Plantronics' (PLT) CEO Joe Burton on Q4 2018 Results - Earnings Call Transcript

Plantronics Inc. (PLT) Q4 2018 Earnings Conference Call May 1, 2018 5:00 PM ET

Executives

Joe Burton - CEO

Pam Strayer - CFO

Will Zelver - IR

Analysts

Greg Burns - Sidoti & Company

Bill Baker - GARP Research

Operator

Good afternoon. My name is Vincent and I will be your conference operator today. At this time, I would like to welcome everyone to the Plantronics Q4 FY'18 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

Thank you. I will now turn the call over to your speaker today, Mr. Will Zelver. Sir, you may begin.

Will Zelver

Thanks, Vincent. Welcome everyone and welcome to Plantronics' financial results conference call for the fourth quarter and fiscal year 2018. Joining me today are Joe Burton, Plantronics' President and CEO; and Pam Strayer, Plantronics' Senior Vice President and CFO.

The information presented and discussed today includes forward-looking statements, which are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The risks and uncertainties related to such statements are detailed on our most recent 10-Q, 10-K and today's press release. The purpose of today’s call will be to discuss Plantronics’ standalone results for the fourth quarter and full fiscal year 2018, and we will not be discussing further details of the Polycom acquisition at this time. Unless otherwise specified, all references to financial performance, guidance and forward looking information are intended to refer to Plantronics as a standalone company and should not be interpreted as guidance for the combined company.

During today’s conference call, we will be providing primarily non-GAAP metrics related to gross margin, operating expenses, operating income, net income and earnings per share. We have reconciled these measures with our US GAAP results in our earnings press release, quarterly analyst metric sheet and investor presentation, all of which are available, along with the recording of today’s call, on the Investor Relations section of our corporate website at investor.plantronics.com.

Plantronics’ fourth quarter fiscal year 2018 net revenues were $216.1 million, compared with $209.0 million in the prior year. Plantronics’ GAAP diluted earnings per share for the fourth fiscal quarter were $0.29 compared with $0.59 in the prior year. Non-GAAP diluted earnings per share for the fourth quarter were $1.05 compared with $0.81 in the prior year. The difference between GAAP and non-GAAP earnings per share for the fourth quarter of fiscal year 2018 consists of charges for acquisition related fees, stock based compensation, restructuring, all net of any associated tax impacts and impacts from the changes in tax regulation. Please refer to the full GAAP to non-GAAP reconciliation in our press release for additional details.

And with that, I will now turn the call over to Joe.

Joe Burton

Good afternoon, everyone and thanks for joining us today. I wanted to take this opportunity to spend a few minutes before we open for Q&A. as communicated to you previously, our customers and partners are looking for guidance and support in maneuvering through the ever evolving UC and UCaaS spaces. In meetings with them, our conversations continue to revolve around some reoccurring themes. First, mapping out cost efficient strategies for unified communications and team collaboration continues to be a headline. And while opportunity is provided by UC, UCaaS, team spaces and mobility, the constant innovation and industry changes can confuse and disrupt customer strategies in these areas.

My observations from a couple of quarters ago, still ring true today. The importance of reliable, quality communications and collaboration is key. Unified communications deployments are on the rise and the communications clients chosen as part of those deployments, takes on several forms. Some are software only. Others are predominantly desk phone oriented, and still others are hybrids, a mix of software and hardware end points. While customers still deploy on premises systems, an increasing number are embracing cloud deployments to access the rich capabilities these systems offer and to gain the speed of adoption that the cloud often brings. We also see many UC systems being deployed into open office environments where noise and distraction are significant concerns. This changes the nature of work and demands new solutions from Plantronics.

Next, for customer service, voice remains the medium of choice to handle the most complex and most valuable customer interactions. And businesses are striving to ensure that those customer service interactions have the greatest possible impact. Lastly, video usage in business continues to be on the rise to improve the richness and fidelity of remote conversations and meetings. Increasingly, headsets are part of that equation to assure a great video experience. In all of these deployments, UCaaS and on premises, voice in video, desk phone and soft client, the need for analytics and insights is being recognized. We’re seeing this need reflected in how strongly our data inside offering is resonating with customers.

Our overarching vision and strategy continues to be validated. Our investments in innovation in the intelligent headset space, software, analytics, insights and soundscaping are spot on. However, our alliance and channel partners and more importantly our customers, are asking us for even more. They desire a comprehensive suite of communications end points, with analytics and insight capabilities that can help maximize the impact of their UC investments and enable even better communications and collaboration than ever before. These market conditions drove us to accelerate our strategy through the acquisition of Polycom.

Thank you again for taking the time with us this afternoon. And with that, let's open the call for questions.

Question-and-Answer Session

Operator

[Operator instructions]. First question comes from the line of Greg Burns from Sidoti. Your line is open.

Greg Burns

Good afternoon. When you look at the guidance for the first quarter, can you just walk us through the decline in the operating margin from the strong trends from the fourth quarter? What’s driving that sequential decline in the operating margin?

Pam Strayer

Hey Greg, this is Pam. I can walk you through that. There's a couple of things that are expected to impact our operating margin in the first quarter. I guess the first thing I'd say is that generally our first quarter tends to be a lower quarter for - a lower profitability quarter relative to the rest of the year. There’s a couple of things that go on there. First of all, if you take a look at the topline quarter over quarter, our revenue is coming down a bit. And so that’s squeezing our profitability. But in addition to that, we also have some typical seasonal spend. If you take the midpoint of our guidance, we've got some sales training expenses that are in there that don't tend to impact the rest of the year. We also get variable compensation reset in the first quarter of the year. In FY’18 if you recall, we were funding our variable comp below 50% because we were missing some of our financial goals. As we start the new fiscal year ’19, we're pretty confident about our topline revenue goals as well as our profitability goal. So we expect that to go back up to 100% funding as the starting point.

Greg Burns

Okay. So for the full year, do you still expect to come within your target 20% to 23% range?

Pam Strayer

Yes, we do. If you look at the full year, we're still expecting to be able to do that in the operating margin numbers of Plantronics standalone. We’ll expect to see increasing profitabilities we get through the year. And profitability will improve. It will tend to be a little higher in Q2 and Q4.

Greg Burns

Okay, thank you. And then in terms of the debt you're looking to raise to finance the Polycom deal, do you have a sense on what the rates are looking like?

Pam Strayer

Yes. Well, right now the full debt is underwritten and we’ll be going out to market that in a couple of weeks. We expect it's probably going to land somewhere around LIBOR plus 250, but the market constantly shifts.

Greg Burns

Okay. Thank you.

Operator

Next question comes from the line of Mike Latimore from Northland Capital. Your line is open.

Unidentified Analyst

Hi. This is Vijay here for Mike Latimore. A couple of quick questions here. With regards to the UC demand, especially within the small, mid and large companies, so how do you see the demand is kind of widening or do you see sort of challenges over there?

Joe Burton

Yes. Hey Vijay, good to talk to you. As you saw in the results, we're actually seeing quite strong demand in UC. We’ve been at or above our model for several quarters in a row, and it's been particularly strong and broad over the last couple of quarters, including this one. So, strong in the SMB as it has been for a while, both on premises and in UCaaS and continuing to get stronger in mid-size and even larger company deployments. So really a great story in UC right now.

Unidentified Analyst

Okay, great. I'm sure you can’t talk much about the Polycom acquisition, but how are your clients looking at this acquisition? I mean are you getting any positive feedback from them in terms of what could potentially be a large opportunity for you?

Joe Burton

Yes, absolutely, Vijay. And clearly we want to primarily stay focused on the very good year and quarter we just turned in. however, absolutely. We had anticipated looking at the shifts in the market and hearing what our customers, partners and channel partners were asking us for, that the ability to be a comprehensive end point provider would excite them very much. The ability to be a one stop shop for everywhere that collaboration meets the person, there'll be a piece of Plantronics hardware there. And frankly, since the acquisition announcement, the feedback has been virtually 100% positive. Every partner, every customer, every analyst we've talked to instantly gets it and is excited by the possibilities.

Unidentified Analyst

It sounds good. If I can squeeze in one more. With regards to Microsoft Teams, how do you see Microsoft Teams really driving growth?

Joe Burton

Well, Microsoft Teams is of course a fantastic team collaboration product that is essentially a follow on to Skype for Business. Skype for Business of course drove a lot of demand for Plantronics headsets. Microsoft Teams is already driving a lot of demand for Plantronics headsets. Something you may or may not have missed is at Enterprise Connect, Microsoft had a keynote address. Enterprise Connect in March is kind of the large industry show for unified communications every year. And Microsoft's keynote was really they had their coming out party for Teams. They showed all the capabilities that team had - that Teams has around group collaboration, person to person collaboration, voice, video, a web sharing persistent chat, all driven by some very interesting artificial intelligence. And frankly, they only showed three or four pieces of hardware on stage as part of that Teams launch.

And I might be a little bit biased, but I would say the most compelling product they showed by a long shot was the Plantronics mobile phone station and headset. So Plantronics, if you go back and look at the Enterprise Connect site, actually showed something we call a mobile phone station. Looks very much like - almost like a desk phone with a headset on top. You bring your iPhone or your Android phone in. you drop it right on it and it kind of magically turns your mobile phone plus your headset into a very, very cool Microsoft Teams desk phone kind of on the fly. So we announced that product there, said it would actually be officially announced in the fall and shipping by the end of the year. Partnership with Microsoft is great. We see a lot of growth. Frankly, one of Microsoft's most primary partners around group collaboration, the in-conference room experience, tends to be Polycom. So we think the two together will really be quite nice with Microsoft.

Unidentified Analyst

Great. Have you seen any competition for this - for the product?

Joe Burton

Frankly, that particular product seems to be unique in the industry, the mobile phone station. This is a place where the deep Plantronics persona research that we do, really comes into play. We're out there with the customers understanding their needs, understanding how they want to work. And this literally was a brand new product for a brand new category that was born out of user need and trying to satisfy that. We think there will be follow on products that will try to copy what we've done. Frankly, we’ll stay keenly focused on delivering the right thing for the customer at the right price, and we're just going to out execute them.

Unidentified Analyst

Thanks a lot for the color. Appreciate it. All the best.

Operator

Your next question comes from the line of Bill Baker from GARP Research. Your line is open.

Bill Baker

Hi. Yes. I just would love to hear a little more color on the US versus international and the enterprise versus consumer because in the Q4, the Enterprise was slightly down year over year and the consumer was slightly up. These are kind of breaks in the trend. And the US, for a long time you've had a little more drift on the international side and a little more strength US I think. And it seems to be a little contrary to what we've been seeing.

Joe Burton

Yes. Maybe I'll start with some macro trends that are kind of numberless and then let Pam actually jump in on the specifics if she'd like. A couple of things to say about that. So first of all on the enterprise side, as we're seeing this very strong growth in the next generation unified communications business, and a little bit more of a stagnant market for the core, that really favors our Europe and Africa business. In Europe and Africa, we are executing extraordinarily well in the enterprise around UC. Unified communications in many respects just seems to have really resonated with modern work, open soft phone based collaboration, a little bit in Europe first. So we seem to be, if we go back over the last few quarters, really hitting the growth spurt around UC over there first. Now, in the Americas, UC is very, very strong as well, but our core business, the somewhat legacy business that hooks to those telephone systems that have been around a long time, is a larger part of our business.

So what we tend to see is core is great big in the Americas. So as it has flattened out, this somewhat smaller UC business that is growing well, can't quite overcome the drag of core to have the same growth rate. So we're very satisfied with the enterprise business in the Americas, in Europe and in Asia. Just the combined growth rates are a little bit different. Frankly, on consumer, we had a particularly weak Q4 last year. This year we had a very solid Q4, really driven by a couple of things. Number one, an easy year over year comp, if you will. And secondly, particular strength in our gaming portfolio that is just doing really, really well right now. Anything on the numbers side to add to that, Pam or?

Pam Strayer

Maybe just a little bit of context. When you look at the Americas, although we don't share the breakout between enterprise and consumer at that geographic level, Americas is really where you see the biggest impact of any consumer changes, as well as the biggest impact of any changes to our core revenue. If you think about our consumer business, more than half of it is in the Americas region. And so because we had some - a strong gaming quarter in Q4, you see that Americas benefited from that. But a weak core quarter brought that down. So that’s some of the dynamics.

Bill Baker

Okay. Thank you.

Operator

Next question comes from the line of Greg Burns from Sidoti. Your line is open.

Greg Burns

Just a question on the Manager Pro, the $4 million to $5 million of revenue you expect to, or bookings you expect in fiscal ’19. Is that a - are those multi-year contracts? Is that $4 million to $5 million over the following 12 months? How should we think about that?

Joe Burton

Yes. So I think, Pam it is a mix, is it not? So it's a mix of probably one and three year contracts for the most part and maybe a little bit in between. One to three year contracts, a couple of two year contracts. The thing I would say about that though is on one hand, it’s a few million in reoccurring, very high margin software revenue that's nice. But we also really, really like the overall impact it has on our business. So it’s a couple of things. So we get that revenue. We have the ability then to first of all go back and sell higher value software modules that we have to them, that provide even more value at a substantially different price.

Also though, it really changes the fundamentals of the headset business. Once they're under contract, they're used to our asset management, our usage analysis. In some cases, even the conversational analysis and higher in-stock. It really creates a relationship with the customer where we think over time, we can drive more standardization around Plantronics and really help customers understand the value of our higher ASP headsets that throw off even more analytics. So this is really to - in addition to the revenue, a shift of our customer relationship from a series of transactions to an ongoing relationship.

Greg Burns

Okay, thanks. And then last quarter, I guess mono Bluetooth was flat or stable and stereo declined. How did those two perform this quarter?

Pam Strayer

Yes. So in this quarter - give me just one minute while I look. Yes. So mono this quarter was flat, similar to the quarter before. We had some year over year declines in Mono a couple of quarters ago. And I think as we said in the call before, when you look at the mono category over the long term, it is a shrinking category. We’ve got strong market share there in the US. And we continue to expect that to shrink. It's hard to predict a bit, but over the last couple of quarters, it has been stable. Stereo has been down this Q4. Stereo was flat. It was down a bit.

But keep in mind that from a stereo perspective, Q4 a year ago was a very easy compare because it was the first quarter that we had in many quarters with a down consumer number because we had some products that had aged in the market. And so we had started to decline a year ago. So stereo was down just a bit, but not significantly. That was all offset by a good gaming quarter. So our gaming headset and the gaming portfolio that we released for the holiday season had - was received extremely well in the marketplace, and that continued - that strength continued into our fourth quarter.

Joe Burton

The other thing, Pam, if I remember correctly, even though Mono was essentially flat year over year and stereo was flat to slightly down, if you will, nevertheless the journey we set off on a year, a year and a half ago to improve margins substantially in consumer, and frankly walk away from some bad placements and some bad products, and make sure we had a more disciplined approach to that market, I think that’s really paying off. Our - I think we continued to make progress on profitability this quarter, yes?

Pam Strayer

Yes, absolutely. If you take a look at Q4 standalone, we were able to improve consumer product margins by over 700 basis points year over year. So we've improved that business significantly and we expect that to continue. We made a conscientious decision to let top line revenues come down while we focused on the most profitable areas of that business. And we're focused on niches where we think we can succeed and have some nice margins in the consumer space in places where customers prefer professional audio and excellent commutation.

Joe Burton

Last consumer thing I remembered, Pam, because there's always a lot of things to the story. The other thing to bear in mind in these comparables, and I think this is the last quarter, is the clarity business that we divested of last summer, accounts for almost 30% of the consumer decline that we had over the last year. So frankly, all of these quarters were making up for a $4 million to $5 million a quarter hole from clarity. So actually we had a decent little gain in the ongoing operations that we wanted to be in and they’re a fair bit more profitable.

Pam Strayer

Yes, that’s right.

Greg Burns

Okay. And then just lastly on the gross margin, really strong this quarter. So like FX helped that out. How should we think about gross margins next year? Will they get back into your kind of 50 to 52 range?

Pam Strayer

Yes. We expect that that's still a good long term range for this business. We did experience some help from FX in the fourth quarter, which put us up above that range a little bit. There’s other dynamics going on in gross margins that might be helpful to talk about. One of those, we talk about it a lot, which is just the ongoing cost savings that we are able to squeeze out of our material costs. Our operations team does a fantastic job of constantly looking at high volume headsets and looking for ways to save pennies out of those headsets. So we had about 140 basis points savings in material costs. That was offsetting some of the negative shift in gross margin from how product mix is changing.

And when you take a look at our product mix over time, UC is becoming a much, much larger part of enterprise, and our higher margin core products are coming down. So that’s causing some pressure on gross margin. Also as we shift a bit from mono - higher margin mono to slightly lower margin gaming, although the gaining margins are nice. I can't complain about those, but it is a bit of a shift downward. So that offset some of the material cost savings. And so net of all of those plus currency is where you get the benefit.

Greg Burns

Okay, thank you.

Operator

[Operator instructions]. We have no further questions. Please continue.

Will Zelver

Okay. Thank you for joining us, everyone today. Please visit investor.plantronics.com for the full set of investor materials. And please don’t hesitate to reach out if there are any further questions.

Operator

This concludes today's conference call. You may now disconnect.