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Edited Transcript of PLT earnings conference call or presentation 6-Nov-18 10:00pm GMT

Q2 2019 Plantronics Inc Earnings Call

SANTA CRUZ Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Plantronics Inc earnings conference call or presentation Tuesday, November 6, 2018 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph B. Burton

Plantronics, Inc. - President, CEO & Director

* Michael R. Iburg

Plantronics, Inc. - VP of IR

* Pamela J. Strayer

Plantronics, Inc. - Executive VP & CFO

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Conference Call Participants

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* David Luke Eller

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Gregory John Burns

Sidoti & Company, LLC - Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Jerome, and I will be your conference operator today. At this time, I would like to welcome everyone to the Plantronics Q2 FY '19 Earnings Call. (Operator Instructions)

Mr. Mike Iburg, you may begin your conference.

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Michael R. Iburg, Plantronics, Inc. - VP of IR [2]

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Thank you, Jerome. Welcome to Plantronics fiscal results conference call for the second quarter of fiscal year 2019. My name is Mike Iburg, Head of Investor Relations, and joining me today are Joe Burton, Plantronics' President and CEO; and Pam Strayer, Plantronics' Executive 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. We are providing GAAP revenue guidance along with the impacts of the purchase accounting adjustments to revenue. However, all other guidance is provided on a non-GAAP basis in a manner that is comparable to past period results.

During today's call, we will be providing primarily historical non-GAAP metrics related to gross margin, operating expenses, operating income, net income and earnings per share. We have reconciled these measures with our U.S. GAAP results in our earnings press release, which is available along with the recording of today's call on the Investor Relations section of our corporate website at investor.plantronics.com.

Plantronics second quarter fiscal year 2019 GAAP net revenues were $483 million. Plantronics GAAP gross margin was 31.6%. GAAP operating margin was negative 17.8%, and GAAP diluted earnings per share was negative $2.21. These GAAP results include the impact of purchase accounting adjustments made at the time of the Polycom acquisition under U.S. GAAP. Our earnings release today includes a table outlining the revenue impact of purchase accounting adjustments, which were included in our non-GAAP results. We have adjusted for those revenue impact to arrive at a combined set of comparative results for the current period and prior year period that management believes provides meaningful supplemental information regarding our performance.

During our last earnings call on August 7, 2018 when we provided guidance for this quarter, we noted that we are providing non-GAAP guidance for the combined company that is in a manner that is comparable to past period results. Actual results will be different from this due to accounting adjustments made at the time of the acquisition of Polycom (inaudible) accounting. The specific impact of these adjustments is unknown at this time, but will be recorded in our September quarter results.

The combined comparative net revenue for the second quarter of fiscal 2019 was $520 million compared with combined comparative net revenues of $512 million from the prior year period. Combined comparative gross margins and operating margins were 53.2% and 18.5% compared with 55.5% and 19.5% in the prior year period, respectively. Combined comparative diluted earnings per share was $1.51 in the second quarter. The difference between our GAAP results and the combined comparative results provided here consists primarily of purchase accounting adjustments, intangibles, amortization, charges for acquisition-related fees, stock-based compensation and restructuring. All net of any associated tax impact and discrete tax adjustments. Please refer to the reconciliation tables in our earnings press release issued today for additional details.

With that, I will now turn the call over to Joe.

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [3]

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Good afternoon, everyone, and thanks for joining us today. I wanted to take this opportunity to provide a few remarks before we open the call to Q&A. Today marks another milestone for the combined Plantronics and Polycom as we report our first quarter of consolidated financial results.

Looking to our combined comparative results, which are adjusted for the revenue impact of purchase accounting, we delivered net revenues of $520 million, gross margins of 53.2%, operating margin of 18.5% and earnings per share of $1.51. Very solid results for our first combined quarter and a demonstration of the leverage available in the model that we have, even with the majority of our cost synergies yet to be achieved. Although, there will be some fluctuation in our results as we go through the process of integrating the 2 organizations, over time as we deliver our synergy targets, we expect to see improvement and deliver on the inherent potential of this combination. Now that we are operating and reporting as a combined company, I think it makes sense to take a few minutes and walk through our core market, our strategy in that market and why we believe we will be so successful.

As we've discussed in the past, we participate in the $40 billion annual Unified Communications and Collaboration market, providing a broad range of intelligent endpoints targeting the enterprise and business customer.

In the past, we were limited to the professional headset portion of this market but with the addition of Polycom, we now have a broad set of voice, video and headset endpoints that address over $5 billion of market opportunity, growing to over $7 billion in opportunity by 2022, and overall combined annual growth rate of approximately 7%. The driving force behind the Unified Communications and Collaboration market is the transition to open, flexible workspaces. We are in the early innings of a massive enterprise technology transition. Businesses want to improve productivity and utilization, while employees want more collaboration and flexibility in their work environment. As a result, the traditional cube/office design is transitioning towards open, flexible spaces with hoteling hot-desk setups that are becoming more common.

The common denominator in this transition is the need for employees to be untethered from their fixed location and yet be able to work from anywhere at any workstation across any work infrastructure and have the same or superior tools, connectivity and reliability as they've had in the past. With this transition, the traditional voice PBX is being replaced by cloud-based or software-based deployments, utilizing IP phones and headsets on the desktop, while the traditional offices of the past are being converted at a rapid pace into small conference rooms or hurdle rooms where collaboration can occur, and this stokes the need for voice and video solutions. This technology transition not only reduces cost but also provides the flexibility and mobility necessary for today's always-connected work environment. The always-connected mobile worker needs the tools to get the job done whether on the road, telecommuting or hoteling and the need to be connected is critical. We have positioned ourselves as the leading provider of intelligent endpoints, working collaboratively with all the tech partners in the industry and with the ability to inter-operate across virtually any back-end infrastructure. We offer unparalleled portfolio of integrated solutions spanning audio, video and content collaboration through our headsets, desk phones, audio and video conferencing, all tied together with enhanced analytics software and services. We believe our success is going to be based on: number one, offering the market a single source for our world-class endpoints that meet all their needs; number two, providing integrated analytics management and provisioning tools that provide insights in management they've never had before; and thirdly, inter-operating seamlessly on top of virtually any communications platform and infrastructure. Over the next several quarters, we will bring to market combined solutions leveraging world-class technology from both Plantronics and Polycom, targeting specific high-growth opportunities in the UC&C market. We believe these combined solutions will confirm our better-together pieces and validate the old adage that the whole really is greater than the sum of the parts.

Thank you again for joining us today and -- for this call. And with that, let's open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question coming from the line of Mr. Greg Burns of Sidoti & Company.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [2]

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So just wanted to start with EPS. Can you just bridge us between the $1.51 you posted for the quarter, and I guess the reiterated guidance that you gave in early September of $1 to $1.25? Where are the variances -- was driven there? And then when we look forward to the third quarter guidance, kind of -- it looks like it's projected to step back down to around like $1.23 or so at the midpoint? Can you just walk us through the bridge between all those numbers?

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Pamela J. Strayer, Plantronics, Inc. - Executive VP & CFO [3]

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Yes. Greg, this is Pam. So on the bridge on EPS, I would point first to the top line. We did overachieve on top line relative to the midpoint of our guidance, so that helped a little bit on our EPS forecast. But I think the biggest impact was really on a decline in operating expenses in the year or in the quarter. OpEx came in below what was being forecasted in guidance that really helped overachieve on the EPS line.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [4]

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Okay. And then looking out to the third quarter, I guess, OpEx is going to be stepping up, back up a little bit in the third quarter? Is that the case?

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Pamela J. Strayer, Plantronics, Inc. - Executive VP & CFO [5]

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Yes. So I think in the current quarter, OpEx, like I said, was a bit lower than we expected. As you can imagine bringing 2 companies together of similar size, starting integration plans, you're going to have a pullback of it on spend, as people like to see what's coming out and what the plans are, going into the December quarter now as we're finalizing more of our specific integration plans. Some of that will come back in the area of operating expenses. We do expect to have a couple of changes there that are impacting that area. Number one, we do expect an increase in R&D expense overall as we get some NRE receipts from strategic partners that help offset some of that R&D spend. We saw some of that spend in [December quarter and December quarter is] going to be slightly lower. We're going to have a little bit of higher sales commissions, because it is the fourth quarter for the Polycom business. And so connections would be going up a bit. And then we're just going to continue on our hiring plans that were put on hold. So there will be a little bit of headcount added, but that's some color on why OpEx is coming back. (inaudible) we do have realized synergies that we'll be seeing and that will be coming in to the December quarter as well but that gives you a flavor of OpEx.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [6]

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Okay. What do you project in terms of, I guess, synergy realization may be in the third quarter and for the full year '19?

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Pamela J. Strayer, Plantronics, Inc. - Executive VP & CFO [7]

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Yes. So I can't comment on the full year, I will tell you a couple of things I know about the quarter. So we did execute on synergies in the September quarter to the tune of $12 million in run rate synergies. We were able to realize actual synergies in the September quarter of about $2 million. So I expect the December quarter that will get back to $3 million benefit in December from the September actions. In December, we are still very much on track for our synergy plan, and we had been projecting $14 million in run rate synergies that we'd execute against in the December quarter, and we're right on target with that plan. Actual realized synergies in the December quarter, however, are very low, just due to the timing of that execution. So we're not going to see benefits from the December quarter actions until next quarter but that should be about $2 million to $3 million, that we would then see in March from the December actions. So we're right on target with our synergies. We're seeing the benefits from them as we would expect and we're still very confident of our plan to get to $85 million in run rate by the end of the first year following the acquisition.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [8]

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Okay, perfect. And then maybe could you touch on the declines in video, the 17% decline you posted in video? What's kind of the competitive landscape look like in the video market? Do you think you could stabilize that business? And maybe, I guess, first stabilize it and then what are your plans to grow that business?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [9]

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Yes. Greg, this is Joe, I'll jump in on that. So really, 2 things going on in the video business. One planned and one temporary, but we still feel extraordinarily good about that business. The decline in the video business this quarter really came from 2 things. It came from the decline in video endpoints in North America and a decline in platform in Asia PAC. So first, let's talk about the decline in platform. Platform is, of course, the MCU, the infrastructure that sits in the wiring closet, which is no longer a strategic focus for the company. It's terribly important to some of our existing customers. It's important to a couple of markets but we -- both Polycom, before we acquired them, and then us as a combined company have expected that business to decline and continue going down over time. So decline in platform in Asia, as expected, was a big part of it. Declines in video endpoints in North America, there is really a couple of items there. First of all, we absolutely believe that this market is still growing with a 5-year CAGR in the low-single digits, and we expect to be able to capitalize on that opportunity. Nobody stealing share from us. This is a blip in what's going on in the market. We got a great portfolio of products that are selling well in many respects, but we're being impacted a little bit on video, frankly a little bit on headsets as well. What we're hearing from our customers and partners is by -- the transition from Skype for Business to Microsoft teams, customers are temporarily slowing their deployment a little bit as they evaluate teams, and we very much have seen this story before. As the major technology partners be it Microsoft, Cisco, Avaya or others, go from one major release to other, we tend to see this little softness in the market that goes on for a part of a quarter or 2, where that reevaluation happens. And we see it a little bit in the headset number, although it's excellent. And we see it a little bit in the video number where -- which is exacerbated, and we were only expecting flat to slightly up growth to begin with, so a little bit of softness puts you in decline. Another piece of the dynamic that's really important there and then I'll be done on the video is some of this is being driven by the market expansion in the smaller-room solutions and plug-and-play -- where plug-and-play solutions are in high demand. This is really evidenced by our Trio product, which is just fantastic. It's currently included in our audio conferencing revenue number, where it is growing well above market rates. And frankly, we're selling into over 70% of the Fortune 100, where it's really going at a nice clip. But the Trio product is actually an all-in-one solution for both audio and video conferencing in a smaller room and it's frequently being used as the video solution in these emergent small conference rooms and huddle rooms. So if you were to reclass the part of Trio growth that's video into video endpoints, our decline in video would be very small. It would be kind of low- to mid-single digits and look much better. So we still feel very good about the long-term growth in video, very good about participating in it, and we just see this temporary phenomenon related to some industry transitions.

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Operator [10]

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(Operator Instructions) Your next question comes from the line of Mr. David Eller of Wells Fargo.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [11]

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It looks like revenue guidance implies low single-digit organic growth for the combined pro forma companies. For this quarter, it was kind of -- mostly driven on the Plantronics side with a little bit of a decline on the products for Polycom. Is that kind of what's embedded in the Q3 guidance, is kind of growth from Plantronics was kind of flattish Polycom?

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Pamela J. Strayer, Plantronics, Inc. - Executive VP & CFO [12]

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Yes. To go down a level deeper, I can talk a little bit more about the individual categories. I'd say, first of all, the big movement is going to be the growth in voice in the Polycom business offset by some declines in video similar to what we've seen this quarter. So again, the dynamic that we did see in September is continuing to December as you suggested. Although, we are expecting voice growth to be better in December. We've got the new VVX phones that we've launched, and we expect that to be really well received in the market, so voice is going to be a little bit up there. On the Plantronics side and the headset side then, we expect the UC growth to continue roughly around what we saw in the September quarter, and then of course consumer will see year-over-year growth there, we're expecting kind of the low double-digit growth in consumer year-over-year. So yes, all that nets out to roughly 1% year-over-year growth on a comparable basis.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [13]

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Great. And then the legacy core headsets you called out the -- you know, there was only a low single-digit decline. Can you kind of remind us what the trend has been the last few quarters? And maybe what drove that improvement in the quarter, and if you expect that going forward?

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [14]

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Yes, a couple of things. I'll start with kind of the strategic and then if Pam wants to add numbers, that's great. So once again, legacy core headsets are the headsets that hook to proprietary desk phones, pre-UC type phones, both in the office and in contact centers. A lot of what we saw this quarter was a bit of reemergence with a stronger Avaya out there in the market, some other big deals and some other contact centers and whatnot, actually driving a stronger demand for the legacy headsets, which has been nice along with the good UC growth. Frankly, we've been seeing -- what Pam -- how much decline typically?

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Pamela J. Strayer, Plantronics, Inc. - Executive VP & CFO [15]

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It's roughly -- it's been usually around 5% decline or mid- to high-single digits decline over the last couple of years.

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [16]

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Yes, that's right, about 5% to 9% decline is kind of what we've been seeing. So of course seeing that back up around flat to even slight growth was a pleasant surprise, but we do expect the trend to still be a bit down.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [17]

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Okay, that's very helpful. And then thinking about foreign exchange headwinds, can you just remind us the percentage breakdown of your large currencies? And if we look out for the full year, maybe what kind of headwind that might be?

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Pamela J. Strayer, Plantronics, Inc. - Executive VP & CFO [18]

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Yes. So currency in the September quarter didn't have a significant impact on revenues. We're not expecting it to have a significant impact in December as well. Just to remind you of our hedging program, we do 4-quarter layered hedge on the major currencies in which we do business. So that does protect us from volatility quite a bit. The majority of our revenues are in US dollars, I'd say the next largest currency is Euro, of course, British Pound, Canadian Dollar and Australian Dollar, but U.S. Dollar is probably 60%, I'm going from memory, but Euro, I think, is around 10%. So that gives you some (inaudible) topic.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [19]

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Great. And then last question from me on the tariff front. If the 25% tariff is to go in effect, are you able to estimate any kind of impact that would have on a full year basis? And maybe if you could talk about how effectively you'd be able to pass on kind of price increases to customers or how much you might have to absorb?

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Pamela J. Strayer, Plantronics, Inc. - Executive VP & CFO [20]

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Yes. So when we went out on September 11, we had a -- we did some long-term operating target numbers that we shared with the Street, including gross margin ranges of 52% to 54%. At that time, we were talking about the potential impact for tariffs as well as the potential impact for MLCC due to the capacitor shortage. Shortly after that, kind of mid-September time frame, there was an announcement that communications devices that communicate over Bluetooth wireless were taken off the tariff list and that's a very nice positive for us. So as a result, our tariffs where we were estimating potentially $10 million a year prior to any mitigation activities that has dropped now to just a couple of million dollars a year. Even if it does come back on and there's some impact to us, we had started some mitigation plans and things. But right now, it's low, it's not an impact to us. So we are pleased with the change.

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Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [21]

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Yes. On top of that, Pam -- perfect answer, but this is another place for our flexible manufacturing and supply chain with both Asian contract manufacturers, both in China and outside China as well as our very strategic asset at Plantronics, Mexico really just gives us a level of flexibility. Now you can't do it on a daily basis, but it gives us a level of flexibility to move final assembly, move products around and frankly mitigate some of that, that we think is just a real advantage for us in the market and you can better imagine that those plans are well underway.

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Operator [22]

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There are no further questions at this time. Please continue, sir.

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Michael R. Iburg, Plantronics, Inc. - VP of IR [23]

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So that concludes today's earnings conference call. I'd like to thank everyone for joining us today, and we look forward to discussing our fiscal Q3 results with you early next year. Thank you.

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Operator [24]

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