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.

Related Articles
  1. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  3. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  4. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  5. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  6. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  7. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  8. Investing News

    Corporate Bonds or Stocks: Which is Better Now?

    With market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
  9. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  10. Investing Basics

    How to Diversify with International Stocks

    Diversifying with international stocks can benefit most portfolios, but beware of country risk.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!