PLT
#Thanks, Erin and welcome everyone to Plantronics' third-quarter FY16 financial results conference call.
Joining me today are <UNK> <UNK>, Plantronics' President and CEO; and <UNK> <UNK>, 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've reconciled these measures in our earnings press release and in our quarterly analyst metrics 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.
Plantronics' third-quarter FY16 net revenues were $225.7 million.
Plantronics' GAAP diluted earnings per share for the third quarter was $0.52 compared with $0.71 in the prior year.
Non-GAAP diluted earnings per share was $0.83 compared with $0.79 in the third quarter of FY15.
The differences between GAAP and non-GAAP earnings per share for the third quarter consist of charges for stock-based compensation, restructuring charges, and purchase accounting amortization, all of which are net of the associated tax impact and tax benefits in the release of tax reserves.
Please refer to the full reconciliation of GAAP to non-GAAP in our earnings release.
With that, we would like to open the call to questions.
Sure, I will try.
And thanks for the question.
It's really a combination.
I mean just to outline this obviously, we have seen a significant reduction in the Mono Bluetooth market, particularly in the US.
We had gained a lot of market share in that business, which had masked some of that decrease.
But over this past year, what we had really seen is that although we gained a tiny bit of market share, we're really about at the limit.
And there were in fact some people exiting the low end of that business, and that gave other people an opportunity to increase.
But what we found was the retailers really did not want to have any more of the market share concentrated with us.
They still wanted to have a little bit of a selection, so we think we've kind of hit somewhere near a peak in terms of our market share opportunity there.
While we expect the stereo business to grow and do believe that we will come in the course of probably towards the end of this year a point that the stereo growth will exceed the Mono decline, nonetheless, it doesn't give us a growth engine on that side.
So then we're looking at a fairly choppy macroeconomic environment, and the FX hits being pretty substantial.
We did not want to ignore that impact on our business model.
We felt that we are in a really good strategic position and that we could in fact continue to be effective and industry leading with a reduction in our cost structure.
So looking at both the Mono Bluetooth looking at our competitive position, looking at the impact on FX, we did want to take a step in the direction of improving our cost structure.
Am I answering your question well enough.
Yes, so this is a specific response.
We are continuously reducing SKUs, but in fairness, we are also continuously adding SKUs.
So we do try to make sure we're doing enough house cleaning there to be cost efficient while at the same time adding innovation on the front-end side.
We are absolutely continuing many programs and operations including taking advantage of the incredibly low-cost position and significant facility that we already have as a fixed cost in Mexico to reduce supply chain costs.
This was separate from those initiatives.
Sure, so there were a few questions, and I will try to remember them all, but if I missed something, just let me know.
So first of all, the stereo business has clearly grown as a portion of the total consumer business, and at this point in time, actually the mono business is less than half of our total consumer business.
And now there's a little bit that's gaming as well.
We had a terrific response to some of our portfolio this year, but more to the point, and we had growth this year obviously, but more to the point, the portfolio that we showed at the Consumer Electronics Show or CES in Las Vegas was really extremely well received.
I think one of the concerns that we've had as Plantronics is we are known and we are a communication brand, and the depth of value add that we can provide in communications is truly unparalleled.
As we were moving into the stereo space, we knew that some of these products were consumption-first, or music-first types of products where communications would be secondary.
And so we were worried about our permission to play in these segments and the reception we would get from some of the key channels.
And very clearly, what we heard at the CES show was ---+ your products have been fantastic, our sales reps are already telling us these are the best products, that the return rates are lower.
Word of mouth is very positive, very positive reviews on the websites.
So we may not be able to compete with the marketing brands or the budgets of some of our competitors, but the authenticity of the experience is very, very high and the enthusiasm we had for the specific models we showed that will launch over the course of the year was very, very high.
So we feel very good about our potential and the ability to compete in that segment.
Now, again you asked a number of questions, and I'm not sure if I remembered them all.
So if I missed one, please tell me.
So guidance for Q4, we are expecting an increase of 2%.
Most of that is going to be driven by the enterprise business and UC in particular.
Year over year for Q4, we're expecting a little bit of a decline in consumer driven primarily by declines in the Mono Bluetooth market.
So UC will be the primary growth driver there, offsetting declines in Mono Bluetooth.
I will just talk briefly.
On the consumer side, clearly we will expect some good progress on the stereo side of the business, but not in terms of this quarter because we don't really have the benefit of the new launches this quarter.
Thank you.
So first I will talk about the gross margin changes year over year in our Q3 results.
They did come down by over 300 basis points, 120 basis points of that was due to currency impacts.
And we also had 70 points from some customer mix and product mix.
There's also about ---+ sorry, about 80 points from some pricing changes that we made in order to stay competitive in our international geographies.
We are forecasting some additional pricing impacts in Q4, but our gross margin for our guidance is somewhere between 51% and 52%.
So that gives you some idea.
I don't know if that was in the range that you were looking at, but that's what---+
Let me clarify that.
So due to the timing of our restructuring activities that are happening during Q4, we aren't going to see all of the savings in Q4 that we would expect.
So there is a quarter-over-quarter increase in our expectation of operating expense.
And some of that has to do with variable compensation.
In Q3, we saw a benefit of about $2 million from reducing our variable compensation as a catch up adjustment reducing Q1 and Q2 accruals.
So we aren't going to see that benefit again.
Also sorry, the bigger impact there going from Q3 to Q4 is really the 14th week.
Due to the way our fiscal year calendar falls, we have an unusual 14th week in our Q4 this year.
It's typically 13 weeks, so that adds about ---+ that adds over $4 million in operating expense just in the 14th week.
Well, we can give you a little bit of color on this.
So the UC business on a constant currency base was up about 8% for the year, which is a little bit lower than we hoped, but nonetheless positive.
The big decline was in the Mono Bluetooth business in the US, which was off about $8 million year over year.
All right, so everything you said is correct, <UNK>.
Let me give you what the concerns are and what the pros are.
We are certainly hearing a very good response to our new portfolio, and I would say globally.
At the same time, it's early January that we have assembled this forecast, and it's been at best a choppy start to the year from a macroeconomic standpoint.
I would say some sectors of the both global and US economy have been very affected.
And so just talking US economy, very clearly the oil and gas industry has taken a significant hit.
And that for us is a very, very good sector of the market.
We'd seen some hits also from the defense contractors, aerospace sector.
And I would say that US exporters such as ourselves who are affected by the dollar ---+ I mean some, of course, are able to price in dollars overseas, but those who have to price in local currency, this has been a significant impact for them.
So I think some of those sectors of the economy have been affected, and I think others have been concerned by macroeconomic events.
We usually find this is still early in the quarter to really understand what we're going to see in the course of the year.
And so we will pick up more of that intelligence as we go to enterprise connect and get more feedback.
But so far what we've heard has been relatively positive, but it's ---+ in my mind there's a certain tentativeness just because of macroeconomic concerns, the downgrading of expected GDP growth rates.
From a global basis, we actually saw a pretty good quarter from a constant currency standpoint from Europe.
I think that ---+ never minding the translation, I think that there's actually some room for hope that the position is getting better.
On the other hand, some of the emerging markets had been very hard hit, and some of them were hit before and it's gotten worse.
So if I look at areas such as Russia, Brazil, South Africa, China having slowed down, very clearly the oil producing regions and as well as big companies within countries.
So if you look at PEMEX or something like that, Petrobras, which are oil companies in diversified economies, these are also weak.
So we've got some of those on the negative side.
So we feel very, very good about the portfolio, the value proposition it provides and the reaction we're hearing.
And at the same time, if I look out longer, I think there is a risk of macroeconomic headwinds on the negative.
Sure, let me comment on that a little bit.
That's probably the smallest of all of the factors in terms of gross margin, and what I would say there is there's two elements of it.
One is we sometimes sell in dollars, but we're really in local currency competition.
And so that's part of it, and the other part is there were some ---+ even on the enterprise areas where we had a little bit of price competition in Europe.
The much bigger effect on the pricing was on the consumer side and then product mix and FX.
So this was a fairly small one.
So I believe the year-over-year increase I was referring to was actually looking at Q4 guidance.
If we look at the full-year FY17, we are going to have cost increases.
We've taken $15 million to $16 million out of our annual cost, but one of the big challenges we have is variable compensation that comes back to 100%.
We're much lower than that this year, and that's a big chunk, $15 million or more in costs that are going to be coming back as a result of the bonuses.
We also have---+
Depending of course on our performance relative to the plan, which has not yet been set for next year.
Sure, right.
The plan is not yet finalized.
We also have merit increases and healthcare costs and other things in there that traditionally go up year over year.
We haven't actually set guidance for Q1 of next year.
All we provided is guidance for Q4, which admittedly is not giving you a perfect understanding of this cost reduction action because obviously it's occurring February 1.
Not all of it will take effect for the whole of this quarter.
So the full effect of that benefit will be in the next quarter, but we've not yet come up with guidance for the June quarter at this time.
That is the case, yes.
But again, a lot of that is the variable incentive compensation coming back.
We haven't put together an actual detail expense as yet for the June quarter.
The way I would think of it is that there was a benefit of $2 million in Q3 operating expenses as a result of the adjustment.
So let me talk partly to it and then I will let <UNK> give you more correct and detailed information.
First of all, some of this absolutely cuts across all categories.
Foreign exchange cuts across all categories.
The lower volumes in the plant which affects our fixed absorption may be due primarily to the drop off in the Mono Bluetooth business, but that affects our total business and it affects our total gross margins.
Some of the higher logistics costs we had were due to the consumer side of the business where we had much greater volume.
On the mix side, we had product mix issues that were really very specific to particular products.
It was probably a little bit more on the consumer side than it was on the business side, and more of the pricing was probably on the consumer side than on the business side.
But that's the flavor I would give you.
<UNK>, do you want to correct anything.
No, I will not correct anything.
I will add one thing though.
The discount or the pricing impact to enterprise was all international due to international pricing.
So the pricing impacts were much more significant on consumer globally, but when you think about the enterprise, it was international pressures.
Well, so I think what you just said is reasonable, but let me just say also, part of the reason we only forecast one quarter is that our accuracy is not very perfect.
So you're asking for when will it get to that inflection point where the drop off in the mono category stops hurting us more than the gains in the stereo.
And we don't know for sure ourselves, just to be clear.
In all honesty, we were surprised that the Mono Bluetooth category's decline accelerated this year in the US.
We were certainly prepared for some decline, but it actually went down much faster than we had expected.
So we don't know for sure how much growth the stereo category will have.
We don't know for sure how much decline the mono category would have.
That means that it's pretty hard for us to estimate for sure where the crossover will be.
Having said that, we do think it's reasonable that within a year as we start to get the traction on all of our new product launches that we will be at or around that zone.
You've made one error, and that is the variable compensation coming back into Q1 is much larger than the $5 million impact over the 14th week.
Let me explain one thing.
So there were two elements that in <UNK>'s comment about the $2 million credit in Q3 I believe.
One is that we had a credit for reversal of prior quarters' accrued compensation, but the other one is our accrual for that period was well below 100% accrual.
So when we go back to a regular quarter, we would be assuming we are on plan, accruing on the basis of 100%.
So that's why those numbers didn't quite add up.
Yes, that was a quarterly number.
It includes AIP as well as merit increases and healthcare.
There's a few other small numbers.
A year ago, we had I think a litigation receipt that reduced our OpEx.
We don't have that this year.
There's a few other little things.
So I think that we are encouraged by the new products from our partners.
I think that it always takes a certain amount of time, having said that, for the market to trial accept them for any issues in the offerings to get smoothed out by the customer base.
And so it's just not been the case that we typically get an instant lift off from new offerings.
However, I do think there is, if anything, continued growing enthusiasm.
I continue to wish that it took off a little bit more like a rocket ship and less look a barge.
But at the end of the day, are we confident there's growth.
Yes.
These offerings are better, faster, cheaper than existing solutions.
They can meaningfully help organizations operate better, more flexibly, embrace mobility in their workforces, do it at lower cost.
Some of the new offerings extend the cost savings opportunities to corporations while extending the capabilities and better supporting both cloud and hybrid architectures that people are very interested in.
So I think we feel positive about that, but again, I've learned that it doesn't always mean that we're going to get an instant acceleration of business.
I would say one other thing ---+ I think that Microsoft is also very interested converting a lot of the people who have adopted their UC solutions currently primarily for IM and presence into using more of the license, and that would also be encouraging.
The current forecast is somewhere between $1 million and $2 million in expense in Q4.
Thanks, Erin.
Thanks everyone for joining us today.
If you have any additional follow-up questions, we will be around this afternoon.
