Plantronics, Inc. Wall Street Analyst Forum Transcript

Mar.27.08 | About: Plantronics Inc. (PLT)

Plantronics Inc. (NYSE:PLT)

Wall Street Analyst Forum

March 27, 2008 12:30 pm ET

Executives

Greg Klaben - VP of IR

Helen Baud - Wall Street Analyst Forum

Helen Baud

The next company we have today is Plantronics Incorporated. Plantronics introduced the first lightweight communications headsets in 1962, and is today the world's leading designer, manufacturer and marketer of lightweight communications headsets products. Plantronics headsets are widely used in many Fortune 500 corporations and have been featured in numerous films and high profile events, including the historic One Small Set for Man Transmission from The Moon in 1969.

Plantronics offers mobile headset to address the cordless and mobile phone market, next generation computer audio headset products for computer applications, and cordless headsets and systems for the office, small office, home office and contact centers.

Plantronics is a publicly held company on the New York Stock Exchange, headquartered in Santa Cruz, California, with offices in 20 countries, including major facilities in Mexico, China, Tennessee, England and the Netherlands. Plantronics products are sold and supported through a worldwide network of authorized Plantronics partners and are available through retail and consumer electronic stores.

Presenting for us this afternoon is Greg Klaben, the Vice President of the Investor Relations.

Greg Klaben

Good afternoon. Thanks for joining us today. It's a pleasure to be able to present in this group. Before I get started, I would like to remind you that there are certain forward-looking statements in our presentation today. So those statements include certain risks and uncertainties I ask you to refer to our recent SEC filings, 10-Ks and 10-Qs, for a list (inaudible).

I would also like to remind you that we reported our third quarter fiscal 2008 results for the December quarter on January 23rd, and then all comments based on current market conditions are as of that date. We have a policy of not updating guidance or business conditions into a quarter, so please keep that in mind.

As Helen mentioned during the introduction, Plantronics has been carrying mission critical messages since 1962 and those famous words 'One small step for man, one giant leap for mankind' went with the first mission to the moon in 1969. That message was carried via a Plantronics headset, and since then we have been delivering millions and millions of messages to our key customer segments. And we've evolved quite significantly since then. We have grown from a business that [dissolved] in the early 90s, when we went public again, delivering headsets for contact centers. Since then, our business has changed quite dramatically so that we've moved from the contact center to the office. We've evolved into the music segment, which was 16% of our revenue, and then mobile, PC and other areas. I am skipping with this slide, and we are going to jump back for a second.

If you forget everything (inaudible), but three key points to take away are: One, Plantronics offers exceptional products for key markets. Second, our core business performed extremely well in calendar 2007. And third, we're making concrete progress in the turnaround of our entertainment division.

My objective today is to review our key businesses and product offerings and why we're optimistic about our long-term competitive position, and we believe our current market position, and our product offerings, our product pipeline are the strongest they've ever been for our core business, and what we call the Audio Communications Group.

Our second business, Audio Entertainment Group, was created with the acquisition of Altec Lansing in August of 2005. Shortly after that acquisition, significant competition entered the market, ultimately resulting in lower profitability for the division. As a result, over the past year, we've been implementing a number of strategic actions to return the division to profitability, which would be significantly accretive to earnings in the forward period. So, those are the key points, and what I think are most important about the company's story today.

We have evolved and moved our headset expertise beyond the contact center for large corporations into the office, and into new categories as well. I'm going to cover that in greater detail now. The key competitive differentiators we have in our product, that make our products exceptional are sound, style and simplicity, and to look at these in greater detail, first let's start with design.

We have huge expertise and long history of offering superb design, and we do lot of industrial design in our Santa Cruz industrial design unit, lead by the person on this Slide, Darrin Caddes, who came from BMW. He has built a world class team of about 18 industrial designers that come from the most prestigious brands including Fiat, Nike, Nokia, Motorola and BMW, and they really are in touch with consumers' desires and needs, as you could see on this slide with some of the product offerings we have today. So design is one of the key competitive differentiators.

Second, is the world class sound. Of course, with headsets we want to make sure that the transmit and receive functions are superb, and we try and deliver an experience that allows the user and receiver not to know they are actually on a headset. So we have 40 years experience in doing analytical and psycho-acoustic sound work. We've an expertise in human factors and engineers. So we have this, you could turn the slide a wall of ears, where we make sure that we are designing our headsets, so that they function properly to transmit sounds into the ear.

We've a membership on the International Acoustics Board and we have mission critical development [states filled] for NASA, all the FAA controllers in the United States use our headsets. The Military, all 911 contact centers in the U.S. use our headsets, and the New York Stock Exchange. So, we are by far the leading premium brand and we deliver an experience second to none. We also have a number of patents that differentiate ourselves in the competition, over 550 patents.

The third key differentiator in Plantronics product offering is simplicity. We try and make our products easy-to-use and easy-to-install. So on this slide, you can see in the upper left, we have a one of our headsets that is plug in place for VoIP, so you can put a dongle in your laptop, you can talk using the same headset on our cell phone, as you can with the computer. We have a new product coming out at the center of this slide called the Discovery 925, and that's the first headset that we have targeting women. It fits in this little lipstick case, but we have developed a case that actually charges the headsets, so you don't need a power, sort of an external power supply for a week or two with that case, depending on your talk time. It's also going to be coming in a lot of different colors. So we are very excited about that product.

The product below, that is one that will charge in your car and the right product there, the Voyager 520, it's a VoIP product also, and it will work with your cell phone. As soon as you turn on these products, they automatically go to synching modes, so that they will sync up with your cell phone. So having products that are easy to use, easy to sell for both mobile and for the office are something we strive for.

Looking at out key market which is the Audio Communications Group, the 10 year current annual growth rate for this businesses has been about 13%, and the different sectors we sell to here are gaming, office, contact center, mobile and specialty and by far, it's 84% of our overall revenue. And it’s a business, as I mentioned at the start, it has been performing very well, our competitive position has been very good. It's a key profit center for the company. The margins have been very consistent, and I'll show you shortly.

We consistently gained market share against our key competitor in this market over the past six years and our current product line and our product pipeline, we believe, are both very strong.

We also have the potential to improve our cost efficiencies in this business, to improve margins and our key objective and something we have been working on for a while now, is to grow headset usage and converge into wireless products and (inaudible). I don't know, do many of you use headsets in the office today? I can tell you, when we give out a sample or when someone gets it for the first time, they just can't believe that they have been without one for so long. Just that action of holding the telephone receiver to your ear or mobile, that will change once you realize that it's so much more clear, convenient, ergonomically correct to use a headset versus holding the handset or the phone to your ear.

So here is the chart of three years performance in the Audio Communications Group. The growth has been very steady. We've been growing a little bit stronger in the mobile business, and we are very pleased with that. We have a gaming/computer division that's gone up a little bit. But for the most part of this business, there has been very steady growth and competitively, we've been doing very well.

A look at the margin structure for the Audio Communications Group. These are non-GAAP margins. We've been operating within the target gross margin range of 45% to 48%. The target operating margin range is 18% to 20%, and we have fit on that very recently, but there is an opportunity to improve that as well. I am going to cover that in a little bit as well. But for the most part, it has been pretty consistent and improving, despite the fact that wireless headsets, either for mobile phones or for office, generally carry a lower gross margin than corded headsets. The mix has been shifting to wireless, but we've been able to increase our product margins at the same time through a number of different efficiencies.

This slide is interesting. Based on our research, we found that only 7% of U.S. office workers, approximately 82 million are using a headset today. That's 93% that aren't, and even if we got a 20% penetration, we think it's just a tremendous opportunity.

The things we are doing to increase the usage in the office include marketing to increase the adoption, rate familiarity with the products, and how office workers overcome the obstacles that they see today, which are the products that are hard to use. They won't sound good, or they are hard to setup and all of those aren't true, and we were marketing to overcome those thoughts.

Second is upgrading existing users. A large part of our install bases today are office workers using corded headsets and in November of 2003 we came up with our first wireless products. And so, we are working to upgrade that install base through wireless products, and we also have some solutions for telecommuters that I will cover in a second. So here is this chart to pick the 82 million office workers in United States. If we were to get to 20% penetration, then it's a multibillion dollar U.S. revenue opportunity, and that's not to mention opportunities that we have outside the United States. The green people on this chart represent the 7% that have headsets today. The orange people, which is two times the size of our install base, represents the opportunity of extremely or very interested office workers, that want to get one, and the third group is somewhat interested. So there is an opportunity to get to a 50% penetration. We are aiming for something a lot lower in the short term, but we think there is an opportunity to increase usage in the office and there is many different ways we are trying to do it. Besides marketing there is viral marketing program that we are trying to do. We are trying to encourage more fleet sales, our human resources department; our IT department would automatically provide a headset as soon as an employee starts for the company.

Here is a look at some of the premium prices we are providing today. The first set of wireless products are at the bottom of this slide. The CS50 and CS55, those were introduced in late 1993. We came out with a new line of products, the CS70, about a year ago. Those are performing very well and gets incredible reviews. And then the upper left one is actually a Bluetooth headset, that works in the office, but it also syncs with your cell phone. The only drawback is that a Bluetooth technology in office only works about 33 feet from where your phone is located. The other products here use a technology called DECT 6.0, which allows you the roam about 300 feet from your headsets. You could go to the printer, you could do a filing, and you could be typing on your computer, all these products have noise cancellation, so it can meet a very noisy cube environment and they work very well. And they are very comfortable, light weight, and they really exude the characteristics with style, simplicity and sound that we are trying incorporate in our products.

This next product is one that targets the home office workers. There is about 32 million office workers in United States today, that work two to three days at least out of their home office. This product is called the Calisto Pro. What it does is that, it is an integrated telephone that allows you to answer landline, VoIP, and mobile calls that has connectors for landline and VoIP. The headset will sync with your cell phone, so you really have one device to carry around. Again with this product, you can wander about 300 feet from the base, you can answer calls coming from multiple sources with one product, and this product stays carried, it carries the Best Buy Office Max, Office Depot staple. There is nothing else like it on the market today. It has gotten incredible reviews. We are very pleased with it, and it's just starting to get more in mass distribution, sells for about $249.

Now I am going to turn to the mobile portion of our Audio Communications Group. Key points here, the product line is competitive and our pipeline is also very strong for this division. We've made significant gains in market share over the past two years and that's despite intense price competition from the likes of Motorola, and other vendors in the market. The division is profitable on a non-allocated basis. Factories' profitable and it has a positive direct operating margin, but with (inaudible) allocated, it's not profitable. And I don' think there are any Bluetooth headset vendors that are profitable. It's a very competitive market there. There is intense price competition, but we really paved the way to a number one slot and all others lie [supporting] the second.

The long-term growth prospects remain healthy and we are one of the few manufacturers that manufacture our own headsets. We have a plant in China, where we do that, it's about two and a half years, we are only about 30% utilization today. But as we increase volumes, the lines should become more profitable for us.

Here is a look at some of recent products we've introduced in the Bluetooth headsets, in the past few months. The one of the bottom left is the Voyager 520, that was released in December, got PC Magazine's Editor's Choice Awards. The Voyager 855 next to that, is one that received the Best in Bluetooth Award at the Consumer Electronics Show, Bluetooth Special Interest Group. Beat out all the competition in the market, we are very pleased with that as well. That's the first headset that is convertible. It allows you to not only carrying a telephone conversation, but more and more cell phones have music capabilities on it, if anyone has a Blackberry Curve, you can listen to your music. This has this added-in clip, a bud for your other ear, so you can listen to your music in a stereo mode.

So, we are very pleased with those products. Those products in fact were designed in our China manufacturing plants. The upper right product is the Explorer 370, which is the first product approved for military use. Its very water, dust and dirt resistant. You can actually be riding a bicycle on 20-mile an hour winds, and it will black out the wind noise, so you can carry on a conversation in very windy environments. There is no other product like that in the market today.

So we are very pleased with the progress we've made in gaining share in the U.S. retail market. So the two primary ways we sell in the U.S. are through carrier stores, we have relationships with AT&T or Verizon, where we sell in known stores. Where sometimes the headsets are bundled with those phones. We also sell in retail, and retail has been an area where we've been very successful over the past year.

We virtually or actually doubled our market share in U.S. retail sell-through from February '07 to February '08, and this is the data we just [draw through] tracking. So this is collected by third party, NPD Intellect, which measures point-of-sales, it doesn't include Wal-Marts. But we have moved against competitors like Motorola, Jabra, and then all of the other vendors who are at the top of this. So we have moved to a 36% share. We are very pleased with our progress there. We think there are opportunities to extend this, outside the U.S. Our brand is very well known in the U.S. and Europe. In the rest of the world, it's not as well known. Our share position in Europe is probably number seven or eight. It's nowhere near this, so we do have an opportunity to increase our brand awareness in Europe. And again the competitive differentiator is that we are at the higher end price point in the market. Motorola is down at the low end with price points of $29 to $39, we are much higher. Our most expense is $149. We have a sweet spot in the market of closer to $59 to $79.

So consumers, we believe, are just trying to become aware of the differences. Usually in the past, it was, that you buy a handset and you get a Motorola headset, or some other headset bundled with it, when you bought it. Consumers say, we believe are understating the differences in sound, quality and performance. And so the fact that, more of our sales we've done through retail, we are also gaining more share in retail. It points to the fact that we are very competitive there.

Unidentified Audience Member

I didn't hear who you said the competitors were?

Greg Klaben

It's Motorola, Jabra and Aliph, which makes the Jawbone headset and then there is a whole host, Nokia and Samsung, dozens of other competitors in the Bluetooth area. So looking at the --

Unidentified Audience Member

(Question Inaudible).

Greg Klaben

The question was, among other competitors in the Bluetooth market, who's growing the fastest? You know, it's hard to say. [We are not able to] reveal that database, and what we're provided by NPD Intellect. But I think Aliph was one growing quickly, when it came out with a very unique product with a Jawbone. I think users, were thinking that in a way that it wasn't very functional in very windy environments. And we've won some awards, we have beaten them at the CES and PC Magazine's Editor's Choice. So we're very pleased with our products and there haven't been any other fast and upcoming competitors.

In terms of the market, I think there's slow consolidation taking place. There used to be a lot of new vendors coming to market. We're seeing fewer of those, but there are still a lot out there, there's probably more consolidation in the works.

But in terms of the underlying fundamentals. Actually since the handset market is expected to flatten out by 2012 or 2009. But what's growing there, the top portion of this is handsets that are enabled with Bluetooth functionality. That growth is very healthy, and by 2012, 68% of cell phones will have Bluetooth enabled on them, and that's by a group called Strategy Analytics.

Now this group has also measured the growth of headsets with cell phones, and that is lot healthier with something like comparing a growth rate of 15% through 2012. We've been growing faster than that in the short term. One thing that's changing is stereo Bluetooth components. So, people that want to listen to conversation or music on both ears and we have a good offering there today, and we're continuing to invest in that market.

Unidentified Audience Member

(Question Inaudible).

Greg Klaben

The question was, is the 15% in units or dollars and it's in dollars.

Unidentified Audience Member

(Question Inaudible).

Greg Klaben

The question was, how are we fast growing, how have we been still growing our retail presence of Bluetooth headsets this February versus last year and there is the continual trend over the past year. It's purely through offering superb products and word of mouth. We don't spend, we've spend almost nothing on media advertising here. It's very hard for a company of our size, small cap company to really breakout in the advertising world. So we rely on viral marketing methods. We rely on bloggers that write about our products, and sometime, the reviews we've gotten from -- if you look at any of our products. User reviews on Amazon or editorial views on the products, you will see that we rank consistently among the top. We put a lot of testing in, we've a long history of sound experience and I think consumers are starting to understand that we have better products.

We haven't been relying on carrier sales. I think what really underlies these trends of the business, is the fact that in retail, where we don't have a lot of promotion, we do some end cap displays. We've really broken out against the competition.

Unidentified Audience Member

(Question Inaudible).

Greg Klaben

Sorry, what was the question?

Unidentified Audience Member

(Question Inaudible).

Greg Klaben

The question was our second competitor, the Motorola headset, they've fallen from number one to number two, and they've fallen quite a bit. That competitor is Motorola. They were very reliant on handset sales to drive headset sales and sometimes they may give away headset free and diminish the value of it, or they use the headset to drive a handset sale. So we've consistently rank, our products specifically rank better than theirs. And I think that it's a function of their loss share in the handset space, that's diminished their position in the headset space.

Unidentified Audience Member

(Question Inaudible).

Greg Klaben

The question was the (inaudible), we will take any share from any particular retailer and they have been really tied into the carrier cell. So they didn't have a strong retail presence. They somewhat have won, but it wasn't particularly strong. And now, as products have to stand on their own in the retail environment, our products stand out a bit more.

So getting the Bluetooth business to profitability. As I mentioned earlier, the business by itself without open unallocated to it is profitable. But we expect to continue market share gains. We've made significant progress over the past two years, where we were a no name in the space, to now number one in retail very recently. As we utilize our China manufacturing plants, we observe overhead a lot better. We are continuing to invest in offshore R&D. So the new products I mentioned earlier, those were actually developed in our China plant. We are doing more and more R&D offshore. And then focusing on a narrow product line with more home run products and using components so we can build up coming platforms. But we are one of the few manufacturers that has an own or few headset vendors that has their own manufacturing plant. Everyone else, Motorola and Jabra outsource their manufacturing. We believe that gives us competitive advantage.

Unidentified Audience Member

(Question Inaudible).

Greg Klaben

Being able to monitor the quality of our growing product, everything is tested. We do it at a lower cost than outsourcing. We've done the analysis and it's cheap for us to manufacture than using a huge contract manufacturer. So we've talked about 84% of the revenues, now I am going to move to the Audio Entertainment Group. This gets a lot of attention by Wall Street, because it has been underperforming since the acquisition. It represents about 16% of our revenues and our primarily sells speakers and docking stations for iPods or desktop PCs. It was $36.9 million of revenue in the December quarter. But the key point is that we are in a turnaround phase right now.

We are very confident, we've been making concrete progress in the turnaround. We've been losing lot of money. In fiscal '07, it cost us approximately $0.42 in earnings per share. We expect to be breakeven and this is the guidance we have given in the last call on January 23rd of this year, breakeven by this December.

So, it's hugely accretive to earnings to get back. But we think, fundamentally, we have a very strong product brand. We have great distribution, the products rate and review very well. They issue had been that after the acquisition, we saw a huge number of competitors come to market and aggressively bring down prices in docking stations for iPods. And so it includes Bose and Logitech and Apple, we are still rated as the top product today. But we were surprised with the extent and the intensity of the price competition, when competition came to market.

So, we are in the middle of the turnaround now, but we are confident we are making solid progress. The key milestones for the turnaround are around our product refresh. So we have a series of new products coming out in the Altec line this fall, and we believe this will be moving significantly towards that goal of breakeven. We started doing consumer research last July-August. We have incorporated that into new designer products, using our own industrial design in Santa Cruz, we now have three full time designers focused exclusively on Altec products. And the prototypes we showed very recently under non-disclosure, at the Consumer Electronics Show, exhibited extremely well with buyers at the show. So we are confident we are hitting on the milestones.

Management of the division changed in October 2007. We hired Vicki Marion who was previously the CEO of a company called Jabra, she sold that to GN Netcom. She is known as a turnaround expert. The new management has been performing well. We did do a restructuring in December as well to bring down the cost structure. In this division, we decided to outsource manufacturing to improve our cost structure and that's been going very well and the long term growth prospects for this business look very healthy for us.

So, here are some of the products we've come out with recently. It is not the new product line for this fall, but we have the first iPhone docking station in the market. It's featured today on Apple's website. It's in all of their stores, it's selling well in other venues besides Apple stores. And it's gotten great reviews. So it's the only docking station where you can dock an iPhone. If you get a phone call, it will turn off the sound, you can answer the phone and it's a thoroughly shielded unit, unlike a lot of previous units.

The one in the middle here, the IM600, has been one of the best selling docking stations in calendar 2007. It's still doing very well, and then we some other products for the Microsoft Zune, the Sansa XM Satellite Radio and Sirius Satellite Radio. So we are starting with some of the new products, but business will fundamentally turn when we come out with some of the new products and we will have a better sense of that this July and August.

So the revenue here, it peaked shortly after the acquisition in December 2005. The docking audio is the bottom part, the blue section of the chart is PC Audio. We've started to make a bit of resurgence in the last three quarters with some of the new products, but there is still a long way to go and a lot of market share to recapture. What's really gotten hurt is in order to keep our shelf space, we had to significantly discount product and so the good news is that retailers like Best Buy, we are still rated the Best Partner and we still have great brand presence and a good distribution channel with them. But the bad news is as you can see from the chart, our gross margins actually went negative in June 2007, as we offered price protection to retailers. Operating margin was minus 50%, we were losing in the order of $10 million a quarter. Then we have eliminated some products since then, we've introduced some other products, we've changed the management and so we are starting to see a recovery here. But there is still a long way to go to the target range for this group as a 5% to 10% operating margin and 30% to 35% gross margin target.

So those are the highlights from the major business unit. I am going to just go quickly through some of the financials before I open it up to Q&A. We do have handouts with all of these charts and the financials, you can review in greater detail if you like. So I started out by saying, we had a great quarter in December with our core business and we are starting to see a turnaround in our Altec business, and so we did a record quarterly revenue of $232.8 million, it was up 8% from the same quarter the previous year. Earnings per share of $0.50 and the March guidance, which is seasonally normally down, was revenue guidance of $195 million to $205 million. This suggests flat to slightly up revenue from the previous quarter, and we did say in our call that we built in expectations of continued deterioration of North American markets, given recessionary concerns.

The operating income improved in the two business groups in December, and our non-GAAP operating margin was 12.9%, the highest in two years. We had solid growth in North America and Latin America, and both office wireless and mobile Bluetooth grew by approximately 15%.

Our cash position is very healthy. We have not debt on the balance sheet. Our cash position was $170 million or roughly $3.40 per share. And our cash flow from operations reverse was over $32 million in the quarter and $120 million in the past 12 months.

We have been generating cash consistently over the past couple of years. We also announced the share repurchase after we announced our results. Our shares kind of fell with a lot of other peers in the group and so part of that fell to dilution and believing that the shares were attractive, we announced a $1 million share repurchase program.

Overall for the company, we're going to look to at the both divisions in the consolidated margins and how we have room for improvement. So the target range gross margin is 42% to 45%, we're just below that today and operating margin, we have room for improvement, the primary reason to get back in way -- the opportunity to get back in the chartered range is through the turnaround of Altec Lansing, there are some other things as well.

Focusing on what we call transformation costs in the factory reducing the cost that is to turn the raw material into a finished product. We have a major supply chain reengineering product and project underway. We have hired, approximately six to nine months ago, Larry Wuerz, who was in charge of operations at Hewlett-Packard. He has come on board and he believes that we have opportunity to improve our product margin and manufacturing margins.

And also we're developing new platform, so that we use fewer components and it's helped the overall costs of the product. And having a manufacturing plant in China for our Bluetooth product helps on the component cost that's been there. I mentioned about two, two and half years, in Mexico we manufacture a lot of our business products.

So in terms of R&D, we're back in the range now 6% to 8% of revenues being spent on R&D. And there is an opportunity to get lower in the range here as a result doing more engineering and design offshore, which we have been doing and investing more in offshore R&D engineers. Our R&D headcount has gone up dramatically in China and Mexico as a result of this, so this is bringing our overall R&D costs down. So we mentioned, we've put design centers in the factories, who are working on common platforms. Overall we expect R&D to grow at a slower rate than revenue.

SG&A is also within the target range. But there is room for improvement here as well. Overall, we expect these expenses to grow at a slower rate than revenue, we are targeting that going forward. And then again the AEG turnaround, so corporate objectives for fiscal year '09 and '10 is first; increased adoption of wireless headsets in the office through continued investment in new products and marketing campaigns.

Second, upgrade our existing customers with compelling performance enhancement. Lot of them are imported products to wireless, and then upgrading in general, with all the wireless product to newer one. We are aiming to continue to expand our market share in the U.S. and the rest of the world and improve our profitability in Bluetooth mobile, improve the overall cost efficiency and then the Altec Lansing is probably the best opportunity to increase earnings per share in the shorter term.

So in summary, the ACG division, 84% of revenue is doing well very competitively. Its gaining share and we have been incorporating cost efficiencies into the model. AEG milestones are being met, that's Altec Lansing, and we are confident we could return to long term operating model. And overall, the long-term growth opportunities appear to be very healthy.

Just in closing, if you don't already have one of our products, I encourage you try one of the exceptional products and experience it first hand, how great they are and you will be wondering why you have been and performing so long without them for a while.

So with that I'll open up to questions. Yeah.

Question-and-Answer Session

Unidentified Audience Member

(Question Inaudible).

Greg Klaben

The question was, how much of the office and I will cover contact center sales, corded versus cordless, and why is the gross margin lower on the wireless product?

So, overall, office and contact center is about a 50-50 split between wireless and corded products. The contact center, those sales are predominantly corded, because in contact centers, they're more cost sensitive. The products might sell for an average of $150 to $200, and they like the person to stay where they are and not wander around.

In the office, the sales are more heavily weighted towards wireless products. People like the freedom to leave their cube, walk around the building and as I mentioned, walk up to a football field away and still answer your phones remotely. With crystal clear clarity and no one will be able to tell you're on a handset, especially noisy cubicle environments, where there's high degree of noise cancellation built in.

And then in terms of the gross margins for each of the lines. The gross margin of corded products approaches 70%. Gross margin of wireless products is about 12 points lower than that. The key reason is that the wireless products have chipsets built in for the transmitter, to see if their battery is built into the headset. So the component costs are a lot higher and there's more R&D associated with that.

But the good news is the gap between the two has been narrowing consistently over the past couple of years where it was a much wider gap, and overall, despite the fact that wireless is increasing as a percent of revenue consistently, we've brought up the margins and actually a wireless product sale has more gross profit dollars associated with it, than a corded product.

So average wireless product might sell close to $300 to $350 versus much lower price in the quote or product. So we like the wireless product sales. Yes.

Unidentified Audience Member

(Question Inaudible)

Greg Klaben

Question was when we do the annual impairment test in Altec Lansing and have we ever done written any of that down? The answer is we haven’t run anything down. We do it typically at the end of our fiscal year. I think twice last year we did it after we reported our quarter normally, and then I think we did it again in July, August timeframe. So we'll do it again after this quarter ends.

Unidentified Audience Member

(Question Inaudible)

Greg Klaben

Okay. The question was inventory and office contact center distributors. Do we have a goal to have it down? Inventory has been declining for both groups in the past couple of quarters. The churns went up in

Unidentified Audience Member

(Question Inaudible)

Greg Klaben

Up selling slightly higher, but I think that was just in North America. I am not sure if it represented Europe. It wasn't a material change in terms of inventory, but we generally give guideline directionally, which way it's gone.

Unidentified Audience Member

(Question Inaudible)

Greg Klaben

The question is, do we anticipate inventory going down in the March quarter. March quarter is just about to end, so I really can't comment on that. I don't think - directionally on the call we said that we did hope for it to go down as the aim, but I am not sure if it will or not.

Unidentified Audience Member

(Question Inaudible)

Greg Klaben

So the question was about the slowing we've seen in the North America in office and contact center, and just to backup at a higher level. So about 40% of our office sales are to financial service, and I had defined that broadly including real estate, banking, insurance and investment sector. So it is a pretty large group. And through December we saw two sequential declines in North America, but year-over-year growth was still up 6%. We saw a strength in Europe, India and the rest of the world to offset that, and the guidance we've given was that we expect the office and contact center could still grow this year, despite a mild recession maybe two quarter in the United States. It could still be a growth business. So it was challenging to give guidance because January is typically a very weak ordering period for us and March is heavier than that. So I can't comment on trends since then unfortunately you'll have to wait till April 29 when we have our next conference call. Yes.

Unidentified Audience Member

(Question Inaudible)

Greg Klaben

The question was the timelines for the AEG margins, and where does revenue have to be to get there. Revenue also with the second part, revenue for the division has to grow from where it is still, but not significantly, we did bring out some cost there. In the long-term objective to get there, we've said, the timelines we've put out there publicly are at December of this year of breakeven. We wouldn't be profitable for the entire year. Fiscal '010, we had expected to be profitable for the whole year and maybe the following year within the target margin of 5% to 10%. So it's progression but we've been making progress there, and we are pleased with where we are today and just a couple of quarters from the new product coming out. Does that answer your question?

Unidentified Audience Member

(Question Inaudible)

Greg Klaben

Dollar figure for breakeven. We haven't speculated it, there's too many factors on that and it's too hard to determine how the new products will weight in term of distribution. So haven't really speculated on what the solid figure has to be for breakeven.

Unidentified Audience Member

(Question Inaudible)

Greg Klaben

The products are predominantly along the lines of again docking stations, but new category for us is wireless, Whole Home Audio. One of the products I had shown earlier was, a set of speakers for flat panel displays. A much higher price point than we have been at. A pair of them is closer to a $1000, and its well above our historical price points in the group. So things that you can, we showed one product let see that's where you put your iPod in a dock and you can hang 100 watts speakers throughout your home up to a 100 feet away at a affordable price point. I think you said that, it's going to about $349 or $399. So wireless whole home is a big opportunity to see there, as well as uniquely and sufficiently differentiated docking stations. Yes.

Unidentified Audience Member

( Question Inaudible)

Greg Klaben

Question was about the repurchase announcement in January, how much we've bought back. It's very unfortunate I can't report mid-quarter. We’ll report that after the quarter ends.

Unidentified Audience Member

(Question Inaudible)

Greg Klaben

I can confirm that we've been in the market. Yes.

Unidentified Audience Member

(Question Inaudible)

Greg Klaben

The question was in the Altec side. Have we cleared out a lot of the obsolete product inventory, and do we have reduced price protection risk. We absolutely think a majority of that's behind us. More of the products selling today are newer products. We have eliminated a lot of obsolete inventory and so we are in a pretty good position there in terms of where we would like to be.

Unidentified Audience Member

(Question Inaudible)

Greg Klaben

The question was how do we plan to take on the new product inventory? There is a recession and that forces pressure on the pricing. I wish I could show some of the products. The buyers' reaction to them how competitive they were was very strong. We think we are coming out with a very good competitive offerings at the respective prices. The goal, of course, is to never have to protect against price. Once we've put them in the market, we think these are sufficiently renewed that's much different from the older set of products that we won't have to do that. But there is so many variables in recession, I wouldn’t want to speculate. Thank you very much for having me today. There will be a breakout right after this.

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