羅技 (LOGI) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Logitech's fourth-quarter of full fiscal year 2005 results conference call.

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

At this time, all participants are in a listen-only mode and we will be facilitating a question-and-answer session during today's conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's conference, Mr. Joseph Greenhalgh, Director of Investor Relations.

Please proceed.

Thank you, Carlo.

I would like to welcome you to the Logitech conference called to discuss the Company's results for the quarter ended March 31st, 2005, the fourth 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.

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 20F dated May 19, 2004 and subsequent filings available online on the SEC EDGAR database and in the final paragraph of the press release reporting fourth quarter results issued by Logitech and available at Logitech.com.

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

Forward-looking statements made during this call, including the forecast for the fiscal year 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 it 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, the presentation slides accompanying this call are also available on our Web site.

Joining us today from Zürich is Guerrino De Luca, Logitech's President and Chief Executive Officer.

And here in Fremont, we have Kristen Onken, Senior Vice President of Finance and Chief Financial Officer.

I would 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 results.

We delivered our best-ever full fiscal year and fourth quarter for sales, operating income, and net income from buying, with an impressive balance sheet and we beat our increased fiscal 2005 target for sales and operating income.

The gross percentages that follow are in comparison to the same period for fiscal 2004.

So let me start with the fourth quarter.

Our sales exceeded our expectations growing by 16% to $403 million.

OEM sales declined by 23% reflecting the anticipated absence of the sales of PlayStation2 peripherals to Sony.

The decline in our OEM sales was more than offset by a very strong performance in our retail business, where sales increased by 25% or $70 million to $352 million, driven primarily by our success in console gaming, (technical difficulty) and the cordless category.

Gross margin was 33.6%, up from 33.2% last year.

This improvement was primarily due to the shift in mix between retail and OEM sales.

Consistent with our strategy to accelerate our investment for future growth, which we initiated in the second quarter of fiscal 2005, operating expenses for the quarter increased by $18 million or 25% to $88 million.

Our marketing and selling expenses grew by 24%, primarily due to increased headcount for expanded territory coverage, increased marketing activity (technical difficulty) brand building and the much higher retail sales volume.

R&D expenses increased by 24%, reflecting investments focused on driving future sales growth in categories such as cordless, headsets, and advanced remote controls.

Our G&A expenses increased by 31%, driven by investment in additional headcount and systems infrastructure to support our anticipated future growth.

Now I'd like to talk about the fiscal year 2005.

Our sales grew by 17% to $1.5 billion.

Sales in our retail business increased by $274 million or 27% to $1.3 billion with growth in all major product categories, and particularly strong performance in console gaming and cordless mikes.

Our operating income grew by 18% to $172 million and our operating margin reached a record high at 11.6% of sales.

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

If we exclude the release of that tax-related allowance from fiscal 2004, our net income in fiscal 2005 would have increased (inaudible) 26%.

And our net margin of 10.1% would have established a record high.

Our cash position, net of short-term debt, reached an all-time high of $331 million, up by $51 million compared to the prior year and by 96 million compared to December of 2004.

Our cash flow from operations for the quarter was $109 million, up by 33% and reaching an all-time high for a single quarter.

For the full fiscal year 2005, cash flow from operations increased by 22%, growing faster than operating income to a record-setting $204 million.

Our inventory was $176 million, up from 136 million in March of 2004 and down by $10 million compared to December of 2004.

Inventory turns as of March 2005 were 6.1 times per year, down from 6.8 turns as of March 2004.

Accounts receivable were $229 million, up from 206 million last year.

Our days sales outstanding was 51 days, two days better than March of 2004.

Let me give you an update on share repurchases.

During the fourth quarter, we repurchased 250,000 shares for approximately 19 million Swiss francs or $60 million U.S.

For the full fiscal year 2005, we repurchased 2,775,000 shares for 167 million Swiss francs or $134 million U.S.

We now own approximately 7.6% (ph) of our shares outstanding.

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

Let's look more closely now at our retail business in the fourth quarter, where sales grew by 25% (technical difficulty) and unit shipments increased by 14%.

It was a great quarter for our two biggest (technical difficulty).

Sales in the Americas grew by 34% while sales in Europe increased by 23%.

The growth in both regions was primarily driven by sales of console gaming peripherals, PC speakers, and headsets for multiple platforms as we also enjoyed strong growth in the cordless category in Europe.

Sales in Asia-Pacific increased by 8%.

While we continued to execute on our strategy to return to sustained growth in China, as previously discussed, we believe this will take a few more quarters.

It was a strong quarter for our cordless product family, with sales increasing by 18% and unit shipments growing by 15% (ph).

Cordless mikes drove the majority of this growth, with sales up by 34% and units by 23%.

The continued success of the MX1000 laser cordless mouse was a major contributor to this growth as was the high end V500 cordless notebook mouse.

Cordless desktop sales increased by 12% with unit shipments up by 10%.

Retail video sales decreased by 7%, but we did see a 17% increase in unit shipments.

The sales comparable to the prior year is a challenging one, as Q4 of '04 was the first full quarter of shipments of QuickCam Orbit, also known as QuickCam Sphere in Europe, our high-end, premium-priced Webcam offering.

The initial sell-in last year of this $129 product was the primary factor in the overall mix shift this year towards our mass market Webcam offerings, where our unit shipments growth was particularly strong.

This was a record-breaking quarter for retail audio, as sales increased by 86% and units grew by 39%, both reaching all-time highs.

The biggest contributor to this growth was PC speakers, where sales doubled and unit shipments increased by 80%, also establishing new highs.

With sales growing across the complete range of our speaker line, we were pleased to see particular strength at price points below $100 confirming the success of our FY '05 strategy to target this segment of the market.

Our audio business is more than just speakers, as we saw strong growth in our headsets for the PC, Xbox and mobile phone platforms, with PC headset sales up by 43%.

It was also a great quarter in retail gaming with sales up by 74% and unit shipments growing by 52%, with the growth coming entirely from our success in the console space.

Sales of controllers for game consoles were nearly 4 times higher than the prior year, growing by 271% with units growing at the same rapid rate.

Our cordless gamepads for the PlayStation2 and Xbox platform continued to be the main drivers with both sales and unit shipments of our console gamepads reaching a level that was more than 5 times bigger than the prior year.

Our console steering wheels also made a solid contribution to growth with sales and units more than doubling.

Let me briefly comment on our OEM business.

While our sales performance for the quarter might suggest otherwise, our traditional OEM business is actually quite healthy.

In fact, our sales of mikes to PC manufacturers were up by 15%, faster than the growth of the PC industry, with the majority of this growth driven by our best-ever quarter for OEM sales of cordless mice.

I want to give you an update of the expensing of employee stock options.

Last week, the SEC changed the implementation dates for the new accounting standards, and as a result, we will not include stock option expenses in our financial statements until the June quarter of calendar 2006, which is the first quarter of our fiscal 2007.

Before concluding my comments, I want to remind you that our fiscal 2006 investor meeting is scheduled for Thursday, May 5th, at the Savoy in London.

Just last week, we sent out an invitation featuring an overview of the agenda, so please let us know if you didn't receive it.

We're looking forward to this event and hope that you will be able to join us.

And on that note, I'd like to turn the call over to Guerrino.

Thank you, Kris.

Thanks again to all of you for joining us today.

I'm extremely pleased with the Company's performance in fiscal 2005 and with the record-breaking performance in each of its four quarters.

Fiscal 2005 was Logitech's best year ever and our seventh consecutive year of double-digit growth.

In spite of pressure in material and fuel prices, which challenged our manufacturing and logistic efforts, our full-year gross margin improved to 34%, and we exceeded our ambitious financial targets while investing significantly for our future growth.

Let me briefly comment on the anticipated departure of our head of worldwide sales and marketing, Marcel Stolk.

As you've read in the earnings release, Marcel plans to leave the Company in June 2005 to pursue personal and business interests nearer to his home and family in the Netherlands.

He has more than 14 years with us.

Marcel has been instrumental in driving Logitech's sustained growth.

Marcel will assist with the management transition once his successor is named and I'm pleased to say that he will leave behind a strong team, well-prepared to continue Logitech's momentum.

I want to thank Marcel for his great contribution and wish him all the best in his life after Logitech.

Speaking of momentum, Kris mentioned what a great year this was for our retail business.

Our best performance came from our two largest regions, the Americas in Europe, with 30% sales growth in both.

We expanded distribution, stepped up sales operations in new markets such as Eastern Europe and Latin America, and broadened the reach of our brand by entering new product categories such as advanced remote controls.

There were a number of product highlights for the year, starting with cordless mikes, where our sales increased by 69% over the prior year.

We achieved this growth by redefining the competitive landscape with an exceptional set of cordless mikes. (indiscernible) to use latent (ph) technology for high-resolution tracking, an elegantly designed mouse for notebooks, and a mouse that controls digital media.

Turning to video, our Webcam sales in fiscal 2005 grew by 32%, reaching a record high fueled by the worldwide popularity of video instant messaging.

We also passed a significant milestone, as we've now sold over 25 million Webcams, with the promise of many more to come.

It was a spectacular year for our console gaming peripherals, as sales nearly tripled, growing by 172%.

Our cordless controllers for the PlayStation2 and the Xbox drove our success in this category.

We shipped 1.9 million of these products during fiscal 2005, compelling evidence of the appeal of a cordless controller that provides the perfect mix of performance and value.

We successfully integrated the highway (ph) remote control business with sales in North America steadily increasing throughout the year and achieving the high end of the target range of 10 to $20 million that we shared at the time of the acquisition.

As planned, we invested significantly in R&D, marketing, and infrastructure during fiscal 2005 to set the foundation for our future growth.

Our results this year indicate that our investments have already started to pay off and we expect that these investments will allow us to sustain our strong growth in fiscal 2006 and beyond.

So let me now comment on our outlook for the new year.

We enter fiscal 2006 at the crossroads of major trends in the digital lifestyle that present tremendous opportunity for us.

Cordless, Internet communications, mobile entertainment, and the digital living room.

The key to exploiting these trends is innovation.

It keeps us ahead of our competitors, it helps maintain stability in pricing and margins, and it's what drives us and motivates us.

Our track record in product innovation speaks for itself, and we plan more of the same this year.

Sales for our retail cordless category increased by 33% during fiscal 2005 driven by cordless mikes and cordless desktops.

When you consider that sales and units in the considerably smaller retail cordless category grew in the low-single digits, it's clear that the adoption of cordless goes well beyond a mere 1-for-1 replacement of corded.

Exciting products like the MX1000 attract both new consumers who otherwise wouldn't have replaced their existing peripherals, as well as the now large number of long-time users who embraced the cordless proposition early on and are looking for performance improvement and the latest technology.

As you expect, during fiscal 2006, we plan to introduce a number of new innovative cordless mikes and desktops, targeted at the variety of market segments that we believe will continue to drive the mass adoption of cordless.

Internet communications, who (ph) I've long talked about, is not evolving to the point where it offers an intuitive and appealing experience for the average consumer.

The best example of this is with the new video conversations featured in MSN Messenger 7.0, which is powered by Logitech technology.

There is no doubt in my mind that video conversation is set to revolutionize how people use their PC to communicate.

With a Webcam and a headset, MSN Messenger customers in 17 countries can now conduct a high-quality, fully-synchronized, full-screen voice and video communication for free.

Logitech makes the only Webcams that are currently recommended for MSN Messenger 7.0 and all of our Webcams will work with the application.

As the market leader for both Webcams and PC headsets, Logitech is ideally positioned to provide consumers with the tools they need to make Internet video and voice communication an integral part and rewarding part of their daily life.

The runaway success of the iPod and the strong initial demand for the PlayStation portable highlight the attractive opportunities for personal peripherals for mobile entertainment platforms.

Consumers want the freedom to enjoy their digital music and games wherever and whenever they choose and we are well positioned to enrich this experience.

In the mobile music, we recently introduced the mm22 portable speakers for the iPod and MP3 players.

These affordable speakers are the first of several planned offerings for this rapidly growing space.

We're also excited about the dramatic growth potential for the Bluetooth stereo headphones and we'll be there from the beginning to take advantage of it.

Our new family of Logitech play gear accessories was introduced in tandem with the launch of the PlayStation Portable.

Our initial offerings in this space included a stylish PSC case, Stealth earphones and portable speakers.

Every indication so far is that the PSC will be a huge hit and we'll continue to offer products that complement this platform with innovative functionality and unique design.

Turning now to the digital living room, where we've already established a strong presence with gaming console controllers and high-end multimedia speakers.

The penetration of cordless controllers into the PlayStation and Xbox installed base remains quite low, providing strong growth opportunities both during and following the transition to new console platforms.

We expanded our presence in the living room with the Harmony remote, which is now the U.S. market leader in its category.

As pleased as we are with our market position, the fact is we just scratched the surface in the U.S. and our rollout in Europe is at a much earlier stage.

We believe the growth potential for these unique remotes will continue to expand in both markets.

Let me give you an update on our new plant in Suzhou, China.

Construction of this much larger production facility is nearly complete and we expect to be fully operational this summer.

The new plant will provide 30% more capacity than our existing facility and can be doubled beyond that.

This brings me to our outlook for fiscal 2006.

On the sales side, we see continued double-digit growth in retail.

With a typical (ph) Sony PS2 comparable behind us and a number of promising opportunities in the pipeline, we expect a return to growth in OEM.

For fiscal 2006 for both sales and operating income, our goal is to deliver 15% growth compared to the prior year.

Fiscal 2005 was the best year in Logitech's history.

We exceeded our targets for sales and operating income and improved our gross margins.

Our ability to deliver a record operating margin of 11.6% even, while making significant investments to drive future growth, is a confirmation of the strength of our business model and our execution.

We plan (ph) for the new fiscal year with a wide-ranging (technical difficulty) portfolio that provides us with multiple growth drovers and increased revisions (ph).

Our strategy is to compete in areas where we have or can achieve a market leadership and where we can use our scale advantage.

Another key element of our strategy, our ability to be the premium vendor in all categories while maintaining affordable absolute price points will continue to play a key role in our growth.

Even as we broaden our portfolio to support new platforms, our mission remains consistent.

To survive personal peripherals that make the digital experience more personal.

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

Please follow the instructions of the operator.

Operator, we're ready for the Q&A session.

Thank you, sir. (OPERATOR INSTRUCTIONS).

Ted Chung with Bear Stearns.

Yes, hi.

Just two quick questions.

One, what is the -- channel inventory level looks like?

And second, can you provide more colors on the demand levels, particularly by geography?

Yes, on channel inventory, I think we are in a healthy shape compared to last year.

We're very pleased with that.

And as part of the indication of early demand, I can only tell you that our first two weeks of the quarter, so that's all we did, are well ahead of last year at the same time.

That's all I can share at this point.

Okay.

And what about -- any color on demand levels in terms of geography?

In particular, weak regions or strong regions?

We are seeing the same class of performance across the board.

We don't see any difference between our regions.

Okay, great.

Thank you.

Mehrdad Torbati with Deutsche Bank.

Hi, everyone.

I have a question regarding your other retail revenues.

Obviously, it's my understanding that you're consolidating at universal remote control there (ph) -- what else is consolidated in that revenue line?

And can you be a bit more specific about this other revenue line?

And as far as your stock option expansion is concerned, it will be Q1 fiscal '07 when you start expensing your options.

What has been the pro forma impact in the fourth quarter of fiscal '05?

And what is the level of grants on a run rate basis going forward?

The third question related to your level of capital going forward into fiscal 2006.

Do you expect current DSOs inventory turns to be sustainable for the full year?

Mehrdad, let me try to answer these here for you.

As far as what is in other income, you're right.

We have the Harmony revenue is in there.

We also have a small company that we don't talk about too much called 3Dconnexion.

And the revenues for that are also included in other revenue.

How much of that is Harmony?

We're not going to disclose that.

Let me just say this.

We originally -- if I can say this -- we originally said the Harmony revenue for this fiscal year was going to be between 10 and $20 million and we closed the year at the high end of that quarter.

All right.

Thank you.

Let me talk about now expensing of stock options.

The grant levels will be approximately the same -- but bear in mind -- that on an ongoing basis.

But bear in mind as our income improves, the percentage of income, of course, is going to be declining.

So yes, we will not be expensing stock options in this fiscal year.

You will see, when we publish our 20F that the impact would have been -- it would have lowered -- slightly lowered this year's operating income, or excuse me, net income, by 12.4%.

Full-year, right?

Yes.

This is an improvement over last year.

Okay.

And in terms of working capital -- do you think the current ratios you have are sustainable going into fiscal '06?

I continue to be impressed with the performance on working capital.

As you can see, we've been able to improve it year after year after year.

There's got to be a limit to that.

But I'm very pleased with this performance.

There's no reason to expect it to get worse.

I think these performance levels are sustainable.

Even though you're expanding your product portfolio and you are having more basically consumer options?

Yes.

Yes, I think they're sustainable.

Chris Kinkade of S.G.

Cowen & Co.

I was wondering if you could comment on the corded versus cordless mix in the OEM segment and where you expect the mix to trend in fiscal '06?

As I said in my remarks, we did very well AND cordless and OEM.

And by the way, just a point of note, we did spectacularly well in cordless mikes in retail and spectacularly well in cordless mikes in OEM.

I think that's a lesson to be learned.

As we broaden the presence of cordless in OEM that even strengthened the visibility and interest of cordless in retail.

That's an interesting point.

We've seen that in corded many years ago.

We're seeing that in cordless right now.

It is still not the majority of our OEM sales.

It's still a fraction of it.

I think it's around 30%, if I'm not wrong.

And I'm sure that Kris on the other side of this line will correct me if I'm wrong.

We expect that to slightly increase moving forward because there's more and more interest.

So that's all I can say.

Great.

And then, I guess for Kris, what is the CapEx budget for fiscal '06?

Can you comment on that?

Chris, what you should see is it will be higher than last year.

One of the things to bear in mind is last year, we spent -- we spent on (ph) capital expenditures about $10 million for our new factory in China.

There's going to be an additional $10 million this spring.

So you'll see a small increase overall.

Can Elbi with Cheuvreux.

A couple of questions and let's take them one by one if that's okay with you.

First, I just want to come back to margins.

I hope I'm not reading too much into your guidance because obviously, it's not an exact science.

But if I remember correctly, in January, you talked about the discretionary investment program slowing down into fiscal '06.

And again, at least looking at the headline figures for fiscal '06, it would imply that you're seeing flat margins in '06.

And obviously, I mean we know that there's leverage in your model and that the program is slowing down.

I mean somehow, the margins should have been going towards your 12% mid-term target.

So I just want to understand if anything has changed from three months ago and why the marketing and selling as a percentage of retail sales should stay a 16.5 if there's a slowdown in this program.

All right.

Let me start with the -- (technical difficulty) you said one question (technical difficulty) 72 questions in one.

So let me talk about the guidance and about the margins.

We have said all over the place and ever and ever and on and on that our targeted brackets for gross margin is 32 to 34%.

We're not kidding.

That's what we believe.

And we believe that because the dynamics of the competitive market and our position in different categories will make this margin (indiscernible).

We ended fiscal '05 with 34%, the top of that bracket.

We never said that that is sustainable.

We just want to play with that flexibility because we will always privilege top line growth over gross margin.

That said, it is true that we said and we still believe that our growth in operating expenses will stabilize and equate the growth of our gross profit, as opposed to be higher as it has been this past year because we made the investments that we said we would make.

Therefore, we are approaching the 12% goal of our operating margin.

We are kind of getting close and making love with it a little bit, but that's what we expect now.

We expect that to remain stable at this point at least as far as projections are concerned.

So nothing has changed.

The only thing that has changed, in fact, from three months ago to this guidance is that three months ago, we said that the fiscal year would end with a growth of 15% of both top line and bottom line.

But we ended up higher.

And this year, we are actually -- and we said then that we expected the fiscal '06 to have similar growth.

Now we are sticking with the 15 to 15 (ph), which we said three months ago in spite of the fact that both top line and bottom line are higher.

So if you want to read something in this, it's a slight and marginal increase in our guidance.

If you want to be very arithmetical.

But at the end of the day, what matters to us is that we are set to a midteens growth rate, both top line and bottom line.

We're indicating that we are interested in top line growth and that we'll do sacrifice in margin if needed and gross margin if needed to get there and we are just set to execute.

At this point, from now on, it's execution that will matter rather than the arithmetics of the guidance.

Can you confirm one of your comments that was on the wire that you expect 13 to 15% top line growth for the Company over the next five years?

I said midteens for the next five years.

I said that we are on track for our $3 billion goal in five years.

Okay.

Just maybe one other thing on that.

There has been -- correct me if I'm wrong, but there have been some bottlenecks in productive development in fiscal '05.

I'm just looking at the mm22 and the fact that you have to outsource this to a Chinese company.

The investments that have basically been ongoing in fiscal '05 -- can you just at least give us some metrics in terms of what that's going to do to productive development -- maybe the size of the team and maybe the time to market in terms of months maybe?

I am not sure about what you're referring to specifically about the bottlenecks -- that we chose to answer the market of the iPod speakers soon with a source product.

We've done it in the past and there's nothing with that.

It's actually been very well-received out there.

As I said in my remarks, we are planning more and just wait and see.

I can't disclose the details of what you will see, but we're very excited about that.

We have significantly increased our bandwidth in the R&D.

The underlying figures that I think are impressive is that we now have more than 550 engineers across the world.

We've added close to 200 this year.

And of course engineers don't get home and get productive the next morning.

So we were spreading (ph) I wish.

That's not the way it works.

But I think we have the firepower to accomplish the product development goals that we have across the wide (ph) product range here.

So I think for one second, I'd say you anticipate to make investments.

And then you know what happened this particular time, I think we did a very good job in equipping ourselves to do what we need to do in the future.

Maybe just one last very small thing -- have you seen any positive feedback flowing into your numbers after the MSN 7.0 launch two weeks ago in terms of Webcam sales eventually (ph)?

That's very early.

I think it will take some time to see that happening.

Again, as anxious as we are to see the cause and effect impact of certain things, we have to be patient.

I think that the Webcams will be a growth driver this year, but for example, we start already with an impossible comparable in Q1.

Q1 was the best quarter ever last year for Webcams everywhere.

So we'll have to struggle to get there, but when we get - -when we look at the long-term impact of this application, I couldn't be more excited.

And remember, it's not just Webcam.

It's headsets.

Thanks a lot.

The combination of the two.

John Bright with Avondale Partners.

Thank you.

Looking forward to the shareholder meeting.

Strategically, what are you thinking about for the use of your cash?

Are you thinking about a stock split?

And then also, is there discussion on initiating a dividend?

Well, and let's not comment on stock splits end let me move on the question of use of the cash.

We continue to generate a substantial amount of cash.

We are not religious for or against dividends.

This is an option that we've always considered and we'll continue to consider.

For the time being, we see that stock buybacks and being ready for possible small, medium-sized acquisitions has paid off in the past and we don't see any reason why in the short term, this shouldn't be the strategy for the next year.

But if I were you, I would just wait until we have the Board approve the proposal for the shareholders and you'll see what we plan for those.

Okay.

And then on more of a numbers standpoint, Kris, what was the employee headcount at the end of the quarter?

It's somewhere in the range of 6,000.

Thanks.

Nicole Burth Tschudi with Lombard Odier.

Good afternoon.

I would like to come back to the OEM cordless mice sales.

Is it right to assume that you generate a higher ASP and is the conclusion valid that you probably get a higher profitability from that?

Certainly true for the ASP.

I wouldn't comment on profitability.

Because our OEM business is extremely cost and price sensitive and it's part of our business that it's more intensely cost comparative and I wouldn't discuss the margins that we have.

So certainly it's higher priced, which helps revenue, yes.

Okay.

So then, to combine this with the margin question which was asked before, you mentioned a bandwidth of 32 to 34 gross margins.

So, but the lower gross margin have anything to do with higher growth in OEM again?

Not necessarily has anything to do with pricing strength in your retail business?

It's very hard to answer your question.

First of all, no, the breadth of the bracket has not much to do with the mix of OEM retail.

We expect OEM to grow, for example, next year.

But we expect retail to grow faster, frankly.

It has much more to do with the way the mix played across the product portfolio.

Every time you hear a question on margin that refers to pricing pressure, I kind of smile a little bit because in truth, that's not what drives the margins.

The mix of product lines as well as the mix within product lines is more important.

In fact, Kris and I discussed and we're going to dedicate a little bit more time on this in detail at our meeting with investors and hopefully you will be there in London to explain the dynamics of our gross margin.

But to answer the question more simply, no, the bracket is not driven by the mix of retail in OEM; it's much more driven by the dynamics of our growth in each individual product line in retail.

Okay.

Then in Q4's gross margin, was there any kind of runoff (ph) in there?

There's always runoff, but nothing of particular --

Nothing else?

Nothing of particular mention this (ph) time.

Okay.

I hate to come back to this, but the share buyback program, and particularly the cancellation of shares.

Some other people already mentioned it before, you have this tremendous cash flow generation.

When, finally, do we see you guys crossing the 10% hurdle rate in terms of treasury shares and start to cancel shares or open up the second trading (inaudible)?

You will see that once we buy another 2.4% of our sales (multiple speakers).

We use -- treasury of Logitech is describing this program.

We'll do it prudently.

We do it opportunistically.

We have another $60 million -- roughly $60 million worth of authorized buyback.

And we'll see what happens after that.

I would refrain from making predictions as to when and if we're going to take the 10% or not.

So it's very tactical (ph) and it's very -- it's very dependent on the dynamic of our buyback.

The other point you shouldn't forget is that we have a convertible out there and we want to make sure that that's covered too.

Yes.

I guess for you it might be tactical, but for shareholders, if you might have a dilution going forward of 13% from your share option plan, it's a bit more than tactical.

Well, I think that's kind of a little bit of a misleading statement.

I think that first of all, our run rate in terms of percentage of options granted is nearing 2.

It's actually, over the long-term is going to go below that.

So I would say that we are more than covered in terms of treasury in what we have today.

We have not issued one extra share, over many, many years to cover stock options.

We have bought our share back at great prices.

So in terms of the way the cash cost of all this program is really phenomenally low compared with the incredible -- although (indiscernible) intangible benefit that is provided to Logitech.

Having a set of motivated employees, there's nowhere where the objective is -- you can't measure.

I cannot report it on an income statement.

Believe you me, it's important.

Last question if I may.

In China, you mentioned in earlier calls that it will take a few quarters until you get growth to where you would like to see it.

Now in the meantime, you have -- there is a bit more experience there.

What is your thinking there?

Is this a problem of general consumer behavior, like growth is still behind?

Or is it exclusively due to let's say wrong provisioning in terms of distribution channels?

It actually is both.

In a way, I suggest -- you're right.

We are now getting our grips around China much more; and there have been two quarters in which there's a significance (ph) in growing, like (ph) small growth -- less growth than we would like to see.

But we are improving our distribution situation in China.

That helps.

We are cutting a number of layers, which means that our inventory flows better in a way that is more controlled.

There is another thing that you have to realize.

How come did we do so much better in what people consider mature markets?

How come that we can grow 30% last year in Europe and the U.S.?

Look at the PC industry.

Look at the cell phone industry.

These are not numbers where they are like 15 years ago.

Now the truth is that wherever the PC is saturated, we do great.

Wherever the PC is still growing and is not completely present in the homes, etc., CapEx (ph) will struggle.

So to us, China would represent the long-term opportunity as the PCs make it in the home of the Chinese.

And that the dynamic that has worked and is working in the U.S. and in Europe will work there.

So it's a combination of maintaining your premium positioning, not dilute the brand, exploiting all the opportunities that exist today, which I believe we don't yet do fully, but also realizing that our growth in China will go together with the growth of the PC in the homes in China as well as the growth of broadband.

And those lag, while they are very, very established in both of our largest regions.

So that's the current state of our analysis.

I still believe that China, because it's small, can provide us with a sustained 30% growth over the next five years, which is really growth.

But China is not the dream that it is today for the PC makers and cell phone makers because that's the only place for them to go.

We are fortunately a much larger more (ph) mature market to continue to exploit.

Thank you.

Charles Elliot with Goldman Sachs.

Hi.

First, congratulations on these results.

I'm going to repeat another question about the operating margin guidance.

And I appreciate that you don't have a crystal ball, but guiding to a constant operating margin rather than an up operating margin, I sort of heard three items.

You want to have the flexibility and don't know fully what the competition will be trying to do to you in the market next year.

You want room for the marketing spend and you would like to be a little conservative.

Is that reasonable?

That's a reasonable characterization.

We can speak for hours.

And in fact, to correct a statement that you made at the beginning, I do have a crystal ball;

I just don't share it!

I'm just kidding.

I think those (ph) of the points you mentioned are fair.

Right.

Thanks.

Barry Ehrlich with Helvea.

Yes, hello.

Is the quarterly decline in video that you experienced due to some sort of market share loss?

Or is it due to lower demand from a year ago or something else?

And if it is lower demand, what is driving that?

And can you give us an idea when we should expect, let's say by Q2 or Q3, a return to growth in the retail video segment?

Thank you, Barry.

As you've heard from Chris, our performance in unit was actually quite good.

And our performance in revenue was not good and was a decline quarter-over-quarter -- I mean year-over-year in the Q4.

And the reason that Kris mentioned it is the real reason.

Q4 last year was the introduction of QuickCam Orbit -- $129 high end premium -- lots of selling at that time, and of course, we didn't have some equivalent in this time.

So the market and the demand migrated more into the sort of entry-level mass adoption kind of Webcams.

You can bet on the fact that we're going to have both moving forward in fiscal '06.

We're going to have exciting high-end Webcams for this Christmas season as well as an even stronger entry-level Webcam offering than you see today because we do expect that MSN 7.0 will make more and more people interested in this application.

You asked when are we expected to see -- our projection is that Q1, because of this last (ph) comparables (ph) of Q1 last year will not be necessarily a quarter of growth for Webcams, but then, the total year will.

And in fact, this is one category that I'm personally more bullish about.

Okay.

And can I have a follow-up on gaming.

Is it fair to say that the growth -- the phenomenal growth -- that you've experienced is due to a very large number of new products that you put on shelves?

And if so, should we expect that growth rate to really rather cool off considerably over the next year?

Well, the answer is no and yes.

Let me answer it.

The actual number of new products we issued in gaming is not so high this year.

The growth is totally driven by 2 SKUs.

The cordless gamepad for PlayStation2, the cordless gamepad for Xbox.

These two SKUs have sold 1.9 million units, as I was mentioning during my prepared remarks.

And we estimate at this point that the penetration of cordless controllers in the base of Xbox and PlayStation2 is what, 3%?

So this can't (ph) continue.

The other question you asked is can these growth rates be sustainable?

If I came here and told you that 172% growth is a sustainable number, I would be lying.

Even Apple says that the growth of iPod is not sustainable at 70%.

So I think that those growth rates may not be sustainable, but the cordless -- the growth in gaming has much less to do with the number of products introduced and much more to do with the appeal of cordless (technical difficulty).

Okay thank you.

Martin Whitbred with Morgan Stanley.

My question has been answered actually.

Oliver Maslowski with Bank Vontobel.

Yes, good afternoon, everybody.

Two questions.

Question one regarding Logitech VideoCall users, how many use that device and what are the growth rates for this in the next couple of years?

My expectation -- I mean the number -- I don't have the number with me and maybe Joe has it.

But my expectation is that VideoCall was the great operative to MSN 7.0.

It is certainly a very viable application for people that don't do instant messaging and (indiscernible) a dedicated application for talking and seeing their buddies.

And I'm a user of VideoCall personally.

But the vast majority of the demand around that application will be on instant messaging, and believe it, it's free.

That helps.

So the reason why we ship VideoCall, which is, by the way, the core fundamental architecture that we share with MSN 7.0.

So VideoCall was some showcase that actually was one of the reasons that convinced MSN to do what they did.

And so it's served its purpose big time.

It is available.

It is supported.

Some people use it.

But it's a fraction of a fraction of the millions of people that use Instant Messenger with MSN.

Second question would be, how does your order book from U.S. retailers look like?

We've seen a slight drop in consumer confidence in the first quarter.

We, as you know, we're normally not dramatically impacted by the cycles of consumer confidence because of our price points.

And I can only tell you what I just said in my remarks, which is we see our sales pretty brisk in the U.S. and in Europe and in the rest of the world for what matters.

Our inventory level at the retailers are better -- in better shape at the beginning of Q1 last year.

So we at least -- the signals that we received are not particularly concerning on the impact of the alleged consumer sentiment issues in the United States.

Last question would be your marketing partnership with Skype, has it influenced the number of Webcams you sold?

Are you satisfied with that partnership?

We're very happy with the partnership.

It's actually not applicable to Webcams today.

It's applicable to headsets.

And Chris said, the PC headsets has been a big component of our audio growth.

I expect that in general, Voice over IP will have a huge -- the combination of Voice over IP as people refer to it, Skype for other services, as well as MSN 7.0, which is video and Voice over IP if you want.

So it will be a big driver of headset and Webcams in general.

Our Skype partnership is currently a headsets partnership.

We are looking forward to working with Skype and others.

There is so much interest in video and audio that we could spend another two hours talking about the opportunities in that space.

I will leave it at that.

I would say that everybody wants to do video and audio for the time being.

Microsoft is the only one that does it well because it's powered by our technology.

Other things could happen.

Thanks a lot.

(OPERATOR INSTRUCTIONS).

We'll take one more question, operator, just in case.

Roger Steiner with Kepler Equities.

Hi.

Just one last question on the Harmony remote control.

I wonder how long it's going to take to really get you the necessary distribution channel active (ph) in Europe to launch a product in a broad range.

How long it's going to take?

We expect -- there's a number of distribution arrangements and agreements already in place.

We wouldn't be surprised to see Harmony in the major European retailers as early as this summer.

So I believe that to simplify the answer here, that this Christmas season is, among other things, is also going to be a Harmony season in the U.S. and in Europe.

Thank you.

All right.

We'll keep it at that.

I just wanted to make a final comment on the strength of our balance sheet and the significant generation of cash flow from operations.

The consistency of our gross margin, our ability to extend our scale advantage over the competition in product development and marketing.

These things, I think, position Logitech uniquely in the technology landscape, as you know.

We close another banner year for us.

This is our seventh consecutive year of double-digit growth and probably you're tired of hearing me repeating it.

I'm not tired to repeat it.

We are more prepared and eager than ever to pursue our growth objective and build a really long-lasting franchise here.

So thank you for your participation today and we really look forward to seeing all of you at our investors' meeting on May 5th in London.

Thank you.

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

This concludes your presentation and you may now disconnect.