Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Plantronics, Inc. (NYSE:PLT)

F2Q09 Earnings Call

October 22, 2008 2:00 pm ET

Executives

Greg Klaben - Vice President of Investor Relations

Ken Kannappan - Director, President and Chief Executive Officer

Barbara Scherer - Senior Vice President, Finance & Administration and CFO

Analysts

John Bright - Avondale Partners

Reik Read - Robert Baird

Paul Koster - JP Morgan

Analyst for Rohit Chopra – Wedbush Morgan

Tavis McCourt - Morgan Keegan

Operator

Welcome everyone to the Q2 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Klaben you may begin your conference.

Greg Klaben

Thank you. Joining me today to discuss our second quarter fiscal 2009 financial results are Ken Kannappan, Plantronics President and CEO and Barbara Scherer, Senior Vice President of Finance and Administration and CFO.

I would like to remind you that during the course of today’s conference call we may make certain forward-looking statements that are subject to risks and uncertainties as outlined in today’s press release.

As we’ve highlighted before, the risk factors in our press release and SEC filings are not standard boilerplate. We update these risk factors every quarter, adding and dropping language and changing the order depending upon the timing and potential impact of the concerns that we foresee.

We believe forecasting the results of operations is becoming increasingly difficult and we ask you to focus particular attention on these risk factors that could cause actual results to differ materially from those anticipated by any such statement.

For further information, please refer to the company’s Forms 10K, 10Q, today’s press release and other SEC filings.

Plantronics second quarter fiscal 2009 net revenues were $216.9 million compared to $208.2 million in the second fiscal quarter of 2008. Revenues were within the guidance range of $210 to $220 million and Plantronics GAAP diluted earnings per share were $0.36 in the second quarter fiscal 2009 compared with $0.34 in the prior year. This compares to the GAAP EPS guidance issued on July 22 of $0.29 to $0.34. Non-GAAP diluted earnings per share for the current quarter were $0.41 compared with $0.39 in the second quarter of fiscal 2008. Earnings per share were greater than the previously provided non-GAAP guidance of $0.35 to $0.40. Differences between GAAP and non-GAAP earnings per share for the current quarter are primarily cost equity-based compensation.

I would like to remind you that on the investor relations section of our website we have an updated PowerPoint presentation as well as an analyst metric sheet with all the financials and metrics released today.

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

Ken Kannappan

Thank you very much Greg and thanks all of you for joining us today. We did receive some feedback from guidance from our investors to shorten our call and we hope you like this approach and we welcome further feedback on what you would find helpful.

Let me start by summarizing key take aways for the quarter. Number one, revenues were driven by continued strength in Bluetooth while the enterprise market weakened globally. Two, our gross margin was 43.5% versus 41.1% last year and our operating margin rose to 14.5% from 11.3% last year. Both represented a two-year high and as a result our operating income was up 33% from Q2 of last year. Three, our Bluetooth product group was profitable for the first time. Four, the audio entertainment group successfully launched a number of very well received new products which are expected to achieve higher gross margins and operating profits than our prior product line. Retail placement for fiscal 2009 is already up by about 40% from the prior year. Five, our inventories were up $26.5 million from the June quarter an unacceptable level despite the seasonality. We intend to reduce it through significant reductions in each of the next two quarters. Six, the economic environment clearly provides new challenges such as forecasts in volatility and various cost elements. We remain in a very sold financial position with approximately $200 million in cash and equivalents, no debt and an unsecured credit line of $100 million.

Let me turn to the OCC. Office and contact center revenues declined by 9% as the result of weak conditions worldwide. We are concerned about further weakening. Our corded and cordless products revenue declined to 10.4% and 7.6% respectively from Q2 of last year. We believe that unified communications will be the top driver of headset adoption and ultimately for our revenue and profit growth we continue to have a high level of confidence in this long-term opportunity. While a number of organizations are trialing Voice from You Speak we are not expecting significant deployment over the next year.

Turning to Bluetooth where we achieved record revenue of $57.4 million up 85% from the same quarter of last year, growth was driven largely in the U.S. where we continue to get a boost from the hands-free legislation implemented in California and Washington State effective July 1.

During the September quarter we were the market share leader in Bluetooth retail in the U.S. Increased volumes and higher product margins allowed the Bluetooth product line to achieve profitability for the first time. Looking forward we expect Bluetooth headset use to migrate towards music over the next several years. We expect it to be the single largest premium market segment of about 40% of that market.

Turning to Altec the fundamentals of the turnaround of the AEG group are on track. We have been working on a product refresh for the past year and have now ten major new Altec Lansing brand products since the spring. The new products in docking, PC audio and wireless home audio categories have received very favorable retail and consumer acceptance. They are also expected to obtain much greater margins than previous product lines. We are targeting break even for the division for the December quarter despite economic challenges compared to significant losses in the prior year. This target was set when we were not expecting a soft economic environment and increases in commodity costs also hit as the products were being built for the December quarter. However, placements are ahead of our original plan with FY09 placements up 40% from FY08 including major retailers such as Apple, Best Buy, Target, Wal-Mart and many other important retailers.

While the fundamentals are ahead of plan, without the adverse impacts we would have projected to be noticeably profitable in the December quarter. For the remainder of fiscal 2009 we continue to focus on maximizing the long-term sustainable revenue earnings growth rate through optimizing the company through the economic down cycle, particularly managing our inventory levels, positioning our B2B business for renewed growth post-recession and continued focus on consumer product profitability.

With that I’m going to turn the call over to Barbara.

Barbara Scherer

Thanks Ken. Overall, Q2 was a really strong quarter for us with revenues, GAAP and non-GAAP EPS all better than the second quarter last year. Revenues were within the guidance range we provided in July and GAAP and non-GAAP EPS was above the high end of the guidance. These strong results were achieved despite a challenging economic environment causing declines in our enterprise businesses. Revenues were up due to the excellent showing in Bluetooth and operating profits were up because of the improvements in both our consumer businesses.

The rapid increase in the value of the U.S. dollar against the major currencies where we have balance sheet exposure led to a large foreign exchange loss in other income and contributed to a higher tax rate. Despite the economic headwinds, FX and a higher tax rate we still grew GAAP EPS 6% in Q2 versus the year ago quarter.

Turning to the audio communications group segment, revenues of $195.3 million were up approximately 8% or $14.3 million compared to Q2 last year. This growth was ds4riven by our Bluetooth headsets for cell phones whose revenue was up 85% or $26.4 million from the year ago, offset partly by a decrease of $11.8 million or 9% in office and contact center products. $7 million of the decline in office and contact center came from the professional grade supported products and $4.9 million was due to office wireless systems.

Geographically, ACG’s growth in net revenues were up 15.1% domestically versus Q2 of last year, down 5.3% internationally and that resulted in a 66%/34% domestic to international mix and an increase in domestic revenue was due to cell phone headset revenues which were up 100% domestically versus the year-ago quarter partially offset by a decline of 10% in OCC revenues. The ACG non-GAAP gross margin was 47.8% compared to 47.2% in the September quarter of last year due to improved profitability on our consumer products.

Despite the lower gross margin of consumer products compared to professional grade products we have continued to improve the gross margin and at our current revenue level have also been able to translate that through what is now positive operating margin on Bluetooth headsets. Given the weak economic environment we are also of course managing expenses more tightly than we would in a period of strong growth on the enterprise side and are continuing to work on improving all costs that comprise cost of goods sold.

The effect of all these actions coupled with the strong market acceptance of our Bluetooth products enabled the audio communications group to achieve a 19.2% non-GAAP operating margin in Q2 bringing us to 17.9% on a year-to-date basis. Our target model for ACG continues to be 45-48% gross margin and 18-20% operating margin which we did achieve in Q2. Clearly we could have exceeded this range if our Austin Contact Center business did not come down $11.8 million or 9% versus the year-ago quarter.

Turning to the audio entertainment group summary, while net revenues were down $5.7 million from the year-ago quarter they were in line with our expectations for the quarter. The year-ago period included a large deal with a warehouse club that was not planned for this period. The year-ago quarter also included significant revenue associated with liquidating inventories on certain discontinued products that was not necessary this quarter.

Evidence of the progress of the AEG turnaround can be seen in the 26% reduction in operating expenses versus the prior year and the positive gross margin on lower revenue due to reductions in manufacturing overhead and pruning of unprofitable SKU’s. In addition approximately two points of the gross margin improvement was due to more effectively managing pricing. As a result of the above actions the quarterly year-over-year loss was reduced by $3.5 million or 36%. Our AEG team has worked hard to position the company to return to profitability and the progress on the cost structure is evidence of that.

Even larger efforts to refresh the product line with highly competitive products. With all ten of our new products now shipping and the strong placements we have we expect AEG revenues to be up significant sequentially.

On a consolidated basis below the operating income line we had $3.2 million in other expense compared to other income of $1.8 million in the year-ago quarter. Virtually all of this came from FX where we had a gain of $0.8 million in Q2 last year compared to a loss of $4 million in Q2 this year. These losses are the result of the increase in the U.S. dollar relative to the foreign currencies where we have net balance sheet exposure, principally the Euro and the British pound but also the Australian dollar and the Brazilian Real. We also have exposure to the Canadian dollar but it did not move much versus the dollar in Q2. While we partially hedged the Euro and the pound and did offset some of the gross loss of hedging gains, the actual exposures were large and also larger than forecasts for hedge purposes.

Our consolidated objective tax rate for the quarter was 28.1% on a non-GAAP basis compared to 24% in the year-ago quarter. The increase in the non-GAAP rate was due to the impact of the foreign exchange loss outside the U.S. where our tax rate is lower and a shift in operating profits in the U.S. where our tax rate is higher. The second quarter non-GAAP tax rate was higher than our guidance of 23-24% provided in July for these reasons. Our GAAP tax rate of 26.9% was higher than our GAAP tax rate of 21.7% in the year-ago quarter for the same reasons.

Turning to the business outlook we are building in a risk of further slow down for our office and contact center business globally based on the crisis conditions in the financial and credit markets and global economic slow downs and the actual order rate so far in the quarter compared to the same period last year. We are therefore anticipating revenues to be down sequentially for ACG and up for AEG in the December quarter.

Given the uncertain and difficult environment we are using a wider range than we have in the past and are estimating consolidated net revenues of $205-220 million. Relative to Q3 last year this range is down 5-12% overall but with office and contact center expected to be down significantly offset by growth in Bluetooth. Despite this, given the improvements in our consumer business is broadening, we expect to deliver fairly similar consolidated gross profit margins as last year.

In Q3 we expect operating expenses to be flat to down compared to Q3 last year in dollars and higher as a percent of revenues. We indicated in our press release we will be changing our non-GAAP measures of performance on a go forward basis such that they excluding purchase accounting amortization. These non-cash charges are running approximately $2 million per quarter of which $1.5 million related to AEG in Q2. To assist investors with a measure of performance that is closer to cash earnings, we are modifying how we measure non-GAAP operating performance.

That said our consolidated guidance includes a range of results for AEG from a small loss to a small profit for the December quarter given this new non-GAAP measure. Given the further increase in the value of the U.S. dollar to other currencies where we have those net balance sheet exposures we do expect to incur another significant foreign exchange loss below the line although the level of this is very hard to predict and depends on currencies behave over the balance of this quarter.

Additionally, interest rates are now very low and we expect less than $300,000 in interest income for the quarter. Taken together the difference in foreign exchange and interest income compared to Q3 a year ago accounts for $5 million lower profit before tax in the guidance we have released. We currently expect equity compensation expense to reduce operating income by approximately $0.05, purchasing accounting amortization to reduce EPS by $0.02 to $0.03 and for the benefit of the reinstatement of the R&D tax credit to increase GAAP EPS by approximately $0.01 resulting in a target GAAP EPS range of $0.19 to $0.27.

On the balance sheet our $200 million in cash is all in treasuries or bank deposits and our accounts receivable performance is outstanding. However, inventories are up $26.5 million sequentially and turn has increased from 3.7 to 3 compared to the same quarter last year. The increase in inventory was primarily in Bluetooth headsets that are selling well, new AEG products for the fall launch and $2 million in increased safety stock of the chip sets used in our wireless office headsets. We are not meeting our targets for inventory turns and with the sharply weaker economic outlook we are now managing inventory differently than we have historically. With a concerted level of effort now in the way we expect to reduce inventory in Q3 and again in Q4 and improve turns.

Capital spending was $9.8 million, higher than depreciation and amortization of $6.9 million in the quarter. Capital spending was higher than typical as we completed the new data center and related facilities expansion and improvements. We currently expect capEx in Q3 to be $6-7 million dropping to less than $4 million in Q4, dropping our full-year estimate to under $25 million. We expect depreciation and amortization to be flat in Q3 with Q2 at approximately $6.9 million.

With that I am going to turn it over to the operator for the question-and-answer session.

Question-And-Answer Session

Operator

(Operator Instructions) The first question comes from John Bright – Avondale Partners.

John Bright - Avondale Partners

Can you talk about how conservative on OCC your guidance is and also maybe give some color on what you are seeing out there in the marketplace in that particular segment right now?

Ken Kannappan

It is fairly difficult because it appears to be in motion and therefore you have to be very, very current and to some degree anticipating the direction of that motion in order to come up with a forecast that is reasonable in an environment which appears to have deterioration in place. We believe on balance that we are being reasonable with our forecast considering again not just existing business but the direction we are seeing for existing business. When we had quite some time in the past, I’ll go back to the March quarter of 2001, we faced a similar decline and we found ourselves doing a very thorough job getting forecasts from customers and our partners and yet those numbers kept reducing during the course of the quarter. We are trying to come up with something that will be valid but of course it is very, very hard to know for sure that will turn to be correct.

I think we are on top of the sell out information. We get great reports from my field team. I personally have called quite a number of our customers globally recently to get a handle on what is happening. I think we are as reasonable as we can be given the situation but of course if it snowballs then we could still be wrong.

John Bright - Avondale Partners

How might GM’s recall of batteries on the 1.2 million units hit that? Is there an opportunity there for market share?

Ken Kannappan

First let me bring everyone up to speed who might not be as familiar with it as you apparently are. The United States Consumer Products Safety Commission announced a recall on this. GM apparently with their primary wireless product had 47 incidents involving overheating. I guess six of those were in flames and one was second-degree burns. This was just announced about a week ago. We don’t know about it. We understand there were parallel announcements in quite a number of other markets including the Danish equivalent of this U.S. organization.

We understand that they may have known about this for some time. We don’t know why it came up just recently. We understand they had stopped selling these products a couple of months ago and customers were still trying to understand why. So there are quite a number of open questions out there for GM including why did they not tell their customers earlier about this and those questions are important as it relates to integrity and trust which are primarily what GM has at stake right now and the degree to which they convince their customers that they are telling them the truth now and they are satisfied with why they didn’t tell them earlier, it may or may not represent a huge opportunity for us. Again, I think that relates really to the long-term.

In the very short-term we do expect that most customers given a free replacement for faulty items from GM will probably take those free replacements. I’m not expecting this will necessarily be a huge boost but again this having been announced only one week ago many customers have not yet even been informed or have seen it in the news or are reflecting on how they want to act on it. It is still too early for me to have a complete read on that issue.

John Bright - Avondale Partners

Yesterday Logitech reported their results and they talked about the retailers really just stopping or certainly paring back their inventory meaningfully in the September month. Have you seen the same thing at retailers in the September month and any insight into what the inventory that you are seeing out there today might look like particularly for the Altec and Bluetooth products.

Ken Kannappan

We certainly heard about retailers looking to manage their inventories much more closely. Mind you we kind of consider this a very good thing even though the reason for it is concern about the economy which might not be a good thing. But at the end of it we all know if we ship a lot of inventory to our retailers and it does not sell through we are in trouble in terms of where we can put that inventory and any efforts they may make to liquidate their inventories either of our products or competitors products. So the fact they are keeping their inventories under control and reducing the risk we would otherwise be worried about for the March quarter in many respects I think is a very positive thing. Obviously to the extent they get sell through still represents an opportunity for better sales levels. I do think the retailers are managing inventories much more which puts more of the pressure further down in the supply chain but again that is the kind of pressure we would ultimately own either way. So, I kind of agree or at least as I understand it the summary of some of those comments.

We do think our categories in general are fairly well positioned in this environment. In other words we are still at a reasonably affordable level. Entertainment and Bluetooth remain target categories. There is no question and everyone has read the papers that the retailers are seeing weaker conditions and we know that extends into our market as well.

John Bright - Avondale Partners

Barbara, since inventory was a discussion there can you characterize your inventory today and what type of products are in the inventory? I think you mentioned in your prepared remarks that you are managing your inventory differently now. Maybe you could tell us what you are doing differently?

Barbara Scherer

Where the inventory increase was in the areas I discussed. Bluetooth and within Bluetooth and products that are selling very well and new products. AEG in new products for the fall launch and then $2 million of the safety stock of the chip set that we have been building up. Overall those are where the increases were. Relative to where you would want to have increases, not that anyone wants them but if you are having them those are the places to have it. Newer products, products that are selling well, products that are scheduled to launch and safety stock of something that we have decided is important.

Relative to managing inventory, we have really changed our philosophy first of all. So in this environment where things can get weaker rather than stronger we are more willing to take risks? For example on running light on something because it would be better to scramble, expedite, suppliers will likely have capacity, freight is likely to be more available and easier to use and so we are reducing our safety stock requirements. We are reducing the forecasts that drive our MRP’s so that they are on the lean side. We are cutting back on risk buys. We are managing the whole flow differently including having a receipts plan that we can measure performance against weekly. I hope that describes broadly what we are doing. We are happy to go into more detail if you’d like.

Operator

The next question comes from Reik Read - Robert Baird.

Reik Read - Robert Baird

Just going to the margins for a second in the ACG business, sequentially they were substantially higher, a little more than 250 basis points. It is a pretty similar revenue picture in that segment. Can you talk about, in your comments it was factory utilization, how did that play into it? Can you go into a little bit more depth on Bluetooth and the improvement you saw there?

Barbara Scherer

Sequentially one of the big drivers was definitely in Bluetooth and in the standard margins in Bluetooth and I’m not going to break down everything by product category, but you’ll probably recall that for example the high end product, the Discovery 925, had just begun to ship in the June quarter. We had it shipping for a full quarter and it is very popular and it is doing well and it is at the higher end of products and it also does carry a higher margin. But it was true across the board and so the margins in Bluetooth were up sequentially and driving an improvement on our overall standard margins despite the fact the OCC business was down. The OCC the margins didn’t fall in it so the standard margins were still the same but it is a much lower impact on the overall business.

Utilization, and by utilization what we really mean is the overheads are flat and volume is up and we are absorbing more and that added about a point. We had lower ENO. We had actually somewhat lower warranty as well. So I hope that is enough. If there is more I am happy to answer it.

Reik Read - Robert Baird

Anything on the pricing front? Was there any real change there?

Ken Kannappan

Not really.

Barbara Scherer

No. On the pricing side versus a year ago that would relate to the Altec Lansing business where we have been really managing price and discounts and specials very differently and that was worth two points on the AEG gross margin versus a year ago and we also saw a similar benefit in Q1 versus the year-ago Q1. This activity really has started since Vicky has been on board, so I would say over about the last nine months.

Reik Read - Robert Baird

On the Bluetooth side of things, obviously with the hands free legislation you got a nice bump there. It seems like you maybe had some agreements with some of the carriers. I would assume there has been some stocking there. Is that largely completed and things kind of ebb from there or does that trend continue?

Ken Kannappan

We think the benefit from the hands free law is largely complete. There may be sort of a sustained slightly higher run rate but the primary spike effect we saw. What we are talking about at this point in time is the normal, seasonal holiday lift which may be weaker in the current environment as well as potential gains due to placement of more product.

Barbara Scherer

Right, our market share is definitely up from a year ago on Bluetooth and if this was a more normal environment, economic environment with consumer spending and retail environment, I think we would be forecasting higher Bluetooth revenues than we are. So the caution we have put to this forecast isn’t limited to the OCC business and we have built in a weaker holiday lift than you would normally have taking into account that we did have the benefit of the California and Washington as well as we have this weaker consumer environment we are selling into.

Reik Read - Robert Baird

One other question on profitability as it relates to the AEG segment and I guess it is similar to the one I just asked. The revenue on a sequential basis was pretty similar. The gross margin is down there. Can you help us understand what that is and then with respect to profitability achieved in the December quarter will you be able to maintain that as you get into March and June?

Barbara Scherer

Give me your question on the AEG gross margin again? The sequential…

Reik Read - Robert Baird

Sequential revenue was similar and maybe I just looked at the numbers wrong but I thought last quarter it was an 8% margin and it is down to 4% this quarter.

Barbara Scherer

We did have some ENO to take this quarter. I think that would account for most of the difference. There was a change by Apple on their new products in terms of their charging mechanism that their products are supporting going from something called fire wire to USB and we have managed that transition I think quite well so we were the first one to have a USB version of docking audio products available and it is ready to ship. It is shipping now. We managed inventories down with key channel partners on that so there would be less in the channel and there would be less potential returns. We also did need to take some reserves on the inventory that we have so that we can clear those fire wire versions out and that is in the numbers.

Operator

The next question comes from Paul Koster - JP Morgan.

Paul Koster - JP Morgan

It sounds like you have really moved quickly in response to the recessionary signals you are seeing here. How is this recession different from what you saw back in fiscal 2002? Both in terms of the external environment and for that matter your internal readiness?

Ken Kannappan

We don’t know fully yet, I don’t think, how this one is different. We do know kind of what we have seen to date on this one and of course we at least have the benefit of a comprehensive knowledge of what happened last time as a potentially helpful guide. In this particular case I think a couple of the benefits we have is consumer business for us is larger and is providing frankly a helpful steadying to what appears to be greater cyclicality on the business enterprise side. So that is a benefit. I think secondarily our fundamentally larger size and scale at this point in time is also a benefit.

We did look at the decline last time to get a feeling for how far did we go down, what was the trough, what was the pattern of the decline and the duration so we could try and make decisions. At this point in time of course we don’t think we are yet clear how deep down things will go to the broad economy, i.e. the overall rest of the recession compared to last time. How fast it will go down and how long we will stay down before we begin to go back up, we did take some actions and I’ll point out very quickly to try to move on certain areas in expense control and to move on certain areas to prevent potential inventory issues. I think that is very helpful to the overall business.

At this point in time having said that the last recession was kind of a high tech recession triggered in part in our case by the expiration of Y2K. We had a big spike as people had prepared for Y2K compliance. We had a large IT telecom budget and that benefited many tech and telecom companies. Ironically those are, if you will, second and third largest market segments. In this particular case probably our highest vertical is financial services and that is kind of at the heart of the epicenter of this and we started feeling some of the impact of that even earlier but it is clearly shaping out to be much broader and much more global than we saw the last time around. So I think at this point in time we have applied all the historical learning’s and we are still trying to be very close to monitoring how this plays out and readying the appropriate contingency plans as we continue to gather information on this one.

Paul Koster - JP Morgan

What percentage of your enterprise business do you think is associated with the financial services segment?

Ken Kannappan

We have spent quite some time internally trying to analyze this. Also the number has varied a little bit as the financial services industry has weakened albeit the rest has weakened also. I think in the past if I were to go back a year or so it was probably in a range of 1/3 or so of our business. It is probably down to around 30% or so of our business at present as we get other areas that are weakened also. So it is a significant part of the business. It is a little bit lower in terms of contact center than it is in the office.

Paul Koster - JP Morgan

Can you share with us the number of weeks of channel inventory in the various channels you operate?

Barbara Scherer

The one we have reported on historically is our U.S. commercial distribution channel and that channel is still running about 4.5 weeks and that is really unchanged. That is a channel that represents approximately 28% of ACG revenue. Mostly focused on the office and contact center business and sell through in that channel was down 8% year-over-year and 2% sequentially. Retailers tend to run in the 10-14 week range and we really haven’t seen any change in that.

Operator

The next question comes from Rohit Chopra – Wedbush Morgan.

Analyst for Rohit Chopra – Wedbush Morgan

First of all could you talk about any initiatives the company is working on in terms of driving longer-term headset adoption and kind of tying into the in-flight communications? Secondly, you guys mentioned FX impact during this quarter. Any initiatives along that line to kind of minimize the strengthening of the dollar? Lastly if you could give us the headcount for the quarter?

Ken Kannappan

I didn’t hear the last one. I heard the first two.

Analyst for Rohit Chopra – Wedbush Morgan

Headcount.

Ken Kannappan

Let me answer the first one relative to initiatives on unified communications. Primarily what we are trying to do is have the right solutions available for customers. We think that the economic gains for customers are really kind of compelling to adopt unified communications. These are significant deployments, changes in workflows and in many cases changes in real estate and the way you house people as well as the way that people are actually behaving. So it is being trialed for some extended period of time by most IT organizations before they are going to go out with larger scale deployments.

The very nice thing here just to be clear is that if we have the best solutions the opportunity for adoption doesn’t rest on us having to convince people. [Inaudible] to give a headset a try. The nice thing here is because you are using your personal computer as a voice communications hub and because the built in microphone and built in speakers are not very effective nor do they offer any privacy for voice communications the opportunity for a third-party accessory to be attached to provide that voice communication is in our opinion extremely high and in organizations we have had with organizations that are looking at it intrinsic to their plans the headset is a perfect accessory for this. So if we have a good solution we can expect them to become a standard part of many rollouts and that will give us the opportunity. So it is more focused around having the right product and trying to explain those to the markets than it is our trying to push to get unified communications adopted earlier. There are already plenty of the large enterprise vendors working on that. Again, I think there will still be a time in that process for IT corporation evaluations and we won’t be able to push that time frame.

Let me turn it over to Barbara to talk about the next topic.

Barbara Scherer

Let me give you the headcount numbers first and I’ll come to FX. Headcount was 4,856 which compared to 5,427 in Q2 a year ago. The decline versus a year ago was really the reductions we made, the manufacturing strategy change on Altec Lansing. 4,856 also compares to 4,573 which was the Q1 number and that increase was driven by growth in our China plant for production of Bluetooth headsets.

The FX question you asked, I didn’t hear it entirely. Was it what are we doing to reduce the loss?

So there are some things we can do to reduce the loss including understanding the exposures more thoroughly and completely and we are using some new software to get trends on those. Then we can when we are more comfortable with the level we can hedge a higher percent of that. That would be true on the pound in particular and we can hedge more accurately on the Euro. In other areas we are basically taking as much cash as we can out and managing the cash levels more tightly so we don’t build up cash. There are some other strategies we are looking at that involve, I would describe it as they involve the type of commitment we have made to the area. So is it a long-term equity investment or is it a short-term investment. Those do have different considerations from an accounting point of view and we are looking at some of those legal arrangements we have with some of those subsidiaries as well.

I would say the way we are organized, we are obviously experiencing the downside of FX here. On the other hand the fact that we have organized ourselves to have large presence and to do business in the local currencies and to do business in a way that suits the customers in those regions I think has served us quite well and it has also supported our tax structure over the years because in fact we do have significant presence and real content behind our international structure which does in general give us a low tax rate. So overall in terms of the strategy I think we have followed the right strategy. Now we need some tactics to reduce the pain as the dollar strengthens.

Operator

The next question comes from Tavis McCourt - Morgan Keegan.

Tavis McCourt - Morgan Keegan

Can you reiterate what the op ex and the gross margin guidance is for December?

Barbara Scherer

I said roughly comparable to the year-ago level. The year ago was 40.5% and the op ex guidance is flat to down and the year ago number was $64.3 million.

Tavis McCourt - Morgan Keegan

Typically what is the linearity in your December quarter like in the OCC business?

Barbara Scherer

Generally October is the best month. December quarter is one that typically starts strong and then gets weakest in the month of December and generally the first two weeks of January are also very weak.

Tavis McCourt - Morgan Keegan

Do you have, even if it isn’t an exact number, maybe a range of what OCC revenues would have been this quarter if we were looking at the currency rates we have in place right now? I imagine we didn’t see much of the revenue impact of currency this quarter because of the hedging but we’ll see it next quarter. Is that a correct way of looking at it?

Barbara Scherer

Actually no, we did see some of the impact on the revenues as well. I don’t have all those numbers handy and I definitely don’t want to do them from memory so I’d like to follow up on that one.

Ken Kannappan

It has worsened the currency, the dollar has continued to strengthen and obviously that does hurt reported revenues and the margins along with it since our product costs are in dollars.

Tavis McCourt - Morgan Keegan

So the hedging strategy does not hedge effectively the revenue line?

Barbara Scherer

We hedge both. So the hedges I have been talking about so far are related to the balance sheet side where we place forwards. On the revenue side we do basically a costless caller and we are doing those 12 months out so it is a rolling 12 months out on the revenue side. Those are called economic hedges and the gains or losses on those hedges net into the revenue itself. It is a partial hedge and it did dampen the effect of the changes but we still did experience some of those and then it also depends on whether you are asking the question sequentially or year-over-year and which direction because obviously the currency movements are different in all of those.

Tavis McCourt - Morgan Keegan

I didn’t see in the press release what the allowance for doubtful accounts was. If you have that it would be helpful. How do you expect that debt to trend? How should we think about that? Did it become meaningful in the last recession and do you expect it this time around?

Barbara Scherer

Actually it was close to nothing in Q2. It has been close to nothing for quite some time. We have included the amount we budget in our forecast for Q3. We basically always include it in our forecast. It is certainly a risk that can go up but in the last downturn I think it was only one distributor that had a problem because of that situation. So, in general we have been able to manage our credit risk fairly well in terms of subscribing to a number of monitoring services, looking at a number of other indicators that would suggest what is going on, holding people to tight payment terms so if it is late you are going to know it right away, putting them on hold, switch to cash in advance if there is a risk that a bankruptcy could be imminent, but in this environment obviously something could go bad and we could have exposure beyond what we have built in. We have built in a provision that is at our budgeted level.

Tavis McCourt - Morgan Keegan

On AEG, obviously the revenue levels have come down in March and June. Are you comfortable that the net losses in those quarters will be better than the net losses this year even if they might be lower revenue levels? Strategically who knows what the new normal is for consumer spending over the next couple of years but how long are you willing to operate this at a loss if it continues to be that way even if the products are fine and it is just an economic issue?

Ken Kannappan

I’m going to let Barbara talk to the specific quarters. Let me just say that number one we are targeting a break even for fiscal 2010 which to be clear is our next fiscal year. As always of course the pattern of that would involve most of the profitability coming from the typically seasonally strong Christmas quarter and then the year after that is where we are expected to have more significant profits. So these are fundamentally the year represents a positive comparison period with the best part of the positive occurring in the December quarter and then further progress the following year. I think that for us this represents in general a positive enough for earnings comparisons through fiscal 2010 and through fiscal 2011. We believe that business is increasingly strategic to our existing business, both in terms of unified communications and B2B but also in terms of the mobile market. As I mentioned before 40% of the high end, which is the good margin part of the Bluetooth business expects to be coming from various types of products. It is just very clear the various integration of entertainment with mobile devices is increasing. We are pretty pleased with the opportunity for it.

From our perspective, as I said, the fundamentals are very, very well with the up surge we have had and tremendous positive reception for these products. We believe the fundamentals are very much on track. You talk about how long do we keep it? We are expecting even in this tough environment to be at that level and making progress so obviously [inaudible] we think we would be well ahead of plan and we will be making money earlier than we had targeted.

Tavis McCourt - Morgan Keegan

In the seasonally down quarters and the upcoming March and June?

Barbara Scherer

Right, if you look at the year ago March we lost $5.5 million and you are asking how confident are we that we will be better than that. Then the year-ago June we lost $10.8 million and how confident are we that we are going to be lower than that? That is really what you are asking? We are extraordinarily confident we are going to be dramatically lower than $10.8 million. Obviously we are not going to have a chance of breaking even for the full year if we don’t get moving in the right direction quite quickly out of the gate in FY10 in the June quarter and that is how our plans line up.

March, I do expect March to be a loss because it is a weak quarter and it is always a quarter that goes way down from the December quarter. It is a hard quarter to make money in any environment but we do expect it to be smaller than a year ago loss in March. Really what is driving that is when you look, it is not only all the cost reductions on the operating expenses and the overhead reductions and the way we are managing pricing, but as these new products are now shipping they have significantly lower cost than the products they are replacing. So at the same price point they have higher margins. Therefore, as the revenue is being largely replaced with these new products the gross margin is expanding.

Tavis McCourt - Morgan Keegan

Is there enough R&D in that business? It seems like most of your competitors are refreshing almost entire product lines annually. You guys kind of held off for a couple of years there and then had a big refresh this year. Is there enough ongoing R&D to be able to keep up with that level of innovation needed to compete?

Ken Kannappan

We really think there is. We’ve got at this point in time a very healthy, ongoing pipeline of what we think are compelling products under way.

Barbara Scherer

We also have a really talented and committed engineering organization and if we spent more could we grow the business faster? Yes. But we need to get the business profitable and we do have enough R&D to get the business up and get it profitable and once we have achieved that and the milestones we need to achieve then we would be putting some incremental spending into R&D.

Operator

(Operator Instructions) Now I’ll give the call back to Mr. Klaben for any closing remarks.

Ken Kannappan

I’d just like to say thanks to all of you for listening to the call. We greatly appreciate it. We are all available if you have any further questions. Thanks again.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Plantronics, Inc. F2Q09 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts