Jan 30, 2018
Executives
Will Zelver - VP, IR Joe Burton - President & CEO Pamela Strayer - Senior VP & CFO
Analysts
Dave King - Roth Capital Greg Burns - Sidoti & Company Paul Chung - JPMorgan Mike Latimore - Northland Capital
Operator
Good afternoon. My name is Giles and I will be your conference operator today.
At this time, I would like to welcome everyone to the Plantronics Q3 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].
Will Zelver, Manager of Investor Relations, you may begin your conference.
Will Zelver
Thanks Giles and welcome everyone to Plantronics' financial results conference call for the third quarter of 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 in our most recent 10-Q, 10-K and today's press release.
The complete set of investor materials related to today's conference call are available on the Investor Relations section of our corporate website at investor.plantronics.com. For the remainder of today's call, unless other specified, we will be providing only non-GAAP metrics.
We have reconciled these measures with our U.S. GAAP results in our earnings press release and our quarterly analyst metric sheet, both of which are available on the Investor Relations section of our website.
After the conclusion of today's call, the recording of the call will be available along with other related information on our website. Plantronics' third quarter fiscal year 2018 net revenues were $226.5 million compared with $232.9 million in the prior year.
Plantronics' GAAP diluted loss per share for the third fiscal quarter was $1.54 compared with earnings per share of $0.68 in the prior year. Non-GAAP diluted earnings per share for the third fiscal quarter were $1.02 compared with $0.79 in the prior year.
The difference between GAAP and non-GAAP earnings per share for the third quarter of fiscal year 2018 consists of charges for stock-based compensation restructuring and the effect of dilutive securities, all net of any associated tax impact and the impacts for changes in tax regulation. Please refer to the full GAAP to non-GAAP reconciliation in our press release.
And with that, I will now turn the call over to Joe.
Joe Burton
Thanks very much, Will. 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. First, I wanted to say how thrilled I am with our latest product launches.
While we're still in the middle of a refresh of our consumer products, the new gaming and stereo products we had in market this holiday season did well. More importantly, our enterprise headset portfolio is stronger than ever.
The reception we've received to our new black wire 5200 and 3200 and the Voyager 8200 has been exceptional. Along with the rest of the product line, this has led to our second consecutive quarter of record enterprise revenues.
This quarter, almost 100 additional businesses purchased Plantronics Manager Pro, our software-as-a-service based data inside offering. Lastly, on the product side, the progress on our Habitat Soundscaping Solution has been solid.
We have pilot installations at Microsoft as well as a large telecom provider and several others and there's a strong global pipeline for the coming quarters. Over the last quarter, I've continued traveling the world meeting with our alliance and channel partners and importantly our customers.
In these meetings we've exchanged views on the communications market. I've worked to understand their concerns and challenges and most importantly to understand how Plantronics can have a greater impact on their success in the future.
Here's a few of the things I've learned. As predicted the contact center vendor landscape has become more clear over the last quarter.
This has led to a bit more strength in our core corded headset business. Next unified communications and team collaboration which were once long-term considerations are now business-critical needs.
The question for many is not whether to move forward, but how to move forward. Companies are looking to make the right decisions around timing, vendors, on premises versus increasingly cloud deployments, but perhaps the biggest inside of the quarter is the continued deployment of desk phones even in the most advanced unified communications configurations.
In these environments, a user is often given a desk phone and several soft clients on their laptop and mobile devices. This creates a headset attach rate that is much higher than in traditional telephone deployments of a few years ago and that's great news for us.
However, it makes the distinction between core and UC deployments very blurry. In fact, you could almost say that our Savvy and Voyager products are becoming the unifiers in business communications due to their ability to connect to multiple devices.
As I mentioned back in Q4 of the last fiscal year, in these multidevice, multivendor deployments, we can no longer fully determine which headsets are attached to phones to PCs or to multiple devices. Therefore, the classic definitions of core and UC are not serving us well anymore.
Going forward we'll talk increasingly about the enterprise B2B headset market and less about UC versus core. Next, I'm seeing a lot of video usage to improve the richness and fidelity of remote conversations and meetings and increasingly, the need for headsets to get a great video experience is being recognized.
In all of these deployments, UCaaS and on premises, voice and video, desk phones and soft client, the need for analytics and the insights is being recognized. We are seeing this need reflected in how strongly our data insights offering is resonating with customers.
I believe that our overarching vision is spot on as we continue to innovate and invest around intelligent headsets, software, analytics, insights and Soundscaping along with others. For more info on this, please refer to our quarterly Investor Relations package posted on our website @investor.Plantronics.com.
Finally, our roadmap of upcoming solutions reflects more exciting innovation, needless to say I am looking forward to sharing more with you once we get a little farther down the road. With that, I'll turn it over to Pam to make a few comments as well, Pam?
Pamela Strayer
Thanks Joe. Good afternoon, everyone.
Before we open up for Q&A, I wanted to discuss U.S. tax reform and give an overview of the impact on our business today and in the future.
Overall, we are pleased with the final passage of the tax cut and Jobs Act, which will modernize the tax code and make American businesses more competitive. We expect that the lower U.S.
corporate tax rate and shift to territorial tax system will be beneficial to our long-term profitability by lowering our overall tax build. In addition, it provides us with the flexibility to choose where we invest excess capital which allows us to make the best investment decisions for shareholder amongst competing opportunities no matter where they are in the world.
We welcome the opportunity to invest here in the United States and drive future growth for the company. As for specifics, our quarterly GAAP results for the third quarter as well as the guidance we issued today, includes the impact of the new U.S.
tax legislation, although some provisions of the new legislation are subject to interpretation and maybe clarified by treasury in the near future. The impact of the new tax legislation on our fiscal year 2018 and fiscal year 2019 rate may differ from the company's current estimates due to among other things, guidance that maybe issued clarifying the mechanics of some of the rules and interpretations and assumptions the company has made in developing this estimated impact.
With that said, as a result of the tax reform, our non-GAAP effective rate for fiscal year 2018 was reduced from 21.9% down to 17%. We're estimating a non-GAAP effective tax rate to between 1% for fiscal year 2019.
The reduction in tax rates increased our non-GAAP EPS by approximately $0.06 in both quarter and year to date periods. In our GAAP results for the quarter ended in December, we have recorded a charge of $69 million for the provisional estimate of taxes owed on our foreign unremitted earnings.
This is sometimes referred to as the toll charge. Of the total $69 million, 61% of that is comprised of tax in our current balance of cash and cash equivalents held offshore.
While the balance of the tax bill is based on foreign investment such as working capital, buildings and equipment. As mentioned earlier, the charge of $69 million is provisional and may change with different interpretation or additional guidance that maybe issued.
With lesser to pay the toll charge over an eight-year period with our first installment of $6 million due in July, and the $6 million will be paid annually over the next four years in calendar years 2022 through 2024, we will pay approximately $10 million, $14 million and $15 million a year respectively. Finally, we have revalued our existing deferred tax assets and liability using a new lower tax rate estimates.
This revaluation further increased GAAP tax expense by $7 million as our net deferred tax asset position was reduced with a lower rate. We are currently exploring different strategies for how to best utilize our available capital.
Although no decisions have been made, we are committed to acting in the best interest of our shareholder and maximizing shareholder value over the long-term. With that, I'd like to open the call for questions.
Operator
[Operator instructions] We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Dave King from Roth Capital.
Dave, your line is open.
Dave King
Thanks. Good afternoon.
I guess first on Manager Pro, it sound like it's early to be anticipating significant revenue from that, but to what extent are customers already beginning to standardize on Plantronics products? I guess what conversation to be had Joe on that front?
And then to what extent is that starting to help with bookings or revenue or is there anything you can share on that front, thanks?
Joe Burton
Yeah. Hi Dave.
Thanks very much for the question. As we've said already, we added almost a 100 new enterprises to Manager Pro just in this quarter, bringing our total somewhere well over 300 altogether, 300 enterprises on Manager Pro.
As you said, it's a little early on the revenue side. We'll probably have a little more guidance on how to think about Manager Pro a quarter from now when we talk more about our model for FY'19.
However, it really is shifting the conversation. In many cases, we lead with our industry-leading headset and their innovations when we talk to customers, but increasingly, we have conversations whether actually looking for the data insights, the ability for the IT to understand the assets that have been deployed around Unified Communications from the reports we can generate from the headset.
The usage of Unified Communications and even conversational analysis where they can actually understand the conversational patterns and begin training agents to have a more optimal lab business outcome with our customers. So being able to have conversations about that our sales team is finding that it really resonates with customers.
I wouldn't say all of them, but certainly we do have customers that are claiming that they are standardizing on Plantronics headsets in order to get a more compelling set of data insights out of Manager Pro. Clearly that's created a differentiator for us and we believe that one of the ingredients and just an outstanding result on the enterprise side.
Dave King
Okay. So that helps.
So then maybe asking it differently, do you think that that's contributed at all to the kind of low to mid-20s percentage gains we've seen on the UC side over the past couple quarters? Has is that been a material contributor do you think?
Joe Burton
There's a couple of things going on Dave. Clearly the Unified Communications market is strong.
We're seeing the market in general taking off and broadening. As we've talked about in the past, we think that is generally the maturation of the Unified Communications products.
We think UCaaS as a deployment model that lets people deploy more quickly has been a bit of a booster rocket on the growth of that industry. And then if anything we'd say really SaaS is a differentiator and an icing on the cake, but much as I wish it was the whole cake.
We got a broad industry that's helping us out too.
Dave King
Okay. That's great color.
And then as we think about the consumer side a little bit, I don't know, low 20%, low 20% drop there, how much of that is do you think is driven by market declines in mono versus, but seemingly more market share declines on the stereo side. And then I guess more importantly, how do you think about that stereo side?
When do you think we might find bottom there and what sort of product instructions do you have coming that may be able to help you [estomatite], thanks?
Joe Burton
Yeah, so I'll go ahead and start on consumer and then I'm sure Pam will chime in as well. So, as we've said over the last couple of quarters, we've taken a much more disciplined approach on the consumer side over the last year.
We've been working to increase margins both to better product introductions and also through more selectively placing our products. While the stereo wireless market broadly is enormous and growing well, Plantronics is going to be very selective and make sure that we are placing ourselves in niches and outlets where our industrial design miniaturization and our acoustic performance frankly will be paid for.
We're about halfway through a product refresh cycle give or take. We had some new products in market this holiday season and we did that I believe see a margin improvement on the consumer business albeit on a lower topline number and we will continue refreshing that product -- the product line over the coming year.
Now on finding bottom, I believe what we said in the past Pam is that we're essentially minus clarity -- minus the clarity divestiture. We're about -- we expect that we are flat year-over-year going forward at this point with increased margins?
Pamela Strayer
Absolutely. I'll also add and jump in there for a minute on little bit more color on consumer.
Mono for instance, this quarter when you look at year-over-year comparison, we stayed flat in mono. So, we are still doing quite well in that category.
In addition, our premium category in mono has nice margins and we continue to work on those. So that's still a good business and see as many declines there this quarter as we had in the past.
So that's some good news.
Dave King
Okay. That helps.
I guess and then lastly for me, maybe for Pam you as well, of the $500 million call it in cash, how much of that is overseas now and then as we think about tax reform, how much do you plan to repatriate or what do you plan and do with that? And I guess likewise, what's the sort of optimal level of debt or leverage assuming you do look to redeploy some so that cash?
Pamela Strayer
Yeah. So, I'll start with the cash balances.
We currently have $600 million in cash offshore. We've got $80 million here in the U.S.
So that majority is offshore and we have been spending time since the tax reform was issued looking at where those cash and investments reside and how we could pull them back to the U.S. if we found some investment opportunities here.
So, we've been looking at that and aside from some working capital offshore, I think the bulk of it could be brought back over time. As you know, we're always looking for ways to improve our capital structure and this a big change in our capital structure today.
We now have access to that cash without paying any more tax on it. So, we want to be very thoughtful about what we do with that capital.
The obvious options, we would look at you mentioned debt, we would -- that's clearly something that we would need to consider. There is some limitations in the new tax rules on interest expense, but that's not impacting us too much.
So pretty small impact. Of course, there might be some M&A that takes our strategy board and of course share buyback is always an option as well.
So, we're looking at all of those. We want to do the right thing, for the long-term growth of the company and long-term return for our shareholders.
So, we're not disclosing anything today, but I expect to be able to tell you more in the next quarter call.
Dave King
Okay. Okay.
That helps. I guess just one more on that front, if you did let's say accelerate the buyback, are you still comfortable with your leverage levels or do you kind of think about the debt you have is going hand-in-hand with the level of cash that you have?
Pamela Strayer
I am pretty comfortable with the debt leverage the way it is today. I think we're in good shape and that doesn’t worry me at all.
Dave King
Perfect. Okay.
Thanks for taking all my questions and good luck with the rest of the year.
Joe Burton
Okay. Thanks Dave.
Operator
Your next question comes from the line of Greg Burns from Sidoti. Greg, your line is open.
Greg Burns
Good afternoon. In terms of the strength in the UC market, how would you I guess characterize what you're seeing?
Is it being driven by a handful of large projects or is it just a more broad-based kind of expansion of demand in the market?
Joe Burton
It's a great question Greg, thanks for asking. So, a little bit of both, but to be clear, we're actually seeing a broad-based UC demand.
It is not overly lumpy. It is quite a few small deals, quite a few medium-sized deals and we do virtually every quarter one or two large deals hit too, but they don't make the whole quarter.
It's just that's the way they hit. So, at this point it is less lumpy than it was in the past and seems to be a bit broader.
The one thing that I mentioned -- that I mentioned in my opening comments that I think is interesting on the UC side though, is as we really get out there and our salespeople have been telling us and when I'm talking to business leaders and actually walking the floor at our customers I see it as well. UC really comes in several different flavors and sometimes it is people that have made the full pivot to a laptop or a tablet with the Unified Communications headset, which is probably what we predicted a lot of back five or eight years ago.
We're also seeing people that have put in Unified Communications or Unified Communications as a service with quite a few desktop phones that are next-generation. They have a USB port and a full USB stack and therefore they're getting a USB headset or even more likely they're trying to future proof.
So, it's a telephone, plus a tablet, plus a PC. So, in many cases, we're seeing really strong growth on the UC side if people either have moved to UC or are even considering it as a future proofing type mechanism, but it is quite broad.
Greg Burns
Okay. Thanks.
What percent of consumer is gaming?
Pamela Strayer
Yeah overall, it's a pretty small percentage. It did grow this quarter because we did quite well in year-over-year ground but it's down below 15% of total.
Joe Burton
Yeah around there right. Yeah.
Greg Burns
Okay. And can you just give us this split I guess on the mobile side of consumer?
What percent of that business is mono versus stereo?
Pamela Strayer
Yeah, we don't give out a lot of detail here, but what I will say is that mono because it's been quite resilient recently, it's still up over 50% of our total consumer loans and probably back into the rest from there.
Greg Burns
Okay. Yeah.
All right. And then one last one on the consumer stereo side of the business, we're seeing a lot of truly wireless earbud factor headsets coming to market.
Is that type of form factor something you feel you need to have to be competitive in the market or just to round out your portfolio?
Joe Burton
It's a great question. CES was lit -- was just littered with people showing prototypes or early samples of true wireless products and as you say there are quite a few of them actually making their way to stores now.
At the same time until very recently, most of them we felt were at a price and performance ratio that was just not something we wanted to put our name on. Going forward, certainly if we can find the formula where we actually see true wireless that can have a Plantronics quality at the right price and really solving a problem for a user, than I think you could expect them, but no product announcements at this time.
Greg Burns
Okay. Thank you.
Operator
Your next question comes from the line of Paul Coster from JPMorgan. Paul, your line is open.
Paul Chung
Hi thanks. This is Paul Chung on for Coster.
Thanks for taking my questions. So just on the enterprise side, I know now you've been driving growth there, but on the legacy quarter, how much of that decline is being replaced by UC business or is this more of a function of some call centers or industry shrinking, if you could comment on the puts and takes in the legacy core business?
Joe Burton
Yeah, I certainly will Paul, thanks so much for the question. As I talked about earlier in my opening comments, because core headsets occasionally get used on UC and UC headsets get hooked to phones in order to future proof.
We can't determine down to a very, very, very precise number, which is which, but let me give some broad remarks based on what we are seeing. First of all, a couple of quarters back we did talk about some vendor confusion that in particular in the contact center space having a negative impact on our core and in particular our core recorded revenues.
We have seen the vendor space clarify to a degree and we seem somewhat proportionally a bit of strength in the core recorded business again. Clearly when we're out there looking at contact centers in particular that you talked about, the death of the contact center is completely ridiculous at this time.
So yes, box and automated service and self-service exist, but we're seeing robust deployment of contact centers. So, we don't see a real problem there.
Now in a general purpose office deployment, certainly we do think that you're seeing Unified Communications headsets being deployed instead of core headsets to some degree. As I talked about before, that can either be because the Unified Communications system is now on a laptop.
So of course you're moving to a UC headset. But increasingly some of the next-generation telephones that support a standard USB port or allowing Unified Communications headsets to be deployed there too.
So, we don't see any loss of share. We don't see any meaningful erosion, we can determine in contact centers.
What we see really is when you add it all together is just our second record enterprise quarter in a row with expanding overall margins at the same time.
Paul Chung
Yeah, it's great. So, the past two quarters have been particularly strong, and I know you mentioned it was broad-based.
But are there any kind of industry verticals you can call out or regions or market share gains?
Joe Burton
On the market share side, nothing really to count -- to call out. Verticals, part of the reason you're hearing a relative enthusiasm in our voice is not particularly this is broad-based, nothing particular to call out.
Regionally strong in all regions, perhaps slightly stronger yet in Europe where just generally the Unified Communications market seems to be going well and we're participating in that fully. But no, it's pretty broad across all regions, all verticals.
Paul Chung
Okay. And then lastly, how should we think about fiscal year '19?
You expect this momentum to continue and in particular and how are you thinking about enterprise growth given that unemployment rates are low, workforce options are -- and turnover is most likely peeking. So just to get a sense for your fiscal year '19 outlook, thanks?
Joe Burton
Two things, and then I'll see if Pam wants to go on. First of all, we've said for a long time on Unified Communications that we thought we were still in the early innings of that cycle.
We believe that this is still be true. There is still a lot of runway in Unified Communications.
Now specifically to our growth model, that something I think we're going to talk about at the next earnings call going forward.
Pamela Strayer
Yeah, and last year we put out five-year CAGR expectation for enterprise as a total category enterprise would grow 6%. So that's still a reasonable estimate at this point, but we will update it next quarter.
Paul Chung
Thank you.
Joe Burton
Yeah. Thanks Paul.
Operator
[Operator instructions] Your next question comes from the line of Mike Latimore from Northland Capital. Mike, your line is open.
Mike Latimore
Great. Thanks a lot.
Great quarter. With the lower tax rate, does that change your thinking around target operating margins at all long-term or are those so to say, stay the same?
Pamela Strayer
That's a good question Mike. The KPI that we hold ourselves accountable is the operating income maturate and operating margin.
So that we're not changing. We're still looking at driving operating income to be between 20% and 23% of net revenues.
The couple of points that we'll gain on the tax line will help earnings next year.
Mike Latimore
Okay. Got it.
And then as you think about the enterprise business, any general color on how that should trend in the March quarter down up flat?
Pamela Strayer
Yeah, there is a little bit of seasonality in enterprise revenues going from Q3 to Q4. It's always a bit of a down quarter typically.
So, it's not a strong down, but slightly down from Q3. Year-over-year we expect growth in enterprise.
Mike Latimore
Great. And then Joe, I think you mentioned this like three different times now, but just want to be clear.
So basically, you're seeing more Unified Communications initiative, more Unified Communications deployment, but just that relative to couple years ago, the percent of maybe pure soft phone deployment is a little bit less, the percent of more desk phones is a little bit more but the net of it is just more opportunity overall?
Pamela Strayer
Yeah, absolutely. Yeah, the reason I called it out is when we talked about it is in the opening comments is frankly maybe three or four years ago we all thought that desk phone was going to go away and it was going to be all about soft clients on the PC and on the tablet.
Interestingly, as I think often happens in technology, it's not an either/or that winds up being an end. It turns out that desk phone -- the desk phone is staying there when people are at their desk, they're using them a lot.
It's highly reliable. It's a user interface we were all raised on, but they're also getting a soft client for their PC and for their smartphone and it really just provides a tremendous opportunity for an intelligent headset and software system like we build to really be the unifier of all of it.
So even though it's not the industry we predicted three or four years ago, it's a better industry for us than we predicted three or four years ago.
Mike Latimore
Okay. Great.
And then with regard to the Unified Communications deployments, is the on-premise version still predominate or is hybrid, facing hybrid being kind of the [duty] now?
Joe Burton
A little bit of all three and I want to be a little careful Mike. Of course, I see what I see.
I visit dozens of customers a quarter and talk to dozens of partners, but done not all of them. I would say that what I see is probably not very surprising to you.
I probably still see -- at the low end of the market it is substantially going to the cloud, going to UCaaS. There are still some on-premise deployments down there, but at the low-end cloud is happening.
At the high end, it still tends -- high end meaning 10,000 plus seats and especially 25,000 plus seats. Those tend to be on-prem deployments and then you see some of those on-prem deployments starting to dip their toe into the cloud by way of hybrid.
Let's take some remote offices and put them on -- put them in the cloud and then lash together the on-premise and the cloud deployment to create a hole. So, the number of seats at which cloud is a good idea continues to raise up as you go forward, but you still see the very top primarily on-prem at the ones that I visit.
Mike Latimore
Got it. And then how much of your headset revenues comes from the contact center?
Joe Burton
Once again, we don't really specifically know because we don't know which -- we don't precisely know on our core headsets is that a core headset in the contact center or is that a core headset that's sitting out in a general office environment. Likewise, certainly there are contact centers that have moved to a hardened soft phone and therefore they're deploying a headset that we might actually call UC back to my earlier statement that those definitions don't serve us as well as they used to.
So, I don't know that we know precisely how much comes from contact center, but still a meaningful chunk of revenue, but not terribly important as a construct for us.
Mike Latimore
And then just last -- you mentioned vendor confusion in the contact center space a few quarters ago, I know that clearing up. Is that specific to one vendor or a couple vendors or can you elaborate a little bit on that?
Joe Burton
There were a handful of things going on. Clearly our friends and good partners over at Avaya had some things that were written about them that created some confusion while they were in bankruptcy.
We're delighted that they have reemerged as a public company and continue to be a great partner for us. That probably takes away some hesitation people felt.
When Amazon first announced they were going into the contact center business with an offering, of course anytime Amazon moves into your space, everybody sits up and listens and maybe pauses a little bit. Amazon's offering may build out and be something deeply impressive over time, but I think at the moment, people have had a quarter or two to understand where to consider it and where not to.
So, any confusion it was causing probably is behind us for the moment. Couple of other things around M&A as well, but we really did have just a unique situation two and half, three quarters ago where several things happened simultaneously in contact center and more than half of that seems to be behind the industry right now and we see that reflecting in our core corded numbers, which is nice.
Operator
There are no further questions at this time. I will turn the call back over to the presenters.
Joe Burton
Thanks Giles and thank you everyone for joining us today. Please visit the Investor Relations section of the website for the complete set of investor materials and don't hesitate to reach out if there are any follow-up questions.
Operator
This concludes today's conference call. You may now disconnect.