Plantronics 2008 Annual Report Download - page 34

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
We are a leading worldwide designer, manufacturer, and marketer of lightweight communications headsets, telephone headset
systems, and accessories for the business and consumer markets under the Plantronics brand. We are also a leading manufacturer and
marketer of high quality docking audio products, computer and home entertainment sound systems, and a line of headphones for
personal digital media under our Altec Lansing brand. In addition, we manufacture and market, under our Clarity brand, specialty
telephone products, such as telephones for the hearing impaired, and other related products for people with special communication
needs.
We ship a broad range of products to over 80 countries through a worldwide network of distributors, OEMs, wireless carriers,
retailers, and telephony service providers. We have well-developed distribution channels in North America, Europe, Australia and
New Zealand, where use of our products is widespread. Our distribution channels in other regions of the world are less mature, and
while we primarily serve the contact center markets in those regions, we are expanding into the office, mobile and entertainment,
digital audio, and specialty telephone markets in additional international locations.
Consolidated net revenues in fiscal 2008 were $856.3 million, which is an increase of 7% from fiscal 2007 net revenues which were
$800.2 million. The year-over-year growth was attributable to ACG, while AEG net revenues decreased compared to the prior
year. Our operating income increased to $79.4 million from $57.4 million in fiscal 2007 on the strength of our product offerings, and
the improved gross margin achieved on net revenues. The increase in gross margin was the result of a focused effort to decrease
product and transformation costs.
In our ACG segment, the increase in net revenues for fiscal 2008 was primarily driven by an increase in sales of our office wireless
headsets, Bluetooth headsets for the mobile market and OCC corded headsets. Growth in these products was partially offset by a
decline in revenues from mobile corded products.
The trend towards wireless products contributed significantly to demand. We experienced substantial growth in both Bluetooth-
enabled products and office wireless systems compared to a year ago. Wireless products continue to represent an opportunity for high
growth, both for the office market and for mobile applications. Our office wireless market, our best opportunity for long cycle growth
and profitability, grew by $36 million in net revenues or 16% in fiscal 2008 over fiscal 2007. In the mobile market, particularly for
consumer applications, margins are lower than they are for our enterprise applications due to the level of competition and pricing
pressures, and the concentrated industry structure into which we sell. Our strategy for improving the profitability of mobile consumer
products is to differentiate our products from our competitors and to provide compelling solutions under our brand with regard to
features, design, ease of use, and performance.
In our AEG segment, net revenues decreased from $123.6 million in fiscal 2007 to $108.4 million in fiscal 2008, and the operating
loss increased from $27.2 million to $35.8 million for the corresponding period. The results for the AEG segment were negatively
impacted in fiscal 2008 by a product portfolio that was not sufficiently competitive, resulting in a cumulative loss of market share,
declining revenues, restructuring charges and reduced profitability. Despite the operating losses we incurred in fiscal 2008 in AEG,
we believe that the continuing trend of the communications and entertainment convergence presents an opportunity to gain product
synergies between our ACG and AEG businesses, especially in the need for wireless products.
In addition, we are in the process of finalizing the restructuring plan we announced and began to implement in the third quarter of
fiscal 2008. We have closed AEG’s manufacturing operations in Dongguan, China and relocated the research and development
activities previously in Dongguan, China to a new site in Shenzhen, China. We have outsourced most of AEG manufacturing to a
network of qualified contract manufacturers already in place and plan to do a limited amount of manufacturing of AEG products in
our plant in Suzhou, China. We are in the process of shutting down AEG’s sales and procurement office in Hong Kong, and
consolidating the sales, procurement and research and development activities into our new Shenzhen, China site. We have
substantially completed the consolidation of our selling, general and administrative functions for most of our Asia Pacific operations
into our Suzhou, China facility.
Our fiscal 2008 results reflect our commitment to long-term growth, and the progress on our key initiatives to capitalize on the growth
opportunities in the office and mobile markets, and to meet the challenges associated with competitive pricing, market share, and
consumer acceptance. Throughout fiscal 2008, we remained focused on our long-term strategy. We have been creating new products
that are appealing in functionality and design and combining these products with marketing programs to increase awareness and
interest. Through the acquisition of Altec Lansing and the establishment of AEG, we moved closer to obtaining our long-term goal of