羅技 (LOGI) 2005 Q3 法說會逐字稿

Good day ladies and welcome to the Logitech International third quarter 2005 Earnings Conference Call.

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

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

We will be facilitating a question and answer session towards the end of today's conference.

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

As a reminder, this conference is being recorded for replay purposes.

And 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, Rachel.

I would like to welcome you to the Logitech Conference Call to discuss the Company's results for the quarter ended December 31st, 2004, the third quarter of Logitech's fiscal year 2005.

The press release, a live webcast of this call and accompanying presentation slides are available online at Logitech.com.

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

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

Factors that could cause actual results to differ materially include those set forth in Logitech's annual report on Form 20-F 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 third quarter results issued by Logitech and available at Logitech.com.

The press release also contains accompanying financial information for this call.

The forward-looking statements made during this call, including the forecast for the full fiscal years 2005 and 2006, represent the management outlook only as of today and the Company undertakes no obligation to update or revise any forward-looking statements as a result of new developments or otherwise.

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

For those of you just joining us, let me repeat that presentation slides accompanying this call are also available on 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 thrilled with our performance as we delivered Logitech's best ever quarter for sales and operating income, while continuing to execute the investment strategy that initially became visible in our Q2 results.

The growth percentages that follow are in comparison to the third quarter of fiscal 2004.

Our sales grew by 18 percent, to $484 million.

OEM sales declined by 34 percent, reflecting the anticipated absence of sales of PlayStation 2 peripherals to Sony.

The $26 million decline in our OEM sales was more than offset by our retail business, where sales increased by $100 million, or 30 percent, to $434 million, driven by our success across all major retail products categories, and particularly the cordless category and in console gaming.

Gross margin was 34.8 percent, up from 34.3 percent in the prior year, primarily due to the shift in mix between retail and OEM sales.

The year over year improvement would have been even better, had we not chosen to fulfill exceptionally strong retail demand through the extensive use of air shipment.

Consistent with our stated strategy to invest for our future growth, operating expenses for the quarter increased by $20 million, or 26 percent, to $95 million.

Our marketing and selling expenses grew by 28 percent, primarily due to the increase in headcount for expanded territory coverage, increased marketing activities in support of brand building and the much higher retail sales volume.

R&D expenses increased by 23 percent, reflecting investments focused on categories such as cordless, headsets and advanced remote controls.

Our G&A expenses were also up by 23 percent, with growth driven by investments in additional headcount and systems.

Let me remind you that the net income of fiscal Q3 2004 was favorably impacted by the release of a $13.4 valuation allowance on specific tax assets.

If we exclude the release of that tax-related allowance from last year's results, our net income in Q3 of fiscal 2005 would have increased by 20 percent and established a record high.

Let’s move to the balance sheet.

Our cash position, net of short-term debt, was $236 million, up by $11 million compared to the prior year, and by $52 million compared to September of 2004.

Our cash flow from operations was a positive $63 million for the quarter, up by $19 million compared to the prior year.

For the first three quarters of fiscal 2005, cash flow from operations was a positive $94 million.

Our inventory was $186 million, up from $141 million in December of 2003, and down by $9 million compared to September 2004.

Inventory turns as of December 2004, were 6.8 times per year, down from an exceptionally high 7.7 turns as of December 2003 and up from 4.5 turns as of September 2004. .

Accounts receivable was $296 million, up from $273 million last year.

Our days sales outstanding was 55 days, 5 days better than December of 2003.

Let me give you an update on our share repurchases.

During the third quarter we repurchased 494,800 shares for 31.7 million Swiss francs, or $26.7 million US dollars.

We now own approximately 8 percent of our shares outstanding.

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

Let’s look more closely at our retail business, where we enjoyed our best ever quarter, with sales growing by 30 percent and unit shipments 34 percent.

It was a great quarter for our two biggest regions.

Sales in North America increased by 35 percent, with unit shipments up by 31 percent.

Our sales in Europe grew by 32 percent, with a 40 percent increase in unit shipments.

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

Sales in Asia-Pacific increased by 4 percent.

While we've seen some improvement with our performance in the China market, it will take several quarters, as discussed in the last earnings call, to return to sustained growth.

It was another record breaking quarter for our cordless product family with both sales and unit shipments growing by 40 percent.

Cordless mice drove the majority of this growth, with sales up by 97 percent and units by 72 percent.

The runaway success of the MX1000 laser cordless mouse, was a major contributor to this growth.

Our family of cordless mice for notebooks, including the high-end D500 cordless notebook mouse, also made a strong contribution, with both sales and unit shipments for the category more than doubling.

Cordless desktop sales increased by 14 percent, with unit shipments up by 17 percent, reflecting the success of both the new LX desktop family and the latest diNovo cordless desktop.

Sales in the corded category increased by 10 percent, with unit shipments up by 26 percent.

Corded mice drove this growth, as sales increased by 16 percent and unit shipment by 28 percent.

The well received MX510 performance optical mouse continues to be our leader in the corded category.

Retail video sales increased by 7 percent and units by 32 percent.

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

The growth in webcams is 19 percent, with units up by 41 percent, and both sales and unit shipments reaching an all-time high.

Our retail audio sales increased by 20 percent, with unit shipments up by 15 percent.

It was a solid quarter for our PC speakers, as sales increased by 8 percent and units shipments by 33 percent.

Sales of PC headsets increased by 53 percent and unit shipments up by 22 percent.

Our Bluetooth enabled mobile freedom headset for mobile phone users also made a notable contribution for the growth in audio.

We enjoyed our best quarter, by far, in retail gaming, with sales up by 84 percent and unit shipment growing by 90 percent, primarily due to our success in the console space.

Sales of controllers for game consoles nearly tripled, growing by 192 percent, with units growing even faster at 275 percent.

Our cordless gamepads for the PlayStation 2 and Xbox platforms were the main drivers, with both sales and unit shipments of our console gamepads reaching a level that was nearly five times larger than the prior year.

Our console steering wheels also contributed to growth, with sales up by 87 percent and units more than doubling.

Looking at PC gaming, our sales increased by 16 percent and units grew by 19 percent, with growth driven by both gamepads and steering wheels.

Before concluding my comments, let me give you an update on the schedule for our fiscal year-end earnings teleconference scheduled for April.

Following our fourth quarter release scheduled for Tuesday, April 19th, we will conduct an investor teleconference as we do after all our releases for the other quarters during the year.

In place of the Zurich meeting for analysts and the press, I'm excited to tell you that we've scheduled our fiscal 2006 investor meeting for Thursday, May 5th, in London.

The agenda will feature a number of our senior executives reviewing our strategy and opportunities for fiscal 2006 and beyond.

We'll have more details to share in the upcoming weeks and we encourage you to mark your calendars for what we plan to be a day of valuable insights into Logitech's business model and future direction.

And 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.

I'm delighted with our outstanding performance during Q3.

Our spectacular retail sales growth in the all-important holiday season is testament to the strength of our product portfolio, to the multiple growth engines of our business and the attractiveness to the consumer of our innovation, style and quality.

So let me comment a little further on the third quarter.

It was a great quarter for retail mice.

In fact, our total retail mice sales, corded and cordless combined, increased by 48 percent over the prior year, with unit shipments up by 36 percent.

We have to go all the way back to fiscal 2002 to find a quarter with faster year over year growth.

With equally strong growth in both North America and Europe, the performance in Q3 translates into share gains in both markets.

I'm very pleased with our success in retail console gaming.

It shows that we are making further headway into the strategic living room market and I see it as a leading indicator of what Logitech can bring to consumers in this attractive new market.

To put our console gaming progress and our performance in perspective, our Q3 retail console gaming sales were over 30 percent higher than our sales in the category for the entire fiscal year 2004.

We're well positioned on the shelves and in the mind of the consumer to take advantage of future growth opportunities presented by new platforms and applications in both the PlayStation and Xbox environment.

And speaking of the living room market, I want to comment on our progress with the Harmony remotes.

While the numbers are still small, we are very pleased with our holiday sales performance.

The ongoing streams of rave reviews for these remotes, evidenced most recently at CES, where we announced the Harmony 880, our first Logitech designed color remote, and our early success on the shelves, where the most recent NPD market share data for the US market, show Harmony as the number one programmable learning remote, confirm our key assumptions in acquiring the Intrigue technologies.

This innovative consumer friendly remote controls put us squarely in the hottest spot in IT these days, the digital converged home.

Webcams reached a major milestone in Q3.

Users of the MSN Instant Messenger network have logged more than 2 billion video instant messaging sessions using webcams in just 18 months of services.

At the current rate we're talking about more than 60 new webcam sessions per second, 24/7, seven days a week.

With a single day record of over 8 million sessions, these user statistics provide another confirmation of the extraordinary appeal of video communications to the consumer.

Over the coming months we expect a widespread deployment of synchronized audio-video capabilities like those available with Logitech VideoCall for broadband, providing consumers with even more reasons to buy both webcams and audio inter [ph] devices for their PC.

I couldn't be happier that our North American region set the pace for retail growth during the quarter.

The 35 percent growth was the best the region has delivered in several fiscal years, which is especially impressive given the mixed reports about US store traffic during the holiday shopping season.

Once again demonstrating that innovative products, a premium brand at affordable prices and strong channel presence make for an attractive proposition for both the consumer and the retailer.

Turning to the OEM side of the business, the year over year performance comparison is obviously skewed by the lack of PlayStation 2 peripheral sales to Sony in fiscal year 2005.

As I discussed in the past, the gaming console component of our OEM sales will remain highly volatile.

Looking at the traditional side of our OEM business, control devices for the PC, we have maintained our leading position and we continue to explore a number of promising opportunities with our OEM customers, with the most recent example being our announcement last month that we'll be manufacturing cordless keyboards and cordless optical mice for HP's new Notebook Expansion Base.

And that brings me to our outlook for the full fiscal year 2005.

Based on our strong Q3 results and entering Q4 with a retail order backlog significantly higher than a year earlier, we now expect our sales growth for fiscal 2005, to be approximately 15 percent, exceeding the earlier stated target of 11 percent.

In line with our strategy, during the fourth quarter we will continue to invest significantly in marketing, product development and infrastructure.

In fact, we now plan to exceed our previously indicated $25 to $30 million expense growth for the second half of the current fiscal year.

Given our improved top line outlook for fiscal 2005, we believe the investment we have made in sales and marketing, particularly in increased sales coverage in the US and Eastern Europe, as well as activities in support of our brand, have begun to bear fruit sooner than expected.

Even as we continue to invest for the future, we expect that fiscal 2005 operating income growth will exceed our stated target of 15 percent over the prior year.

Let me now turn to our preliminary comments for Logitech's fiscal year 2006, which begins in April of 2005.

Naturally, our first order of business is to focus on the current quarter and on achieving the increased targets for the current fiscal year that I just shared with you.

Once fiscal 2005 is behind us, we will discuss in more detail, the expected product and operational drivers of our fiscal 2006 performance.

That said, on the sales side, we see continued double-digit growth in retail.

With the difficult Sony PS2 comparable behind us and a number of promising opportunities in the pipeline, we expect a return to growth in OEMs.

For fiscal 2006 for both sales and operating income, our goal is to deliver growth similar to what is currently expected for fiscal 2005.

We have just completed the best quarter in Logitech's history.

The strong execution by our teams has positioned us to exceed our original fiscal 2005 targets for both sales and operating income.

Our success in delivering impressive retail sales performance and improving our profitability even while investing aggressively to build a $3 billion Logitech, demonstrates that our growth strategy is working.

I look forward to a successful conclusion to fiscal 2005.

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

Please follow the instructions of the operator.

Thank you, sir. (OPERATOR INSTRUCTIONS.) Ted Chung, Bear Stearns.

Thank you.

First, can you expand on your implied guidance for 4Q?

Based upon your current guidance for -- raised guidance for fiscal year '05, it seems that you just had a very significant revenue increase for 3Q, but your implied guidance for 4Q, even with the significant backlog, seems to be you're guiding to sort of an expected -- you're maintaining your 4Q guidance.

Is there something to be concerned about that?

No, I wouldn't say so.

I think that you should remember that we have this ugly comparable on the OEM side with the sales of PlayStation 2 that weren't there last year and certainly will not be here this year.

So we continue to expect a strong retail quarter and end a [ph] very very declining OEM quarter, so there is nothing else implied.

And what was the impact on the weaker dollar on your sales?

Did the strong Euro impact help -- led to lower prices for your European devices and also led to a stronger demand for that?

As we've commented many times, usually the European consumer is the beneficiary of the weak dollar and for many reasons; competitive reasons and several of our competitors' price.

They're probably seeing the dollars to US to [ph] European distribution and therefore, there's a price relationship between what we do and what they do.

Also there is worldwide balancing [ph] and matters to limit gray [ph] market.

So yes, there has been some price decline in Europe driven by the strength of the US dollar.

So, not more than that.

Rob Stone, SG Cowen & Company.

Good morning, Guerrino and Kris.

I wonder, Guerrino, if you could comment a little more specifically on what you think your market share position is now in mice and gaming?

You noted, I think, market share gain.

Yes.

I based this on data which is published by NPD in the United States and by GfK in Europe.

We have the market leading position in mice in the United States.

We've had it now for, let's say, at least two to three quarters at this point, and it has actually strengthened a little bit over the course of the holiday season.

In gaming consoles we have become the market leader, by far, of gamepads and certainly cordless gamepads.

In cordless gamepads, nobody sells more than we do and that's true particularly in the United States.

I would say that the third party console peripherals category is growing faster than any other category within the console space.

And the cordless element of that is actually the dominant driver.

We have sold close to 1 million cordless gamepads at this quarter, which is a phenomenal performance and we just have gotten to tap the very huge PlayStation and Xbox installed base.

And so we're very excited about that.

So, what does that translate to in terms of a share of points for US mice and gaming?

What do you mean, in terms of revenue share --?

If you're the market share leader, what share numerically do you have?

In mice we have around 35 percent in value in the United States around 40 in Europe.

In gamepad we have more than half of the cordless -- actually more than half of the cordless gamepads.

And I don't have the number for the total of gamepad categories line.

And we are the market leader in the wheels as well.

And again, I don't have these numbers immediately available.

Okay, that's helpful though.

A quick question for Kris.

On the gross margin impact of airfreight, can you give us a sense of the magnitude of that?

Yes, I sure can.

You know, our cost of goods sold included about $6 million more of incremental freight.

This is for air and sea combined, and this is even after we normalized for the increased value in revenue.

Nicole Burth, Lombard Odier Darier Hentsch.

Hello, can you hear me?

Okay, sorry about that.

Hi there.

Following question from my side.

Coming back to your 2006 guidance, you mentioned in your comments that you have a few promising projects in your pipeline.

Could you give us an idea of whether this is more on a potential change in consumer habits that we would have, for example cordless mice for PCs, or is it more projects with Sony?

Well, I don't think [indecipherable] to give all the details.

I think what my comment was specifically referring to -- to the PC OEM side we see more and more interest in cordless mice and we see interest in cordless desktops as well.

And the first announcement we made with Sony is probably an indication of other things to come.

So my comment was specifically referring to the PC platform.

As I said, the OEM business on the gaming platform is less predictable and more volatile, so we'll consider that as an upside.

Okay, thank you.

The second quarter I have is on Asia retail growth.

And can you give us -- or share your thoughts about China with us, how are you doing in terms of distribution, have you been able to change something?

I think last time you commenting on having quite a lot of layers you have to go through.

Yes.

And in fact, we are doing a lot of things in China.

The fact our result does show growth in the Asia region, 4 percent, is an indication that some progress is happening.

That said, this is a long-term strategy, Nicole, and as I said previously, it will take several quarters to see China going to sustained growth.

We have hired people.

We are now covering our territory better.

But you know, you have to give time to time and patience is very important, especially in China, and culturally very important and we are there to stay.

So, I think I will give progress about this over the course of the coming quarters, but I'll say that there's still a way to go.

Is it possible that you have to make an acquisition to get the thing going in terms of distribution?

No, I don't think so.

We tend not to be vertically integrated in that dimension and I don't believe it's the right or wise move to do in any market, including China.

The issue is mostly making sure we get closer to where products are displayed and marketed.

We have to establish ourselves as a differentiated premium brand for the China that is interested in this class of products.

And to do that we have to have a much closer relationship with the ultimate retailer.

We certainly will continue to use distributors for everything that has to do with logistics and all the services that distributors provide in general, but our increase in the head sales headcount will allow us more feet on the street to work with the ultimate retailers in the major metropolitan areas, to work on product displays and merchandising and how to position our products on the shelf.

And we have left that entirely to the retailer up until now and we need to be more creative [ph] ourselves, otherwise it's easy to get confused with the rest of the pack.

But I don't believe that an acquisition will actually help.

It is not set in our plans.

Can Elbi, Credit Agricole Indosuez Cheuvreux.

Hi, Kris.

Hi, Guerrino.

Fantastic figures, so nothing much to say, I guess, on our side.

But I still have a couple of questions.

First of all, looking out the overall global hardware space, I guess one of the important trends is really what Apple and Creative have to report on the mp3 player side.

So can you just really talk about the stereo of headphone opportunity for Logitech, especially on the Bluetooth side and whether you could be also working with Apple in the future?

Well thanks for the question.

Yes, we all have seen the growth of iPods has become another mythical [ph] device out there.

And I actually bought two just a week ago.

And to answer specifically about us, I would say, of course, we're extremely attracted by the opportunity, particularly in stereo and Bluetooth.

We have made an announcement of an OEM relationship with HP on that front for their iPAQ.

It's just the beginning of things to come.

We consider mobile music and what we can bring particularly to the mobile space [ph] as one of the interesting growth drivers for us [inaudible].

So you already have a working model for a Bluetooth stereo headphone?

Yes, we do.

Actually we have a working model, we have a product that is being shipped under the HP brand in conjunction -- as an accessory to the iPAQ. [Inaudible] I do strongly recommend to an iPAQ than to a [inaudible].

Okay.

The second one is on the question that I keep asking and then you keep eluding.

Maybe you'll answer it this time.

But I understand your reason.

It's on the margin leverage, your incremental margin leverage and the potential to go above your stated 12 percent.

I mean looking at the product portfolio, where the gross margins are and also seeing that you're obviously have this incremental discretionary spending program, this could obviously decelerate into next year.

How much leeway is there to way above [ph] 12 percent, is I guess the question?

Well, I think you understand the reasons why I'm keeping to my line, which is our targeted gross margin bracket is 22-24 [ph] percent.

We have consistently been at the very high end or beyond that bracket [inaudible] in this fiscal year.

Will that continue?

It's very hard to tell.

It will depend also on the mix that we have retail, but not only on that.

In terms of our operating expenses and our investments, you're correct in saying that we have decided to invest substantially this year.

But we do expect our growth rates to be slower in terms of operating expenses next year and to align itself better to our gross profit growth.

So is there an opportunity to go past 12 percent on any particular year?

Of course there is.

But it is difficult to set this as a model.

We maintain our top priority being top line growth.

Look at what we've done this quarter, just to be very clear.

We've had an extraordinary demand that we were not expecting -- extraordinary.

And we could've made the decision of maintaining reasonable customer satisfaction, maybe shipping would be $10 million less and not airing lots of products, et cetera, et cetera, and therefore, you would have seen our gross margin being even higher than what it is today, which is pretty high, 34.8.

Would that have been the right choice for Logitech?

No, I don't think so and that's why we did what we did.

And we will continue to make those decisions -- those tradeoffs, in that direction.

Okay.

So, without spending too much time on this, but overall then, I guess in terms of the way you manage the business in the growth versus profitability tradeoff, you think an interface devices hardware company should ideally, basically not go over 12 percent in terms of not jeopardizing contributors [ph], I guess that's what you're trying to say, no?

That's what I'm trying to say and you know very well that when we get within detailed numbers it's very hard to predict.

But in terms of the managing criteria, what you said is exactly.

Okay.

Maybe one very small thing, PC OEM sales growth, is it in this -- what was that [ph]?

Six percent.

Mehrdad Torbati, Deutsche Bank.

Hi, everyone, thanks for seeing the question.

I have a question regarding your relationship with your OEM business partners.

Do you see any interest on their part for configuring or including webcams or cordless mice into their offering?

Has the interest increased on their part as you're reaching all those early masses as far as cordless mice is concerned?

And webcam, certainly with the growth we're seeing, do you see any change of behavior there?

We see an increasing interest in OEM in cordless products in general and cordless mice, but also cordless desktops.

In fact, as I alluded to, what we announced with HP recently is an indication of other things to come in this space.

To the answer to your question on cordlessness [ph] and particularly mice, but also mice and keyboards combined, is yes, there is increased interest there.

On the webcams, frankly, the traditional PC OEMs are not there yet.

And I believe that once this audio-video communication gets established, which I believe will give another boost for the category, there may be something there.

But PC OEMs continue to be extremely cautious in adding anything that is not absolutely essential to their platform, because it's a commodity business driven by price, as you know.

And so it's very hard for me to tell when and if webcams will become part of a base configuration.

I'm sure that, as in the past -- and we seem to have very opportunistic chances to work with optional programs.

But in terms of mass adoption of webcams as a standard PC configuration device, I don't see it coming yet.

Another question perhaps on the -- since you are on the way to substantially increase your production capacity in China, are there some categories you would consider producing in house that have been produced by -- I think so far being produced by your partners, are you thinking about something first of all like remote controls or keyboards?

Yes.

First of all, thanks for the question.

It gives me the opportunity to restate our strategy is when it comes to operations.

The reason why we are building a new factory, which is actually on schedule, which should start shipping products in the middle of 2005, is that we continue to want to keep a 50/50 look and a 50/50 -- the rough statistics, between inside and outside.

And certainly to have manufacturing -- inside manufacturing and outside manufacturing [ph].

In terms of categories, we already do build a few keyboards.

A very small proportion of our total keyboards are built in house and that was started 12-months ago.

You mentioned remote controls and I don't want to confirm or deny anything.

But the notion that we could add some categories to our own inside manufacturing is correct.

We believe that that might happen in the coming 12-months.

Wolfgang Fickus, WestLB.

Hi, Kris.

Hi, Guerrino.

Congratulations to the results.

I have a few more, maybe strategy questions and one more operational question.

On the operational side, would you share some numbers with us, giving us an idea about the percentage of retail product sales, which were, say, very young, which is product which has been ramped over the last three months, in a year to year comparison.

So what I look for is that you say 20 percent of your retail sales or 40 percent came from products which were younger than three-months, versus, say, 20 percent last year.

I don't know whether you share those numbers with us, but I would be interested, given the significant ramp up which you had in the September-November period.

And the second question is, you mentioned some expansion into the living room.

And I would be interested in two things particularly.

First, the cooperation with Microsoft on the Windows Media Edition 2005, what do you think is a midterm potential in that market?

And then secondly you announced a preview to the Harmony remote control, which also includes HDTV and PVR functionality.

Is that a product which could eventually go into some kind of OEM structure as well, with a completely new set of clients, more to TV and setup box manufacturers, or is that a completely wrong way of thinking?

Well thanks very much for the questions.

On the first question, which is what is the percentage of revenue driven by products that are less than three-months old, this quarter versus last year, I won't share a number.

It's not a major difference here year over year.

This is in terms of number of new products that we introduced last year versus this year is not very different.

We are on sort of run rate of 100 products for the year -- new products per year, roughly.

And so no, there's not a -- this is not a particularly strong season for things that have just been introduced.

I might say MM1000 has been there for a while and been a significant contributor to our growth.

But our good old cordless optical notebook -- optical mouse for notebooks, which has been around for what, 18-months or something, has been doing extremely well this quarter.

So not particularly skewed towards [indecipherable] products, if you want that -- that's the way to answer.

On the more strategic question on the living room, first of all, the number of times we cooperate with Microsoft is now increasing dramatically.

You know very well what we're doing with video.

Sure we've been very close to them with this remote.

I am told that Bill Gate's actually used Harmony in his CES speech and keynote session and we were very pleased about it, especially because it worked very well as opposed to maybe other [indecipherable] that we're trying to make [ph].

But that's what happens to demos.

And so, it simply means that we are interested in taking the two sides of the digital living room, the PC side and the traditional visual entertainment side.

And Harmony can cover both.

The beauty of the platform is that it can allow us to play wherever the market goes.

It's very difficult to know who will win that, whether the PC will play this big role in the living room or not.

Whatever happens, Harmony can help us in both sides.

And on your last question about opportunities in the more traditional consumer electronics space and with traditional sort of TV suppliers and especially with this next generation of TVs, the answer is, of course we have been interested in that and we are working towards that.

It's too early to say whether it will be successful.

But we are serious about this notion that the advanced remote control is the mouse of the digital house and as a mouse it will be as pervasive around the digital house as the mouse is on the PC.

I am very very excited about Harmony and I can't tell you how happy I am that we did what we did with Intrigue.

Anuj Mutreja, Morgan Stanley.

Hi.

Thank you very much.

Hi, Guerrino.

Hi, Kris, how are you?

There were some questions that were very interesting [ph].

A couple of things I want to touch on actually.

Which is, basically, can you tell us what happens with this IFRS coming in?

Presumably you'll have to expense some of the stock options and when does that actually come into force?

You know, actually Anuj, IFRS is not necessarily the concern.

It's US GAAP that's a concern for Logitech.

And we will begin expensing our stock options in Q2.

We're going to comply, of course, with US GAAP.

So you will see results of that in our September quarter.

Okay and obviously that would -- would you tell us how much roughly the charge would be or have you not done your homework on it yet?

We're not ready for that yet.

We're still analyzing that.

You're going to hear a lot more about that as we close the year end and certainly at our investor conference in May.

Okay, that's fine.

The second quarter I have for you -- it's just more for Guerrino.

I want to be able to understand two things.

One, how much do you think the growth is coming -- well, if you just look at the last Christmas period, it wasn't a great one for retailers or PCs.

How much do you think growth is coming because people -- it is a slightly depressed consumer spending environment and people are buying smaller things as opposed to bigger things?

I don't know if you could comment on that.

That's very hard to answer.

Our core business proposition is exactly that we provide mass luxury at affordable price.

Usually that dynamic works independent of the economics.

Now of course, when the economics do not favor high price ticket items, then at least they don't hit us.

But the cost really is not necessarily -- by the way, it's hard to qualify this business season as bad in general.

I don't think it was bad for the overall market.

People bought, you know, plasma displays a lot.

I bought two iPods.

Even though [indecipherable] lucky, Guerrino.

So I think intrinsically our business model tends to protect us from the swings of consumer sentiment and spending, as it has proven to do for a long time now.

I don't know whether this was particularly true this Christmas season.

I have the impression, talking to the retailers, that they weren't devastated on everything else but Logitech.

They were very happy with Logitech, but they were not unhappy in general.

Okay, fair enough.

The second one is for yourself as well, is a little bit around competition.

I mean, you guy are doing phenomenally well on the growth.

Your margins are better than you can find anywhere else in the consumer electronics hardware space.

Do you think that there is potential for people to look around, say well hang on, this is a much more profitable area than what I'm doing and go down that road, whether it's the likes of Sony -- and I know it's a very small portion of --?

Yes, there is always the potential for them to come in this category --.

Are you seeing anything like that?

We haven't seen anything different than what we have seen all the time.

Remember that this was a category Intel was playing and then they just went out.

And then this was a category where Microsoft is playing and we are decently [ph] fairly competing with them.

So we're not particularly terrified by the big guys.

The notion here, as you know, I know you, is that this is a relatively small pond and we are the big fish.

We are twice as big as Microsoft in the categories in which we compete with them.

We are four times as big as Creative in the categories in which we compete with them.

And then everybody else follows much much smaller.

So there is still advantage.

Now of course, a very big player may decide to spend a lot of money to become Logitech in this space.

But you know what, that big player might as well figure out that probably the best way to do it is to acquire Logitech.

And I haven't received any letters with that --.

Which actually brings me to my next question.

I mean, if you look at your profile of the company and then you've got reasonably -- well, you've got decent growth, you've had reasonably stable margins apart from one or two quarters or halves [ph], and you generate a lot of free cash flow.

Why does Logitech need to be a private company?

Would you look at it from an LBL perspective or would you be willing--?

Why does Logitech need to be a public [ph] company?

I feel very comfortable with our share ownership.

I don't believe that there's anything in the cards for us to be private.

But why do we want to leverage ourselves so dramatically?

I don't think that's in the cards.

I think that's very speculatory.

I believe that we will -- we might in the future -- this Company is here to stay for longer than you and I will be alive.

And so in the future we may tap into the capital market and we will be happy to do so as a public company.

I don't believe there's any short-term interest in anything like an LBL.

Yves Kissenpfennig, UBS.

Yes, hi, Guerrino.

Hi, Kris.

A couple of questions.

I wanted to ask firstly -- they're both follow-up questions actually.

I was trying to, if I've done my math right, I'm seeing at the ASPs, your pricing in sort of the cordless segments, the video segment and the console platform segments are down quite dramatically.

And I was wondering, is that really a strategy in line with your stated overall strategy to sort of drive adoption rates in these segments or is that partially related to the dollar?

I think that was partly answered before.

And then my second question would be in terms of your marketing and selling costs, you mentioned that you expected your overall operating expenses to rise in line with your gross profits.

Do you not have a little bit of room actually to scale back a little bit following the quite heavy investments you made this year, in fiscal '05?

And then finally, also on the R&D, could you give us a little flavor on what you feel comfortable with or how you approach the problem of, or approach your budgeting process and how much do you want to spend on R&D to keep the innovation rates up?

Thanks.

So, a preface in general of more detailed sort of discussion as to what we're going to do in fiscal '06 will come when we close fiscal '05, as I said.

In terms of pricing, well, there's so many dynamics into the ASP decline or increase, that it's very hard to draw a conclusion.

Let me give you just a simple example.

One of the most dramatic deltas between revenue growth and unit growth is in console games, right?

So we did spectacularly in revenue and then we did even more in units, so you may say gee, these people are lowering their prices to get more penetration.

The truth of the matter is that the mix is a big driver here.

This year was great for steering wheels, which are a very high-ticket items, but spectacular for gamepads, which is a lower price point product.

So is that a strategy?

Not necessarily.

It happened to be this way.

What's important is what individual margin we make on individual products.

And no, we have not made individual product margin sacrifices in general.

I can't say that we've never made them.

We have 200 products [inaudible].

But we have not pursued that.

We have done that a year and a half ago when we needed to be stronger at the desktop level, at the cordless desktop level we actually lowered the entry price points of our cordless desktops.

But since then we haven't done anything on the price specifically to get market share for a specific product.

Most of the changes in ASP that you see -- and again, I don't want to be completely total.

But let's say the vast majority of the changes you see are driven by mix.

So that's your first question about pricing.

In terms of investment, do we have an opportunity to scale back?

As I said, we do intend to scale back the growth rate of our operating expenses in fiscal '06.

Many of these expenses that we make today are discretionary, so we have the opportunity to scale back if we want.

But we don't want to.

Actually, we intend to continue to persist on this investment in sales and marketing and R&D.

Look, our sales growth here this quarter is also driven by the extra investments we started to make late Q1 and in Q2.

When I said that our investment strategies started to pay off sooner than expected, this is where it does.

So, why would I want to scale it down?

I certainly want to put it on par of the gross profit growth next year, at most.

And that's what we're going to do.

In terms of R&D, we have 5 percent of R&D in our long-term business model.

We have 500 engineers working for Logitech.

We spend in R&D, more than any of the Taiwanese competitors actually make in sales every year.

So we have a very very substantial R&D.

We believe we need it.

We believe that it's all about product innovation and meaningful product innovation.

And so we'll continue to spend.

I don't think that there will be any sales leverage here.

We'll continue to spend 5 percent, even when we're going to be a $3 billion company.

Okay, great.

And maybe one for Kris, very quickly.

Could you remind us what the other income line was?

Sure.

Other income, the significant part of that was foreign exchange gains and losses.

Barry Ehrlich, Helvea.

Hello everyone.

Video category was the worst performer of the six retail categories, although it itself did pretty well.

And I've got a number of questions with respect to video.

If we had excluded dual cam, would growth have been at 19 percent or close to 19 percent?

Yes.

The answer is yes.

Okay.

As we move out of the comparison quarters where dual cam was present, do you expect to see video to start to perform, let's say, more in line with the other categories?

Well, first of all, Q4 is another quarter where there is the comparable with dual cams.

So the comparables should go away in fiscal '06.

I'm bullish about the growth in video.

I think that we are going into two quarters of dramatic dramatic video performance in comparables.

So it's going to be interesting to watch what kind of a growth rate we can have in the next couple of quarters with webcams.

But the structure of that is that the category is going as fast as cordless is and we believe that video will resume its role in our growth portfolio, let's say, in the coming two to three quarters.

Okay.

Is that because -- and one thing that I've noticed is that some of the other categories, mice and desktop in particular, have had a tremendous amount of innovation and new product releases over the past 18-months, but video has had less.

Is that going to reverse somehow and we're going to see more within video?

That's a very good observation, Barry.

You're very right.

Our focus -- we have been making this webcam category for the last five years and our entire focus has been on building reasons for people to use webcams.

So we didn't really need to do anything on mice.

People have to use a mouse now, because it's part of their PC experience.

So, our focus on web cams has been let's develop the software and the services that make people use web cams.

And that's what we did with the MSN collaboration with Microsoft and we were tremendously successful at that.

Once more and more of these applications are available, once more and more people don't even ask the question as to why they have to buy a web cam, that they ask the question, which web cam do I want to buy and do I want to buy another one?

This is where you will see more and more product specific innovation in the category.

And you will see some of that in fiscal '06, absolutely.

Okay.

And then finally, just to be very specific, because I didn't -- maybe I should have understood, but I didn't quite understand if you were giving specific operating income guidance for fiscal year '06, and if so, what it was?

What I said, verbatim, is that we expect both sales and operating income in fiscal '06 to grow at the rate -- obviously at the rate that we will see in fiscal '05.

We'll take one more question, operator.

Roger Steiner, Kepler Equities.

Good morning, Kris.

Good morning, Guerrino.

Just two very quick questions left.

One for Kris on the share buyback.

In the last conference call you were talking about a second trading line that should come in fourth -- some time in November-December.

Obviously, the buyback activity changed in the meantime.

Is that just linked to the price increase in US dollar or is there any other reason we should read in that?

Well let me talk about that second trading line.

As you know, we were hoping to engage that when we went above the 10 percent mark.

As we're still in the 8 percent of shares that we own in treasury, there's no need to actually invoke that.

Let me talk about the share buybacks for this fiscal year.

You know, for the first nine months of this fiscal year we've bought back more shares than we did the entire fiscal year 2004.

So I think our plan is still on track.

We certainly take advantage when we can.

But, I think you'll find when our window opens again that we're going to once again reengage this.

Okay.

And probably for Guerrino, I mean, looking at your guidance for '05 and '06, and looking at your guidance for [indecipherable] in OEM, is there any specific category in retail that you expect sales price to decline or is it just a whole ship [ph] target?

I wouldn't call it a growth of around 15 percent, which is what it implies.

But in my statement it is not necessarily a proven growth.

I mean I think that we expect retail to grow in double-digit.

We expect OEM to go back to growth.

I've not been saying that OEM will have a gang buster year in OEM.

It's just that the comparables of the PS2 go away and we expect to maintain a good position in the PC OEM, so you'd expect some growth.

That said, I want to stick to what we said in the call, which is it's a bit too early to go specific in fiscal '06.

You'll get much more information once we know how fiscal '05 closes exactly, once we understand better the dynamic of the product line.

And this will be the time for this kind of [inaudible].

I'm sorry I can't be more specific.

Well, let me close with a small comment on our business model.

Q3 has been our 25th consecutive quarter of double-digit sales growth.

You probably have noticed that.

Looking back over all these periods we have seen up and down cycles in the industry, we've seen work [ph] crisis, we've seen economic downturns and recoveries, I mentioned consumer confidence swings, yet we have proven that our unique business model, which is based on innovation and continuous reinvention of our product lines, on a mass luxury brand at affordable price points and it's combined with OEM and retail synergies and a global presence and significant scale advantages.

All this has allowed us to sustain our base throughout.

So I look forward to the coming months and years with the confidence that this business model will continue to deliver more to our customers and our employees, and of course, our shareholders.

Well thank you very much for your participation today.