ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis is intended to help you understand our results of operations and financial condition. It is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and related notes thereto included elsewhere in this report.  This discussion contains forward-looking statements.  Please see the sections entitled "Certain Forward Looking Information" and "Risk Factors" above for discussions of the uncertainties, risks, and assumptions associated with these statements.  Our fiscal year-end financial reporting periods end on the Saturday closest to March 31 ^st .  Fiscal Years 2019 , 2018 , and 2017 each had 52 weeks and ended on March 30, 2019 , March 31, 2018 , and April 1, 2017 respectively. For purposes of presentation, we have indicated our accounting fiscal year as ending on March 31.

OVERVIEW

We are a leading global designer, manufacturer, and marketer of integrated communications and collaboration solutions that span headsets, Open SIP desktop phones, audio and video conferencing, cloud management and analytics software solutions, and services. Our major product categories are Enterprise Headsets, which includes corded and cordless communication headsets; Consumer Headsets, which includes Bluetooth and corded products for mobile device applications, personal computer ("PC") and gaming; Voice, Video, and Content Sharing Solutions, which includes Open SIP desktop phones, conference room phones, and video endpoints, including cameras, speakers and microphones. All of our solutions are designed to work in a wide range of Unified Communications & Collaboration ("UC&C"), Unified Communication as a Service ("UCaaS"), and Video as a Service ("VaaS") environments. Our RealPresence collaboration solutions range from infrastructure to endpoints and allow people to connect and collaborate globally and naturally. In addition, we have comprehensive Support Services including support on our solutions and hardware devices, as well as professional, hosted, and managed services.

On July 2, 2018, we completed our acquisition (the “Acquisition”) of all of the issued and outstanding shares of capital stock of Polycom, Inc. (“Polycom”) for approximately $2.2 billion in stock and cash. As a result, on that date we also became a leading global provider of open, standards-based Unified Communications & Collaboration ("UC&C") endpoints for voice, video, and content sharing, and a comprehensive line of support and services for the workplace under the Polycom brand.

Our consolidated financial results for Fiscal Year 2019, includes the financial results of Polycom from July 2, 2018. For more information regarding the Acquisition, refer to Note 4 , Acquisition , of the accompanying Notes to the Consolidated Financial Statements.

Total Net Revenues (in millions)

Compared to the prior year, net revenues increased 95.4% to  $1.7 billion . The increase in net revenues was primarily related to the Acquisition. As a result of purchase accounting, a total of $84.8 million of deferred revenue that otherwise would have been recognized in fiscal year 2019 was excluded from annual net revenues of approximately $1.7 billion .

The table below summarizes net revenues for the Fiscal Years ended March 31, 2018 , and 2019 by product categories:

¹ Voice and Video product net revenues presented net of fair value adjustments to deferred revenue of $7.9 million .

² Services net revenues presented net of fair value adjustments to deferred revenue of $76.9 million .

Operating Income (Loss) (in millions)

Operating profit decreased (188.5)% from the prior year to $(109.3) million or (6.5)% of net revenues, driven primarily by $160.2 million of amortization of purchased intangibles, $68.7 million of acquisition and integration expenses, and $30.4 million inventory fair value adjustment.

Our strategic initiatives are primarily focused on driving long-term growth through our end-to-end portfolio of audio and video endpoints, including headsets, desktop phones, conference room phones, and video collaboration solutions. The acquisition positions us well as a global leader in communications and collaboration endpoints and by targeting the faster-growing market segments, such as the Huddle Room segment for video collaboration, we believe will drive long-term revenue growth.

Within the market for our Enterprise Headsets, we anticipate the key driver of growth over the next few years will be the continued adoption of UC&C solutions. We believe enterprises are increasing their adoption of UC&C systems to reduce costs, improve collaboration, and migrate to more capable and flexible technology. We expect the growth of UC&C solutions will increase overall headset adoption in enterprise environments, and we believe most of the growth in our Enterprise Headsets product category over the next three years will come from headsets designed for UC&C.

Revenues from our Consumer Headsets are seasonal and typically strongest in our third fiscal quarter, which includes the holiday shopping season. Other factors that directly impact performance in the product category include product life cycles (including the introduction and pace of adoption of new technology), market acceptance of new product introductions, consumer preferences and the competitive retail environment, changes in consumer confidence and other macroeconomic factors. In addition, the timing or non-recurrence of retailer product placements can cause volatility in quarter-to-quarter results.

We remain cautious about the macroeconomic environment, based on uncertainty around trade and fiscal policy in the U.S. and broader economic uncertainty in many parts of Europe and Asia Pacific, which makes it difficult for us to gauge the economic impacts on our future business. We continue to monitor our expenditures and prioritize expenditures that further our strategic long-term growth opportunities.