Greg Klaben - VP, IR Ken Kannappan - President & CEO Pam Strayer - SVP & CFO

Greg Burns - Sidoti & Company Mike Lattimore - Northland Securities Nick Meyers - Roth Capital Yi-Dan Wang - Deutsche Bank

My name is Sheika and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Fiscal Year 2016 Quarter Earnings Conference Call. [Operator Instructions]. Thank you. Mr. Greg Klaben, you may begin.

Thanks very much, Sheika. Welcome to Plantronics' second quarter fiscal year 2016 financial results conference call. Joining me today are Ken Kannappan, 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 and 10-K and today's press release. 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 in our quarterly analyst metric sheet, both of which are available on the investor relations page of our website. We've also reconciled constant currency in the investor presentation. Note that we have changed the format of our call this quarter to Q&A and that the quarterly prepared remarks on our second quarter from Ken and Pam are available on the IR section of our website. A replay of this call will also be available with dial-in information on our press release. Unless stated otherwise, all comparisons of the second quarter fiscal year 2016 financial results are to the same quarter in the prior fiscal year. Plantronics' second quarter fiscal year 2016 net revenues were $215 million which includes a charge of $3.6 million for an increase in revenue reserves. Plantronics' GAAP diluted earnings per share for the second quarter was $0.52 compared with $0.65 in the prior year. Non-GAAP diluted earnings per share for the second quarter was $0.70 compared with $0.77 in the prior year. On a constant-currency basis our non-GAAP EPS was $0.81 and, excluding the revenue reserve made in the quarter, our adjusted non-GAAP EPS was $0.89. The difference between GAAP and non-GAAP EPS for the second quarter consists of charges for stock-based compensation and purchase accounting amortization, both 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. With that, we'll open the call to questions.

[Operator Instructions]. And your first question comes from the line of Greg Burns.

Just had a question about the strong performance in the enterprise segment. Can you just maybe give a little color on what was driving that? And do you think there was any kind of catch-up or pent-up demand from the introduction of Skype for Business? And do you expect that to lead to maybe a fall-off in the coming quarters as that gets worked through? Thanks.

Sure. Well, first of all, I do think that there was some, as you normally have, some dip in the market when Skype for Business was introduced. Inevitably people don't necessarily want to go ahead with an older system. Once they get the new one they want to evaluate it. And so there is just sort of a natural dip. And to some degree you could say, okay, that creates a corresponding increase in revenues that's a little bit of both what you might otherwise expect. Having said that, we did expect some of that already. And therefore I would say that the quarter was a little bit better than expectations. And some of that was that the economic conditions were a little bit better than we had expected them to be, particularly within some of the markets in Europe, UK and Germany, within the U.S., than we had expected. And so I would say that. Now, relative to the forecast obviously we've already baked in as it relates to next quarter, our input. As we go past that it's really hard to say. I do think that we feel that fundamentally UC is a growth opportunity. How much? There was kind of a little bit of pent-up that goes away in the immediate following quarter. Hard to say exactly.

Okay. And looks like the guidance is implying sequential increase in OpEx and a little decline in the margins. Could you just run through what's driving that?

Sure. So, in terms of decline in the margins, our December quarter is a holiday quarter where we tend to have a much higher mix of consumer sales which carry lower gross margins. So we always expect a dip in gross margins sequentially from Q2 to Q3. That's to be expected.

I'd make one other comment on the Q3 and Q4 pattern for this year which is unusual. Q3 - and this happens to us because we're on a 52-week fiscal year and then this happens to be a 53-week year. That means that the Q3 in this case is actually shifted a little bit forward, so it's got a lot of favorable dates. Q4 will actually have 14 weeks in it, although it's slightly unfavorable dates. This happens to be a fiscal year with two Easters in it. And we'll get an Easter at the end. And of course the first week of the quarter is the last week of the calendar year which is not a very strong week for us typically.

Okay. But in terms - I think the guidance is implying like a sequential increase in OpEx. Could you just address that and why it's up -

Yes. So, there's a couple of things going on. We do have some additional legal spend that we're expecting. We've also got some credits that we booked in Q2 related to variable comp that won't be in there. And we've got a lot of other small amounts spread around, some marketing, some small increases in R&D, that type of thing, a lot of small things, no single large thing for me to point out.

Your next question comes from the line of Mike Lattimore.

Can you talk just a little bit about - I mean, obviously the consumer business probably trends up in the December quarter. But do you see enterprise growing a little bit sequentially potentially?

Yes, you’re right. The consumer business does typically trend up a little bit in the December quarter. We're expecting to have a pretty good December quarter as well, both on UC and on the core business. I'd make one other comment. That's kind of a currency-neutral statement.

Sure. Okay, yes. Skype for Business is coming out with kind of more of a cloud service a little later this quarter. Does that have any impact on your business, either incremental or potentially cause some pausing to analyze the new offering or anything like that? Or does it not really impact the business?

Well, I think that we've seen more and more of the cloud models get implemented and many companies are very interested in moving to that type of model for a variety of reasons. So, to the extent that we have a good solution in the market or another good solution in the market, that is attractive to people it can be a positive in terms of market growth and adoption. I would say that in general those sorts of solutions are also prized by people who are very interested in mobility. And that tends to be a positive it terms of the selection of use of headsets. I think it fits very well some of the models that we've put into place to work with the system integrators in the other channels from a customer standpoint. So I think we'd see this as fairly advantageous. That said, to your other point, can anything create a delay in the market also that's new? Yes, it can. I mean, people can always evaluate something for a period of time before they decide what they're going to do.

And then I guess just on the - I'm just curious. I know you don't give us sort of a definitive number, but the ASP for your enterprise business, can you sort of generally talk about the pattern that's followed over the last year or so?

Sure. I can take that one. So, we do watch ASPs over extended period of time. And we're not seeing any major changes to that anywhere in the enterprise business, either in core or in UC.

Your next question comes from the line of [indiscernible].

I understand you've made a move recently to authorized Plantronics dealers only. Could you tell me what the business objective was for that?

Sure. What we're trying to do is really help our channels receive a return on the investment that they make in developing customer bases. So these are very commonly implemented by many manufacturers to support their partners in terms of route to market.

Okay. And with respect to Amazon, for example, how does that affect Amazon? Are they signed up as an authorized dealer, then?

So, I don't want to go into particular customers and answer particular questions, except to say that it is a very broad program that we have in place. And, again, it is intended to preserve the return that those people have in making marketing and other development efforts on our behalf.

Your next question comes from the line of Dave King.

This is Nick Meyers on for Dave King. I had a jump on late so forgive me if I ask any questions that have already been asked. I just wanted to ask about your 10% reduction you guys are targeting in the supply chain over the next three years. I guess I just want to know how we should be thinking about it in terms of how it's going to flow through to EPS maybe versus being reinvested in growth and new products such as UC.

So, let me make sure I understand the question exactly. How we're going to take returns from our supply chain into - whether it's going to be invested into R&D or whether it's going to shareholders? Was that the question?

Correct.

Okay. So we don't allocate specifically where profit dollars are coming from that they are dedicated to a particular source. We have set an overall model based upon the revenue levels that we have as to what we intend to invest in sales and marketing and R&D. And then we make it a little bit more tangible within that broad framework as to the right levels of investment that we think are appropriate based upon what we see in a particular fiscal year. It's always subject to error, in my case of what the actual revenues turn out to be, to volatility as in the case of foreign exchange which has hit us quite a bit. And then ultimately the profits, as we've said before, particularly as it relates to cash flow generation, we intend to pay out 60%, two-thirds in terms of share repurchases, one-third in terms of dividends.

And just one more thing and sorry again if I missed it. Your December quarter guidance, can you talk about what it assumes for enterprise and, more specifically UC, as well as the consumer business?

Sure. So, our guidance for next quarter assumes that we've got some low growth. Core is slightly up. UC is up in low-single-digit growth rate. Quarter over quarter, of course, the consumer category would be up and - because it's a holiday quarter for us. So consumer in total would be up by 22%. Enterprise in total would be up around 2%, if you take a look at our midpoint.

[Operator Instructions]. Your next question comes from the line of Yi-Dan Wang. Yi-Dan Wang: I have a few questions. The first question relates to the comment you made that your income is shifting from lower tax jurisdictions. Can you talk about what is driving that and how we should think about that going forward and the impact on your forward tax rates? And then the second question is, the dynamics that you talked about for the mono Bluetooth across the markets, it seems that that's just happening in the U.S. at the moment. And it would be good to get some color on your expectations for the ex U.S. market, whether that's something that's going to come later that we should think about. And then, the third question also -

Yi-Dan, let's just go one question at a time. I'll let you keep going - Yi-Dan Wang: Okay, sure. We can do that. So if you could start with those two, that would be great.

So, Pam, why don't you take the first one. I'll take the second one. And then we'll hear what the third one is.

Okay. Yes. So you asked first about the shift in income between jurisdictions. Keep in mind that that shift is really a comparison to what we were planning on or what we were forecasting. Because our effective tax rate, our effective non-GAAP tax rate, in Q1 was 24.5% and the current projection for the full year is 26.5%. So we had to book a little bit of a catch-up in Q2 and that was because it was different from forecast. And so we're experiencing slightly less revenues offshore and slightly more expenses offshore than we had originally forecasted in that first tax rate. So that's the first part of your question. And then as far as the expected tax rate going forward, the full year expected non-GAAP tax rate is 26.5% at this point.

Okay and then, Yi-Dan, I think your - sorry. Yi-Dan Wang: I was going to clarify that. So, when you say there's less revenues offshore, were there any particular countries that we should think about? And it seems that this is a trend that is going to play out for the rest of the year. So do we need to think about it the sustainability of that change?

Yes. No. So, we always update our forecasting based on the full year. Some of it is currency, certainly. There aren't any particular countries that I'd point out. And, again, it's based on a comparison to our internal forecast rather than any comparison of numbers that we've shared publicly. So, yes. That's all I have to say on that. Yi-Dan Wang: Okay. But are you saying that these are just temporary factors currency related - driven by currency? Or these are going to be something that we need to think about longer term as well?

So this is really heavily driven by currency when you get down to it. That's what's, at the end of the day, decreased the amount of revenue and profit that we're generating internationally where are tax rates is lower. And that's what's shifted it into the U.S.. We still have, systemically on the long term, higher growth rates expected outside the U.S. than in the U.S.. So that's kind of the driver to it. Can I proceed with your other question or not? And I just want to make sure I got it, because I think what you said was a question related to the growth rate of the voice Bluetooth market outside the U.S. Is that correct or not? Yi-Dan Wang: So, for the mono Bluetooth market, we've seen quite a lot of, I suppose, release of shelf space by retailers. And it seems that this phenomenon is more U.S. than ex U.S.. So, if you could confirm that is the case? If that is the case, then should we expect the ex U.S. retailers to catch up with this trend over time, at some point? Is that clearer?

So, let me make sure I understand this. You're talking about the U.S. catching up with what? Yi-Dan Wang: So, the mono Bluetooth market has been weak this year because retailers, as you've indicated, have been releasing shelf space for mono stereo - sorry, for stereo Bluetooth products. Right? And -

Yes. Yi-Dan Wang: It seems that that is really mainly occurring in the U.S. market. Is that the case?

Yes. So I think I've got you now, Yi-Dan. So, short answer is the mono Bluetooth market declined much more significantly in the U.S. than it did elsewhere. This is not to say that it has not declined globally. It has declined globally, although a significant portion of that is simply attributable to FX. Yi-Dan Wang: The last bit again? Attributable to--

Sorry. The significant portion of it internationally is simply attributable to foreign exchange rates. Yi-Dan Wang: Okay. So then, the question is, should we expect the ex U.S. market to also suffer the kind of declines that we've observed in the U.S. market, independent of currency, at some point? Perhaps next year? Is there any reason why the ex U.S. markets are not behaving in the same way as the U.S. market on a constant-currency basis?

So, let me just say that, first, we don't know because it is kind of a future item. And we were actually surprised by the size and scope of the decline of the market in the U.S.. I think that there is certainly a risk of additional reductions in international markets. Certainly in the case of France there was a change to their regulations that no longer permitted you to use a headset in a car while you're driving in order to make a call. They switched it to other hands-free devices. That's not something that helps out. I think that the mono voice market is likely to continue to decline for a period of time and that there is certainly some risk that the international markets will decline further. We've certainly seen that the much broader adoption that we had for the category in the U.S. was heavily affected by people using smartphones where they frequently wanted to both only pay for and only carry one audio device to go with it. And as those became content delivery for music and other streaming content, increasingly that meant a stereo device rather than a voice devoice. That adoption was not as high overseas. And therefore I think the correction to that market should be lower overseas. But, again, we're dealing with a speculative area on this a little bit. So is there some downside risk to the category going out next year? We think that there is. And I don't know for sure how big it would be. Yi-Dan Wang: Okay. In terms of your revenue mix, how much of your, I suppose, the consumer products are ex U.S. versus U.S.? So if you could somehow reconcile what the potential impact may be, whether it would be as bad as this year - hopefully not, given - I would presume that you have greater contribution of revenues from the U.S. market than ex U.S., but I may be wrong.

You know, Yi-Dan, I would just assume that it's similar to the full revenue split between domestic and international. We don't provide that level of detail in our revenue categories. So I would assume, you know, roughly 60/40 split, like total revenues are. Yi-Dan Wang: Well, given that you've released a lot of time on your call today, we can ask quite a few questions during that time. But I will just come with one more. So you've talked about consumerization and how some employers are happy for their employees to bring in their own devices. And I suppose that an interesting development may be that you could see the increasing cannibalization of your higher-margin enterprise headset revenues by lower-margin consumer headsets. Can you comment on that, whether that is a risk and how we should think about how that market is developing at the moment? Are you actually seeing such cannibalization happening?

Sure. Let me first say - is it a risk? Of course it's a risk because everything is a risk and possible. And there will undoubtedly be some people who'd elect to buy a less expensive product. However, what we're actually seeing in the market has been very encouraging. We've just, as you know, launched the Voyager Focus UC. And I did cover it in the prepared comments that we sent out, but this is a remarkable product. This allows people who are, whether they're consumerized and buy it on their own or whether their company pays for it, getting a product that is one that provides, for sure, fantastic audio experience, great integration into the UC solutions that they're using at the workspace. But this is also one that releases them from all the noise, allows them to focus, allows them to listen to music if they want to, allows them to be a lot happier. Now, the truth is that in consumerization, this means that the individual is more likely to have an influence on what they choose, what they pick. You've already seen in many cases that if it's important to people, they'll pick products they really want. Consumerization doesn't necessarily always mean that the consumer will actually have to pay. It simply means that they are going to be able to choose. Sometimes they may have allowances. Sometimes they may be able to directly bill the company. Sometimes they may indeed decide that they want to pay for the product. But in this case audio, comfort, the sound quality that you get when you communicate, we know these are important to people. And we've repeatedly seen that people are willing to pay for Plantronics quality. And that, at the end of the day, is why we have a leading position in the consumer market today, as well as a leading position in the business market. Yi-Dan Wang: Okay. So, the pricing for the Voyager UC product that you mentioned is more in line with the enterprise headset pricing or is it more in line with the consumer headset pricing?

It's in line with the enterprise pricing. It's actually - I mean, it's a new product with some advanced capabilities, so it's a slight premium. I do want to say this is brand new and we've just started shipping it. But, again, it's being extremely well received.

Your next question comes from the line of [indiscernible].

Couple of quick ones, first up, the organic growth rate on a constant-currency basis looks slightly less than your nearest peer. Is there anything that might explain that other than just noise?

Well, by our calculations that wasn't really the case. But I would say that your point about noise is valid. I think that most of the things that influence them are the same ones that influence us.

Yes. Yes, but I didn't really expect anything different, but - and it wasn't that material anyway, from a headline perspective. But the other question I've got is on the consumer front, is there anything - as we shift from mono to stereo Bluetooth, is there any difference in the way in which you're getting out to the consumer? Is it distributed through a slightly different channel than previously, more sort of big box than specialty and telco channel?

Mono to stereo, just to be clear, Paul?

Yes.

Yes. So, some of it is the same and then some of it is different. but let me talk - even when it's the same it can still be a little bit different. So, sometimes you have a different part of a story. You can still have Best Buy; you can still have Verizon; you can still have other places internationally. But at the same time, the location within the store where you put voice products may be a less prominent position at this point in time than the place in the store that you put the stereo products. The focus you put on it, who the sales person leads you to, the height on the shelf, a whole bunch of other things and the marketing emphasis in the front store, the amount of flyers you put out, all that type of stuff can create a different level of concentration. So even when we're in the same place it can be different. Sometimes we have different buyers between stereo and mono, even though, again, it is the same store. In addition to that, there can be some stores that only carry one type of product, don't carry the other. That's not at this point in time significant for us from a revenue standpoint.

Okay. So lots of change, but not anything to draw a conclusion in terms of where it's being distributed or revenue momentum. Is that right?

Well, no, I mean for us it is primarily being distributed in the same channels although it can be a different location or buyer in that same channel.

Got it. All right. And my last question, Ken, is on the enterprise side, are you seeing any change in the sort of buying pattern, meaning large price versus small versus medium? Large orders versus sort of a trickle of orders coming through from your customers? Is there any sort of material change this quarter or over the last few quarters you'd call out for us that might help us understand behavior of the buyers in aggregate?

Well, I would say there's definitely been a change, although I would call it more over the past year than certainly over the past quarter. We've been seeing a steady increase in the portion of the business that is coming from small and mid-size businesses as UC adoption begins to hit those organizations. More of the channels have begun focusing on it. There's more of the born-in-the-cloud services available to those and that's definitely increased adoption in that part of the market.

At this time, ladies and gentlemen, I would now like to turn the call back over to Mr. Greg Klaben. Please go ahead.

Thanks very much, Sheika. And thanks, everyone, for joining us today. If anyone does have any other questions we'll be around this afternoon. Thanks again.

And this does conclude today's conference call. Thank you for your participation. You may now disconnect.