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Plantronics, Inc., (NYSE:PLT)

Q4 2006 Earnings Conference Call

May 2, 2006, 5:00 p.m. EST

Executives:

Ken Kannappan, President and CEO

Barbara Scherer, Senior Vice President and CFO

Jon Alvarado, Treasurer and Director of Investor Relations

Greg Tyrrell, Finance Director EMEA

Beau Wilson, Manager of Budget & Planning, IR

Analysts:

Daryl Armstrong, Citigroup

Jason Ader, Thomas Weisel Partners

John F. Bright, Avondale Partners

Sophia, Robert W. Baird & Co

Amy Lamb, JP Morgan

Manny Recarey, Kaufman Brothers

Ted Chung, Bear Stearns

Unidentified Analyst

Operator

Good afternoon, my name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Plantronics Fourth Quarter Fiscal Year 2006 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time simply press “*” then the number “1” on your telephone keypad. If you would like to withdraw your question, press the “#” key. At this time, I would like to turn the call over to Mr. Ken Kannappan, President and CEO of Plantronics. Sir, you may begin your conference.

Ken Kannappan, President and CEO

Thank you Melissa. Good afternoon and thank you for attending our conference call. On the line with me are Barbara Scherer, our Chief Financial Officer; Jon Alvarado, our Treasurer and Director of Investor Relations; other members of our Finance and IR team, Beau Wilson and Greg Tyrrell in Europe.

The agenda we will follow today is that I’ll give a quick synopsis of our results, which you should have all received by now, and a business plan overview and update, and I’ll turn the call over to Barbara to go through the financial results. Following that portion of the call we’ll open it up to Q&A. I want to remind you that during the course of the conference call we may make certain forward-looking statements that are subject to risk and uncertainties. As we have highlighted before, the risk factors especially in these filings are not standard boiler plate. We do 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 perceive. We believe forecasting our results of operations is becoming increasingly difficult as our business becomes more volatile 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 including demands overall, mix and margin of our products that are difficult to forecast, inventory maybe high or low in a particular quarter and it’s difficult to properly gauge. These difficulties are exacerbated in periods such as the present where a significant portion of our revenue is derived from new products and forecasting volume production are even more uncertain. The market price of our common stock could fluctuate substantially due to those and other unforeseen factors. For further information, please refer to the company’s Forms 10-K, 10-Q, annual report, recent press releases, other SECs filings.

Fiscal year 2006 proved to be a key transition year for Plantronics. Though our profits were lower than our plan, we do think we made the right investments to position the business for long-term success. Our current market opportunities were as favorable if not more so than they’ve ever been, and we continue to hear encouraging feedback from our customers that we’re on the right track and that our products are extremely attractive.

As you probably know, growing the office wireless categories is our number one priority for sometime. It was our number one priority last fiscal year and seems to be our top priority in the coming year as well. By bringing to the market compelling new products like the Bluetooth Multipoint Voyager 510 System and investing in an integrated national branding and marketing campaign targeted off this wireless, we’re able to grow revenue in this category to over $150 million in 2006, up from $72 million in 2005. We also recognize the landmark in the fourth quarter where we shift our millionth CS50 product that has only been in the market for a little over two years.

Even with these successes, we still believe that only about 2% of the estimated 74 million people in the U.S. who use a telephone at work are now using wireless headsets. This fertile ground remains a top priority for us and can be witnessed by our recent announcement of the CS70 and SupraPlus Wireless products, both of which received rave reviews at the recent seated show in Europe.

The SupraPlus Wireless set a new record for us with $1 million bookings on the first day it became available in March. The CS70 is scheduled to start shipping in the first quarter of fiscal 2007, which is the June quarter. We are also planning to increase our total investment and demand generation targeted at Wireless Office from $11 million to approximately $19 million in fiscal 2007, although we plan to adjust the mix of spend with the goal of increasing the effectiveness of the campaign as it relates to revenue generation without compromising the positive progress made on awareness and consideration of Plantronics wireless headsets from the fiscal 2006 campaign.

Over the last year, we saw unprecedented demands for Bluetooth headsets from consumers desiring wireless freedom from their cellphone. Our award winning portfolio of Bluetooth headsets had more demand than we had expected and we suffered from supply constraints on the day the new products were available. The problem that persisted into the fourth quarter will be corrected towards the end of this quarter. Even with good demand we continue to improve upon our offerings as can be seen in our latest product announcement of the Voyager 510 SL and the Discovery 645.

The Voyager 510 SL was the first Bluetooth headset in the market to include both a noise canceling microphone and wind reduction technology for brilliant sound in moving environments. The Discovery 655 improves upon its already illustrious acclaimed predecessor by including digital signal processing for clear calls. This technological improvement coupled with its already award winning designs helped the Discovery win first place for the E-Tech award for innovation in the mobile accessory category this year at CTIA. We got nearly 200 applicants on the criteria of innovation, functionality, technological importance, implementation, overall raw factor.

Now, we are encouraged by the reception of our new Bluetooth products and are taking the necessary steps to ramp supply to meet demand and put in safety. We are still very cognizant of the margin pressure that exists in this category due to fierce competition. In 2006, we completed a significant investment in our China manufacturing facility and design center to help lower our cost of infrastructure and improve our supply chain flexibility, which we view as critical to compete effectively in this market. We’ll be ramping up the China facility over this next fiscal year and expect to be in a better cost position with greater capacity and improved supply flexibility going into the fiscal 2008.

We look to our manufacturing facility in Mexico as the model for overall excellence. Plantronics recently received the esteemed Mexico National Technology Award, which honors companies that exemplify outstanding technology development and management and continually develop new process innovations. Plantronics has proven to be a flexible, agile, and high quality manufacturer, now also performs a significant role in new product development. Plantronics is particularly adept at handling high mix variation with very short cycle times of being able to accommodate both short and long production lines. Proximity to our largest geographic markets also makes it a superior distribution point with excellent packed order capabilities.

Another key strategic investment we made last year was the $165 million acquisition of Altec Lansing which positions us well to capitalize on the convergence trend of audio and entertainment. Evidence of this convergence trend is accelerating and can be found in Strategy Analytics forecast for worldwide sales of MP3 enabled cellphones to grow to 54% compound annual growth rates from 2005 to 2010, becoming the majority of this market.

With Altec as part of our arsenal, we can now offer compelling differentiated products across the audio spectrum. As expected, the MP3 accessory market became increasingly competitive this year with new brands entering this high-growth market. In spite of the challenging market dynamics, Altec was able to outperform our expectations adding over $10 million in GAAP operating income in fiscal 2006 and over $20 million in non-GAAP operating income during this eight-month period. We are continuing to learn about the consumer audio business, in particular the relatively a new market for portable speakers for MP3 players. IDC is forecasting worldwide MP3 player shipment to grow 37% from 133 million units in 2005 from 182 million units in 2006. We believe speaker attached rates to MP3 players to be at least in the range of 9% to 15% and could be higher. As for purchase behavior in the portable speaker category, we believe that only about a third of accessories are purchased at that time of the initial mp3 player, and most portable speakers are bought for individual themselves rather than as a gift for someone else.

One major area that we need to focus on during the coming fiscal year is our overall supply chain flexibility, our fundamental cost positioning including cost of components, cost of transforming raw materials into finished goods, our logistics cost, cost targets we have set in product management, the way we design for manufacture building, and the cost for schools of support and enable decision and execution of these areas. Headsets will become the in-stream in global estimates of annual volume. Within the next few years, we’ll approach the 100s of millions. It is vital to our future that we are able to feed and thrive on these demanding and sensitive competitive high volume consumer markets, but continue to provide exceptional value to customers in mission-critical applications.

We’ve made some progress in this area, but much more remains to be done and this will probably focus not just in fiscal 2007 but continue into the fiscal 2008 as well. Our competitors in some cases are much larger with better resources than we’ve ever faced and it is likely that as the market for headsets and consumer audio solutions grows, competition will continue to get stronger.

The good news is the demand for all these products, whether it be wireless in the office, mobile Bluetooth, portable speakers or computer and gaming has just remained excellent. Our market opportunities are favorable, though the total unit profitability of certain fast growing applications, particularly Bluetooth consumer applications, is more limited. We believe that the investments we made over the last year as well as the plan we have in place for this upcoming year will enable us to resume executing a possible growth strategy during the balance of fiscal 2007. We are being committed to running this business for long-term value creation for our shareholders and appreciate your patience as we continue to transition over the coming year, preparing ourselves for these great opportunities. With that, let me turn it over to Barbara to scroll the numbers.

Barbara Scherer, Senior Vice President and CFO

Thanks Ken. Overall, the fourth quarter in fiscal 2006 was top, especially in terms of profitability at the growth margin level. Revenue growth was excellent in some categories and solid overall, but the lack of growth recorded in corded professional grade headsets for the year as a whole and a decline in the fourth quarter of that category had a noticeable negative effect on profitability. Although manufacturing efficiency improved somewhat in the ACG segment in the fourth quarter compared to the third quarter, it remains lower than a year ago. Managing inventories short of product lifecycles in our supply chain also remains a challenge as evidenced by higher provisions for excess inventories, both compared to the third quarter and the year ago quarter. We are not satisfied with the level of profitability we are achieving on our revenues, particularly in the ACG, and are focussed on improving our cost effectiveness.

In terms of revenues for ACG, some of the highlights for that, net revenues from wireless headsets of all types comprised 48% of total revenues for the quarter. Wireless Office headsets represented about 28% or $47 million, while net revenues from Bluetooth Mobile headsets represented 17% or approximately $29 million of total ACG revenues in comparison to just 8% or $11.7 million a year ago.

Compared to a year ago the 35% growth in net revenues for mobile headsets was the highest. Our OTC business grew by 14%. The strong growth rates experienced in our wireless products, i.e. Bluetooth products and products for the office market outweighed the decline in our corded business. Revenues from Bluetooth products grew approximately 144% in comparison to a year ago quarter as a result of a fleet which began shipping at the end of the fiscal quarter such as Explorer 320, Voyager 510, and Discovery 640. Within the ACG segment, domestic and international revenues increased by 15% and 14% respectively and the percent of revenues remained stable at 65% and 35% respectively.

On AEG, some of the highlights were that within the segment of portable category, which is defined as all speakers that work with portable digital players; for example, iPod or MP3 players amounted to approximately $20 million or 52% of the total. This category was down approximately 51% sequentially compared to a 39% decline in iPod shipments as reported by Apple in their March quarter earnings release. Although sales of Altec portable iPod compatible speakers declined more than iPod shipments themselves, Altec’s dollar share in the accessory market in North American Retail appears to have been fairly consistent with levels in the December quarter. The other major product categories within AEG are the powered category defined as speaker systems used for computers and other multimedia applications, headphones and headsets for use of PCs. Combined, those categories declined about 22% from the December quarter, and geographically approximately 68% of AEG’s revenues were domestic and 32% were international.

So, now on a sequential basis, consolidated quarterly revenues decreased by approximately $15.7 million with a decrease of $23.2 million from the AEG segment, and we had anticipated revenues to decline sharply in the March quarter based on Altec Lansing’s historic seasonality and the seasonality of most consumer audio companies.

Within ACG, revenues increased sequentially by $7.5 million or about 5% with virtually all the net growth coming from wireless, either for the office or for mobile Bluetooth products, offset by an unexpected decline in shipments of our professional grade corded OTC headsets of about 7% and declines in the computer and gaming category as well as at Clarity.

Our sell through tracking of the U.S. commercial distribution channel for the ACG segment indicates that sell through increased approximately 23% versus a year ago quarter and by approximately 4% sequentially, which indicates that distribution channel inventories declined. We believe that part of the decline in channel inventory is attributable to efficiency as we have a somewhat smaller number of distributors surveying a somewhat larger number of dealers in comparison to the December quarter. The distributors appear able to service the dealers on existing inventory levels. The point of sale data that we received from our U.S. commercial distributors indicates a record sell through for this quarter as a whole. Please remember that the sell through data that I just discussed is only for a portion of our revenue. It is U.S. based commercial distributors and this channel represents approximately 27% of the ACG revenues for the March quarter.

Finally I turn to gross margin, which on a blended basis was at 41.2% in the quarter with ACG at 43.1% and AEG at 32.6%. On a non-GAAP basis, gross margins were 41.7% in the quarter with AEG at 35.3%.

ACG gross margin was 43.1% compared to 50% a year ago. Relative to the year ago quarter, the principle reasons for the decline was product mix, particularly the decline in corded OTC headsets and the growth in Bluetooth headsets, and a continuation of the fiercely competitive market for Bluetooth consumer headsets, which means that net realized prices are under constant pressure. The other key factors are set out in the press release, and I would point out that the production efficiencies are still not at target levels and the efficiency losses are primarily centered on Bluetooth products. We are making some relatively small changes in tooling and design for manufacturability, which are in progress and they are expected to improve yields and reduce re-work and scrap, but they’re not yet completed and so we won’t have the benefits of those for most of this quarter.

Sequentially, ACG gross margin decreased by 3.3 points from 46.4% to 43.1%, and relative to the December quarter the key drivers for the decrease for both product mix and pricing, especially on Bluetooth products, which are the same factors in comparison to the year ago quarter.

We actually saw our volume of OCT corded products decline unexpectedly and as these are our highest margin products had a disproportionately negative impact on gross profits. Mayo and rebates and other forms of competitive pricing continue for Bluetooth products, and the total impact of the level of competition in terms of pricing was greater than we had anticipated. In addition, requirements for ENO were higher. One bit of good news was that manufacturing efficiency did improve from the third quarter, but that was more than offset by the factors I’ve just outlined.

In terms of operating expenses compared to the year ago quarter, they had increased by $15.1 million with $10.6 million of that in operating expenses associated with the AEG group. Our worldwide consolidated operating expense as a percent of revenue decreased from 30.4 to 28.7.

The key factors behind the $5.5 million of growth in the ACG segment OPEX, number one, $2.4 million based on the higher level of investment in our new product pipeline especially for wireless products, the growth for our offshore design centers in Mexico and China, and also investments in new technologies; and the second largest factor was higher compensation in SG&A driven by growth in new hires, especially in our sales and marketing functions.

Within the AEG group, the sequential increase was $0.6 million in operating expense from $10 million to $10.6 million, was mainly due to a higher level of trade shows during the quarter and cost incurred with the Altec Lansing integration as well as some higher cost associated with R&D for new products.

So, as a result of all the above consolidated operating margins with 12.5%, 14.3% for the ACG segment and 4.5% for AEG, without the purchase accounting changes, AEG’s operating margins would have been 9.5% in comparison to 21.9% in the December quarter, which reflects a substantial effect of leverage in comparison to the seasonally slow December quarter. Operating leverage helped the December quarter and negatively impacted the March quarter.

Please do note, however, that the amortization of intangible assets, which are accounted for in the cost of revenues in SG&A expenses will continue for many years and are expected to run about $1.8 million per quarter with about $1 million hitting cost of revenues and $800,000 in SG&A. After this quarter, we do not intend to issue non-GAAP pro-forma results for this impact. We strongly prefer that you anticipate GAAP as it relates to non-cash charges or amortization of intangible assets acquired that affect the overall financial results for the AEG segment. We provided a final set of GAAP versus non-GAAP results for this quarter and for the year, since this was the year of acquisition and we have provided information for the September quarter.

Below the operating margin line, we have $1.5 million of other income, up significantly from the prior year ago quarter income of $0.3 million which is primarily due to the need to release most of the remaining balance of an environmental reserve we had been caring since before the 1994 IPO. The release of the environmental reserve of approximately $750,000 is a result of research tests and cleanup work either completed or as mentioned is the cost to complete. This work was performed for us by third-party environmental engineering and consulting firms. We also had FX gains in comparison to FX losses in the year ago quarter due to our rate increase. We had much lower interesting problem compared to the year ago quarter due to lower levels of cash as a result of the Altec Lansing acquisition last August.

I have explained most of the issues that effected with tax rate in the release itself and include the answers to questions about that when we get to that section.

Let me turn now to the business outlook. We are cautiously providing guidance to the first quarter and want to reemphasize the risks and uncertainties which characterize our markets and our business as well as the substantial uncertainties and difficulties in forecasting the impact of equity compensation expense at the EPS level pursuant to FAS 123R.

With those caveats, I request to please consider the risk factors carefully, we’re estimating a revenue range of $195-$205 million, an EPS of $0.28 to $0.33 before the impacted equity compensation expense in accordance with FAS 123R. We are subject to FAS 123R beginning with this first quarter and we will report results on a GAAP and non-GAAP basis to highlight the impact of equity compensation expense.

We currently expect equity compensation expense to reduce operating income by approximately $4 million or approximately $2.7 million on a consolidated after-tax basis, and that will probably translate to $0.04-$0.06 lower EPS than non-GAAP EPS.

We are expecting revenues from AEG to decline modestly, generally consistent with historic seasonal trends and for the ACG business to either decline somewhat or to grow modestly. Should we achieve revenue growth in ACG, it will likely be due to continued growth in Office Wireless, led in part by new products such as SupraPlus Wireless and the CS70 together with potentially higher sequential demands in mobile consumer Bluetooth headsets. Should revenues decline sequentially, we currently believe that the most likely areas of decline will be OCT corded, mobile corded, and the gaming MP3 category.

We are targeting an investment level of approximately $3 million in Office Wireless demand generation activities in the first quarter, in comparison to approximately $2 million of such spending in the fourth quarter.

Our operating margins in the ACG segment will decline to say flat or perhaps even rise slightly in the first quarter and will be entirely dependent on the overall level of revenues and the underlying product mix comprising those revenues. That mix is unpredictable but I am unfortunately confident that ACG’s operating margin will be low relative to the historic levels, higher targets, and substantially lower than the year ago June quarter.

Within AEG, operating margin is likely to be below break even as the June quarter is historically the lowest revenue quarter and AEG’s cost structure is largely split. In addition, expenses are expected to increase in part due to integration and stock compliance cost anticipated for the first quarter. We are also anticipating that our overall worldwide non-GAAP consolidated tax rate will increase from the fourth quarter of fiscal 2006 and will likely be in the range of 25% to 27% for the first quarter, heavily depending on the profit mix between AEG and ACG. The tax rate is going to be higher in quarters where AEG’s profits are higher and vice-versa since their income is virtually all taxed at U.S. rates.

Finally, the weakness in bookings that we are experiencing was not expected, and in fact it’s surprising in contrary to some other indicators. We had been driving our supply chain in the substantially higher estimated demand for the first quarter and since it now appears unlikely that we will need as many components and other materials as we had either ordered or planned to order within the quarter, it is likely that our inventories will increase and cash flow will be limited and perhaps even negative in the first quarter.

I think on the cash position, the press release covers it. On accounts receivable, our balance decreased sequentially from $126.2 million to $118 million with the ACG accounts receivable increasing by $6.2 million, primarily due to the revenue growth and a somewhat backend loaded quarter given the supply constraints that we’ve been working our way out of on Bluetooth for much of this quarter. We did achieve record cash collections in this quarter. Then on the AEG side, our accounts receivables decreased by about $14 million due to lower quarterly revenues, which is typical for this business in the fourth quarter with excellent collections far outpacing revenues and continued low DSO.

We did find it necessary to provide more for bad debt expense in the quarter than we did in the December quarter in a higher amount that we typically planned for. That impacted our year-over-year SG&A expense by about $400,000 in the ACG segment. The payment pattern of certain U.S. customers changed during the quarter and the risk of non or incomplete payment has increased. Having said that, we believe the net receivable balance is collectable and that we have sufficient reserves to cover our anticipated exposure to bad debt.

The details of the inventory balance for the fourth quarter consolidated were raw materials of $44.8 million, and $3.8 million, finished goods of $72.3 million, and an ENO provision of $15 million.

Finally, capital spending was $10.8 million in the quarter with about $1.1 million of that for a new IB center we are building. Depreciation and amortization was $6.8 million for the quarter and the China building actually ended up at $17.6 million; we limited production there this quarter and then the total fixed assets investment base in China at the end of the fiscal year was $23 million. That figure includes manufacturing equipment, furniture, land use rights, and computer and software assets. As a result of the plant going into service during this quarter, we began depreciating it. Putting the plant into service was the first step towards our goal of getting the plant loaded and our long-term goal of improving cost and improving our supply chain’s speed and flexibility. Finally, with that I’m going to wrap it up and open it up for Q&A and turn it back over to Melissa, our operator.

Question-and-Answer Session

Operator

At this time, I would like to remind everyone, if you would like to ask a question, press “*” then the number “1” on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Daryl Armstrong of Citigroup.

Daryl Armstrong, Citigroup

Thank you very much, a couple of questions. The first one is relative to the Bluetooth business. Where is this demand outlet for Bluetooth which looks pretty good? As you know, you have competitors that have a lot more volumes than you at this point, but what gives you the assurance that even as the demand continues to improve that they won’t just bring down the pricing curve to take it into the cost structure and will always have a margin problem with this particular business? Then, I have one followup.

Ken Kannappan, President and CEO

Let me pick that. First of all, you face competitors who we think have achieved better cost positions partly due to their success in having achieved volumes but also in some respects due to better execution than we have, and in some cases due to some other strategic advantages that they have in the business. The biggest opportunity for us is to improve our execution gap, and we think that that is very, very significant. We do expect the prices will continue to declines. It’s obviously impossible for us to fully foresee the competitive actions that maybe taken, but the upright now on execution is still large in terms of cost potential that we think it is likely that we should be able to get to a profitable business structure. However, to your point, there is no guarantee of that and if competitors bring their pricing and their margins down to extremely low levels, it’s certainly possible that our own profitability at best would be nominal.

Daryl Armstrong, Citigroup

Thank for the clarification. Barbara, you did talk about some challenges that are reflected within the guidance for the first quarter. Could you talk again about the office and contact center business, are you guys expecting the sequential decline, is that a big driver in terms of margins for the first quarter?

Barbara Scherer, Senior Vice President and CFO

Within the details of the range we’ve put together, we’ve built in both plotted down scenarios and I think the high end is basically just flat for the fourth quarter…1and I just want to add we hadn’t see a quarter this low in OTC corded for over eight quarters. Basically have been pretty flat for the last four quarters and you have to go back over eight quarters to see an end of life that we built of this decline at the lower end of the range and about flat at the upper end.

Daryl Armstrong, Citigroup

And what caused that?

Ken Kannappan, President and CEO

Well, let me just speak to the fact that first of all we do think the cordless business in particular is a growth business. There are lots of trends in the corded side of course…and there are a number of factors there; one being the essence of a strong degree of growth in terms of contact center positions globally. The second one being that we probably finished a fairly good cycle with the SupraPlus product and some marketshare gains and upgrades that we have from that. In addition, there maybe some cannibalization of corded going to cordless which certainly is an awkward position. Having said that, we’ve kind view that the business as a whole — to a great degree it is a business as a whole still — has had good growth and his accordingly represents, if you will, an inflection point because we’re continuing to hear very positive stories in terms of end-consumer interest in the product portfolio, we’re continuing to hear that the prospects are very, very good and our field organizations are more optimistic. When we look at this last period in terms of the March quarter and April quarter results, there are a couple of things that color in effect and it’s hard for us to know that we’re wrong. One of course is a number of new products and we are hearing that it’s some decision cycle, not necessarily just related to our products but more broadly are elongated, and then of course we have the phenomenons of Easter coming a little later within April and how did that affect our forecast for the quarter. So, fundamentally, we’re still optimistic in terms of the growth prospects and then we look specifically at the April results we have to acknowledge that they’re lower than we expect and that’s got to be reflected in our forecast.

Barbara Scherer, Senior Vice President and CFO

Does this help to clarify the remaining part of your answer about the corded and the optimistic growth offset partly by the wireless…I think we’re ready for the next question.

Operator

Your next question comes from the line of Jason Ader with Thomas Weisel.

Jason Ader, Thomas Weisel Partners

Yes thank you. I’m trying to understand the gross margin weakness better and Barbara maybe you can help me out here. The variance in terms of the professional corded based upon looking at some numbers here, looks like it was about maybe $2.5 million down sequentially in revenue…

Barbara Scherer, Senior Vice President and CFO

It was more than that.

Jason Ader, Thomas Weisel Partners

Okay, so last quarter Wireless Office was $47 million in the March quarter, so in the December quarter, could you give us that number?

Barbara Scherer, Senior Vice President and CFO

It was $54 million.

Jason Ader, Thomas Weisel Partners

It was $47 million in the March quarter right for Wireless Office, what was it in the December quarter?

Barbara Scherer, Senior Vice President and CFO

The Wireless Office business in the third quarter was $47 million approximately…the CS60s, CS50s, and the Voyager 510S, and then you’ve probably just picked out subtracted and put everything else that is professional grade corded. But the professional grade corded is a subset of everything else; so your other office products in the mix and the professional grade corded, which are basically the HTOPs and the M12s that are sold for contact center and for professional office applications, we’re down about 7%, which is substantially more than $10 million. On the gross margin it is a big decrease and it is certainly lower than we were expecting. I did set out in the press release the reasons for each category and the next issue about professional grade corded was the biggest issue, but the level of competition in Bluetooth was the second biggest within that four-point item that we…

Jason Ader, Thomas Weisel Partners

Okay. So, the pricing on Bluetooth was worse in the March quarter than it was in the December quarter? It’s just hard to believe that, it was pretty bad late last year as well, it’s gotten worse, what happens when it gets worse?

Ken Kannappan, President and CEO

We’re just seeing aggressive competition, and I think that the major customers have gotten used to it, taking advantage of it effectively, and frankly what we’re generally viewing is the customer preferring to buy our products but we have to match the price levels typically that our competition is offering. Sometimes they then lose the business for a lower price and we have to match that new lower price. So, the good news is that the products are being really well received, but certainly we’re seeing a lot of price competition.

Barbara Scherer, Senior Vice President and CFO

The type of price competition is not fundamentally different, but the use of Mayo and rebates is continuing, it’s more extensive, and I feel it’s a larger percentage of our customer mix that is using these and the levels of claims under those rebates are high and people tend to be…maybe it’s easier to get them. Anyway, the net realized prices are under significant pressure.

Jason Ader, Thomas Weisel Partners

And did the gross margins for the mobile segment decline sequentially?

Barbara Scherer, Senior Vice President and CFO

We haven’t been providing gross margins by product growth.

Jason Ader, Thomas Weisel Partners

Okay, I’m just trying to get a sense of compared to the December quarter, pricing seems like it was worse but yet you had a lot more volumes.

Barbara Scherer, Senior Vice President and CFO

Directionally yes, but it’s not information that we’re providing and there are a lot of assumptions that go into even calculating it internally, as you have to allocate a lot of fixed manufacturing costs across different products.

Jason Ader, Thomas Weisel Partners

When might you think that you could start to see some improvement in the mobile gross margins?

Ken Kannappan, President and CEO

Well, as I said earlier, we view ourselves kind of in the middle, if you will, of the two-year transition in many respects in the business where we’re migrating to be prepared for these consumer businesses, and so we’re kind of halfway into scaling up. The China plant has been complete, but it’s certainly not ramped; that will help us with the cost. In terms of understanding the business model that we really need to be in and designing the products from the platform perspective so we can lower our R&D expenses and of course tooling and tests tend to go along with that, we’re really still early in that process and the leverage comes with future cycles. We’ve seen a lot of opportunities with benchmarking our product costs, to change what we’re doing and be more in performance with some lower costs opportunities. Of course, on the OTC side, there are some things that lever in part with halfway up into that marketing campaign, which is halfway into the whole preparation for convergence. So, it’s really the stand of another year, although we hope to make progress during the course of that year. Obviously the June quarter is not evidence of that, but as I said in the earlier comments, we are hoping that in the balance of fiscal 2007 we will begin to show progress as there are number of initiatives we’re working on from the areas I’ve mentioned and although the pricing environment is one that we can’t control, there’s a lot of execution opportunities that we can control.

Jason Ader, Thomas Weisel Partners

Okay, last question; Barbara, before we talk about professional coded, can you give us a below CC where professional corded is? Is it like a third?

Barbara Scherer, Senior Vice President and CFO

No, let me come back to you on that Jason.

Jason Ader, Thomas Weisel Partners

Okay, thank you.

Operator

Your next question comes from the line of John Bright at Avondale Partners.

John F. Bright, Avondale Partners

Thank you. Good afternoon. On the professional graded corded headsets in the contact center, are you seeing anymore competition from potentially GN? They have talked about in the past competing for the wireless application; do you think that’s applicable and what do you think is causing the flat sales on the professional grade corded headsets in the contact center?

Ken Kannappan, President and CEO

John, I really told you what I thought was expecting, but I’ll kind of give you a couple additional comments, but we don’t think this is fundamentally a loss of competitive marketshare. In fact, we feel very, very comfortable with the competitiveness of our product portfolio and our marketing programs. The information we have suggests that this is more of a general phenomena. Having said that, there were a couple of things you need to ask and so let me just highlight those. We did change a few elements of our distributors, which Barbara touched on during the March quarter that may have affected negatively the total inventory level as some distributors became dealers and therefore no longer were holding stock, and that of course negatively affects the particular period. Some of the April extrapolations were a little tough because it is a one-month period and secondly there is a holiday factor that you had during that time, and again it’s a little bit hard for us to always know at a moment of time how much of impact there can potentially be from cannibalization of corded to cordless, because it’s not simply something that affects us at one time. I think in the early stages of the cordless business a lot of the pushback, corded products are good enough and we were having a little bit of trouble getting people to buy into what are the value benefits of cordless. In some cases, as corporations are brought into that, then very few people if given a choice are going to take a corded headset over a cordless one, so the cannibalization impact isn’t necessarily constant. With respect to some of the cordless products of course, one, we’re getting some feedback in general but decision cycles may have lengthened a little bit, and this is not something I’ve got data on, but obviously we introduced new products so people don’t have to decide which product they think is appropriate, and prior to that we were primarily selling one offering.

John F. Bright, Avondale Partners

What are your comments to GN articulating that they would compete for some of the existing customers that are using the wireline headsets, using the cordless offering, are you seeing an adoption of that or an acceptance of that?

Ken Kannappan, President and CEO

I’m not sure if I fully understood your question.

John F. Bright, Avondale Partners

Not in the office market in the contact center market.

Ken Kannappan, President and CEO

In the contact center market, what is the question?

John F. Bright, Avondale Partners

Are you seeing GN trying to sell their wireless products into the contact center market?

Ken Kannappan, President and CEO

Sure, of course so are we. It’s primarily confined to portions of the contact center market as opposed to the entire contact center market. Applications include supervisors, include help desks, and include whatever you’d call very high-end contact centers, many of the contact centers — most of the agents — are really not interested in paying a price and frankly don’t necessarily want mobility of the agents relative to their workspace. So, I would say yes they are, yes we are, but it’s not a universal thing with respect to contact centers.

John F. Bright, Avondale Partners

Shifting to your business outlook, you made your comments on the bookings rate thus far in the quarter, not fully supporting the revenues in the forecast that you’re providing, and you’re expecting some pickup in the level of orders that you’ve received to date, how does this compare to the prior quarter and how wold it compare year over year?

Ken Kannappan, President and CEO

Let me make a couple of comments on that. The March quarter is normally a quarter that starts very slowly and finishes more rapidly and that is a typical pattern for the March quarter. The June quarter is normally a flatter quarter, albeit every quarter changes a little bit, and let me just make a comment. Sometimes, for example the March quarter, the Christmas-New Year holiday impact hits a little bit more in December, sometimes it shifts out a little bit. Again Easter is something that varies a little bit, so the seasonality is not universal year over year and of course we influence it with the timing of new products. So, while we try to make our bookings meaningful by eliminating inventory stocking on the part of our channels by offering very fast shipping and everything else, it’s still true that you can get noise in the information and so we can’t be 100% sure. But in general, this is a quarter that is amongst our flatter quarters.

John F. Bright, Avondale Partners

A few last ones; Barbara, for the provision for ENO, could you tell us what products?

Barbara Scherer, Senior Vice President and CFO

There is a variety of products mostly on the consumer side, and Altec also had some of the mobile corded variety of the consumer products primarily.

John F. Bright, Avondale Partners

Lastly on the marketing program, you’re increasing the campaign to I believe $19 million from $11 million. I didn’t get the number, how much you spent in the March quarter and what we might expect from a progression in fiscal year 2007, as well as will there be a change in the media’s import?

Barbara Scherer, Senior Vice President and CFO

Right, we spent a total of $11 million in fiscal 2006, $2 million in the fourth quarter fiscal 2006. We’re expecting to spend about $3 million in the first quarter and then the $15 million over the balance of the remaining three quarters, and some of the timing is still being worked but I anticipate that it will be pretty heavy in the September through January time period, because those are significant periods of new products and good buying activity broadly for us, and yet there’s going to be a significant change in the mix of the media…really the campaign last year was primarily a branding campaign with a heavier percent of TB to the total mix, and now we’re trying to move more into our demand generation mode and there’s much more kind of channel engagement, a vertical market targeting with a very different mix of activity, still keeping some for TB and the branding, but a small percentage.

John F. Bright, Avondale Partners

Shifting more from the awareness to the product specific in the application?

Ken Kannappan, President and CEO

Yeah, part of that was because we were announcing wireless headsets the first plan around and it was a brand new category as we at the company have not advertised and we needed the time to introduce ourselves, and we’re hopeful that that represents the foundation that we’re going to be able to build on.

Barbara Scherer, Senior Vice President and CFO

I want to answer Jason’s earlier question, the professional grade corded headsets were approximately 45% of our OTC net revenues in the fourth quarter.

John F. Bright, Avondale Partners

I know I said that was the last one, but just one additional one; we’ve gotten beyond the closing of the Altec acquisition, have there been any synergies that you’re seeing on the potential head count synergies, engineering synergies beyond the ones you’ve articulated in the past?

Ken Kannappan, President and CEO

Let me just say that there’s nothing really that we’re looking to disclose at this time. We do see synergies, most of them…I’m not aware of head count synergies per se, I mean we’re not finding jobs plus these results, but we’ll see to that, but there are synergies in the area of development and marketing opportunities that we are pursuing, but nothing that we’re prepared to speak to right now.

John F. Bright, Avondale Partners

Thank you.

Operator

Your next question comes from the line of Sophia of Robert Baird.

Sophia, Robert W. Baird & Co

Hi, I have a couple of questions regarding the China facility. I’m just curious in terms of where your expectations were and where that has come through. But you were talking about taking the keys over in kind of mid February and then shifting some of your easier to manufacture consumer products from I think a temporary facility over, has that occurred at this point, are you still in the process of doing that?

Ken Kannappan, President and CEO

Well that’s occurred already. What we really have done was begun some limited production in a temporary facility with an opportunity then to kind of train a nucleus of people, and we’re still ramping. Again, it’s going to take us at least a year to continue to ramp that facility.

Sophia, Robert W. Baird & Co

Have you started moving any of your more complex products from Mexico or is that after you kind of get up to speed in the next year?

Ken Kannappan, President and CEO

I’m not going to go through product by product, but we have started building slightly more complex products that weren’t actually from Mexico, they were actually from one of the contract manufacturers that we’ve used, and on a long-term basis we do suspect that we will continue to use Mexico as well as China as well as subcontract manufacturers depending upon the nature of the product, where it has been developed, and few other parameters.

Sophia, Robert W. Baird & Co

Last question on this, is I understand that you’re not fully ramped yet so you have a utilization issue, but have there also been stumbles or inefficiencies related to this process that you’ve experienced, and are you accounting for that in your guidance going forward?

Ken Kannappan, President and CEO

On the one hand there are always stumbles but on the other hand in total the project was actually completed ahead of schedule and below cost. We were extremely pleased with the caliber of the team that we have over there. You know, you’re always dealing with cases that kind highlight a very volatile mix of products, so as you plan to capacity in one location and then the actual volumes on different SKUs are very dramatic to what you plan, it always makes for a challenge. But fundamentally, I think we’re on track strategically even if quarter by quarter variations can be significant and maybe significant as we try to ramp this plant over the balance of the year, but I still think we’re going to wind up very close to our goals.

Sophia, Robert W. Baird & Co

That’s helpful, just one…I just have one other quick question. With respect to the Altec business, given that it is a competitive landscape with solid players like Bose and now Apple is going to start getting into the game of making their speakers, is there a particular segment within the marketplace that you feel you can really dominate or that you’re going to be really attacking?

Ken Kannappan, President and CEO

Well, a couple of comments. First, I think it wold be very presumptuous to use the term dominate in a category with some large players with very significant brand name, and I don’t think that our practical goal is to look at dominate, where we all have a tendency. I think that when we look at the business, Plantronics has always stood for great design in terms of the markets and applications that we’re using, products that bring incredible ease of use and above all outstanding sound that fits the application. I think that we think Altec is much the same from a brand standpoint. Products like the iPod you know they pioneered the whole MP3 speaker category, they pioneered powered PC audio, and we think that there were critical ease of use elements to these new markets. It’s good sound quality and at the same time I think that they’ve had some real good innovation on the design side. I think that there is a set of customers who are looking for that in what are still mainstream markets and upper tier parts of the market, and I think we can compete very well in those segments offering those values. Clearly, from a convergence standpoint, we can benefit with certainly their products, where on the one hand it maybe entertainment centric but people are still looking for communications in addition, that’s one part of leverage. Clearly a lot of wireless technologies that are coming early into their market and we’re in a position to help that. So, I would say, with respect to brand there’s very similar commonality, but are we looking at dominate? No, I don’t think we’re looking to dominate.

Sophia, Robert W. Baird & Co

Great thank you.

Operator

Your next question comes from the line of Amy Lamb from JP Morgan.

Amy Lamb, JP Morgan

Hi it’s Amy for Paul Coster. I have a couple of questions. My first one is going back to the marketing spend for 2007, can you give us a sense of what type of metrics you’re using to measure the pay back from the spend that you did in 2006, to kind of justify this incremental spending in 2007?

Ken Kannappan, President and CEO

Let me just say honestly that although we’ve tried to bring clients to these items, it was easier when we were dealing with control in our tests because we had isolated geographic markets and we could really measure the difference. In certain areas, we were able to correlate to changes in product consideration, brand preference, and awareness and so forth with billed results in the past and try to understand other markets. We did find, however, that with the absence of a control you lose a lot of the pure science, because it is very hard to say what would have happened otherwise given particularly the new noise and the variety of sources can enter into, and so extrapolating the trend as if nothing happened other than the advertising campaign is very, very difficult. So, we’ll tell you that we’ve looked at a lot of different techniques in measuring this. I think most reasonable people looking at all this data would agree that there could be a variance of opinion as to what the impacts were from this campaign. We’re pretty clear that it did help our revenues and that it did help us in some respect, and at the same time we’re also pretty clear that we think that there’s opportunity to improve the productivity of our marketing stand based upon what we’ve learned and so our determination was…it’s not clear that we did a home run here and in fact it’s not fully clear that we even got all the money back that we’ve spent on this marketing campaign. Yet, the opportunity to improve it and the opportunity for a sustained campaign to have a long-term benefit seems to justify that a continuation with certain improvements based upon feedback that you frankly only get once you’re really immersed in this type of campaign and get the benefit of the learning that gives you. You want to end it up Barbara?

Barbara Scherer, Senior Vice President and CFO

Well, I’d say that on the non-financial metrics, the key ones are awareness and consideration, and we did do statistically valid surveys before we started the campaign and we had measured in the test market work that we had done a couple of years ago. We had done the pre- and post-measurements as well and we set a goal for how much we wanted this awareness to increase and consideration to increase for this campaign, and those metrics were met, and there were good increases in those. We also set a revenue target and I think we made some progress toward the revenue target, but it’s not at all clear that we achieved it, which was a tense point that was certainly not clear that we got back in terms of profits on revenues, money equal to what we spent on the campaign. But, it was a campaign that with a kind of 20:20 hindsight that was more of a rending focus and that part does seem to have worked. So, extend it but with a more focussed effort on demand generation, it seems appropriate and that’s why we’re planning to increase the spend and to have it continue over the entire year, as the levels in any particular quarter is not really different than what we’ve spend running out last year.

Amy Lamb, JP Morgan

Second question relating the supply constraints on the Bluetooth side; if I remember correctly this was an issue a couple quarters ago as well and then it seemed like it got better, I’m just wondering what are the steps you’re taking to kind of ensure that this problem gets remedied as we go into fiscal 2007?

Ken Kannappan, President and CEO

Well, first of all, when we see cost problems, they’re not all solvable right away. Some of them take a certain amount of time to put in place in terms of their design, and on the supply side, likewise, we’ve got fairly long leap time in the silicone, and we’d set up all of our systems very much on a full-system basis as the bulk of our revenues are silicone ware; the fundamental stab time is 13-14 weeks and frequently this acute time on top of that and then a little bit of assembly test time, you’re dealing with a very long fundamental supply chain that’s not very effectible and particularly in the volumes we’re ordering silicone, which are fairly large relative to the overall production, you’re really are out of the full leap time with this volume order. So, what we are doing is trying to create some buffers with lower cost locations and a finished good location primarily as the subcontract level where we can deal with long leap time components and have a better time to market giving us a little bit more of a buffer swing. That will largely be in place in the July timeframe, some of it already is in place. We’ve extended a little bit our test capabilities just to increase the speed with which we have capacity with which we can convert those things. So, those are kind of some of the things we’re trying to do; on the design side, increasing platform flexibility, on the one hand it reduces cost but on the other hand it also improves flexibility in production, which also helps us.

Amy Lamb, JP Morgan

Okay great, and then my last question, Barbara, I may have missed it, but the GAAP tax rate for 2007?

Barbara Scherer, Senior Vice President and CFO

Yeah, I actually didn’t provide that. I provided the non-GAAP tax rate. I mean I think the tax rate on the option expense is going to be in the kind of low-to-mid 30s since the receive options are in the U.S. are SKU’ed towards that, but I think there are a lot of uncertainties with respect to the tax rate, so I didn’t actually supply that.

Amy Lamb, JP Morgan

Okay, so from a modeling perspective, I guess from a 30-35% tax rate, you think it’s a bit higher, is that reasonable look at it?

Barbara Scherer, Senior Vice President and CFO

That should be okay for the option expense part, yeah, with the range.

Amy Lamb, JP Morgan

All right, thank you.

Operator

Your next question comes from Manny Recarey of Kaufman Brothers.

Manny Recarey, Kaufman Brothers

Good afternoon. The marketing that you’re talking about is $19 million as I understand it. That’s about the same type of a trend that you had been expecting; I think at the last conference call you spoke about $20 million being spent in fiscal 2007, is that correct?

Barbara Scherer, Senior Vice President and CFO

Right.

Manny Recarey, Kaufman Brothers

Okay, there’s no change there really?

Barbara Scherer, Senior Vice President and CFO

No.

Manny Recarey, Kaufman Brothers

The Altec Lansing, you’ve spoken about the powered sector is low single digit type growth and the portable is the rapidly growing pot, and mixed together is somewhere around 20% year-over-year growth, do you still feel comfortable with that type of range?

Barbara Scherer, Senior Vice President and CFO

Actually, we for the Altec blended growth rate it was kind of 10-15%, that’s what’s been in our IR presentation. It depends on the mix of the portable and the portable has been rising, so it’s true that it’s probably ratcheting up a little bit, but the 10-15% is kind of the right range.

Manny Recarey, Kaufman Brothers

Okay, and then the pricing pressure that you’ve seen, is that just coming from your main competitor or are your seeing it also from the Asian manufacturers wanting to ramp up a little bit on the Bluetooth side?

Ken Kannappan, President and CEO

No, I think that the pricing pressure is kind of universal because on the one hand it maybe one player initiating it, but pretty much everybody winds up having to follow it through in one form on the other. I do think in this case it’s not primarily led by Asian competition but primarily led by the leaders in the market.

Manny Recarey, Kaufman Brothers

Okay, and then the last question; you spoke of the supply constraint on the Bluetooth side, can you quantify in any way how much revenue that may have cost you in the quarter?

Ken Kannappan, President and CEO

We really can’t. One of the things that we continue is that any time we have a shortage, it’s very difficult to discern how much the shortage really is, because you get sort of a bubble effect of demand with the people trying to load up and then you have supplies and sometimes it goes away again. There are certainly situations that we miss as a result of inadequate supply, places where obviously things roll out of the stores and we kind of bought those. We open also in some cases business we simply had to turn down because we knew we wouldn’t be able to adequately support it, and they have to go with other products. So, we know those effects and we know in some respect how much quantities were being offered. So, it’s really hard to know what it really would have been otherwise and I don’t want to try to share that publicly because it’s just too likely to be inaccurate.

Manny Recarey, Kaufman Brothers

Okay, thanks.

Operator

Your next question comes from the line of Ted Chung with Bear Stearns.

Ted Chung, Bear Stearns

Hi, I have just an overall broad question. You talked briefly about potential execution improvements that you actually will implement in the coming year or so, could you elaborate on that, on what type of goals or what type of plans you’re thinking about in terms of improving execution overall for Plantronics?

Ken Kannappan, President and CEO

Maybe I wasn’t successful; I did try to explain it a little bit, I’ll try again and if you’d like to interject where you think you need more detail or I’m not clear please do so. One of the areas is in product cost and part of that does involve benchmarking the products and understanding where our components are more expensive and why, and understanding whether or not we’re receiving value for that and if we’re not, attempting to close the gap in our product cost, which is again largely attributed to design differences in the product. We are trying to create architectures at are lower cost so you can leverage into different products, which allows you to reduce the amount of R&D spend on a particular product, because you’re leveraging those platforms and attendant with that greater leverages that there’s less tooling expense for product and there’s less test expense for product, and because you’re getting greater commonality you’re typically able to get the piece parts out of better volume rate. There are areas in our packaging where we found our packages to be larger than our competitors and hence higher cost and some other issues around that. There are a variety of things as we really focus on cost that we’ve found and that we believe that we can take action on. Is that clear?

Ted Chung, Bear Stearns

Is there any specific timing so the plans will be implemented, I mean are you looking at the fiscal year or is it an ongoing process?

Ken Kannappan, President and CEO

No, if you’re in the situation that we’re in where you’re not happy with your profitability of becoming something that you tried to implement, you go as quickly as you can, but certain things are hard to do fully until you get new products with all the knowledge base. So, there are some things that you can cut in and change but there are other things that really depend upon next generations of product, and of course as we’ve outlined previously, we do not expect the plant from China to be ramped up until close to the end of this year. So that’s part of the reason I’ve talked about it as being kind of the second year of transition. Some of this may still extend beyond this year, but we do hope to get improvements during the course of this year.

Ted Chung, Bear Stearns

Just on that China plant, what’s your ultimate goal in terms of potential volume that’s going to go through that plant?

Ken Kannappan, President and CEO

Well, we think of the plant in terms of earned hours and there’s kind of the initial capacity of the plant on a certain number of shifts, and then there’s the potential we have ultimately to expand the plant. We have additional acreage which we could build out and largely leverage the same management team and structure, which is a good deal of the expense. So, in reality, it’s probably got room for us to grow for a number of years and during that time we ought to be able to achieve a lower transformation cost per unit as we benefit in that leverage. So, I could give you a stab on how much we fill up on one shift for the existing infrastructure, but it really is the continuation, and ultimately even as you fill it up you get the opportunity to improve the mix of the earned hour you put in the factory and what items that you get less benefit on with subcontractors.

Ted Chung, Bear Stearns

Okay, great, thank you.

Operator

Your next question comes from the line of (inaudible).

Unidentified Analyst

Hi, thank you. My first question is on competition, so a follow on. You’re obviously implying that the price competition has been led by GN and whether sort of new competitors have followed and now it’s been led by GN, where do you think in fact you’re market share is relative to GN stand at the moment on an overall basis, and more specifically on the CCNO and mobile segment?

Ken Kannappan, President and CEO

Well, I just want to make a comment up. Relative to the contact center, we do generally see GN being more focussing their competition on price, but within the mobile sector it’s certainly not only them, you know there are other players that are very aggressive on price. Can you reiterate the question again; I just want to clarify that starting with functions?

Unidentified Analyst

I mean that answered the first part of my question. I was just wondering beyond that, yourselves and GN pretty much were for a long period of time, 70% plus of the market in all segments; do you still see that as being the case?

Ken Kannappan, President and CEO

Within the Bluetooth segment it’s Motorola, so the answer would be no.

Unidentified Analyst

Okay, and within CCNO?

Ken Kannappan, President and CEO

We’re still the market leader and GN still has the second largest division.

Unidentified Analyst

Do you think that’s changed in any material way, both in terms of your respective shares and is there a third competitor now or do you still share the same percentage of the market in that space?

Ken Kannappan, President and CEO

A couple of comments first; data there is poor. There is some data from GN and there is data from Plantronics, of course we have excellent access to the latter, but frankly data on other players is extremely poor in terms of its availability to us. Many of them are private companies or very small pieces of other organizations. We still believe that the bulk of that market at this point in time is Plantronics and GN, but there are always new entrants coming and sometimes leading in that business. I would say our data suggests that we probably gained a very small amount of marketshare in the OCT business over the last several years, but again I would say the business in general market share shifts are very, very small. It’s not like the mobile business which has a much greater level of volatility in marketshare.

Unidentified Analyst

And in terms of potential new markets for headsets, it’s been rather vague over the last year or so. The game sector seems to have established itself, you didn’t talk at all on this call about VoIP, are there any other areas that you’re focussing on in say the next three to five years that you consider to be exciting?

Ken Kannappan, President and CEO

Well there are, but let me just comment, it’s just a matter of time in the business as it gets more complex and how many things we focus on in the call; so I apologize. We are still extremely interested in the gaming market and when we talk about VoIP for us that’s not just consumer VoIP there’s also B2B VoIP, which is again a very exciting business; frankly increasingly the bulk of the shipments in VoIP, the new shipments for terminals and PBX tend to be VIP-PBX, and so it’s a critical part of our business already. We do think that it creates some exciting longer term opportunities for increased penetration on the B2B side. There are other markets that we are targeting. I think we have mentioned in the past that we’ve been engaged in very significant investments over the past year and over the coming year in markets that we consider to be certainly new to Plantronics and we really think are substantially different enough from what’s out there that really represents fundamentally new segments that we think we’re going to create, so those are heavy investment areas. We are not discussing them as we do recognize that these are our owners on the line but we also think that the enormous value we have in this significant lead time into these business is significant and because we are so excited about these concepts, we’ve chosen to keep them entirely a secret and not share the nature of what we see the opportunity, and so we are ready for a release of the business.

Unidentified Analyst

Okay, thank you.

Operator

Next, we have a followup question from line of Jason Ader of Thomas Weisel Partners

Jason Ader, Thomas Weisel Partners

One quick question really is on the CS70, do you expect that to have an impact this quarter in terms of the OCT business?

Ken Kannappan, President and CEO

Well, of course. If we released it we would be very disappointed if it didn’t. Having said that, we’ve generally found that new products into the office and contact center business ramp somewhat more slowly as typically the channels like to get familiar with and comfortable with their performance, the IT departments like to do the same, and they take a little while to get approved and put on networks and through word of mouth to get out on them. So, we do expect a contribution and we’re extremely excited about the feedback. On the other hand, like most of our products in this sector, they tend to ramp more slowly than a consumer type of product.

Jason Ader, Thomas Weisel Partners

Okay, and last question just on international, why was that down sequentially?

Ken Kannappan, President and CEO

Well, of course the consumer part of that business has some seasonality. The office and contacts center…

Barbara Scherer, Senior Vice President and CFO

…we actually had heavy demand for Bluetooth, but we had heavier demand in the U.S. and we actually had some allocation issues because of the shortages that we saved. So, partially their revenues were down as a result of lack of supply that we had.

Jason Ader, Thomas Weisel Partners

So, on the office contacts center side, there were no issues there?

Barbara Scherer, Senior Vice President and CFO

Yeah, it was pretty flat.

Jason Ader, Thomas Weisel Partners

Okay, thank you.

Operator

At this time, there are no further questions. Mr. Kannappan, are there any closing remarks?

Ken Kannappan, President and CEO

No, I just like to thank all of you for taking the time to listen to us, and thank you very much Melissa, of course. We’re all available if you have any further questions if you’d like to follow up with. Thanks very much.

Operator

This concludes today’s Plantronics Conference Call. You may now disconnect

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Source: Plantronics, Inc. Q4 2006 Earnings Conference Call Transcript (PLT)
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