羅技 (LOGI) 2006 Q4 法說會逐字稿

Good morning.

Welcome to the Logitech fourth quarter and fiscal year 2006 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) Thank you.

I would now like to turn the conference over to Joe Greenhalgh, Logitech's Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Rachelle.

I would like to welcome you to the Logitech conference call to discuss the Company's results for the quarter ended December 31, 2006, the fourth quarter of Logitech's fiscal year 2006.

The press release, a live webcast of this call, and the 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 20F dated May 18, 2005, the 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.

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 the presentation slides accompanying the call are also available on our website.

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

Here in Fremont we have Kristen Onken, our retiring Chief Financial Officer and her successor Mark Hawkins.

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.

I joined Logitech at the end of fiscal 1999 and in the seven-plus years since then, our sales have grown from 448 million to $1.8 billion.

And we generated over $830 million of cash flow from operations.

I am proud and grateful that I had the opportunity to contribute to the Company's sustained profitable growth.

I know I will miss the interaction with both the Logitech team and the financial community.

But I am looking forward to starting my retirement at the end of this month.

During the last three weeks, I have had the opportunity to work very closely with Mark both in closing the books as well as briefing him on the key aspects of our business and financial model.

He has quickly earned my confidence.

I am very comfortable with handing the reins over to him.

So, it is my great pleasure to turn the call over to Mark Hawkins, Logitech's Senior Vice-President of Finance and Information Systems and Chief Financial Officer.

Mark.

Thank you very much Kris.

I am thrilled to be here, I want to say just to start out.

Having spent my previous six years at Dell and then 18 years before with Hewlett-Packard, I am look forward to applying the best of what I've learned in both places here at Logitech.

I will now discuss the performance for the fourth quarter of '06 and also the full fiscal 2006.

I want to call out at the beginning that we are very pleased with our results in total.

We delivered our best-ever full fiscal year and fourth quarter for sales, operating income, and net income combined with a strong balance sheet.

We also delivered on our increased fiscal 2006 targets for the important areas of sales and operating income.

The growth percentages that I am going to talk about from here forward are in reference to the same period compared to fiscal 2005.

When we look at Q4 of '06, our sales grew by 16%, or 63 million, to reach 466 million.

Our retail business – let's talk about that for a minute – continued to deliver solid growth with sales increasing by 19% to 418 million driven by outstanding performance, I might add, in the audio, video and remote control area as well as, it's important to note, double-digit growth in the cordless mice.

Turning to our OEM sales, they declined by 6% primarily due to lower mice sales.

If I shift now into gross margin for Q4 '06, this was at 31.9% down as expected from last year's 33.6%.

Important to call out is that this year's gross margin includes the impact of roughly 60 basis points for a substantial reserve taken from one product in the audio category.

It was a wireless headset for audio.

Excluding these one-time reserves, our underlying gross margin for the quarter would have been 32.5%, slightly higher sequentially compared to December.

If I shift now to OpEx for Q4, we grew our operating expenses by only 7%.

It's important to note this is the fourth quarter in a row where we've had lower year-over-year growth and the smallest quarterly growth we've seen in years.

With saying that, I am pleased to report that we did make the essential investments.

You can see that in our engineering being increased by 12%.

That was heavily geared to our audio and remote controls.

If you step way back away from it, the OpEx is in line with where we were shooting and in our model as well.

It is important to see that our gross profit grew almost twice as fast as our operating expenses, which yields of course, a good operating income growth that came in by 17%.

I want to call out this reach a record high for the fourth quarter.

And our operating margin was at 11.8%.

Now let's shift into the net income for Q4.

This grew by 27%.

Our net margin reached 11% with both benefiting, I want to specifically call out, 2.8 million in other income.

Let me explain a little bit about that.

That was due to a transaction timing that resulted in some related exchange rate gains.

If we also shift and address the tax rate, we had an effective tax rate of 12.9%.

This is down from last year's 15% in the prior year and also below our target of 14%.

I want to recall also for all folks that we did talk about that there would be variation in our tax rate on a quarter-to-quarter basis.

That is what we've seen here.

Now let's go ahead and step away from Q4 for a minute and go ahead and get into fiscal year 2006.

Our sales grew by 21% to 1.8 billion.

If we take a little deeper level of that, we look at our sales in the retail business increased by 293 million or 23% to 1.6 billion with growth driven by spectacular results in the audio area and then complemented nicely by very strong performance in video and our Harmony remotes.

We also saw a return to growth in the OEM with sales up 11% due to very solid demand for mice.

For the FY '06 gross margin, this was at 32%, down from the 34% in prior year and still well within our target range of the 32 to 34.

This decline in gross margin primarily reflected the combination of first of all significantly more retail audio sales and the product mix and also, I'd say, a return to more typical margin levels in a number of product categories as last year's gross margin was at the top of our range in several of these categories.

So net message, within the range, audio mix impacting things, and a little bit of a normalization in terms of several categories.

Looking on to our FY '06 OpEx, the thing to call out immediately is when you look at the operating expenses growing by 13%, still scaling nicely as we would like – growing at 13%, and also scaling compared to either revenue and/or gross profit.

Our net income grew by 21%.

This 21% had a nice complement from our other income related to things that we talked about on the quarterly basis also including some of the related exchange rate gains and a few other matters including our tax rate that came in for the year at 13.7% compared to the prior year at 15% compared to our target for 14%.

We're pleased to see that.

Let me shift now to the balance sheet.

Our cash position at 245 million, was down only 96 million to the prior year despite the fact that we spent $241 million repurchasing our shares during fiscal 2006.

Our cash flow from operations for the quarter was a record-breaking 137 million.

Pleased to see that – up by 15% compared to last year's previous high of 119 million.

For fiscal 2006, our ash flow from operations was 152 million, down from the 214 in prior year.

When I look at inventory, I think that we called out at the last call, that you could expect a significant decline sequentially in the March quarter.

That is exactly what we delivered.

Our inventory was 197 million, down by 61 million from the December 2005.

We are actually pleased with the inventory results for this period.

You can see it in terms of the turns.

They were up to 6.4 turns compared to 6.1 at this time last year and 6.0 sequentially in the prior quarter.

If we shift now to accounts receivable, that was up – rather was at 290 million, up from the 229 million of last year.

Our day sales outstanding was 56 days compared to 51 days achieved in 2005.

Let me now touch base, after talking about some of the assets, to our share repurchase.

A couple things to call out.

In the fourth quarter we repurchased 3.975 million shares -- $164 million worth of spend.

For the full fiscal year 2006, we repurchased 6.138 million shares for 241 million.

We now own 4.7% of our shares outstanding.

By the way for everyone, I want to also remind you that on the website we do have a helpful summary regarding our repurchase in the Investor Relations section.

Now, we've completed the balance sheet.

Now let's take just a little bit deeper look into Q4 '06 in terms of the business.

As we look at our retail business in the fourth quarter, we grew this by 19% on units increase of 29%.

The faster unit growth was driven by product mix shift in several categories reflecting the broad appeal of our offering in the mass market segment – number one.

Number two, it is important to call out, we did not implement any significant price changes during the quarter.

We are pleased that we are continuing to execute the strategy of selling into stable price points.

If we look at it now on a regional basis, we achieved strong growth on all of our regions with sales in the Americas up by 18% on a 39% unit growth rate; and Europe delivering 20% growth on a 37% increase in units.

Audio and video were the main contributors in both regions.

Really a nice performance there with cordless mice making a strong showing in the Americas and Harmony remotes ramping impressively in Europe.

We continued to achieve double-digit growth in Asia with sales up by 15%.

Shifting away from the region now to the product area and the product families and starting with the cordless where our sales decreased by 2%.

But units were up by 21%.

I think as promised at the start of the quarter, we saw a return of double-digit growth in cordless mice.

Sales were up by 21%.

Units grew by 41% with a near doubling of the sales and units in the mass market segment.

The overall growth in the cordless mice category was driven primarily by the success of our line of cordless mice for notebooks.

This is including the V400.

While our supplier is still ramping to meet the demands of the V400 component shortage that hurt us in December, there was improvement and we were able to ship a reasonable quantity of these, especially in Europe.

As expected, our cordless desktop declined by 17%, but units grew by 4%.

With this said – and we talked about this at last quarter's call – we didn't anticipate a return to growth in this particular category until early fiscal 2007.

This continues to be true.

This is our view on this.

The decline in sales was primarily a function of mix shift within the category.

We continue to experience strong growth in sales in units in the mass market segment of the category.

Our worldwide market share is stable.

So with this said, the key points is, we thought the growth would return in FY '07.

That continues to be our view.

The mix – you can see it shifting within the categories.

That is primarily the dynamic that is happening.

We have a share that is stable and really strong growth in the mass market segment, which we see as a good sign.

If we move to the retail audio Q4, again strong performance as described with sales growing at 68% and units at 78%.

Going a little deeper, our speakers, the biggest audio category, increased by 77% with units growing 90%.

Complementing our continued strength in the PC speakers, it was another strong quarter for our MM50, our flagship iPOD speaker.

PC headsets really are riding, I'd say the wave of the voiceover IP communications and contributed to sales growth of 61% and unit growth of 69%.

So again, audio is very strong and speakers, obviously, and the MM50 iPOD – a lot of good dynamics going on in that category.

Shifting now to the retail corded, this grew by 7% with units up by 13%.

Corded mice sales increased by 6% with units growing 17% with the growth driven by the success of our mice for the PC gaming and in particular the G5 laser mouse.

If we now shift to video, we saw significant acceleration in our growth in retail video.

The sales were reflected by a 61% growth and then units growing at 72%.

Again, this is just showing a reflection of the increased video communications over the internet dynamic, which we feel we are well positioned for.

The strongest growth came in the midrange in the mass market segments of the webcam category with sales and units roughly doubling for both these segments.

Retail gaming – when we look at that our sales declined by 26%, but our units grew by 6.

There is a bit of a story in here because when we look at the – we had a strong quarter in PC gaming with sales growing by 33% and units up by 32%.

This growth was driven, it's important to call out, by largely some of the success with our G15 gaming keyboard, which has been very, very well received by our PC gamers.

The other side of the story is that we look at the decline in gaming sales in total is really due to the transition to the new gaming console platforms, which led to a 61% drop in this sales of our peripherals for console gaming platforms and a 16% decline in units.

Looking at Harmony and the remotes – again continuing rapid growth during the quarter with sales in Europe accelerating.

These remotes made a solid contribution.

When you guys look at the other retail category, this is really the driver for the growth with a majority of the 7 million increases reported.

Let me comment on the OEM business now and with our sales – they decreased by 6% in the quarter, but units grew by one.

Mice sales declined by 11% with growth in video and gaming partially offsetting that.

Now let me stop for a minute and as I sum up the headlines for Q4, I think of this.

Best ever Q4 sales, op inc and net income.

Record Q4 cash flow.

Strong balance sheet that we are exiting with.

And beating the guidance in Q4 in total.

So those would be my summary headlines for Q4.

Before concluding my comments I want to remind you that our fiscal 2007 investor meeting is scheduled in May – on May 11 specifically in London.

The agenda will feature a number of our senior executives reviewing our strategies and opportunities for fiscal 2007 and beyond.

We are excited about this meeting.

We hope you can join us.

On that note, let me go ahead and turn it over to Guerrino.

Thank you Mark.

Thanks again to all of you for joining us today.

Before I begin my remarks, I would like to extend my sincere appreciation to Kris Onken for the tremendous contribution she made over the years at Logitech.

We were looking for a truly world-class replacement to a world-class CFO.

We have found him.

I am delighted that Mark has joined us in this key role.

So on to my comments on the results and the outlook.

As you can imagine, I am very pleased with the Company's performance in fiscal 2006 and with its record-breaking performance in each of the four quarters.

Fiscal 2006 was Logitech's best year ever and our eighth consecutive year of double-digit growth.

In spite of the decline in gross margin largely driven by the retail product mix, we managed our operating expenses in line with gross profit, increased our operating income by 16%, our net income by 21%, sustained our net margin of 10.1% of sales, and delivered again our increased full year targets both for sales and operating income.

Let me talk about our gross margin in the fourth quarter, which was negatively impacted by reserves taken for one audio product, as you have heard, our wireless headphone for iPOD.

This product was eagerly anticipated by our customers when we began shipments in the June quarter.

The initial response from the channel and consumers was very positive and we ramped up production accordingly to meet demand.

Apple's subsequent launch of the nano and consumers' favorable reaction to its [small form] factor, negatively impacted the market for our headphones since they couldn't be used without the addition of a rather large adaptor.

So during this quarter, it became clear that we needed to take action.

We increased our reserves accordingly.

This was obviously expensive.

But the good news is that we have learned a lesson about the ecosystem for iPOD peripherals.

Our iPOD speakers continue to do very well.

We have a number of new iPOD-related products coming later this year.

We will clearly proactively manage both our product development and our inventory planning with the knowledge that this platform is subject to rapid and potentially disruptive change.

The notable fact is that without these specific charges, our gross margin in Q4 marked an un-seasonal sequential increase over Q3.

As a final point on Q4, let me also say I was quite pleased with our operational performance that led to the record-breaking $137 million in cash flow from operations during the quarter.

There were a number of retail product highlights during the year led by the spectacular performance in speakers.

Our speaker sales more than doubled in the fiscal '06 driven by the combination of a substantial increase in PC speakers and a solid contribution from our iPOD speakers.

Another star in the audio category was PC headsets with sales nearly doubling due to the rapidly expanding appeal of internet communication.

The success of these two product categories helped make retail audio our second largest business.

Speaking of internet communication, it was also a great year for retail video with sales up 36% and units up 53% driven by the increasing penetration of video conversation.

As the market leader, we did our part to help increase this penetration through the introduction of innovative new video products for desktop PCs and notebooks along with the Logitech video effects software, a key differentiator available only with Logitech webcams.

I am also very pleased with the explosive sales growth of our Harmony remotes.

Our sales in this category roughly tripled compared to the prior year and are now nearly as large as the PC gaming category.

In a relatively short period of time, the Harmony remotes have taken the number one position in US retail for both the advanced remote control market and the total remote control market.

During the second half of the year, we also started to build momentum in Europe.

Let me talk about cordless where our sales were essentially flat.

The two main categories of this segment are cordless mice and cordless desktop.

Our cordless mice sales grew by 8% for the year with units up by an impressive 21%.

Our growth in cordless mice, specifically in the all-important second half of the year, was constrained by our supplier's inability to satisfy our component demand for the V400.

Even with this constraint, I am still quite pleased with the sales growth delivered by our line of cordless mice for notebooks.

You have seen the 9% decline in cordless desktop sales.

The market itself continues to grow, particularly in the mass market segment, and we had very strong success in this segment, compelling evidence that the massive optional cordless is happening and we are participating as the market leader.

We continue to expect a return to growth in the category as we roll in a stronger innovative offering in the mid range and the high end in the first half of fiscal 2007.

Turning now to our operational performance, one of the main highlights of 2006 was the successful move in June of last year to our new manufacturing facility in China.

We completed the move on time, within budget, and most importantly with zero disruption to our ability to ship product to our customers.

The new plants gives us increased capacity and flexibility and leaves us well-positioned to accommodate our expected future growth.

My comments on fiscal 2006 wouldn't be complete without also mentioning the addition of three new senior executives to complement our strong management team.

They come from senior positions held in much larger companies and will be key contributors to help Logitech scale as we grow.

In addition to Mark, Gerry Quindlen joined the Company as Senior Vice-President of Sales and marketing after a successful career at Kodak.

Joe Sullivan, who joined us last year from Carrier Corporation a subsidiary of United Technologies, has recently been promoted to Senior Vice-President of Worldwide Operations, succeeding Company veteran Erh-Hsun Chang, who will be presented for election to the Logitech board of directors at our annual shareholder meeting in June.

We enter fiscal '07 focused on two key priorities – capturing the attractive growth opportunities before us; and improving our profitability.

Our main growth drivers in fiscal '06 were audio, video, and Harmony remotes.

We expect these categories to retain their momentum in fiscal '07.

In audio we see a continued strong growth opportunity due to the popularity of digital music and the increasing penetration of internet voice communication.

Our product lineup for the new year will include a number of innovative and attractive speakers targeted to the PC platform as well as the iPOD and MP3 space.

We also plan to broaden and enrich our user-friendly wireless music offerings enabling the streaming of music from your PC, iPOD, or MP3 players to any room in the house.

We are thrilled by the growing penetration of internet communication.

As leaders in both webcams and PC headsets, we are uniquely positioned to provide consumers with an appealing lineup of standalone and integrated products that both simplify and enhance the user experience.

The new products we expect to launch this year will recognize and address the unique needs of different users be they in the home or on the go.

Increased complexity and richness of home entertainment systems in the livingroom translate into a huge opportunity for our Harmony remotes.

The impressive initial success of our offerings in the United States and most recently in Europe provides strong evidence that these remotes are becoming widely acknowledged as the answer to this complexity.

We believe our sustained investment to simplify the setup process and provide effective customer support gives the Harmony remote the potential to become the universal remote control device for enjoying digital entertainment across the home.

Turning now to cordless where we continue to expect a return to growth in fiscal '07.

As the unit growth figures in our fourth quarter results demonstrate, the mass adoption of cordless has begun.

With penetration rates relatively low, we believe there is lots of runway left.

We also believe that the penetration of Bluetooth technology into the PC install base is starting to approach critical mass providing an attractive opportunity for Bluetooth enabled mice in desktops, especially at the high-end.

The increasing popularity of notebooks has created a substantial and growing market opportunity for cordless mice.

Our mobile cordless mouse lineup is already robust and we plan to improve it further during the year.

Speaking of cordless mice, I am pleased to tell you we still see opportunities for significant innovation.

While I won't offer any detail at this stage, I will say that in reviewing our cordless mice roadmap for fiscal '07, I am very excited about our potential to once again redefine the cordless mouse category.

I am also excited by the new offerings we plan in the cordless desktop space.

Beyond the product innovations you'd expect from us, we also plan to launch cordless desktops that address both the increasing penetration of notebooks as well as the popularity of voice and video internet communication.

We enter the new fiscal year focused on improving our profitability.

Our product development teams are looking at every aspect of product costs from components to the size of the retail package to identify potential improvements.

Many of the products we plan to launch later this fiscal year, particularly in the speaker and cordless categories, are expected to carry better margins than the products they replace.

That brings me to my outlook for fiscal '07.

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

In fiscal '07, we expect both sales and operating income to grow 15% compared to the prior year.

Gross margin is expected to be at the low end of our long-term targeted bracket of 32 to 34%, but slightly higher than in fiscal 2006 due to anticipated upside in the second half of the year related to new product introductions.

Our fiscal '07 targets exclude the cost of equity-based compensation, which will be included in operating results beginning in the June quarter.

The net cost of equity-based compensation for fiscal '07 reflected in net income is expected to be between $16 million and $19 million.

Fiscal '06 was the best in our history.

Even with a 200 basis-point drop in gross margin, we demonstrated the adaptability of our business model by growing our operating expenses slower than our gross margin, limiting the decline in operating margin to only 50 basis points while preserving our net margin of 10.1% of sales.

We enter fiscal 2007 well-positioned for sustained growth and profitability with an innovating and appealing product roadmap targeted at substantial growth categories, a proven ability to scale our operations as needed, and a strong and experienced management team focused on delivering against our full year targets.

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

Please follow the instructions of the Operator.

(OPERATOR INSTRUCTIONS) Ted Chung with Bear Stearns.

Good morning.

I have a couple of questions.

First, can you discuss in more detail regarding the desktop weakness.

You mentioned that the penetration rate is still fairly low.

Is there a specific trend towards mass market that could potentially help you grow the market further in terms of additional features and so forth?

Let me tell you what – to try to explain what is happening – or what we think is happening.

We have dug into this category pretty substantially.

There is clearly unit market growth substantially out there.

It takes place at the entry level because that is where newcomers to the categories tend to buy.

We have grown our units.

We are doing well.

Prices are lower in that space.

Fine.

But we participate.

What has not worked this year, which is what usually works for us and we believe will continue to work, is the fact that we were unsuccessful in stimulating enough of the newcomers to trade up to our midrange.

A lot of people stayed with the entry level, which is great.

We keep share and we plant another seed for future repurchase.

But of course, we suffered on the revenue side.

What we want to do is address the appeal of the midrange.

It will happen through the introduction of new products in the first half of fiscal of '07.

We believe that on one side we'll continue to take advantage of the mass adoption of cordless, which is where all these entry level sales are taking place, and on the other will give us more revenue growth because of the trade-up.

In addition, I mentioned Bluetooth as a promising higher-end extender of the category.

You should read by that that our Bluetooth offering at the very high end will become more substantial.

I understand on the gross margin your guidance towards the low end of your target range.

It seems to be conservative given the growth in your video categories than other categories.

Can you explain more on that.

Our gross margin we said, and we repeat it – and we'll never tire to repeat it – will fall in the bracket.

We'll continue to be in that bracket.

We see – we were very pleased with the growth of video.

The growth of video for the year was 36%.

We are now providing guidance for category-by-category next year when we believe video is going to be a good participant to the growth.

Video is a great margin category.

So that is great.

But, once again it is the combination of categories and price points within the categories that makes the margin.

We prefer to guide where we are today with some slight improvement because we see products coming at better margins than the products they replace.

That we can say.

That is where we stand today.

Finally, for your fiscal '07 tax rate, would you still expect 14%?

Let me address that. 14% is the range that we're looking at.

Even with some of the stock option expensing and some of the other regulatory activities that are going on, we think that the 14% makes sense.

We think it's sustainable.

There will be some variation by quarter, it is important to note.

In total we think that it's going to be within the range – within 1% of the range.

So 14 is our target.

And just one last question.

Would you be breaking out the stock options impact by line item or----?

Could you repeat that, Ted.

Are you planning to break out the stock option expense when you report your earnings?

Yes, we will in fact.

That's correct.

Going forward, we will obviously comply with the requirements in terms of external reporting.

But we will provide a pro forma that also shows with and without that.

Okay?

Thank you.

Joel Wagonfeld with First Albany.

Thank you.

Two quick questions.

Number one, I apologize if I missed it.

Could you comment on the supply constraints?

Are those completely gone on the V400?

Are there any constraints in any other products?

That's the first question.

The answer is no, they are not completely gone.

We believe that they will be gone this quarter.

Even though we were able to ship a substantial amount of V400 in the past quarter, we were not completely in a position to meet full demand.

We believe that we will be out of that particular constraint in the current quarter.

As far as general constraints, I can't say that there is anything major at this time.

On the stock option expense for fiscal '07 was a little bit higher than what we had been anticipating.

Can you comment on your thoughts about trying to manage that down or why that would be up potentially year-over-year?

Let me speak to that a little bit.

If you look at – just in terms of year-over-year – one, in FY '05, we pro-forma-ed it at 18.5 million or 12% of our net.

Looking at it in FY '06, we anticipated it at a14.9 million impact on our FY '06 or around 8% net.

Then in FY '07, I think we have projected a $16 million to $19 million range, again with a similar percent impact on our net.

If you look at the bigger picture, it is actually coming down substantially from '05 to the projection in the business for '07, even though we have a bigger business and we've added 400 professionals in total for the year.

Those are some of the dynamics that are going on.

Is that just less use of options or restricted stock?

Any details on how you are doing that?

I think in total the bigger picture is looking on a multi-year period, yes we are reducing the total number of options issued, consistent with what is happening in the broader marketplace.

Obviously we view these as important.

We are doing the appropriate amount competitively.

We are bringing those down much like the rest of the marketplace.

Great.

Thanks very much.

John Bright with Avondale Partners.

Thank you.

Good morning.

Allow me to – hello Guerrino.

Hello Kris and Mark.

Allow me Kris to again extend my congratulations to you.

It's been enjoyable working with you.

Mark, welcome aboard.

Thank you.

Thank you very much John.

You're welcome.

First question, in the press release I think you talk about you expect product and marketing initiatives – you related your cordless desktops and mice – trying to drive the cordless category to solid growth [indiscernible].

Can you detail some of the expectations there?

We said that we would return to growth for desktops in the first half of fiscal '07.

I don't think we want to say more than that.

I profoundly believe that the market is there, that the dynamics haven't changed.

There is massive option, which means consumers are entering the category at the lowest possible price points.

Fortunately they are buying products, which is good.

It means that we have an appealing entry level.

What we would like to see is a little more trade-up.

For example, in webcams, the situation is very similar.

And yet we have been able to actually trade up a lot of the entry level customers to midrange.

So the same dynamic has to be and can be recreated on desktops.

What action do you take to help encourage the consumers to trade up?

In this particular case it's a product issue.

That is why we talk about the first half.

We usually, as you know, introduce our main products in the September quarter.

That is when we expect to address that particular element.

You mentioned significant innovation in your prepared remarks for cordless mice and looking to redefine the potential.

Yes.

Did I whet your appetite?

Yes, you did.

Do you have a timeframe that you want to talk about?

It is going to be before Christmas.

Before Christmas?

Yes.

And video continues to be a very strong performer.

Great publish that you had on YouTube.com, by the way, for the animation features associated with that.

Is there anything in particular you are doing on your side of the equation to try and drive that awareness further?

One of the most powerful elements of this kind of [vio] marketing or consumer-driven marketing is that you just don't touch it.

It took us weeks before some journalist convinced us to get in touch with us this young woman who was posting those beautiful videos on YouTube and our mandate to our PR people that wanted to jump on it was – just don't touch it.

It is happening so beautifully.

I believe that more of these things will happen, especially with the video sect, which was the driver of the excitement for that particular posting.

I believe at this point that the category has legs.

The awareness is starting to happen, especially across a certain age group.

We will have to continue to deliver fun products for these people to use.

Believe me, we have plans for that.

Two other questions on the revenue side – or one on the margin side.

One, you are talking about better margins expected for some of the audio speakers.

What leads you to give that type of guidance?

As you know, we have an elaborate product development cycle and process that has targets and feature sets and cost targets.

From the way that we see things developing at this stage, we are excited about what we will be capable of doing, particularly in the cordless and in the speakers categories.

It's projected cost of future products that replace existing products or complement existing products.

That is what makes us make that statement.

On the Harmony remote sales, when did you introduce those initially into Europe?

We started very early with very, very occasional sales.

The true structured approach started maybe five months ago or so – or five to six months ago.

So we're thinking the December timeframe?

Yes.

Well, actually slightly before that.

On the ramp to Christmas in the October-November timeframe.

Lastly, on the tax rate.

Mark, I didn't understand.

I didn't get that.

I apologize.

Why was the tax rate lower in this quarter?

A couple things.

One, the geographic mix obviously has an impact on us.

Secondly, we had some actual favorable tax rulings that also went on a favorable side.

A couple dynamics that provided a really nice quarter on the tax rate.

I think the key thing that I would underscore with you that is important is it's a very – the fiscal year target.

We did again agree on variation by quarter.

You are going to see that going forward as well.

The fiscal year target of 14% plus or minus one is really sustainable.

It's not dependent on net operating losses and whatnot.

It is more of a structural strong tax rate.

Thank you.

Manny Recarey with Kaufman Brothers.

Good morning.

Or good afternoon, I guess, wherever you are.

A couple of questions.

The gross margin, if you exclude the reserve, you said would be 32.5%, which would be a sequential increase as you pointed out.

Historically, the margin goes down from December to March.

Can you give a little more color on how you were able to achieve that.

Was it just product mix?

What was driving that?

As we said on the downside, it is product mix.

I believe that the tremendous growth of webcams had something to do with it.

On the audio side those margins continued to improve as well though.

Year-over-year they did, absolutely.

Looking at the sales and marketing line, that only grew 2% while the top line grew 16% year-over-year.

Can you give a little bit more color on how you were able to achieve that.

A couple things I'd say here.

One is, when you step back – I am going to build the full points here.

When you look at total OpEx as a percent revenue, really came in, in total, in line with what we see on an historical basis for Q4 – if you go back for several years – in the 20.2% range, we made – the overarching theme is we made the investments that we really feel we need to, to grow going forward.

You can see that with some of the engineering investments and whatnot.

We were able to spend where we needed to and not where we didn't, basically.

I think there is a lot of puts and takes to it.

But I think that is the answer.

Fundamentally we are within the range of where we want to be both in our business model that we've called out to you before.

Historically in total OpEx, we made the total essential investments that we needed to.

We were able to also make those puts and takes trade-offs that we feel allow us to get a little bit of leverage being a bigger business.

So I think that is some of the key thoughts that I would share with you.

Let me add something.

Mark cannot yet take credit for this – this last quarter.

But I think he will continue to take an aggressive view there.

The important thing here is that A, we didn't sacrifice anything.

B, this shows a tremendous adaptability of the business model.

Let's face it.

The Company can absorb a 200-basis-point decline in gross margin and basically show only a 50-point decline in operating margin, continuing to grow R&D dramatically – explosively, I would say in audio and remote controls.

That is powerful, I believe.

So very, very happy about that.

I am sure that Mark will contribute that.

I understand what you are saying.

Looking at it on a quarterly basis going forward with the different line items on the operating expenses there will be some variability.

Would it be a fair assumption to expect sales and marketing to increase more on a year-over-year basis than they did the March quarter?

I would say that 7% is quite tight.

I would say that the overall envelop should increase, as we said, in line with the gross profit.

What does that in line mean?

The same?

One point less?

That's very hard to predict.

That is the class of things that we're looking at.

Exactly.

We still believe we support the model and the overall aggregate level of investment.

You are going to see variation from quarter-to-quarter as you would expect as different product introduction cycles happen and whatnot.

Thank you.

Michael [Felletz] with LODH.

Yes.

Three questions actually.

First one would be that one-off impact on the gross margin – 60 basis points for those reserves.

Is that really one-off limited to Q4?

Or do you feel that you will have to take more?

If I understand correctly, you produced too much and will have to discard these products?

This is definitely one of these one-off events in this particular case.

You always have certain kinds of adjustments and reserves and whatnot.

This is very specific to one particular product in the wireless audio category.

It was significant.

To really give transparency to all of you, we wanted you to understand the underlying gross margin rate with and without this event.

That is why we called it out.

We really see this as a significant isolated event.

Obviously we will continue to have the normal kinds of – what you would expect with excess and obsolete and things of that nature.

But this was a specific one.

Thanks.

Second question would be concerning the corded products.

Actually last year, if I recollect correctly in your investor day you talked about a declining market for corded products, but you actually sold gross.

Are you still expecting this market to decline in 2007?

Or is there more growth?

We won't apologize for growth.

We will not apologize for growth.

I think that we were underestimating the tremendous response to the G15 keyboard, which was a substantial driver of corded growth.

We do not believe that, from a secular perspective, corded mice and keyboard have higher potential than any other category in the portfolio.

We will take growth.

We'll continue to pursue it.

Remember this distinction of cordless and corded equipment that was chosen for us many years ago and that has driven a lot of our approach to the market may not be the only distinction.

There are other distinctions, for example, like desktop and notebook that may be intriguing.

In a way I might not be surprised to see a growth in corded, for example, driven by more product for the notebook.

We look at our categories with a very open mind.

As I mentioned, sure we don't believe that corded product mice and keyboard have the same potential as Harmony or webcams.

But their death may be proclaimed a little bit prematurely.

Thanks.

My final question would be on financials.

Could you tell us what your net cash use for share transaction was?

I mean that is purchased shares and the proceeds from sale of shares net of tax.

Do you have that number?

I think last year it was 88 million.

Go ahead and explain that one more time in terms of the question.

I can tell you a lot about the share repurchase.

The purchase of – the dollar amount used for share purchases and the dollar proceeds from sale of shares upon exercise of options.

Let me tell you – yes.

I think I can address some of that here.

Certainly – let me reorient a little bit.

Let me reiterate a little bit about the share repurchase program.

We will keep taking this one step at a time.

We purchased for the year – let's just start with that – 6.138 million shares.

That was for a spend of $241 million.

Let's stop at that.

Now you want to go down to a deeper level and understand the following.

Go ahead and share with me what you are looking for.

Normally you show that in your filings – the proceeds of sales from shares that you sell upon exercise of share options by your employees.

We actually don't have that at this point.

So I am just going to have to tell you we don't have that at this point.

Alright, fine.

That will be all from my side then.

Do you plan any further share buyback programs given that one is nearly over?

Let me speak to that.

First of all, we have – use the facts.

We have remaining authority to repurchase shares within the program that has been approved by our board.

Secondly I would call out the fact that our board has historically obviously encouraged us to do share buyback.

Obviously it will be for the board to entertain that going forward.

They are the ones to make that decision.

Certainly we are a Company with a history of share buyback.

You can see what we did in Q4.

Thanks.

Believe it or not, I have found the number that was being asked about.

If I understand the question, it's how many shares did you use because of the exercise of options and employee stock purchase programs.

Is that correct?

Was that the question?

I assume that was.

Mark said that we purchased 6.1 million shares, roughly.

Then we "stopped" upon exercise of option on the SPP something like 3.5 million.

So the net in this case is roughly 2.6 million in favor of what we repurchased.

Remember that we also used shares to cover the conversion of the convertible bond.

That was for about 5.4 million shares.

So net net we have – there was a negative net of 2.8 million between conversion of the convertible and covering the conversion of the convertible and covering stock options.

The ratio of stock options that were purchased is roughly 50%.

Next question.

Yves Kissenpfennig with UBS.

I have two short questions.

First, you continuously mention your product launch upcoming in the first half of fiscal '07.

Will you be concentrating most of that in the second quarter?

Or will you be staggering it a little more unlike you've done in the past?

We will have products this quarter.

But the fundamental bulk will come in Q2.

My second question was to the OEM business that seems to be neglected at the moment.

I was wondering----

Not by us.

Not by us.

Not by us.

I know.

By the analysts, it seems.

You mentioned double-digit growth also in your OEM business.

Does that include any potential sales to the PlayStation 3?

Are you working with Sony together on something along those lines.

We may or may not we working with Sony along this line.

The guidance does not include that.

This guidance has to do with some major transition that is happening at a major customer that we cannot name, whose transition was responsible for the decline of OEM in this Q4.

This transition is basically replacing a mouse with a desktop at a major customer.

So you will see moving forward at some point in time in fiscal '07, that the – we will have less mouse sales and significantly more desktop sales if this program is successful.

That is what fundamentally leads us to believe that OEM is going to grow in fiscal '07.

Great.

Thank you.

Can Elbi with Cheuvreux.

Can you hear me?

Kris, if you're still there, from my side as well, thanks for all the help during your last six, seven years.

All the best in the future.

Thanks, Can.

It's been a pleasure.

I have two questions left, it guess.

One, I understand your comments with respect to cordless desktop and the fact that you have not been able to entice people to trade up.

I guess that's had an impact on your ASPs in cordless desktop, which I think was down 12% in fiscal '06.

That still doesn't answer, I think, our question with respect to unit growth.

Because if look cordless mice unit growth in fiscal '06, I think it was around 21% versus only 5% for desktop.

So there must be something going on in terms of the unit growth area as well.

I am trying to understand if there were any structural issues with respect to the emergence of notebooks.

Or also, probably at the same time, the fact that maybe consumer penetration into the PC desktop space has already reached some mature levels.

I have another question afterwards.

Yes, I think it's a fair question.

I believe from the data we have – and believe me we have analyzed this across all possible dimensions.

We see a material growth at the entry level, particularly in Europe and the amount of the average spread growth.

So it Europe you see the market declining as a whole with a substantial growth of entry level.

In the United States you see the market growing.

But the European market is larger than the US market for the time being.

That is the dynamic we are facing.

We are participating in the high-volume growth in Europe.

We believe that is an indication of the contrary of what you may think.

Which is, penetration is not high.

Therefore, there are a lot of consumers who have never bought it and they just want the cheap one.

If you had bought it in the past, why would you want the entry level one.

There is no reason.

Mostly these products continue to work for a long time.

That is what makes us believe that there is an ongoing entry-level penetration.

I believe strongly that there may be more tactical things that we are looking at channel-by-channel.

It's too detailed to be discussed on a call like this.

Then you get into competitive issues that I don't want to disclose.

The fundamental issue is trade-up.

I believe now – we have asked ourselves the question about notebooks big time.

What we notice is that A, if there is a unit growth in Europe pretty substantial in a market where notebook penetration is even higher than in the United States, that doesn't call for a substantial notebook impact on that, even though there must be some.

We will actually target certain keyboards and desktops next year specifically to the notebook market to prove what is in there.

But we believe, without arrogance, that we are the experts in the category.

Believe we, we are dissecting this.

I can tell you our projection now is that there has got to be a [return to] growth.

Maybe the second question – and this was asked.

I want to rephrase it a little bit because I was still not convinced by the answer, without being arrogant.

If I look at marketing and selling in fiscal Q4, as was pointed out, it was up only 2% whereas retail sales were I think, up 19%.

Obviously the growth in retail sales somehow drives marketing and selling.

I am trying to understand how much discretion you have in marketing and selling and whether you can really push it out at discretion if you need to.

You have on many occasions pointed out the fact that gross profit growth and OpEx growth would be in line.

They are certainly not in line if fiscal Q4.

So I am trying to understand how much discretion there is in marketing and selling and whether you can really push it out if you want to.

We have substantial discretion.

You said something which is interesting to remark.

You said the sales and marketing costs are driven by sales.

It's true.

The other way around is also true.

That sales and marketing expenses drive sales.

That is what we would like to see, right?

If you look at our guidance for revenue for the year, we actually went slightly higher than what we had expected.

So sales are there.

As Mark said, why do you spend money if you have sales?

Remember also that there is a component of expenses that you don't see in the operating expense, a component of the marketing expense that has to do with soft dollars and other promotional channel incentives that you don't see – you see it in gross to net and therefore you see it in the margins.

We have ample margin of using the right tactic at the right time.

So I continue to insist that this is not like – we didn't cut anything.

We didn't kill anybody.

We didn't – actually our [inaudible] unfortunately too low.

We were doing what the model allows us to do and are very, very happy that that is the flexibility that the model shows.

Maybe just one quick add-on and then I'll let you go.

The retail ASPs, playing the devil's advocate again, I think retail ASPs – and you have constantly told us that it's an issue of mix.

But retail ASPs, I think, were down 3% from Q3 and now down 8% in Q4.

Is it still only a mix issue?

Or were there some pricing initiatives because in your presentation there is a sentence saying there were no significant pricing actions.

So I just want to understand what significant is.

I don't think we can be more literal than that.

Did we reduce some prices in some products in some geographies?

Yes.

Do we always do that?

Yes.

Were they significant?

No.

Serge Rotzer with ZKB.

Yes.

You mentioned that you want to launch a new desktop, kind of voice-over-IP video desktop.

Is the customer able to use this desktop by – if the PC is turned off?

Sorry, could you repeat the question.

I am not sure I understand the question.

Can you repeat it.

Can a customer use this new desktop, this IP desktop by switching or turning off the PC?

Or can you replace a normal phone with this desktop?

That's interesting.

You are asking a product feature question.

That may be a great feature for – you may look for a job in a phone marketing department.

I can't answer this question without talking feature of unannounced products.

Okay, we will see.

The second question is, is there a certain reason you are in such a hurry to buy back shares before Q4 has [inaudible]?

I don't know.

What do you think?

I think yes.

That's just a guess.

Because you are full of net financial has a lot of shares.

Are you screening the market actively for acquisitions?

I think that we saw the price at which level that we consider is a very, very attractive investment opportunity.

Remember we buy back shares because it's a good investment.

Let me tell you that the $160-million-plus that we spent in Q4 was a great investment.

Yes, there is a reason.

Of course, there is.

We thought it was very attractive.

We will see how in the long-term it is up for follow-up.

Thank you very much.

Thank you very much.

Operator, we'll take the last call if we have one.

Jon Lopez with OTA Asset Management.

Thanks so much for taking the question.

I appreciate it.

I want to revisit the gross margin topic.

I apologize because I know you have covered it several ways.

If I look on a year-on-year basis, excluding the inventory provision that you took, your gross margin is down on the order of about 100 basis points.

Yet the retail video business was up about 61% year-on-year.

And your OEM business, as you noted, was down year-on-year.

My sense is that those are both reasonably favorable from a gross margin perspective.

Can you give a little more clarity on a year-on-year basis as to what caused that contraction.

The majority of the contraction is due to the substantial audio impact year-over-year – 68% growth in Q4.

That is what drove the majority of it.

As Mark said, I am sorry to steel the stage, Mark – a number of our product lines went to more typical margins.

That is why we give a range of 32 to 34.

It is fundamentally, if you want to look for one culprit – if you want to call it a culprit – is audio.

Okay, great.

The second question relates to your capital spending.

You initially guided to 40 million, I believe, in CapEx.

Then you had spent about 40 through the first three fiscal quarters.

Then I think you talked about something like 50.

The actual looks like it is about 60.

So your capital spending last year was up about 64% year-on-year and another 47% this year.

So two questions.

The first one is, what is the – what are you spending on?

Do you have any initial plans for fiscal '07 from a CapEx perspective?

Let me take that.

A couple things.

One is factually.

We spent 54 million this year to see that and give you a sense of where we're at.

Secondly, when you look at that, I think you can see in FY '07 you can expect a range – it will be somewhere close to that also in FY '07.

A couple of things that have driven that historically – obviously computer and software activity; tooling; plant and building activity; certainly Oracle as well in this particular year; and some 10 million for the factory – the rest of the factor in China.

I think the net message for your is 54 million is where we landed this year.

Expect a similar range in FY '07.

Okay.

Just a last question on that topic.

This may be my lack of understanding specifically what you are spending on.

You quarterly depreciation in fiscal Q1 was about 7 million.

That actually declined through the course of this year to 6.4 million in the most recent quarter, if I have the numbers right.

That comes as your CapEx, as we've just discussed, is increased fairly meaningfully.

So, what is the – why are you not – why is the quarterly depreciation not trending higher given the higher level of CapEx?

Or is it going to in some future period?

Yes, I think a couple things.

One of the things we should look at is even the mix within asset lives I think is some of the key things.

You think about tooling being like a year or whatnot.

Then you look at things like factories more in the long-term in terms of 10 to 20 years.

So I think you've got to look at the mix within asset lives.

I think it's a good question.

That is the dynamic there.

I do want to underscore one point.

We see capital investment as a good thing, as a good growing business where we are pleased to be able to generate the cash flow we're doing and at the same time make the investments in our future.

Absolutely.

I am sorry, just the very last question on this topic.

My assumption is that the majority of the depreciation is probably run through the COGS line.

If I have that incorrect, please correct me.

As you contemplate the gross margin range you've laid out for next fiscal year, are you contemplating a higher level of depreciation commensurate with the increase in the CapEx?

Or am I thinking about that incorrectly?

Yes.

A couple things I'd say.

One is you are correct.

I think the majority of the CapEx would show up in the COGS area.

So I think that is a sound assumption.

I want you to think about our gross margin in general comprehends all the integration of our capital expense plans.

That would be very safe to say.

Terrific.

Thanks very much for the help.

I appreciate it.

Thank you everybody.

Thank you for participating.

I want to close on a comment about the future.

As you've seen, we've reached $1.8 billion in sales in fiscal '06.

Our goal for fiscal '07 keeps us very well on track to reach our $3 billion goal.

Our focus on profitability is designed to increase our operating margins on our way to that sales goal.

So as we celebrate our 25th anniversary – you know it's our 25th anniversary this year – the Company is stronger than ever, young and yet experienced with a blend of veteran employees and new experienced additions.

Mark is one example.

Over the last twelve months more than 400 new professionals joined Logitech's payroll in engineering, operations, marketing, and staff functions.

We are prepared to capture the tremendous opportunity coming our way.

Convergence is happening.

Our interface devices will be at the center of the user experience.

Our fiscal '07 portfolio, which you will begin to see unroll this summer – I am very happy that I have made you eager to do so – will demonstrate once again what innovation can do to our category.

Thank you for your participation everybody.

Ladies and gentlemen, this concludes today's Logitech fourth quarter and fiscal year 2006 earnings conference call.

You may now disconnect.