Plantronics’ (PLT) CEO Kenneth Kannappan on Q1 2015 Results – Earnings Call Transcript

Our GAAP diluted earnings per share was $0.68 compared with $0.62 in fiscal 2014. Non-GAAP diluted earnings per share for the first quarter was $0.78 compared with $0.70. The difference between GAAP and non-GAAP EPS for the first 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 press release.

With that, I’ll turn the call over to Ken.

S. Kenneth Kannappan – Chief Executive Officer, President and Executive Director

Thank you, Greg. During our first quarter of fiscal 2015, we achieved record quarterly revenue, operating income and earnings per share. Revenues grew 7% to $216.7 million, operating income was up 4% and earnings per share grew by 11%.

With that backdrop, I’d like to highlight the following 4 points from our first quarter: first, the fundamentals of the Unified Communications or UC market remains solid. We remain confident of market growth over the next few years as more large enterprises move to deploy voice as part of their UC implementation.

Our UC revenue grew by 17% and enterprise revenue overall grew by 1% in a challenging comparison to a strong prior year quarter. We continued to receive indications that more and more customers are planning to move forward with their UC deployment and received further indications of this at the recent Microsoft Developer Conference, Cisco Live Conference and Microsoft World Partner Conference.

Our position in UC continues to be strong and we continue to receive feedback from the customers and partners that we have the best offering in the market. In addition, our excellence in partnering with the channel and customers to deliver support above and beyond their expectations in our own obligations has helped us establish leadership and excellent customer satisfaction. One example of our partnering was with a Fortune 100 company which began their initial Microsoft Lync rollout with instant messaging and presence in late 2011. They turned on Enterprise voice functionality and Lync in late 2012.

During their headset selection process, they undertook a series of product tests and ultimately decided on Plantronics as the only headset solution for their UC deployment. At that point, there was no competitive battle for us, but to ensure their usage goals for Lync were met, our field sales team participated in a series of roadshows with the IT department in all of their major locations. We shared with their employees how we use Lync and the IT department distributed the headsets to their employees for immediate use. Lync usage went up dramatically as a result of the roadshows and their Lync deployment is continuing across Europe and Asia Pacific and the Americas. Our value proposition in UC is clear to our customers, as well as broad. One key proposition is we provide a lower burden on the IT department versus competitive offerings, such as through our Spokes 3.0 platform, which I’ll cover later. Additionally, our products work better, employees have a much better user experience, and our aftersales support continues to be rated the best in the industry.

Second, we believe that our business model has leveraged in 2 to 3 years. In Q1, we experienced double-digit growth in earnings per share due to healthy top line growth combined with a continued return of cash to stockholders via share repurchases. We believe our business model is leveraged into — leverage-able in 2 to 3 years as UC growth overtakes our rate of investment for the UC opportunity. It’s not something we can plan perfectly, but we aim to grow profits with revenue this fiscal year, and in the long term, we expect to see margin expansion.

Third, our consumer business demonstrated very good growth of 25%, due principally to market share gains in mono and stereo Bluetooth. Our Bluetooth sales grew in all major geographies. In the U.S., our calendar year-to-date market share and U.S. model Bluetooth retail is above 45%. Our industry-leading Voyager Legend headset, combined with the success for our new Voyager Edge headset are largely responsible for this strength. Our new BackBeat FIT stereo Bluetooth product started shipping midway through the June quarter and is already one of our top 5 Bluetooth headsets in terms of revenue. It’s been picked up broadly throughout our channels.

To receiving exceptional product reviews from both editorial reviewers such as CNN and PC Magazine, as well as consumers, and has proven to be an incredible competitive offering for its price point. Demand for the products is very strong, and we are likely be supply constrained for an extended period.

Fourth, we continue to make great strategic progress. Besides our market share gains and profitability growth, we have made solid progress on our product pipeline and has some exciting product announcements planned for the fall. Today, we announced an evolution of our Plantronics Spokes software platform by introducing Plantronics Manager Pro version 3.0, a cloud service that customers and partners can use to deploy and manage Plantronics communication devices, as well as a consistent user experience. Also part of this portfolio, the new Plantronics Hub application, helps IT managers rapidly diagnose and resolve client-side Unified Communications deployment issues. We have a good track record of increasing long-term stockholder value and believe we are very well positioned to continue doing so by investing in excellent growth opportunities, leveraging our business model as we grow, and continuously returning cash to shareholders.

With that, let me turn the call over to Pam to discuss our Q1 results.

Pamela J. Strayer – Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Thanks, Ken. First, an overview of our results. As a reminder, unless stated otherwise, all comparisons of our Q1 fiscal year 2015 financial results are to Q1 of fiscal year 2014. First quarter net revenues were $216.7 million, representing 6.8% growth, non-GAAP operating income of $44.1 million is an increase of $1.7 million or 4%. Non-GAAP EPS of $0.78 per share is $0.08 per share higher than the prior year, an increase of approximately 11%. I want to highlight a few key points on our financial results for the quarter.

First, our financial results were better-than-expected, with revenue and earnings per share exceeding guidance. We also did better-than-expected on operating margins in the quarter with our Q1 operating margin coming in at 20.4%, just above the low end of our long-term target range of 20%.

Second, I’m very pleased with the improvements we are making in the business that are strengthening gross margins. Our gross margin of 53.2% remains above our long-term range of 50% to 52%. Even with the strong increase in revenues from consumer products, which generally have lower margins, our operations and in-house manufacturing expertise provide enormous competitive advantages as the lowest-cost producer of headsets with the highest quality. Our focus on continuous improvement in all areas of the business has resulted in lower cost of goods sold through a variety of efforts, including engineering changes, supplier cost control, improved inventory management, as well as facilities improvements, which drove lower overhead rates due to lower total cost and increased production capacity.

Third, we completed the reimplementation of our ERP system during the quarter. We successfully cut over to the new system with limited business impact and are feeling confident about our new platform. This new system will be instrumental in supporting global processes, scaling well to support higher revenues and transactional volumes, improving global data and analytics and reducing our cost of maintenance on the system.

Now I’ll cover revenue in more detail. Total net revenues for the first quarter of $216.7 million were up $13.9 million, or 6.8% compared to the first quarter last year, most of which was driven by 15% growth in our Europe and Africa region. The E&A region experienced growth in revenues from products in the traditional Office and Contact Center, UC, as well as mobile products. In addition, in the U.S. and the Asia Pac region, we experienced growth in mobile revenues, driven by stronger product portfolio that was well received in the retail market. In addition, U.S. and Asia Pac also saw growth in UC revenues, offset by year-over-year declines in the core Office and Contact Center revenues. Growth in the U.S. and Asia Pac region was approximately 3% and 13%, respectively.

The following are key product line comparisons to Q1 last year: Enterprise net revenue of $152.4 million were up roughly $1.2 million and 1%; UC was a driver for that growth with core Enterprise being down year-to-year, due to an unusually strong quarter in the prior year; UC revenues of $49.2 million were up $7.1 million and approximately 17% over Q1 of the prior year; consumer net revenue of $64.3 million were up roughly $12.7 million and 25%, driven primarily by growth in our stereo products, including the introduction of our new BackBeat FIT product. Mobile Bluetooth products also experienced strong growth, aided by the launch of our new Voyager Edge product; growth in revenue from our consumer products was strong across all regions of the world.

Non-GAAP gross margin was better-than-expected at 53.2%, that’s up 60 basis points compared with last year’s margin of 52.6%. Our shift in product mix toward mobile and UC products brought down average product margins by approximately 220 basis points compared to the prior year’s gross margin. However, this decrease was more than offset by cost reductions mentioned above, which reduced component costs and overhead rates. In addition, excess and obsolete inventory charges were down by over $1 million compared to the prior year.

Non-GAAP operating expenses were $71.1 million, up $6.9 million, due primarily to increases in headcount, annual salary increases and increases in variable pay associated with our strong results. In addition, we have higher IT-related spend, primarily associated with our Oracle Go-Live activities and higher legal expenses associated with an ongoing litigation. Offsetting these increases is a benefit of $2 million we recorded in the quarter from a litigation settlement.

As a percentage of revenue, operating expenses were 32.8%, that’s up 110 basis points from the prior year of 31.7%. Our non-GAAP operating margin was 20.4%, down slightly from 20.9% in the prior year. Our effective non-GAAP tax rate for the quarter was 27%. As a result of all these items, our Q1 non-GAAP net income of $33 million was 7.8% higher than a year ago, yielding non-GAAP EPS of $0.78, up $0.08 and approximately 11% from last year.

Now for some balance sheet and cash flow highlights. We finished the quarter with $437 million in cash and investments on our balance sheet, and generated over $29 million in cash flow from operations during the period. Of the $437 million in cash and investments at quarter end, approximately $11 million was domestic. We used $12.4 million to repurchase shares during the quarter. Our DSO was 63 days, up from 54 days at the end of Q1 of the prior year. The increase was due in part to less time and focus spent during the quarter on customer collection activities as a result of our ERP implementation in the quarter. We estimate that our ERP focus increased DSO by approximately 7 days. In addition, the timing of billings within the quarter added approximately 3 days to our DSO compared to the same quarter in the prior year.

It should be noted that we are a book-and-ship model with 48-hour delivery targets. As a result, billings linearity trends are driven by relatively short-term fluctuations in demand and seasonality in our business. Backlog numbers and billings linearity should not be used as an indicator, nor are they reflective of any long-term business trends or significant fluctuations in business demand.

Turning to our capital expenditures. Our Q1 investment was approximately $7 million, and slightly over 3% of net revenues. Expenditures include a large deposit on the construction of a new smart working facility in our European headquarters in the Netherlands, Santa Cruz facility improvements and equipment and tooling for our operations. Depreciation expense on a GAAP basis for Q1 was $4.6 million, up $0.6 million from the prior year.

Now turning to the outlook. We believe that total net revenues for our second fiscal year — second fiscal quarter ending in September, will be in the range of $210 million to $220 million. This focus assumes growth — this forecast assumes gross margins to be approximately flat to slightly up from the current quarter. Depending on revenue mix and other factors, we believe our GAAP operating income will be approximately $35 million to $40 million, and non-GAAP operating income of approximately $42 million to $47 million. The GAAP reconciling items we expect in the second quarter include approximately $7 million in stock-based comp expense and purchase accounting amortization before tax. Although the low end of this non-GAAP operating margin range is just below our long-term targeted range, we do expect to make up for this with a higher profitability in the second half of the year. Our guidance includes an expected spend of approximately $1.9 million on GN litigation in Q2.

As a reminder, we are including GN litigation costs as part of our non-GAAP results based in our policy for non-GAAP reporting. The GN lawsuit is in the discovery phase and the impact to operating income from the associated legal expenses is particularly difficult to forecast. Actual expenses can vary significantly from our forecast.

Similar to last quarter, included in our non-GAAP guidance is a $2 million benefit to operating expenses, which we will receive as part of a binding agreement with one of our competitors to dismiss litigation. In addition, we’ve recently settled a second separate lawsuit in our favor. As a result, our non-GAAP guidance also includes this benefit that is expected to be $2.2 million and will be recorded as a reduction to our operating expenses in the second quarter. Our non-GAAP tax rate for the quarter is expected to be 27%, and we are anticipating a full year tax rate of 27%.

Based on all of the above, in the second quarter, we expect GAAP EPS of $0.60 to $0.68 per share and non-GAAP EPS to be $0.72 to $0.80 per share, on average diluted shares outstanding of approximately $42.5 million.

With that, I’ll open the call for questions.

Question-and-Answer Session

 

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