Plantronics Inc. (PLT) CEO Joe Burton on Q2 2019 Results - Earnings Call Transcript

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About: Plantronics Inc. (PLT)
by: SA Transcripts

Plantronics Inc. (NYSE:PLT) Q2 2019 Results Earnings Conference Call November 6, 2018 5:00 PM ET

Executives

Mike Iburg - Head, IR

Joe Burton - President and CEO

Pam Strayer - EVP and CFO

Analysts

Greg Burns - Sidoti & Company

David Eller - Wells Fargo

Operator

Good afternoon, my name is Jerome and I will be your conference operator today. At this time, I would like to welcome everyone to the Plantronics Q2 FY 19 Earnings 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. Mr. Mike Iburg, you may begin your conference.

Mike Iburg

Thank you, Jerome. Welcome to Plantronics fiscal results conference call for the second quarter of fiscal year 2019. My name is Mike Iburg, Head of Investor Relations and joining me today are Joe Burton, Plantronics' President and CEO; and Pam Strayer, Plantronics' Executive 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.

We are providing GAAP revenue guidance along with the impacts of the purchase accounting adjustments to revenue. However, all other guidance is provided on a non-GAAP basis in a manner that is comparable to past period results.

During today's call, we will be providing primarily historical 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, which is available along with a recording of today's call on the Investor Relations section of our corporate website at investor.plantronics.com.

Plantronics' second quarter fiscal year 2019 GAAP net revenues were $483 million. Plantronics' GAAP gross margin was 31.6%, GAAP operating margin was negative 17.8% and GAAP diluted earnings per share was negative $2.21. These GAAP results include the impact of purchase accounting adjustments made at the time of the Polycom acquisition under US GAAP.

Our earnings release today includes a table outlining the revenue impact of purchase accounting adjustments, which were included in our non-GAAP results. We have adjusted for this revenue impact to arrive at a combined set of comparative results for the current period and prior year period that management believes provides meaningful supplemental information regarding our performance.

During our last earnings call on August 7, 2018, when we provided guidance for this quarter we noted that we are providing non-GAAP guidance for the combined company in a manner that is comparable to past period results. Actual results will be different from this due to accounting adjustments made at the time of the acquisition of Polycom under GAAP accounting. The specific impact of these adjustments is unknown at this time, but will be recorded in our September quarter results.

The combined comparative net revenue for the second quarter of fiscal 2019 was $520 million compared with combined comparative net revenues of $512 million from the prior year period. Combined comparative gross margins and operating margins were 53.2% and 18.5% compared with 55.5% and 19.5% in the prior year period, respectively.

Combined comparative diluted earnings per share was $1.51 in the second quarter. The difference between our GAAP results and the combined comparative results provided here consists primarily of purchase accounting adjustments, intangibles, amortization, charges for acquisition-related fees, stock compensation and restructuring, all net of any associated tax impact and discrete tax adjustments. Please refer to the reconciliation tables in our earnings press release issued today for additional details.

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 provide a few remarks before we open the call to Q&A. Today marks another milestone for the combined Plantronics and Polycom as we report our first quarter of consolidated financial results. Looking to our combined comparative results, which are adjusted for the revenue impact of purchase accounting, we delivered net revenues of $520 million, gross margins of 53.2%, operating margin of 18.5% and earnings per share of $1.51, very solid results for our first combined quarter and a demonstration that the leverage available in the model that we have, even with the majority of our cost synergy is yet to be achieved.

Although there will be some fluctuation in our results as we go through the process of integrating the two organizations, overtime as we deliver our synergy targets, we expect to see improvement and deliver on the inherent potential of this combination. Now that we are operating and reporting as a combined company, I think it makes sense to take a few minutes and walk through our core market, our strategy in that market and why we believe we will be so successful.

As we've discussed in the past, we participate in the $40 billion annual unified communications and collaboration market, providing a broad range of intelligent endpoints targeting the enterprise and business customer. In the past, we were limited to the professional headset portion of this market, but with the addition of Polycom we now have a broad set of voice, video and headset endpoints that address over $5 billion of market opportunity, growing to over $7 billion in opportunity by 2022 and overall combined annual growth rate of approximately 7%.

The driving force behind the unified communications and collaboration market is the transition to open flexible workspaces. We are in the early innings of a massive enterprise technology transition. Businesses want to improve productivity and utilization, while employees want more collaboration and flexibility in their work environment. As a result, the traditional cube/office design is transitioning toward open flexible spaces with hoteling, hot desk setups, they are becoming more common. The common denominator in this transition is the need for employees to be untethered from their fixed location and yet be able to work from anywhere at any workstation across any work infrastructure and have the same or superior tools, connectivity and reliability as they have had in the past.

With this transition, the traditional voice PBX is being replaced by cloud-based or software-based deployments utilizing IP phones and headsets on the desktop, while the traditional offices of the past are being converted at a rapid pace into small conference rooms or a huddle rooms where collaboration can occur and this stokes the need for voice and video solutions. This technology transition not only reduces cost, but also provides the flexibility and mobility necessary for today's always-connected work environment.

The always-connected mobile worker needs the tools to get the job done whether on the road, telecommuting or hoteling and the need to be connected is critical. We have positioned ourselves as the leading provider of intelligent endpoints, working collaboratively with all the tech partners in the industry and with the ability to interoperate across virtually any back-end infrastructure. We offer unparalleled portfolio of integrated solutions, spanning audio, video and content collaboration through our headsets, desk phones, audio and video conferencing, all tied together with enhanced analytics software and services.

We believe our success is going to be based on, number one, offering the market a single source of world-class endpoints that meet all their needs. Number two, providing integrated analytics management and provisioning tools that provide insights and management they have never had before. And thirdly, interoperating seamlessly on top of virtually any communications platform and infrastructure.

Over the next several quarters we will bring to market combined solutions leveraging world-class technology from both Plantronics and Polycom targeting specific high-growth opportunities in the UC&C market. We believe these combined solutions will confirm our better together thesis and validate the old adage that the whole really is greater than the sum of the parts.

Thank you again for joining us today for this call, and with that let's open the floor for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We have a question coming from the line of Mr. Greg Burns of Sidoti & Company. Your line is now open.

Greg Burns

Hi, good afternoon. So just wanted to start with EPS, can you just bridge us between the $1.51 you posted for the quarter and the reiterated guidance that you gave in early September of $1.00 to $1.25, where the variances was driven there and then when we look forward to the third quarter guidance kind of that, it looks like it's projected to step back down to around like $1.23 or so at the midpoint? Can you just walk us through the bridge between all those numbers? Thanks.

Pam Strayer

Yes, hi Greg, this is Pam. So on the bridge on EPS, I would point first to the top line, we did overachieve on top line relative to the midpoint of our guidance. So that helped a little bit on our EPS forecast, but I think the biggest impact was really on decline in operating expenses in the year or in the quarter. OpEx came in below what was being forecasted in guidance, that really helped us overachieve on the EPS line.

Greg Burns

Okay. And then looking at the third quarter, OpEx is going to be stepping back up a little bit in the third quarter, is that the case?

Pam Strayer

Yes. So I think in the current quarter, OpEx, like I said, was a bit lower than we expected. As you can imagine bringing 2 companies together of similar size, starting integration plans, you're going to have a pullback of it on spend, as people like to see what's coming out and what the plans are, going into the December quarter now as we're finalizing more of our specific integration plans. Some of that will come back in the area of operating expenses. We do expect to have a couple of changes there that are impacting that area. Number one, we do expect an increase in R&D expense overall as we get some NRE receipts from strategic partners that help offset some of that R&D spend. We saw some of that spend in December quarter and December quarter is going to be slightly lower.

We're going to have a little bit of higher sales commissions, because it is the fourth quarter for the Polycom business. And so connections would be going up a bit. And then we're just going to continue on our hiring plans that were put on hold. So there will be a little bit of headcount added, but that's some color on why OpEx is coming back. [indiscernible] we do have realized synergies that we'll be seeing and that will be coming in to the December quarter as well but that gives you a flavor of OpEx.

Greg Burns

Okay. What do you project in terms of, I guess, synergy realization may be in the third quarter and for the full year '19?

Pam Strayer

Yes. So I can't comment on the full year, I will tell you a couple of things I know about the quarter. So we did execute on synergies in the September quarter to the tune of $12 million in run rate synergies. We were able to realize actual synergies in the September quarter of about $2 million. So I expect the December quarter that will get back to $3 million benefit in December from the September actions. In December, we are still very much on track for our synergy plan, and we had been projecting $14 million in run rate synergies that we'd execute against in the December quarter, and we're right on target with that plan. Actual realized synergies in the December quarter, however, are very low, just due to the timing of that execution.

So we're not going to see benefits from the December quarter actions until next quarter but that should be about $2 million to $3 million, that we would then see in March from the December actions. So we're right on target with our synergies. We're seeing the benefits from them as we would expect and we're still very confident of our plan to get to $85 million in run rate by the end of the first year following the acquisition.

Greg Burns

Okay, perfect. And then maybe could you touch on the declines in video, the 17% decline you posted in video? What's kind of the competitive landscape look like in the video market? Do you think you could stabilize that business? And maybe, I guess, first stabilize it and then what are your plans to grow that business?

Joe Burton

Yes. Greg, this is Joe, I'll jump in on that. So really, 2 things going on in the video business. One planned and one temporary, but we still feel extraordinarily good about that business. The decline in the video business this quarter really came from 2 things. It came from the decline in video endpoints in North America and a decline in platform in Asia-Pac. So first let's talk about the decline in platform.

Platform is of course the MCU, the infrastructure that sits in the wiring closet which is no longer a strategic focus for the Company. It's terribly important to some of our existing customers, it's important to a couple of markets, but we both Polycom, before we acquired them, and then us as a combined company have expected that business to decline and continue going down over time. So, decline in platform in Asia as expected was a big part of it. Declines in video endpoints in North America, there's really a couple of items there.

First of all, we absolutely believe that this market is still growing with a five-year CAGR in the low-single-digits and we expect to be able to capitalize on that opportunity. Nobody is stealing share from us. This is a blip and what's going on in the market. We've got a great portfolio of products that are selling well in many respects, but we're being impacted a little bit on video, frankly a little bit on headsets as well, what we're hearing from our customers and partners is, the transition from Skype for Business to Microsoft Teams. Customers are temporarily slowing their deployment a little bit as they evaluate Teams and we very much have seen this story before.

As the major technology partners, be it Microsoft, Cisco, Avaya or others go from one major release to another, we tend to see there's a little softness in the market that goes on for part of a quarter or two where that reevaluation happens and we see it a little bit in the headset number although it's excellent and we see it a little bit in the video number there that was just exacerbated. We were only expecting flat to slightly up growth to begin with, so a little bit of softness puts you in decline.

Another piece of the dynamic that's really important there and then I'll be done on the video is, some of this is being driven by the market expansion in the smaller room solutions and plug-and-play where plug-and-play solutions are in high demand. This is really evidenced by our Trio product, which is just fantastic. It's currently included in our audio conferencing revenue number where it is growing well above market rates and frankly, we are selling into over 70% of the Fortune 100 where it's really going on a nice clip.

But the Trio product is actually an all-in-one solution for both audio and video conferencing in a smaller room and it's frequently being used as the video solution in these emerging small conference rooms and other rooms. So if you were to reclass the part of Trio growth, that's video into video endpoints, our decline in video would be very small, it would be kind of low to mid-single digits and look much better. So we still feel very good about the long-term growth in video, very good about participating in it and we just see this a temporary phenomenon related to some industry transitions.

Greg Burns

Okay. Great, thanks. I'll back in the queue.

Operator

[Operator Instructions] Your next question is coming from the line of Mr. David Eller of Wells Fargo. Your line is now open.

David Eller

Hi, good afternoon. Thanks for taking the question It looks like revenue guidance implies low-single-digit organic growth for the combined pro forma companies. For this quarter it was kind of mostly driven on the Plantronics side of a little bit of a decline on the products for Polycom. Is that kind of what's embedded in the Q3 guidance, is kind of growth from Plantronics with kind of flattish Polycom?

Pam Strayer

Yes, to go down a level deeper I can talk a little bit more about the individual categories and say, first of all, the big movement is going to be the growth in voice in the Polycom business offset by some declines in video similar to what we've seen this quarter. So again, the dynamic that we did see in September is continuing into December as you suggested. Although we are expecting voice growth to be better in December, we've got the new VXX phones that we've launched and we expect that to be really well received in the market, so voice is going to be a little bit up there.

On the Plantronics side, on the headset side then, we expect the UC growth to continue roughly around what we saw in the September quarter and then of course consumer, we'll see year-over-year growth there, we're expecting kind of the low-double-digit growth in consumer year-over-year. So, yes, all that nets out to roughly 1% year-over-year growth on a comparable basis.

David Eller

Great. And then the legacy core headsets, you called out that it was only a low-single-digit decline. Can you remind us what the trend's been last few quarters and maybe what drove that improvement in the quarter and if you expect that going forward?

Joe Burton

Yes, a couple of things. I'll start with kind of the strategic and then if Pam wants to add numbers, that's great. So once again legacy core headsets are the headsets that hook to proprietary desk phones, pre UC type phones, both in the both in the office and in contact centers. A lot of what we saw this quarter was a bit of reemergence with a stronger Avaya out there in the market, some other big deals and some other contact centers and whatnot actually driving a stronger demand for the legacy headsets which has been nice along with the good UC growth. Frankly, we've been seeing what Pam, how much decline typically?

Pam Strayer

It's roughly -- it's been around 5% decline like our mid to high single-digit decline over last couple of years.

Joe Burton

That's what I thought, 5% to 9% decline is kind of what we've been seeing. So of course seeing that back up around flat even slight growth was a pleasant surprise, but we do expect the trend to still be a bit down.

David Eller

Okay. That's very helpful. And then thinking about foreign exchange headwinds, can you just remind us the percentage breakdown of your large currencies and if we look out for the full year, maybe what kind of headwind that might be?

Pam Strayer

Yeah. So, currency in the September quarter didn't have a significant impact on revenues. We're not expecting it to have a significant impact in December as well. Just to remind you of our hedging program, we do fourth quarter layered hedge on the major currencies in which we do business, so that does protect us from volatility quite a bit. The majority of our revenues are in U.S. dollars. I'd say the next largest currency is euro, of course, British pound, Canadian dollar and Australian dollar, but U.S. dollar is probably 60%, I'm going some from memory, but euro I think is around 10%. So that gives you some topic.

David Eller

Right. And then last question for me, on the tariff front, if the 25% tariff is to go into effect, are you able to estimate any kind of impact that would have on a full year basis and maybe if you could talk about how effectively be able to pass on kind of price increases to customers or how much you might have to absorb?

Pam Strayer

Yes, so when we went out on September 11, we did some long-term operating target numbers that we share with the Street, including gross margin ranges of 52% to 54%. At that time we were talking about the potential impact for tariffs as well as the potential impact for MLCC due to the CapEx capacitor shortage. Shortly after that, kind of mid-September timeframe, there was an announcement that communication devices that communicate over Bluetooth Wireless were taken off the tariff list and that's a very nice positive for us. So as a result, our tariffs where we were estimating potentially $10 million a year prior to any mitigation activities, that's dropped now to just a couple of million dollars a year. Even if it does come back on and there is some impact to us, we had started some mitigation plans and things, but right now it's low, it's not an impact to us and we're pleased with that change.

Joe Burton

On top of that, Pam, perfect answer, but this is another place where our flexible manufacturing and supply chain with both Asian contract manufacturers, both in China and outside China, as well as our very strategic asset at Plantronics Mexico, really just gives us a level of flexibility. Now, you can't do it on a daily basis, but it gives us a level of flexibility to move final assembly, move products around and frankly mitigate some of that, that we think is just a real advantage for us in the market and you can better imagine that those plans are well under way.

David Eller

Great, thank you for taking the questions.

Operator

There are no further questions at this time. Please continue, sir.

Joe Burton

So that concludes today's earnings conference call. I'd like to thank everyone for joining us today and we look forward to discussing our fiscal Q3 results with you early next year. Thank you.

Operator

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