羅技 (LOGI) 2004 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q2 2004 Logitech International Earnings Conference Call.

My name is David, and I will be your coordinator for today.

At this time all participants are in a listen only mode. (Caller instructions.) I would like to now turn the presentation over to your host for today’s call, Mr. Joe Greenhalgh, Director of Investor Relations.

Please proceed sir.

Thank you David.

I would like to welcome you to the Logitech Conference Call to discuss the company’s results for the quarter ended September 30, 2003, the second quarter of Logitech’s fiscal year 2004.

The press release and the 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 of the Securities Litigation Reform Act of 1996, including forward-looking statements with respect to future operating results.

The 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 second quarter results issued by Logitech, and available at Logitech.com, and Logitech’s Annual Report on Form 20F, dated May 21, 2003, and subsequent filings available online on the SEC Edgar database.

The forward-looking statements made during this call, including the forecast for 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.

I 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 Web site.

With us today are Guerrino De Luca, Logitech’s President and Chief Executive Officer, and Kristen Onken, Senior Vice-President 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.

We are very pleased with our results for the quarter, as we exceeded our targets for both sales and operating income, delivering significantly more profit than anticipated, while establishing new second quarter records for top and bottom line performance.

Let me start with sales, which exceeded expectations and grew by 17% compared to the prior year to $294m.

Our better than expected performance was primarily driven by robust OEM sales.

In addition, our retail sales were also higher than we anticipated, with strength across all regions, and particularly in North America.

Gross profit for the quarter increased by 8% to $92m.

Gross margin is 31.5%, down from 34.1% in the same quarter last year, but up sequentially by 370 basis points.

Even with considerably more OEM sales in the overall mix, the sequential improvement is roughly 150 basis points better than what we had anticipated at the beginning of the quarter.

The faster than expected improvement in our gross margin reflects a favorable combination of new product introductions, product cost reductions, product mix, and higher retail average selling prices.

In fact, the worldwide ASP for our retail business increased by 10% sequentially.

As just one example of our improved gross margin by product, the gross margin of our audio products increased by over 660 basis points on a sequential basis.

Operating expenses increased by 8% compared to the prior year to $65m.

Our marketing and selling expenses grew by 10% over last year, reflecting the successful launch of our advertising campaign.

R&D expenses increased by 6% over the previous year.

And G&A is up by 4%.

Our operating income increased by 7% to $27.4m.

And our net income is $21.2m, establishing new second quarter results in both cases.

We reported interest expense of $1.1m in the second quarter of this year, which include the charge of roughly $800,000 for factoring of a portion of our BAT receivables in China.

We chose to factor these specific receivables due to our expectation of a relatively long selection period.

Let’s move on to the balance sheet.

Our cash position, net of short-term debt, is $187m, up by $40m compared to September of 2002.

As an indication of the strong cash generating characteristics of our business model, this increase was achieved despite having spent $83m repurchasing our shares during the last 12 months.

Cash flow from operations is a positive $31m for the quarter, up by $20m compared to the same quarter last year.

Our cash conversion cycle for the quarter is at 55 days, six days faster than the prior year.

Accounts receivable is $217m, and our DSO is 66 days, in line with the 65 days achieved in both the September 2002 and June 2003 quarters.

Our inventory is at $133m, essentially flat compared with the $132m in the September 2002 quarter.

Inventory turns as of September 2003 are six times per year, well up from the five turns achieved in the quarter ended September 2002.

Other current assets is $39m, down from $47m in June of 2003.

The decrease is primarily due to a $5.3m reduction in BAT receivables.

Let me give you an update on our share buybacks.

During the quarter we completed our second buyback program through the repurchase of one and a half million Swiss registered shares for 64m Swiss francs.

Looking at the first and second buyback programs combined, we have repurchased approximately 3.3m shares, for 150m Swiss francs, over the course of the last five quarters.

Our Board of Directors has recently provided authorization for us to buy back up to 40m Swiss francs, or approximately $30m worth of Logitech shares, during the next 12 months.

I’d now like to provide you with more details on our second quarter sales by channel and produce category, starting with our retail business, where sales grew by 11% compared to the prior year, and unit shipments increased by 19%.

It was a strong quarter for our cordless mice offerings, with sales increasing by 34%, and unit shipments up by 48% compared to the previous year.

While sales for our desktop and keyboard family were essentially flat compared to the prior year, our unit volumes increased by 25%.

The stronger unit growth reflects a combination of lower ASPs and product mix.

We delivered another impressive quarter with our retail audio products, as sales grew by 78% over the previous year on a 48% increase in unit shipments.

The biggest contribution came from the Logitech branded speakers, with sales and unit shipments more than doubling compared to the prior year.

PC headset sales increased by 66%, with unit volumes up by 54%.

We enjoyed a strong quarter in the retail Web inventory, sales and unit volumes increasing by 36% compared to the prior year.

Sales in the significantly smaller dual cam category declined by 42% compared to the previous year, as we continue to focus the majority of our efforts on our market leading web cam offerings.

Moving to the interactive entertainment category, I am pleased to say that it was an outstanding quarter for sales of peripherals for both game consuls and the PC platforms.

The retail sales of our controllers for game consuls increased by 75% compared to the prior year, with unit volumes increasing by 145%.

Sales of our cordless controller doubled, with unit shipments reaching an all time high.

Sales of gaming peripherals for the PC platform increased by 96%, with unit volumes up by 54%.

This performance is all the more noteworthy, given the fact that the market for PC gaming peripherals continues to decline in both the U.S. and Europe.

We delivered double digit growth across all product categories, from joysticks and game pads to steering wheels.

The strength of these results in a declining market, which clearly translates into increased into increased share in the PC gaming category, is a confirmation of the attractiveness and breadth of our product offerings.

Before talking about our OEM business, I want to provide some geographical data for our retail business in the second quarter.

Our retail sales in Asia grew by 19% over the prior year, with Europe up by 11%, and the Americas by 10%.

That brings me to the OEM side of the business, where we achieved the highest sales of any quarter in our history.

Sales grew by 45% compared to the prior year, and represented 20% of our total sales.

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

Sales of mice, our core OEM product offerings, increased by 29% compared to the prior year, with unit volumes up by 35%.

The other major contributor to our OEM growth was our sales in both USB Headsets and the EyeToy™ camera for the PlayStation 2.

The combination of these two products resulted in our best quarter ever for both sales and units shipments of consul products to Sony.

Looking at the retail and OEM channels combined, our sales and unit shipments of gaming consul peripherals reached a record high, and more than tripled compared to the prior year.

That brings us to the end of my comments.

And now I’d like to turn the call over to Guerrino.

Thank you Kris.

And thanks again to all of you for joining us today.

I am very pleased with our performance in the second quarter.

Our record sales, sales profitability and improved margins in a vibrant and extremely competitive market clearly indicate that our growth initiatives and product cost improvements are working.

Let me comment a little further on the second quarter, starting with OEMs.

The market for new PCs is healthier than it has been for quite some time.

And this obviously benefits our OEM business.

Even so, when you consider that in the second quarter we grew our OEM mice sales by 29% compared to the prior year, it is clear that we have gained share among the major PC manufacturers.

Our sales to Sony of the headset and the Eye-Toy™ camera for PlayStation 2 made a healthy contribution to our results for the quarter.

While driving OEM sales is a cornerstone of our strategy in working with Sony, another key element of this strategy is to turn today’s OEM successes into tomorrow’s retail opportunities.

For example, we now successfully sell a new retail version of the Logitech branded headset that we originally sold to Sony for bundling with their [SoCon] [ph].

Turning to retail, during the second quarter we were able to deliver significant [inaudible] and defend or gain share in a market where we see signs that overall consumer demand is beginning to pick up.

It is too early to tell if this will grow into a sustained market trend.

But we are cautiously optimistic.

The retail pricing actions we took during our first quarter worked as we had intended.

While the market remains intensely competitive, with Microsoft in particular presenting a renewed formidable challenge in the mice and desktop categories, we head into the all important holiday season confident that our products are well positioned from both a price and a value perspective.

We remain poised to fight aggressively should conditions change.

We’ve successfully launched a number of exciting new products during the second quarter.

And our operations and marketing team did an excellent job making sure that these products were in the stores on time.

As we had indicated, we were counting on these new products, combined with cost reductions on existing products, to play a major role in attaining a sequential improvement of our gross margin.

I am pleased to say that progress we made during the second quarter exceeded our expectations, providing us with substantial momentum to carry into the last two quarters of the fiscal year.

So let me now talk about the remainder of fiscal 2004.

We see three significant market trends that provide attractive growth opportunities.

These are cordlessness, mobility, and video communications.

Logitech has long been a leader in providing PC users with integrated cordless peripherals, using our own wireless technology.

We’ve also embraced industry standard technologies, such as Bluetooth, whenever it provides an opportunity to significantly improve the user experience.

With this in mind, we are encouraged by signs that the mass adoption of cordlessness may be just around the corner.

Specifically, we see increased retail competition for cordless PC peripherals.

We’ve also seen a wider range of product offerings with lower price points, which translates into an expanding base of satisfied customers.

We also see a growing interest in cordlessness from large PC OEMs as they evaluate how and when to add this feature to their core offerings.

In recognition of this trend and anticipated breakthrough, our recently launched advertising campaign is focused on heightening awareness of the benefits of our cordless products, and to reaffirm our image as the market leader.

We introduced a number of exciting cordless products in recent weeks, and plan to add even more during the next six to 12 months.

Allow me to focus on our two most recent additions to the cordless desktop category.

The Logitech diNovo™ Media Desktop™ and the cordless desktop MX™ for Bluetooth set new standards for leadership in cordless functionality.

Most of these highly innovative offerings provide wireless connectivity and integration services between a desktop PC and Bluetooth devices, such as mobile phones, headsets or PDM.

These products deliver on the promise of Bluetooth wireless connectivity, by enabling users to transform their desktop PC into a control center for Bluetooth mobile devices.

Nothing like this exists in the marketplace.

In addition to these compelling benefits, sleek, stylish diNovo™ Media Desktop™ completely redefines how the most discriminating PC enthusiast will view a keyboard and a mouse.

The enviable design of this truly unique product features a low profile reduced width keyboard, a detached number pad, with [inaudible], providing value added services, and our MX™ 900 Bluetooth rechargeable optical mouse in an attractive finish.

If you haven’t seen the diNovo™ yet, I encourage you to visit our Web site or a store near you.

It’s worth it.

I wouldn’t want to conclude my comments about wireless technology without mentioning the new Logitech mobile Bluetooth headset.

The most recent addition to our wireless mobile headsets combine the benefits of Bluetooth technology, with an extended battery life, and a comfortable soft touch wrap around design.

I am pleased to say that the initial reviews for this product have been highly favorable.

We anticipate wider distribution of this product in our full line of mobile phone headsets in Europe, as well as the early indications of interest in the United States.

Mobility is becoming increasingly important to the technology users.

The strong growth in notebook computer sales is the most recent example of people’s preference to access the digital data at the time and place of their choosing.

Last month we launched a cordless optical mouse for notebooks.

The newest addition to our mouse family features an ambidextrous design, in an ultra slim key size USB receiver, that addresses the need for portability and compact design.

Along the same lines, we also offer two web cams for notebook users, including the high end QuickCam® for Notebooks Pro.

These notebook peripherals, which will be joined by others over the next several quarters, are examples of Logitech’s focus on providing mobile technology users more products which enhance and simplify their computing and communication experience.

Our focus on mobility also includes the Logitech io™ Personal Digital Pen.

During the second quarter, we introduced a new version of the io™ software, and handwriting conversion application.

I am pleased to say this enhancement has been well received.

We continue to pursue opportunities to build demand for this product in a variety of enterprise environments.

We recognize that developing these opportunities will take time.

But we remain firm believers in the promise of a product and technology that converts what is being written on paper into digital [inaudible].

Let me next talk about video.

As the worldwide leader in web cams, Logitech is uniquely positioned to take advantage of what we see as a growing opportunity to ultimately establish the web cam as the must have [inaudible] for every PC.

Our retail web cam sales have grown by 34% for the first two quarters of fiscal 2004 compared to the prior year, with growth accelerating in Q2.

It is clear to us that video instant messaging is a key driver of this growth and of Web cam users.

The most recent example of our efforts in this space is our work with Microsoft to bring web cam functionality into MSN Messenger.

Even though we had reasonably high expectations, I must say that we have been very pleasantly surprised with the rapid adoption rate of this feature within the large MSN user base.

Just one indicator of this success, during the month of August there were roughly two million web cam sessions per day on MSN messenger.

And the number continues to grow at an impressive rate.

We believe that the user of video instant messaging will continue to expand on MSN Messenger and other platforms.

To help us make sure that it does, we are working on a variety of ways to further enrich the user experience, including the immanent introduction of the market community web cam, and the inclusion of reliable audio IT communications to compliment the video image.

As part of my comments, I have typically talked about our outlook for the current quarter and for the remainder of the fiscal year.

We are 100% focused on achieving our stated sales and operating income growth for the full year fiscal year 2004.

We have initiated a number of programs in support of this goal, programs that extend across multiple quarters, with benefits that we expect to accumulate over time.

The sales and operating income progress we’ve provided at the beginning of fiscal 2004 are for 10% growth in sales, and 15% growth in operating income.

It is against these targets that we intend to deliver.

Given our focus on the full year, [inaudible] and potential distraction in stating targets for our third quarter.

Reaching our operating income goal for fiscal 2004 remains ambitious.

To get there, we will need to sustain our momentum on the top line, and build upon the market growth trends we saw in the second quarter.

As we evaluate the sales opportunities before us, let me be clear that our primary objective is to go for growth in share.

We see signs that the weaker environment is improving.

We have the strongest product line up in our history.

And the feedback we have received from our retail OEMs and reseller customers is positive.

As we indicated [inaudible] points to continued strong top line performance.

For example, we entered the third quarter with over $45m more backlog than we had one year earlier.

Additionally, for the first few weeks of the quarter, our retail bookings are 40% higher than in the same period last year.

We also believe that channel inventories are at the appropriate level as we enter the holiday season.

In short, we see the potential for up side of the top line.

And we intend to pursue this up side.

We believe our ongoing success at achieving product cost reductions, combined with better margins on a number of new products, and improvement in the efficiency of our supply chain, will help preserve and grow our profitability in the face of what we expect to be continued intense competitive pressure in all categories.

Although fiscal 2004 had a rough start, I am very encouraged by our rapid response in the second quarter.

We fully recognize that we aren’t yet out of the woods.

But there is no question as to the overall health of the company.

And we have solid prospects for continued growth.

We’ve entered the second half of the fiscal year eager to exploit momentum generated by our top line growth, the benefits we are experiencing from initiatives begun earlier in the fiscal year.

I told you last quarter that the fighting spirit of our team would be a key ingredient in returning to our path of growth profitability.

It is equally true today.

And I am proud to tell you that their spirit has never been stronger.

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

Please follow the instruction of the Operator.

Thank you very much sir. (Caller instructions.) And we’ll pause just a moment for the first question please.

And our first question comes from Bob Stone from S.G.

Cowen Securities.

Please go ahead sir.

Kristen, just a couple of housekeeping questions first.

I had trouble coming to the same per share figures cited in the press release, using the numbers in the financials.

Is there a typo in there somewhere?

No Rob.

As you know, when we calculate the earnings per share, we have to factor in the convertible bond.

And we use the as converted method for that.

So what I’ll do in a separate email is I will show you that reconciliation.

But we have to actually, when it is diluted, or as we dilute it, we have to actually calculate – reduce the interest expense inherent in the bond.

And then we have to add in the number of shares that underlie the bond as well.

Okay.

And approximately – did you buy back stock during the quarter?

And approximately how much?

Yes we did.

We bought back 64 million Swiss francs during this quarter.

That’s about one and a half million shares.

On the subject of pricing, could you provide any color relative to either geographies or product segments where price competition is more or less than it averaged overall?

Well I would say that the entirety of the market is very competitive.

Certainly our mice and keyboard for desktop market is also competitive.

Gaming and speakers are not much less competitive than that.

We have, as you will remember, we mentioned that we have adjusted some pricing.

We have introduced new products at aggressive price points.

We have also introduced premium products, and broadened in a way the price range of the portfolio.

So we believe we can compete both with the aggressive sort of entry level pricing competitive as well as the competing brands.

And I think we have repositioned ourselves to where we were probably like six or twelve months ago.

And I am very pleased to see that of course the effects are visible.

So turning to the growth in the OEM category, you noted that given the percentage growth in units, you’re clearly gaining share.

But do you have a sense of from whom you are gaining that share?

Well in OEM we compete with a myriad of strong Taiwanese companies mostly, and some Japanese.

Most of these companies – I would say none of these companies have any significant retail presence.

But they are very strong in OEM.

So they are manufacturers as much as we are.

And I think we’ve taken price shares from those.

Would you attribute that to feature differentiation?

Or what do you think is causing the OEM business to shift your way?

We believe that our OEM business is driven by many factors, including reliability of supply, quality, cost, price, and flexibility to demands of our customers.

And there’s more than the simple product in an OEM business relationship.

And at these volumes, many customers feel more comfortable to us, to stay or to go with the supplier that has a proven track record of flexibility, reliability and quality.

Given the strength in units, do you see any supply constraints for the December quarter?

Not particularly for the OEM market.

I would say no.

Thank you.

And our next question comes from Can Elbi from Cheuvreux.

Please go ahead sir.

Hi Kris.

Hi Guerrino.

As time permits, I would like to cover three areas – Bluetooth, shelf space and pricing.

Starting with Bluetooth, obviously you have just – you are in the process of selling your Bluetooth line in terms of the desktop into the channel.

I was wondering how many years of experience do you have in Bluetooth and integrating Bluetooth into your products.

And plus, on top of that, how easy and/or difficult it is of integrating the Bluetooth profile into a source code, and the drivers for the interface devices, and whether you see this as a source of differentiation, particularly versus the Taiwanese and the Chinese.

First of all, we have been the first [inaudible] Bluetooth.

And you may remember the product [inaudible] controller, combined with a cordless optical now.

It is not difficult at all to actually to include integrating Bluetooth into the PCs.

But what is most important, it is certainly not easy to make Bluetooth Bluetooth.

Let me explain.

Now you can use Bluetooth with just another cordless connectivity protocol.

But that it costs you only ten times more than using something else.

And so what’s the benefit?

When you – the reason why you want Bluetooth is because it enables things that other connectivity protocols don’t enable.

It’s a standard.

It is multiplatform.

You can connect your PDA.

You can connect your cell phone to integrate your address book, or even move a picture from your cell phone to the PC.

And that’s what we were able to do.

And I think the know how to do that is quite significant.

And we’re building upon it.

So when I mentioned that the diNovo™ Media Desktop™ is unique in the market, I mean it.

There is no other combination of mice and keyboard and hub that does what the Media Desktop™ does.

And we believe that we are in the premium space here.

We will drive the cost down for Bluetooth.

The industry will drive the cost of Bluetooth down.

But we want to leapfrog everybody here, and make sure that we remain the cordless leader within a standard world, and within a proprietary world.

So would it be simplistic to say that the innovation gap, which I think was getting smaller in the last one year, should start to increase again versus the Taiwanese?

I will leave it up to you to compute that.

We just try to do our best.

Okay.

Second question on pricing.

I mean if I am looking at your cordless desktop MX™, which I think will retail for $180, and I compare that to Microsoft’s similar product, I think you combine Microsoft Bluetooth Desktop for around $120 on Buy.com, what leads to this price difference?

And obviously how do you set your pricing?

Put it this way.

Microsoft [inaudible] has had some difficulty selling different products.

And I won’t comment further.

We believe that we’ve achieved a much higher level of integration of Bluetooth than anything else in the marketplace.

And we are very aware that Microsoft will do more and better.

For the time being, there is just no comparison.

Okay.

And maybe the last one, Microsoft announced the Tilt Wheel technology, which they have been profiling in a very open manner in the last one month.

Any comments on that?

Yeah.

It’s a very interesting technology, as much as our TrueControl, and the technologies that we have on the MX™ line.

Microsoft is a maybe more powerful marketing machine than we are.

But rest assured that we continue to compete.

The mouse is being redesigned and redefined by of us.

And expect great things to happen in the next 12 months in that space.

Okay.

Thanks.

Thank you.

And our next question comes from Andre Jaekel from ABN Amrow.

Please go ahead sir.

Yes.

Good morning.

I have a couple of questions.

First of all, on the logistics side, it looks like that the cash flow metrics in the quarter have improved quite a lot, particularly on inventory turn.

And I wonder whether we should be – whether all the logistic improvement which were the problem before have been resolved before, that all the problems are now – and whether there is something coming up in terms of more improvements in the coming forward, is the first one.

The second question, a little bit more on the two areas that you are a little bit responsible for the shortfall in the June quarter, i.e., corded mouse and in desktop.

I wonder whether you could also give us a little bit more in depth number in terms of how well did the corded mouse this quarter, and also whether the gross margin on the desktop side has improved sequentially in the September quarter versus June quarter.

Well let me address the question on logistics.

I think the logistics remain – it is not necessarily a problem.

It is an opportunity for us.

As you said, we have improved.

And we will continue to improve.

We are nowhere done.

But I think that in terms of availability of supply and execution, we have made substantial progress.

What we are left with is additional potential savings, and expected opportunities over the course of the next several quarters.

But I think that I will just [inaudible] to support our growth.

In the other question about the details, in our product line we start with desktop margins.

They’re essentially flat.

And here is where we have substantially reduced certain price points.

And this is also where we expect, over the course of the next six to twelve months, to have a vibrant renewal of the line.

We just started at the very high end with diNovo™ and the Bluetooth desktop.

You won’t be surprised to see us going all down the line to the entry level over the course of the next six to twelve months.

In terms of more details on corded mice, we are not prepared to disclose more details than we have already on those lines.

Thank you.

Thank you.

And our next question comes from Nicole Burth from Lombard.

Please go ahead ma’am.

Hi Guerrino.

Hi Kris.

I was wondering if there is an update on what are your plans in terms of marketing spend.

Do we have – do you expect the same level we have seen in Q2?

Or do you expect because of this additional, like the [inaudible] you do with Monday Night Football and things like that, to actually see these expanses increase?

And the second question will be you mentioned that you have seen quite nice entry into the sales of this headset, [inaudible] headset for mobile phones, have started quite nicely.

Does that mean that you entered the mobile distribution channel?

Let me answer these two different questions Nicole.

Thank you.

On the marketing expense side, as you know, we don’t quantify the size of our market investment.

But we have cited solid first flags, if you want, in Q2.

Expect more to happen in Q3, and in Q4.

I don’t – I wouldn’t consider that the expenses would materially differ.

But they will remain the same.

And we believe that it is the best thing that we could have conceived at the time.

And this arrival of cordless [inaudible] option is just, from a timing perspective, we couldn’t be luckier, if you want.

In terms of distribution of headsets, what I said is that we are beginning to be there, particularly in Europe.

But I believe that if you go around most countries [inaudible], I would say U.K., France, Germany, the larger countries, and you go to the premier telephone stores and retailers, you will find our product finally.

And in the U.S., we are beginning to get there.

But we are not there yet.

And certainly the introduction of the Bluetooth headset has given an increased impulse to [inaudible].

And people are starting to see that we are bringing something different across the board, including in our corded line.

So I remain optimistic.

I think that to give a first sort of assessment of how successful we will be is going to take well into January/February of 2004.

Okay.

Thanks.

Thank you.

Thank you.

And our next question comes from Charles Elliot from Goldman Sachs.

Please go ahead sir.

Hi.

Kris and Guerrino, first congratulations on these very, very strong results.

And I would like to ask about Bluetooth applications.

Could you take me through under what circumstances you need to work on an application to, for example, if you are linking with a PDA, Logitech needs to work with the PDA maker to make sure that there is a full download?

And under what circumstances is it purely standard, so you just buy a product off the shelf, and it immediately works for your Bluetooth devices?

Thank you very much for the question, because Bluetooth is still in its infancy.

We’ve gone as far as I think anyone could go in terms of let’s say plug and play Bluetooth.

We’ve also put up a Web site that describes everything you ever wanted to know about whether your particular Bluetooth cell phone works, and to which extent it works with our Bluetooth desktop.

But I don’t think that Bluetooth can be considered a complete plug and play standard across the board, no questions asked.

But not even USB can be considered that, after like what eight years, nine years?

And this is substantially more complex.

That said, it works very well in surprisingly many cases.

And no, we didn’t have to just spend hours with the engineers of Nokia or Sony Ericsson to figure out how to transfer a picture from their phone to our desktop.

In truth, there are profiles as defined by the Bluetooth standard body.

And we include as many profiles as humanly conceivable on [inaudible].

And when the manufacturers follow these profiles, there is an extremely high chance that it works.

That said, Charles, you know how technology is.

You see the demo, and everything is fantastic.

You encounter your particular problem at home.

And just go to the Web site.

I think that – I believe genuinely that we make a substantial Bluetooth integration statement with this product.

And there is more room to improve.

And we are certainly ahead of the pack in doing that.

Thank you.

And if I could sneak in another question.

On your newly announced Media Desktop™, it sounded very good.

But you are looking at an initial price of about $250.

Isn’t that a bit high?

Charles, if I would categorize this as the desktop for the rest of us, I would lie.

It’s probably the desktop for the enthusiast PC addict of us.

And for that category, which admittedly is a subset of the market, it’s fantastic.

And I don’t know if you have actually had a chance to see it or use it.

As I said in my remarks, it’s worth it.

Now we do not expect our high volume desktop sales to come from the diNovo™, to be honest with you.

Mmm-hmm.

Thank you.

Thank you.

And our next question comes from Anuj Metreja from Morgan Stanley.

Please go ahead.

Please go ahead with your question sir.

Hi.

Thanks very much.

Hi Guerrino.

Hi Kris.

How are you?

Just a couple of questions from me.

One is if we can go back to some of the price protection mechanisms that kicked in last quarter, and some of the inventory that I think – Kris, nice work about that – you actually wrote down to nothing.

How much of that actually helps in the gross margin improvement for this quarter?

That’s my first one.

And I’ve got a follow up.

So I don’t know if you want to take that first.

I don’t know if I can answer the question.

But none of that impacted gross margin this quarter.

The price protection had to do with [inaudible] of the channel.

As I understood it last quarter – and please correct me if I am wrong – there was some inventory that was written off, but not obviously physically destroyed.

It is immaterial, because we haven’t sold that inventory.

Okay.

A second question I guess is – and this is just a numbers one – I think one of the things that Kris said today was that retail, worldwide retail ASPs were up 10% quarter on quarter.

Is that right?

That’s correct.

Would that translate into an 8% or a 9% decline on a year on year basis?

It is a 5% decline year over year.

Five percent.

Okay.

Great.

That’s me then.

Thanks very much.

Thank you.

Thank you.

And our next question comes from Oliver Maslowski with Bank Vontobel.

Please go ahead.

Congratulations also from my side.

Three quick questions.

First of all, the OEM gross margins, what were they in the first quarter?

And how have they developed in the second quarter?

Oliver, I am sorry.

I am afraid I cannot share the gross margin with our OEM business.

There are incredibly sensitive competitive and customer relationship issues.

And so we have never provided a gross margin number for OEMs.

That said, the gross margin of our OEM business was substantially lower than the gross margin of our retail business.

And the vast improvement you have seen, which is higher than what we had anticipated, it took place even in spite, if you want, of the fact that the OEM sales were growing much faster than we had thought.

That’s all I can say on gross margin.

Okay.

Then the percentage of U.S. sales to total sales – could you deliver that figure?

The percentage of sales in the U.S. to total sales.

Kris?

It is – let me just have a – 39% of total in the U.S.

And my last question would be the development of market shares in the two main categories, meaning mice and keyboards.

So did you gain market share [inaudible]?

[Inaudible] in market share in mice and keyboards.

We are actually flattish.

In the last few months, we have improved a little bit.

We had lost substantially in the previous three months.

That’s one of the reasons why we had to move our prices.

Now we kind of are flattish in a substantially growing market for cordless, which is a good sign.

And we intend to do better than that.

Let’s put it this way.

In every other category we are growing market share tangibly, I would say virtually every category.

In some we are substantially strong, like web cams it’s very hard to grow.

But we remain in the 50-60% market share.

Okay.

Thanks a lot.

Thank you.

And our next question comes from [Conner O’Mara] from [Marrett] Research.

Please go ahead sir.

[Conner O’Mara]: Hi there.

A couple of questions.

I guess the first one is in terms of gross margins for the full year.

Do you still believe you can achieve 33-34%, given the margins for the first half?

And how will that be achieved?

What more costs can you take out of the business?

Just before I fully answer the question, [inaudible] costs out of the business, we’re talking costs out of the product.

[Conner O’Mara]: Yes.

We’re not going to take cost out of the business.

We’ve been actually growing our expenses.

What I tried to explain when talking about the confirmation of my guidance is that our first priority is not necessarily gross margin percent.

It’s top line growth.

So it’s – we haven’t particularly confirmed any number in terms of gross margin percent for the year.

I can tell you that our expectation is to grow sequentially the gross margin, maybe not as fast as we have grown from Q1 or Q2, but certainly to grow sequentially in Q3, and then seeing a more solid gross margin for the second half.

That said, that’s not our primary focus.

Our primary focus is actually gross profit, which means top line growth

[Conner O’Mara]: Right.

And Kris, you normally talk about the impact of currencies on top line.

Could you help us understand what the impact was for this quarter?

Yeah. [Conner], the reason I didn’t bring it up this quarter is we compared the Euro impact of the quarter compared to the time we have our guidance.

There was actually no impact whatsoever.

[Conner O’Mara]: No impact.

Okay.

And then one last question I guess.

What do you believe?

I mean you’re talking about increased entry level pricing pressure, and Microsoft will eventually get it back together on Bluetooth.

What do you believe the long-term margins of Logitech are now?

We – as you know, we have a business model that indicates a 32-34% gross margin target for the next – within the next probably three years, as far as we can see.

We see no reason to change it.

Mix – product line mix, different competitive situations in different places, OEM and retail mix – there is a lot of ingredients in coming up with the gross margin number.

But we see no indication that the structural gross margin of the company should change.

[Conner O’Mara]: That’s great.

Thanks very much.

Thank you.

And our next question comes from Mehrdad Torbati from Deutsche Bank.

Please go ahead sir.

Hi.

I’ve got two questions here.

First, would it be possible for you to quantify the increase or decrease of the number of SKUs you have per store?

And the second question relating to that is have you been able to expand your access to a number of distributors or stores you directly access?

And then maybe a third question on the currency.

I mean looking at your average selling prices retail, sequentially you have increased ASPs by 10%.

And if I go back, in looking at the currency, Euro/U.S. dollar, there has been a decline in the U.S. dollar compared to last year.

How can there be no currency impact in the quarter?

Can you please comment on that?

Thanks.

What we – I think the answer, [inaudible] currency [inaudible].

The answer that Kris provided was that, based on – there is no impact of the currency relative to the guidance that we have given for the quarter.

In terms of the year over year impact of the currency, we had said in the past, and we continue to say right now, that we don’t disclose that number, because we believe [inaudible] indication of the reality of the facts for a strong Euro, overtaking [inaudible] consumer.

So that’s as far as we would go for currency.

In terms of distribution, it’s a hard question to answer Mehrdad, because obviously it depends on geography product line.

Of course, for example, we dramatically increased our SKU presence in speakers.

But we are growing.

We have new products, etc.

Of course, as we’ve had virtually no presence in headsets for the mobile phones, the fact that we show up in some shelves does include that.

In the core business, we actually maintained or potentially expanded our presence – it’s very hard to judge – particularly in the mass channels in the United States of America.

Overall our position on the shelf is not materially [inaudible].

For example, in Q3 of last year, we had a little bit more products, and therefore a little bit more SKUs in some of our customers.

But I wouldn’t say materially different than in Q2.

Okay.

Thanks.

Thank you.

Thank you.

And our next question comes from Yves Kissenpfennig from UBS.

Please go ahead sir.

Yes.

Hi guys.

I just wanted to again come back to the gross margin improvement that you showed in the quarter.

And I was hoping that you maybe, firstly, could give us an indication of what impact the changing mix within OEM is having on your OEM margins, not quantifying, but qualitative.

And then also, if you could, on a group level, try and – I know in past quarters sometimes you have dissected how much you think the gross margin improvement came from the top line, how much cost have you actually taken out of the key products, and how much is coming from the [inaudible].

Great.

A detailed question.

So let me answer your first question, how much does the changing mix in OEM impact the OEM margins.

What I can say, that – how do I say that in a way that is disclosable from our customer perspective?

I would say that in the grand scheme of things, there is not a major impact.

Put it this way.

By selling more to the PC market, or selling more to the PlayStation market, there is not a major difference in margins in OEM.

Having said that, the [inaudible] may be low single digit.

And that said, I won’t go further than that, [inaudible] the margins.

As you understand, we have pretty significant commercial implications here.

In terms of breaking down the benefit on the gross margin, I am not sure – Kris and I are looking at one another.

I am not sure we understand exactly the question.

Our gross margin is driven, obviously, by average selling price, by product cost, by channel promotions, by logistics costs.

Okay?

Which ones work [inaudible]?

I would answer very simplistically, all of them.

I would say we probably, with the exception of promotional expenses, we continue to be participating in the traditional promotions in the channel.

So that didn’t change much sequentially.

But certainly everything else is going in the right direction.

If I can maybe just follow up then.

You are saying that – you mentioned that the OEMs could be increasingly interested in future quarters in cordless products.

I was wondering, would you be lowering or keeping their price or keeping them happy with your pricing?

Or would you see an increase in your OEM margins due to that mix effect?

And then secondly, on the – specifically on the product cost side, how much – if you were to say in a percentage of 100% - do you think you’ve already taken out of your profit cost base?

Yves, we continue to take out as we speak.

And we will continue to take out for as long as the company exists.

Product cost reductions are part of the genes of Logitech.

And one thing that happened six months ago is that we missed a cycle of about three months.

And if you want one simple explanation of what happened to our margins in Q1, that’s what happened.

Not necessarily that we had to lower our pricing, because that sort of happens frequently.

It is that we were not prepared from a cost perspective to do so.

And believe you me, we will try not to get unprepared in the future for things like those.

And so we’re seeing progress.

And we’ll continue to see progress.

And particularly if you look at the cordless space, and I will just bridge to the other question, mass adoption means lower prices.

Mass adoptions mean lower prices for two reasons.

Number one, because you sell to OEMs.

And I can tell you OEMs tend not to like to pay very much premium margins to Logitech.

So that would be true for probably cordless as well.

Now obviously the price is maybe higher because the products are intrinsically more costly.

But margins may not be very different than our traditional OEM margins.

Also, mass adoption means lower prices for the entry level, because you have to reach a consumer that is now completely sort of uninterested, except by the fact that he has to have or she has to buy this cordless thing, because it will help sell it.

That said, that’s where product costs and engineering takes, where we believe we can and will respond to those pricing needs and opportunities from a cost perspective.

And going beyond that will be impossible from my side.

But I can tell you that just watch out in the coming six to twelve months.

And you will see what I mean.

Okay.

Thank you very much.

Thank you.

And our next question comes from [Matt Gable] from [Quipso] Capital.

Please go ahead.

Please go ahead sir.

Hi.

Did you give any – did you speak to what September quarter, or sorry, December quarter revenue gross margin operating income will be?

And also, could you speak to how the bookings trends look in the first three weeks of the December quarter so far?

[Matt], you didn’t miss anything.

We did not say anything about Q3.

And we said we would stick to our full year guidance for over the next six months.

So we did not give a target for Q3 of anything.

We are just focusing on the second half of the year [inaudible].

I also said in my remarks that we have seen a pretty brisk product beginning of Q3.

And I gave two facts.

The first had to do with backlog.

So orders at the beginning of the quarter, comparing to the beginning of Q3 last year, we’re $45m more in backlog orders than we had last year.

And the second thing I indicated is in the first – in spite, if you want, of this much higher backlog in the first three weeks of the quarter, we are seeing 40% more bookings in retail than last year.

Okay.

Thank you very much.

And very nice quarter.

Thank you.

We’ll take one last question, if any.

Thank you.

And our final question comes from Serge Rotzer from ZKB.

Please go ahead.

Hi everybody.

Hi.

Meanwhile, you have [inaudible] the brand Labtec.

Could you give some more indication that means how big is the share in the retail business?

And also, about the margins, are they at the same level as the Logitech brand?

The Labtec brand margins are slightly lower than the Logitech brand margins.

I would say maybe in the sort of high single digit lower than the Logitech brand.

The intent of the Labtec brand is to actually make sure that we stay into the absolute value part of the channel, and compete with no name brands appropriately.

That said, the bookings are quite healthy.

It is doing as well as the Logitech business.

And [inaudible], and varies by geography.

And we’re actually happy [inaudible].

It’s a great defensive weapon for Logitech.

And the shares – double digit?

One digit?

No.

I would say less than double-digit.

Less than double-digit.

Okay.

Yes.

I would say that’s it.

Less than double-digit [inaudible].

If you look at the cord and cordless products, can you say what is the share of the cord and cordless product compared to last year?

And what is the difference of the margins?

Is it one-tenth, two-tenths, three-tenths?

The margins are comparable.

And the share – it would be – we will give all the details of all the product lines to answer this question.

And so we are not prepared to do that.

Okay.

Thank you very much.

Thank you.

And again, thank you all of you for being on the call.

Let me conclude by saying that as you have seen in the past few quarters, there has been a dramatic increase of our OEM business.

Now the merging interests of large PC OEMs and cordless, our consul OEM success that leads to new retail categories such as consul headsets, the increasing popularity of web cams to create a renewed interest in the category by OEMs – all of these facts indicate that one of the unique differentiators of Logitech is our cost, volume and quality disciplines that come from our OEM roots, coupled with our product definition and marketing skills that we developed in years of retail, will once again be together a source of tremendous opportunity.

We successfully married the OEM and retail business with our mouse business.

And we look forward to the potential of these new opportunities to provide us with a sustained competitive advantage over the next cycle of growth.

So thank you again for having been with us today.

Thank you sir.

Thank you ladies and gentlemen today for your participation.

This concludes the presentation.

You may now disconnect.

Good day.