羅技 (LOGI) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Logitech's first quarter 2004 earnings results conference call.

At this time all lines are in a listen-only mode.

After our host's remarks we'll open the call to questions.

Should you require operator assistance while on this call, key star, then zero on your tone dial phone and we'll be happy to assist you.

Now I'd like to turn the call over to Logitech's Director of Investor Relations, Joe Greenhalgh.

Thank you, operator.

I would like to welcome you to the Logitech conference call to discuss the company's results for the quarter ended June 30th, 2003, the first quarter of Logitech's Fiscal Year 2004.

Press release and a live Webcast of this call are available online at logitech.com.

This conference call will include forward-looking statements that are being made under the Safe Harbor and the Securities Litigation Reform Act of 1996, including forward-looking statements with respect to future operating results.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from that anticipated in the statements.

Factors that could cause actual results to differ materially include those set forth in the final paragraph of the press release reporting first quarter results issued by Logitech and available at logitech.com and Logitech's annual report on Form 20-F dated May 21st, 2003, available online on the SEC Edgar database.

Forward-looking statements made during this call, including the forecast for the second quarter of Fiscal 2004 and the full Fiscal Year 2004 represent the management outlook only as of today and the company undertakes no obligation to update or revise any forward-looking statements as a result of new developments or otherwise.

We would like to remind you that this call is being recorded, including the question and answer portion, and will be available for replay on the Logitech Website.

With us today are Guerrino De Luca, Logitech's President and Chief Executive Officer and Kristen Onken, Senior Vice President of Finance and Chief Financial Officer.

I'd now like to turn the call over to Kris.

Thank you, Joe.

And thanks to all of you for joining us on our quarterly earnings teleconference.

As you've seen from the earnings release, our results for the quarter are consistent with the preliminary results we announced two weeks ago.

Let me start with sales, which grew by 12% compared to the prior year to $218 million.

While inline with our target of $215 to $220 million, sales are lower than we had expected as we entered the final week of the quarter.

To be specific, our retail sales in Europe for the last week of the quarter fell over $5 million short of our expectations, due to competitive pricing pressures and weak demand.

This shortfall, combined with a traditionally backend loaded quarter, where over half of our retail sales shift in the final three weeks, prevented us from developing a reasonable assessment of our overall performance until the books were closed.

Gross profit for the quarter decreased by 9% to $61million.

Gross margin is 27.8% down from 34% in the same quarter last year.

The decline was primarily caused by two factors.

The more significant of the two, by far, was lower margins in our retail business.

The lower margins were caused by price reductions implemented during the quarter to address an intensely competitive environment and weak demand in several key categories.

The price reductions hit us on two fronts - as they translate into lower revenue per unit on new sales and price protection charges for previously sold products that are still in the channel.

As a result, the gross margin in our retail business declined by approximately 450 basis points compared to the prior year.

I think the best way to illustrate the extent of our pricing actions is to share some data on average selling price in two particularly hard-hit categories.

During the first quarter, the worldwide ASP of our Logitech retail corded mouse business declined by 17% on a sequential business and by 20% compared to the first quarter of the prior year.

The worldwide ASP of our retail desktops declined by 15% compared to the first quarter of last year.

If we look at just our retail business in Europe, the desktop ASP, in Euro, declined by 21% compared to the prior year.

When we've reduced the prices in our retail business, we provide price protection to our customers for products that they still hold in their inventory.

We estimate the amount of channel inventory based on the data we receive from our customers and reduce our sales and receivables to cover the anticipated price protection exposure.

This entry results in a reduction in both our sales and gross profit.

The retail price protection charges we booked during the first quarter of Fiscal 2004 were $2.6 million higher than in the same quarter of Fiscal 2003.

This one factor alone represents almost half of the year-over-year reduction in our gross profit.

The other factor that negatively impacted our gross margin is that our sales mix included more OEM sales at a lower OEM margin this year than in the prior year, reducing our gross margin by roughly 80 basis points.

Operating expenses decreased by 2%, compared to the prior year, to $53 million.

As a strong indicator of our continued emphasis on developing innovative products, our R&D expenses increased by 13% over the previous year.

Marketing and selling expenses declined by 7% compared to the prior year.

As stated two weeks ago, we are planning for growth in this important area during the remaining quarters of Fiscal 2004.

Our operating income declined by 38% to $7.9 million and our net income is $5.7 million, down 47% from $10.8 million one year earlier.

The first quarter of last year we reported a foreign exchange related gain of $1.1 million in other income.

We reported 48.1 million diluted shares outstanding in the first quarter, which is roughly 4.5 million shares lower than in the prior year.

This reduction is related to the shares we've repurchased over the last 12 months, as well as the U.S.

GAAP accounting treatment of our convertible debt called the IF converted method.

In the first quarter of Fiscal 2003, under the IF converted method, our diluted shares outstanding included 2.7 million shares for the assumed conversion of our convertible debt.

For the first quarter of Fiscal 2004, the impact of the convertible debt is non-diluted and therefore, the 2.7 million shares are not included in the total.

Let's move on to the balance sheet.

Our cash position net of short-term debt establishes a new record at $220 million, increasing by $59 million over June of 2002.

Cash flow from operations is a positive $10 million for the quarter.

Our cash conversion cycle is at 71 days, two days faster than the prior year.

Accounts receivable is $158 million and our DSO is 65 days, in line with the 63 days achieved in the June 2002 quarter.

Our inventory is at $126 million, $13 million higher than the June 2002 quarter.

Inventory turns as of June 2003 are five times per year, up from the 4.6 turns achieved in the quarter ending June 2002.

Other current assets is $47 million, up from $39 million in March of 2003.

The gross in this category is primarily due to a $4 million increase in BAT receivables and a $3 million increase in miscellaneous receivable.

Let me give you an update on our share buybacks.

During the quarter, we repurchased 12,511 Swiss registered shares for 646,000 Swiss francs.

We are authorized to spend up to an additional 64 million Swiss francs to repurchase our shares over the course of the next seven months.

I should add that our trading window has been closed for the last five weeks and our share buyback program can be re-initiated when our trading window opens this Friday.

You can view updated information on this program on an ongoing basis by visiting the investor relations section of our Website.

I'd now like to provide you with more details on our first quarter sales by channel and product category starting with our retail business, where sales grew by 7% compared to the prior year, and unit shipments increased by 23%.

Our sales of mice, corded and cordless combined, increased by 5% over the previous years, with unit shipments up by 15%.

Desktop sales grew by 4% compared to the prior year, with minute buy-ins increasing by 26%.

The gross picture for our stand-alone keyboards is similar, where sales grew 5% and unit volumes increased 33%.

It was a great quarter for our retail audio products, as sales grew by 41% over the previous year with a 58% increase in unit shipment.

Sales with the Logitech branded Z-series speakers increased by 56% while unit shipments grew by 32%.

Our success in the audio category went beyond speakers with the sales of our PC headset increasing by 50% on a 26% growth in units.

We also enjoyed a strong quarter in the retail webcam category with sales up by 30% and unit shipments growing by 32% compared to the prior year.

Sales in a significantly smaller category declined by 85% compared to the previous year, as we continue to focus the majority of our efforts on our market leading webcam offerings.

We're very pleased with the retail sales of our controllers for game consoles, with sales more than doubling and unit volume more than tripling compared to the prior year.

This growth was due to the success of both our cordless controllers and our steering wheels with sales and unit volumes of our well-received console wheels more than doubling over the prior year.

Sales of gaming peripherals for the PC platform declined by 25% with unit volumes down by 16%.

This decline was expected, as the market for PC gaming peripherals remains very weak.

Before talking about our OEM business, I want to provide you with some geographical data for our retail business for the first quarter.

Our retail sales in Europe grew by 14% over the prior year with Asia growing by 12% and the Americas by 1%.

That brings me to the OEM side of the business where sales grew by 31% compared to the prior year and represented 22% of our total sales.

This growth was driven by our success in multiple product categories.

The biggest contribution came from our sales to Sony for both the USB headset and the EyeToy camera for the PlayStation 2.

The combination of these two products resulted in our second best quarter ever for both sales and unit shipment of console products to Sony.

It was a strong quarter for OEM sales of cordless desktops, with sales nearly tripling compared to the prior year, while sales of mice, our core OEM offering, grew by 5% with unit volumes increasing by 12% over the previous year.

I want to highlight one additional point regarding sales during the first quarter.

Looking at retail and OEM sales combined, our total audio sales grew by 52% compared to the prior year.

That brings us to the end of my comments.

I'd now like to turn the call over to Guerrino.

Thank you, Kris, and thanks again to all of you for joining us.

I believe we have sufficiently addressed our first quarter results, so the focus of my comments will be to share our strategy for delivering growth and higher profitability during the remainder of Fiscal 2004.

The strategy is focused on strengthening our competitive positioning and improving our gross margins.

Let me start with our competitive position.

Our overall competitive strength reflects the combination of a number of factors, with the most important being our pricing, our products and our support for the Logitech brand.

I plan to address each separately.

Our strategy assumes that our retail business will continue to face intense competitive pressure across all product categories.

This is nothing new, as we've fought strong competition all along.

We also expect no improvement in the current weak market conditions.

What is new is the competitive impact of a stronger Euro, specifically in the mice and desktop categories, and the increasing number of competitors in the desktop category.

Our primary competitors in the mice and desktop categories are headquartered in the U.S. and Asia.

It is clear to us that many of them have recently chosen to reduce their prices in Europe to gain market share, safe in the knowledge they can avoid a significant hit on their non-Euro based top line.

The

SB data provided earlier gives you an idea of the impact our competitive response had on our retail business during the first quarter.

The desktop category has provided very strong growth for Logitech for a number of years with a significant amount of our success coming from Europe.

Now, in addition to Microsoft, we're facing competition from an increasing number of players based in Asia and focused on the low end of the category.

We believe the recent price reductions we've implemented in both the mice and desktop categories solidly position our product in the retail channel in Europe and in the U.S.

That said, we are also prepared to respond aggressively to new development.

But enough about pricing.

The fact is that pricing is only one aspect of our competitive picture.

I strongly believe, and Logitech's history stands as a clear confirmation, that providing innovative Web design products that consumers love to use is more important than price.

The way we will continue to differentiate ourselves from the competition is through the usability, value and quality inherent in our products.

This fall we will be introducing a number of exciting new retail products across all product segments.

As you would expect, the most important of these products will be in the mice and desktop categories.

We will introduce a completely redesigned line of corded and cordless mice focused on the midrange of the market.

We believe these exciting new offerings will significantly strengthen our competitive position in the most important segment of the mouse market.

On the high end, we'll compliment the well-received MX-700 by extending the line to embrace Bluetooth technology.

As the market leaders in cordless desktops, we believe the time is right to reinvent the concept.

We intend to enrich the user experience by introducing products that make the desktop the center of the universe for interactions between their PC and other digital devices.

These products will feature significant innovation from both a product design and a technology perspective.

Our retail product portfolio extends well beyond mice and desktop, and I must say I'm delighted and encouraged by the solid growth we see in many of our other product lines.

We plan to build on this growth with the introduction of innovative new offerings in a number of categories including webcams, PC speakers, gaming console peripherals and mobile phone headsets.

Judging by the initial feedback from our key retailers in Europe and in the U.S., I'm confident that we will enter the Christmas selling season with the most competitive and innovative products line in our history.

Speaking of innovation, I'm very pleased to tell you that we've recently received six Industrial Design Excellence awards from the Industrial Designer Society of America, co-sponsored by BusinessWeek.

Logitech led the global competition, winning the most overall design awards.

I believe these prestigious awards provide a timely example of the importance of design in our product philosophy and why we view it as a competitive advantage in differentiating our offerings.

That brings me to the final element of our competitive positioning strategy, the support of the Logitech brand.

Given the competitive and market conditions faced by our retail business, we plan to increase our investment in advertising and marketing activities in order to heighten awareness of the Logitech brand and stimulate demand in our core business.

As we approach the end of the current quarter, you can expect to see an increase in our advertising and marketing activities.

These activities will utilize a number of different media, and we will also supplement our ongoing channel merchandising efforts to utilize specific opportunities, such as the integrated webcam capability for MSN Messenger's video instant messaging.

As a result of these activities, we are planning for higher marketing and selling expenses throughout the remainder of Fiscal 2004.

Let me now talk about our strategy for improving our gross margins.

Our business is predicated on a tight linkage between innovation to drive growth and the value of our brand, and cost reductions to improve our gross margins.

One avenue for reducing our product cost is to continue exercising the leverage our substantial procurement volume gives us with our supplier.

Equally important, our engineering organization is focused on identifying design changes that will deliver lower cost for many key retail products.

This is an expertise that we have already developed and utilized throughout many years of working with our OEM customers.

From a product cost perspective, we expect that many of the new retail products we launched this fall will contribute to our anticipated improvement in gross margins.

In fact, in what has been our fastest growing retail product category over the last several quarters, Logitech branded PC speakers, the majority of our new fall products will feature higher margins than their predecessors.

There are also significant opportunities to reduce our costs in distribution and logistics.

We believe the initiatives we've launched in this area will allow us to realize substantial savings, particularly as we take advantage of the global economies of scale associated with our freight operations.

We also see cost saving possibilities in our utilization of warehousing space in the U.S. and in Europe.

While we will gladly take as much growth as we can deliver in our OEM business, there is one other factor that should improve our gross margin during the remainder of the year and that's the mix between our retail and OEM sales.

As you realize, we have higher gross margin in our retail business than in our OEM business, and the first quarter of our fiscal year is traditionally the weakest for our retail sales, and this year was no exception.

As we move through the remainder of Fiscal 2004, and particularly in the second half, we believe that our retail sales will represent as much as 85% of our total sales, providing a favorable impact on our gross margin, compared to what we saw in the first quarter.

So, where does that leave us in our outlook for Fiscal 2004?

Given our performance in the first quarter, we remain on track to deliver 10% growth in sales for the full fiscal year.

When review of the expected cumulative impact of the actions that I've just outlined, our internal estimates indicate that we are within close reach of our original goal of 15% growth in operating income.

On that basis, and acknowledging the uncertainty inherent in any attempt to forecast results in multiple future periods, we continue to target 15% growth in operating income for Fiscal 2004.

Let me talk about our outlook for the current quarter, the second quarter of Fiscal 2004.

On the retail side, we expect double-digit sales growth, led by the Logitech branded PC speakers, cordless mice, webcam and gaming console peripherals.

On the OEM side, we expect more moderate sales growth driven primarily by the EyeToy camera for PlayStation 2.

Looking at our retail and OEM channels combined, we anticipate sales of between $270 and $280 million.

We anticipate that our gross margin will be around 30%, improving by roughly 200 basis points on a sequential basis, in anticipation of the initial benefits of our cost-reduction initiatives.

We expect operating income to be between $15 and $17 million, which includes the first phase of the increased marketing expenses I mentioned earlier.

Up until the last day of Q1, our teams were fighting to meet or beat their goals.

So, one thing we could do now is blame that fighting spirit for believing we would make our targets, even though there was a high degree of uncertainty and our performance could not be definitively determined until the end of the quarter.

It would be irresponsible and shortsighted to do so.

In fact, this same fighting spirit has brought us 20 record quarters and one disappointment.

On balance, Logitech is better off with it than without it.

And this same fighting spirit will be a key ingredient for Logitech to return to its path of growing profitability.

At this point I'd like to open the call to your questions.

Please follow the instructions of the operator.

If you have a question, key star, then one on your tone dial phone.

If you want to withdraw your question, key star, two.

Again, star, one for questions.

And we'll pause for just a moment while those signals register.

Operator, I can't hear the question.

Key star, one for questions.

And our first question will come from Rob Stone from S.G.

Cowen Securities.

Kris, on the subject of price protection, what range of price erosion within a quartered year do your retailers normally expect?

In other words, at what point does this price protection kick in?

I'm not quite sure, could you ask the question again, Rob?

Well, I'm trying to get a sense of, under what type of market conditions would you have to come back in during the current quarter with another round of price protection?

You know, certainly these things are called on a day by day, battle by battle basis.

It's hard to know, it's hard to predict whether or not we have sufficiently price reduced all of our current offerings sufficiently to get it through our new product launch.

But it's impossible to know, Rob.

We'll fight these battles every day and I guess at this current time I think we feel that the price protections that we've taken so far are sufficient, and time will tell.

Well, my question is more a mechanical one.

In other words, is there some threshold level after which price protection kicks in or does that start from any price movement on your part?

In other words, in a business where some amount of price erosion is routine, do price moves by Logitech have to surpass some level before protection kicks in or does it start on any price move on your part?

No.

It starts on any price move on our part.

And let me again clarify too, the moment we make that price move, that is when we recognize the channel inventory impact of that as well.

But it's by any price move that we decide on a day by day basis.

Let me add something here.

On a forward-looking basis, when we project our results for any given quarter, we include, every time, a portion of price protection, because I can tell you, there's never been a quarter in my memory in which we haven't reduced a price here or a price there.

So, there is always a projected price protection charge at any time.

The question is, how far do we go?

And last quarter, obviously, we were much more aggressive.

We had to be much more aggressive, and therefore, the price protection charge exceeded what we had anticipated.

So, the excess price protection this time was about 200 basis points of margin, something like that?

Indeed.

Yes.

OK.

And normally that would be just within, it's contained within the margins we usually see.

Exactly.

It's included in our margin guidance, normally.

Great.

From the point of view of your new products line introduction plan for this fall, you've pointed out that you expect to have cost reductions on many of the new products.

Another feature that we've noticed over the last couple of product cycles has been product line extension towards the higher end in certain areas like cameras and speakers and mikes where the highest end newly introduced products actually establish new price points at the high end of the categories.

In terms of your line expansion and refresh this fall, it sounded to me like there was going to be some of that as well as more new products emphasis on the midrange, as well.

Am I interpreting that correctly?

Well, it's difficult to characterize what 40 or 50 different products do, but yes, your point is correct.

We will continue to extend certain life at the high end.

We also focused intensely on midrange almost everywhere, so both things are happening.

And just a clarification, when I talked about product cost reduction, I'm not referring to products that we have not yet introduced.

I mean, they will be introduced at the cost they will have at the time.

I'm talking about existing products that will stay in the line and will accelerate certain cost reductions so that the entire line will be more competitive from a cost point of view.

So, just an observation on the price comment then.

In listening to your sales growth and unit growth commentary for the various product lines, Kris, it sounds like, notably in the area of audio this time around, you actually enjoyed a move up in the average selling price across the line since revenue grew more than units.

Did I catch that correctly?

That's exactly right.

And as we said before, we're also encouraged in as much as we're expecting great growth for that in Q2 as well.

Great.

Thanks very much.

And Yves Kissenpfennig from UBS will have our next question.

Hello.

I had just a few questions.

I wanted to start with, maybe if you could help quantify sort of what level of advertising or increased marketing spend that you were looking to push at the end of the second quarter and into the third quarter.

And then I also wanted to, you mentioned that PC speakers, for instance, is one area where you would expect gross margins to be higher.

Could you maybe elaborate on what other areas you feel comfortable putting that same label on?

Let me talk about the level of marketing.

I will disappoint you here.

In the second half of the year we usually have more marketing than the first half.

This year we have decided to actually up that planned increase by a certain number of millions of dollars.

Having said that, I consider this information highly sensitive and so I won't go further than that.

OK.

In terms of the PC speaker line and margin for the set of product lines, we expect that the introduction of new products will benefit the average margins of every line.

We can see particularly, and that's because of margins of the new products, as well as expected mix, particularly on the speaker line, which has been fast growing, we can see that the products that are added to the existing line and those products will hit both the entry level and midrange of the line, have entry gross margins that are higher than what we sell today.

And this being the fastest growing retail line, obviously there will be some benefit out there if these new products are successful as our retailers tell us they will be.

OK, great.

And then I just had two quick questions for Kris just to make sure I heard correctly.

I wanted to, could you please tell us what the $483,000 charge is in other expenses?

And could you also tell us what the currency impact was for the quarter, please?

What was the second part of your question?

I'm sorry.

What the currency impact was in terms of dollars.

OK.

Well, let me talk about the other income/other expense.

Certainly in our other income/other expense, we had FX gains and losses and other charges and provisions that we made against investments.

And the net of all those is about 450,000 U.S. dollars.

It looks unusually, you know, the comparison against last year makes it rather difficult because we had such a positive impact in our FX last year.

But I think the amount that you key in this particular quarter is probably more in line with what is a reasonable format for Logitech.

OK, and as far as the FX impact, as we've mentioned in the past and repeatedly, it's difficult to give a meaningful number as to what the FX impact is for the quarter.

We've talked extensively, as you've heard, about the price initiatives that happened in our quarter.

And so, to just take one part of this equation, that is the FX impact, and what it had on our quarter without taking into consideration the price drop that we had, I think that there's no meaningful conclusion to be drawn by just the FX impact.

If I may add on this one, we estimate that a significant portion of the European price reduction is actually FX-driven.

So, there is a negative.

I would say that the negative components from there is offsetting the positive components from the original translation.

And because this is creating more and more confusion, we have decided to discontinue providing a number because that number, out of context, doesn't mean anything.

OK.

Thank you.

And our next question will come from Andre Jaekel from ABN Amro.

Yes, hi, good morning.

Just a couple of questions.

Regarding the geographic development regarding the U.S., the Asian and the European market, what is your guess, particularly now that the

still anticipate that your ability will be very slow and you assume a bit of a pickup in the U.S. or what is your thinking here?

The second thing also in terms of channel inventory.

Do you basically feel that, at the current stage, that there is a little bit too much channel inventory, in particular in Europe, it took more pricing action, or to get this channel or inventory out for the new products or maybe your thoughts on that?

And basically, also a little bit of the third part, in particular desktop side, we have seen historically the desktop price break at, basically behind $99.

Do you try with your new products to get into this $99 price bracket again or is it something which you think it's out of the range, going forward?

Well, that would be my third question, thank you.

Let me comment on the forward-looking part, particularly on regional growth expectation as well as pricing.

We expect that the profile of our growth will not change in the short term, in terms of the percentage growth that we've given.

Asia was a bit slower than we usually see and there was some marginal impact of SARS there, which, I think, is behind us.

So, other than expecting a little bit better performance in Asia, we expect the other two big regions to say where they are.

And that's one portion.

The portion of our pricing, I can't be too specific, but you mentioned the desktop line as being priced at the high end at $99.

We mentioned that we are introducing significant innovation in that line and so, we plan to continue the strategy that we followed in mice and other products to extend the line and be aggressive at the entry level as we have been with the price changes and whatever other move we will have to do and then stretch the line high.

But have you seen the channel, basically, now in Europe or in the current environment change in their shop space allocation at all between you and your competitors?

Is that more the Taiwanese are gaining share against you or is it basically still the same, it's just that they are lowering pricing, hence getting the higher

rate?

Well, our response to the pricing position was exactly to maintain, if not extend, shelf space.

This is a very precious commodity for us and we believe we haven't lost shelf space at all.

So, that's critical, and, in fact, it's more important than market share if you want because that's future, it's indicating the potential for future sales.

And we feel we're strongly present on the shelf and we expect that the Christmas product will make it even more obvious.

So, we're profitable on that front.

You were mentioning, you asked about channel inventory and accessory

.

I can tell you that our indication is that we entered the quarter with a slightly higher inventory than the seasonal norm.

This was due to the debt loading nature of our previous quarter.

On the other hand, our booking for the first three weeks of this quarter have been well ahead of last year.

Thank you.

And Charles Elliot from Goldman Sachs will have our next question.

Guerrino, hi.

Can I just put off on your last comment that bookings in the first three weeks of this quarter were ahead year-on-year, because presumably those bookings are in advance of your launch of new products.

They are both covering both products, existing products and new products, yes.

OK.

And-

The comparable is meaningful.

We had new products last year as well.

Right.

OK.

And those products that probably are going to, are those products which will only reach the stores in mid-September?

We'll start shipping significant new products mid-August, early August and well into September.

Maybe a couple of months of new products

Second, I appreciate that you don't want to blame external factors, but SARS was a significant factor during the second quarter in dampening Asian demand.

Yes, it was.

Is it possible that, A) it hurt you in Asia and B) not only did it hurt you and your competitor in Asia, but it encouraged a big flow of extra product into the European markets?

Well, that's interesting.

It's possible.

It is not something that we have factored in as one direct thing we see, but we're not in

of our Asian competitors, so it is possible.

I have to say that yes, we have been impacted in Asia.

Our Asia growth is usually significantly higher, but I cannot and we cannot estimate the degree of impact and so we leave it at that.

We're only happy to see that the situation seems to be, it seems to have stabilized.

Right.

OK.

Thank you.

Thank you.

And our next question will come from Mehrdad Torbati from Deutsche Bank.

Hi, everyone.

Could you please tell us whether you had any excess in obsolete inventory in the first quarter, whether you would expect some in the second quarter?

That would be the first question.

The second question, you've already given us the growth profile according to different regions.

Can you also give a specific breakdown in terms of sales based on these three defined regions?

Let me answer that, Mehrdad.

Certainly we have, every quarter we have E&O reserves that we take.

We formulate this based on a methodology that we've used year in and year out.

Certainly we have had E&O reserves this year, excuse me, this quarter, and they've certainly impacted our bottom line.

And did you destroy inventory?

There are times when we do.

And when it comes to E&O, usually the inventory that we destroy is returned products that have been opened.

But as far as E&O, we will either liquidate it or just actually write down the value and continue to sell it.

So, how much was that?

I am not ready to disclose that at this point.

That was above the line on your cost of goods, right?

Yes.

It happens on our cost of goods, so it impacts our gross margin.

Was it a contributing factor to the margin decline?

It was, but it was not significant.

All right.

And then you wanted a geographic breakout of our...

Yes, please.

You know, quarter by quarter, Mehrdad, these things are not as meaningful as they could be, but if I can give you the last 12 months, that might be helpful.

In the last 12 months of revenue, Americas was 39%, Europe was 45% and Asia was 16.

All right.

Thanks so much.

And Nicole Burth from Lumbar Odier has our next question.

Yeah, hi.

I would like to go back to the stock protection Europe and I was wondering if you could give us some insight how actually, how long does it take from the minute you actually agree to do price reductions until you know how much that will cost you, will be reduced from your top line.

And then maybe if you could give us a difference between the time it takes between Europe and the U.S.

Actually the minute that we choose to actually reduce one of our average street prices and the minute that decision is made, that is exactly the moment, it is immediate, and it's as immediate in the United States as it is in Europe.

The difference might be is, we have to make an estimate of our channel inventory and that gets corrected over time.

But for the most part, the estimate of price protection impact is immediate.

But for the general inventory, your retailers or your clients need you to give you some feedback how much they actually hold.

How long does that take normally?

Yes, they do.

You know, in the United States they're a little more prompt.

Then again, we make estimates on this and record those immediately and then we correct the actuals.

But in the United States our information on channel inventory is considerably more timely than it is in Europe.

Most of our retailers and our distributors in the United States can give us this information on a weekly basis.

We have to rely on longer time periods for our European customers.

So, that's like more end of the month for the Europeans.

I'd say on average.

There are some that are more prompt than that, but I'd say the majority we'd have to wait a month.

Yeah.

And I have an add-on question to your guidance, and I'm not sure if you're going to give me an answer on that, but anyhow, I'll try.

And you know, you stick to the $140 million EBIT and I guess this is really if everything goes right.

And I would like to get some kind of sensitivity what could the impact be if not everything goes right?

So, can you give us an idea on what kind of margin or price pressure for overall of all the products you factored into actually getting to 140?

We expect to have to do more regular price movements as we have done in the past 12 to 24 months.

We don't expect the drastic moves that we have done now.

So, obviously, significantly drastic moves would impact our growth margin and therefore our growth profit and therefore operating income.

The factor that could influence the gross margin, which may not influence our actually operator income if our OEM business actually grows faster, than we anticipate.

If the retail business grows as fast as we anticipate, then the fact that growth of OEM only impacts the gross margin a percent, but would have no impact directly, have a positive impact on operating income.

The success of our line, what we know today is that we have a significant success in SKU placement with this line and we have significantly more SKUs in several product lines that are taken by a large number of our retailers.

This doesn't guarantee sales, of course.

Certainly a preliminary indication that sales might come.

So, there is a multiple variable equation here to play with and we have, it is hard to estimate the short-term impact of our extended marketing.

It certainly is a shorter impact; we'll spend more than what we had anticipated.

How much that will impact our top line or our gross margin, it remains to be seen.

We have some expectations there I would like not to discuss at this stage.

But we believe that the, especially the branding side of these actions, i.e., the one that is not directly linked to the channel, will have a long-term impact.

The one that is more directed into the channel may bring more sales or a better price.

OK.

And I have a last question for Kris.

Unfortunately, I didn't get the answer for the other expenses.

Can you repeat that please?

Yeah.

You know, in our other expenses, Nicole, we have a few things that hit here.

We have a, our FX impact hits in this category.

We have other expenses that come from some

We have some, we've taken a small provision for an investment.

And for the most part that's a pretty normal looking other income, other expense line.

The one that actually looks unusual for us is last year at this time, where we had such a high FX impact in the other income line.

Thank you very much.

And our next question will come from Anuj Mutreja from Morgan Stanley.

Yes, hi, Guerrino.

I've just a couple of questions if I may.

One is, correct me if I'm wrong, but I picked up that the mice category ASPs were down 10%.

Is that right?

I think it's actually more than that.

I think at quarter one Kris said 15.

15.

But given this time last year the comparisons are pretty easy and going into sort of the second, third and fourth quarters, you guys actually saw positive ASP growth.

This is information from your 6-K.

Is it not, I mean, given that we're starting from a low point on an awful low base, 'cause then I'll make it a bit worrying for the three quarters that, you know, you've got a tough year in year composites as far as ASPs are concerned.

Well, we have been having tough comparables for five years and we are getting used to it.

OK.

I would say that if I look at, you have to be careful how you look at average selling price decline.

You may have a, and a decline in that reselling price in a particular product line and not a decline in margins.

If the mix in the line is skewed towards lower price products that have a higher margin, that's fine.

So, it's not an immediately automatic calculation to make.

That said, if I look at the average selling prices and the mix expectation that I have from the new line, let's think about mice, yes, I do expect an increase in ASP.

OK.

That's fine.

And the second question I have is, over the last sort of, I haven't been following you guys for that long, but I see an increased look at the midrange market.

Is that because the high end market of things like

are getting stretched out because

?

Is this why there's an increased focus on the midrange?

No.

I would say this is cyclical, Anuj.

We've been going back and forth.

There's seasons in which we have emphasized the high end, seasons in which we feel, you know, the midrange.

If you know our product life cycle is in the order of 18 to 24 months and for example, in desktops, we have not introduced anything meaningful, even though we've made a number of retouches for three years.

So, this is the year, this and next will be the year of the desktop.

So, it moves from product line to product line.

There is no strategic implication of midrange/high end at this point.

OK.

That's good.

Thank you very much.

Thank you.

And

from

will have our next question.

Hi.

I was wondering, did you break out what effect the Euro had on the top line in terms of absolute dollars?

And what was your operating cash flow in the quarter?

Let me answer that.

And I think the answer is yes, we did discuss the impact of the Euro on the top line, and of course, our answer was, is that as we were adjusting our prices downward in growth to meet competition and other non-Euro-based competitors, just looking at the Euro impact alone is a relatively meaningless exercise in as much as these price reductions were clearly the result of pricing actions taken by individuals who were taking advantage of a higher Euro.

So,

we're not going to comment on the impact of the Euro on our top line.

OK.

And what was operating cash flow in the quarter?

$10 million.

10, and actually two more.

What did the PC web camera do year-over-year?

30% growth.

And audio?

That's in revenue.

Pardon me?

And audio in revenue terms year-over-year?

41%.

41 for audio as a whole.

Right.

OK.

Thank you.

And Oliver Moslowski from Bank Vontobel will have our next question.

Yes, good morning.

Just shortly, once again, back to average selling prices.

What is your assumption on these prices for the retail and the OEM side for the whole year?

And the second question would be, do you see a danger of higher production costs due to excess manufacturing capacities?

We have no excess manufacturing capacities to speak of.

In fact, the health of our OEM business actually helps us on that side.

So, no, we don't expect the manufacturing to be part of the issue.

Actually, if you look at our unit growth, our unit growth has been dramatically going up.

So, if there is a concern one might have is, do you have enough capacity?

And the answer is yes.

In terms of the trend of average selling prices, what we said and what we believe is that we've made pricing actions on individual products and particularly on the desktop and mouse line, that we believe our positioning the product correctly vis-à-vis the competition at this point.

We have also said that it's impossible to know if this is everything we will ever have to make.

In fact, I can tell you that there will be some more normal price reduction along the way.

No, we are not anticipating another round of drastic price changes between now and the end of the fiscal year.

All right.

Thank you.

And our next question will come from

from

.

Hi.

You mentioned that to improve the gross profit margin you have several product cost improvement.

Can you specify in absolute terms or in base points?

And secondly is, can you give me a certain kind of a route number or a time feeling for that, when will affect?

And the third question is, you mentioned especially due to economics of carrier freight causing warehouse costs, but as far as I remember, you already lost

the warehouse in the United States and so on.

So, where are these improvements coming from?

And secondly, why freight costs?

Because ok, we are having 10%, but why are you so keen that you have such a big impact?

Well, you have multiple questions.

So, the fundamental question is, can you break down the improvement of gross margin?

Where do they come from?

Or you're expecting an improvement of gross margin.

Is that the way to characterize

?

The impact of the product cost improvements especially.

Yes, Serg, we have, let's say if you look at what we indicate in terms of this current quarter and the implied gross margin underlying, you know, the fact that we are still targeting that operating income for the year, 15% growth, first you see some improvement in gross margin sequentially from 27.8% to 30 roughly, and that is fundamentally the first, just the beginning of the product cost saving and some beginning influence of our new products.

Then both freight, warehousing costs, product cost reductions and mix will significantly impact, we expect, our second half margins.

And we expect our second half margins to be significantly higher than what we will see in the first half.

Certainly in the 35 or plus percent.

So, the main impact will happen in Q2.

So, you do not expect...

No.

The main impact will happen in Q3 and Q4.

Otherwise we wouldn't be at 30% only in Q2.

OK.

Yeah, ok.

That's ok.

I

on you.

Thank you.

You're welcome.

And our next question will come from

from

.

Yes, good morning everybody, and I just wanted to ask a follow up on that question before, that you said, am I understanding correctly if you said that your implied gross margin assumption for the second half of 35 plus?

Yes.

OK.

Then second question regarding

.

It's almost seeking nothing about the end consumer.

What gives you the confidence regarding the success of your new product as reported on Plan 4, H-2 of '03, given the fact that the volume shipments have grown so far so fast in the first quarter of this year?

Well, that's actually a good indication.

It means the consumers like our products.

So, the fact that our unit volume grew fast is actually a good indication for the second half and further.

What gives us the optimism?

This is all forward-looking, as you know, but the only fact we have is that we have presented all of our new products to all of our channels in Europe and in the United States.

The product is being incredibly well-received and we have had more takes, meaning every customer decides which SKU they're going to carry in which season.

There are resets at certain customers meeting certain dates at which certain decisions have to be made, and we've been more successful than ever in this particular season.

This means that more of our products will be on the shelf and therefore more chances for the consumer to buy.

We don't have a crystal ball as to the state of the economy, the sentiment of the consumer or anything else.

So, we're making the assumption that nothing was significantly changed from an external factor point of view one way or the other.

OK.

But you're not saying that you're creating new demand with the product launched with innovations?

You're probably more afraid that you increased their replacement cycle at the end consumer buy your new product and that you gain market share.

Well, all of our sales are a combination of new customers and replacement customers.

And our marketing effort is targeted at both.

Because we are expecting sales growth for, I guess, for the second margins, et cetera.

Because we are expecting sales growth we are expecting more demand to be there, partly created by new products, partly created by advertising and partly created by the fact that we happen to be in some fairly growing markets, and that's kind of, the interest of the

and that's why everybody is very interested in those

.

OK.

Thank you.

My final question regarding your share buyback program.

Do you have some time for a level of share price where below that you stop to reprioritize your share or are there other correct earnings on which you decide whether you continue with the share buyback or not?

Let me answer that.

We're not going to actually comment on our buyback tactics, but we believe that the recent drastic price drops in our stock gives us a very good opportunity.

As you know, our window opens on Friday.

OK.

Thank you.

That's all.

And our next question will come from

from

.

Hi.

Just a couple of questions.

Can you give me the breakdown, I think I asked you this before a couple weeks ago, but we said we'd wait till the end of the quarter and the full report, but the April/May/June sales breakdown for Europe, in terms of what percentage was in April, May and June?

I don't recall saying we would address that in this call, but I'd say overall, what's important to know is that the last three weeks of the quarter represented more than 50% of our revenue.

50%, ok.

For retail, of course.

Yeah, for retail.

For retail, yes, yes.

OEM is relatively more flat.

OK.

And then the following question, and so this might have been the question, I think, that you said you may come back to me on.

Was this the gross margin movement, I guess, from Q4 to Q1 in terms of the European gross margin?

Well, Dieter, you know, we don't give gross margin by region.

Just from my calculations, it seems like that was where, I mean you mentioned that, at the beginning of the call, where more than half of the retail price protection program represented half the gross margin reduction.

From my calculations it seems like majority or the lion's share of that was, and therefore kind of by region from the European side.

I just wanted to cross check that.

Yeah.

And again, let me back up.

As you know, sequentially we always do have a decline.

I would not, necessarily attribute that sequential decline more to Europe than the United States.

OK.

Thank you.

We'll take one last question, operator.

And that question will come from Jamie Doyle from Causeway Capital.

Hi, thanks.

Just a little clarification on some numbers you gave out, Kris.

I think you said, you gave out the year in Euro volume growth for audio Logitech speakers and PC headsets?

No, I didn't do that.

I gave it in dollars.

Oh, those were in dollars, ok.

But are Logitech speakers and PC headsets included?

Are they a subset of audio or are they distinct from audio?

Yes.

I should make that clear.

Yes.

Our audio group includes our PC headsets as well as our speakers, as well as our cell phone headsets, yes.

And the numbers that you gave out were not for speakers, but specifically for Logitech speakers?

No, actually I gave you total audio.

I also gave you total speakers and I think I gave you Logitech branded Z-series speakers.

Oh, OK.

I got you.

I missed the speakers, the total speakers.

Could you please repeat that?

Oh, you know, I gave the total audio.

Can I back up on that one?

Yeah, sure.

I apologize.

I gave you total audio, which grew by 41%.

OK.

Well, then, just by looking at those numbers, it looks like the

branded speakers had a pretty good quarter, at least on a year-on-year basis.

I wouldn't call that necessarily so.

You know, certainly a lot of our great success in our audio business has been with our Logitech brand of products, and you might imagine that that's where our biggest growth is coming from.

Maybe I got the numbers down incorrectly, and I apologize for sort of dragging on this, but the volumes that I have written down for audio were up 58% year-on-year?

Is that correct?

That's correct.

Uh-huh.

But Logitech was only up 32% and PC headsets were up 26%, so I would have thought that the

would have been stronger to make the total category.

Let me just give you those figures again.

OK.

What we did say is that the Logitech branded Z-series speakers increased by 56%.

That was in dollar terms.

In dollars, yes.

OK.

But it was 32% in volume terms.

Yes, in units.

And just a little bit more broad of a question in terms of a competitive response.

You've talked a lot about the pressure you've seen coming from the low-end Asian manufacturers or competitors.

Have you seen similar reaction from some of your high-end competitors in the product categories?

I guess companies like Microsoft and Creative come to mind.

Have they been as aggressive as Logitech has been on the pricing side?

I think we belong to the same categories, and so you would expect that the branded players would have to play the same game that we do.

I see.

Ok, great.

Thanks so much.

You're welcome.

And that will conclude our question and answer session.

At this time I'd like to turn the call back over to Guerrino De Luca for closing remarks.

Thank you, ladies and gentlemen, for having been with us again after a short period of time.

I look forward to talking to all of you at the end of Q2, and have a nice day.