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Wednesday, July 26, 2006

Plantronics Does it Again

By William Trent, CFA of Stock Market Beat

We said in June that Plantronics was spending too much on advertising. In May we were harsher, saying Plantronics should fire their marketing director. Now, after yet another disappointing quarter (and guidance for yet another still) they are going to reduce their marketing costs. Sort of.

According to the press release:
Given the weaker environment which has been developing, we reduced the level of marketing expenditures we had planned for the first quarter and re-evaluated elements of the marketing campaign planned for the balance of the year. Based on our review, we re-allocated certain funds to shorter-cycle marketing programs that should yield a better return on investment in the near-term. We are continuing to evaluate the extent and types of marketing programs we will undertake for the balance of the year.

In other words, fewer expensive commercials talking about how they were the headset Neil Armstrong used on the moon, more “head on down to Headset HQ and get yourself a headset now buddy!” cross-promotions with retailers. While it certainly marks an improvement, we continue to puzzle over why they need advertise at all. The consumer businesses that should be the beneficiary are doing so poorly we can’t imagine it being any worse without the ads.

The company is blaming the poor consumer revenues, by the way, on Apple:
Based on Altec Lansing’s historical seasonality, we expected a revenue decline in the range of 5-10%. The actual 17% sequential revenue decrease was driven by weaker U.S. retail market conditions for iPod-related accessories.

Didn’t Apple just report better than expected iPod sales? Did customers just suddenly stop accessorizing them?

We think we’ll fall back to the recommendation we made in May. In the meantime, if you are thinking of bottom fishing you should check out the valuation piece we wrote in June. At the time we said a 3.6 percent free cash flow yield just doesn’t cut it when CDs are paying five percent. With the after-hours sell-off today the yield is up to 4.4 percent based on 2005 free cash flow, but rising receivables and inventories suggest cash flow may be lower this year. We’ll let you do the math.

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