羅技 (LOGI) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2005 Logitech International Earnings Conference Call.

My name is Carlo, and I will be your coordinator for today’s presentation.

At this time, all participants are in listen-only mode.

We will be facilitating a question and answer session towards the end of this conference.

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 September 30th, 2004, the second quarter of Logitech's fiscal year 2005.

The press release, a live webcast of this call and a Company presentation slide 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 subsequent filings available online on the SEC Edgar database and in the final paragraph of the press release reporting second 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.

For those of you just joining us, let me repeat that presentation slides accompanying this call are also available on the IR section of our website.

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 very pleased with our performance as we delivered our best ever Q2 for sales, operating income and net income, while executing on our investment strategy.

The growth percentages that follow are in comparison to the second quarter of last fiscal year.

Our sales grew by 12 percent, to $330 million.

OEM sales declined by 24 percent, reflecting the anticipated absence of sales of PlayStation 2 peripherals to Sony.

The $14 million decline in our OEM sales was more than offset by our retail business, where sales increased by $50 million, or 22 percent, driven by our success in the cordless gaming video and audio products category.

Gross margin was 33.2 percent, up from 31.5 percent in the prior year, primarily due to better retail gross margin and to a lesser extent, a shift in the mix between retail and OEM sales.

Our improved retail gross margin reflected better margins in several categories, with the biggest gains coming from video.

The majority of this improvement in video related to our exit from the dual-cam category.

The 166 basis point improvement in our gross margin year-over-year would have been even higher had it not been for the extra cost associated with the introduction and phase-in of a large number of our new retail products during the quarter.

As one example of extra cost, we incurred significant freight charges as we expedited the fulfillment of strong demand for our new cordless desktops in Europe and North America.

Consistent with our plans and strategy, operating expenses for the quarter increased by $15 million, or 23 percent, to $80 million.

Our marketing and selling expenses grew by 25 percent, primarily due to increase headcount for expanded territory coverage, increased marketing activities in support of brand building and the much higher retail sales volume.

R&D expenses increased 520 percent, reflecting investments focused on categories such as cordless, audio and retail console gaming.

Our G&A expenses were up by 18 percent, with growth driven by investments in additional headcount, systems infrastructure and business process improvement for projects such as an upgrade to an Oracle 11I and compliance with the requirements of Sarbanes-Oxley for ’04.

Let’s move to the balance sheet.

Our cash position, net of short-term debt, was $184 million.

This is essentially unchanged from September of 2003, in spite of the significant increase in our inventory positions for the second half of the year, the acquisition of Intrigue Technologies and having spent $124 million repurchasing our shares during the last 12-months.

Our cash flow from operations was a negative $23 million for the quarter.

For the first half of fiscal 2005 cash flow from operations was a positive $32 million.

Our inventory was $195 million, up from $133 million in September of 2003.

Inventory turns as of September, 2004, were 4.5 times per year, down from 6 turns as of September, 2003.

The increase in inventory, which is predominantly in finished goods, is in anticipation of a strong retail demand for the two remaining quarters of fiscal 2005.

As one indicator of this demand, we entered the third quarter with a retail order backlog that was nearly twice as high as the prior year.

Based on our data, channel inventories are in good shape compared to last year.

Accounts receivable was $215 million, down slightly from last year, even with $36 million more in sales.

Our daily sales outstanding was 59 days, 7 days better than September of 2003.

Let me give you an update on the share repurchases.

During the second quarter we repurchased 1,283,700 shares for 73.5 million Swiss francs, or $57.6 million.

We now own approximately 8.8 percent of our shares outstanding.

Logitech Board of Directors has authorized the Company to exceed 10 percent ownership of its shares through repurchases on a second trading line of the Swiss Exchange.

Implementation of this second trading line is subject to approval by the Swiss Regulatory Authorities.

You can view updated information on our share repurchases on an ongoing basis at the Investor Relations section of our website.

Let’s look more closely at our retail business, where sales grew by 22 percent and unit shipments were up by 7 percent.

It was a very solid quarter for our two biggest regions, with the sales growing by 38 percent in Europe and 19 percent in North America.

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

Sales in Asia-Pacific were down by 23 percent due to a significant decline in China.

Later in the call, Guerrino will talk about our strategy for addressing that market.

It was a great quarter for our cordless product family with sales growth of 38 percent and unit growth of 34 percent, reflecting strong performance in both mice and desktops.

We achieved a record-breaking quarter for cordless mice as sales grew by 45 percent and units by 50 percent, allowing us to reach all-time highs for both.

The MX1000 laser cordless mouse, the world’s first mouse to use laser illumination and tracking, made a major contribution this quarter as did the ongoing success of our cordless optical mouse for notebooks.

Cordless desktop sales increased by 40 percent, with unit shipments up by 27 percent.

Much of this growth was driven by the strong initial demand for our new LX desktop family, which began shipping during the second quarter.

We also continue to experience growth from sales of the highly regarded diNovo media desktop.

Retail video sales increased by 31 percent and units by 48 percent.

The prior year’s results include sales of dualcams, a category which we exited late in fiscal 2004.

The growth in webcams is even more impressive, with sales up by 53 percent and unit growth up 67 percent, as unit shipments reached an all-time high.

Two of the main growth drivers for webcams were Quickcam Communicate, our new entry level offering that began shipping during the second quarter, and Quickcam Orbit, our high-end webcam that continues to generate strong demand.

Our retail audio sales increased by 17 percent, with unit shipments up by 1 percent.

It was a strong quarter for Logitech’s branded PC speakers, as sales increased 34 percent and units reached an all-time high, growing by 49 percent.

The significant growth reflects the success of our X family speakers, which effectively target the midrange of the category.

We enjoyed continued growth in retail gaming, driven by the success of our portals (ph) for both the console and PC platforms.

Sales for the gaming category grew by 53 percent, with unit shipment up 76 percent.

Sales of controllers for game consoles increased by 87 percent, with units more than doubling.

Console gamepads were the main drivers, with sales and unit shipments more than doubling and establishing record highs due to very strong demand for our cordless controllers for both PlayStation 2 and the Xbox.

Looking at PC gaming, our sales increased by 32 percent and units grew by 47 percent.

This growth across all product categories, the main driver was gamepads, with sales and unit shipments more than doubling.

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

Thank you, Kris.

Good day ladies and gentlemen, and thanks again to all of you for joining us this morning.

Q2 was a solid quarter that keeps Logitech on track to meet our goals for the year.

Our very strong retail sales, which more than offset our anticipated decline in OEM sales, enabled continued profit growth, even as we pursued our stated strategy to invest in marketing, product development and infrastructure to accelerate our future growth.

There were a number of highlights during the quarter, including our solid retail growth in Europe and North America, strong retail demand for our market-leading cordless and webcam offerings, the continued expansion of our retail console gaming business and the launch of a number of exciting new retail products that will be on the shelves for the holiday season.

On the other hand, our sales performance in China does not yet reflect the potential that this market represents for Logitech.

We’re working to improve our distribution model in that country and we are in the process of recruiting new channel partners as well as working to strengthen the relationship with several existing partners.

We are bypassing unnecessary distribution layers for key retail accounts in larger IT models and cities, establishing direct sales contact with these accounts and segmenting that channel coverage.

We are committing substantial resources to take advantage of this huge opportunity.

Among other marketing and product initiatives we are expanding our sales teams to get more feet on the street across several Chinese regions.

We expect it will take some time before we begin to see the full impact of our investment, but we’re confident in a return to the growth track in China.

Let me talk about our product opportunities.

Sales for our cordless family in the first half of fiscal 2005 have increased by 38 percent compared to the same period of fiscal 2004.

It is clear that the cordless opportunity is growing and we continue to introduce new highly innovative products to accelerate the trend.

In fact, we enter the holiday season with the most attractive and comprehensive cordless product offerings in Logitech’s history, addressing all key price points.

Kris already mentioned the initial success of the MX1000, which sets a new performance benchmark for responsiveness and accuracy.

The initial market response to this product has been overwhelmingly positive and we’re looking forward to a strong holiday season.

Earlier this week we announced what is clearly the premium mouse for the notebook user, the Logitech V500 cordless notebook mouse.

This unique ultra thin mouse features many breakthrough innovations such as an expandable chassis, detached sensitive solid state scrolling panel, 2.4 gigabits wireless technology and a sleek design that is guaranteed to turn heads.

Just this week we also introduced the diNovo cordless desktop, a lower priced version of the award-winning Logitech diNovo media desktop.

It combines the sleek low profile design element of the original diNovo with the top-selling Logitech cordless optical mouse for notebook and the removable receiver with our proprietary cordless product.

The result is a versatile modular ensemble that offers desktop comfort, but instant mobility.

Webcams continue to be a major growth driver for our sales.

Through the first half of fiscal 2005, our webcam sales have grown by 80 percent, compared to the same period of last year.

Our broad range of market leading offerings combined with the growing penetration of broadband and an increasing appreciation for visual communication puts us in a strong position to continue on the growth curve.

Success in the webcam category has always been closely related to compelling video applications, such as video instant messaging.

And there’s definitely more to come.

We expect to release exciting news about the next phase of this category in the very near future.

Turning to audio, we recently introduced our new flagship PC speakers, the Logitech Z-5500 Digital.

These 5.1 surround speakers, which replace our award-winning Z-680, feature THX certification (ph), 505 watts of power and 9624 digital decoding capabilities – a first for both the PC platform and home entertainment systems.

We’ve also announced our newest Bluetooth mobile phone headset, the Logitech Mobile Freedom Headset.

This attractively priced headset features a unique lightweight design, adaptive frequency hopping technology to reduce interference with WiFi and Logitech’s patent-pending WindStop technology that allows people to make clearly audible calls even in windy conditions.

Last week we introduced our newest gaming headset, the Logitech cordless headset for Xbox.

Licensed by Microsoft, this compact headset includes rechargeable batteries that provide up to six hours of play time.

Coupled with our cordless gamepad for Xbox, the new headset enables Xbox Live users to experience the first completely cordless solution for online game playing.

The integration of Intrigue technology into Logitech is now complete and we are seeing the early success of the Harmony product in several US channels.

We have recently introduced our first two Logitech internet powered Harmony remotes, the Logitech Harmony 676 and the 680.

Both of these advanced universal remote controls are easy to set up and use and work seamlessly with all the other devices in a home entertainment system.

In addition, the Logitech Harmony 680 is specifically designed to control a media center PC.

And that brings me to our outlook for fiscal 2005.

We continue to target 11 percent growth in revenue and 15 percent growth in operating income compared to the prior year.

Based on the enthusiasm we have seen for our product portfolio, as evidenced by the strong retail order backlog mentioned by Kris, we expect the second half of the year to deliver strong retail sales.

We also expect a significant decline in OEM sales due to the difficult (ph) comparable caused by the largest spike last year of PlayStation 2 peripheral sales to Sony.

But we continue to work closely with Sony on a variety of future opportunities.

Our current expectation is that sales of PlayStation 2 peripherals to Sony will be absent during the second half of fiscal 2005, which translates into a reduction of roughly $50 million in our OEM sales, compared to the second half of fiscal 2004.

With more retail in the sales mix, a continued focus on cost management through the supply chain and the completion of the transition to our new and expanded retail product portfolio, we anticipate that our gross margin in the second half of fiscal 2005 will be higher than in the second half of fiscal 2004.

Pursuing a strategic move to invest in marketing, product development and infrastructure, we plan to increase our operating expenses in the second half of the fiscal year by as much as $25 to $30 million over the same period of last year.

Let me give you some specifics on our projected operating expense growth this year.

On the sales and marketing side we’re adding people to increase our presence in and coverage of several key markets, most notably China, Eastern Europe and the mass channels in the United States.

We are increasing our brand marketing to raise the awareness level of the Logitech brand across all geographies, with an emphasis on China and the United States.

On the engineering side we’re adding resources that will allow us to shorten the time between major product introductions.

We are also investing to beef up new areas, such as the Harmony remotes and to accelerate our efforts across several of the product categories to bring wireless to the mass market.

We are also adding headcount in IT and the supply chain, so that our systems and operational infrastructure will be ready to support our anticipated future growth.

We expect that the investments we’re making in fiscal 2005 will serve us for the coming two to three years.

We anticipate that once we put this additional firepower in place, our opening expense growth will once again be closely linked to our gross profit growth.

We are making this investment because we firmly believe that now is the time to exploit and expand our scale distances with the competition.

The majority of our competitors lack the revenue or margins that would allow them to match our accelerated investments and we fully intend to lengthen the distance.

We are entering the holiday season with Logitech’s best ever lineup of products, many of which we introduced during the latter part of the quarter and are now on retail shelves.

Our strong performance in Q2 keeps us on track to reach the targets we established at the beginning of the year.

At the same time we’re investing aggressively in the current year to accelerate our growth in future years, leverage our scale advantages and build the $3 billion Logitech.

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

Thank you, sir. (OPERATOR INSTRUCTIONS.)

Andrew Neff, Bear Stearns.

Hi.

Just two questions or clarifications.

One, could you give us a geographic mix of sales?

And two, when you talked about the gross margin impact, how much higher would it have been without these expenditures and can you go into more details about those expenditures?

Yes, let me give you the details.

We do not split our sales on a quarterly basis.

I can give you the yearly split.

Retail volume combined last year was Europe 48 percent, America 37, Asia-Pacific 15.

If you are more interested in the retail split, I can tell you that Asia-Pacific is slightly higher than 10 percent on the retail mix.

In terms of the margin question, we believe we spent maybe a point or slightly more than a point in margin in accelerated freight.

Next question, please.

Can Elbi, Credit Agricole Indosuez Cheuvreux

A couple of questions.

First of all, looking at your retail sales, it seems like growth on a sequential basis was below normal seasonal trends.

I mean I think it was up around 27-28 percent, whereas it should have been somewhere around 35.

Knowing that again, a, you’ve been continuing to gain market share in certain categories and also knowing the Intrigue was in there, can you just tell us what you’re seeing in the retail channels and what the overall environment is?

Well, we have quite bullish feedback from our customers regarding our products.

It's very hard for us to give a judgment on the overall state of the retail, but I can tell you that we’re growing in our key regions, Europe and America quite substantially.

And we are making great inroads in the American mass channels (inaudible) and the targets, et cetera.

So we feel pretty comfortable as to how the retailers are seeing our new products.

And remember, we have an incredibly fresh new product line across the board.

So that makes us quite optimistic to (inaudible) the holiday season – if that was the gist of your question.

So we should basically see at least normal seasonality in Christmas this year for your categories?

Yes, sir.

Okay.

The second question is another one which is pretty short.

In terms of basically the way you manage the growth versus profitability tradeoff, looking into fiscal ’06, again, based on my calculations, I think you’re probably somewhere around 34 percent if not slightly higher next year, without speculating on it.

Assuming there is basically an upshoot over your 12 percent margin target, would you be spending that in additional discretion?

Are you spending into let’s say advertising or can we maybe see an upside to your 12 percent margin targets going forward?

We haven’t changed our long-term margin targets for the time being.

I think it’s inappropriate to do so right now.

What we are doing this year is just utilizing some extra gross profit dollars that we believe we then generate to put ourselves in good shape for the next two or three years.

As I noted in my remarks, you should see this as sort of ramping up and preparing us for growth and then you will see our operating expenses growth decline compared to what you see right now.

And that is all the signs of investment.

But in terms of whether we are decreasing our long-term margins, I would not go as far as that.

We’ll stick to the 12 percent operating margins goal that we have.

And our guidance for the year puts us very close to reaching those.

So I wouldn’t comment further than that.

Okay.

And just the last thing is in terms of housekeeping, can you give us what the growth in mouse retail was?

The growth in mice retail?

I would say it totaled between cordless and corded, 10 percent.

Robert Stone, SG Cowen.

Good morning, Kris and Guerrino.

Could you comment on whether you expect to have additional cost in expediting new products this quarter or is that initial startup expense basically done now?

Right now retail is a tough environment and I cannot exclude from that some extra costs, but the fundamental expediting of our new products has happened.

In fact, Kris was mentioning that our expectation for gross margin in the second half does factor the fact that we are now over with the main product transition and, therefore, with the expediting that goes with that.

That said, there’s always the potential that some sort of acceleration is needed, depending on the strength of demand.

But we are very well-positioned with supply at this point.

So we’ll see.

That was actually going to be my follow-up question, whether there are any areas where you see supply constraints now or potentials coming up?

Everything is relative.

As I said, we feel pretty confident with overall supply.

Some of the products are doing extraordinarily well and way beyond the wildest expectations and we have beefed up supply.

But we may not eventually be able to fill all demand, but that’s good news.

Finally, on competition, you’ve introduced a couple of really exciting new products in my opinion, the laser mouse and especially the new notebook mouse.

Can you comment on what you’re seeing in terms of a competitive reaction or anything similar, either out there or that you believe is on the way from the competition?

We haven’t seen anything out there yet.

And probably we have the most differentiated mouse line in the history of the Company, certainly for a long time.

And not only do we have these two mice that you mentioned, we have the media play mouse, which is also quite innovative.

It's a mouse that allows you also to use the digital media features of your PC from a distance.

And these three new mice come on top of very solid mouse lineup.

The cordless optical mouse for notebook, remained, according to our data, the number one selling mouse in the United States retail for the past several weeks.

So that certainly could boost our mouse position.

The competition will respond, certainly.

We’re not even assuming for a second that this is it.

But this puts us at a significant advantage.

It's very hard for me to predict when we’re going to see laser mice in the marketplace.

We will eventually, but there will be more from Logitech.

This has always been a hallmark of the Company.

So for now I feel very very confident of the competitive positioning of the entire line, when I look at markets everywhere.

That was actually my last question, are there any areas where you see new competitive challenges such as you had a while ago, in the cordless desktop category?

Or another way of putting it is which category of you products do you feel it most competitive right now?

We feel pretty good across the board, I would say.

I spent a lot of time on mice, because it’s a classic example of what reinventing a product line that people continue to believe there’s not much to do with.

What it means to actually put innovation in place.

But our new line of desktops is phenomenally powerful and we had very strong competition on that front, but we are very well position on that.

Our webcams (indiscernible), I mean, our gaming devices are highly competitive.

The success that we had expected evangelized in a way over our cordless gamepads on Xbox and PlayStation 2 are a good indication of competitiveness.

But you know what, we never sleep.

Competition is very fast and very aggressive and the reason why we are putting in place the investments we fare, particularly in product development – just to give you a sense, this is close to 500 engineers organization today.

We’ve added 27 percent headcount in product development year over year.

And we believe that product development and differentiation will be the main source of growth.

So this is the bread and butter of Logitech.

So I can’t tell you that we’re all set and done.

We haven't even begun.

But we are very well positioned in the short-term.

Charles Elliot, Goldman Sachs.

Excuse me, I’m just going to ask some questions from Kris (indiscernible).

Kris?

Yes?

Kris, could you just run over the increase in the inventories and where do you think the inventory will be at the end of the December quarter?

Sure.

I’m not going to give you an exact balance, but we’re targeting inventory turns between 6.5 and 7 in December.

I’m sorry, although you’ve touched on this earlier, could you just go over why the only reason for the increase in inventory was that you were ramping up for a big December quarter?

Yes.

And Charles, one other thing that’s important to note is that our order backlog at this point in time as we go into the beginning of Q3, into October, was twice what it was last year at this time.

So there’s certainly a lot of need to ensure that we fulfill that demand.

And additionally, one other thing I think it’s important to note is customer satisfaction is becoming increasingly a competitive advantage of Logitech and I think this is something that we need to continue and it’s something we can do.

So I wouldn’t even be surprised over time to see our inventories remain a little bit higher than we had in the past.

I think they might have been a little on the trim side.

But customer satisfaction is certainly an effort for Logitech, so we should continue that as well.

Does the easier supply/demand position on semiconductors generally mean that you can do a bit more last minute purchases of inventory, or are your products so specialized that it doesn’t really impact you?

I would hesitate to make a general statement about the relationship between the semiconductor industry and what we do.

There is a lot of specialized product.

We tend to be influenced by capacity constraints though.

And so if the capacity constraints are relaxed, we obviously have access to more fabs and more – set the cap on semiconductor capacity and therefore, may provide closer to when we need it.

But as Kris was saying, the inventory here is much less components at this point and much more finished products.

What we did at the beginning of Q1, was to actually buy components ahead, to ensure supply of critical components now.

And that we’ve done.

And we’re consuming those components.

The dynamic of the inventory is skewed more towards finished goods at this point.

Kris was mentioning the early demand in Q3.

In the first two weeks of this quarter we are way ahead of sales compared to last year, first two weeks.

And this had to do with the profile of demand.

We had substantial orders that we had to fulfill.

Our customers become more and more sort of scheduled in the way they want our products to get there and we respond.

And that’s kind of, as Kris alluded to, also an advantage for us.

Because we can do it.

Our cash position allows us to do these things, when others may have more difficulty doing it.

And one more question.

Would you expect a working capital flush in the December quarter?

The cash burn last quarter turned into a very strong cash flow generation this quarter?

Q2 can be kind of a stressful cash flow situation for us.

But technically, as you know, over the year we generate positive cash flow and we’re on target for that.

Right.

Are you confident that you’ll generate – that the cash conversion this year is as high as last year?

It might – the one thing that will be a slight variable on this is we may be carrying slightly more inventory, Charles.

And all of the rest of the metrics should be just fine.

And when I say slightly more, we’re not talking significantly more.

Anuj Mutreja, Morgan Stanley.

A couple from me actually.

Guerrino, didn’t you enter the year talking about growing revenues in China by 30 percent?

Am I mistaken?

But I seem to have either read or heard that.

Did I say that – sorry, what is the question?

The question is, didn’t you guide or talk about growing Logitech’s revenues in China well up to 30 percent this year?

I don’t remember doing that, no.

Our sales have been growing in China in the past at that space or higher, but that has never been my statement for this year.

I can tell you that I believe that China can grow even faster than that, but it will take longer than this year to get there.

Okay.

The second thing I want to talk a little bit about is the operating expenses.

You’re basically investing into infrastructure, which I can see some sense into, to basically ward off competition and try and get on the shelves, so on and so forth.

Do you now think that the business model that you have, which is reintroducing new products every year, making sure the consumers go to the store to buy it and so on and so forth sort of merits that sort of thing anyway?

So my point being here that this higher OpEx intensity of revenues is here to stay?

No, I don’t believe that almost entirely.

I completely don’t believe that.

I do believe that there are substantial leverage opportunities in the model and I do believe that what we’re doing now will serve us for the next two or three years.

Beyond that, neither you or I know.

But I certainly don’t believe that there is a change in the underlying business model.

In fact, the relationship of our increased expenses to grow sales is pretty loose now.

As I mentioned, our growth in G&A and R&D is going to do with the pace of retail growth for example.

Certainly the more retail in the mix, the more expensive it will be.

But in terms of business model, I think that our 10-12 percent is here to stay.

My point being because the market is getting even marginally more competitive then that 12 percent is kind of peaking.

I think 12 percent is the goal.

I don’t know what you mean by peaking, but I don’t expect that 12 percent to change.

Okay.

And my final one on stock options for Kris.

You got 9 percent of your stock, right?

How much of that actually have you cancelled?

Because as I understand it, 17 percent of your outstanding shares are actually issued as stock options, so thus far my calculation is that you’ve only covered about a half of that stock option program and you’ve still got to cover the half.

I don’t know exactly what you mean by we don’t issue stock options.

The shares are not issues at the time the stock--.

I know, but the stock options that you have outstanding representative 17 percent of your shareholder base.

And that means that--.

And just to be very clear, in our run rate in grant stock option is --.

Slowed down, sure.

We expect that to be absorbed over time.

But as you and I both know, there is a real cash cost of those stock options and thus far it seems you’ve covered about half of that cash flow.

You’re not canceling all of these 9 percent shares.

No, but let me point out, Anuj, that we are putting these shares in treasury, so in essence they’re not outstanding as we calculate our earnings per share.

And another think I mentioned in call is we’re opening up a second trading line that will allow us to go beyond 10 percent.

That would allow us, if we choose, to cancel those shares.

So it’s the ones that go beyond 10 percent that we are allowed and might cancel.

These ones we’re not.

For an EPS calculation I agree with you, but if you calculate economic earnings then maybe we can discussions the finite--.

And Anuj, let me just point out something that might not be absolutely clear to you.

That is if we cancel our shares there’s a bit of a tax penalty under Swiss law.

And this is why we’re opening a second trading line to at least avail ourselves to some way of canceling those shares.

But for the time being, the smartest and the most prudent thing we can do is to leave those shares in treasury.

Nicole Burth, Lombard Odier Darier Hentsch

A few follow-up questions from my side.

First of all, when you talk about the 12 percent operating profit target, your long-term target, does this include the upcoming expensing of share options?

Operating profit is not impacted my that.

Let’s put it this way, or at least we don’t know.

Because the rules of expensing are not completely clear.

Okay, so it’s not included in the 12 percent?

Well, it may or may not impact the 12 percent (inaudible).

Okay.

Then second question just as a housekeeping question, what is the other income?

Other income is predominantly, Nicole, is FX gain.

We had a significant FX gain.

Predominantly it came from Europe, of course.

Okay, then next question, do you actually plan to pass this 10 percent threshold in terms of your treasury shares?

Certainly that’s our plan as we go throughout the quarter.

You’ll probably be seeing this second trading line sometime next month when we get approval from all the Regulatory authorities.

But that’s clearly our plan is to continue our share buyback program, which means close to 9 percent.

We’re going to have to take some action here (inaudible).

Okay.

And last question from my side.

Can you tell us how much the OEM growth was if I exclude the Sony FX?

Mice this quarter actually declined 4 percent.

One of the things I want to remind you is our mice last quarter grew 25 percent.

Quarter-by-quarter we don't always naturally track.

You have to look at our growth in OEM over a longer period of time and then quarter by quarter.

Yves Kissenpfennig, UBS.

I have a question regarding your – the whole situation with the inventories is clear I think, as well as you expedited some cost and that impacted your gross margins.

Are you finding that this Christmas perhaps or that generally from your retailers you’re getting a little bit less shelf space and that means that you have to tighten your supply chain in order to maintain a full shelf presence at all times?

That’s my first question.

And then my second question is, I was wondering if you could update us a little bit on the capacity investments that you’ve taken?

I know you’ve talked a lot about it.

Could you just give us sort of a timeline as to where you are relative to your capacity in China?

Thank you.

Okay, so in terms of shelf space, in fact I would say that our shelf space is increasing and not decreasing.

And the more shelf space you have, the more responsibility to fill it you have.

And there’s also a much more linear order booking profile that we see from our retailers, which is a very good sign.

So I think this answers the first part of your question.

On the China capacity we’re on track to have our new factory starting to ship product in the middle of calendar 2005.

Construction is proceeding and we look forward to actually celebrating its opening.

It should open in the sort of May-June timeframe.

Thanks.

And maybe to your first point.

You don’t see that basically there’s a lot more competition for consumer dollars, namely that this particular Christmas there’s a lot of other devices that people – or consumer digital gadgets that people want to go out there and buy and yet – and the retailers I find from when I travel, that they’re putting a lot more of these devices – much more than they were last year.

You’re pretty sure you’re seeing an increase in your shelf space?

I would say I see an increase in the number of SKUs that get placed across the board in Europe and the United States.

I cannot guarantee you 100 percent that that corresponds to an increase in linear shelf space for the categories in which we play.

But looking at the perspective growth that we expect, I would doubt that it is not the case.

That said, retailers love high velocity products these days.

And you know what, if you have hot products they just rotate fast.

And that is the other way to do it.

But I don’t have any evidence of reduced shelf space for our categories on a systematic basis, no.

Okay great.

And maybe one final question.

In terms of your ASPs, if I got it correct, your video ASPs on average fell about 11 percent year-on-year.

Is that something that you are driving going forward to drive this mass market as an option of these technologies?

And how do you expect that will develop going forward?

We have made, for example, in cordless desktops and cordless mice, some aggressive price moves in the past, roughly six-months ago, to reach the soft spot of the mass adoption market.

But if you look at the performance of ASPs and so growth and revenue versus units of cordless mice and for the desktop, you see for example that we grew faster in revenue than we did in units.

So yes we do have aggressive price points at the entry level.

But our average selling prices in general – look at the totals of our portfolio.

We grew our revenue in retail by 22 percent and we grew our total units by 7.

What does that mean?

It may mean one of many things.

It's mix as well as it is mix within product lines.

So there is no systematic, I would say, conclusion that you might take as to our ASP growing or declining relative to margin.

It's a little bit more complex equation than that.

But yes indeed we are aggressive at the entry level on our product lines, every time we believe there is as mass reduction (ph) cycle happening and at the same time we are targeting the repeat buyers with more and more rich and sometimes expensive higher-end products.

And that balances the mix.

Mehrdad Torbati, Deutsche Bank.

I have a question regarding your laser 1000.

You said one of the major contributors to the quarter was this laser mouse.

Obviously you are selling it through the channels.

What is your experience so far in terms of sell throughs of other product on the shelf, the velocity of this product or what is the feedback you get?

And in terms of geographic exposure of the product, where have you started selling this product?

Is it in Europe?

It's started to show on the shelf in Europe and the United States.

It's on Best Buy, it’s in Japan.

In Japan the first week of sales out was just ashamedly high – to the point that we doubt the data, because it’s really too good to show.

In a sales out market, independent market information.

The response for the mouse from the retailers and the consumer is quite remarkable.

We are making the top-five list of best-selling mice in some weekly reports that we get from US channel.

MX1000 is in the top-five and you think about the fact that this is a $79 mouse, it’s quite remarkable.

So we feel pretty good about this.

People love it, because it’s the best mouse you can buy and I strongly and personally recommend it to all of you in the conference call.

Let me ask a follow-up question.

So the extra freight charges are in conjunction of their unexpected sales were up of this mouse?

They are not necessarily mouse-related.

In fact, what we pointed out in the remarks was they are predominantly desktop-related.

We have undergone probably the largest product transition in our desktop products in our history.

We basically phased out the older product line and introduced four new SKUs that actually cover a very broad range of price points.

Now desktops are also larger products to ship.

Therefore, while you can expedite mice at a lower cost, it cost a little bit more to expedite desktops from a logistics point of view.

So this is mainly desktop – LX desktop-driven.

Maybe a final question.

Your geographic performance in terms of sales growth has been very different, Europe and US.

Can you explain what is in back of product mix different distribution model you have?

And we see a positioned (indiscernible).

What is happening in the US?

What is happening in Europe?

We could talk for an hour about this.

In Europe we have a significantly – we have a stronger competitive position in Europe, because our competitors are weaker, especially in our main categories.

If you allow me not to mention too many names.

And therefore, we enjoy a substantial share.

In the US, the market is more competitive and in fact seeing our growth of 19 percent is remarkable.

So it is hard to judge how these things will – these things will vary over the course of the next several quarters.

Sometimes the US may grow faster than Europe and sometimes it may not.

But I don’t have a one-liner answer to your question.

It's country dependent, it’s competition dependent, it is not so black and white.

I’m sorry, Mehrdad, I’m not more specific than that.

If we have one last question, otherwise I would (indiscernible) remarks.

Operator?

Oliver Maslowski, Bank Vontobel.

Two questions from my side.

You mentioned retail order backlog is twice as high as last year.

Could you quantify this number?

We do not, sorry.

It's a very large number, but we do not disclose our backlog.

You introduce a lot of new products every year.

What market potential must a product have to get developed?

Well, every product undergoes a pretty aggressive scrutiny in the product conception and development process.

There are what we call a number of gates that the product has to pass, some are technical and some are financial.

In some cases we don't look at a product specifically, but we look at a product line.

Sometimes a product is more helpful as part of the mix than it is individually.

But we certainly have – our R&D returns are quite high and we tend to apply those ratios to every new product.

Okay, so regarding headsets, would that be a big growth driver in the near-term future or are you scared of rapid commodization from mobile phone users?

I would say that if we haven’t seen commodization in mice, we will be able to not see commodization in any of the categories in which we play.

That said, headset has a very high potential and not only on the mobile phone space, they have high potential on the PC.

Think about what’s happening with voice over IP these days.

A lot of people are using their PC as a way to make calls and they need a headset.

And another set of opportunities in headset is coming from portable music and digital music.

And we just announced an OEM headset for Compaq – I’m sorry, for HP (inaudible) flip the words. iPac from HP has a Bluetooth connectivity and we are providing them a Bluetooth stereo headset, which is the first of its kind.

So there is a great opportunity in headset.

I don’t see that market commoditizing any time soon.

Price points will go down, of course, but innovation and differentiation will continue to play.

Okay, first of all I wanted to thank all of you for having been with us today.

From what we discussed, I would say that the health of our retail business and the very positive response to our new products are the main sources of our confidence for the future.

Just a data point, in Q2, the past quarter, for the first time in the history of the Company, our branded unit sales – sales of units with the Logitech logo, were higher than our OEM unit sales – 13.3 million units were sold under the Logitech logo in Q2.

This (indiscernible) brand presence is one of our strongest assets and as we invest for growth as we are doing, it provides us with the springboard to sustain our (indiscernible) track record.

With that I thank you for your participation today, and I pass the call to the operator.

Thank you, sir.

Ladies and gentlemen, we thank you for your participation in today’s conference.

This concludes your presentation.

You may now disconnect.

Good day.