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Plantronics, Inc. (NYSE:PLT)

F2Q11 (Qtr End 09/30/10) Earnings Call

November 2, 2010 5:00 pm ET

Executives

Greg Klaben - VP, IR

Ken Kannappan - President and CEO

Barbara Scherer - SVP Finance and Administration, CFO

Analysts

John Bright - Avondale Partners LLC

Reik Read - Robert Baird & Co.

Tavis Mccourt - Morgan, Keegan & Company, Inc

Rohit Chopra - Wedbush Securities Inc.

Mike Latimore - Raymond James & Associates

Operator

At this time, I would like to welcome everyone to the Q2 fiscal year 2011 conference call. (Operator Instructions)

I will now turn the call over to our host, Mr. Greg Klaben, Vice President of Investor Relations.

Greg Klaben

Thanks Jeremy. Joining me today to discuss our second quarter fiscal 2011 financial results are Ken Kannappan, Plantronics’ President and CEO; and Barbara Scherer, Senior Vice President of Finance and Administration, and CFO.

I’d 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 have 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 results of operations is 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 statements. For further information, please refer to the company’s Forms 10-K, 10-Q, today’s press release, and other SEC filings.

Please note that all financials, metrics and comparisons are stated in terms of continuing operations, which exclude Altec Lansing or the AEG division. The sale of Altec Lansing was effective as of December 1, 2009.

Plantronics second quarter fiscal 2011 net revenues were $158.3 million compared to guidance of $158 million to $163 million. Plantronics GAAP diluted earnings per share were $0.52 in the second quarter compared with $0.32 in the same quarter of the prior year. Non-GAAP diluted earnings per share for the second quarter were $0.58 compared with $0.42 in the prior year quarter and guidance of $0.48 to $0.52.

The difference between GAAP and non-GAAP earnings per share from continuing operations for the second quarter includes stock based compensation charges and purchase accounting amortization, both net of associated tax benefits.

I’d 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 the financials and metrics released today.

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

Ken Kannappan

Thank you, Greg, and thanks all of you on the call for taking the time to listen in. As Greg covered, second quarter net revenues were within our guidance range and the quarter was highly profitable, exceeding our operating profit and earnings per share guidance.

This was driven by strong office and contact center revenue, including increased sales of Unified Communications headsets, good margins and low operating expenses. All product categories were at or above our expectations with the exception of mobile Bluetooth, which Barbara will discuss in greater detail.

I’d like to give you my key takeaways for the second quarter.

First, we continue to see strong momentum in Unified Communications. Our UC revenues were $13.3 million compared with $9.8 million in the prior quarter and represent over 10% of our OCC revenue. We believe that we are performing well on all fronts of our Unified Communications strategy, including customer wins, scope and strength of our alliances, net revenues realized and our UC product pipeline.

We’re building alliances throughout the spectrum of UC vendors and system integrators. On the vendor side, Microsoft previewed their next version of UC software called Lync. We expect this next version to increase adoption of UC over the course of 2011. We remain a committed partner to Microsoft and have already certified a number of new UC products for this platform.

We also remain closely partnered with the other major UC platform vendors, including Cisco, Avaya, Alcatel and IBM, and our products are closely integrated with their platforms. Cisco provides a broad opportunity for headsets as they offer multiple hardware and software opportunities. For example, our products are fully integrated with their cell phones, the PC, in addition to their desk phones, and their applications for mobile devices.

The Cisco opportunity extends beyond the PC, and given their significant installed base of over 30 million VoIP phones, there is a sizable opportunity for headset adoption as they provide new UC functionality and applications which extend to new devices. We already have solutions for their CoIP phones and PC devices and believe we have a very good position as their platform evolves.

Second, we continue to invest heavily for the growing UC opportunity. Besides investing in R&D to build a strong product pipeline, our focus on UC is creating an improved infrastructure to drive initiatives throughout the business and to build on our current UC market position. We are creating a strong management team across disciplines.

We recently hired Ingrid Van Den Hoogen, as our Chief Marketing Officer. Ingrid brings over 20 years of marketing at Sun Microsystems. She’s an exceptional marketing professional with a track record of building compelling value propositions for our new IT technology offerings. Earlier this year we hired Pat Wadors as SVP of Human Resources. Pat has 24 years experience, including four of most recently at Yahoo!, bringing world-class HR function to Plantronics.

We’ve been investing in our sales organizations. We’re finding more and more interest and discussions about Unified Communications and we need to increase our bandwidth to handle both end users as well as system integrators and alliance partners. Additionally, we reorganized the company last year to focus on UC and have recently formed cross-functional teams to speed development of more complex UC products and provided rigorous training across many topics, including making our technical assistance agents Microsoft Certified.

Third, we are seeing organizations put more and more thought into how they can increase collaboration and communications effectiveness and efficiency. Businesses large and small are focused on team collaboration across spaces and geographical boundaries. As seen in our recent study on how we work, one of the most effective ways of working and collaborating is still voice communication, thus placing a greater emphasis on audio technology and acoustics.

Communication is from anywhere, an open queue, a busy airport or in your car basically to anywhere, and it requires a sophistication in audio quality that is paramount for the immersive and connected experience. While UC allows these modes of working to be technically possible, it’s our headsets and other UC solutions that provide the communications link for superb communication to take place from varied environments.

Internal collaboration spaces have acoustical challenges for immersive experiences that do not disrupt others. And virtual offices outside the traditional workspace likewise need to be able to understand hostile noise environments so that the communication is not impaired.

From our perspective, Unified Communications is still in a very early stage of adoption. However, it is already starting to have a favorable impact on our net revenues, and we expect this opportunity to grow substantially over time. We believe this to be true from the large number of Global 2000 companies that are in a planning or deployment stage of the technology in our growing UC customer base.

We expect to see much higher levels of adoption of the headsets among office workers as UC becomes more widespread. We’ve already seen cases where headset usage in an organization has grown from 10% to upwards of 50%, 60%, 70%, 80% even 90% adoption amongst the business employees.

Our strategy for UC is straightforward. Number one, continue to deliver a superb user experience, the high value-add portfolio. Number two, partner with the major UC vendors to ensure that our products are tightly integrated with their platforms. Number three; grow our sales reach and depth.

With that I’d like to turn the call over to Barbara to discuss our quarterly results in more detail.

Barbara Scherer

Thanks, Ken. We had a strongly profitable second quarter driven by growth in our office and contact center revenues, helping to drive a 24.2% non-GAAP operating margin and $38.3 million in non-GAAP operating profit. We were also highly cash flow positive, generating $25.2 million in cash flow from operations.

Strong profitability and asset management resulted in a return on capital well exceeding our cost of capital. Net revenues of $158.3 million were up approximately 10% compared to the second quarter last year. OCC revenues of $118 million were up 26% compared to Q2 last year. Our mobile revenues were down 20%.

Within OCC, we had double digit revenue growth in every region of the world. In terms of products, both UC and traditional products contributed to the $24.4 million increase in OC revenue from the year-ago quarter. And at $118 million, our OCC revenues were also up slightly sequentially which was a better pattern than is normal seasonally. Mobile net revenues were $27.6 million, a decrease of 20% or $7.1 million compared to the second quarter last year.

Our U.S. revenues decreased the more we grew internationally. Several factors contributed to the decline in U.S. revenues and mobile products, namely channel inventory reductions, overall category weakness, and what we believe was a slight decrease in U.S. market share. The channel inventory reductions are mostly due to phasing out older models to take our newer models for the fall holiday season, but we have also seen across the board reduction in weeks on hand targets by CE retailers.

On a sequential basis, some other factors were also at play with more notable category weakness, a larger impacted timing of taking our new products for the fall. For example, large shipments started in October this year versus September a year ago, and a decline in market share.

On market share, I want to note that we have grown our Bluetooth market share for several years running and reached the number one position in retail two years ago. And we maintain the number one position today by a wide margin.

To recap on revenues, OCC was $118 million, up 26%; mobile 27.6%, down 20%; PC and gaming, $8.2 million, down 9%; and Clarity, $4.5 million, down 38% or $2.7 million, and that was from an unusually high revenue level for Clarity of approximately $7.3 million in Q2 last year.

Last year did a budget issues in the state of California resulting in a risk of payment. We recognized revenue for one of Clarity’s significant customers based on cash collected in Q2 for products shipped in Q1.

International revenue increased by 22% or $11.1 million to a total of $62.2 million. This growth from the second quarter of last year was led by OCC products in dollar terms, and we also experienced strong growth in mobile. We believe we have gained some share in both these product categories internationally.

Geographically our mix was 61% domestic and 39% international, compared to 65% domestic and 35% international in Q2 last year, and consistent at 61%, 39% sequentially.

Our non-GAAP gross margin was 54.8% compared to 48.7% in the September quarter last year. The 6.1 point improvement was primarily due to 3.5 points from higher standard product margins, driven by increased OCC mix and improved margins on mobile and 1.9 points from lower manufacturing expenses due to outsourcing of Bluetooth in China in the prior year and higher utilization of overhead cost on higher volumes, with the balance due to a variety of individually small efficiencies and positive effects from product mix.

We had a non-GAAP operating margin of 24.2% in Q2, up from 18.5% in Q2 last year. All of the 5.7 point improvement is due to gross margins. Our operating expenses were in fact a bit higher as a percent of revenues than in the year-ago quarter. Our non-GAAP operating margin is the highest in over five years on an unusually strong OCC mix at 75% of total revenues.

A more typical OCC mix of 65% to 70% of revenues could be expected to result in a gross margin 2.5 to 4.5 points lower. Our long term target model of 18 to 20 points is built around both a more typical consumer mix and success in UC.

As we’ve discussed for some time now, we do expect UC to have a lower margin profile than our historic OCC business, while also being an excellent and very profitable business. Thus, the 18 to 20 points allows for both quarterly fluctuations as well as structural trends likely to play out over the next three to five years.

Coming down to our tax rate, our effective non-GAAP tax rate for the quarter was 28% compared to 25% in the year-ago quarter. The year-ago rate of 25% was due to a catch-up adjustment needed to bring our year-to-date rate down to 26%, which was our full fiscal year ‘10 estimate at that time. Our non-GAAP rate for the current quarter was also 1 point higher than our forecast of 27%, that’s about $400,000, due to some small discrete items in the quarter. We expect the rate for FY ‘11 to be approximately 27%.

As a result of all the above, our Q2 non-GAAP net income from continued operations was up 37% to $28.3 million compared to $20.7 million in the year-ago quarter.

Let me now turn now to the balance sheet and cash flow highlights. The strong profitability helped to generate over $25 million in cash flow from operations in the second quarter. In addition, we received proceeds of $3.4 million in cash from stock option exercises.

Our primary uses of cash in the quarter were $16.3 million to buy back stock, $3.2 million in CapEx and $2.4 million in dividends. We ended the quarter with $359.4 million in cash, cash equivalents and short term investments, which was down $3.6 million from $363 million in June.

Please note that we also have $14.8 million of long term investments up from zero at the end of June. We are investing some of our foreign cash into instruments where the maturity is greater than one year in order to improve the yield on those assets.

Of the $359.4 million in cash, cash equivalents and short term investments at quarter end a $104.8 million was domestic. Cash collections were strong, and DSO decreased to 54 days from 64 days in the same quarter last year, and increased from 51 days sequentially. The quality of our ageing continues to be very good.

Net inventories were down $8.4 million from June, with inventory turns consistent at 4.1 in both the September and June quarters. We expect inventory to continue to decrease in dollar terms in Q3, and our goal is to improve our turns over the course of this fiscal year.

And finally, on the CapEx front, as I mentioned our Q2 capital spending was $3.2 million, up from $1.3 million in Q1 and up slightly from $3 million. Depreciation and amortization expense was $3.8 million in Q2, which was down from $4.8 million in the year-ago quarter and $4 million from Q1.

We currently expect CapEx for FY ‘11 to be in the $14 million to $15 million range, slightly higher than our prior forecast due to investing in an extended solar energy system at our corporate headquarters, and depreciation and amortization to be approximately $15 million to $16 million for the full fiscal year.

Turning to the business outlook, we expect the December quarter to be up significantly sequentially, primarily due to increased mobile revenues associated with the holiday season and the fact that most of the channel inventory reductions and product transitions were done by the end of Q2. We also expect OCC revenues to grow.

The December quarter tends to be characterized by a very strong order flow in October, which diminishes substantially towards the end of December. We are experiencing this pattern once again, which together with placements and orders-to-date for mobile lead us to believe that our net revenues for the December quarter will be in the range of $180 million to $185 million. Net revenues of $180 million to $185 million would represent an 8% to 11% increase from $165.9 million in the year-ago December quarter.

Depending on the revenue mix and other factors, we believe non-GAAP operating income will be approximately $37.5 million to $40.5 million compared to $31.8 million in the December quarter last year, and would represent a strong 18% to 27% year-over-year increase.

We also currently expect non-GAAP EPS from continuing operations would be $0.55 to $0.60. And the GAAP charges we currently expect include approximately $4.2 million in equity compensation expense and $0.3 million in purchasing accounting amortization, bringing total estimated GAAP charges to $4.5 million pretax and $3.1 million or $0.6 EPS after tax. We therefore expect GAAP EPS on continuing operations of $0.49 to $0.53.

With that, I am going to turn it back over to Jeremy, the conference facilitator, for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Bright.

John Bright - Avondale Partners LLC

Ken, you see trends remained strong; low margin Bluetooth was weak as forecast and anticipated into the quarter. But on the UC side, have any of the assumptions that you’ve made about the opportunity in terms of ASPs or gross margin or cannibalization since we spoke three months ago, have any of those changed?

Ken Kannappan

I would say, not really. Having said that, I mean, it’s a very dynamic market, so there are a lot of little things that are continuing to evolve. But at the macro level I think that we believe that the base opportunity as we’ve described it previously is very much intact and consistent.

John Bright - Avondale Partners LLC

Microsoft, you mentioned in your prepared remarks rolling out their new communicator or Lync software this quarter we believe. What impact could that have to Plantronics? Is there a pent-up demand, or is this likely going to be just replacement software for existing versions?

Ken Kannappan

Well, first just let me make a comment that I am commenting on this more in terms of 2011 than I am in terms of the December quarter because I do suspect that it will take some time before customers will roll out, based upon the new software. But to answer your question, we do think that there is some pent-up demand for this system.

There were a number of customers we believe were waiting for this that they think that there are some capabilities in the new systems as they had to have before they could proceed. At the same time, we don’t expect that rollouts will be instantaneous company wide. We do expect that most organizations, particularly large ones have figured out that it takes them some time to implement to roll these out and to change internal management practices in conjunction with this. So we expect that there will be an increased demand that it would be spread out in time that it will begin during 2011.

John Bright - Avondale Partners LLC

You mentioned rollouts. Are the rollouts still long rollouts, really going as fast as the IT departments can deploy these, probably more in the year, particularly for the larger deployments?

Ken Kannappan

Yes. There was a pattern early on; it was that companies were telling us they’re going to roll it out pretty quickly. And repeatedly what we’ve found is that they have taken much longer to roll them out than they had anticipated. And we think there’s still little bit of a gap in plan and reality, but the gap has diminished some, where the plans are now for more measured rollouts.

John Bright - Avondale Partners LLC

Barbara, two questions for you, one on the mobile Bluetooth low gross margin business. Sales were down as expected in the quarter. You talked about the channel inventory in your prepared remarks and you mentioned weeks on hand targets by some of the customers.

Maybe you could give some more color around what that means.

Barbara Scherer

See retailers and most customers, they have certain number week on hand for a category that they want to see. And without naming names, generally across the board, you’ve been seeing them drop anywhere from two to four weeks in comparison to where they would have been this time last year.

So I think as the category has gotten a bit weaker, they may be putting their inventory dollars to work in other categories. And in general everyone is trying to improve asset management. So I think it’s just kind of a broad trend, but it’s also playing out in Bluetooth.

John Bright - Avondale Partners LLC

Two final questions associated with that. One, in your long term goals, you continue to state the goal being profitable in Bluetooth. Were you profitable in the quarter in the global Bluetooth business?

Barbara Scherer

Bluetooth contributes very significantly actually to our profitability. The gross margins are in the target range. The target range being mid-to-high 20s, and the level of direct OpEx deployed against that is sufficient but not terribly large.

John Bright - Avondale Partners LLC

Last question. The long term business model, you’ve now been performing above the long term business model. You’ve mentioned a couple of thoughts regarding that in your prepared comments, one of them was that you were concerned about structural changes over the next three to five years, correct me if I’m wrong.

What are you talking about when you are talking about structural changes that you might see over the next three to five years?

Barbara Scherer

The structural changes you see, we talked about the UC opportunity, how large it is in revenue and that it’s our significant long term profit growth opportunity as well. So we do expect it to be very, very profitable, but the gross margins aren’t in fact as high as our historic business. Few things are; very few things are, particularly in the world of hardware.

And so we’ve built our model on what we expect to happen in terms of our mix of UC and traditional, and what we expect margins to be in UC. And last quarter I talked about the fact that the gross margins that we were seeing on UC were very much in line with our model.

This quarter, if I got asked that same question, I would say they were actually a little bit better than our model. But it’s very, very early; it’s very early, so they’re in line with our models and we expect the revenues to grow significantly. And that will change the gross margin model over time.

John Bright - Avondale Partners LLC

Is it fair to say that you could perform at this higher level for the near term? And this is more of a longer term model.

Barbara Scherer

There’s not that much difference between where we are right now this quarter and the longer term actually.

Operator

Your next question is from Reik Read.

Reik Read - Robert Baird & Co.

Back to Bluetooth and maybe talk a little bit about what you guys mean by category weakness. Is that suggesting that the category is more fully penetrated, or do you mean something else? And maybe expand on the share loss and what maybe occurring in the market and how that may play out the next quarter or so?

Ken Kannappan

Sure. Well, first in terms of the category I think that there has been several things that have played on it. One, there may have been some that it was just consumer weakness of playing in on the category. Secondly, there was certainly greater focus on what I would call non-communications products. You had a lot of iPhones being purchased by younger people who are into texting and some of them may not even be driving and corresponding with that greater focus on the part of both CE as well as carrier channels on music and stereo corded types of solutions.

In that sector you also had some instances where products were in short supply and then they were filled directly to customers, which reduces some of the aftermarket activity that goes into the store. So there were a variety of things affecting the category in a negative way.

From a share standpoint, as Barbara said, we actually still have a very strong position and we look kind of year-over-year, we’ve been on a steady uphill climb with very slight lowering from where we were. I think that we still expect that we’ve got a very competitive portfolio of products overall. We have seen, particularly I would say, some of the cellular OEMs bring some good products into the market and promote them pretty effectively and that’s taking a little bit of market share. But we still feel good about our overall competitive position and structure.

Reik Read - Robert Baird & Co.

I guess what I hear you say, Ken is, it’s down a little bit but it’s still relatively stable. And it sounds like the inventory adjustments are done. So would that suggest kind of a normal 30%, 35% sequential increase that you’d see? Is that the right metric to put on it, or is there reason that would be different?

Barbara Scherer

Because the inventory reductions were so significant, we actually expect that it could be up more than the typical seasonal effect because normally at the end of September we would have already started shipping; that, and the way the transitions hit and the way the inventories were being worked, those big shipments didn’t start till October.

So I think the sequential increase will be more than typical.

Reik Read - Robert Baird & Co.

And even if you were up closer to 40% or 50%, just given your overall guidance, the implied guidance for the call centered office would be still above normal. Can you disaggregate that a little bit in terms of how much of that you see ramping because you’ve mentioned in the past that there is some volatility there? And how much of that is maybe the core call centered office?

Ken Kannappan

We’re not at the point yet that we want to give forecasts on our UC revenues specifically. I appreciate the question and it’s a legitimate one, but I think we’re not quite ready to go there yet.

Reik Read - Robert Baird & Co.

Can you just comment a little bit on how that would look in terms of the volatility and maybe some of the factors that maybe contributing that, not quantitatively but qualitatively?

Ken Kannappan

Just to be clear, contributing to the OCC?

Reik Read - Robert Baird & Co.

Well, I guess I am going back to what you’ve commented on in the past, Ken is, just with some of the Unified Communications there can be some volatility. And I am assuming a lot of that is due to the newness in the market. But maybe you could comment on what may be pushing or pulling at that?

Ken Kannappan

Couple of things; first, as it relates to UC in the December quarter, I think that there’s a few of the things going on. Number one of course, Lync is a new platform. I think at this point in time relatively few people will go ahead and deploy on R2. So they’re more likely to wait for Lync. So from a timing perspective, you could even argue it might be a modest negative relative to the December quarter.

Pulling against that, this is not the only UC vendor, there are other things still moving forward and there are some deployments that are still underway. So those are some of the timing factors. The way around it, on top of all that some people may wish to deploy over the course of slightly better time periods i.e. the very end of the year.

So those are some of the present causes. As you point out it is lumpy, although over time we are hoping that it will become less lumpy as a business. Is that what you were looking for?

Reik Read - Robert Baird & Co.

That’s real helpful. And I take it that once you get beyond the next couple of quarters, it sounds like the UC revenue should ramp somewhat sequentially each quarter?

Ken Kannappan

Well, I am hesitant to make such a forecast. I’d make one other comment, which is that we have seen some effect from the UC vendors’ activities. And in particular, note that they all have quarters to make as well in terms of UC business. And some of the major vendors do have fiscal years that end in June and July and that can influence the timing of this business.

This business still being a little nascent for us, we don’t know how that may affect the pattern of quarterly results.

Reik Read - Robert Baird & Co.

And just last question on UC. You mentioned having to add sales. Any sales constraints at this point that are facing you, i.e. not having the capability to add enough salesmen to support?

Ken Kannappan

No, it’s not really a constraint. Clearly, we are adding sales capability. It is an activity that is very intensive at the front end. People are making a significant decision. They want to have more discussions with us than they did when they were just buying kind of the next gen of one of our former products in the past. And so there’s no question that exhorts more organizational bandwidth.

So we’re doing it, but I don’t view that as a constraint. That’s just kind of the natural balanced growth in the business.

Operator

Your next question comes from Tavis Mccourt.

Tavis Mccourt - Morgan, Keegan & Company, Inc

Barbara, first a couple of quick financial ones for you and then some follow-ups for Ken. What was cash flow for operations in the quarter?

Barbara Scherer

It was $25.2 million.

Tavis Mccourt - Morgan, Keegan & Company, Inc

And I think you said this one, but I missed it. The CapEx in the quarter?

Barbara Scherer

$3.2 million.

Tavis Mccourt - Morgan, Keegan & Company, Inc

And then Ken, can you talk about, you mentioned there were some deployments where you are seeing a few instances of headset adoptions going way up in the enterprise. As you see is adopted, what mix of USB versus wireless are you seeing in those deployments where it’s being extremely widely adopted?

Ken Kannappan

It’s being very widely adopted. It’s heavily on the USB side. Let me just kind of explain this real quickly. We’ve historically had adoption of let’s just call it 10% of people in an enterprise. And in round numbers, those represent people who are heavily on the phone a lot, doing a lot of voice communication.

A significant portion of them are upgrading to our wireless products because they have some need and value of mobility and they are often highly paid professionals where the ROI is well-justified. As we extend out the adoption to people from the 10% level to, pick a number, 80% or 90% level, a fair number of those people are not talking a great deal of the time.

And organizations are price-sensitive in buying wireless voice communication products for people who don’t talk a lot. It’s just not something that they feel is justified.

Tavis Mccourt - Morgan, Keegan & Company, Inc

And can you talk about the ASP difference for you in terms of wireless versus USB?

Barbara Scherer

Well, you see that would be a very significant difference, although there is a wide range of USB connect products that are going to be generally well below $100 versus generally above $200 on wireless. So it is a big difference.

Overall, revenue in terms of the mix and actually on a revenue basis so far it’s just running about 50/50, just like our normal overall OCC mix.

Tavis Mccourt - Morgan, Keegan & Company, Inc

Interesting. And then Ken, can you give us an update if there has been any impact, positive, negative or otherwise on kind of the Avaya Nortel merger? What’s that meant for you, kind of how it’s impacted channel relationships if it all or if it’s been kind of a non-event so far?

Kenn Kannappan

Well, really going into the nuances, and I don’t want to say too much partly because Avaya is a key partner of ours and I prefer to let them make communication as relevant to their business. Obviously that gave Avaya a very, very strong position in terms of installed base. Clearly, we’ve had a very, very long and successful relationship with Avaya.

As part of that merger, and partly they were beginning that earlier, they did change a little bit their go-to-market strategies with a greater portion of their sales handled through channel, rather than through direct sales which changes the way that we partner with them. So that’s kind of a top-line, but on an overall basis I’d say that there have been some pros and some cons for us of their change. We still think we have a very good relationship; we still think it’s cooperating well, and we don’t see a big change in our overall business as a result of that.

Tavis Mccourt - Morgan, Keegan & Company, Inc

And then the last question was, to me it was a pretty interesting quarter for the Bluetooth business because it’s kind of your first significant down quarter I think since you moved to the outsourced manufacturing strategy, or at least since the recovery. And clearly, the gross margins held up with that strategy.

Is that something that you’d expect to continue to play out even in future contract iterations, or at some point when this contracts runs out, is it going to be difficult to keep the gross margin north of 20% in this business? Or based on other bids you had for this, do you think that’s pretty sustainable long term?

Barbara Scherer

What we negotiate with the vendor is basically the price that we pay for each product. In that we’ve had experience. It’s not a sort of a fixed margin target, its product-by-product. And so we’ve continued to have experience over time as we’ve brought on new products. So even though a contract has a certain period of time within it, you are continuing to evolve and gaining experience and that’s working well.

And the reason that it’s so variable is because we’re able to eliminate the overhead. And we wouldn’t be paying for vendors’ overhead; we’d be paying for product cost. So when revenue does drop, the thing that’s great is, we don’t have that $1.5 million, $2 million kind of overhead that we had associated per quarter with that business when we had the factory and other operation costs in Santa Cruz and Mexico.

Operator

Your next question comes from Rohit Chopra.

Rohit Chopra - Wedbush Securities Inc.

I had a few questions here. OCC was very strong. I was just wondering, was there a lack of also competitive response which may have helped OCC strength this quarter?

Ken Kannappan

No, I mean, we continue to see our competitor be very active in the market. Sometimes when IT prefers us, we see them chop their price down, so we still think there’s competitive intensity.

Rohit Chopra - Wedbush Securities Inc.

And then last quarter, you mentioned on the call, I think it was just in response to a question that the UC pace was stretching out a little bit. But it looks like it may have come back in the quarter because it was fairly strong sequentially. Was there anything that changed in the quarter? What do you see, the way you saw it in the quarter and then come back with such strength?

Ken Kannappan

Well I think those are two separate comments, and let me try to blend them together. What we were referring to is that first, that the installations are stretching out relative to what we had expected. On the other side of it, we’ve kind of seen growing interest in UC and we’ve still been waiting for when even a greater level of adoption will occur. But we have always been seeing rising momentum and rising interest in UC and we continue to believe that we will see that.

Rohit Chopra - Wedbush Securities Inc.

I want to ask Barbara a real quick question. You mentioned there were some product transitions or something that were going on. Is there anything notable that we should look at in there? Was there anything specific in the products that are new, or something that might drive the top-line a little bit more?

Barbara Scherer

It’s really just a normal transition of products within Bluetooth within consumer products, where typically the big new products are launched and introduced in the fall. And we had new packaging rolling out that these new products are in. And so, as retailers and carriers work down the older models, then they’re taking the new models. But its similar price points, family names, the general attributes I guess you would say of the products are similar. But there are new features and colors, and maybe Ken would want to add something.

Ken Kannappan

I was going to say, these aren’t huge items for us to bring up on the call. But we did add a speakerphone product that we have not had previously, the K100. We don’t really have a lot of sell-through data at this point in time, but it had a warm reception and we think it’s a nice form factor. We’d seen a lift like everyone else to some degree with the shift-over from communications towards stereo listening on the part of some of these mobile phones, were back to the stereo products.

So there’s been a little bit of that shift. But what Barbara said is right. I mean, it’s fundamentally next gen products in this space.

Rohit Chopra - Wedbush Securities Inc.

Couple more questions here. With the UC vendors that you have, are there any exclusives developing, or maybe feature sets that are being incorporated into your product that maybe another vendor doesn’t have?

Ken Kannappan

Well, there is some of that. It’s not stuff that I’m trumpeting to a significant degree on the call, but there are areas where we have better integration that is exclusive to us on the UC side with key players. And we do think that provides us a competitive advantage in the market.

At the same time, I also would say that most companies actually want to have two choices, and therefore are taking both companies in general through two pilots. Most of the time the conclusion of those pilots is, our products are providing a better experience, are providing better performance, and then there is still a negotiation at the end afterwards.

Rohit Chopra - Wedbush Securities Inc.

And Ken, by the way, there is no better place than the conference call to trumpet some of your exclusive arrangements. And my last question, Avaya had a brand new platform called Flare; Cisco had CS integrated with their UC platform; Microsoft, Lync. Polycom, I think next month is going to talk about their new platform.

Are you working with these vendors to maybe promote your UC product at the same time as they start to release their new platforms whereby it drives the top-line? So maybe the closest one is Microsoft because they are going to do something now. Is there something coming where you are co-promoting what’s happening or is that a question for Ingrid?

Ken Kannappan

The answer is, of course we are. Having said that, part of it is trying to be up and with their marketing activities; part of that is really field sales cooperation with their organizations as we’re dealing with individual customers. If you go to, for example the Microsoft Lync site, you can see that we’re on there, that site as a partner. Likewise, you’ll find us in a variety of other both web and marketing collateral types of things.

If you go to the demo centers that all of these companies have, you will find our products in there because customers want to come in, they want to see how its working and they want to get the full experience of that product.

So the answer is, yes, very, very broadly, we are cooperating with them.

Operator

And the final question comes from Mike Latimore.

Mike Latimore - Raymond James & Associates

Just on the December quarter guidance that’s strictly on mobile, are you assuming that kind of a percent of mobile revenue from October is sort of a normal percent in that guidance?

Barbara Scherer

I’m sorry, from October?

Mike Latimore - Raymond James & Associates

You said a lot of your orders in the December quarter are in October and then they sort of diminished (quarterly). That’s kind of a typical pattern, so are you assuming a sort of normal percent in the month of October for the December quarter?

Barbara Scherer

With mobile, we have run rates at all of our channel partners by the price points and based on the placements in the holiday season and we have orders in backlog. So we look at the combination of those factors and build in the seasonal lift on the sell-through levels. And that’s what it’s based on; it’s not based on October by itself. It’s not a monthly type of analysis. That type of analysis is more suitable to the OCC business, not the mobile business. Mobile business was at the account level by placement, by price point and the level of typical seasonal lift.

Mike Latimore - Raymond James & Associates

And then you said that in the OCC category you are expecting growth. Were you referring to both sequential and year-over-year growth there?

Barbara Scherer

Yes.

Mike Latimore - Raymond James & Associates

And if you just sort of look at the OCC category separate from UC, it looks like you’re having solid growth in that segment, excluding UC. And we haven’t really had a major economic recovery or job gains. What’s kind of driving the non-UC piece of that business?

Barbara Scherer

Well, we haven’t had a major recovery, and if we did we historically would have had a recession and then a nice sharp recovery. We’ve put like back-to-back 30% years together. But the absence of a decline and stability and slight growth is actually good enough to get some growth. As equipment gets older, as people start feeling comfortable changing jobs, going from one employer to another employer, it may not be adding to the total level of employment but it’s creating new opportunities to sell our products to people that are new in their positions because you typically don’t use someone else’s headset.

And with the economy just being mildly positive, people feel that they can invest, and invest for the future and all of that very much helps our business.

Mike Latimore - Raymond James & Associates

Any particular industry verticals that were strong or weak in the quarter for OCC?

Ken Kannappan

I mean we’re continuing to see that healthcare was strong. I think technology remains strong, and a lot of those global businesses are benefiting from strength in Asia. We’ve seen, I’d say, a little bit of a rebound in financial services. Education’s still pretty good.

Mike Latimore - Raymond James & Associates

Your last question is around the Lync initiative. Given the different timelines now to most generally (although) that sort of thing, when do you think will the Lync deployment start having a kind of noticeable impact on headset purchases? You said it might even have a little bit of a potential I think modest negative in December quarter. When do you think it starts having a modest to a noticeable positive?

Ken Kannappan

Well, we think for sure in the June quarter of next year we should get some benefit. I think it’s possible that we would see some in the March quarter.

Operator

There are no further questions at this time. Presenters, do you have any closing remarks?

Ken Kannappan

Yes. I’d like to thank you all for joining our call. As always, we’re available if you have any additional questions. Appreciate your time.

Operator

That does conclude today’s teleconference. You may now disconnect.

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