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Plantronics (NYSE:PLT)

Q2 2012 Earnings Call

November 01, 2011 5:00 pm ET

Executives

Greg Klaben - Investor Relations

Barbara V. Scherer - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance & Administration

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

Analysts

Sanjit Singh - Wedbush Securities Inc., Research Division

Joanna Makris - Mizuho Securities USA Inc., Research Division

Tavis C. McCourt - Morgan Keegan & Company, Inc., Research Division

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

Gregory Burns - Sidoti & Company, LLC

Mike Latimore - Northland Securities Inc., Research Division

Operator

Good afternoon. My name is Casey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Fiscal Year 2012 Financial Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to your host, Mr. Greg Klaben. Sir, you may begin.

Greg Klaben

Thanks, Casey. Good afternoon and welcome to Plantronics Second Quarter Fiscal 2012 Financial Results. Joining me today are Ken Kannappan, Plantronics' President and CEO; and Barbara Scherer, Senior Vice President of Finance 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've highlighted before, the risk factors in our press release and SEC filings are not standard boilerplate. We update these risk factors every quarter for significant changes, 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. We will be discussing non-GAAP measures during today's call, and we have reconciled these measures in our earnings press release and in our quarterly metric sheet, both available on the Investor Relations section of the Plantronics website.

Plantronics' second quarter fiscal 2012 net revenues were $176.9 million compared with guidance provided in August 1 of $172 million to $177 million. Plantronics' GAAP diluted earnings per share were $0.60 in the second quarter compared with $0.52 in the same quarter of the prior year. Non-GAAP diluted earnings per share was $0.67 compared with $0.58 in the prior year quarter and guidance of $0.58 to $0.63. The difference between GAAP and non-GAAP earnings per share for the second quarter includes stock-based compensation charges and purchase accounting amortizations, both net of the associated tax impact.

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

S. Kenneth Kannappan

Thank you, Greg, and thanks to all of you for joining us. There are 3 key points I'd like to discuss on our second quarter fiscal call. The first is our record financial results. The second is how Smarter Working is driving adoption of Unified Communications, and the third is our leadership position in UC. First, we achieved some key records in the second quarter, including record Unified Communications revenue, record operating income, while continuing to invest in extending our leadership position in the growing Unified Communications market.

Second, we're seeing an increased interest in UC as an enabler of Smarter Working in leading enterprises. While UC has always been a tool for greater collaboration, communication and cost savings, we've been seeing growing interest and awareness of the need to change the way knowledge professionals work. The term Smarter Working recognizes that productivity is optimized by matching working environments and professional interaction to the activities which people are pursuing.

With technologies like UC allowing professionals to be very effective remotely, companies are opening up new avenues of cost savings, including reduced facility space, which lower real estate costs and enable them to be more eco-friendly in the process. Many enterprise are also recognizing productivity gains from allowing employees to work from the location where they can be most effective. Employees at such organizations report higher job satisfaction and motivation.

Smarter Working relies on the fact that people are motivated by 2 key things: exciting projects and working closely with other people in a way that increases engagement, whether that is online and remote or in person. Smarter Working emphasizes a new approach to work. When working in the office, professionals benefit from new, open, collaborative spaces during periods when their work requires collaboration. In other times, immersive, reflective and secluded locations are most conducive to achieving their goals.

Consequently, people often move about and reset groups throughout the day without being confined to conventional offices or conference rooms. UC and collaboration tools help enable this by providing them flexibility to accommodate changes while maintaining communications and integration with other enterprise systems, and the office doesn't need to be a set location. With UC, it is everywhere. I've seen a growing number of growing companies considering and implementing Smarter Working, with greater consulting in the university expertise in this area and positive results for people working in these environments.

One recent example is Commonwealth Bank of Australia, the largest financial institution in the country with over 32,000 employees, which has begun deploying voice on its Microsoft Lync rollout in conjunction with Smarter Working. Their new offices, a twin building, with 6,500 employees has been renovated over the course of 2 years with an array of Smarter Working spaces.

Greater density was achieved in the office, allowing the company to consolidate locations, realizing a hard dollar cost savings. But the bigger payoff is there's actually a tool for recruiting, retention and motivation and more effective teamwork in their organization. The bank's highly agile work force requires mobility, has led to an unusually high adoption of headsets, primarily wireless, which we were pleased to provide.

I'd like to turn to my third point for the quarter, which is our leadership position in the UC audio device market, came through our integrated hardware and software solutions. The foundation of our leadership position is our 50-year heritage of superb audio quality, which is designed into all of our product lines. For UC, we've started investing a few years ago in other areas such as software in order to deliver products that have enriched both the communications experience for the user and the capabilities of the communication device.

One example of this is our patent-pended Smart Sensor technology, which allows the headset to know where it is, that is if you're wearing it or not. And among its features, it will answer calls simply by putting it on. This technology was initially just in our Voyager PRO UC product. We've recently brought it into our new consumer, Voyager PRO HD product. Now when you are even on a smartphone and using an Apple applications such as Surrey, you can dictate to and communicate with your device seamlessly.

This quarter, we started shipping a breakthrough set of new wireless headsets for both UC and office, featuring the most advanced and lightest headset ever. These products have far greater performance than any other products in the industry, while also being simpler and easier to use.

In conclusion, we believe our strong UC revenue growth of 70% year-over-year validates the health of the UC category and our very strong position in the industry. We also believe that the worldwide adoption of the technology by organizations of all sizes of all segments validates our long-term growth expectations, including our expectation that UC product revenue will reach $350 million by fiscal 2015.

In today's volatile economic environment, many companies may be uncertain about their hiring plans. However, they are generally less reluctant to invest in technology such as UC as they look to reduce costs while increasing employee productivity. We believe that we are a strong leader in UC, and our technology leadership will be just one of the many differentiators for us.

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

Barbara V. Scherer

Thanks, Ken. Our Q2 results were very strong, including that our non-GAAP operating income of $41.5 million was well above our guidance of $37 million to $40 million. This is primarily due to higher gross margin, which translated to higher operating margin. Non-GAAP earnings per share of $0.67 exceeded the high end of our guidance range, which was $0.63. Of the $0.04 EPS outperformance, approximately $0.02 was attributable to the benefits on diluted shares outstanding from our stock repurchase programs and $0.02 to stronger operating margin.

Turning to revenues. Total net revenues of $176.9 million were up $18.7 million or 12% compared to the second fiscal quarter last year. The key product line comparisons to Q2 last year are OCC net revenues of $136.4 million were up $18.4 million or 16%. Approximately half the dollar growth was from UC products and the balance from our core lines. Net revenues from OCC products grew in all major geographies, and revenues from UC products grew nearly 70% to $22.4 million.

Mobile products were up 3% compared to Q2 last year. Within mobile, we achieved very strong growth in EMEA and in Asia-Pac, partially offset by declines in North America. Gaming and Computer products were up 2%, and Clarity was down 15% on push-outs from state-funded programs and product transitions at retail.

Sequentially, our OCC net revenues were up $5.4 million or 4%, with the strongest growth from the U.S. Mobile net revenues were down $3.8 million or 12% compared to the June quarter, with that decline coming from the U.S., partially offset by growth internationally. And geographically, our mix was 57% domestic and 43% international, compared to 61% domestic and 39% in Q2 and in -- last year in Q1.

Non-GAAP gross margin was excellent at 56.3%, up 1.5 points year-on-year and 2.4 points sequentially. Versus the prior year ago period, the 1.5 point improvement was due to 1.2 points from a higher percentage of OCC products in our net revenues, and the actual mix within OCC, 0.8 points from the benefit of the weaker dollar, 0.5 points from manufacturing efficiencies, partially offset by 1 point from higher commodity and sourcing costs.

That brought our non-GAAP operating margin to 23.5% in Q2, down from what was an usually high 24.2% in Q2 last year. Our year-to-date non-GAAP operating margin is at 23%, consistent with the high end of our long-term operating model.

Below the operating income line, other income in Q2 was roughly 0, compared to $1 million of other income in the year-ago quarter. A year ago, we had foreign currency gains and interest income, whereas this year, we had small foreign currency losses, which largely offset our interest income and netted to close to 0 for other income in total.

Our effective non-GAAP tax rate for the quarter was 26.1%, compared to 28% in the year-ago quarter. The lower rate was the result of the reinstatement of the U.S. R&D tax credit and higher foreign-sourced income taxed at lower rates. On a GAAP basis, our Q2 tax rate was 25.3% compared to 27.4% in the prior year quarter, and the factors above for non-GAAP were the primary drivers of the reduction in the GAAP rate as well.

As a result of all of the above, our Q2 non-GAAP net income was up approximately 8% to $30.7 million compared to Q2 last year. The cumulative benefit of our share repurchase programs was the main factor driving a 6% lower diluted share count versus the year-ago quarter, which combined with our net income growth, resulted in non-GAAP EPS growth of $0.09 or 16%.

We remain committed to completing the stock repurchase programs authorized by our Board of Directors and currently expect our diluted shares outstanding to drop by a further 2 million shares from Q2 to Q3.

In terms of the balance sheet, we finished the quarter with $349 million in cash and cash equivalents and short- and long-term investments after spending $89.5 million on repurchases of our common stock during the quarter, inclusive of 50 million paid under the second accelerated share repurchase program we announced in August.

We generated approximately $37 million in cash flow from operations in the second quarter and continue to have a strong financial position. Of the $349 million in cash, cash equivalents and short- and long-term investments, $17.7 million was domestic.

DSO decreased to 52 days from 54 days compared to a year ago and from 56 days sequentially. Cash collections during the quarter were greater than net revenues on the strength of a somewhat stronger-than-usual demand environment at the outset of the quarter, making relatively more receivables available for collection prior to the end of the quarter, and the quality of our aging continues to be excellent.

AR was also lower due to the stronger dollar at the end of the quarter compared to the beginning of the quarter, resulting in our foreign currency-denominated receivables being revalued into fewer dollars. That accounts for about one day of the sequential decline in DSO.

Net inventories are down $9.1 million versus September of last year and up $3 million from June 2011. Non-GAAP inventory turns improved from 4.1 a year ago to 5.1 in the quarter just ended, but were down from 5.6 in the June quarter as we increased inventories primarily related to the new OCC products which started shipping in the September quarter. Inventory of Clarity products also grew sequentially on the unexpected order push outs.

And then turning to CapEx, our Q2 spending was $6.1 million or 3.5% of revenue, bringing year-to-date CapEx to $10 million. Our CapEx plan for the fiscal year remains $18 million to $20 million. Depreciation and amortization expense was $3.4 million in the quarter, down from $3.8 million in the second quarter last year, and our full year estimate remains $15 million to $16 million.

So with a highly volatile macro environment, we saved unusual uncertainty in forming expectations for the December quarter. The macro environment has been growing increasingly uncertain, and the markets' volatility has certainly reflected that. We've grown concerned about the outlook due to the impact it could have on our core OCC business and have deferred hiring plans and also trimmed discretionary spending where we felt we could to bring our expenses down sequentially rather than continue to grow them.

Decisions like this are being made in many companies, putting plans on hold even if just for a few months, so as to gain greater visibility with the benefit of time.

As it relates to revenue expectations, our OCC orders, so far this quarter, have been a bit weaker than normal. And our most reliable forecasting tool suggests that our OCC revenues will be down sequentially, while a more typical pattern is plus 3% growth sequentially. Given the macro environment and the fact that our incoming order pattern suggest we could be down sequentially in OCC, we believe total net revenues will be in the range of $175 million to $185 million.

The entire range includes an expected negative impact of $1 million to $1.5 million for FX, as the dollar is sequentially stronger than it was in Q2, making our euro- and GBP-denominated revenues worth relatively less when translated to U.S. dollars. The $185 million high end of the revenue guidance range incorporates a very slight sequential decline in OCC revenues, more than offset by a seasonal pick-up in mobile, as well as some growth in PC and Clarity.

The low end of the range assumes a greater decline in OCC and less of an increase in mobile. Depending on the revenue mix and other factors, we believe non-GAAP operating income will be approximately $36 million to $41 million or $20.6 million to 22.2% of revenues. The outlook anticipates OpEx levels at 30% to 32% of net revenues, slightly below those seen in Q2 and roughly on par with our OpEx levels a year ago.

Based on all of the above, we currently expect non-GAAP EPS from continuing operations to be $0.60 to $0.70 on average diluted shares outstanding of approximately 43.7 million. The lower share count mainly reflects the full weighting of repurchases executed in the second quarter, as well as additional open market purchases planned in Q3. This estimate of 43.7 million diluted shares outstanding assumes that we will not take delivery in Q3 of any additional shares related to the 50 million accelerated share repurchase program announced in August, as the timing and amount of any such additional delivery is not estimable.

The GAAP charges we expect in the coming quarter include approximately $4.6 million in equity compensation expense or approximately $0.07 EPS after tax. We thus expect GAAP EPS of $0.53 to $0.63 for the quarter.

In summary, I'd just like to do a quick recap noting we had an excellent Q2, which included 16% year-over-year growth in OCC. Half the growth came from UC revenues and half from traditional. Revenues from UC products are tracking very well and grew nearly 70%. And we continue to estimate $350 million in revenues from UC products in FY '15. We have a leadership market position, which we've been investing into and believe we are very well positioned for the growth opportunities we expect to continue to develop over the next several years.

With that, I'd like to turn it back over to our conference facilitator for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of John Bright with Avondale Partners.

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

Could you guys talk about how the quarter evolved? And then into your guidance itself, what you saw where the weakness was? Was it in Europe? Did you see it in the financial industry government? We've seen orders on the videoconferencing side from the likes of Polycom and LifeSize pushing out in commentary to that nature. Maybe you can talk about that. And then also, do you think UC revenues will be up sequentially?

S. Kenneth Kannappan

All right. So I'm going to try to remember all those questions. And if I miss one, just follow up with me. First, let me just start with kind of the last quarter. What we saw, and I think Barbara covered this a little bit, but I'm going to kind of break it down a little bit between OCC and mobile. In OCC, we saw a better-than-normal July relative to June, stated a better-than-normal August relative to our expectations. And then the second week of September, we didn't get the lift that we normally get. And then we finished with a pretty good week 12 and week 13 of September of winding us up at a very strong level relative to our OCC business. On the mobile side, we saw a pretty good reaction to some of our new products, which were just starting at that point in time. And so the overall mobile business was about in line with our expectations, continuing to see that category being a little bit weak for mono voice and continuing to see some international strength. As I move into the December quarter, we had ironically, again, a pretty good weeks 1, 2 and 4. And week 3 was a little bit weaker on the OCC side. It was not necessarily a European phenomena. We did see -- and again, it's only really slightly weaker and in the pattern of, I would have to say, higher overall volatility in the business that we've seen in the past. So that's kind of the framework on it a little bit. It has a little bit of business moved out, perhaps a little bit of business has moved out. We've certainly been aware of that. But at the same time, I'd also say that there are some -- some of our verticals, we've heard some concerning signs. And particularly in financial services, there have been a number of layoffs in the business. And as we look into the December quarter, there's a couple of things that come up on a comparative basis. One is, we do have a little bit of a negative on FX from September to December; and two, we're coming off a really strong September quarter, which affects the comparison into December. So I would say there's greater signs of volatility. We did have a slightly weaker week 3. But overall, nothing to suggest that the business has really got any fundamental issues with it, and not necessarily concentrated in Europe. UC continues to remain, in our minds, pretty healthy. Has there been some concern related to the old -- the whole topic of push-outs -- will there be some in UC? Absolutely. But overall, we still think it's pretty healthy. I don't want to get -- I mean I've done in the past, but I don't want to get in the business forecasting UC on a quarterly basis just because it's still embryonic and volatile enough that it's hard to make a prediction that narrow into this quarter. And we haven't had enough December quarters to understand the seasonality of the rollout and how that's affected by year end. But we continue to believe that the fundamentals are good for UC. I think on the consumer side, a lot of people are still trying to figure out what kind of a holiday shopping season we will actually have. I think that in general, retailers are remaining fairly light relative to their inventory levels. And if the season turns out to be good, therefore, that could be a positive. But I think most people believe that the consumer markets will be cautious this quarter. And hopefully, we'll have less hangover going into the March quarter if their reported season is not that good. John, I'm afraid that I probably missed 1 or 2 of your questions, so tell me what I forgot.

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

No, I think you hit those questions. I'll ask you another question that I ask on most quarters in that. When you think about the components to the assumptions that you've built into the long-term opportunity for UC and the time frame, attach rate, ASP, cannibalization, et cetera, has anything changed since we last spoke?

S. Kenneth Kannappan

Nothing has changed. I mean, we've -- a couple of comments around it, though. We continue to be surprised that the UC margins and pricing are good. We were expecting a little deterioration. That clearly hasn't happened to this point in time. The attach rate on headsets to Lync continues to be very strong and favorable. And I would say that also we're independent of UC. We're continuing to see growing category interest due to one software [ph] only clients like Skype at this point in time, as well as to greater use of the PC for audio and, therefore, the need to be able to access it, as well as the use of PC independent from audio on the phone where you have a greater hands-free need. So I think all those things kind of remain a positive for us. I think the -- from our standpoint, the emerging markets' strength continues to be increased secular driver.

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

Barbara, a couple of financial questions, one on your guidance. If I heard you correctly, you're assuming in the high end of your revenue guidance, a slight sequential decline in OCC revenues. Is that correct?

Barbara V. Scherer

That's correct, you got it exactly right.

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

Which is typically up sequentially in December, is that correct?

Barbara V. Scherer

Yes, it's -- there is variation over the years. But in general, when I look at the most typical years and kind of drop the low liers and the high outliers, a more typical sequential change is plus 3%.

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

Okay. Then on the share repurchase, one, reconcile for us where you are relative to the original goal of 7 million shares? How many have you gotten repurchased and the time frame associated with that? And then reconfirm if you would, you're not expecting any delivery, I think, of the -- of shares in the remaining authorization, ASR authorization, in the December quarter?

Barbara V. Scherer

Right. So let me recap on that. So against the 7 million, we have as of now 1.560 million left. And we continue to be buyers in the open market. The 50 million ASR that we did in August, we took delivery of the initial shares under that program. But there is a -- an amount that remains -- that you get at the end when -- in this case, it's Goldman. When they are finished with the program, they deliver shares. And the timing of that and the amount of that is not something we can estimate. So the shares that we will still at some point get under that second piece are part of the 1.560 million that remains outstanding. And in total, we believe that we should be able to wrap this up this fiscal year.

Operator

And your next question comes from Greg Burns with Sidoti.

Gregory Burns - Sidoti & Company, LLC

In terms of the guidance, you're looking for down -- a little down sequentially on the OCC segment. But in terms of mobile, are you looking for a normal seasonality there? Or is that looking soft also?

S. Kenneth Kannappan

I would say that this is a -- on the softer end of our normal seasonality reflecting the fact that one, there's some category concerns; but two, there's also just some macroeconomic consumer concerns on the holiday season.

Gregory Burns - Sidoti & Company, LLC

Okay. And I guess in terms of the gross margins going into the third quarter, I guess, how should we expect those to shape up given OCC is down and given the mix that you're kind of expecting?

Barbara V. Scherer

Yes. So you should be expecting them to be sequentially down for those reasons and the fact that just the December quarter normally has a greater mix of consumer promotions -- of various types, not limited to consumer. So you should expect a decline, and if you kind of look at prior Q3s, I think that's probably a good indication. I've given you the operating margin that we're expecting in the guidance. And we've indicated that we expect OpEx to be about the same as a year ago, so there's probably not just too much math backed into it.

Gregory Burns - Sidoti & Company, LLC

Okay. And, Ken, in terms of UC deployments, are you seeing the number of trials increasing or companies advancing quicker through trials and moving past that and rolling it out on a broader-term basis? Is there anything you can give us in terms of maybe some qualitative data around UC deployments?

S. Kenneth Kannappan

Sure. Well, first, I don't think the sales cycle has changed at all, okay? I mean we're hearing very consistently that the sales cycle remains as it has before now. There has been certainly some uptick in what I would call broadly as the SME type of markets, slightly smaller organizations, where the sales cycle is naturally slower. And then you get to more numbers of firms, but it's disproportionate, the number of firms, relative to the number of actual revenues because they're smaller firms. So is that moving forward? Absolutely. Where relative to larger firms, those are still moving forward in our mind. As I mentioned before, there were a few cases that we are aware of were they have slowed down a little bit due to macro economic conditions. I think those were more the exception than a norm, but there were a few of those.

Gregory Burns - Sidoti & Company, LLC

Okay. And then in terms of -- if you back out the UC contribution, the OCC, it looks like the core was down year-over-year. Are you starting to see any cannibalization in that market?

Barbara V. Scherer

So on OCC, we're up $18.4 million, and $9 million of that growth was UC, and the balance was from the core business. So of the dollars of growth, it was actually about 50-50 between traditional and UC, which is terrific. It's a good balance. It was over -- throughout geographies, some nice pickups on the traditional OCC-quoted business as well.

S. Kenneth Kannappan

As I've tried to outline, we're seeing increasing interest in the category apart from UC as well. Those people trying to use softphone-only types of clients for certain types of cost-effective communication, as well as increasing use of the PC for broader audio applications, as well as people on the phone wanted to use a PC at the same time, so just hands-free productivity. We also saw -- we have seen some what I'd call renewed investments in terms of contact centers. There are several trends going on in the contact center as they are going more upscale in terms of the caliber of employee that they hire. And that's led to some renewed equipment purchases.

Operator

The next question comes from the line of Mike Latimore with Northland Capital.

Mike Latimore - Northland Securities Inc., Research Division

Just to ask you on that contact center comment, are you seeing any weakness in that area? Or has that area been sort of unfazed by any economic changes?

S. Kenneth Kannappan

Well -- so I guess the technical answer to all those questions are no. But let me kind of rephrase a little bit. We've definitely seen a pickup in the contact center over the course of this year. Contact center does have economic sensitivity. It's always had some economic sensitivity. We are able to push out or accelerate replacements based upon those conditions. And of course, retail expansions have always been cyclical with respect to the economy. I think though that there is several fundamental trends that have been going on. I mean one is that people have been increasingly trying to focus on improving customer service, and they've been increasingly trying to use what I'd call kind of CRM-like, but on an individual basis, greater customer relationship management on the part of individual agents and a broader set of responsibilities. That's led to a higher-skilled individual, greater use of wireless. We've seen some of those people too as long-term promotional candidates inside the organization. So all of those things have been increasing the vibrancy of that market. Can it change? Of course, it can change. Again, there is economic sensitivity. But we think that there's still, in general, some more room to come within the contact center market.

Mike Latimore - Northland Securities Inc., Research Division

Great. And then on gross margin, are the UC products you're selling kind of similar gross margin to the overall category? Or is it -- I mean gross margins are strong. Is it because of the UC products specifically or other dynamics there?

Barbara V. Scherer

Well -- so the margins on UC have certainly improved from a year ago. And so they're improving. And basically, the gross margins on UC are right on track with our overall model of 50% to 52% gross margins. So what's actually driving the margin up, one, there's been FX; two, it's the actual mix within OCC. So we've seen some strength in contact center kind of mapped and recorded. And then just some of the high runners within OCC are products where we've been able to get some cost reduction, despite what's overall a very poor cost reduction environment. So there have been a number of things that are favorable, and so we've got a pretty high gross margin right now. Over time, we'd still look to our long-term model and really focus on the 20% to 23% operating margin as the real long-term target for the business.

Mike Latimore - Northland Securities Inc., Research Division

Got it. And just last question on Europe. Ken, I think you said -- I guess can you clarify what you're talking about with regard to Europe? Are you seeing any differing trends there? And is that factored into your guidance here?

S. Kenneth Kannappan

Well, I mean, Europe is of course factored into our guidance. And are we seeing some different trends in Europe? So far, Europe has held up reasonably well. I would say that we have a perhaps somewhat higher level of concern in terms of volatility for Europe relative to other parts of the world.

Operator

Your next question comes from the line of Joanna Makris with Mizuho Securities.

Joanna Makris - Mizuho Securities USA Inc., Research Division

Your operating margins remain above the long-term target. And in the past, you've commented on, over the long run, some increased investment in UC. So I'm wondering if you can just update us on your thinking? I know, Barbara, you mentioned that you're looking at trimming a lot of discretionary spending going into next quarter. But I'm just kind of wondering on your views on how you view ongoing UC investment going forward.

Barbara V. Scherer

So we're definitely going to continue to invest in UC. And what we really did on the spending side was we basically put most planned new hires on hold, other than a handful in really critical areas. So it's not cutting, it's deferring and pushing that out. And then on the discretionary expense side, the typical culprits that you can trim back, we've gone through that. We've done that. Very good collaboration here among the management team in making that happen, just to bring the expenses down a bit, given what we're seeing in the incoming order pattern. On the operating margin side, year-to-date we are at 23%. And the metric, the 20% to 23%, isn't meant to be quarter-by-quarter, but more of a cumulative view. And then the guidance for the December quarter at 20.6% to 22.2%, that will bring it on a year-to-date basis a little under 23%. So we are operating toward the high end, which is terrific. And we expect in this kind of phase to be more at the high end, just like our gross margins are higher. And we're still in the early stages of UC, so the investments are a higher percent of revenue, so it's netting out still to the right operating margin. And then as you look at that model going forward over the next several years, we continue to expect to operate in this range. But we expect to evolve toward a little lower gross margin, a little lower E-to-R [ph] ratio but about the same operating margin.

Operator

Your next question comes from the line of Rohit Chopra with Wedbush Securities.

Sanjit Singh - Wedbush Securities Inc., Research Division

Sanjit Singh for Rohit Chopra. I apologize upfront if these questions have been asked. I got disconnected. So relative to the guidance, if I look at the high end, assumes that OCC is flat to sequentially down. What's happening in the mobile business that gives you visibility for that part of the business to be up, flat to up?

S. Kenneth Kannappan

Well, the mobile business, even if the consumer environment is weaker, is still going to have a holiday element to it. So it would be an incredibly bad holiday season if there was not at least some seasonal lift to that business. So we do expect that. Independent of that, we also have a very well-received couple of new products that are shipping. And so I think that there is certainly a very good expectation for there to be some holiday lift.

Barbara V. Scherer

I'd also add on that we started to see the kind of typical pickup in bookings for mobile products in September, especially as you move toward the end of September, which is very normal as you start to -- you have those placements and you start to get some shipments going in.

Sanjit Singh - Wedbush Securities Inc., Research Division

Got it. And then just another follow-up question on the guidance. Before, you guys were saying for the first 4 weeks, 3 of them were okay or good, and one of them was slightly, let's say, volatile. Was that -- I mean if I take the -- take all 4 data points in total, is that -- isn't that concerning that you guys wouldn't see normal typical seasonality going in, in Q4?

S. Kenneth Kannappan

Well, so first of all, it's hard to predict as well in a volatile environment. And that's part of the reason why we've increased our transparency, both last quarter and this quarter in terms of kind of very specific data points. So really, we have 3 very good weeks, and one wasn't that weak, but it was just a little bit weaker. But when we take the data together over a period and use some of the models that have been the most accurate for us, it does give us a slight down. Now it's a slight down over what is in fact very strong Q2 levels. So we don't consider it to be anything more than what we've laid out on the table and in terms of the implications for it. So can we be super accurate at this time? We really can't. I mean we've seen business both pick up suddenly, as people respond to more favorable emotional economic news, and go the other way as well. Our business people respond to the overall macroeconomic environment.

Sanjit Singh - Wedbush Securities Inc., Research Division

Got it. And my last question is concerning the U.S. I understand that we're worried about a volatile Europe. But it seems to me this quarter, U.S. or North America was the region that underperformed. What was driving that relative underperformance relative to Europe and Asia?

S. Kenneth Kannappan

Well, I don't think U.S. underperformed per se, but let me kind of comment back on that. We have seen that UC is being adopted more rapidly in Europe and then secondarily in Asia as a whole. Now some parts of Asia-Pacific are ahead of Europe. But nonetheless, I think that they've got a little bit of more of that boost. And I would say that Asia-Pacific has benefited from emerging markets growth, which have gotten much higher GDP growth overall. So I would say that the systemic inherent growth rates have been higher in those regions than it had been in the U.S. I didn't view it as the U.S. underperforming.

Barbara V. Scherer

Yes. I mean our largest dollar growth in OCC year-over-year was in the U.S. And far and away the largest dollar growth sequentially in OCC was in the U.S. You might have picked up on that perspective about the U.S. related to our comments about the mobile market, where in the mobile market, year-over-year, we're up plus 3%. But within that, we had strong growth in EMEA and Asia-Pac, also Latin America and Brazil, and then it was offset by declines in the U.S. But that comment was very limited to the mobile market.

Operator

Your next question comes from the line of Tavis McCourt with Morgan Keegan.

Tavis C. McCourt - Morgan Keegan & Company, Inc., Research Division

Barbara and Ken, couple of follow-ups, and I apologize if you've covered this on the early part of the call. I missed some of it. But, Barbara, I think you said, as part of the guidance, you expect operating expenses to be roughly flat year-over-year, which I think if my model is right, would also mean they are roughly flat, if not down a bit sequentially. Is that correct? And then there normally is kind of some seasonality in the selling expenses as well in December?

Barbara V. Scherer

Yes. So it would be about flat versus a year ago, we're thinking, and that would translate to actually down a bit sequentially. And that is because we did take some management action to defer hiring and to actually cut some discretionary expenses, things like travel and training and entertainment in some areas that we could -- some expenditures we could as easily make at a later time that aren't critical right now. So we went through and we trimmed out that type of spending.

Tavis C. McCourt - Morgan Keegan & Company, Inc., Research Division

Got you. And then in terms of the foreign currency impact on your business, remind me, do you hedge at all? In other words, if there was a big shift in the euro-dollar, whether it ended up being a benefit or a hindrance to your earnings or revenues, do you feel it that quarter? Or is there a lagged impact because of the hedging?

Barbara V. Scherer

Yes, there's a lag impact because of the hedging. So we hedge the revenues out a year in advance, so we do it one month at a time. So we do it, a hedge. So right now, we're basically hedged through this time next year. And their cost is collar, so there's a floor and the ceiling. So if we look at -- and then we have a natural hedge in the form of euro-denominated expenses and pound-denominated expenses. So when we look at potentially very large movements that are sustained, we actually pick up a lot of benefit on the OpEx because eventually the hedges will normalize, but it is lagged. So revenue would decline, costs would stay about the same, gross margin would decline, but OpEx would decline. And it doesn't have as dramatic an impact even once it comes to pass, but it does have an impact...

Tavis C. McCourt - Morgan Keegan & Company, Inc., Research Division

It's all with a one year lag basically.

Barbara V. Scherer

And certainly it will be pushed out quite a bit in time.

Tavis C. McCourt - Morgan Keegan & Company, Inc., Research Division

Yes. And then I know you finished the quarter with 1.5 million shares left on the repurchase program. How many shares did you actually purchase in the quarter?

Greg Klaben

3 million shares repurchased.

Tavis C. McCourt - Morgan Keegan & Company, Inc., Research Division

3 million, Greg, was that?

Greg Klaben

Yes.

Barbara V. Scherer

Yes, the 3 million -- and I believe all the components of that include the delivery of the shares under the -- the second delivery under the ASR from the first program, the delivery from the ASR we announced in August and the open-market repurchases. And the sum of all those come to that number.

Tavis C. McCourt - Morgan Keegan & Company, Inc., Research Division

And I saw on the balance sheet there was a little drawdown from the line of credit. Does that mean that the cash that's left on the balance sheet is largely overseas at this point?

Barbara V. Scherer

Yes. So our domestic cash at the end of the quarter was $17.7 million. And actually, as of today, our line of credit is up to $26.5 million. And I expect over this quarter that we should hit the peak on our borrowing, under the line of credit, probably in the neighborhood of $55 million to $60 million, maintaining a small domestic cash balance. Those have the right under that line of credit to ask for it to be increased up to a total of $200 million.

Operator

We have a follow-up question from the line of John Bright with Avondale Partners.

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

Well, I'll follow on to Tavis's question. On the line of credit, Barbara, what's the interest rate on the line of credit?

Barbara V. Scherer

I should know that off the top of my head, and I actually don't. It's LIBOR plus a very small markup. It's very, very low, but I don't actually remember the rates, so I'll get back to you.

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

That's fine. And then I'll stay with that line of questions. Has there been any discussion or thought along the board about the use of cash, particularly the large balance overseas in the next FY year?

S. Kenneth Kannappan

Well, there has been quite a bit of discussion. We're expecting to revisit that with the board as we approach the end of the fiscal year and the conclusion of this repurchase activity. And again, that discussion not having happened yet, there will be an updated set of stock prices, financial conditions, outlook and all that kind of stuff. I don't want to preview it too much. I will tell you though that the board has generally been in the view of not to repatriate overseas cash absent the events of a tax holiday or something like in the hopes that such a holiday will actually arise.

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

Okay. And then 2 final questions. One, is there a typical order pattern for OCC in the December quarter?

S. Kenneth Kannappan

Yes. The -- this -- the December quarter, we normally see a very good October. It stays fairly good, I would say, through November and getting very close to Christmas, in fact. There's, of course, a little bit of weakening around Thanksgiving, where you lose what amounts to kind of 2.5 days for the holiday. There is usually a slight tapering just before Christmas. But then it just comes to something very close to a standstill from Christmas through New Year, so when we get very, very little business.

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

Final question. Ken, strategically, when I look at R&D, where are you, if you would characterize it this way, overspending in R&D right now? And where do you see the opportunities exist for more R&D spending in your business model today?

S. Kenneth Kannappan

Well, I think that -- couple of comments on that. First, of course, we're spending largely the way that we intended to. So I would say that where we're overspending, we're still early in our improvement and maturity fitting our new business. So while we've hired some really outstanding talents. Joe Burton who has come on board as our CTO and SVP of Development. This is an organization that has longtime roots in, say, hardware, acoustics, engineering, excellence of business and some of the new areas in software, firmware and so forth. We could have, in hindsight, done a number of things better from our original architecture to how well we implemented audio and made a test of the software to enhance the efficiency with which we developed code and those things. So I think we still have an opportunity to improve the efficiency and effectiveness of a number of the things that we are doing in the organization. And it's not so much any areas. It's kind of the general opportunity for improvement. I think that what we are on the brink of, okay, is I think a very fundamental strategic change where we have got incredibly valuable information about the state. And I mentioned that before with sensors, understanding whether somebody has something on or not and being able to turn that into context about what somebody is doing, what they want to do and thereby enabling communication systems to be more effective, to allow somebody themselves to do complex things more easily, more intuitively, is a very, very rich and fertile space. It's all these conferences you will see that context and contextualized communications is becoming a very, very hot topic. I think we're on the leadership edge of that. And I think that it is a embryonic space for us in terms of adding more and more value.

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

If I simplify that and say it's more software versus the hardware DNA?

S. Kenneth Kannappan

Yes, I mean we're -- and I would say and related to that, what you see is that we've been improving our platform to increase efficiency and hardware but can improve that as well, because as you're adding more and more value on the software side, that gives you greater potential to reduce some of the total number of hardware platforms that we've got deployed.

Operator

And there are no additional questions in queue at this time.

Barbara V. Scherer

Let me just come back on the question on the rate. It's LIBOR plus 1.1 points. There are a couple of options. The cheapest one tends to be the one-month LIBOR, so our all-in rate is running around 1.35% right now.

S. Kenneth Kannappan

Thank you very much for joining us on the call. As always, we're available if you have any further questions. I appreciate your time.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.

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