prepared remarks of today’s conference call are available on the Investor Relations section of our website. 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 website. After the conclusion of today’s call, the recording of the call will be available with information on our website. Plantronics’ second quarter fiscal year 2017 net revenues were $216.2 million. Our GAAP diluted earnings per share was $0.63 compared with $0.52 in the prior year. Non-GAAP diluted earnings per share for the second quarter was $0.82 compared with $0.70 in the second quarter of last year. The difference between GAAP and non-GAAP earnings per share for the second quarter consists of charges for stock-based compensation, executive transition costs, restructuring charges and purchase accounting amortization, all net of the associated tax impact and tax benefits from the release of tax reserves. Please refer to the full reconciliation of GAAP to Non-GAAP in our earnings release. I’d like to provide a brief update on our GN Litigation. Despite a previously reported unfavorable ruling and the imposition of sanctions by the court in July 2016 in connection with certain discovery matters in the litigation, we continue to believe the underlying antitrust action is without merit and intend to vigorously defend against the action. Trial of the underlying antitrust case is currently scheduled to commence in October 2017. Given it’s Joe’s first quarter as President and CEO, he will be reading a portion of his prepared remarks, after which, we’ll open the call for questions and answers. If you haven’t received them, the full portion of Joe and Pam’s remarks are available on our corporate website. Finally, I’d like to let you know that Joe, Pam and I will be presenting at the Raymond James Conference on December 8th, and also holding one on one meetings. We hope to see you there, and if not, the event will be broadcast. With that, I’ll turn the call over to Joe.

Thanks, Greg. And thank you all for joining us today. As you know, this is my first call with you as President and CEO. And while I’ve met several of you in the past, I’m looking forward to getting to know you all better over the next several quarters. I’m honored to be entrusted with the leadership of Plantronics, and as we discussed in our August 2nd earnings call, Ken and I’ve been working together closely over the past several years, along with our management team and Plantronics associates to develop our long-term strategic direction and investment decisions related to our Innovation Waves. The Plantronics brand promise will continue to be the creation and development of simple, reliable and easy to use communications solutions that are acoustically excellent. Our brand promise, combined with our hardware and software vision, are being enthusiastically embraced by our customers and partners. We continue to define the industry and are well underway in extending our strategy in some pretty exciting ways. Our key objective at Plantronics continues to be the acceleration of growth, both at the top and bottom lines, while investing in new growth opportunities, which we’ll be discussing further in this call and in future quarters. I’d like to cover a few Key strategic points before we review the quarterly results. First, we believe our current cost structure will improve operating margins this fiscal year and in subsequent years. Second, despite ongoing sluggishness in the global economic environment, and a strong dollar, we are targeting improved top-line and operating income growth for this fiscal year. Three, our headset and software solutions in both enterprise and consumer markets remain highly differentiated, and our competitive position in both categories remains strong. Fourth, existing growth opportunities in our current businesses are healthy, and we expect additional growth through strategic investment in our Innovation Waves. Our Innovation Waves enable us to have higher level conversations with our customers and partners to solve broader business and IT problems. We believe these conversations are resulting in stronger industry alliances and increased customer loyalty. Here are some key points on the second quarter, all comparisons are year-over-year. The business delivered solid results in Q2 FY17, in what continues to be a sluggish macroeconomic environment. While revenue growth year-over-year was 0.5%, our year-to-date results reflect 4% growth, in line with our outlook for the full fiscal year. Our second quarter revenue growth was driven by double digit gains in both the Unified Communications and Consumer product categories. These gains were offset by a decline in Core Enterprise headset sales. Mono Bluetooth revenues grew in the low single digits year-over-year. These revenues grew year-over-year for the third consecutive quarter, driven by a successful launch of our new Voyager 5200 this past May, and are a reversal of the revenue declines we previously recorded in the mono Bluetooth category in the fiscal year 2016. This resulted in a record market share in U.S. retail sales. We achieved significant increases in stereo Bluetooth headset sales driven by new product introductions and increased retailer placements. R&D and SG&A expenses together increased at a slower rate than revenues for the second consecutive quarter, with R&D and SG&A together declining slightly year-to-date. Our 19.6% operating margin for the quarter and 18.4% operating margin year-to-date are in line with our goal to improve operating margins for the year. Earnings per share increased by 17% to $0.82, and our year-to-date EPS was $1.58, compared with $1.36 the prior year-to-date period, a 16% increase in EPS. We’ve discussed our three Innovation Waves in the past, but I’d like to review them briefly. Our first Innovation Wave is Taming Communications Chaos. Here, we’re providing devices and software tools that minimize the complexity of using and managing headsets, and furthermore gives IT departments unique insights into the operation of their Unified Communications systems. This enables us to create a seamless experience for users as the world of devices and apps grows ever more complex. We remain at the forefront of this opportunity, with an approach unmatched by our competitors. Our second Innovation Wave is In The Zone. We enhance user productivity by minimizing distractions and preserving focus. For instance, we are adding active and passive noise reduction to our headsets and are developing our Soundscaping technology, a new software and hardware solution that reduces noise distractions in open office spaces. Our third Innovation Wave is Smarter Customer Interactions. This is about providing our enterprise customers with data insights about sound quality, conversational health, communications software compatibility, and other attributes that impact their customer experiences. Thanks to our investments in software, we have developed unique capabilities to report realtime actionable data that helps customers improve service and lower costs. Initial customer interest in our solutions is even stronger than we had anticipated and we’re bringing new data insight capabilities to market as quickly as we can. At this point, I’d like to open the call for Q&A, and as Greg mentioned, additional commentary from Pam and me is available on the IR portion of our website.

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

Couple of questions about the Core Enterprise business. I noticed, Joe in your prepared remarks you talked of how the move to cloud-based solutions may be impeding some of the sales in that segment. Can you just elaborate on that? And why that you should be -- is that transient or is that a permanent state I guess moving forward? And I’ve got one follow-up. Thank you.

Hi Paul. Thanks very much for the question. First of all, your question whether it’s transient or permanent, very much transient, in other words temporary. We really believe that the decline in the Core Enterprise that we talked about, isn’t related to market share losses. We think that indeed some of the shift to cloud that we’re seeing right now has paused a few deals in the market. But we do expect to resume the 0% to 1% growth rate in that area that we’ve committed to in the past.

And then on the UC side, we obviously saw this big surge, and I’m not complaining about the growth rate at the momentum; it’s not bad but it slowed down a little bit from the March, June periods. So, I’m wondering is it possible that we’re kind of through the hump of activity that might be associated with this cloud for business deployed and sold or is there some other reason why we’ve decelerated at least in the September and December quarters from my record?

Yes. Not really, Paul. We still think the great bulk of the UC opportunity is in front of us as we said in the past. UC tends to be big deal driven. We may have a had a couple of extra big deals fall into one quarter versus the other. But we’re still very comfortable with UC growth in the teams as we said in the past and we think that will continue.

I’ve got one last question. I do to apologize and I feel like I am picking things when actually these pretty solid results. But the other question I’ve got is the gross margins have basically been trailing down very, very modestly over the last five or six quarters on a year-over-year basis. What’s going on there and do you expect that reverse quarter some point?

So, Paul, I’ll respond to that. Our gross margins this particular quarter were down year-over-year just because of the higher mix of consumer. I think in the past, we’ve always playing to our target range gross margins to be 50% to 52%; we were exceeding that for a while. But we’d always expected it to come down into that range as we’d make a stronger shift towards UC revenues away from Core Enterprise and then Consumer is growing, that’s just adding to the mix shift and causing margins to come down.

But just within that category, that range.

Yes, within that range.

Your next question comes from the line of Tavis McCourt from Raymond James. Your line is open.

Hey everybody. Thanks for taking my questions; I’ve got a few. First, in terms of guidance for the December quarter. Are there any more transitional expenses related to Ken’s retirement in that guidance? And then, can you give us an update on lawsuits, expenses heading into the October trial and whether or not that will be included in non-GAAP results or not?

Yes. Hi, Tavis, this is Pam. With respect to your first question on transition costs, we are not expecting anything significant in there. Ken is still working part time. There are some costs associated with that but very small, so no large charges next quarter. On the GN case, we are forecasting like we typically do. We expect costs there to be about $1.5 million, next quarter. They typically range from $1 million to $2 million and it does vary depending on what activities are going on. With some depositions coming up, it will probably be $1.5 million to $2 million next quarter.

Okay. And you’re including those expenses in non-GAAP?

That’s correct. Yes, consistent with how we’ve done it. Yes.

Okay. And then, yes, I recognize that both this quarter and last quarter, it doesn’t seem like foreign currency really had a material impact. But, can you outline what your pound exposure is from a revenue perspective and how much of that is covered by hedges and for how long?

Yes. So, we don’t give specific currency exposure but I will tell you it’s low to mid single-digits in revenue in that currency. The exposure -- we continue to hedge that exposure like we always have which we kind of target 70% of revenues being hedged. So, we do have a little bit of exposure there for positive or negative news but the majority of it is hedged and has been hedged.

And a couple for Joe, I think. First, although I recognize the numbers are pretty small, it looks like it was kind of the strongest quarter in the Latin America or I guess in Americas ex-U.S. that you’ve had in a number of quarters. Is there any specific going on in that region? And then, we’ve been hearing of -- I don’t think you’re the only one with strength in stereo Bluetooth right now. We’ve been hearing of some creeping supply shortages. Are you seeing any supply issues as stereo Bluetooth gets more popular as a category?

The good news on stereo Bluetooth so far is we do have a very nice line of products and some nice growth predicted there. So far, our growth is very much in line with our internal expectations and therefore we have our supply chain sorted out accordingly.

Tavis, I missed the beginning of your question.

Can you repeat the second one on…

Yes. So, I think if my model’s correct, Americas ex-U.S. had a reasonably strong quarter this quarter, especially year-over-year. Is there any specific going on, over $2 million ahead of what it typically has been?

Yes. We had a strong quarter there this quarter. We’ve got some new agreements, channel agreements going on down there that’s really helping improve our business; it’s strong on the enterprise side. So, that’s good news for us.

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

Good afternoon. I just wanted to follow-up on the Core Enterprise market may be your hardware service initiative. Do you think that might help alleviate some of the softness you’re seeing in that market? Is that something you’re moving forward with to address the shift of the core business? And just maybe more generally how that internal initiative move in that direction in development?

Right. Yes, when you talked about our hardware as a service or as we internally refer to it, device as a service, this is an initiative we’ve put together over the last year or so, very much in order to make sure that we can align with the way people want to buy. There are certainly plenty of customers that are still buying their unified communications, their contact center as a capital system that they put on premise. When customers do that, they tend to buy their headsets as well. We are seeing that in the shift to the cloud that we mentioned in our prepared remakes where people in some cases are now consuming this in utility model where they’re paying monthly or yearly, there are indeed customers that are asking about being able to have the hardware component of that sale, headsets very much on the same type of billing model, by the month, by the year on a term contract. We put our device as a service together to be able to align with those customers and make it easier to do business with us. It’s still early days, we’ve customers that are using it, we’re shaken out the system, and certainly over time and as the service model would indeed provide a more consistent revenue flow for the customers that are doing it. But it’s still early days and it’s not a material part of our revenues at this point.

Then on the consumer business, it’s down a little bit more sequentially than I was looking for. Was that a function of there being a sell in, in the first quarter with -- amongst new products you brought to market? And then what does the roadmap look like in future quarters; [ph] do you have handful of new products come out in the back half of the year?

For the most part, the sequentially down quarter-over-quarter that you’re talking about in Consumer, you understood correctly, Greg. It is much more about a very nice sell-in in the previous quarter related to some new product launches the 5200 and some others. It’s not about any weakness in the business. Consumer has actually been quite strong. And we’re predicting it to be strong for the foreseeable future.

Your next question comes from the line of Dave King from Roth Capital Partners. Your line is open.

Forgive me, if you already answered some of this because I had to jump on late. But, I guess first off on the guidance, can you talk a bit about how you’re thinking about that shaping up sort of by category, UC versus Core Enterprise versus some of the Consumer and any help may be on mono versus stereo there? And then similarly, what sort of -- obviously we can make our assumptions around what sort of impact that will be to gross margin by mix but as I think about the operating margin and guidance, what does that sort of assume in terms of changes in SG&A versus sort of gross margin?

Okay, there is a lot in there. So, let me try and take those down one by one. So first of all on guidance for the revenue line. We always assume some puts and takes but generally I would say that the revenue guidance is going to shape up with year-over-year growth rate. So, it’s similar to what we saw this quarter. We expect the strong UC growth quarter, we expect the strong Consumer growth quarter with Core Enterprise being flat, maybe down slightly, maybe up slightly, it’s hard to know. On the Consumer side, that growth there we’re expecting yet again strong stereo quarter contributing to Consumer growth. Mono, it’s kind of anybody’s guess, but we’re forecasting that to be somewhat flat to be down slightly, could be up slightly. So that’s the revenue line. You asked about operating margin.

Sure, yes, operating margin, SG&A versus kind of gross profit?

So, the operating margin itself, we are forecasting for that to go down a bit quarter-over-quarter as is typical Q3 is a heavy consumer quarter. And our gross margin is expected to go down a little bit because of the product mix shift next quarter. So that gross margin slight decline will fall to those bottom line and our operating margin will come down a little bit. But again, it’s seasonal; it’s Q3. We expect that to bounce back again in Q4. On the SG&A and OpEx lines, we’re expecting it flat to a little bit up quarter-over-quarter.

Okay. That’s good color, Pam. And then, maybe just one more, switching gears, and Joe, maybe just thinking longer term and understanding that some of the new SaaS offering is still nascent and small contributor to revenue. But, as I think about it, in sounds like it’s going to be fairly high ROI and high margin. I guess what are you sort of thinking longer term in terms of as that shifts, I guess as the way I’m thinking about it, not being necessarily a software analyst. But as I think about that, I would think that would boost your margins, but maybe there is a negative revenue impact. How should we be thinking about that shift over time? Do you still get that related sell-in from a revenue perspective, or there something we need to be -- I’m missing or we need to be thinking about? Thanks.

Once again, early days, but to take the Software as a Service data insights apart a little bit. Our Software as a Service is a set of data insights that allow customers to manage their UC deployment and actually run their business more efficiently. This is an adder that lays over top of the headset businesses. So, you saw the headsets just like before, it doesn’t shift the revenues in or out, doesn’t drive them down, doesn’t do anything. It’s an additional software layer that provides additional value on top. Yes, because it’s Software as a Service, it tends to be attractive margins. It’s very small numbers right now. Certainly over time that would have a positive effect on the overall blend. Does that answer the question?

Absolutely, it’s perfect. Thank you. And good luck with the rest of the year. Thank you.

Thank you.

There are no further questions at this time. I’ll turn the call back over to the presenters.

Thank you very much everyone for joining us today. We’re available afterwards, if you have any other follow-on questions.

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