Greg Klaben - VP, Investor Relations Ken Kannappan - President and Chief Executive Officer Pamela Strayer - SVP and Chief Financial Officer

Greg Burns - Sidoti & Company David King - ROTH Capital Partners Paul Coster - JPMorgan Jim Fitzgerald - Northland Capital Markets Tavis McCourt - Raymond James & Associates, Inc.

Good afternoon, my name is [Delina] and I will be your conference operator today. At this time, I would like to welcome everyone to the Plantronics' Q4 Fiscal 2016 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 will now turn the call over to our host Mr. Greg Klaben. Sir, you may begin your conference.

Thanks, Delina and welcome everyone to Plantronics' fourth quarter and 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, 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've 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 and after the conclusion of today's call the recording of the call will be available with information on our website and our prepared remarks on our Q4 results and outlook are also available on our website. Plantronics' fourth quarter fiscal 2016 net revenues were $209.8 million. Our GAAP diluted earnings per share was $0.39 compared with $0.61 in the prior year. Non-GAAP diluted earnings per share was $0.64 compared with $0.72 and the difference between GAAP and non-GAAP earnings per share for the fourth quarter consists of charges for stock-based compensation, restructuring charges 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, I’ll open the call for questions.

[Operator Instructions] Your first question comes from Greg Burns with Sidoti & Company

Good afternoon. Just a question about the restructuring that you have in place, and you guess last quarter you were talking about $15 million in annualized savings, sounds like you did have some additional initiatives that you implemented this quarter. So I was just wondering what the cumulative savings are you're looking for how much of that was realized in the fourth quarter, and how we should think about OpEx going in to the fiscal 2017?

Yes. So we were able to find more savings on top of what we announced previously. The question is what do you compare that to. And the savings that we had announced before was a comparison to what our original FY 2017 plan was going to be. So I guess what I would say in terms of forecasting OpEx. For Q1 we're expecting our OpEx to be flat to slightly down from Q4 actual. And from that point we're going to manage OpEx so that it grows slower than revenues, so we can improve our operating margins during the year. But other than that I'm not going to be giving any more guidance for the full-year.

Okay. And in terms of SoundScaping, could you just talk about maybe what - how that differs from the competing solutions that are in the market, what kind of interest you're seeing from businesses and then also what you see the total adjustable markets for that kind of service to be?

Sure. Well, first of all it's very early days in terms of the market and so let me try to give you a little bit of rundown. Number one most of the other solutions that are in the market are what I would call, comparing somebody doing surgeon with a club to somebody doing laser arthroscopy or something like that. I mean it's just a quantum difference in terms of the performance and as a result of that experience. With many of these other solutions where you have is just a very high level of background noise that people find fatiguing and is not very well targeted to what we're talking about. With our solution you can literally be five to eight feet from somebody have a normal conversation, and yet not disturb somebody who is 12 to 15 feet away. And the effect is very, very subtle, so you don't feel any acoustic fatigue during the course of the day. We think that it's based upon our technology, which we've been working on for years and years and years that results in very high levels of acoustic intelligibility. We are basically doing the reverse of our normal technology where we normally try to make conversations very clear and intelligible and bring people closer together. We are actually doing something slightly different on it, but it gives us a phenomenal technology based upon which we are working. I would say that we have had this in a – what I would call pre-alpha stage working in our facility for some time. We've been working on the challenge of bringing that out into a general market, where obviously it needs to be somewhat more plug and play, needs to be able to adapt to a variety of different shapes and sizes, different absorptive materials in terms of different frequencies. And so that's work that we’re still not completed with, but having said that we think that we're getting close enough that we – and we're talking about it and dealing with partners and other people at this point in time that we thought it made sense to be public about it. As a result of this installation, the fact we've had many companies come to visit us. We have in fact realized that there was enormous demand for the product even as it stood now. Virtually everybody who has seen it, the corporations that come to visit us, has wanted to buy it. Again it's not quite ready and so we’ve not sold it as yet, but we know that there is a very high level of interest; fundamentally we're dealing with something that addresses a huge need. As I said in the prepared comments there’s really two camps of people. Those who have already tried to convert to a modern open plan type of environment. We are doing that to break down barriers to improve collaboration as well as to save money on real estate cost and they're finding that they have a big pain point. The productivity of their people is being affected. People are frustrated and unhappy and they don't have any good solution out there. They put in noise dampening systems and solutions, and they wind up making the problem worse. They create a library or – and almost any sound bothers people, and so they're desperate. And on the other hand, we have people out there, spending a lot of money for real estate that is typically only used 50%, 60% of the time, and they're eyeing all the big real estate cost savings and they're very, very interested in it. And at the end of the day they understand that in order to facilitate that they have to install something like the solution we have. So as you're looking at the workforce out there when we talk to facilities teams and we talk to IT, there is a significant level of interest. Having said that, we are very early in this process and therefore there's a big difference between having people express interest and having people write purchase orders. It's going to be determined over the course of time, when we have a product complete and we figure out how we're going to be able to effectively bring it out to market, what’s the real sale cycle is what the real ramp up is and other things like that. Now, I think there were three questions you asked and I have to confess I can't remember right now, what was the third question?

It’s just related to the addressable market, but I think you somewhat touched upon that I guess it's to be determined?

Okay. Good enough. Thank you.

All right. Thanks.

Our next question comes from Dave King with ROTH Capital Partners.

Thanks. Good afternoon, everyone. I guess first off on the improved outlook for the consumer business. Can you talk about what's driving that perception, whether its success with some of the new products in stereo, is it more that mono has turned the corner at this juncture, and then I guess just along those lines where is mono as a percentage of the wireless mix at this point?

Sure. Well first of all, yes, the improved outlook is primarily driven by the stereo portfolio and what we're seeing is very good reception of the stereo portfolio. And on the one hand we expect some pickup in Q1 and on the other I would say that more the portfolio will really start to get around the holiday time frame later in the year. I would say as it relates to mono, on the one hand we certainly do expect the category is going to continue to decline some over the course of the year. It’s declined some in Q1. On the other hand, we did have some market share gains in Q1 that helped soften a little bit of that. We're getting a phenomenal reception to our new 5200, which is just been launched. As well as a nice pickup on the [case] [ph] so that further lifts the ASP and so that again helps to offset it a little bit.

Okay. And then in mono as a percentage of wireless mix, are you able to share that?

Are we sharing that?

I guess what I would say is that for next year I mean we do expect mono to decline a little bit, so it’s going to be a smaller portion of the overall mobile mix within consumer.

Okay, thanks Pam. And then on the outlook, switching gears for fiscal 2017 assuming that consumer revenues do hold flat as we discussed, UC is up mid-single-digit or excuse me, mid-teens as you guys described. I guess it assumes that sort of flattish in the traditional CC, if I’m thinking about that right. Is that indeed the right way to think about it and I guess what sort of – what are sort of the puts and takes to that outlook, what’s driving the comfort and just how are you feeling overall about that part of that business?

So I am going to disaggregate a little bit and talk about one piece and if this wasn’t the entire question then just let me know, but if we're talking about the core OCC business, what we believe is that actually it's been declining a little bit and actually we expect it will continue to decline a little bit. Now within core OCC, the macro economic factors tend to be very, very large relative to business. So starting off with foreign exchange rates this is a very large determinant of what we actually realize in a relatively flattish kind of economic environment. I would say that relative to GDP growth, again we're not yet seeing what we would call truly robust economic conditions driving high levels of voluntary turnover and accelerating our replacement cycle. So what we see is a relatively flat market, a slight decline as we do see UC growth and while most of that growth is incremental. There is a small part that at the end of the day is cannibalizing it. I would also say that we've seen – we continued to see an extension of the replacement cycle in our core business and that's been a slight negative on that market as well.

That answers it perfectly. Thanks for the color there. And then I guess lastly with regards to the as a service and maybe SoundScaping as well. Can you talk about the economics of those initiatives, margin profiles you alluded to I think a little bit maybe on the SoundScaping, but I understand it’s early. And then does that mean transitioning to more of a subscription model over time. What should that mean for revenues and then did that play at all in that decision to take down the longer-term topline outlook. I think you guys are thinking about 10% long-term growth previously announced. It sounds it’s mid to high single-digits, so any color on economics would be…

So I’m going to try to answer it, if I missed part of the questions just remind me. So let me start with margins, so relative to these new areas – subscription areas, we do see them as being substantially higher margin than our existing business. Let me start with the data inside modules, the software-as-a-service areas that we announced earlier today and we would be adding additional modules over time to this. At the end of the day, this is really leveraging the data insights that we’re already able to gather and providing them to our customers and what we think is value add for their business allowing them to manage their business more easily, get information that they really want. And so we see this as a very high margin overlay as a level of value add on our existing business. And relative to the SoundScaping, again I would say this is early stage and so in the early stages many of these models you have to figure out what is going to be the OpEx required to go-to-market and to be successful, but the intrinsic gross margins of the product should be very attractive. Most of the value add is in the algorithms and so while we do need to obviously put some sound equipment and other server and so forth on locations most of the value add being really technical in nature the margins on that should also be higher than our regular business. Device as a service, we see that as being embryonic at this point in time, but it should have some attractive margin characteristics it should reduce the replacement cycle for our products which is attractive from a P&L standpoint. So we see all these as being better. Now in terms of subscription models over time, and the growth rate, we have not attempted to add those into as yet the growth rate for our revenues. I would say that the lower rate that we see out there is really a reflection of the fact that number one, the UC market is not grown as much as we wanted and it's not at least imminently showing a sign of having a higher growth rate that would lift the total enterprise business. We've still been in a fairly sluggish macroeconomic environment and it's not clear that that global GDP number is rising. From a consumer side the mono category again is not showing great opportunities for growth and so that leaves us with the service side growing well. So this is a reflection of our view as well as third party analyst views of where we think the market growth is likely to be.

Okay. That’s really helpful. Great color. Nice quarter and good luck with fiscal 2017.

Thank you.

Our next question come from Paul Coster with JPMorgan.

Yes, thanks for taking my question. So the current revenue growth outlook 6% to 7% or rather [‘17] is low-to-mid single-digits, the longer term is 6% to 7%. Ken, can you just talk just a little bit about why the sub-secular growth trajectory near-term and what the puts and takes are in your guidance in terms of the risk?

Sure, I'll try. Well I think that you know right now we are in terms of the guidance we're not seeing a higher level of UC adoption to be a driver at overall higher level while we're still in again this relatively soft macroeconomic environments not a bad economic environment, but it's not a robust one. So you know most of our replacement cycle business, there is not a driver near-term that says hey this is why we're going to see a cyclical rebound. On the side of the UC side, while we’re seeing continued growth and there are some causes for optimism that could make it grow at a faster pace. We think it's unlikely that we're going to see a significant pick up over the near-term, there's not enough in progress to make that seem likely. It's always possible. We think it is more likely to happen longer-term. I think that the products and solutions are absolutely outstanding at this point in time. There's no question that this offers a better cheaper solution for customers. Many of the born in the cloud PBX players are seeing very, very good growth. We think that that a lot of these offerings are ready for people to adopt and therefore should have better attach rates for us. If I look at kind of the near-term puts and takes to answer that part of your question, clearly in a very near-term way you know we can get lumpy UC business, they can help us a good deal. It certainly got the potential for positive effects on the FX side as well. I would say that on the stereo consumer side and on gaming we do have a very nice new portfolio and we could see traction in those, better than what we expect. On the negative side, I would say it would primarily be a risk in the core space that the growth is sluggish, the economy is not very good. I mean, obviously there is an 0.5% U.S. GDP growth which is not a wildly robust number. And then on the mono Bluetooth side again there's always risk that we could see further contraction in that segment.

Great. Thank you.

Our next question comes from Mike Latimore with Northland Capital.

Hi, this is Jim Fitzgerald standing in for Mike Latimore. So for my first question here I just want to start on the macro level. Have you guys have been customers four channel partners pausing lately to evaluate economic news such as what we're seeing in China, or have the bookings there that linearity been pretty normal?

So I would say that more of the pause that comes from macroeconomic tends to come at the system level rather than a headset level and then we tend to follow that. Relative to an economic headline, it is extremely rare for a Company to put in any kind of pause on smaller purchases at the level that we operate. To the extent that they're really worried by headlines then they might delay installation of an upgrade or a new system or something like that. Even then I would say it's fairly rare. Normally by the time you're ready to implement those plans you've got a lot of sunk investment in time and effort and you have another system that you are planning to end of life and save those license payments and so you tend to go ahead. I would say that it's usually more of a slightly longer cycle delay that it hits the sales cycle rather than at the very end of the funnel.

Sure. And then can you talk about the Voyager Focus product a little bit. I know you mentioned in our prepared remarks that you're happy with the reception that product received. Can you elaborate a little bit on that?

Sure. I mean back to kind of what I talked about with our SoundScaping solution, right now today the only way to really deal with that environment if you're in it is to have your own private cocoon, and that's what this product is offering. It’s offering you the ability to avoid distractions, shutout the noise it's near you, and at the same time to make conversations, communicate effectively do what else other that you’re looking to do. So for those sorts of environments at the leading edge it is really been a fantastic product, separate from that you can use it anywhere. So I mean I can use that product if I’m sitting at a Starbucks and I'm the sales person or any other location that I wanted to do it. We have people using it on planes and they’re listening to conference calls. Now over Wi-Fi they’re presumably not talking and annoying their neighbors, but nonetheless it's a fantastic product, very differentiated in the market.

Okay. Great. Thank you. Nice quarter.

[Operator Instructions] Your next question comes from Tavis McCourt with Raymond James.

Hey guys. Thanks for taking my question. In the prepared remarks you made a comment that the first quarter is going to be – have a benefit from a one-time royalty payment? Can you just discuss maybe the size of that? What it's related to and if I plug in your guidance, it looks like your gross margins are going to be up a bit sequentially, is that because of that royalty payment and in anyway to talk about how if the core gross margins trending I think you mentioned in the last call being a little cautious on that. And I'm wondering if you're seeing improved ASP trends in the market?

Yes. Hi, Tavis. So on the royalty revenues, what we're expecting there is about $2 million and this is ongoing royalty revenue we've had for a while, we just end up with an unusually large chunk of it in this quarter which we don't expect to recur. So we do expect like 50 basis point improvement as a result of that. Going forward I would say gross margins including Q3 there are going to be right in a range of 50% next year and then depending on product mix with Q3 being at the lower end of that range.

Pam, I missed you. You went out when you said what range 50 to what percent?

Sorry, 50% to 52%. I think in the past we would tend to go a little bit north of 50%, because the currency I’m expecting it to stay within that range….

Got you. And then two follow-ups, it’s been a few quarters since you called out legal costs and I'm wondering are those de minimis now or are they still running in the same range as they are always been. And then it looks like the international growth in the quarter was probably as good as it's been on a year-over-year basis in four or five quarters. I know the extra week helps, but was there anything else even if you adjust for that it looks like it was materially better than last quarter, any glimmers of hopes in some of the geographies where you mentioned some relatively extreme weakness on the last conference call?

Why don’t you do the legal?

Yes. On the legal costs, they have been running between on the GM litigation somewhere between $1 million and $2 million a quarter. And that's roughly what we expect going forward as well.

So let me turn to the international business and you're right. It was a good quarter internationally. We actually saw really across the Board by which I mean both Europe as well as Asia Pacific. Pretty good conditions and actually we’re continuing to see that right now.

Great, thanks a lot. End of Q&A

There are showing no further questions at this time. I’ll now turn the call back over to Mr. Klaben for any closing remarks.

Thanks again everyone for joining us, we are available afterwards if you have any follow-up questions.

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