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

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

Plantronics (NYSE:PLT)

Q1 2015 Earnings Call

July 29, 2014 5:00 pm ET

Executives

Greg Klaben – Vice President of Investor Relations

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

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

Analysts

David M. King – Roth Capital Partners, LLC, Research Division

John F. Bright – Avondale Partners, LLC, Research Division

Ryan MacDonald – Northland Capital Markets, Research Division

Tavis C. McCourt – Raymond James & Associates, Inc., Research Division

Yi-Dan Wang – Deutsche Bank AG, Research Division

Operator

Good afternoon. My name is Delinah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Plantronics’ First Quarter Fiscal Year 2015 Results Conference Call. [Operator Instructions] Thank you. Mr. Greg Klaben, you may begin your conference.

Greg Klaben – Vice President of Investor Relations

Thanks, very much, Delinah, and welcome, everyone, to Plantronics’ First Quarter Fiscal Year 2015 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-K, 10-Q 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. Additionally, after the conclusion of today’s call, a recording of the call will be available with information on our website. Unless stated otherwise, all comparisons of the first quarter are to the same quarter and the prior fiscal year.

Plantronics’ first quarter net revenues were $216.7 million. 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.

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