羅技 (LOGI) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Logitech Q1 Earnings Conference Call. My name is Carlo, and I will be your Coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this presentation. If at any time during the call you require assistance feel free to press star, followed by zero, and a coordinator will be happy to assist you.

I would now like to turn this presentation over to your host for today’s call, Mr. Joe Greenhall, Director of Investor Relations. Please proceed, sir.

Thank you, Carlo. I would like to welcome you to the Logitech Conference Call to discuss the Company’s results for the quarter ended June 30th, 2004, the first quarter of Logitech’s fiscal year 2005. The press release and a live webcast of this call are available online at logitech.com.

This conference call will include forward-looking statements that are being made under the Safe Harbor 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 its statements. Factors that could cause actual results to differ materially include those set forth in Logitech’s annual report on Form 20-S dated May 19th, 2004, and in the final paragraph of the press release reporting first quarter results issued by Logitech and available at logitech.com. The press release also contains the Company’s financial information for this call.

The 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 takes 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’re thrilled that fiscal 2005 is off to a strong start, as we delivered our best ever Q1 for sales, operating income, and net income.

Let me start with sales which grew by 22 percent compared to prior year, to $267m driven by strong growth in retail. Gross profit for the quarter increased by 50 percent to $91m, and gross margin was 34.1 percent, up by 629 basis points over the prior year and 86 basis points on a sequential basis, establishing a new record for Q1.

The year-over-year improvement in our gross margin is mainly driven by a better retail gross margin, reflecting both a favorable product mix and our ongoing success in reducing product costs, and also, to a lesser degree, by a shift in the mix between retail and OEM sales.

Our retail gross margin improved by 518 basis points over the prior year, with our fastest growing categories: cordless mice, Webcams, and gaming peripherals, all delivering year-over-year margin improvements.

Operating expenses for the quarter increased by 31 percent compared to the prior year to $69m. Our marketing and selling expenses grew by 41 percent over last year, primarily reflecting increased marketing activities in support of the much higher retail sales volume. R&D expenses increased by 14 percent over the previous year, and SG&A expenses were up by 28 percent, with growth in both categories driven by increased investments to support future growth.

Our operating income almost tripled, increasing by 175 percent to $21.6m, and our operating margin was at 8.1 percent of sales, up by 449 basis points compared to the prior year and setting a new record for Q1.

Net income was $18.9m, more than three times higher than last year’s 5.7m. And our net margin was at 7.1 percent of sales, a 446 basis point improvement over last year’s 2.6 percent. This also establishes a new high for the first quarter.

We reported other income of $900,000 in Q1 this year primarily due to favorable impact of exchange rate movement between the Euro and the U.S. dollar. I would also 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.

We’ve reported diluted shares outstanding of 50.3m shares for the first quarter of fiscal 2005, up from the 48.1m shares in the prior year. The reason for this increase in diluted shares outstanding is the different accounting treatment under U.S. GAAP of our convertible debt between the two periods.

Under the ‘if converted’ method the impact of the convertible debt was dilutive this Q1 and, therefore, 2.7m shares are included in the total. The impact of the convertible debt in Q1 of last year was non-dilutive and, therefore, the 2.7m shares were excluded from the total.

Let’s move on to the balance sheet. Our cash position net of short-term debt was $264m, up by $44m compared to June of 2003. The substantial increase in net cash comes in spite of having spent approximately $113m repurchasing our shares during the last 12 months, significantly increasing our inventory to position us for our peak selling season, and acquiring Intrigue Technologies. This performance is due to an effective management of our working capital and operations. In fact, our cash flow from operations was an impressive $55m for the quarter, up by $44m compared to Q1 of last year. And our cash conversion FIFO for the quarter was 63 days, 8 days faster than the prior year.

Accounts receivable was $151m, down by $8m from last year even with a $48m increase in sales. Our days sales outstanding was at a record low of 51 days, 14 days better than June of 2003.

Our inventory was $180m, up from $126m in June of 2003. Inventory turns as of June 2004 were 3.9 times per year, down from five turns as of June 2003. There’s several factors contributing to the higher inventory, with the most significant being the purchase of components to both ensure against shortages later in the year, and to position us to respond to potential top line up side. In fact, the majority of the increase is reflected in our manufacturing inventory which has grown by over 150 percent compared to the prior year. We’ve also increased our finished goods inventory to ensure a high level of customer satisfaction and to reduce the risk of not finding flexible freight alternatives later in the year.

Both goodwill and intangible assets increased compared to March 2004. The increase in these categories was due to the acquisition of Intrigue Technologies in May 2004.

Let me give you an update on our share repurchases. During the first quarter we initiated our most recent program, buying back 746,500 shares for 43.4m Swiss francs or $34.2m. We now own approximately 6.9 percent of our shares outstanding. You can view updated information on this program on an ongoing basis at the Investor Relations Section of our web site.

All of the gross percentages that follow are in comparison to the first quarter of fiscal 2004. And so let’s start with our retail business where sales grew by 32 percent, and unit shipments were up by 10 percent. It was a great quarter for our two biggest regions, with sales growing by 42 percent in Europe, and 33 percent in North America. The growth in both regions was primarily driven by sales of cordless mice, Webcams, and gaming peripherals. Sales in Asia-Pacific were flat as we’re in early stages of implementing our new demand generation programs with a strong focus on China.

Before providing more product detail for our retail business let me briefly mention the new supplemental financial information included in our earnings release. I’m pleased to tell you that for the first time in our history we’ve included a breakout of our retail sales by product family, namely, corded, cordless, video, audio, gaming, and other. This categorization reflects the way we look at our business today as well as the market opportunities currently before us.

I do think a word of explanation is in order for what’s included in cordless and corded families. Both of these categories are made up of PC pointing devices, such as mice and [track falls] [ph], as well as PC keyboards and desktops.

Let me give you a few examples. A cordless desktop would be reported under cordless, while a corded mouse would be reported under corded. However, a cordless gaming controller would be reported under gaming.

And so, let’s start with the cordless product family, where our sales grew by 39 percent, and unit shipments increased by 72 percent. The primary growth driver in this category was cordless mice, with both sales and unit shipments more than doubling and growing by 121 percent and 126 percent, respectively. A major contribution to this growth came from our cordless optical mouse for notebooks, which was one of our top selling products for the first quarter. Cordless desktop sales increased by 17 percent, with units up by 48 percent. The impressive unit growth in both cordless mice and desktops is an early indicator of the success of the value segment offerings we introduced late in fiscal 2004.

Sales in the corded category with corded mice being the largest component declined by 3 percent, with units down by 13 percent. Given the increasing momentum of the consumer move towards cordless we believe it will continue to be challenging to generate growth within the corded category outside of certain niche markets.

It was a stellar quarter for retail video, with both sales and unit shipments more than doubling, as sales grew by 110 percent and units by 119 percent. This was also the second quarter in a row where we’ve established an all time high for unit shipments of our Webcams.

Our retail audio sales increased by 10 percent with unit shipments declining by 8 percent. A significant contribution to the sales growth came from PC headsets as sales increased by 13 percent, with units up by 8 percent. Sales of our Logitech branded PC speakers grew by 1 percent with units up by 31 percent. The significant growth in unit shipments primarily reflects the impact of the midrange offerings we introduced during the second half of fiscal 2004.

We enjoyed a very strong quarter in the retail gaming category, driven by the success of our peripherals for both console and PC platforms. Sales for the gaming category almost doubled, growing by 99 percent, with unit shipments up 107 percent. Sales of controllers for game consoles increased by 75 percent, with units growing by 106 percent. This growth was due to the strong initial response of our cordless controllers for both the Playstation II and the Xbox, which began shipping during the first quarter.

Looking at PC gaming, our sales and units more than doubled with sales up 120 percent and units up 108 percent. This growth was achieved across all product categories with sales of joysticks, gamepads, and steering wheels all more than doubling.

That brings me to the OEM side of the business where sales declined by 11 percent and represented 16 percent of our total sales. This decline was primarily due to a very steep but largely anticipated drop in our OEM sales of peripherals for the Playstation II. I’m pleased to note that we enjoyed a very strong quarter in OEM mice with sales increasing by 25 percent and units by 15 percent. While the numbers are still much smaller than corded, I also wanted to mention that our OEM unit shipment of cordless mice increased by 151 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 today. This was really a wild first quarter, and I’m very pleased especially with our robust growth in the retail cordless and Webcam categories, and the strength of our gross margin.

Our mouse franchise also did very well, as total retail mouse sales, cordless and corded combined increased by 25 percent over last year. In looking at our exceptional growth compared to the prior year we [tend] to initially view our performance as being helped by an easy comparable. Let me briefly comment on why I think there’s much more to this growth than a weak Q1 last year.

In the first quarter of fiscal 2004 our top line grew by a solid 12 percent and reached an all time high for Q1. Even with the double-digit decline in OEM sales this year we still delivered 22 percent growth and shattered the sales record set a year ago.

Let me also put our operating income growth in perspective. The compiled annual growth rate of operating income over the past two years was 31 percent. A key factor driving the growth of our profitability this year was our healthy gross margin. Although we planned for a significant improvement over the prior year, I am pleased to note that we exceeded our expectations. Our gross margin performance is a strong indicator of the value of our unique combination of premium brand, attractive products, and efficient manufacturing.

We are excited by our Q1 results yet, as I pointed out, at this time last year the first quarter is historically the smallest contributor to our full year performance. And so we remain focused on executing our full year plans.

Let me talk to you about some of what’s in store for the remainder of fiscal 2005, starting with cordless. The growth of our cordless mice and desktops in the first quarter is a confirmation of the consumers’ increasing appreciation of cordless peripherals. We believe this trend is at its early stages, and we are committed to investing in the technology, products, and marketing to take advantage of and accelerate the cordless opportunity.

After all of these years we still see growing opportunities to bring innovation to the mouse in both product design and functionality. The mouse offerings we plan to introduce this year will feature easy and accurate scrolling in three dimensions, as well as media friendly options for controlling digital content on the PC.

We are particularly excited about our plans for delivering dramatic improvements in tracking performance by moving beyond today’s optical based mice. We’ll also build on the momentum we’ve established with our notebook mice by introducing new products offering a compelling mix of design, performance, comfort, and convenience to the mobile user.

In the cordless laptop category Logitech has long been the leader, and our announcement earlier this week is the latest example of our focus on strengthening our position by offering the users even more compelling reasons to make the switch to cordless.

We have now three cordless desktops shipping later this quarter, the LX 500, LX 501, and LX 300 that feature inventive and bold new keyboard design. These keyboards make computing more comfortable and ergonomic, and offer unparalleled control of digital entertainment and rich media. The design features much lower keyboard height, enables two-handed navigation by combining the enhanced navigation control of the keyboard with those of the mouse, and provide advanced media controls.

The LX 500 and 501 will also come with a new Logitech media live software which brings together all the music, pictures, and video of your PC into an integrated user interface that is designed to be used from up to 10 feet away.

Along with cordless, video is another category where we see significant growth opportunity. The number one enabler of Webcam [pro] is the increasing penetration of broadband connectivity, especially in the U.S. and Europe. In addition, the combination of a relatively low penetration rate, easy-to-use software, and compelling application is increasing the appeal of video in our daily communications, and driving significant growth for Logitech.

The best example of the appeal of video communication is the rapidly expanding use of video instant messaging. Last month we announced that users of MSN have logged more than 1b video instant messaging sessions using Webcams for MSN instant messenger since March 2003. Combined with the fact that our retail Webcam shipments reached an all time high during the first quarter which is far from our peak selling season it is clear that Webcams are moving even closer to the mainstream of personal computing.

As Kris mentioned, it was a great quarter for both our retail console and PC gaming controllers. As you would expect, we have a number of exciting new products lined up for the Christmas season to build on our momentum, including NASCAR branded racing wheels in North America for the Playstation II, Xbox, and the PC.

Our success in cordless peripherals isn’t limited to mice and keyboards, as was most recently demonstrated by the strong initial demand for our new cordless controllers for Playstation II and the Xbox. And so the combination of fewer batteries and extended battery life, a smaller and more comfortable size, and pricing that’s affordable for all gamers, we’re making cordless gaming real.

Turning now to audio. We’ve made substantial market share gains in our PC speaker business during the last 12 months in both the U.S. and Europe by continuing our leadership of the high end, while expanding our offerings across multiple price points. We plan to sustain this momentum with appealing updates to our offerings across the entire range, with a special focus on high performance 2.1 stereo speakers.

At the beginning of the fiscal year I said we would increase our investment in engineering and marketing for mobile phone headsets. Later this year, we’re plan to introduce our next generation of Bluetooth headsets. Among its many attractive features this headset will include Winstop, a unique approach to wind blocking that dramatically reduces wind noise and delivers bests in class audio quality.

Let me conclude my remarks on our product by giving you an update on the Harmony remote control device. We acquired Intrigue Technology in early May, and I’m pleased at the progress we’ve made integrating the Harmony Team into Logitech. I believe the major integration challenges are behind us, and we are well positioned to begin driving growth in the advanced remote control category.

And that brings me to our outlook for fiscal 2005. While we continue to target 11 percent growth in revenue and 15 percent growth in operating income compared to the prior year, our current outlook suggests that how we get there is likely to be different from what we thought at the start of the fiscal year.

Based on our strong retail momentum during Q1 combined with a planned introduction of a number of innovative new products we now expect that for the remainder of the fiscal year retail sales will grow faster than originally anticipated. Consistent with the Q1 results we now also expect OEM sales to decline year-over-year.

On the OEM side we had expected sales to be essentially flat compared to the prior year due to the challenge of repeating the success we enjoyed with OEM sales of our Playstation II peripherals to Sony. We continue to work closely with Sony on a variety of opportunities, yet the timing and size of these opportunities remain difficult to predict and leads us to believe we will experience a reduction in our OEM sales compared to fiscal 2004.

Given the expectation of faster growth in retail and a decline in OEM, the natural conclusion is our gross margin will benefit, particularly in light of the strength demonstrated in the first quarter. The potentially higher gross margin provides us with increased tactical and strategic flexibility. Our primary focus continues to be to go for top line growth, and we are well aware that markets we compete in remain intensely competitive. Margin flexibility provides us with a possible insurance quality against competitive moves, and with the ability to selectively implement pricing actions in key categories and, or markets.

More importantly, in addition to countering or anticipating competitive actions, potentially higher margins also make it possible to give a further acceleration to our stated strategy to invest in marketing, product development, and infrastructure to drive future growth.

Our first quarter results provide strong confirmation of a number of key points. Our impressive growth in cordless and Webcams demonstrates our ability to take advantage of the substantial opportunities in these categories. The health of our gross margin validates the powerful combination of the Logitech brand, innovative product, and efficient manufacturing.

While Q1 is not the most typical period of our year the momentum from our first quarter performance carries us into the second quarter confident that we’re well positioned to deliver on our fiscal 2005 target.

And at this point, I’d like to open the call to your questions. Please follow the instructions of the Operator.

[Caller instructions.]

The first question is from Rob Stone with SG Cowen and Company

Good morning, Guerrino and Kris. Congratulations on a great quarter.

Thank you.

I wonder if you could comment, Guerrino, on the competitive landscape and, in particular, you know it looks like your growth relative to some of these categories suggests a pretty good share gain. From whom do you think you’re gaining share?

Yes, we have experienced gain, either gains or [subrogation] [ph] of market shares across all categories this quarter. We are taking share from branded and unbranded players in general. There is no specific trends I can indicate. I believe that, once again, brand matters, especially at the price points in which we operate. Therefore, that gives us an advantage over several unbranded players. But I think also product innovation and product design matters a lot and that sort of puts us in a very good competitive position against our branded competitors. But I cannot detect a particular trend towards one or the other. I would say that, yes, as you said, we have gained some share.

You have to also, too, remember that the market, some of the markets in which we play are actually also growing fast, and so our cordless growth is reflecting a growth of the market. And so in that particular case we may have gained margin and a lot of share but it’s also a growing market which we like to see.

In terms of the comparisons year-on-year of units and sales I recognize that last year this quarter had a significant drop in price points, but it looks like overall your ASPs are higher. What do you think the most significant drivers were in terms of overall ASP growth?

Well, yes, our ASPs are higher than this time last year, and they increased by approximately 16 percent. It’s, it varies by product categories. In some categories it declined.

For example, it certainly declined in cordless desktops in spite of the fact that we include our margins, which is another indication that ASPs are not, in fact, your best bet to identify where gross margins go. And so we reduced our ASPs and desktops are affected by going, by aggressively at the entry level. Our mouse ASP was reasonably flat. We saw a little bit of ASP improvement in Webcams and in gaming products. It’s a mixed lot.

In fact, you know, and as we look at this metric at the end of the quarter, it is one of those things that it is hard to tell where it’s going, okay. We are more focused on driving growth than controlling our ASPs. The fact, people seem to be willing to pay premiums and move to the midrange and high end in many categories. We had a significant decline in ASP in speakers, as you can see from the revenue growth versus unit growth. It’s also expected, as people shift or actually our offerings shift to the midrange of the line.

And so I wouldn’t say that there is a significant signal in the trends of ASP. We certainly haven’t seen any pricing collapse, or anything. Actually, the price has held quite strongly.

And so, with respect to the trend and, you know, in the past you had product line extensions that were going more towards the high end. This time around you seemed like you’ve filled in the midrange and the low end. Is it fair to characterize a part of the overall growth and share gains as stemming from not only new products like the cordless optical for notebooks, but in general an expansion in the number of skews that retailers are carrying overall for you?

I would say that our number of skews have not changed dramatically year-over-year. We have, we continue to get placement which is the way you get sales. I think it’s fair to say that the strengthening of midrange and entry level has helped, but you shouldn’t expect Logitech to continue to play on both sides of that spectrum. And in fact, several of the mice that we’re going to introduce in the coming months are in the midrange and high end of the product line. So it’s an ongoing innovation entry pricing kind of strategy that we execute, and we may be in different cycles of this strategy in different product lines.

Great. Turning to the supply side, you mentioned taking on more manufacturing inventory against potential bottlenecks later this year. Can you provide any color on, in what areas you’re anticipating possible bottlenecks?

We have, if you look at our fastest growing categories, cordless and Webcams, we wanted to make sure that we would not be constrained by component supplies in the critical components of these two categories. I wouldn’t elaborate more than that, but so we paid an insurance policy with low interest rates and our substantial cash has been a very affordable insurance policy to pay for a, to avoid, to be surprised later in the year by such shortages. We expect that these categories to continue to grow fast, and we want to be able to supply.

Great. Thanks, very much.

Thank you.

Sir, our next question is from Wolfgang Fickus with WestLB.

Yes, good afternoon. Wolfgang Fickus with WestLB. Hi, Kris. Hi, Guerrino. And congratulations for the results.

Thank you.

Thanks.

From my side. I have one question on mobile headset side. On China and then on the corded mice business, retail corded mice business. At first on the mobile headset, it looks as though the Plantronics results show that there is continued strong growth in mobile headsets. Is there any kind of possibility that you can get this product group into an OEM relationship with one of the bigger suppliers? Is there any kind of visibility on that to happen? Sometime soon?

I hesitate to comment on this one. Of course, we want to develop this category, both on the retail side and OEM side. We are convinced that that is the right way to go. But I hesitate to comment on the specifics.

I can only tell you that that conversations are happening, and we’re also very excited with what’s happening on the retail side as we come into this Christmas season, but it’s too early to tell. I mean Plantronics is showing how attractive the category is. They’re doing a wonderful job, and you know, we hope to do the same in the future.

Okay. And then on Asia, the flat performance, and your progress in China? Could you elaborate a little bit on how confident you are that growth will pick-up in that region, especially in the Chinese region?

Well, you know, I am very confident that growth will pick-up, and I am anxiously awaiting the results of the investments we are making, mostly in China presently. I mean our biggest goal in China is to move closer to the retailers. We have had a distribution based business for awhile in which distributors were taking care of developing our business in the retail market.

That works for awhile but then it just stops when it comes to – what we’ve done in other regions in the world, both emerging markets and established markets, is getting much, much closer to retailers. Not necessarily delivering product directly, but working in marketing programs, presence, point of sales, more aggressively than we had done in China for awhile.

So this doesn't take an overnight kind of effort, it takes work, and we are already to significantly expanding our presence and our contacts, I would say, may be better in six or seven major cities in China. And so we expect the results of this effort to be visible in the coming year, I would say, with also, hopefully accelerating towards the end of that period.

I am very confident that Logitech can establish itself as a premiere brand in China. There are multiple examples of that to happen, the Chinese market is attracted by brand as other key Asian and European markets. And I don’t see why we would not be able to make our mark there, as we did elsewhere.

Okay. And then the last one, Kris, I didn’t catch the retail mice numbers, especially on the corded side given that you made some entry product introductions. Is that accelerated?

Yes, the corded mouse business declined by three percent. The total mouse business grew by 25, retail mouse business, corded and cordless combined. And so there is a market trend here. There’s a Logitech trend. We have actually not lost share. Actually, probably gained a little bit of share on the corded side. But the corded market is not growing fast, actually declining. And that’s expected. And so you have to look at the total growth probably to have a better sense of how we’re doing.

We believe that there are niches in the corded market that we can further exploit, both at the very high end, some gaming high performance mice, and sort of market, vertical market specific mice for notebooks, for example, in which we see opportunities. We just introduced a very attractive new corded optical mouse, the notebook, which is getting good placement. And so we expect that to do well. But in general, our expectation is that the corded mouse market will not grow in total, and that the attractiveness of cordless is going to be the driving force of the growth of the mouse market.

Okay. Great. Maybe a follow-up on the mouse [inaudible]. On the OEM side you had very strong growth in your cordless mice business. I guess that’s from a pretty small comparison base, but could you confirm that? And could you just maybe, an outlook on how this business will drive your OEM business?

Yes, well, one thing that you could look at is a 25 percent growth in revenue in the OEM mice paired with a 15 percent growth in units. It’s quite unusual to see that, the OEMs as price competitive as ever. And so that obviously means that there is a shift in mix. As Kris commented in her remarks, cordless mice are not as significant in OEM but they’re growing, and they’re growing quite fast.

They grew 151 percent.

Yes, they grew 151 percent. Exactly. And so we expect that trend to continue. There’s a lot of interest in making cordless a feature of [inaudible].

All right. Thanks.

Sir, our next question is from [John Elbie] [ph] with [Shiverow] [ph].

Hi, Kris. Hello.

Hi.

Hi, Kris. Hi, Guerrino. Sorry, I was on mute. I’ve a couple of questions. Maybe it’s better to take them one by one.

First, on video, I’ve noticed that the sales growth on a year-over-year basis has been accelerating since the December quarter. And obviously, has not reached nearly 100 percent or even more, I think. Can you just give us the reasons behind that? It cannot only be Logitech Orbit, I presume?

it’s certainly not Logitech Orbit, as you presume, Orbit has done wonderful. It is that we believe that the category is becoming mainstream. And if you look at the figures of instant messaging you see that the application is very compelling. And as people get more broadband. So that I would say that the secular trend here is configuration penetration at home. And of course, we have the applications to take advantage of that with Webcams, but that is the main driver. In fact, if you look at the product line all of the SKUs did very well. You know, midrange, entry level, high end.

Of course, we continue, we are now facing, you know, two dimensions in the Webcam market. One is the growth of the penetration, of course. And that is accomplished with entry level, midrange, compelling products, quality products, and with the awareness of the application of Webcam. And then there is a growing installed base of people that have experienced Webcams and want better. And that’s where Orbit’s success comes from, and we will continue to target that market, as well.

Okay. Going one step further. There’s been a lot of talk in the market, actual data points as well, that point to increasing inventories along the technology food chain. And the market, I mean correctly or maybe incorrectly has taken this as a softening signal that the end market denied the softening. When you talk to your retailers are you seeing any caution on their part?

Well, I would say that, you know, our signals from the channel are quite positive in general. And the reason why we have taken the precaution we’ve taken from or particularly for components is because we believe that there may be an up side on demand, or, and there may be some shortage on components, as I mentioned before.

And so I don’t know how to read the inventory situation elsewhere. We probably think of Intel, we’re not Intel. In our case it’s fundamentally customer satisfaction, insurance policy, potential offsite more, that we felt we wanted to do because we can afford to.

Okay. Perfect.

On the margin leverage side, your target, 12 percent EBIT margin. I respect that, I mean gross margins will be higher. And then you are happy with the flexibility to increase tactical spending on marketing and selling or for selective pricing actions. But I mean no matter what happens that 12 percent target I guess stands, and maybe even for this year?

Yes, it does.

Okay.

This year I’m not sure, but it does, it’s our target, absolutely. We, as I said, and I think, as well, we see increase those margins. We see it in the numbers, and obviously if you look at the mix that’s going to be more retail than what we had anticipated and we gave in our guidance. You know, we, there is that potential [inaudible]. As you said, we know that we will do, and we might do pricing actions. And so we have room to move. And most importantly, I would say, this is the time to put our money where our mouth is. You know, we have the opportunity to accelerate the growth of the company in the coming years, and this is the time to put the R&D and the marketing and infrastructure in place and make that happen.

Okay. And just a last, very quick one. Would you disclose the TC gaming console mix with an OEM?

We are not disclosing the details of OEM. As you see, we are opening the [inaudible] a little bit. And of disclosure, which I hope that [inaudible] officiate. But we’re not, I want – this quarter was really small.

Okay. Thank you.

Sir, our next question is from Matt Gabel with Calypso Capital.

Hi. Nice quarter. What did total REIT ASPs do sequentially? And what do you think they were looking to do sequentially in the current quarter? And is there any color on the top line guidance for the current quarter?

Let me answer that for you. You know, sequentially our ASPs actually declined by 9 percent. And I think Guerrino made some excellent points about the significance of, or the lack thereof, of significance of our ASPs as an indicator of trends. Much of this has to do, first of all, I think much of it has to do with the product mix, the products we’ve introduced, and you know, the products that become popular in one quarter versus another. And I think the most important takeaway here is that our ASPs are not always the best indicator of our gross margin performance and our profitability performance.

And so having said that, back to your next question about the trends, Guerrino had mentioned that, you know, we are going to be introducing some midrange products and some high end products. You might expect to see those sequentially change. But last year at this time we had a good deal of high end products, as well. And so, again, year-over-year I don’t, you know, don’t expect them to increase greatly. Having said that, I don’t think it’s an important trend for us.

You also asked for a specific revenue indication for Q2, and you certainly have noticed that we’re not providing specific guidance for future quarters. We continue to be focused to execute our fiscal year goals. And I think it’s a distraction to look at each individual quarter. We want to signal that we’re looking for the long-term of this company. And we’re executing hopefully effectively in the short-term. But what matters is what we’re doing to create a $3b Logitech over time. And that’s, to us, the biggest opportunity for us.

Okay. Thank you. And congratulations on your good performance.

Thank you.

And our next question is from Nicole Burth Tschudi with Lombard Odier.

Hello, everybody. You did an excellent job on your gross margin improvement year-on-year, particularly. Could you give us a flavor on how much of this over 600 basis points improvement we can allocate to product mix, changes within retail, and productivity enhancement in general? Then also, what mix OEM retail?

Well, the most important driver of margin increase, of margin improvement, as Kris was mentioning, is the improvement in retail which is more than 500 basis points, and so it’s a substantial portion, and you can see how important retail in the total revenue mix.

What drove that? Well, you know, we can talk for two hours about on each individual skews what happened. I would say that it’s a combination of mix towards categories that have an intrinsic higher margin, and product cost improvements across-the-board. And so it’s both.

And do I know which is the most important? I would say they kind of equally share the merit of the improvement.

And I have another question on your guidance. You said now, or you’re saying now that the OEM sales you expect to drop. Do I have to read into that that you don’t have any new bundles planned with Sony, or you don’t have anything in the pipeline which might come in this fiscal year?

As I said in my remarks, I think we are working with Sony and other gaming vendors for project and programs towards the Christmas season, but we don’t have today the visibility and the assurance that these things will materialize. We’ve also announced recently an initiative around the Playstation portable, which will happen but we don’t believe will materialize this year. And so it’s kind of a – it’s our best guess right now. These things happen reasonably fast so that might be more than what we have today in our projections, but I wouldn’t count on it.

When you say ‘reasonably fast,’ what does that mean in months, two or more?

Well, these things, they are in the making, and eventually they become real. And then the other thing is, you know, how big they are. And that you’ll discover as you execute them. So you see, most of our success for OEM bundles have been driven by incredibly successful games. And so it’s very hard to project that. So there are opportunities, there will continue to be opportunities with Sony. It is impossible to ascertain the value, though. And so we decided to provide our best guess today, which is that we believe the overall volume of sales this year will decline.

Okay. And my last question is on Asia. You explained before how you want to position yourself in China, and earlier you mentioned something like the new demand generation program. Is that exactly what you talked about? Or is this something which is, you know, broader mix as of China?

No, there is not, there is nothing different than what I mentioned before. I was more specific as to our broadening presence in the retail channels and key malls throughout China. And the presence that is more driven by ourselves and our programs than it is by our distributors. This is implying, you know, higher resources invested in China, and a decision of future growth. And when I say ‘higher resources,’ I mean, you know, headcount as well as marketing dollars that get used in the more direct to retailer marketing programs.

Thank you very much. And congratulations, again.

Thank you, Nicole.

Our next question comes from Mehrdad Torbati with Deutsche Bank.

Hi. Just two quick questions. Congratulations on this quarter, Kris and Guerrino.

Thank you, Mehrdad.

First, on the comments you made earlier this year, in April you said that you do feel as far as cordless mice and keyboards are concerned you are slowly but surely approaching early masses, and your numbers today certainly confirm that view.

Since you are seeing some interest in the OEM, customers you have, for this cordless mice, in particular, how, you know, how far are we from seeing, you know, broad based interest among OEM customers for configurations including cordless mice and keyboard, would be one question?

And the second question would be in terms of your marketing and selling expenses, you know, as your sales increase in the following, in the coming quarters, how can we expect this revenue, this cost block to increase? What portion of it is variable in the sense relating to advertising and what portion you would call being fixed at this stage?

Okay. So let me address the cordless OEM question first. There is broad based interest in every OEM in cordless. I don’t know of any of the of the large OEMs that are not willing to consider in certain configurations to use cordless resources. In fact, some of our OEM business today even though not a large part, not a majority for sure, a growing part is cordless.

When it comes to broad adoption, let me give you a historical example. Optical mice today cover between 75 and 80 percent of our OEM mouse sales. And we’ve been in optical mice for what, three years? And so it takes time for OEMs to actually embrace any technology which is intrinsically more expensive.

With that said, there is a sure but slow, you know, slow but sure trend towards that. And that’s what we’re looking forward to serve, because as I mentioned many times the volume benefit that we have in our margin are driven by that mix. And if we can successfully grow our cordless OEM business with basic attractive cordless product there is great after market opportunities and great cost savings on core cordless technologies.

So that said, there’s multiple sub trends in the cordless, the buyer, you know, our OEMs, you know, which technology, interest in Bluetooth, et cetera. And we’re following all of them. In fact, we want to be their one-stop shop in cordless OEM. And we hope to see some tangible results in the coming, even this fiscal year, particularly in the coming l2 to 18 months.

The second question was marketing expenses, right, Mehrdad?

Yes, marketing expenses?

I would say that a majority of our marketing expenses are variable, and therefore, they go with sales volume. Now, the intensity of the marketing programs vary by quarter. And it’s very hard to project linearly. One of the strategies for growth that we had established is not only to invest more significantly in engineering and infrastructure, and you will see that happening in an accelerated fashion moving forward in the fiscal year. But also to continue to invest in our brand. In my opinion other than our people, our brand is our biggest asset. And it is proving to pay-off substantially from the margins.

And we continue to pour resources into brand building, which doesn’t mean mega advertising, lifestyle and beautiful television ads. It means continuing to make ourselves visible for what we are, makers of great products that enhance your life. And we’re going to spend a significant amount of money in that, to a certain extent not related to specific revenue. And that’s a portion of our marketing expenses. That portion will be sustained throughout the year, and hopefully, in the future. So there is a linkage between sales and marketing expenses, of course. The linkage is not as tight, and we have the flexibility to tune it if the need arises.

Mehrdad, if I can add one more comment to that. I think it’s important to remember, too, that our marketing and selling expenses tend to follow our retail sales growth more closely than our overall sales growth. And so as you remember, last year was a difficult retail quarter Q1 versus this year, where our retail sales grew by 32 percent. And so, you know, as you model our marketing and selling expenses make sure that you have them track with our retail sales more closely.

Did – just as a follow-up question, if I may. On the OEM side, did you see any gross margin improvement for your OEM products? Being what you said OEM mice up 25 percent, in terms of sales up 15 percent in terms of minutes, and you know, the difference, a different product mix on that front, as well? Has there been any improvement on the OEM gross margin side?

You know what? There has Mehrdad. It was relatively small, what we had. And we did see, you know, an appreciable margin improvement. The mix helps, as you might imagine. And when we sell higher end products, you know, we can enjoy a better margin on that. But as I mentioned before the richness of this mix is relatively small in the overall grand scheme of OEM business so that we did see some improvements but they were small.

Okay. Thanks so much.

And our next question comes from Barry Ehrlich with Pictet

Hello.

Hi, Barry.

I have four questions. Perhaps we can take them in groups of two, starting with two product questions. With respect to the remote control device market, do you have an idea of what is the market size, potential growth rate, and your market share? And on video, given that we’re well over a year into the MSN video, instant messaging launch, and given that it seems like we’re not seeing that many new products out in this category this year, should we expect the category on a sequential basis, so using Q1 as a base, to begin to flatten out over the next quarters?

All right. And so one question after another. The first question was? The size of – okay, thank you.

We estimate the size of the advanced remote control market to be roughly $500m. Our current market share is nonexistent. You know, with Harmony just starting to sell. The market is projected to grow in the double digits. And we believe that certain offerings can actually improve market growth. So that’s where we stand today. And so that’s why we believe that there is significant opportunity moving forward, and also has implications in the connected home as implications in the relationship between the PC and the entertainment systems in your house. And so it’s a very strategic category for us.

In terms of video, you mentioned there we’ve been in MSN, instant messenger for a year. In fact, we are seeing the blossoming of the application. We’ve also introduced and we will shift our final version this quarter of our video call for broadband and other, I would say differently compelling application for video that actually enhances the audio part of it, which works with the current versions and information platforms. You can expect that improvement to also pervade instant messaging platforms over time. And so there is more and more compelling reason to make, if you want, PC based video conferencing for the rest of us actually happen.

And so I would look at the potential growth of the Webcam category more with respect to the attractiveness of the applications, that’s specifically driven by any new product, even though, obviously, as I mentioned in a comment before, there is a very large installed base out there and we are more than eager to start taking advantage of replacement cycles by providing more compelling products. And you’ll see that happen over the course of the next several quarters.

In terms of your question on sequential projection of this category, we are not providing guidance for Q2. I would be remiss if I provided guidance on this specific product line in Q2.

Okay. Thank you. The final two questions, how much is the finished product inventory up year-over-year? And how much is the order backlog at this time of the year compared to last year, how much higher or lower is it?

And so, as Kris mentioned in her remarks, the manufacturing inventory grew 150 percent. And so it’s fundamentally a component inventory growth. I have what …

Yeah, the finished goods increased by 31 percent. So it was significantly less growth in that than the components. And we did that for customer satisfaction insurance.

Okay. Operator, we are at the top of the hour. We will take one more question.

Sir, our final question comes from Yves Kissenpfennig with UBS Warburg.

Yes, hi, Kris. Hi, Guerrino.

Hi.

I wanted to try and just get from you, have you reconcile for me a little bit, your guidance. You’re talking about inventories, you raising your inventories for strong demand in the second half, you’re talking about OEM sales down which implies a full year retail mix of something like 84 plus percent. And yet at the same token you’re still seeing, I think, fairly conservative with your guidance, both top line and on the EBIT growth. And I was wondering, you know, what is holding you back? And why are you now getting more aggressive on that?

Well, let me, you know, predicting the future is not, you know, something that is an established skill set here at Logitech, or anywhere. What we know is that we are going to spend more money to prepare for future growth. We are going to spend more money in engineering. We are going to spend more money in IT. We are going to spend more money in operations. And we’re going to spend more money in brand development.

And as I have repeated many times this is the time to do it. This won’t change the fundamental business model of the company over time. This is if you want to call it this way, sort of a one-off period of increased, accelerated investment to generate faster growth moving forward.

And so no matter how our top line performance, and most importantly, our gross margin performance will go, we will use a substantial portion of that extra to build for the future. Which I hope is something that our shareholders do appreciate. And so that is the reconciliation of guidance, Yves. There is no evil or mysterious kind of, other sort of motive.

Of course, we are very encouraged by demand. We see our inventory levels indicate that we want to prepare either to supply what the demand is or even to do more. Remember that also you have to look at this inventory, particularly because it’s component inventory, over the course of the next two or three quarters, not over the course of the next two or three weeks. It’s critical, you know, that you read that inventory growth more as a Christmas season kind of focus than a tomorrow morning kind of focus. Because, you know, you don’t provide up side demand with component inventory today. The up side demand is tomorrow. It takes a little bit of time to get to market. And so that’s the way I would read the guidance. And there’s nothing more than that to the story.

So maybe just a quick follow-up question. Would you say that it’s unlikely that you have an EBIT margin above 12 percent? Since it seems you can more or less choose whatever margin you want this year.

Well, I wouldn’t be so arrogant as that. But, you know, it is, we are, we’re not going for a blow-out margin this year. We believe the wisest way to use our cash generation is to build for the future.

Okay. Well understood. Thanks.

Thank you. And thank you very much to everybody for being here.

Let me add one remark in closing. After our Q1 warning in July of last year many doubts were raised about our ability to sustain our differentiation, as you remember, and therefore, our margins, and about the health of our core franchises. I think the last 12 months, and particularly our growth profile in Q1 are the answers to these doubts. The market out there has never been more competitive, mind you, and yet we have proven that consumers value what we design for them tremendously. So I’m convinced that by listening to their desires and executing effectively we can continue to grow and deliver great value to them and to our shareholders. So thank you for your participation today.

Ladies and gentlemen, we thank you for your participation in today’s presentation. This concludes your conference, and you may now disconnect.