羅技 (LOGI) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 204 Logitech International Earnings conference call.

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

At this time, all participants are in a listen-only mode, and we will be conducting a question and answer session towards the end of this conference.

If at any time during the call you require assistance please press star, zero and a coordinator will be happy to assist you.

I would now like to turn the presentation over to Mr. [Joe Greenhall] [ph], Director of Investor Relations.

You may proceed.

Thank you, Ann Marie.

I would like to welcome you to the Logitech conference call to discuss the company’s results for the quarter and full fiscal year ended March 31st, 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.

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 Logitech’s annual report on Form 20-F dated May 21st, 2003, and subsequent filings available online in the SEC Edgar database, and in the final paragraph of the press release reporting fourth quarter and full year results issued by Logitech and available at logitech.com.

The press release also contains the company’s financial information for this call.

Forward-looking statements made during this call including the forecast for the full fiscal year 2005 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 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.

We couldn’t be more pleased with our results for the quarter.

We delivered our best fourth quarter ever for sales, operating income, and net income, combined with an impressive balance sheet.

Our strong fourth quarter results brought fiscal 2004 to a fairly satisfying conclusion as we exceeded our full year targets for sales and operating income while achieving new records for sales and profitability.

Let me start with sales for the fourth quarter which grew by 15 percent compared to the prior year, to $347m, driven by our strong growth in both retail and OEM.

Gross profit for the quarter increased by 21 percent to $115m, and gross margin is at 33.2 percent, up by 166 basis points over the prior year.

This year-over-year improvement in our gross margin is primarily driven by our continuing success in reducing our product costs, combined with a favorable retail product mix.

The best example of this product mix is webcams.

This category delivered our fastest retail sales growth during the quarter, as well as substantial improvements in margin compared to the prior year, favorably impacting our overall gross margin.

Operating expenses for the quarter increased by 17 percent compared to the prior year to $70m.

Our marketing and selling expenses grew by 23 percent over last year, reflecting the final stage of our fiscal 2004 advertising campaign combined with marketing activities in support of higher sales volume.

R&D and G&A expenses both increased by eight percent over the previous year.

Our operating income increased by 29 percent to $44.9m, and our operating margin is at 12.9 percent of sales, up by 140 basis points compared to the prior year.

Net income is $38.5m, up by 44 percent compared to the same quarter last year, and our net margin is at 11.1 percent of sales, a 225 basis point improvement over last year’s 8.8 percent.

We’ve reported other income of $500,000 in the fourth quarter of this year, primarily due to the favorable impact of exchange rate movement between Euro and the U.S. dollar.

I would like to remind you that our effective tax rate was lowered from 20 percent to 15 percent at the beginning of the fourth quarter of fiscal 2004.

I’d now like to talk about the full fiscal year 2004.

Sales grew by 15 percent compared to the prior year to a record high of $1.27b.

It was a spectacular year for OEM with sales growing by 32 percent over the previous year.

We also achieved double-digit growth in retail with sales increasing by 12 percent over the prior year.

Gross profit for the year increased by 12 percent to $409m, and gross margin is 32.2 percent, down from last year’s 33.1 percent.

The decline in gross margin reflects a combination of several factors that had their most noticeable impact during the first half of the year, including price pressures in our retail desktop business, relatively flat sales and lower margins in our corded retail mice, and more OEM sales in the overall mix.

Operating expenses increased by nine percent compared to the prior year to $263m.

Our marketing and selling expenses grew by 11 percent over last year, with engineering up by nine percent, and G&A growing by five percent.

Our operating income increased by 17 percent to an all time high of $146m, and our operating margin also established a new record at 11.5 percent of sales.

Net income grew to 34 percent, grew by 34 percent to a best ever of $132m, and our net margin is at a record high of 10.4 percent of sales.

Net income includes the release in our third quarter of a $13.4m valuation allowance on specific tax deferred taxes.

If we exclude the release of this allowance our net income still would have reached a record high of $119m, up by 20 percent compared to last year, and our net margin also would have set a new record at 9.4 percent of sales.

Let’s move to the balance sheet.

Our cash position net of short-term debt is at an all time high of $284m, up by $76m compared to March 2003.

The growth in our cash is even more impressive considering we spent a total of $79m repurchasing our shares during fiscal 2004.

Our cash conversion cycle for the quarter is at 51 days, slightly faster than the prior year.

Cash flow from operations is a positive $82m for the quarter, up by $7.9m compared to the prior year, and $166m for the full year, improving by $21m over fiscal 2003.

Accounts receivable is $206m, and our DSO is at a record low of 53 days, one day better than the 54 days achieved last year.

Our inventory is at $136m, up from 124m in March of 2003.

Inventory turns as of March 2004 are 6.8 times per year, slightly faster than the 6.7 turns achieved in the quarter ended March 2003.

Other current assets are $45m, up from $39m in March of 2003.

The increase is primarily due to the release of the valuation allowance I mentioned earlier, partially offset by a decline in other categories such as prepaid expenses.

Let me give you an update on our share repurchases.

During the quarter we completed our most recent program, buying back 515,000 shares for 31.8m Swiss francs, or $25.7m U.S.

For the full we repurchased 2.2m shares, nearly five percent of our outstanding shares.

As we announced today, our Board of Directors has approved a new share buyback program which authorizes the company to purchase additional shares up to a maximum of 10 percent ownership.

We currently own approximately six percent of our shares outstanding.

We are authorized to invest up to 250m Swiss francs, or approximately $200 U.S. for this program.

We plan to move forward upon receiving approval from the Swiss Takeover Board.

You can view updated information on this program on an ongoing basis at the Investor Relations Section of our web site.

I’d now like to provide you with more details on our fourth quarter sales.

To avoid any confusion I want to point out that all of the gross percentages that follow are in comparison to the fourth quarter of fiscal 2003.

Let’s start with our retail business where sales grew by 15 percent and unit shipments were up by 14 percent.

Sales in our two biggest regions, Europe and North America, grew by 22 percent and 10 percent, respectively.

The growth in both regions was primarily driven by sales of webcams, PC gaming peripherals, and desktops.

Sales in Asia-Pacific were essentially flat.

And since then we’ve come to realize that this complex market requires an increase in demand generation programs, particularly in China.

We have just begun to make that investment and expect to see the benefits over the coming quarters.

Let me provide more product details for our retail business starting with mice.

Our total mice sales, corded and cordless combined, declined by one percent on a six percent increase in unit shipments.

I am pleased to note that we successfully launched several new mice late in the quarter.

The initial reaction to these products is encouraging, and we believe they have strengthened our competitive positioning particularly in the value segment of the market.

We’re also very pleased with the strong sales we have experienced in the Logitech cordless optical mouse for notebooks.

It was a solid quarter for cordless desktops as our sales increased by 14 percent and unit shipments grew by 20 percent.

We are pleased with the initial demand for our new value segment offering, cordless desktop express, and have strong expectations for this product moving forward.

Sales of our retail audio products grew by 16 percent with unit shipments up by seven percent.

The primary contribution to this growth came from our PC headsets as sales grew by 41 percent and reached an all time high.

Our retail total video sales increased by 79 percent with units growing by 62 percent.

It was a spectacular quarter for our retail webcam offerings with sales growing by 93 percent and unit shipments increasing by 73 percent.

Although the prior year comparable is a relatively easy one our performance in the fourth quarter was so strong that we established all time highs for both sales and unit shipments in our retail webcam.

A notable contribution to this growth came from QuickCam Orbit, the industry’s premiere webcam that started shipping in North America and is just now beginning to roll out in volume in Europe as QuickCam spheres.

The retail sales of our controllers for game consoles increased by 12 percent, and unit volumes increased by 27 percent.

The majority of the sales growth was driven by sales of our console steering wheels.

Sales of gaming peripherals for the PC platform increased by 89 percent with unit volume up by 58 percent.

This growth was achieved across all product categories, with joystick sales growing by 70 percent, and sales of both Gamepads and steering wheels doubled.

That brings me to the OEM side of the business where sales grew by 17 percent and represented 19 percent of total sales.

This growth was driven by sales of our PlayStation2 peripherals and mice.

Sales to Sony of our USB headsets and the iToy allowed us to increase our console sales by 58 percent, while unit shipments grew by 79 percent.

Our OEM mice sales increased by 15 percent with unit shipments up by 17 percent.

Looking at the retail and OEM channels combined, sales of our gaming console peripherals increased by 44 percent and unit shipments increased by 75 percent.

On that note, I’d like to turn the call over to Guerrino.

Thank you, Kris.

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

I am very pleased with our performance and our accomplishments during fiscal 2004, our best year ever, as we delivered record levels of sales, operating income, net income, and cash flow from operations, while continuing to improve our net and operating margins.

I am proud to note that we also exceeded our full year growth target of 10 percent in sales and 15 percent in operating income.

Without spending too much time looking back, I want to briefly review some of the key accomplishments driving these impressive results.

Starting with the top line I believe our fiscal 2004 results offer compelling evidence that the growth opportunities provided by both our broad retail product portfolio and the synergies between retail and OEM have never been stronger.

The performance of our OEM Team in fiscal 2004 was outstanding.

The combination of exceptionally strong sales to Sony and solid growth in our cord mice offerings resulted in a 32 percent increase in yearly sales, easily establishing a new record for the best year ever for our OEM business.

In a year when our sales of retail mice were essentially flat and when for most of the year our offerings in the value segment of the cordless desktop category were not as competitive as we’d like we still managed to grow our retail sales by 12 percent, and exceeded the $1b sales level for the first time in the history of our retail business.

This growth was driven by a number of categories with the biggest contribution coming from webcam, gaming controllers, and Logitech branded speakers.

Our sale of webcam for the year grew by 46 percent compared to fiscal 2003.

As the market leader in the category we continued to demonstrate our ability to grow sales by offering the consumer industry leading hardware and software functionality that allows them to easily utilize applications such as video instant messaging.

Our retail gaming sales grew by 51 percent over the prior year, with strong growth in both the PC and the console category and large share gains on the PC side aided by Microsoft’s exit from the category.

Sales of our Logitech branded PC speakers increased by 53 percent for the total year.

This growth reflects our success in positioning Logitech as the PC audio leader across multiple price points, and has led to significant market share gain in both North America and Europe.

Our ability to exceed our fiscal 2004 target of 15 percent growth in operating income is particularly notable, considering some skepticism that greeted our commitment to and plans for achieving this goal following the release of our Q1 results.

The area of greatest concerns at the time was understandably gross margin.

We stated our intention to drive improvement through a combination of higher margined new products, cost reductions on existing products, increased marketing, and efficiencies in distribution and logistics.

Our results clearly demonstrate that we delivered on all fronts.

The margins of the majority of our key retail products were higher in the fourth quarter of the fiscal year than in the first, and the cost managed by our worldwide distribution teams grew significantly slower than the top line for the full year.

Comparing the second half of fiscal 2004 to the same period in the prior year provides a telling example of the success of our initiatives.

Even with more OEM sales in the overall mix and a decline of relatively high margined retail life sales we still delivered a 133 basis point improvement in our gross margin.

My comments regarding 2004 wouldn’t be complete without mentioning the ongoing cash generating nature of our business model.

Thanks to efficient working capital management our cash flow from operations reached an all time high of $166m, and we have every reason to believe this trend will continue in the current year.

So let me now turn to fiscal 2005, and talk about our strategy to continue building shareholder value.

We will focus on three points: accelerating organic growth, acquisitions, and share buybacks.

On the organic growth front let me start with cordless.

Logitech has long been a leader in cordless mice and desktops, and we are encouraged by growing signs that the mass adoption of cordless is steadily approaching.

We recently introduced new cordless desktops and mice targeted at the value segment of the market, and we plan to launch a number of exciting new cordless products covering all key segments during fiscal 2005.

Cordless is one area where we do plan to increase our engineering and marketing investment in order to both accelerate and leverage the anticipated transition to cordlessness by the broader market, as well as to maintain and grow our leadership position.

The rapid growth of notebook computers provides an attractive opportunity for both our cordless and corded mice.

We are pleased with the positive initial reaction to the notebook mice we’ve launched over the last several months such as cordless optical for notebooks and will continue to focus on providing product that meets the needs of notebook users.

We’re also excited by the prospect for the entry level corded mice we rolled out last quarter and by the strong initial demand for our hot, new performance mouse, MX 510.

All in all, we entered the new fiscal year with a highly competitive product lineup in the still large and important corded mice category.

Turning now to webcams.

We are thrilled with our performance in fiscal 2004, and we believe that the low penetration of webcams into the PC installed base means that the best is still to come.

In addition to innovative hardware offerings such as QuickCam Orbit applications are a key to our growth strategy.

We plan to continue growing the consumer market through applications such as video instant messaging and the recently introduced Logitech video call for broadband currently in beta and set to launch later this year.

We also plan to integrate real time [avatars] [ph] into the next generation of instant messaging and consumer video calling applications.

We see an untapped and potentially large growth opportunity for video instant messaging in the enterprise environment.

We plan to target this environment by developing unique hardware and software solutions and partnering with the best application providers in the market.

In the PC speaker category our success in growing our sales and market share confirms that our existing strategy is working.

During fiscal 2005 we plan to launch a number of new products covering all T5 points that will solidify position, the position of Logitech as the style and performance leader.

We have every reason to believe that we can continue to grow our share principally at the expense of no-name brands across multiple geographies.

That brings me to the mobile phone headsets.

While our sales in this market were insignificant during fiscal 2004, we are encouraged by the fact that the market, particularly for Bluetooth headsets, is still in its infancy.

The factors that convinced us to enter this market, mainly its size and growth potential, combined with the strength of our brand, product design, and engineering capabilities are still in place.

Our Bluetooth headset has received favorable reviews.

We’ve made good progress, increasing our distribution in Europe, and we are starting to build momentum the U.S.

In order to accelerate our progress in this category we plan to increase our level of investment in engineering and marketing.

We believe we can and will succeed in this space, and we are committed to funding to make it happen.

Another relatively new opportunity is digital writing.

Our challenge here is clearly to develop the market and we are convinced that adoption will start in the enterprise space.

We’re working with a number of partners such as HP, MetaMedia, and Standard Register on a variety of deployments and pilots focused on developing value add applications for the healthcare, government, sales automation, and customer relationship management sectors.

We are focused on driving the professional productivity market by developing the software and paper solution that will enable the use of our pen in multiple small and medium business application.

And we also expect to introduce two smaller [IO pens] [ph] during fiscal 2005, one for the consumer market and one for the enterprise market.

We remain convinced that through the effort of Logitech and its partners the digital writing market is poised for strong growth.

To fully leverage the significant portfolio of organic growth opportunity and to develop the infrastructure that can eventually support a $3b Logitech we plan to increase our investments in brand building, supply chain, and manufacturing.

We will continue to invest in marketing and advertising activities designed to support and strengthen the Logitech brand across all markets and geographies.

In fiscal 2005 you can expect to see similar or greater investment in this area to what we did during fiscal 2004.

We also plan to increase the investment in our global distribution and logistics capabilities with a focus on further improving our operational processes and fully utilizing the supply chain functionality of our existing ERP system.

I also mentioned increased investment in our in-house manufacturing.

Our current plant is approaching full capacity, and our Board has approved plans for a new plant to replace the existing one.

The new plant will still be located in China in the [Sujonu District] [ph].

It will initially have 30 percent greater capacity with room to double beyond that.

We expect to start operations there in April 2005.

Let me add that our manufacturing strategy has not changed.

We will continue to source and supply our products utilizing a combination of in-house manufacturing, outsourcing, and regional postponement.

That brings me to the second front of strategic focus for Logitech, acquisitions.

We have looked at a wide variety of acquisition candidates over the last several years, and we have narrowed our criteria to selectively target small and medium sized companies with product and technologies that would provide Logitech with a jumpstart entry in lateral, complementary markets.

We believe that firms of this size are easier to integrate, allowing us to generate incremental shareholder value with a better risk reward profile and with larger targets.

The first [e-front] [ph] to increase shareholder value is share buyback.

Kris has already described the plan approved by our Board, but let me add that our strong cash position and our expectations to continue generating free cash flow present us with a unique opportunity to put this cash to work to increase both earnings per share and the value of each share held by our owners.

And that brings me to our outlook for fiscal 2005.

We see another good year for sales in our retail business with double-digit growth similar to what we saw in fiscal 2004.

On the OEM side we expect sales to be essentially flat compared to the prior year.

The year-over-year comparable is a challenging one in OEM, given the huge success we had in fiscal 2004 with sales of PlayStation2 controllers to Sony and the fact that the size of these opportunities is difficult to predict.

That said, we are well positioned for continued success with our classic PC OEM customer base.

Looking at our total sales with retail and OEM channels combined for fiscal 2005 we anticipate sales growth of 10 percent compared to the prior year.

As I’ve indicated, we plan to invest in a number of growth opportunities during the new fiscal year.

Even with this increased investment we are still targeting a 15 percent growth in operating income with further improvement in our operating margin.

Fiscal 2004 was a remarkable year for Logitech.

We gained momentum throughout our business, delivering record breaking results that exceeded our targets for growth, and sales, and operating income.

The Logitech brand was strengthened by the introduction of innovative new product and the marketing initiatives that were conducted in each of our regions.

And I could not be more proud of the improvement made in operating efficiencies and product costs, and with the fighting spirit of the Logitech employees.

This morning in Zurich we had a long Analyst and Investor meeting with an extensive q and a that I invite you to review on the web at logitech.com, and to follow the questions that we had, the question and answer session that we had there.

But at this point, I’d like to open the call to your questions, and please follow the instructions of the operator.

[Caller instructions.] [ph]

And your first question comes from [Ross Stone] [ph].

Congratulations, Guerrino and Kris, on hitting and beating your targets for the year.

Thank you.

I wonder if you could review, and I realize it’s probably a different answer by major market segment, who you see as the most important competitors?

It’s always nice to see segments where they’re exiting like in the PC gaming category, but in desktops, for instance, where you were challenged, I guess, by lower priced competition early in the year, if you could start there and just review by major segment how you see the competitive landscape now?

Sure.

Well, let me start by saying that we remain the leader in cordless, and we remain by far the leader in webcams and we are the leader in each of the console categories in which we play.

And so the three, if you want, developed, market developed categories of our growth, you know, we see as a very strong leadership.

Our competition, as you know, in mice and keyboards is Microsoft.

It was Microsoft, it is Microsoft, and it will be Microsoft.

There are, there have been, and there will be a lot of no-name brands and even some branded players trying to play, but you know, they represent collectively less than 30 percent, 35 percent of the total market of mice and keyboard, while Microsoft and Logitech depending on the region share the rest among themselves.

So the intent is to keep fighting for the position, and I think that this competitive situation greatly benefits the consumer as Microsoft and Logitech do their best to provide more exciting offers to them.

We responded to a weakness in our corded mouse business which was a weakness against both branded and non-branded players.

We’ve introduced great entry level new corded business, and enhancing our notebook corded offering.

We’ve also introduced a new entry level desktop product which was less in response to competitive opportunities and more in anticipation to what we consider the opportunity to mass, to make cordless a mass adoption category.

In webcams, I have to say I wish we had stronger competitors.

We see another brand player, Creative, doing okay in the marketplace.

Creative is a distant second in market share both in Europe and in the U.S. but doing fine, and it’s good to be in two brand to make a market as opposed to alone.

In console peripherals we are the market share leader in [spin] [ph] wheels and we are making headway in game pad.

In PC gaming we basically at this point have more than 50 percent of the category, thanks to having basically gained all the market share, the vast majority of the market share that Microsoft owned a year or two ago.

In speakers, I’m very pleased to say that for the first time in the history we are the number one microchip player in the United States.

We passed the number two player, which happens to be Creative at this point, without a close number three.

Altech is the brand that has lost the most in the recent months.

We don’t believe that Altech will go away.

We believe that they’ll continue to fight.

But we’re proud to say that we have achieved one of our goals in speakers which is to be number one in the U.S.

In Europe both Creative and Logitech grew substantially in the last three to six months, and we are now number one, Creative, and number two Logitech.

And so Europe is the most fragmented market in speakers.

And so, the no-name brands and the micro players are actually losing share dramatically to both branded players, Creative and Logitech.

We expect that trend to kind of solidify in the future, and we expect this category at many times to end up being a two-horse race and maybe in the future.

And we certainly want to be the number one in both regions, and we are developing products to make that happen.

In the digital writing category there is no competition.

We have to build a market.

And we’re doing so with an Eco system of partners, [inaudible], of course, but of several system integrators that, and HP, and [Accenture] [ph], and Standard Register that is the market leader in forms, electronic and paper forms management in the United States.

This market is an Eco system market development more than anything else at this point.

And we are fully committed to it.

And in wireless headsets our competition is fundamentally Plantronics and [Geo Netcom Java] [ph] brand.

They are more established than we are.

We are, you know, very small right now, but I wish you would ask me this question a year from now, and I will have a different answer.

Great.

One other question, please.

You mentioned that given the flattish sales growth in Asia that you were going to focus there on demand generation.

Can you elaborate on what that will be, and in which category do you see the biggest opportunity to stimulate demand?

Yeah, the key point in Asia is, and particularly true in China, which has been the weak link in our Asia operations at this point is that we have to migrate – let me start with a little bit of a history.

Usually when we enter a market, and it happened when we started in Europe and the United States, we start operating through distribution and distributors, and we leave the market making part of the job to distributors.

It usually works at the beginning of a market because your products are new, and there’s a novelty element, and distributors are very motivated to do the job for you.

When the market starts to grow and your presence starts to grow that’s no longer sufficient, since you have to migrate from a distributor focus market making activity which is low in headcount, which is fundamentally sale in driven and volume incentive driven to a strategy that requires more direct presence if not direct sales to the real retailers, the customers of the distributors.

You still continue to use distributors and distribution for logistics in extending credit to retailers but you have to directly hit the retailers, and to develop market programs and promotional programs that hit particularly the retailers.

We’ve done that in all of Europe and the United States, in the United States actually we deal directly with several of the largest retailers.

In Europe we continue to use distributors but we have a direct presence in planning promotion and marketing activities at the retail level.

We have to make that shift in China because China has reached the inflection point where that happens.

And so it’s much less an issue of product, or pricing, or competition, it’s much more an issue of channel development and creating pool demand from the retailers to the distributor.

Great.

A final question, what would you estimate is the penetration of cordless desktops into installed PCs?

Well, if you take cordless desktops alone we’re talking really low single digits.

And the largest cordless device that penetrates the market is the single cordless mouse.

The combined penetration at this point we estimate around seven percent, which means that, and we believe, that’s why I said and repeat, we believe there is a discontinuity happening here.

We believe that we can accelerate penetration through more aggressively priced, compelling, quality branded product like the success of express and the entry level cordless optical mouse we just introduced.

And we believe also that in parallel the interest that OEM has shown on cordless will increase.

Today we already sell, you know, a modest amount of cordless product to some OEMs, particularly in the laptop business and particularly in Japan.

We see an enormous interest in cordless by all OEMs.

One of the things we’ve done recently with the introduction of our new cordless desktops is to actually not only design but manufacturer ourselves a cordless keyboard, which enables us to now have in-house manufacturing for cordless keyboard and mice, and therefore, better serve the potentially growing cordless market for mice and keyboards on the OEM side.

So in a way, in the long term we see a cordless world for PCs.

You know, five, eight, whatever years from now you will not be able to provide a PC with a corded mouse or keyboard.

Between now and then we want to make sure we get our position strong.

And I think that’s one area where we expect substantial growth opportunities over time.

And so, the desktop express is the first keyboard that you manufactured in-house?

Well, there’s – no, we have two entry level cordless desktops.

One is called ‘cordless desktop express,’ and one is called ‘cordless desktop.’ The cordless desktop is marketed through the U.S. mass channels at this point, and the keyboard that is part of the cordless, that cordless desktop is in-house.

And that’s the first one that you’ve done in-house?

That’s the first volume keyboard that we do in-house.

We also build Denobo which is the completely outside of the spectrum.

Right.

Is an early adopter, kind of high end product.

But this is the first test in high volume manufacturing of a cordless keyboard in-house.

Great, thanks very much.

Thank you.

And your next question comes from Charles Elliot of Goldman Sachs.

Hi.

Three questions, please.

First, where do you see operating margins going over the next, can you give us a range for where you see operating margins over the next three years?

Hi, Charles.

We haven’t made any change to our long-term or three-year model, and we still have our 12 percent, the 12 percent number there.

We, as you can see from the guidance, just simple arithmetic, we should be there or slightly above that if we meet our goals for the year.

Whether or not this indicates an opportunity to further improve our operating margins it’s unclear to us.

We want to invest in our organic growth for the long-term.

What we are doing this year in spite of this higher growth in operating margin, that income and top line, we are making substantial investments, as I already said, in marketing on the engineering, product development, and infrastructure.

We believe that to sustain the long-term growth of the company we will continue to make certain investments, and so it’s hard to say that we can anticipate higher margins, and so I would leave it at that for the time being.

Okay.

Second, you are planning mid-term revenues of $2b.

You’re now getting pretty close to that target.

What’s the new plan?

Sorry, what, you’re referring to?

You’re referring to our plan of $2b?

Yes.

Well, I don’t think we’ve ever made a plan for $2b.

What I said in my remarks, I said that we are building a $3b, and even more ambitious than what, that you would suggest.

But what I mean by that is that we have to put in place the infrastructure by chains, manufacturing, the operation systems to support that level.

I am not saying that next year, the next three years, or the next five years we'll be a $3b company.

I think we will eventually be a $3b company, and I think our next billion will come faster than the first billion came.

Right.

And what will happen to your capital spending plans in ’05 with the new China plant?

Will it rise a lot?

No, Charles, actually it won’t.

We’re expecting that it will cost somewhere around $14m, possibly $15m.

As you know, we’re not very capital intensive to begin with.

Remember, our manufacturing is lightweight assembly, it is not like a steel plant, or a chemical plant.

And so it’s relatively an incentive.

And, of course, one of the reasons why we are in China is that the location is particularly favorable.

Great.

And just a follow-up on that.

I think you originally used to have a profile of around 50 percent manufacturing you did yourselves and 50 percent was outsourced.

Are you staying with that?

We are staying with that.

In fact, the fact we have a plan for the manufacturing side, means that we are staying with that.

As we continue to grow and our existing plants reach its capacity, if we did not make this investment we would shift dramatically our manufacturing profile into more of an outsourcing mode.

We don’t believe that’s healthy for the company.

In fact, if you look at the opportunities that we have on the OEM side I mentioned keyboard, but either categories are subject to OEM opportunity beyond that.

It is obvious that maintaining a strong quality in-house manufacturing is essential to that.

And as you know, that business in spite of the fact that it is usually considered kind of a second class citizen at Logitech, the OEM business is essential for our retail margin.

And so, in a way, the creation, the plan for a new factory indicates that we’re actually staying with our 50, 60 strategy of in-house and outsource, but we also see that there’s growth coming.

I’ve got you.

And I am sorry, one more question if I may, and I promise to stop.

Go ahead.

Can you give a feeling for the penetration and the life cycle of webcams?

When you first did webcams they had a tremendous growth, and then they [stopped] [ph] for awhile.

I just, I think it was around the March quarter of last year.

And then you launched MSN, and you had further growth.

Where do you think penetration is now?

And how long do you think you can have these very high growth rates in webcams?

The, you’re right, we had an accelerated growth of webcams this year, and we believe that the biggest driver of the operation was the success of MSN instant messenger with video.

There’s other application, including [Aim] [ph] at this point that support video, and we haven’t seen the benefit of that yet.

As you know, Aim is the largest system platform.

This year we grew our webcam business by 46 percent, a dramatically higher number that we have seen in the past.

Now, I think that that growth is probably, at that level of pace, is probably not sustainable, however, we haven’t seen the impact of Aim video yet.

We have launched a video call, and video penetration is in the mid single-digits for webcams overall.

The other key point that I mentioned in my remarks is the enterprise market.

Today the entire penetration of our webcams is in the home which makes it, you know, a low double-digit penetration category in the home.

We see an incredible interest in video in the enterprise, together with an incredible interest in instant messaging in the enterprise.

There are predictions that state there are going to be 280m users of instant messaging applications in the enterprise in the year 2008.

You know, major communications platforms in the enterprise such as Lotus Notes support instant messaging.

They have a site application called ‘Same Place,’ that supports instant messaging.

And guess what?

That application supports video, as well.

So there is interest in the PC based video in the enterprise.

You may have seen Cisco injecting voice-over-IP applications that happen to have Logitech cameras attached to it.

So there is a completely untapped enterprise play on top of what we’re doing in consumer application.

That’s why I rank webcam together with [inaudible] as our sort of dual growth opportunities moving forward.

That’s great.

Well, I suppose it’s 1990s and old-fashioned to say ‘congratulations,’ but I’d still like to say ‘congratulations!’

Thank you, Charles, and we appreciate it.

I don’t know if it is 1990s, but I appreciate it!

And your next question comes from Oliver Maslowski of Bank Vontobel.

Yes, good afternoon, everybody.

And congratulations for the good results, Kris and Guerrino.

Thank you very much.

I have also three questions.

The first question, could you give us the development of the average selling price in the fourth quarter, and your assumption for this year?

Yeah.

Now, it’s important, Oliver, of course before I mention it, the average selling price, of course, is not as meaningful as you, you know, it’s difficult to draw any real conclusions about our average selling prices regarding the impact on let’s say on gross margin.

I just want to make sure, you know, you understand that.

But anyway, our ASPs in the retail business increased by four percent for the same quarter last year.

And it declined eight percent sequentially.

The full year-over-year it’s basically unchanged.

And your assumption for this year would be?

The assumptions for this year, we’re – as you’ve kind of noticed, we’ve introduced some value mice.

The likelihood of our having those ASPs go down as we sell more and more value mice is probably pretty high.

Remember that what we’ve done in the entry level of mice, both corded and cordless, and the entry level of the desktop is to engineer new products with lower cost and [inaudible], therefore, they have an impact on the average selling price.

If we are successful would be difficult.

On the other hand, we expect these products to be substantially good marketing products, at least in line with what you see from Logitech.

And so that’s kind of, we will trade volume for ASPs.

All right.

One question regarding options, how many options were exercised last year?

And what is the amount of exercisable options for the end of this year?

Last year there were about two million exercised, two million shares that were options that were exercised during the fiscal year.

The amount that is remaining, this is vested and unvested, in the money, not in the money, is around 7.5m or so, in that range.

Okay, and my last question would be regarding this year’s [growth rate] [ph], that with or without acquisitions?

That’s organic.

Organic, all right.

Thanks a lot.

Thank you.

And your next question comes from [Matt Gable] [ph] of Calypso Capital.

Hi, thanks.

I was wondering if you could speak about gross margin for the current quarter and the current fiscal year, as well as what did retail product ASPs in whole do sequentially in the just reported March quarter?

Kris just touched the retail ASP, and I think it was sequentially down eight percent, and year-over-year up four percent.

And so kind of in the grand scheme of what ASP means it is kind of with 250 products I would say unchanged.

In terms of gross margins, I assume you’re talking about this year, this current fiscal year?

Yes.

We consider that if our prediction about a factory growth and retail in OEM are true we expect that that would somewhat benefit our gross margin versus where we ended the fiscal, the year for fiscal ’04.

And so, it’s slightly higher than 32 percent.

We believe that we will remain in the historical band of 32 percent to 34 percent but slightly higher than what we figured here.

Okay, thank you very much.

You’re welcome.

And your next question comes from [Justin Marcos] [ph] of [Graham Partners] [ph].

Yeah, hi.

I had a question regarding the, on the cell phones, how are you increasing your distribution here in the U.S. and then in Europe, on the cell phone headsets?

Let me give you some example.

We’re not there yet.

That said, we have just started a test distribution comp U.S.A.

We have closed a telephone, a cell phone distributor U.S. wide.

We have available at five electronics and several e-commerce sites.

And we absolutely intend to make sure that you can find our headsets wherever you would look for headsets.

We are way better in Europe.

We are distributors Europe wide of [inaudible], we’re distributors [inaudible] of [inaudible].

We have several specialists including the [Dixson Group] [ph], telecom outlets, as well as other mobile outlets throughout the region.

And so we are, let’s say 50 or 60 percent there in Europe.

We are like 10 to 15 percent there in the U.S., if you want a ballpark estimate.

That’s our biggest effort.

We will invest more in R&D, more in marketing in this category, as I mentioned in my remarks.

The Logitech categories, there is no real brand playing in the mind of the consumer.

There are good companies playing, but no real brand in the mind of the consumer.

As I said, ask me the question it’s here.

One other thing, how do you see, I guess, the pricing for you guys on the margin?

Are the gross margins better for you initially, but the operating margins might be a little bit weaker because of the amount of spending you have to put in to develop the channel for you?

Well, no, the margins of the mobile headset business are in the ballpark of the rest of the business.

I don’t see that particularly impacted.

It’s certainly by increasing certain market impact the gross margin, particularly channel promotional expenses.

We will see that reduced.

But we are also working on product cost, as usual.

This is not different in any of our product lines.

There is innovations, there is product cost of marketing.

And so we expect to do both, to work both sides of the equation.

And so we do not believe, need, hope for success would have any particular impact on our margins one way or another.

Thank you.

Thank you.

And your next question comes from Jill [Muscovini] [ph] of [Amina] [ph]

Hi, guys.

Most of my questions have been answered.

But regarding the iToy, your business with Sony has been extremely strong.

Can you talk a little bit about what, how you’ve seen the iToy launch, and some of the new products outside of North America?

And what kind of seasonality you see with that product line, especially in that sort of Christmas is over?

If you see any sort of seasonality now that the initial launches have been somewhat behind us?

Yes, thank you for asking the question.

I was trying to explain in my remarks about guidance for OEM that the most -- there is an incredibly tough comparable with sales to Sony in OEM, and iToy is a portion of that together with headsets.

And what I said also is that the predictability of these kind of sales is the lowest among the entirety of our portfolio.

We are very capable of predicting our OEM sales of mice, as well as predicting global sales for retail than predicting this one.

That said, there is a strong seasonality, you’re very right.

Sony has, you know, there is a wave that is now getting to an end, and we expect this to have a much stronger impact on the second half of the fiscal year than it does on the first half.

The first half is going to be really kind of dry when it comes to these particular OEM sales.

That said, iToy is today is iToy play, it’s one game.

There are significant players planning to launch games that are video based.

One example is [inaudible], that will introduce a new version of Harry Potter, which if the book is telling a story should be the success of the game.

And that particular version supports [cameras and automation] [ph], and motion driven action.

And so, the combination of Sony wanting to establish webcams as a feature of PlayStation2 plus third parties adding video capabilities make us think that this will happen in not a significant way for the next Christmas season, and that’s as far as I can go predicting.

How were the iToy sales this quarter?

They were very good.

In fact, the combination of I think Kris was sharing the numbers with you.

But the combination of iToy and headsets grew by more than 50 percent year-over-year.

So, not as exceptional as the quarter before but very good.

Okay, thank you very much.

Thank you.

And you have a follow-up question from Matt Gable.

Yeah, given the recent strengthening in consumer demand in general what are you seeing in the current quarter?

Are you seeing that continuing?

And if so, or if not, what kind of color can you put on your top line guidance for the current quarter?

As you have noted, we have not given them guidance for Q1.

We would prefer to focus on the full fiscal year, and so that’s as far as I would go.

I can certainly tell you that we’ve seen a great start to the quarter.

We started with a, you know, a substantially higher book, orders on the books, and we’ve also seen in the first couple of weeks, you know, stronger bookings than we had last year.

But as I say, it’s only two weeks, and so that’s as far as I can go.

And we are focusing to delivering the year.

And I think that if you look at the history of Logitech in the past six years Logitech is much better judged across that length.

I understand it’s not, the one that is in fashion these days, but that’s the way we run the company.

There’s too much seasonality going on a quarter-by-quarter basis.

You said you had higher orders coming into the quarter.

Is that versus coming into the March quarter?

Coming into this quarter, yes.

Coming into – the comparison is higher year-over-year.

I am always comparing year-over-year.

Okay.

How does it compare sequentially?

It’s probably slightly lower sequentially which is absolutely due, you know, completely [inaudible] driven.

Okay.

So if you want to extrapolate, and I warn you not to, this is not going to be a $347m quarter!

Okay.

If that was the point.

It’s never been – as you know, Q1 is our lowest quarter for the year both in top line and bottom line.

Many things have worked, though.

Okay, thank you.

You’re welcome.

And we have no further questions.

Well, thank you very much.

As I expressed, I believe that Logitech answers the fiscal year with position for success.

We’ve introduced new, affordable products intended to stimulate and respond accelerating adoption of cordless [products] [ph] by mainframe computer users.

We began marketing at the range of new corded mice targeted at the fast growing and profitable market segments such as precision gamers, notebook users, and price conscious desktop users.

And we unveiled a video calling application that provides a new option for using Logitech webcam to integrate video into personal and professional communication.

And so, we’re off to a great start.

We expect the new year to bring the inception of even more innovative products across our product lines, as we accelerate our investment in marketing, product development, and infrastructure to fuel our growth and increase value for our shareholders.

With that, I thank you for your participation today.

Thank you for your participation in today’s conference.

This concludes the presentation.

You may now disconnect.

Good day.