Good morning. My name is Carina and I will be your conference operator today. At this time, I would like to welcome everyone to the Plantronics Q4 FY 2017 Conference Call. [Operator Instructions]. Mr. Greg Klaben, you may begin your conference.

Thanks very much, Carina. Welcome to Plantronics' Fourth Quarter and Fiscal Year 2017 Financial Results Conference Call. 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 prepared remarks of today's conference call are available on the Investor Relations section of our website. For the remainder of today's call, we will be providing only non-GAAP metrics related to gross margin, operating expenses, operating income, net income and earnings per share. We have reconciled these measures in our earnings press release and in our earnings quarterly analyst metric sheet, both of which are available on the Investor Relations page of our website. After the conclusion of today's call, the recording of the call will be available with information on our website. Plantronics' fourth quarter fiscal year 2017 net revenues were $209 million. Our GAAP diluted earnings per share were $0.59 compared with $0.39 in the prior year. Our non-GAAP diluted earnings per share were $0.81 compared with $0.64 in the prior year. The difference between GAAP and non-GAAP earnings per share for the fourth quarter consists of charges for stock-based compensation, restructuring and purchase accounting amortization, all net of the associated tax impact and tax benefits from the release of tax reserves. Please refer to the full GAAP to non-GAAP reconciliation in our earnings release. With that, I'd like to open the call for questions.

[Operator Instructions]. Your first question is from Dave King from Roth Capital.

I guess, first off, we look at the outlook for the first quarter on revenue for -- I think it's down 1% to 5% or so. How does the Enterprise outlook compare to the -- I think the low to mid-single digits you're guiding to for the year? And then understanding that you're not willing to give guidance for the year on Consumer, how should we be thinking about it in the first quarter? And what are some of the puts and takes there?

Sure. So on the Enterprise side, you asked about guidance for Q1 and year-over-year. What we're forecasting is roughly single-digit growth in Enterprise overall. We do expect Enterprise growth for to --- the year to be a little bit above that, but that's our forecast for Q1.

And Dave, we should probably point out, there were some anomalies in the first quarter of last year where we had -- this year, we have a continued FX effect of approximately $3 million. There was -- there's a one-time royalty we had in the prior year and the guidance is lower mainly because of Consumer revenues in mono primarily.

Okay, okay. Then maybe just touching on the Consumer business in particular, now what was the -- do you guys have what the market share on the stereo side was in the fourth quarter? How does that compare to prior periods? Is that -- are there any signs that that's roaming over at all or is this primarily more of a Bluetooth sort of issue?

Yes. This is Joe jumping in. So I think we've talked about it in the past. On the stereo side, we have much more of a targeted approach. In other words, we play in niches of the stereo market that performance audio and our ability to actually transact a terrific phone call are actually valued. We continue to do well in the niches that we participate in. As you say, the real drop was in the continued drop-off in the mono market where we take share in that declining market, but we're continuing to see the drop-off that we've seen for the last couple of years there.

Okay. Okay, that helps. So it sounds like stereo is still doing okay from that perspective. Joe, maybe can you talk a little bit about the product pipeline there? I think we've talked in the past about some of the kind of edgier products. I guess when do you expect some of those to begin rolling out? And then I guess bigger picture on the Consumer side, is there an opportunity to go more direct, have more of an e-commerce offering? Particularly given I think in some of the prepared remarks, you guys cited the ongoing shakeout with bricks and mortar. How do you think about maybe addressing that as we move forward?

Yes. A couple of pieces there, Dave. First of all, we continue to feel like we have a very attractive product pipeline shipping over the next year in all major categories, including, of course, consumer stereo that you cite in this case. So we do think there's a nice pipeline of products coming. Plantronics is very much a channel-fulfilled company both on the Enterprise and the Consumer side. We see e-commerce as being increasingly important but not direct e-commerce that you talked about. We'll continue to work through the major channels that you expect -- that you know of on the online side. And while any kind of a shift from brick and mortar to e-commerce might show little dips here and there, we do think the product finds its way to market pretty efficiently.

Okay, great. And then I guess maybe one -- go ahead.

That's great. I was going to add that -- you'd asked about share. And in mono Bluetooth, it remains at a record high 66% in U.S. retail and that continued through the March quarter. So we've been gaining share in a declining market. On the stereo side, we don't track that data, but it's -- we believe it's probably in the low single digits. Joe mentioned the stereo products. We won several awards on those products. The BackBeat FIT --- BackBeat PRO 2, for example, won a major award. So we're very careful and deliberate about what we introduce on the stereo side. And we're also aiming for higher profitability there with these products as we bring them to the market. We're very excited about some new gaming products we have coming out later in the year. And gaming, as we pointed out in our prepared remarks, we're --- the revenue was up about 100% year-to-year.

Okay. And then I guess just one more from me. As we think about the rollout, it looks like it already there has started now with some of the SaaS offerings and then the Soundscaping products which I think are going to be -- there were -- it sounds like would probably be fairly well received. How should we be thinking about how material the contributor to revenue or margin -- how much do you expect that -- those to contribute in fiscal '18 and beyond?

Yes. So in -- so first of all, we're incredibly excited about both of them, Dave. I mean, our software-as-a-service with both headset management and data insights to help people actually run their business more efficiently are being received extraordinarily well. What we're incredibly excited about, it is still early days. We're rolling out quite a few customers worldwide. From a contribution in FY '18, we think that it still will not be material this year, although we think that will ramp over time. Similarly, on the Soundscaping initiative, we've said that we expect to actually take that to market as an official product midyear, kind of the July, August time frame. And while early returns from our beta customers is very, very strong, we don't expect that to be a material contributor to revenue this year.

Your next question is from the line of Greg Burns from Sidoti & Company.

Your SaaS solution, can you give us -- do you have the number of customers or seats you're currently serving? And what's the average price per module for that offering?

Yes. I don't think we're disclosing a precise number of customers this quarter, although it continues to ramp considerably. We said we had over a hundred enterprises last quarter, I believe, that continues to ramp at a very nice clip going forward. To the modules, the initial version that we released last May was headset management which allowed people to understand where all the headsets were in their enterprise, versions of firmware, change settings, understand last time, all the headsets were used and so forth. With the release of our Plantronics Manager Pro 3.9 here just a couple of months ago, we added additional modules onto that to help people actually run their business. So conversation analysis where they could actually understand the interactions in a conversation between an agent and a customer, along with usage analysis to give them deeper insights. The actual pricing, I don't know off the top of my head. I don't know if you have it, Greg. Maybe we should get back on that.

Yes. We describe it as market-opening potential for us in terms of pricing. There's trial periods at the beginning for a lot of customers to try it out. The responses have been extraordinary and we have some good case studies in the prepared remarks on channel partners, customers, distributors who have found it to be quite significant, just the version 3.9 that we introduced last quarter. Importantly, you'd asked about metrics around software. We will be introducing more metrics over time. We do -- the executive incentive plan does have metrics related to both Soundscaping and software tied to performance compensation. So that is an increasing focus of the board and the management team on meeting certain milestones over the next year. We continue to believe it's a very significant, longer-term revenue opportunity, but in the next year or two, it's unlikely to be material.

Okay. Just to maybe ask it a little differently, I mean, is it tens of cents per module per seat? Is it like dollars per module per seat? Like how should we conceptually be thinking about like what the revenue potential per module per seat is for some of these types of solutions?

Yes. So we actually sell it in bands, but broadly speaking, I think you should be thinking, on a monthly basis, high seats 2 dollar-ish as opposed to pennies or tens of dollars.

Okay. And then just switching to the Consumer business, I don't know if you're willing to give this breakdown, but can you give us the percent of revenue that's now coming from stereo, mono and gaming?

We don't actually break that down, Greg. As you might imagine, mono continues to decline a bit as a percent because the whole market is going down. As Greg Klaben mentioned, we're gaining share in a declining market, but at 66% plus in North America, there's not a lot of share to gain. Stereo continues to be a nice story for us. It is gaining ground relative to mono. And we had just phenomenal growth with our gaming portfolio and we expect that to continue. Although it's, unfortunately, of course, growing off of a fairly small base for us.

Okay. And then lastly, in terms of the margins on the Consumer business, is there a differential between gaming and stereo and mono? And I guess what's that gap or --- where are margins overall in the Consumer and where are you --- hope to get them to over the next year or 2?

Yes. In the Consumer category overall, I'd say the margins are roughly supporting a gross margin of low 30s, high 20s within the individual categories, so it really depends on -- by product. The longer a product is in the market, we can usually get some material cost savings out of that which leads to higher margins over a longer term. Also, a higher-volume product will have higher margins generally. So yes, I would say it's difficult to draw a line between stereo versus mono versus gaming at this point. But as a portfolio, low 30s is about where we're at in gross margins.

Your next question is from Paul Coster from JPMorgan.

So Joe, it looks like you're launching SoundScape in earnest this summer. Can you just talk to us a little bit about how you go to market and whom you go to the market through? Is it -- are you going direct to the enterprise? Or are you basically empowering the channel here? And how do you educate the channel if it's the latter?

Yes. Much like the other products at Plantronics, we will have fulfillment being completely through our channel, although we will have an enterprise sales force that is very involved in stimulating demand. From a channel perspective, it tends to be the same distributors we already have great relationships with. The actual installers of the Soundscaping solution tend to be the AV resellers, the kind of people that put in audio-visual products into a high-end conference room, paging systems or other speakers and microphones into an open work environment. So we're very engaged with both resellers that are already Plantronics partners that also offer that service, along with some new channels to make sure we have good geographic coverage for them to actually do the installation.

There's no reason why this launch should have any impacts on channel inventory or customer purchase decisions, the timing thereof, is there?

No, none whatsoever.

Okay. And then your long-term view is 6%, I think, growth both in Enterprise and the Consumer segment. But this year, you are pointing to lower growth in that --- in the Enterprise segment. This is a time when the economy looks pretty good and not just domestically but on a synchronized basis globally. But why is it that we're not going to be at or above long-term growth rate this year?

Well, once again, I believe we've been pointing towards low to mid-single digit this year, so maybe a couple of points off the long-term plan at best. Once again, we think as Unified Communications deployments take a larger percentage of the market over the next couple of years, there tends to be a higher attach rate. So for every desktop of Unified Communications, you get a higher attach rate of headsets than you do in a legacy telephony environment. So as Unified Communications continues to build out going forward and we're seeing signs that it is beginning to, that attach rate goes up and the growth indeed accelerates.

Okay. And my last question is regarding the litigation. Is there any update there?

No update at this time, Paul. We --- as we mentioned in our comments, we continue to think the charges are without merit and we're very confident of a good outcome.

[Operator Instructions]. Your next question is from Mike Latimore from Northland Capital Markets.

I'm just curious. On the -- you talked about expecting margin expansion this year. Does that general guidance exclude or include sort of legal expenses?

So that margin expansion would exclude legal expenses from GN. We're expecting them to be a little bit higher than they were last year, so our forecast excludes those.

So to be clear, so we're expecting our non-GAAP operating margins to increase this year by another 50 or 60 basis points. And excluding the litigation, it would be higher than that.

Okay, all right. Great. And then in terms of the kind of the emerging cloud phone, cloud contact center channel and environment, is that an important part of the kind of view that Enterprise could grow this year or improve growth rate this year?

Yes. To the improved growth rate, it's certainly a part of that. As we've stated before, when there's a shift from a deployment being a legacy desk phone deployment where of course, Plantronics has great market share, but worldwide attach rate tends to be maybe in the 8% range of headsets to desk phones. When you move to a soft-phone deployment, be that a soft phone in a Unified Communications open office or a soft phone in a next-generation contact center, in either of those, the attach rate tends to go substantially up. So it's several times the attach rate that you tend to have from -- to legacy desk phones. Clearly, we do see Unified Communications deployments a bit on the rise and I think you mentioned cloud-based Unified Communications, of course, being a bit of a catalyst of those deployments accelerating a little bit. So that's still in the early days of the unified communications market, but nevertheless, as that ticks up a little bit, it ticks the growth rate a little bit.

And then this year, we've had -- Avaya filed for bankruptcy and then Amazon kind of launched a Connect service that I think you were demonstrating with at Enterprise Connect. But do either of those events have any noticeable impact on trends for you guys?

Too early to say, but one of the pieces that's great about Plantronics is, of course, we have a broad, broad interoperability story with all of the major players in the market. So we tend to work -- if you name a unified communications or a contact center system, Plantronics tends to have good relationships, deep compatibility. So as one vendor's a little up and the other vendor's a little down, we tend to surf over the top of that quite nicely. But no, we have seen no material effect from either one of those.

And just last one. In terms of Unified Communications for fiscal '17, can you give us some sense of like, in terms of absolute dollar numbers, where that ended up?

I'll let Pam take it, but -- whether we have a specific number there, but it's getting increasingly difficult to actually split the Unified Communications from the core legacy business. More and more companies tend to be buying a future-proof solution. They have a combination of legacy desk phones and soft clients. They tend to be buying more and more products that can float across either one of those and help with their transition. So I think you'll hear us talking less and less about the difference between core and UC, frankly, because it's harder to separate it out.

And Mike, I just wanted to come back to the non-GAAP question. So we will be providing legal expenses, but we don't exclude them from our non-GAAP guidance. They are -- it ranges from quarter-to-quarter. We do expect that they'll be increasing this fiscal year as the case goes to trial. But we will let you know what the legal fees are if you choose to exclude them.

Your next question is from Mike Koban from Raymond James.

This is Mike Koban on for Tavis McCourt. I actually wanted to go back to this -- the gaming real quick, just to kind of get a sense of what's going on there. It sounds like it was growing off of a small base, but it also sounded like you think it's going to continue. Can you just kind of give us a sense of what's driving the strength here and what's -- what gives you confidence that it's going to be sustainable in the future? And then I have one follow-up.

Yes. A couple of quick things on that. First of all, over the last couple of years, we've really been building out a portfolio around the console gaming business. So building performance audio headsets with a phenomenal industrial design really targeted at the PlayStation 4, the Xbox One and a few other things, but that part of the market. Last year, we had a very solid portfolio out and we had just phenomenal growth. We intend to continue building on that with both more products this year plus just the momentum of having had success last year. We have every confidence that will continue to be a very solid grower for us over the next couple of years. You talked about into the distant future, the gaming business is always an interesting one as consoles get refreshed. We're certainly not providing 10 years of guidance around gaming, but for the next couple, we see this as a growth area for us.

Great. And then -- and I'm sorry, I'm making a liar out of myself. An additional quick follow-up. Is there any -- can you give us a sense, is the growth in gaming -- like is there any geographic concentration? Like is it more overseas? Is it domestic? Can you give us any color on that?

We're actually really, really pleased with gaming, meaning geographically, we seem to be strong in all major developed markets. So we do quite well in North America, in Europe and developed parts of Asia where gaming products are selling.

Okay, great. And then I kind of had a strategic or more strategic question. So you've mentioned the decline obviously in mono Bluetooth but also your kind of strengthening market share and position in some other categories. When this kind of trend occurs, it actually -- it can sometimes end up giving that market leader some -- a bit of power. Does this -- do you guys see this as a situation where you might actually get some pricing power in the future? Or is it not as rosy as I'm thinking?

Well, we wish it were that rosy. Indeed, it is nice to be the market leader in mono. There are still fierce competitors out there in the -- that haven't fully exited that category. So while we do feel like we get a premium for our exceptionally good products, we don't exactly have a clear playing field either.

There are no further questions in queue at this time. I now turn the call back over to the presenters.

Thanks, everyone, for joining us. If you have any follow-up questions, we'll be available afterwards.

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