羅技 (LOGI) 2007 Q1 法說會逐字稿

Good morning.

My name is Angela and I will be your conference operator today.

At this time, I would like to welcome everyone to the Logitech first-quarter fiscal year 2007 earnings call.

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

After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Now, I would like to turn the call over to Mr. Joe Greenhalgh, Vice President, Investor Relations, Logitech.

Thank you, Angela.

I would like to welcome you to the Logitech conference call to discuss the Company's results for the quarter ended June 30, 2006, the first quarter of Logitech's fiscal year 2007.

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

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

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

Factors that could cause actual results to differ materially include those set forth in Logitech's annual report on Form 20-F, dated May 19, 2006, and in the final paragraph of the press release reporting first-quarter results issued by Logitech and available at logitech.com.

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

Forward-looking statements made during this call represent the management outlook only as of today, and the Company undertakes no obligation to update or revise any forward-looking statement 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.

With us today are Guerrino De Luca, Logitech's President and Chief Executive Officer, and Mark Hawkins, Logitech's Senior Vice President of Finance and Information Technology and Chief Financial Officer.

And now I would like to turn the call over to Mark.

Thanks, Joe.

I will begin with an overview of our Q1 '07 performance.

We delivered record Q1 sales and profits.

Our sales grew by more than 18%, with $393 million in sales and with growth in both our retail and our OEM.

This is our 31st consecutive quarter of double-digit sales and growth.

There was a broad-based demand for our retail products, with particular strength in the Americas.

As a result, I could say we are off to a really good start to achieve our financial goals for fiscal year 2007.

Before we review the income statement, I want to give you an overview of the impact of the equity-based compensation and how we will discuss this during the call.

Our U.S.

GAAP results for Q1 2007, for the first time, include the cost of equity-based compensation, as a result of our adoption of FAS 123(R).

Let me kind of describe this in that, again, this is the first time ever we're going to have about $5.1 million in costs that are reflected in our operating income.

About $4.2 million in costs will be reflected in our net income, and that is net of tax benefit.

And the cost impact on EPS is about $0.02.

Like most companies adopting FAS 123(R), we will provide non-GAAP pro forma information to ensure a meaningful apples-to-apples comparison to our prior year.

To have an apples-to-apples view, we will compare Q1 '07 non-GAAP pro forma results, excluding FAS 123(R), with Q1 '06 GAAP results, which also exclude FAS 123(R) cost.

And hence -- and this is an important point -- our comments during this call about our gross margin, our operating expenses, our operating income and net income for Q1 '07 will be based on non-GAAP pro forma numbers, excluding FAS 123(R) costs.

We have provided a reconciliation between our GAAP and our non-GAAP pro forma results in our earnings release, as well as the earnings call slides that we posted on our website for your convenience.

Now that we have covered this, let's press on and discuss gross margin.

Our gross margin was 30.9% compared to a 32.1% last year.

The decline was primarily the result of channel actions we took to move several end-of-life products in the retail audio and consumer gaming categories.

The three most important points that you should take away as it relates to gross margins are this.

One, we expect to see substantial, sequential and year-on-year improvement in our gross margins in Q2.

Number two, we anticipate an upside in our gross margin in the second half of the year following new product introductions, and we have discussed this prior.

Number three, we are on track to deliver our full-year gross margin that is slightly higher than fiscal 2006.

These are the key points.

As I shift on into the next part of the discussion, I want to remind you that all the percentages that will follow will be in comparison to our Q1 fiscal 2006.

Our operating income grew by 15%.

Our OpEx grew by 13%, in line with our 13% growth in gross profit.

Despite the lower gross margins, operating margins are essentially unchanged compared to the prior year.

When we push on and look deeper into the operating expenses, you'll note that our sales and marketing grew by 7%.

As a reminder, under U.S.

GAAP, the majority of the variable costs that we incur to generate demand at the point-of-sale are booked as a reduction in gross sales, not as operating expenses.

These soft dollars grew at a very similar rate to our Q1 sales in a retail category.

The key point is that our total investment in sales and marketing grew by significantly more than the 7% growth in operating expenses.

R&D was up by 15%, driven by investments in retail audio, video, and remote.

The G&A grew by 27%.

The growth in G&A, again, is primarily reflected around headcount increases, especially to support the SOX activity that we have going on this year, as well as our Oracle 11i implementation.

These hires, again, took place throughout FY '06.

Now let's turn to net income.

Our net income grew by 53%, and there were three primary contributories to the net income growing faster than the operating income.

First, our other income was $8.5 million higher than last year, due mainly to the $6.6 million gain in Anoto's share of sales, which we had previously talked about, both at the London Investor Day, as well as filing this in our 20-F.

Two, our interest income was $1 million higher than last year.

Three, our tax rate was favorable to last year.

These three factors contributed to the higher growth in net income versus operating income.

FYI, I want to call this out, that this is our most profitable quarter ever from a Q1 standpoint, even if we excluded the gain of the Anoto shares.

This is a good sign that our model is intact and performing well.

If I move to effective tax rates, as we have said before, you should expect to see effective tax rates vary quarterly.

Q1 was a good example of this, with variation that resulted in a rate of 12.3%.

There is no change in our outlook for the full year.

We continue to expect our tax rate, excluding equity-based compensation, to be around 14%, with likely variation by quarter.

If I move to cash, our cash position was $246 million.

This is basically flat sequentially and down from 299 last year in terms of the balance.

The decline compared to last year is primarily the result of our ongoing share repurchase program.

During the last 12 months, I think most of you are aware we repurchased $234 million on share buybacks.

Our cash flow from operations was $19 million.

This was a $24 million improvement compared to last year's negative $4.9 million.

The higher operating cash flow was driven from a combination of higher income, efficient payables management, and the add-back of the non-cash equity-based compensation.

If I move to DSO, DSO was 67 days.

This was up from 55 days last year.

This quarter was more back-end loaded for the retail shipments than prior years.

We had a big June.

As in most cases and in most years, we expect to launch most of our new products relatively late in the current quarter, so we don't anticipate significant improvement in DSO in the September quarter.

If I push on to inventory, our inventory turns were five times, up from 4.8 last year.

We believe our inventory was in good shape as we entered the second quarter.

As I look at share repurchases, during the first quarter on a post-split basis, we repurchased 1.22 million shares for $25 million.

We currently own just less than 5% of our shares outstanding.

We have roughly $37 million remaining under our current share buyback program, and we expect to utilize that and also implement the previously approved $250 million repurchase program when the current program is completed.

So our intention is to continue on with our share repurchase.

Now let's discuss the revenue by family and category, starting with the retail sales.

So we will take a little deeper look into the revenue at this point.

Retail sales and units both grew by 20%.

We achieved double-digit sales growth with strong demand across a number of product categories.

Americas lead the way with 30% growth, and I want to call out that within the Americas, there was a growth across all categories, led by a outstanding performance in the video and cordless.

Europe was up by 15%.

Asia was up by 12%.

And the video was very strong both in Europe and in Asia.

As I look retail sales in cordless, we are very pleased to report that as projected, we achieved and returned a nice rate of growth in the cordless area.

Had discussions with many of you and were pleased to see this.

Sales were up by 18%, with units up 25%.

We feel good about the return to growth in cordless desktops, as sales grew 9%, with units up 14%.

I would say it was a great quarter for cordless mice.

Sales were up by 32%, with unit growth of 37%.

Most of the growth was driven by strong sales of our line of cordless mice for notebooks.

All in all, a really good growth story for cordless.

We are very pleased to see it.

As I push on into retail sales for video, this was an outstanding quarter.

Sales were up by 56%, with unit growth of 53%.

This was the second straight quarter with both sales and units growing by more than 50%.

Our success extended across all price points.

We experienced a continued strong demand for desktop offerings led by QuickCam Communicate STX, and we more than doubled our sales of webcams for notebooks.

When I look retail sales for audio, this was a solid quarter for audio, with 23% growth in sales and 35% in units.

Our speakers grew by 34%, with units up by 51%.

IPod MP3 speaker sales were more than 5X higher than the prior year, driven by continued strong demand for our mm50 portable speakers for iPod.

We also experienced good growth with our X-530 PC speakers.

Sales and unit shipments of our PC headsets were both up double digit.

When I look retail sales reported, our sales declined by 6%, but units grew by 5%.

Corded mice sales were down by 14%, with units up by 1%.

It is important to call out here as a reminder that the comparable to the prior year is particularly challenging since we had a huge quarter with our MX 518 gaming mouse last year.

It was a good quarter for our corded keyboards, with sales up by 13%.

We experienced strong demand in particular in the Asia-Pacific for this product category.

And the retail sales for gaming, no surprises here, right, with sales down by 7% and units up by 1% due to the expected weakness in the console gaming.

Our console gaming sales declined by 48%, with units down by 28%.

The weakness in this category is due to the transitions to new platforms and is likely to continue for several quarters.

Again, we have had discussions about this.

We had a very strong quarter in PC gaming, with sales up by 58% and units up by 41%.

The growth was driven by sales of our very well-received G15 gaming keyboard.

As I press on and look at retail sales and other, sales in the retail other category grew by 71%.

The growth was driven by continued success in our Harmony remotes, which grew by 122%.

We are very pleased with that.

We achieved solid growth in double-digit areas of growth, both in the Americas and Europe, and Europe was ramping very nicely, with strong sequential growth.

OEM, sales grew by 4%.

Our mice sales declined as anticipated, down by 15%, with units down by 7.

The decline reflects the weak desktop PC market, as well as product transitions at major customers.

It was a very good quarter for sales of embedded webcams for our notebooks in the OEM category.

In conclusion, we delivered our best Q1 ever for sales and profits, and a substantial improvement in cash flow from operations.

We experienced strong demand in a number of product categories, including video, audio, cordless, and Harmony remotes.

And we anticipate a substantial gross margin improvement in Q2.

Our model is intact.

It is performing well.

Before wrapping up, let me say that we've scheduled our midyear investor meeting for November 2 at the Reuters Building in New York.

We will have more details to share with you in the coming weeks and we hope that you will be able to join us.

Now let me turn it over to Guerrino.

Thank you, Mark.

Thanks again to all of you for joining us.

I am very pleased with our Q1 results.

The fiscal year is off to a good start, with strong double-digit growth in retail led by an impressive 30% growth in the Americas.

I'm also pleased that we delivered on our projected return to growth in the cordless category, with growth in both mice and desktops.

And we achieved this growth without the benefit of our soon-to-be launched new product.

In spite of our anticipated decline in gross margin, we managed our operating expenses in line with gross profit and increased our operating income by 15% on a comparable basis.

Even if we exclude the gain on the sale of the Anoto shares, we still delivered our best ever net income for Q1.

We are pleased with our Q1 results, yet as I always point out at this time of the year, the first quarter is historically the smallest contributor to our full-year performance, so we remain focused on executing our full-year plans.

Last month, we held our fiscal '07 product showcase meetings with our major retail customers in Europe and the Americas.

The response from our channel partners for fiscal 2007 product roadmaps was outstanding.

The feedback from these corporate buyers is a key indicator that we have developed a lineup of innovative offerings that will enhance our market position throughout the remainder of the fiscal year.

Our launch plans are on track and we are excited about getting these products into the hands of our customers.

Let me talk about some of what is in store for the remainder of the fiscal year, and I will start with video.

We have experienced great growth in this category over the last four quarters and we believe the market opportunity has never been more attractive.

The most recent confirmation of this attractive opportunity was Microsoft's announcement that they were entering the Web category.

As we discussed during our investors meeting in May, we have planned for this development and we believe we are well positioned to sustain our leadership in the fast-growing video communications market.

Just this week, we announced the launch of our flagship QuickCam Ultra Vision WebCam, featuring a unique, appealing design and offering a true-to-life video calling experience by delivering twice the image clarity as that offered by typical webcams.

We also upgraded other members of our award-winning webcam lineup, adding new technologies such as RightLight 2, a system that intelligently optimizes video settings in low light and uneven lighting conditions.

Our success in the webcam category has always been driven by the combination of best-in-class hardware and software technologies that provide the user with a highly satisfying experience.

As just one example, our webcams includes Logitech Video Effects software, which allows users to personalize their onscreen appearance using Avatars and face accessories.

This software is especially popular among users of video-sharing Websites, as demonstrated by the downloading of over 5 million Video Effect accessories and characters from our Website.

Just last week we announced that we had teamed up with YouTube, one of the best-known video sharing sites, to promote webcam video sharing.

By providing one-click access to YouTube in our software, along with easy access to video calling applications and video effects, we will make the experience of video communication easier and more natural than ever before.

Let me turn to cordless.

We expect the new mice and desktops launching the coming weeks and months to sustain the growth momentum we established in the first quarter, further enabling the mass adoption of cordless.

Cordless notebook mice were a key driver of our cordless mice growth during the first quarter.

We will continue to strengthen our already robust mobile cordless mouse lineup with a particularly exciting addition in the high end.

The opportunity in cordless mice extends well beyond notebooks.

We are eagerly anticipating the launch of our new flagship cordless mouse, an offering that will redefine the category and leave no doubt that the mouse is gaining an even more central and sophisticated role in navigating digital information.

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

Beyond the product and design innovations you would expect from us across all major price points, we also plan to address the increasing popularity of IP telephony by making it easier for people to use Voice-over IP services directly with a Logitech cordless desktop.

That leads me to the audio category, where we plan to take advantage of the growing interest and acceptance of Voice-over IP by launching a number of products for use both at and away from the PC.

We will continue to innovate in the PC speaker category with stylish, high-performance offerings that meet the needs of PC users to listen to digital music at their or on the road with a notebook.

We will also continue to expand our line of well-received speakers for the iPod and MP3 players, and you can expect a significant addition to our Music Anywhere line, making it even easier to stream music from your PC, iPod, or MP3 player to any room in your house.

Turning to the Harmony remotes, where we expect to further strengthen our competitive position with several products, including an innovative and attractive offering at the high end.

Given our market-leading position in the remotes category in the U.S., our rapidly growing business in Europe, and the emerging opportunities in Asia, we continue to invest in simplifying the set-up process and providing effective customer support.

We believe the Harmony remote has the potential to become the universal control device for enjoying digital entertainment across the home and we're focused on making it happen by providing consumers with the best possible user experience.

On the operational front, in addition to ensuring a successful launch of our extensive new product lineup, we are also approaching the go-live date for the upgrade to our Oracle 11i ERP software.

As you can imagine, this is a major project involving multiple groups across the Company over many months.

While there is always the potential for unexpected developments with any project of this magnitude, we are on schedule and anticipating a successful implementation.

That brings me to my outlook for fiscal '07.

For fiscal '07, we continue to target 15% growth for both sales and non-GAAP operating income compared to the prior year.

As we said at the beginning of fiscal '07, we expect gross margin to be at the low end of our long-term targeted bracket of 32 to 34%, but slightly higher than in fiscal '06, due to anticipated upside in the second half of the year related to new product introductions.

As Mark mentioned, we also expect to see substantial sequential and year-over-year improvement in gross margin in Q2 as we roll out a new range of exciting new products, many with margins higher than those of the products being replaced.

Our non-GAAP operating income growth target excludes the cost of equity-based compensation.

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

With our solid performance in Q1, we are on track to achieve our financial goals for fiscal '07.

We are pleased that our top-line growth accelerated in the first quarter, even though we have yet to launch the large majority of our new products.

We believe that the innovation and attractive designs featured in our new products will allow us to sustain this momentum during the coming year.

We are focused on delivering profitable top-line growth by executing our plans to take advantage of the many opportunities before us.

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

Please follow the instructions of the operator.

(OPERATOR INSTRUCTIONS) Ted Chung, Bear Stearns.

I had a quick question for you regarding your guidance.

Given that your revenue growth for 1Q was 18% and you talked a exciting new product coming up for the second half of the year, is 15% growth being very conservative at this point?

Is there something that we're not seeing that we should be worried about?

I don't think there is anything you should be worried about except the fact that the future is the future and nobody knows it.

We're very pleased with the 18% and we are very excited -- of Q1 -- we're very excited about our products.

We know from experience that not everything that could go right does go right, so we factor that in in our forward-looking guidance.

Also, Q1 is a small quarter, remember.

So even though we're very pleased with our Q1, let's wait until we see the developments in the coming weeks and months.

For the time being, this is our guidance and we confirmed it.

Okay.

Just on your cash conversion cycles, Mark had talked about previously that there's some opportunities to improve that.

Do you continue to see that?

Ted, I do believe that there's opportunities to improve that.

We are looking at that, as I had mentioned to you.

I wanted to begin to explore it without giving any particular targets.

One of the things I would say is that you saw in the year-on-year that we improved our cash position partly through more efficient payables.

That is one of the beginning points.

I think I'd said DPO is an area that was of interest.

Clearly, we will continue to look at the entire cash conversion cycle.

But it is early days, Ted.

But it is something we want to look at, explore, and try to optimize for the Company.

Great.

Thank you.

John Bright, Avondale Partners.

On the gross margin side of the equation, Mark, can you talk about what the impact was and elaborate on the channel actions that you took in the quarter in the audio and games?

I sure can, John.

We -- a couple of things here.

We looked at both from the audio and gaming, and in the channel, felt that it was important to move these transitions or these end-of-life activities in the channel to position ourselves well for the entire year, thought was in the best interest of the business to do that, and we made those actions.

So basically, that is what happened.

We wanted to move things along in the channel and took the appropriate actions in those two areas.

I think you can step back here, John, and with the gaming activities going on, what's happening with the product transitions, I think it makes a lot of sense.

And also in the audio, with the explosive growth that we have, we want to just continue to position ourselves for the entire year.

Can you talk about the impact on an absolute basis?

We're not going to talk about the specific impact.

Those really -- fundamentally, those are the two drivers that really kind of drove the impact for the whole gross margin.

Right.

Guerrino, you continue to talk about your breakthrough product redefining this segment.

Are you going to give us some timeframe on that?

We're not going to pre-announce anything here.

In this room there is my PR Director.

She's looking at me like, don't say anything, don't say anything.

I have to tell you that we showed a lot of great new products across the categories to our customers, as I mentioned.

I don't recall such a positive feedback in all the eight years I have been here.

So you will start to see some of these products -- a good number of these products this quarter and the balance of it early next quarter.

Right.

One last one for you, Mark.

On the Oracle and the SOX costs or expense increases, are these one time or is this something we might see a step down in G&A associated with these in the future?

Here's what I would say, John, is that we will continue to operate within the range that we articulated in the London Investor Day in terms of the range of G&A, in terms of the model.

We certainly hope that some of these expenses will transition as we go and implement, for example in the Oracle.

But I think from a material standpoint, I would just kind of go back to the guidance that we're giving from a G&A standpoint.

Thank you.

Manny Recarey, Kaufman Brothers.

Can you talk a little bit about the audio sector?

Looking at the number, 23%, is a nice year-over-year growth, but it is down fairly substantially from the previous quarter -- I think it was 68%.

Is it just tougher comparisons going forward and you expect the growth rate to be more in line for this June quarter?

Or would you expect it to bounce back?

You know, audio has been a very exciting business and will continue to be.

We said in the past that sustaining a triple-digit growth pace is just unthinkable, and we will continue to believe that.

We are very pleased with 23.

That 23 factors in in part the substantial action we took to transition the existing lineup into a new lineup across many elements of the audio line.

So audio will continue to be a major contributor to our growth.

It won't be triple-digit.

But we are very bullish across both the PC side of audio and the iPod side of audio.

Triple-digit would be nice, but I don't --.

It has been triple-digit, but, you know, at our size it is a little bit difficult to sustain.

Audio, as you know, is our second-largest business at this point, and so it is a significant chunk of our revenue.

Yes.

Then one more question for Mark.

You had spoken about the sales and marketing.

It was up only modestly, but -- the income statement, but if you include the soft dollars, it was up more.

Can you give a little bit more color?

Was it up about the same amount as gross profit or up as much as sales?

Let me actually speak to that, Manny.

When you look at the OpEx, you see it growing like at 7% from that standpoint.

But when you think about all the soft dollar activity that basically happens between gross ships and net ships, basically, that soft dollars grew roughly in line with our retail growth rate.

Okay?

Okay.

So you can see what's happening on the OpEx side and then just envision the soft dollars growing roughly in line with the retail sells growth rate.

Then you can get a better view of how we're driving demand.

Okay.

That helps a lot.

Thanks.

Matthew Yates, Merrill Lynch.

My first question is if you could give some more color on why the quarter was back-end loaded, and in particular, if the higher level of Accounts Receivable were flat, any selling into the channel rather than sellthrough?

Then my second question is do you still expect OEM to grow double-digit this year?

Let me tackle both questions.

This quarter was more back-end loaded than last Q1, a few percentage points.

Not like a dramatic difference, but a tangible difference, and that is reflected in the DSOs in part.

Why is that?

Well, you know our customers order frequently, and the performance in the late April/early May was not as good in terms of sales out.

It picked up in the second half of May and became stronger in June, and that obviously drove our sales.

There is a pretty tight correlation between sales in and sales out at this point in our business, which is, by the way, a healthy the thing.

As I talk about back-end loading, next quarter -- the current quarter, Q2, is much more naturally back-end loaded.

It's driven much, much less by, if you want, sales out issues, but much more by the timing of introduction of our new products.

And when you introduce new products, you have sort of a built-in kind of phenomenon because you have to put enough on the shelves to start selling.

So that will be more natural and that is why Mark was referring to not expecting a significant change in DSO at the end of Q2.

Sorry -- second question was --?

On the OEM price expectation for this year.

We do expect OEM to grow to double-digit.

And let me sort of comment on what's happening there.

I think Mark alluded to it.

We are seeing a soft general desktop PC market.

You know that.

We know that.

And that's somewhat impact on OEM, especially because we have significant market share in mice, so our performance in that business is closely related to the market.

However, there is also an additional thing which is interesting.

At a major customer we are transitioning from a mouse offering to a desktop offering.

We are in the middle of that transition.

The desktop offering is not entirely ramped up at this point.

From a revenue and gross profit perspective, it is actually a very positive change, as you can imagine.

You replace a mouse with a desktop, it's obviously more value getting in.

And that is going to be a driver of our growth in the remainder of fiscal '07.

So to answer specifically, we do continue to expect double-digit growth in OEM, yes.

Great.

Can I ask just one follow-up question from Mark perhaps?

Are you seeing any rising impact from higher wage costs in China?

You know, Matt, we have looked at this before.

We have talked to people and what-not, and of course, wages go up everywhere, right, to a degree.

But there has been no significant effect on that at all on our business.

Okay, thank you.

Again, very small, de minimis effect.

Mehrdad Torbati, Deutsche Bank.

I just had question back to DSOs.

You are saying that you're not going to see any significant improvement in DSOs through the product launch at the end of the quarter.

Now okay, if we had a (indiscernible) going back to the first quarter.

If you had to normalize the quarter in terms of selling in and sellout and that was evenly split in the quarter, where do you think your DSOs would have been at the end of the quarter?

So what you are really asking about is trying to normalize for the ramp of a big June and trying to kind of stand back and look at the terms fundamentally, I think is kind of the gist of your position -- or your question, rather.

We, from a Logitech standpoint, a couple things are going on that we discussed in London.

One is that certainly there is emerging market activity that is having some impact on the regional mix, if you will, of DSO, which has kind of a weighted average total effect.

But the biggest thing that drove the change basically was in fact the big ramp in June.

So if you normalize that, I think you might see some movement in DSO, but the biggest explanation, far and away the number one Pareto bar, is in fact the big June.

I think that will be -- without quantitatively giving it to you, I'm telling you the big Pareto bar far and away was the June ramp.

Let me qualify -- let me add to what Mark is saying.

We are not providing a guidance on DSO, if that is the question.

So that is what is.

It is higher than its (indiscernible) level due to the back-end loading, but we're not telling you what it is projected to be moving forward.

Okay.

You were trying to explain the potential improvement in the cash conversion side ahead of you.

You have referred more to payables as a source of improvement.

Do you see DSOs as a source of improvement in the short-term as well?

Let's talk about Q3, Q4, when you would not be having a back-end loaded quarter.

The thing I believe is that the cash conversion cycle in aggregate, there is an opportunity there for us.

And that is what we want to explore more deeply and more fully.

I think the first-quarter call you can see is looking at what's happening with DPO, and we're just beginning to look at that.

And if you look at this quarter's cash position, there's a $24 million improvement period-on-period, and the payables was a contributor to that.

So we're just beginning these days of really starting to dig in and look at this.

But I believe that the cash conversion cycle is an opportunity and we will continue to look at that over time and we will dig in to unfold this over time.

But I'd rather deliver some good progress for you as opposed to guide you to a specific number in this respect.

But we do believe that there is an opportunity.

Could you please further comment on what you said just earlier, that you imagine market activity increasing, putting length in your DSOs?

Is it coming from China?

What kind of (multiple speakers)?

Think about it more in terms of things like Eastern Europe, Latin America, activities like that.

Okay.

Thanks very much.

I have no further (multiple speakers).

Michael Foeth, Lombard Odier.

Good morning.

I have one question on the Other operating income.

Apart from the Anoto contribution, what was in there?

And could you maybe tell us if we should expect more positive contributions in coming quarters on that side?

The other thing that was in there, we had some foreign exchange gains as well, and there was favorability year-on-year from that standpoint.

So we had interest income that was up year-on-year was one of the explanations that I gave as well.

So if you think about the differences between operating income and net income, again the contributory factors were the Anoto, which we called out.

And then on the same line there, you looked at the foreign exchange.

Then separate from that, you have the interest income and the tax improvement, okay?

And those are some of the accelerators that helped drive good operating income to an even higher net income.

But no expectations for the future?

We never give guidance on things like foreign exchange and things of that nature, but those were the actual dynamics that were happening.

Okay.

My second question would be on the console gaming.

Can you give us some kind of -- explain what the drivers are, what will drive growth again there, and what timeframe we should look at in terms of turning momentum in console gaming?

By far, the largest driver of our console gaming business is the PlayStation.

And as you know, the PlayStation is undergoing a major transition, and Sony is telling the world that perhaps before the end of this calendar year they will introduce PlayStation 3 in some markets.

I'm being cautioned here -- I don't want to speak for Sony.

We are very close to Sony.

As you know, we have a long-standing relationship with them, and there is a lot of things we are working on with them, some of which will appear at the launch of PlayStation 3, some of which will lag a little bit.

But fundamentally, the PlayStation 3 introduction will be the great catalyst of our growth.

This is why we are saying that it is hard to expect a return to growth well before towards the end of fiscal '07.

At that point, we will become very bullish on our console gaming business again.

Other platforms, we have been doing very well with PSP, but it's a much smaller platforms.

And we expect the PSP to continue to be a driver.

And we have never and don't expect we will have a substantial business on a Xbox, so that is not on the radar screen.

We have a unique product there -- and Harmony remote specifically geared for Xbox.

We will have a couple of other retail products that work with Xbox, but Microsoft licensing products is such that it doesn't make it either possible or attractive to do a lot around that platform.

Historically, we're talking a 10-to-1 ratio for us in terms of the importance of PlayStation.

So we are all the eagerly anticipating that introduction, and that should lift our gaming business, particularly console gaming.

As I am on gaming, I was very pleased to see the growth of PC gaming, and I would not underestimate the opportunity in that space, due particularly to the introduction of Vista.

Vista has many things in it, but certainly is a much more suitable platform for PC gaming.

It defines an aggressive game pad, which means that every game will work with the same game pad.

It is never been the case for the PC.

So that should continue to drive PC gaming.

Also the success of online gaming will drive gaming keyboards and gaming mice.

So I am definitely bullish on that side of the business.

Okay, great.

Just a last one -- I just wanted to get confirmation that these 130 basis points on the gross margin there was really only due to the channel effect of audio and console sets.

Absolutely we believe that the impact of audio and console gaming end-of-life activities in the channel was very significant.

We are not quantifying that, but it was very significant.

And you should look more at what we said about our margin going forward.

We said that we expect substantial sequential improvement in Q2.

And we also confirmed that we see overall year margins to be slightly ahead of last year.

Exactly.

That is why I think we should really, Michael, just refer to the three takeaway points that we gave and Guerrino just covered them.

So you're going to be back in that bracket?

Yes, absolutely.

In Q2 as well.

We said substantial.

It's up to you to interpret the chemical meaning of substantial.

Thanks a lot.

Charles Wolf, Needham & Company.

I just wanted to do a follow-up on the issue of console gaming arena.

When should the year-over-year growth turn positive once PS3, PlayStation 3, is introduced?

Hi, Charlie.

Let me speculate.

If Sony launches as announced, I believe that Q4 might be a good time to look for it.

Okay.

Our Q4 fiscal.

Got it.

Okay, thanks a lot.

Can Elbi, Cheuvreux.

Just one follow-up as well.

I believe your allowance for customer programs and returns grew 3X versus net sales in fiscal '06 versus fiscal '05.

Should these directional changes give us a sense of how that did in fiscal Q1?

First of all, hello there, and thanks for the question.

We actually don't get down to that level of detail in terms of specifics.

But I think the key point for you is understanding and getting kind of the bigger context of what we're doing from a gross margin and sales standpoint.

But we don't typically comment at that level.

It is a gross to net kind of item.

I was trying to understand the dynamics between gross DSOs and net DSOs.

That is why I was trying to get my hands around that.

I appreciate that.

Hopefully, Guerrino really helped you with the DSO, articulated a little bit more and elaborating some of the key takeaways on that.

Again, the biggest driver from that standpoint, just to be clear, is the fact that we had a big June, which we're really happy about, to be honest with you.

And then secondly, there's some regional mix activity, including Eastern Europe, Latin America, that is out there, and some of the regional mix affects us.

Some term changes, but those are down the Pareto bar in terms of dissecting the actual what is happening with DSO.

Okay, and maybe just one quick refinement on gross margin.

You made certain comments on year-over-year comparisons.

Do your comments also pertain to a quarter-over-quarter comparison?

So I mean, if I am looking at this 160 basis point clean quarter-over-quarter decline, including that 60 points that you claimed was there last quarter, is that also due to these actions that you took or would there be anything else there on a quarter-over-quarter basis?

No, there wouldn't be anything else there.

Okay, thanks a lot.

Yves Kissenpfennig, UBS.

I also had a question to your gross margin.

You are talking about the gross margin being weak in Q1 due to the channel actions in audio and remotes.

And you seem pretty bullish --

Sorry -- it is audio and gaming.

And gaming.

I'm sorry, yes.

And you seem pretty confident near-term and you keep saying that the product introductions are going to push the gross margin back up.

Could you maybe be a little more specific as to is it just these two areas or what other areas do you really expect to be relevant from a gross profit margin perspective?

Let me take a shot at that and maybe Guerrino can add in.

A couple things here, Yves.

One is I think you've characterized it well.

First of all, if you look at what has happened currently, we have taken the appropriate actions.

We felt it was appropriate move some things through the channel, and hence we did that in the console and also in the audio area.

If you push beyond that, and have that not be there in the current quarter, then you start to look at the fact that we have been introducing new products already, a lot -- a number of recent announcements that are happening.

Thirdly, we begin to shift more into it new products throughout the year as we even talk about what you can expect from a DSO standpoint, because historically we have a big wave of products coming out.

So new product introductions has been a consistent part of our plan.

It is something we talked about back in London.

We are beginning to execute on that, and seeing that happen, we have taken the right actions now to position ourselves for the long-term and to stay on track for the guidance.

So I would be very clear and crisp and say, yes, moving through these two, the console and moving through the audio has helped us.

And also looking at the product mix and the introductions is helping us.

And we actually feel that we are well on track to achieve our commitments in the gross margin area.

More specifically in terms of new products, as you know -- you've followed Logitech for a long time -- when we introduce new products, their gross margin tends to be lower than it will be in a few months through the lifecycle.

However, in this particular case, this is compensated -- more than compensated by the fact that several new products are replacing older products, and these new products at introduction will have better margins than those that they replace.

And that is particularly true in audio and cordless.

That is as much color as I can give you on our sort of bullishness on the sequential improvement in our overall fiscal year margin.

No, that's great.

Thanks a lot.

We will take one more question.

Joel (indiscernible) of [AWP] News Agency.

I just wanted to ask about your [midterm] goals.

Still confirm $3 billion to be reached around 2010?

Thank you for the question.

That is way beyond what we usually provide as formal targeting, so it is way beyond fiscal '07.

But we are very confident that we can sustain double-digit growth for the foreseeable future.

So if you apply that statement to a simple compound growth opportunity for the Company, the answer to your question is yes.

And we see that $3 billion as just one milestone we will pass as we build Logitech for the very long-term.

Thank you very much.

Let me give you just a couple of observations before we close the call.

Thank you very much for your participation.

I believe it was tangible how excited I am about this year product portfolio.

I think we are entering the holiday season with our strongest lineup ever.

But let me also share what we saw -- what I saw last week when we completed a strategic review of our product roadmap for fiscal '08.

So here I am going really to the future.

Fiscal '08, as you know, starts in next April.

As thrilled as I am about this year's progress, I must say that I am very impressed with next year's plans for continued market-leading innovation.

I strongly believe that our ability to innovate has long been one of our primary competitive strengths, and that our fiscal '08 products will just widen the competitive gap even further.

As it has been the case for a long time with Logitech, the best is yet to come.

So thank you very much for your participation today.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.