羅技 (LOGI) 2006 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the quarter two Logitech International earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Joe Greenhalgh, Vice President of Investor Relations.

You may go ahead, sir.

Thank you.

I would like to welcome you to the Logitech conference call to discuss the Company's results for the quarter ended September 30, 2005, the second quarter of Logitech's fiscal year 2006.

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 been made under the Safe Harbor of the Securities Litigation Reform Act of 1995, including forward-looking statements with respect to future operating results.

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

Factors that could cause actual results to differ materially include those set forth in Logitech's annual report on Form 20-F dated May 18, 2005, and subsequent filings available online on the SEC EDGAR database and in the final paragraph of the press release reporting second-quarter results issued by Logitech and available at logitech.com.

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

The forward-looking statements made during this call 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 website.

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

Joining us today from London is Guerrino De Luca, Logitech's President and Chief Executive Officer; and here in Fremont, we have Kristen Onken, Senior Vice President 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 are delighted with our second-quarter results, as we delivered our best Q2 ever for sales, operating income, and net income.

The gross percentages that follow are in comparison to the second quarter of fiscal 2005.

Our sales grew by 28% or $93 million to reach $422 million.

Our retail business continued to deliver strong growth, with sales increasing by 29%, to $369 million, driven by outstanding performance in audio and a significant contribution from video and console gaming.

Complementing the growth in retail, our OEM sales grew by 19%, reflecting robust demand for our mice.

Gross margin was 31.4%, down from 33.2% last year.

The explosive growth in our sales of audio products led to significantly more audio in the product mix.

Audio has traditionally been a lower gross margin segment for us; and I am pleased to say that we continued to achieve gross margin improvements in the category.

Our gross margin for the quarter also reflects the launch of a number of new retail products that incorporate advanced and initially higher-cost technology.

For example, several of our new cordless mice feature unique 2.4 gigahertz micro receivers that deliver superior interference performance and mobility convenience, and second-generation laser technology for improved tracking and lower power consumption.

As is typical with our business, we expect that as we ramp up the volume for these new products, our unit cost will decline.

Even with these factors, we still grew our gross profit by 21%, outpacing the 18% growth in our operating expenses.

The combination of strong gross profit growth and the smallest year-over-year increase in our operating expenses in the last six quarters led to a 29% growth in operating income, as well as an improvement in our operating margin to 9.1% of sales.

Our net income grew by 39%, boosted by $3.2 million in other income.

This primarily reflects gains related to the exchange rate movements, with 2.2 million of the total specifically coming from the revaluation of the Chinese yuan.

Let's move to the balance sheet.

Our cash position was $255 million, up by $61 million compared to the prior year.

Our cash flow from operations for the quarter was a -25 million, very similar to last year's -23 million even with a much larger sequential increase in inventory from June to September this year.

Our inventory was $267 million, up by $78 million from June of 2005 and by $72 million from September of 2004.

The increase reflects our plan to ensure adequate supply of our new products is available to fulfill demand both at the start and on through the anticipated reorder cycle in what is our biggest quarter of the year.

Inventory turns were 4.3 times per year, similar to the 4.5 turns as of September of 2004.

Accounts Receivable were $297 million, up from 215 million last year.

Our Days Sales Outstanding were 63 days, slightly higher than the 59 days achieved in September of 2004, because a number of this year's new products didn't start shipping until the last few weeks of the quarter.

In August, we announced we are exercising our right to call for an early redemption of all of our outstanding 1% Convertible Bonds due June 8, 2006.

Bondholders may elect to convert the bonds into Logitech registered shares at any time until Friday, November 4, 2005.

At quarter end, roughly 1.5 million shares out of the total of 5.5 million shares has been delivered to fulfill our conversion obligations; and the remaining value of the Convertible Bonds was $101 million.

We intend to fulfill all conversion obligations through holdings of our own treasury shares.

Let me give you an update on share repurchases.

During the second quarter, we repurchased 570,000 shares for approximately 27 million Swiss francs, or US$21 million; and we now own approximately 6% of our shares outstanding.

Roughly 18 million Swiss francs or $14 million remain under the current share repurchase program, and once we have completed this program we plan to begin repurchases under our 300 million Swiss franc or $238 million program.

You can view you regularly updated information on both share repurchases and shares delivered for bond conversion at the recently improved and expanded Investor Relations section of our website.

Let's look more closely at our retail business in the second quarter, where sales grew by 29% and unit shipments increased by 30%.

We achieved strong growth in all regions, with sales in Europe up by 30% on a 28% increase in units, and the Americas delivering 28% sales growth with 29% more units.

The growth in Europe and the Americas was driven by audio, with solid contributions from video and console gaming, with the Americas also seeing a big impact from the success of the Harmony remotes.

I am pleased to say that our fastest-growing region was Asia-Pacific, as sales increased by 31% with particular strength in mice.

Sales in our cordless product family increased by 9% with units up 19%.

The growth was driven by our cordless mice; and sales grew by 28% and units by 33%, fueled by the launch of a number of innovative new products during the quarter, including a solid expansion of our notebook mobile mouse line.

Sales of our cordless desktops declined by 4%, while units grew by 6%.

The decline was in the high-end category, reflecting strong demand in the sales primarily due to the transition of our line of new desktops.

In addition to completing the phaseout of our older products, a number of our new desktops didn't begin shipping until the close of the end of the quarter.

Sales in the retail corded category grew by 3%, and units were up by 15%.

The primary growth driver was corded mice, with sales growing by 9% and units by 19%, reflecting the continued success of our high-performance mice targeted at the PC gaming segment.

We returned to strong growth in retail video and delivered our best quarter ever, with sales growing by 28% and units by 47%.

In addition to continued success of our mass-market webcam offerings, we also achieved growth in the high end of the category, reflecting strong demand for the recently launched QuickCam Fusion webcam.

It was another record-breaking quarter for retail audio, with both sales and unit shipments reaching an all-time high as sales more than doubled and units grew by 62%.

We enjoyed our best quarter ever for speakers, with sales growing by 95% and units by 87%.

Our success in this category reflects continuing strength in PC speakers as well as the initial success of our iPod speakers.

Our great performance in audio went well beyond speakers.

We more than doubled our sales of PC headsets, establishing a record high for the category for the second straight quarter.

And we saw a significant contribution from sales of our wireless headphones for the iPod and MP3 players.

It was a solid quarter for retail gaming, as sales grew by 24% and units by 58%, with the growth coming entirely from our success in the console space.

Sales of peripherals for game consoles were up by 62%, with units more than doubling.

We saw strong growth from the sales of console steering wheels.

But the best news in the category was the success of our offerings for PlayStation Portable.

In particular, we continued to see very strong demand and high attachment rates for PlayGear Pocket, our protective case for the PSP.

We continue to see accelerated demand and sales for our Harmony remotes.

These products made a solid contribution to our growth during the quarter and were responsible for the vast majority of the $11 million increase we reported under the retail other category.

As a comment on our OEM business, where our sales increased by 19% and units by 33%, our mice sales to PC manufacturers increased by 27%, establishing an all-time high in the category for the fourth consecutive quarter, and unit shipments grew by 34%.

Before concluding my comments, I want to remind you that we will be holding a midyear investor day on Wednesday, November 2, at the Langham Hotel in Boston.

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

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

Thank you, Kris, and thanks again to all of you for joining us today.

I'm very pleased with our best-ever Q2 results, which demonstrate that the investments we made to accelerate growth continue to pay off.

As demand exceeded our expectations, the powerful combination of double-digit growth in both retail and OEM allowed us to deliver our highest quarterly sales growth in more than three years.

Even with a primarily mix-driven decline in growth margin, we were able to grow our gross profit faster than our operating expenses, leading to an improved operating margin, as we continue to execute our strategy of delivering solid profit growth.

There were a number of highlights during the quarter, starting with the continued superb market response to our broad range of audio products, which we attribute to the growing popularity of the MP3 music format, the iPod, and the widespread interest in voice communication over the Internet.

To put this performance in perspective, this was the fourth consecutive quarter where we have established a record high for retail audio.

And our sales through the first two quarters of the year have more than doubled compared to the prior year.

At the same time, we have continued to improve our gross margin in the category, and we expect to see further improvement through the remainder of the fiscal year.

I am very pleased with the return to strong double-digit growth in the retail video category.

The increasing use of video communication over the Internet, combined with the launch of our great new webcam lineup, not only gave us our largest video quarter ever, but also led to our best sales growth in the category in the last four quarters.

I'm excited about the accelerating sales momentum of the Logitech Harmony remotes and, in particular, with the response in North America to the Harmony 880.

This color screen product has received more accolades than any product in our history and deservedly was one of Logitech's top sellers during the quarter.

When you consider that we have just begun to sell our Harmony products outside North America, it is clear that the potential for this franchise is quite substantial.

Another highlight of the quarter was our successful launch of a large number of new products.

The operational and logistical complexity associated with the worldwide rollout of many new products across multiple categories is significant, and our ability to manage this complexity was a major enabler of our strong top-line performance.

As a final highlight, I am pleased to announce that Gerald Quindlen has joined Logitech as our Senior Vice President of Worldwide Sales and Marketing.

Gerry was with the Eastman Kodak Company for 17 years, where he most recently served as Vice President of Global Sales and Operations for the Consumer and Professional Imaging Division.

I am looking forward to Gerry's contribution as a key member of our senior executive team.

Let me talk about our goals for the remainder of fiscal 2006.

We are riding the wave of significant trends, the growing popularity of digital music, the pervasiveness of broadband connectivity, and the increasing role of the PC as an entertainment and communication platform.

Our innovative, broad-ranging product portfolio positions us quite favorably to continue to take advantage of the growth opportunities provided by these trends.

The foundation of these trends is the increasing penetration of broadband into the home.

Faster connections enriched a variety of computing activities, including music and video downloads, video communication, Internet telephony, online gaming, which naturally leads to an ever-growing usage of the PC.

We have been very pleased with the initial success of our headphones and speakers for the iPod, which has come to symbolize the enormous appeal of the digital music proposition -- the ability to listen to your music whenever and wherever you choose.

Our broad range of audio products, including wireless speakers and headphones, as well as our unique and user-friendly wireless music systems, provide consumers with the ability to listen to their music in style, on the go, around their PC, or anywhere in their home they choose.

The opportunity in this category is huge and it's only going to get bigger.

The landscape for Internet-based communication is changing rapidly.

In recent weeks, we have seen eBay acquisition of Skype, the planned integration of Microsoft and Yahoo's instant messaging platforms for text and voice, as well as the ongoing efforts of cable companies and telcos to take the lead in offering voice over IP services.

As these and other well-known companies actively develop the infrastructure, services, and applications for Internet-based communications, I am pleased to note that as the leader in webcams with integrated microphones and in PC headsets we are uniquely positioned with an appealing product offering, market leadership, and an attractive brand to be the personal interface supplier of choice in this growing market.

We're focused on leveraging our strength in the month to come.

The more consumers use their PCs, the more likely they are to operate their peripherals, starting with the ones that they touch the most, mice and keyboard.

We rolled out an innovative new line of cordless mice and cordless desktops during the second quarter.

Many of these products featured key differentiating features, such as second-generation laser technology, 2.4 gigahertz micro receivers, LCD displays, two-way communication, and smart-power management.

Our offerings provide the consumers with an affordable, comfortable, and enjoyable way to enrich their computing experience.

So that brings me to our outlook for fiscal 2006.

We entered Q3 well positioned for the 2005 holiday buying season, with innovative new products recently launched across our product portfolio and a higher backlog of retail orders compared to last year.

For the first two weeks of the quarter, our retail bookings and shipments are also higher than last year.

Our priority continues to be to deliver sustainable operating income growth by driving our top-line performance.

Based on our first-half results, combined with expectations for continued strong demand in the second half of the year, we are increasing our goals for sales and operating income.

For fiscal 2006, our goal is to deliver 18% to 20% sales growth compared to the prior year, and operating income growth in excess of 15%.

We expect our gross margin in the second half of the year to be higher than it was in the first half, primarily due to continued improvement in the audio category.

We anticipate our product mix in the second half of the year will be similar to the first half, with our audio offerings leading the way.

For the full fiscal year we now expect our gross margin to be at the low end of our long-term range of 32% to 34%.

The first half of fiscal 2006 was a great start to the year.

As just one indicator of the strength of our performance, our top-line growth through the first six months of the fiscal year is the best we have delivered since fiscal 2001.

The accelerated growth that we have achieved this year is exactly what we intended when we ramped up our investment during fiscal 2005.

Also as intended, in addition to our strong sales performance, we also held our operating expense growth lower than our gross profit growth, which has been the key driver of our increased profitability.

We enter the second half of the year with a strong lineup of innovative new products well positioned to leverage the trends in is digital music, broadband connectivity, and the expanding growth of the PC.

As always, we remain focused on executing our plans and achieving our goals for the full fiscal year.

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

Please follow the instructions of the operator.

(OPERATOR INSTRUCTIONS) John Bright with Avondale Partners.

Thank you.

Kris, Guerrino, on the consumer confidence issue, a lot of people were thinking the top line might be weak because of consumer confidence, energy, and interest rates costs.

Could you give me your take on what you're seeing out there related to the consumer?

Well, historically, our performance has been immune in a way from the vagaries of consumer confidence.

Our explanation to this is that people might move from higher-ticket item purchases to lower-ticket item purchases; and that in general benefits Logitech.

You have to choose between buying sort of a midpriced TV or a good mouse, and you choose a mouse; it is good for us.

When they move down in the sort of price range, they tend to buy the best in the lower categories; and we tend to be the premium priced in an affordable category.

So we are not readers (ph) of consumer confidence; but historically, that has not impacted our business.

You can see this quarter, if you believe the fact that consumers are concerned, which I believe is true, that our top line has not suffered from that.

A second question, when I think forward, when I think into calendar year '06, and I start thinking about the incremental improvements in the mice and in the keyboards, could you give me some idea of what type of incremental improvements I might be thinking about?

You know, we tend to shy away from announcing products that are not there yet.

I can tell you that we have just finalized our roadmaps for fiscal '07 across the product portfolio, so products that we will see, sort of starting this summer and way into the fiscal year.

I am as excited as I have ever been, particularly around the lines that you have just mentioned.

But I would keep it for myself.

All right.

Kris, two accounting questions or numbers questions.

One on CapEx.

Are you still -- what are you thinking for fiscal year '06? 40 to 50 million?

Yes, that is a good range.

One of the things, of course, John, that happened this quarter is the remainder of our new Suzhou factory, that got capitalized this quarter.

So the rate of capital expenditures should go back down on the subsequent quarters.

Then any initial thoughts on option expense, when you start that in March -- after March of next year?

Yes, let me just give you a bit of perspective about what it would have been this quarter, had we done it this quarter.

As you know, we're going to begin in fiscal 2007.

But had we expensed our stock options this quarter, it would have been about roughly $3 million or 8% of our net income.

Okay.

Then Kris, I'm certainly very sorry to see you going to retirement.

Happy for you, but any update there on your replacement?

Let me ask Guerrino to talk about that one.

You don't want to talk about your (multiple speakers), right?

That's right.

Yes, I think I would echo you.

We're very sorry to see Kris leave, and we are very happy for her.

We have interviewed great candidates; and of course we can not -- we can only have a great CFO to replace a great CFO.

I would not venture a date.

I am hoping to have somebody on board before the end of the year.

But we will not settle for less than a great person.

So I see a lot of interest in joining us, and we seem to be attractive, but we can choose and we will.

Thanks.

Thank you.

Ted Chung with Bear Stearns.

Just a couple of questions, in terms of the gross margin, do you expect that to trend back up to the high level of your long-term guidance, as the gross margin improves on the audio products?

As we said, as I just said, we expect for this fiscal year to end sort of within the bracket, but on the low end.

We haven't made any projection moving forward.

But rest assured that our focus on cost is number one, and I would leave it at that.

It is too early to talk about where we will be exactly.

I consider gross margin a secondary metric for us.

Our primary metrics are EBIT; of course net income; and they will be driven particularly by our ability to maintain our OpEx growth at or below our gross profit growth, which we have done this quarter.

Margins will fluctuate.

We continue to believe that 32, 34 EBITDA is a bracket in which -- where we will stay.

Where exactly they will position themselves, it is too early to tell.

Just to touch upon the holiday season, you mentioned that the backlog was fairly strong.

DO you see anything to indicate that the holiday season demand may be -- can you characterize that at all, your first impression?

It is still very early, but --?

It is very early about it.

I think what we said all we know now, which is that our backlog was strong and also our first few weeks were very strong, in additional bookings and as well as shipments.

Stronger than last year.

But beyond that, I can't say.

Okay.

Just one lastly.

Can you provide us an update to your China plant and what type of utilization rate you're getting from that plant?

We have -- the plant is up and running.

We just formally opened it just a few weeks ago; but it's been operational for a while now.

It has 30 lines, and many of them are you used.

It has also additional special sort of smaller cell operations to manufacture lower-volume products.

We don't have a capacity percentage that we disclose, but we are -- they're fully capable of doing what they need to do this Christmas season.

Okay, thank you.

Rob Stone with SG Cowen & Co.

Congratulations on another great result, Guerrino and Kris.

Guerrino, I wonder if you could comment on your view of the upcoming console gaming cycle, and how you think that will affect the category for Logitech?

Well, we're very excited about what is happening in gaming.

As you have seen, we had a great quarter for console gaming again.

We tend to be doing better and better as installed bases are bigger and bigger.

We continue to do very well in PlayStation2.

We have done very well on PSP because we had the ideal attachment product at purchase.

The pocket case, protective case, is something that people buy, because they buy a very precious product that has no protection; and so they like what we provide.

But in general, we tend to do better when platforms are established.

So we expect to continue to do very well on PlayStation2 until PlayStation3 launches, and even beyond that.

We will have product for PlayStation3 and for Xbox 360, of course.

But we will see more better results on the new platforms as the first initial sales happen, as the installed base starts to growth.

A question regarding the OEM business.

Your unit growth there was considerably stronger than the overall unit growth in the category.

With the mix of PC units actually shipping shifting towards notebooks, which don't bundle a mouse, you must be either gaining share or gaining penetration.

Can you comment on that?

It's a bit of both.

We gained a little bit of share in some accounts where we were not completely dominant; and we have also added a few products, such as keyboards in some cases.

So it is a combination of both.

Can you comment on the competitive landscape?

Where you think, if you look across your broad product categories, where you think you are best positioned or where you have the strongest competition?

I would start with a question on Harmony.

Although it is a small category, it seems like a pretty strong unique product.

Yes, Harmony is really unique across multiple dimensions.

This is a category where we were nobody; a category with big players.

Kind of a unique situation.

We thought we could get in because we were really bringing something revolutionary to the category.

Our initial sales proved that.

We have gained a tremendous amount of share against everybody in the United States.

In the programmable learning remotes category we now, according to NPD, we now have more than 50% of the shares in retail, which is dramatic.

So there we basically redefined what people should expect from a remote control.

In general, competition is very strong everywhere.

People are attracted by this category.

We keep or improve our share position in general across the majority of the category.

We fight everywhere.

I would say that competitive pressure is as strong as it has ever been, but it has never been absent, so this is the name of our game.

I would not name a particular category.

Our results are built every day by fighting on every category.

So I don't -- I would not characterize any specific competitor or category as more or less competitive than another one.

Given the big strength in audio, what would you estimate your share is overall in the category?

Who is your closest competitor?

I would say that on the PC side, we are the market leader.

PC speaker side we are the market leader.

We are the market leader and our share, depending on where you look, is between 30% and 35% in Europe and the U.S.

Very fragmented category, so great opportunities for consolidation.

In PC headset, which has been one of the giants of growth in the quarter -- it more than doubled, and it is all driven by voice over IP -- we are the market leader, and we are around 45% in Europe and in the U.S.

We are just beginning our entry into the iPod MP3 speakers range, so too early to tell where we are.

The initial response to our speakers for the iPod has been good.

But we will see what happens at Christmas season.

With respect to who is chasing you in those categories?

The usual suspects are playing.

In PC speakers it is Altec, now Plantronics, and Creative.

In the iPod speakers it is Altec/Plantronics and Bose.

Thanks very much.

Chris Gretler with Credit Suisse.

I have just a few questions.

First with all due respect to gross margin, you mentioned now some positive impact now on other income from the yuan re-valuation.

Is there any negative impact offsetting that to some degree on a gross margin level?

Or is it solely due to mix and this trend we have seen?

Let me answer that question, Chris.

As you know, the re-valuation amount was relatively small.

Certainly on an ongoing basis, the actual impact to our cost of goods sold and therefore our gross margin, there will be an impact.

But as you saw, the change was so minuscule that that impact is not going to be great as we go forward.

Okay.

So it was predominantly mix.

Would you actually now be so kind, and give now a certain split of this audio division?

As it now starts to grow, you know, and becoming now -- almost now getting now towards now the biggest category in your business now.

So I was wondering whether you would be so kind and break it down into speakers and headsets.

You know, I don't think we're ready at this time to give yet another breakdown of that.

Needless to say, you won’t be surprised to hear that speakers are the biggest component of that category.

I can do my calculation.

Thanks.

Then basically, just now with respect to your guidance, am I correct to assume that it basically assumes that the spot rate, in dollar spot rate, is basically implied in this guidance?

Or have you got any specific budgeted rate in your (multiple speakers) ?

You know when it comes to FX, we make absolutely no assumptions on our ongoing basis.

Our guidance is to grow the top line 18% to 20%, and that is what we hope to deliver.

Because now there is quite some headwinds, now, going forward, given where we are right now.

Then lastly, but just on the base EPS, do I basically have to add this number of shares coming from the convert to basic EPS, as it is right now, in order to get to the new basic number?

You know, I am glad you brought that up.

Because one of the things you might remember, if you go back and do this calculation, is that the underlying shares for the Convertibles have always been -- well, at least when it was in the money -- they have always been a part of our earnings per share.

So the earnings per share actually will have no impact once these shares convert.

On a diluted basis?

That is exactly -- on a diluted basis.

Exactly right.

Not on basic.

Okay, thanks.

Very good quarter.

Thank you.

Mehrdad Torbati with Deutsche Bank.

Congratulations; great quarter.

I have a question regarding your long-term outlook of mid-teen growth.

Could you perhaps, since you're breaking down your sales, break down your expectations regarding growth of each segment?

That is my first question.

The second question if I may relates to the other division that you have.

I'll follow-up with that one.

So we do not give guidance by product line, so I can't answer your first question.

We have indicated that we expect audio to be -- to have the same role in the mix in the second half than the first half, which implies a strong growth of audio.

But beyond that, we don't provide any further breakdown.

Your second question was on the other category?

Yes, if you can --.

You can see the dramatic growth in the other category.

Kris mentioned during the call that was primarily driven by Harmony.

Before you ask the question, sooner or later as Harmony grows we will have to probably pull it out of that category and put it separately.

But it is not the time yet.

Your mentioning that you are just entering Europe with the Harmony product.

How long will it take you to carry the same amount of revenue you are generating in the U.S. in Europe?

Do you see the same competitive environment here as you face in the U.S.?

Have you entered the channels yet?

Do you have the shelf space for that product?

What is your plan there?

We want to pursue the market very aggressively.

We expect to be available in several retail, and we're pursuing also some installer channels.

We're not as present as we are now in the U.S.; and even in the U.S. there is a lot of work to do to broaden our presence.

How long will it take?

Well, if I tell to my people, it should take a week; if I tell you, I probably take longer than that.

We are very anxious to establish ourselves.

That said, you asked about the competitive environment.

The product is so dramatically different than what is available right now that the competitive environment can be sort of characterized as very similar on both sides of the pond.

So if I have to take the cues of what happened in the U.S., we're very bullish about Europe.

But it is too early to tell.

I think that the profile of the consumer use of a multiplicity of entertainment devices at home is similar.

In the U.S. and Europe we expect flat panel TVs, digital television, etc. to be a big driver of increased interest in the European consumer for solutions that simplify the multiple remote control nightmare that people live today.

So from an underlying market perspective, we see the same opportunities in Europe as we see in the U.S., but it is all forward-looking, so we have to just execute.

If I can come back to the first question, you are not breaking down your growth scenario going through product lines.

We have seen a very strong pace of growth in the first half.

Your guidance now is implying a slowdown in the sales growth in the second half.

Can you perhaps give us some insight where it should come from?

Maybe quantify your backlog growth you have seen at the end of the quarter?

Our focus from the start of the year has been to deliver against our full-year goal for sales and operating income.

We have just raised this goal.

So it is important to remember, as you know, that our retail business is seasonal.

And that as a result the second half of the year has historically been significantly larger than the first half, for both sales and operating income.

So the absolute dollar difference between the two half-year periods reduces the usefulness of percentage growth comparisons.

So other than that, there is no other indication what the numeric sort of weight of each part of the year has on our growth.

We said that we wanted to accelerate our growth.

But coming from a fiscal year, last fiscal year, in which our growth was around 16%, if I remember well, or 17, we expect to be faster (ph) this year, and that is all we wanted to accomplish.

Okay.

Could you perhaps just as a last question, basically give some details how you are going to improve retail audio gross margin?

Is it improved pricing?

Is it purchasing power?

Where is it (ph) should come from?

It usually doesn't come from pricing.

It comes from product cost, volume, and mix.

You will see these three -- we expect to see these three elements at play as we improve, as they have been in play in Q2 in improving that margin.

Thanks very much.

Can Elbi with Cheuvreux.

A couple of questions.

First, I just want to come back quickly to the issue of the gross margin.

If you look at the number that you reported this quarter on a sequential basis, comparing it with fiscal Q1, I guess it was down 70 basis points.

If I am looking at the moving parts there, obviously the retail OEM mix was better.

You had a higher number of retail SKUs.

The only thing that was negative was that audio was 20% rather than 19% of retail.

So this 70 basis point decline doesn't seem that logical to me.

Obviously that is what you reported.

So I am just trying to understand what other things are in there that caused this decline?

There is a number of moving parts here, and of course you have a good point.

The other point that Kris mentioned during the call is the fact that more than ever this year we have introduced several new products, particularly in the pointing device line, with dramatically new technology.

As you know, the way we keep our prices at the same level is to innovate.

You innovate; you introduce new technology.

We mentioned 2.4 gigahertz microcontroller; nobody has it in the market.

Next-generation laser technology; nobody has it in the market.

These technologies at introduction come with their own cost.

What happens with our gross individual cost, product cost, is they tend to decline for Logitech over the course of the lifecycle of the product.

We fully expect that to be the case for these technologies.

So the major driver of the gross margin decline is volume; and the secondary driver as Kris said is the particularly high-technology content, new technology content in several of the products we introduced.

Which is part of our strategy, so that that is something that is exactly the way it should be.

But you would not want to, I guess, quantify what kind of decline the new technology content caused, right?

If you exclude this higher technology content from the equation, would the gross margins have been at least flat?

I don't have this.

Kris, do you want to comment on this?

It sounds reasonable.

(multiple speakers) this sounds reasonable.

Okay.

The back office was finding the answer for you.

Okay, thank you.

Just maybe one more question.

Looking at audio and obviously your new guidance, is it safe to assume or should I assume that you are probably still breakeven on the EBIT level for certain audio categories?

I would say we don't break our business by that.

But I would say that there is no category I know of where we don't make money.

Okay, maybe just one last thing.

Speakers; did you say 25% growth in dollars?

In speakers?

Yes.

Actually more than that.

95.

95?

Thanks a lot.

Charles Elliot with Goldman Sachs.

It is more of a long-term question.

Now that Logitech has reached its present size, how the do you think you can continue growing revenues at 15% plus?

As long as we are capable of surfing the wave of the trends we have been surfing.

See, the Company has been executing quite well; and we have myriads of things we can do better -- and will, by the way.

But one of the things that has been going for us is really the fact that we are -- we have been in the right place at the right time.

So these trends are secular trends.

The broadband penetration at home; the increased role of the PC; the complexity in the visual entertainment space in the living room; online gaming.

These are things that are there to stay.

We are course (ph) for all of those really at the beginning of the cycle.

I forgot to mention of course Internet communications, etc.

So we happen to play everywhere on these trends.

So our goal, even though I hesitate to call those targets, because it is really too early to tell, is to continue to maintain this mid-teen growth for the foreseeable future.

What is the foreseeable future?

I don't know; two, three, four, five years.

It's very hard for me to master.

It is very much depending on our ability to innovate and to execute properly while being positioned on these growing waves.

It is all that.

Thank you.

Congratulations and good luck.

Operator, we will take one more call before we conclude.

John Bright with Avondale Partners.

Two follow-up questions.

First, any comment on the Harmony remote, Guerrino?

Partnerships with maybe some domestic U.S. cable providers?

No comment on that, no.

There are many avenues of business development for Harmony, and we are pursuing all of them.

Okay.

From an acquisition standpoint, I know you are continually looking at acquisitions.

Comment on either what you're seeing out there, from an outlook for acquisitions, interesting prospects, or valuations?

We always have several, several opportunities that we look at, and we decline and continue to decline.

We are very prudent, as you know, with acquisitions.

We are convinced that the underlying theory of acquisitions is they usually don't work.

We have been pretty fortunate with three of them, the ones that we made.

We would not be where we are today without the Labtec acquisition.

We would not be where we are today without the QuickCam acquisition.

And we would not have the tremendous opportunities in the digital home without Harmony.

So that said, we have been going against the average.

We are continuing to look at small and medium-sized acquisitions that are complementary to our portfolio.

But we have also very well convinced that we have solid substantial organic growth in the portfolio, and we absolutely have to execute to that.

Thank you.

All right, let me close by saying that more than ever we see that that the main trends in technology markets point to a crucial role for the personal interface.

Technology is less and less in the box, and more and more in the way users interact wit it, in the devices and the interfaces they use, and it is how it becomes part of their lifestyle.

So long ago, Logitech had this vision and chose this market as our own.

As consumers embrace online gaming, Internet communications, digital music, and coreless freedom, we see a huge potential for Logitech in the years to come, as I said.

As always, it will be a matter of execution, effectiveness, and customer focus.

But we feel strongly that we are in the right place at the right time.

So thank you for your participation today.

Thank you for participating in today's quarter two Logitech International earnings conference call.

You may now disconnect.