Plantronics Still A Bad Call (PLT)

By Philip Barton | February 07, 2007 AAA

When Santa Cruz, CA-based Plantronics (PLT) reported its Q3 2007 results in late January, revenues and earnings were right on target, with some extra pennies booked from a lower tax rate and $1.5 million in foreign exchange gains.

At a time when high profile mobile handset profit warnings were being issued by the likes of Nokia (NOK), the disconnect from the results was clear for this maker of wireless "Bluetooth" headphones for mobile phones and associated peripherals. Moreover, PLT admitted these one-time gains would not be repeated in the March quarter.

Plantronics, Inc. engages in the design, manufacture, and marketing of lightweight communications headsets, telephone headset systems, and accessories for the business and consumer markets, probably a 5-7% annual growth market.

But somewhat strangely, during 2006 PLT bought a marginal player in the commodity computer and home entertainment sound systems (Altec Lansing) and that business suffered substantial gross margin pressure during the seasonally strong Christmas selling season.

Management warned that they have no effective control over component lead times and that the chances of reaching their "target operating model" are low until late 2008. Kind of sounds like a forecast on balancing the Federal budget!

Plantronic's core is its Audio Communications Group (ACG), the specialty headphones business, which rose 9.3% year over year to $176.5 million, with the mobile revenues (i.e. Bluetooth) rising by 44%.

However, ACG's non-GAAP gross margin slumped to 44.2% compared to 46.4% a year ago, in part due to the higher percentage of revenue represented by mobile products, which carry lower gross margin than the high value OCC (call center) category.

But inventories in the channel have surged and other ACG product sales have slumped (i.e. professional grade corded products). PLT is ramping up a new Chinese plant which increased its output 37% sequentially, but is still a long way away from being breakeven, especially if the 25% annual decline in wireless peripheral products is factored in. Even at an aggressive ramp rate, the plant is a year from a 30% utilization rate.

And PLT is also betting aggressively on continued strong consumer demand for highly discretionary wireless and entertainment purchases. The Altec-Lansing products are already produced at another Chinese plant and so no consolidation or efficiency gains can be expected there.

Moreover, PLT will be incurring sharply increased marketing and R&D expenses in the current quarter as its price points for the A-L product line are too high. And already A-L is losing share and losing money.

But there's even more issues of concern. PLT faces higher costs sequentially and compared to a year ago to complete Sarbanes-Oxley disclosure compliance and substantial implementation costs for a new Oracle financial software system rollout.

But folks, the pricing environment for these products has never improved. Motorola (MOT) has already indicated its intention to push for full utilization of its China factories, and in this arena, PLT simply lacks scale.

From its platform at the recent Consumer Electronics Show, Motorola paraded every single new broadband phone model and its functions like internet surfing. Not exactly groundbreaking stuff, and the prices are dropping 30-40% annually, so the PLT assumptions for price declines for its peripherals could very well turn out to be too optimistic.

With all these risks in the mix, investors should seriously consider hanging up on PLT shares, at least until the outlook improves a bit.

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