羅技 (LOGI) 2007 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Logitech second quarter fiscal year 2007 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 session. (OPERATOR INSTRUCTIONS).

I would now like to turn today's call over to Joe Greenhalgh, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Cynthia.

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

The press release, a live webcast of this call and accompanying presentation slides are available on line 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 subsequent filings available online on the SEC EDGAR database, and in the final paragraph of the press release reporting second quarter results issued by Logitech and available at Logitech.com.

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

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 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 this call are also available on our website.

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

And here in Fremont, we have Mark Hawkins, Logitech's Senior Vice President of Finance and Information Technology and Chief Financial Officer.

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

Thanks, Joe.

I will begin with an overview of our strong Q2 performance.

It was an outstanding quarter with record sales and profits for Q2.

And we delivered the expected substantial year-over-year and sequential improvement in gross margin that we projected following our Q1 results.

Our sales grew by 19% to $502 million with growth in both retail and OEM.

We had balanced double-digit growth across all our retail regions, reflecting excellent channel acceptance of our broad range of new products.

It was our 32nd consecutive quarter of double-digit sales growth.

Our comments during the call about our gross margin, operating expenses, operating income and tax and net income for Q2 FY '07 will be based on our non-GAAP numbers but exclude 123(R) costs.

This is similar to what we did prior quarter.

Gross margin; our gross margin was an impressive 34.6%.

It improved by over 300 basis points, both sequentially and also compared to the prior year.

Let me talk about the improvement.

The improvement was primarily driven by the launch of new products that had higher margins than the products that they replaced.

Our gross margin in both the cordless and corded categories delivered substantial sequential and year-over-year improvement.

The cordless improvement was mostly related to cordless mice with higher margins, and this is an important point, higher margins achieved across all price bands and the highest gains in the low-end.

The corded improvement was primarily due to significant gains in corded keyboards.

We are also pleased to note that our PC speaker margins improved sequentially and year-over-year, driving a gross margin increase in the audio category.

And again, we talked about the audio improving in the second half.

You could see this activity.

Please note the growth percentages that follow are in comparison to the Q2 fiscal 2006.

Our operating income.

This grew by 50%.

This was the second-highest year-over-year quarterly growth that we've achieved in the last four years.

Our gross profit growth of 31% significantly outpaced the 24% growth in operating expenses.

Here we are actually very pleased to see good scaling compared to our gross profits in terms of operating expenses and at the same time as you know we're stepping up and making significant investments to grow this business.

Taking a closer look at our operating expenses, sales and marketing grew by 20%.

This is in support of and in line with the continued double-digit retail sales growth that we're seeing.

Research and development was up by 18% with a majority of the growth driven by investments in key categories such as video, audio and remotes.

G&A increased by 48% due to headcount increases particularly in support of and related to the SOX 404 certification and also the implementation of Oracle 11i and the related ongoing support.

Now let's turn to net income.

Our net income grew by 47%, and our net margin reached 10.6%.

Earnings per share grew even stronger, up by 56% to $0.28 reflecting the ongoing positive impact of our share buyback program.

We talked a lot about the share buyback program.

We feel it's a good thing from a company standpoint.

You can see the effectiveness in addition to the earnings effect.

So let me just pause and say this was far and away our best ever Q2, and I think most importantly as a reflection that our model as well and operating effectively.

Let me add a few additional comments to our income statement.

Our other income declined by $2.1 million compared to the prior year.

Now a lot of you will recall (indiscernible) the stock carefully that we had a gain of $2.2 million last year with the re-evaluation of the Chinese yuan, and that is basically the delta in the other income.

In terms of interest income, we were up by $1.2 million compared to the prior year as we earned higher interest on our cash balances and also you will recall that last year we had convertible debt expense that we do not have this year.

Turning to tax rate, the tax rate for Q2 was 11.8%, and as we've said before, we do expect volatility by the quarters and we continue to expect that.

But that was the rate.

We now expect our tax rate excluding the equity-based compensation cost to be around 13% for the full year.

That's a small improvement from our earlier target of around 14%.

Turning to cash, our cash position was $150 million plus there was another $95 million in short-term investments.

Adding the two together leaves our cash position essentially unchanged from the prior quarter and down $10 million from the prior year.

But when comparing to the prior year it's important to note that during the last 12 months we've spent $237 million on share repurchases, and we've been buying stock back on an average price of roughly $20.68.

The $95 million that I reported in terms of short-term investments represents an investment we made in variable-rate, U.S. government guaranteed securities that generate a higher interest income with minimal incremental risk.

Our cash flow from operations for the quarter was $22 million.

This was a $47 million improvement over last year's $-25 million in cash flow.

The higher cash flow was driven primarily from lower inventory and the significant increase in net income.

Through the first two quarters of fiscal 2007 our cash flow from operations is $72 million higher than the same period last year.

We said we would be attentive to cash and cash management.

I think you're seeing that; again a good reflection on the model.

Turning to inventory, inventory we ended up the quarter with roughly $4 million less in inventory than in September than even the prior year.

Even though we have grown the business by 19% on the top line.

So as you can imagine, the inventory turns improved significantly to 5.1 turns compared to 4.3 last year.

DSO.

Our DSO was at 71 days for the quarter, and this is in line with the outlook we provided during the July earnings call.

It is up from 63 days last year, up just slightly sequentially.

The increase is due to a combination of a slightly more back end loaded quarter that we've been talking about and predicted and some select term changes.

Now let me just make the key point here, and that is that we expect solid sequential improvement in our DSO in Q3 due to a more linear customer ordering pattern.

And let me dive deeper into this and let you know some information that is a good indicator of this, and that is that our actual backlog that we have entering the quarter is substantially higher than the backlog we had last year at the same point in time.

So again it reflects the strong appetite that our customers have for our product, and we think that bodes really well for the business, as well as it will help us in the DSO next quarter.

Share repurchase.

During Q2 we repurchased 1.19 million shares for $24.6 million at an average price of $20.70.

We currently own just under 5% of our outstanding shares.

We have roughly $12 million remaining in our current share buyback program, and we also as all of you are aware, we talked about this in prior sessions, we have been approved to have another $258 million repurchase program that we will execute once we use up the $12 million.

So share repurchase has been part of our history and will be part of our future.

Let's turn to ADR exchange.

Our previously announced ADR for share exchange will be effective next Monday, October 23rd, and you know we're excited about this because we are able to offer our investors the convenience of trading all shares on the NASDAQ starting next week.

We expect that this will lead to enhanced liquidity for investors trading on the NASDAQ.

October 20th will be the last day of trading for our ADRs.

It's important to note that the vast majority of the ADR holders for those ADR holders was really nothing that they need to do at all.

ADRs held in brokerage or bank accounts will be automatically exchanged for Logitech shares on or soon after the effective date.

As I exit the ADR topic, again I think the theme that I think about is one of offering our shareholders choices and the choice now is whether they want to trade it on the Swiss index or the NASDAQ.

We give them more flexibility which we like.

Now let's discuss the net sales by product family and starting with retail.

We'll go into the topline in a bit more detail.

Our retail sales grew by 21%, and units were up by 15%.

We achieved balanced double-digit sales across all the regions, and I think that balance is a good thing.

America's led the way at 23%, Europe at 22% and Asia at 17%.

And I want to call out the WebCams and cordless mikes really were major growth drivers in both the Americas and Europe.

If I go to retail sales cordless pleased about this, as well.

Our double-digit sales growth in cordless was not only there, but it accelerated in Q2.

Sales were up 22% with units growing at 18%.

We had more modest growth in our cordless desktops with the sales up 5% and units growing by 11%.

It was an outstanding quarter by any measure for our cordless mikes with sales growth accelerating to 40% and unit growth at 22%.

Let me talk a little more on that.

The growth in Q2 was primarily driven by the launch of our MX Revolution cordless laser mouse and the VX Revolution cordless laser mouse for notebooks.

Got a lot of press on this, a lot of good journal articles and what not.

You've probably read a lot about that.

That really panned well for us.

To provide some historical perspective on our MX Revolution sales these were almost twice as high as our prior benchmark, the MX 1000 sales that we launched when we launched the world's first laser mouse in the same quarter two years ago.

So MX performing twice at the rate of the MX 1000.

We also saw continued strength in our notebook category with sales of cordless mikes for notebooks nearly doubling compared to the prior period.

So if we transition now into video, it was another very strong quarter for video with sales up 43% and units by 37%.

It was the fourth consecutive quarter with sales growth in excess of 40%.

Once again, we had success across all of our price points, and I want to also noted that our new line of WebCams that we've launched during the second quarter have really obviously generated strong demand and are being very well received.

Our sales of webcams for notebooks grew by more than 60%.

So again, nice to see the WebCam business healthy.

Audio.

It was a solid quarter for audio with sales up 21% and units up by 26%.

Our speaker sales grew by 51% and the units were up by 57.

If I go a little deeper into that sales for our iPod, MP3 speakers were well over three times higher than the prior year.

PC speakers grew by 27%, and I might note also that Europe was particularly strong with the PC speaker business.

Our best-selling speaker you might note is the mm50 in terms of this prior period; the mm50 portable speaker for iPod.

It was a strong quarter for the PC headsets as well as sales grew by 24% and units by 27%.

Corded.

I am pleased that we had a strong corded business as well in this particular quarter.

And we grew by 13% on the revenue line and units were up by 9%.

And if I go deeper here, it is important to note that this is the fastest sales growth in the corded category that we've had in the last five quarters.

So that is growing strong in addition to our cordless.

The growth was primarily driven by our corded keyboard sales, which were up by 33% with units up by 22%.

We also had growth in corded mice with sales up by 6% and units by 3%.

Looking at gaming, we had a similar quarter to what we saw in Q1 with sales down by 3% and units down by 6% due to the expected weakness in the console gaming.

Our console gaming sales declined by 41%, and units were down by 37%, and we all have talked about the fact that this weakness in the category is due to significant transitions, new platforms and will likely continue in the current quarter.

This is all a matter that is in the press a lot and the platforms and the transitions.

We've had a very strong quarter in the PC gaming with sales growth of 63% and unit growth at 21%.

And again, the G15 is the strong engine that is really delivering that sustained strong demand in the PC gaming area.

If I go to retail sales other, sales were up by 21%.

Growth was driven by our harmony remotes which grew 30%.

It was a solid quarter for our remotes in the Americas, and were off to a promising start in Asia.

OEM sales.

Sales grew by 3%.

Our mice sales declined as expected, I might note, down by 11% with units down by 3%.

The decline is really part of an ongoing product transition with one of our major customers.

A separate point on the OEM is it was our second straight strong quarter for sales of embedded WebCams for notebooks.

And again, we're pleased to see that business.

So let me just conclude and say that it has been -- we delivered our best ever Q2 for sales and profit.

We think this is a strong indicator of our model being well in order and operating effectively.

We achieved our expected substantial sequential and year-over-year improvement in gross margin with our second-highest quarterly gross margin in the last five years.

We entered the December quarter with a higher retail order backlog than the prior year, and it was substantially higher indicating a strong demand for our new refresh product line.

Obviously a hungry appetite by our customers.

And I want to note also that our cash from operations is up nicely year-to-date from the prior year $72 million growth, half the date rather on that so we feel good about that aspect as well.

So strong quarter and before I wrap up, I want to remind you all that we have the midyear investor meeting that is scheduled on November the 2nd at the Reuters Building in New York.

We hope to see you there, and at this point I'd like to go ahead and turn it over to Guerrino.

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

As you can expect, I am delighted with our outstanding Q2 results.

Our retail sales continued to grow at an impressive double-digit rate with strength across all regions.

Our gross profit grew significantly faster than operating expenses, and we delivered one of our strongest quarters ever for profit growth.

One of the key highlights for Q2 was delivering on our projected substantial year-over-year and sequential improvement in gross margin.

Our ability to achieve one of our best gross margin quarters in our history is a clear indication of our success in introducing stellar products that in many cases deliver higher margins than the product they replaced.

This solid gross margin is a true measure of the value of our innovation, not only boosts our profitability but also puts us in an even stronger position in what remains a highly competitive marketplace.

Speaking of products, I am very pleased with the acceleration of our retail cordless mikes growth to 40%.

This growth is largely driven by market enthusiasm for the breakthrough MX Revolution and VX Revolution mike was the highest we've delivered in the last seven quarters.

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

The operational and logistical complexity associated with the worldwide rollout of many new products across multiple categories is significant.

And our ability to manage this complexity was a major enabler in our strong topline and bottom line performance.

During Q2 we also implemented successfully the upgrade to our Oracle 11i CRP software.

This was a major project involving multiple groups across the company over many months.

We believe this upgrade provides us with a solid operational foundation to support our expected future growth.

Naturally, as pleased as we are with our Q2 results we remain focused on executing our plans during the pivotal second half of the year.

Let me talk about what we see for the remainder of fiscal '07.

There are many factors that have contributed to our achievement of eight consecutive years, actually 32 consecutive quarters of double-digit, year-over-year quarterly sales growth.

But none of them is as significant as the combination of consistently delivering great products that are solidly positioned in the sweet spot of consumer trend.

This combination has never been more powerful or promising for Logitech than it is today.

Let me talk about some of these trends, starting with IT communications.

The growth of broadband is enabling a revolution in Internet based communication with the most recent example being Google's acquisition of YouTube.

The continuing success of our broad offering of industry-leading WebCams validates the consumer appeal of easy-to-use video communication.

In fact, since inception through the month of August there has been over 9 billion cumulative windows live messenger video IM sessions.

It's an impressive number; gives you an indication of how pervasive this kind of form of communication is happening.

Our IT communication targeted offerings go well beyond WebCams.

Our PC headset sales continue to register strong double-digit growth.

In addition, last quarter we introduced several innovative new products, including the Logitech EasyCall Desktop, the world's first combination speakerphone, headset, mouse and keyboard which provides a complete solution for Internet calling and navigating the PC, as well as the Logitech Quickcall USB speakerphone for Internet calling and the Logitech cordless Internet headset which makes using Skype (technical difficulty) as easy as using an ordinary cordless telephone.

The next trend we are exploiting is the explosive popularity of digital music which continues to be one of our major growth drivers.

Our stylish high-performance product in the PC speaker category address the needs of PC users to listen to digital music at their desk or on the road with their notebooks.

And our extended line of speakers for the iPod and MP3 players continues to meet the strong market acceptance.

For the ultimate in listening freedom we recently announced the Logitech FreePulse Wireless headphones for iPod and MP3 players.

Our second generation wireless headphones deliver great ease, style, comfort, durability and performance.

And today to further our momentum in digital music, we have acquired Slim Devices, a pioneer in the development of music systems to take advantage of the home network.

Products from Slim Devices, such as the acclaimed Squeezebox and the recently announced Transporter enable people to enjoy high-quality digital music in multiple rooms of the home regardless of whether the music is streaming directly from the Internet or from a PC, Mac or storage device on their network.

We purchased the privately held company based in Mountain View, California for $20 million in cash plus a possible performance-based payment tied to reaching certain future revenue targets.

The acquisition of Slim Devices allows us to build on our foundation of innovation in digital music and home entertainment control to address an emerging market.

Slim Devices brings expertise in both network based music delivery and high-quality digital audio streaming and a committed community of developers.

This acquisition will immediately broaden our product offering for multiroom music systems and build our capabilities in network based streaming technology.

It also complements our existing technology in human interface strength as well as our own offering which includes the recently introduced Wireless DJ Music System -- a product for streaming any PC-based music to your stereo or power (technical difficulty) without (technical difficulty).

The acquisition of Slim Devices follows the same rationale that we successfully applied for QuickCam, Labtec and Harmony over the past several years.

We're adding a small company with great products, great technology and a great team to Logitech in an emerging market that we expect to experience substantial growth and to whom we can add unique value.

Let me continue to review the key trends underlying our product strategy and our exciting prospects by turning to navigation.

Transforming the experience of navigating and manipulating the vast amount of digital content on a person's computer or on the Web remains a central opportunity for us, 25 years after our first mouse.

What we accomplished with the MX and VX Revolution mice may specifically reflect the revolution (inaudible) enable for PC navigation is just one element in a strategy and a set of significant innovation opportunities in this space that will unfold in the coming months.

Another trend out there, the growing complexity and richness of home entertainment systems in the living room is a perfect match for our market leading line of Harmony advanced universal remote controls.

The most recent addition to our lineup, the flagship Harmony 1000 which will begin to ship this quarter features a color touch sensitive screen and sets new standards for ease-of-use.

Beyond the products themselves our most significant competitive differentiator is the world's largest audio video control database.

This database now includes over 5000 unique branded devices and over 175,000 unique devices.

And we also continue to add thousands of new devices to the database each week which extends our lead with this valuable asset.

We've given it a relatively low-profile recently by the increasingly widespread appeal of console and PC-based gaming is a trend that will become much more visible in the near future.

Earlier this month we announced the first of our products for the PlayStation 3, the Logitech ChillStream Controller.

We believe we are uniquely positioned to leverage the opportunity for third party PlayStation peripherals, and we are eagerly anticipating the launch of this exciting platform.

We also believe the expanded centralized windows Vista will reignite the market for PC gaming, which as you have heard is growing substantially this quarter; as the leaders for PC gaming controllers we will be ready from the start.

Another way we have begun sourcing is the migration from desktop computers to notebooks.

This trend presents us with attractive opportunities in both retail and OEM.

We continue to add to our broad line of retail notebook peripherals which includes mice, WebCams, headsets and speakers.

As one indicator of our success in the notebook category, during Q2 the growth rate of our retail notebook peripheral sales was over four times higher than the growth rate for our total retail sales.

There is more to come this fiscal year with an innovative addition to our offering that brings the comfort and experience of using a desktop PC to notebooks.

I wouldn't want to conclude my comments on key trends without mentioning one of the most important of all, and that is the consumer willingness to cut the cord and go wireless everywhere.

The consumer's interest in easy-to-use innovative wireless product is growing in every one of the markets that we play in.

We've long been the leader in cordless mice and keyboards with the recently announced Logitech de novo EDGE keyboard being the most recent example of our ability to offer a cutting-edge plan of refined design and breakthrough innovation in the cordless category.

But our portfolio today includes a wide range of other cordless devices, the Harmony radiofrequency (inaudible) remotes, Wireless Music Distribution systems, wireless headphones for iPod and MP3 players and wireless game controls.

The appeal of wireless devices and our opportunity to benefit from it has never been greater.

That brings me to my outlook for the remainder of fiscal '07.

We have increased our target for the current fiscal year ending March 31, 2007.

We now expect sales to grow by 17%, up from our previous target of 15% and non-GAAP operating income to grow between 20 and 25%, up from our initial target of 15%.

Gross margin is now expected to be above the midpoint of our long-term range of 32 to 34%, an upward revision of our earlier estimates of the low end of that range.

This means that we expect that our gross margin in the second half of fiscal '07 will be higher than the 33% we delivered in the first half of the year, and of course significantly higher than in the second half of the prior year.

The impact of the Slim Devices acquisition on our increased fiscal '07 target is expected to be immaterial.

Our non-GAAP operating income growth target excludes the cost of revenue based compensation and we continue to expect the net cost of revenue based compensation in fiscal '07 reflected in net income to be between 16 and $19 million.

One of our key goals for fiscal '07 is to sustain our revenue growth while increasing our profitability and taking advantage of the leverage opportunity of our business models.

Our results throughout the first half of the year and particularly our gross margin improvement in Q2 provide compelling evidence that we are on track to achieve this goal.

Our strong top and bottom line performance combined with our expectations of continued strength in the second half of the year have allowed us to increase our full-year target.

With strong demand from our channel partners for our new premium peripherals for the PC, the lineup of new video and audio devices for Internet communication and a set of must haves for digital music, we've entered the Logitech holiday season with our strongest portfolio ever and a high degree of confidence.

And 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 have a quick question regarding the cash conversion cycle.

You previously indicated that you were focused on improving that and we were just wondering how the progress is going on that aspect of it.

We actually have made some progress on that.

I think if you look at the cash conversion cycle in total we are looking at it improving about -- it looks to be it was about 71 days last year.

It is 66 days this year for this quarter, so we have made some improvement on that, and we will be continuing to attend to that.

And can you update us on how your sales strategy is going in the China market?

Okay.

The Chinese market, as you know, all the developing countries market have a structure which is different from the markets in which we operate in the West.

We are very successful where markets are saturated with the platforms we target.

So that explains why our growth in Western Europe and Eastern Europe and the Americas region is always sustained.

When everybody suffers like PC makers and telephone manufacturers we actually benefit.

China is not there yet, and what our strategy in China is to continue to maintain the high-profile in a premium brand position we want to be the aspirational brand and as the market broadens and as more people have PCs at home, etc. that will bring China in line with the growth rates or even faster that we see in the developing world right now.

So China is doing well structurally.

We had teamed up and have significantly simplified our go to market channel structure, and we are waiting for China to become the nature of the market that benefits most of our products.

Good.

Thank you.

John Bright, Avondale Partners.

First, Mark, on the corded sales side, what do you attribute the better-than-expected performance at least versus my expectations on the corded side?

I know you mentioned keyboards but is there a particular driver behind this?

It's really, John, the keyboards.

I don't think there's a lot more behind that other than we just had strong performance there and that has been the singular driver.

Okay, and on the gross margin side, performed much better, and you attribute that to driving down some costs or some costs in this generation of products lower than the last generation of products.

Can you elaborate on what those might be?

A couple of different things here.

One of the things that we looked at really the biggest message I would say, John for the gross margin improvement had to do with the replacement of new products, basically.

So the cordless we had some strong performance which contributed to the substantial sequential year-on-year improvement in gross margin.

We also had in the corded and in the audio, those three categories in particular led the way with replacement products that fundamentally allowed us to raise the gross margin.

Of course you would expect, as always cost reduction projects and things of that nature are [op scenes] and our collected team do, but the biggest headliners were those three drivers.

Okay, and then I also noted you talked about the significant investments in the Oracle 11i and SOX driving the G&A.

Is that something that we might expect to step down from in the future?

Yes, two points here, John.

One is for SOX there is both these initial certification which we are going through, and then obviously there is a sustaining amount of that it is going to happen in the future, so I would not expect the SOX investment to come down substantially.

Secondly in relation to Oracle, we have made the investments for Oracle to get that live as Guerrino called out, and now the opportunity is to really optimize that and harness that productivity.

So in the near term I would not expect any major change there.

And then last question, Microsoft did enter into the WebCam market during this reporting quarter.

Don't expect any major signs from them at least now.

Your thoughts still the same, have them baked into your guidance?

Are you seeing them in the market making any presence, Guerrino.

We see them everywhere.

They launched their products, and the impact they had is in line with our expectation.

We believe that the market opportunity in video has never been more attractive, you have seen our results this quarter.

We believe that Microsoft actually may help drive market growth even faster than we can on our own, the fact that we have been alone in this country for a very long time.

What we see so far is fundamentally consistent with our expectation.

I think we are well positioned to sustain our leadership in this fast-growing market, and we used to compete with Microsoft.

So nothing has changed, and of course the guidance factor (inaudible).

Any impact of their entry into WebCam entry on your Windows live relationship?

Actually, surprising as it may seem, we are the preferred communication partner for Windows live.

Don't ask me why.

Okay.

Gentlemen, congratulations on a strong quarter.

Matthew Yates, Merrill Lynch.

Couple of questions, please.

I just wanted to dig into the full-year guidance a bit.

At the investor day you talked about how the gross margin on new products usually peaks sometime after their introduction.

Just wonder therefore if you felt that Q2 margin was sustainable through the rest of the year?

Let me address this one.

First of all, let me reiterate what Mark said, that new products have higher margins than the products they replace and this is not because we decided to all of a sudden cut the cost of the old products and make them new.

The margin is a clear indication of the -- it is a clear metric of innovation; margin is the delta between the perceived value and the cost.

I think that never more than in this Christmas season we have introduced and injected in our productline substantial innovations across the board and the list of dramatically innovative product that could have been called revolution goes well beyond the revolution life.

So in that sense, that is what the margin improvement is all about.

We have guided for an improvement in the second half over the first half.

Margin is driven by many factors.

It makes (inaudible) across product lines.

That is why we are seeing what we are seeing in terms of the second half and we also want to make sure that we can utilize the competitive advantage with such a great margin to do anything we need to do to compete effectively.

Our primary target is to increase gross profit dollars.

And that has been the maniacal obsession of the Company and we've shown this quarter what that means.

And that is what we are aiming at.

No particular percentage will replace gross profit dollar growth, that is what we're going for.

And then just a second one if I may.

I think you've recently launched a number of products across different categories that have higher price points than you previously had.

I just wondered if you had seen some evidence of consumers trading up to a higher price model from you.

It's a bit too early to tell.

Certainly our ASP has increased, and so that is an indication that people had to go higher up, but ASPs are also on average driven by a combination of mix issues by product line and within productline.

I would say that our pricing strategy has not changed, but certainly we believe that for certain product lines in certain categories measuring the innovation we can bring the perceived value justifies the price.

There is no fundamental going away from being the premium brand affordable pricing, but we certainly opportunistically take advantage of what the perceived value that our products bring.

And just one quick last question.

The other business is down sequentially.

Is that in line with your expectations or is there any comment you can make there?

There is no particular things to say other than this has to do with all the ups and downs of any business.

For example, how many had a solitary percent growth; we expect this growth to be substantially higher in the third quarter.

It has to do with product cycles and that is also part of the business model to have a significant resilience across elements of the portfolio.

Okay.

Thanks, guys.

Charles Elliot, Goldman Sachs.

Congratulations.

Just two questions from me.

First, I just like to check on the tax rate when we are calculating this at around 13% do we take it off pretax profit plus stock option expenses or (multiple speakers) profit.

Let me just speak to that.

The tax rate we are talking about 13% is pre 123(R).

That is correct.

So if you want to factor in the effect of 123(R), there is a bit of a tax shield there, as you know.

And so the guidance, the target rather specifically is pre 123(R).

So that is prior to -- can you just spell that out in terms of --

Charles, let me make it even clearer here.

Basically we talked about the target at 13%.

There is basically, if you take it as close to a point of tax shield, if you will, for the 123(R) stock comp, so effectively on a post 123(R) it would be closer to 12%.

Again, it will be plus or minus some but that is the target.

Thank you.

This is more of a vague one, but do you have an estimate of what percentage of your sales is Bluetooth or could you just make a comment on how Bluetooth is impacting across your product range and across the (indiscernible) demand?

I don't have this with me, and we don't take that angle.

Bluetooth is one of the many wireless technology we're using, and you can see it both in Wireless Music System, in cordless desktops in mice.

So we don't have that cut.

I would say that Bluetooth is -- at this point it has been an advantage for us.

We've learned a lot in Bluetooth over the course of the last year.

It provides the high-end customers additional features and functionalities that are not available with other wireless technologies from us at this point.

I would say it is one of the many ingredients that we built our recipes with, Charles.

It is neither the most important one, nor an irrelevant one.

Good.

Thanks.

Mehrdad Torbati, Deutsche Bank.

Thanks for taking my questions.

I have a couple of questions.

First one is on your guidance.

You are guiding an operating profit or at least 20% higher than last year, gets you to around 239 million.

If we take a step back here that is around 40% higher than fiscal '05.

Is there any reason why your operating cash flow this year should not be 40% higher than what you generated in 2005?

Are there any structural reasons why your DSOs should be any different than what you enjoyed in the past, or what is the optimal level of DSOs you should be having or reaching soon?

And the second question relates to the geographic breakdown of your sales.

Can you be here a bit more specific on Americas?

How did U.S. sales grow, how did South American sales grow.

In Asia-Pacific can you make a breakdown based on different geographies in Asia-Pacific?

Let me address your second question by disappointing you, we don't provide revenue beyond the level of the regional aggregation that Mark mentioned.

As far as the ideal, the optimal level of DSO cash flow, I will let Marks answer although I'm sure you will be disappointed by the answer also.

On the cash flow let's say a couple things here.

One is that as you know we don't typically guide on the particular elements of the cash conversion cycle.

We don't set forward-looking targets on that.

So that's one thing to kind of call out.

Also just in general I think the main point to look at is our business model looking at the guidance that Guerrino had talked about, but in terms of operating income, net income, of what you should expect there.

And also know that we will be attentive to our cash conversion cycle but we do not guide going forward.

Let me make sure to call out one thing here that I think might be useful to you, whereby we don't go in more detail, we do have a mix for the geographics that I want to make sure you do know that in this quarter we achieved 48% of our total sales in Europe, 35% in the Americas, 17% in Asia.

So we do go at that level but we never disclose it a lower level than that.

So I think from that standpoint, and that would be both retail and OEM together, so that is what we can share.

As far as the DSO, in terms of what we shared with that, I think the big message with the DSO we talked about is that you should expect that to go down sequentially.

That is the overarching point.

The ordering pattern has been a major factor, and we are strongly related to new product introductions and I already told you about the backlog and how it stands at the beginning of the quarter so you should expect to see a decline sequentially.

But in terms of -- let me just leave it at that and hopefully at least addressed some of your questions.

When you're saying that DSOs are coming down sequentially or seasonally in the third quarter DSOs always come down sequentially.

Right?

What my question is more on a long-term basis.

You generate 119 million operating cash flow in fiscal '05.

Your operating profit is 40% higher this year according to your guidance.

To what extent is your operating cash flow going to be higher than fiscal '05?

What type of operating cash flow growth can we expect in this business?

That is just something we don't give guidance on, and so I really can't speak to that to be honest with you.

Let me try to help you a little bit.

There is nothing that is structurally changed from fiscal '05 to fiscal '07.

We have been maybe there is a few terms with some of our customers that are longer than they were in fiscal '05, but it is not enormously significant.

We have taken some inventory position to guarantee customer satisfaction and use our competitive advantage which is derived from the fact that we have a lot of cash and that is maybe having a marginal impact.

But fundamentally the business is a cash generating business.

There is no fundamental change from then other than the two points I called out.

The reason I'm asking that is your operating cash flow last year was down 20%.

And you have done a great job in the first half of this year to improve some of the metrics.

I just want to know where you're going to end up for the full-year in terms of cash flow generation.

I understand that but we don't share that goal.

Sorry about that.

We don't guide on that but I do think you called out the right point, which is to take a look at the first half and look at the north of $70 million growth in cash flow.

And I think that is probably being perceived favorably in the market today.

Okay.

Thank you.

Manny Recarey, Kaufman Brothers.

Thanks, and congratulations on a good quarter.

If I just go to gross margin again, the outlook, what kind of gives you the confidence this time that it's going to be able to remain strong because as I understand it, Logitech continues to always introduce new products, and typically at the higher price point.

So what is different this time?

First of all, the dramatic jump in gross margin that we had anticipated and predicted and shared with you is driven by what we thought and the market is now proving seeing a dramatic innovation injection in the product portfolio.

That is a critical point, and we believe that what we are seeing in terms of response to these new products, we have introduced the majority of our holiday product lineup at this point.

There will be a few coming but it is fundamentally done, and so we expect that to help sustain gross margin.

There was a comment made by one of your colleagues before on the call that I would like to address, which is we have said and continue to say that normally during their life cycle products gross margin improve.

And so they are at the lowest when we introduce them as they tend to improve over the time over the majority of their life cycle.

It is the case this year, too.

The difference is that the products we introduce this year at the beginning of their life cycle are better margin than the products, than most of the products they replace.

It is a very nice combination here.

So we would certainly see some improvement in product cost in some of the newly introduced products and therefore a tendency of margins to sustain at least.

But again there is mix issues and there is our willingness, that as I said, to use the flexibility that a higher margin gives us to drive growth.

And we want to make sure that it is clear to all of you that for gross profit, dollar growth is the priority of the company.

If I could ask one more question, the audio segment, this has nice growth, 23% in the first fiscal quarter, 21% this quarter, so that is down fairly substantially from the growth in fiscal '06.

Has that reached a level where the 20, 25% is kind of a more realistic growth rate for that segment?

As I have to repeat, we don't share goals or by product segment, I can tell you there is nothing bad with 20, 25% growth.

We will see the impact of some great new products for the iPod coming in.

We have made an acquisition that eventually will be very, very beneficial, not material this year.

But over time pretty substantial hopefully for the audio business.

So it is very hard to say that you have seen the best of audio.

I don't think so.

Okay.

Thank you.

Michael Foeth, with LODH.

Congratulations from my side, also.

I would have some questions on the OEM side.

When are you actually expecting this product transition at one of your major customers to be over and close starting again?

And also on that I believe that you had guided for 10% growth in the OEM segment.

Is that still valid?

That would be the first two questions and then a follow-up.

We expect OEM to grow substantially in the second half and therefore we expect to reach the double-digit for the year.

So therefore we expect the transition to be completed in the quarter we are in now.

Good news.

And can you tell us who are your biggest customers for embedded WebCams?

Is that something you can disclose?

No, we cannot.

Okay.

Thanks.

Roger Steiner, Kepler Equities.

Good morning; congratulations also from my side.

I would have two questions.

The first one is on channel inventory.

I wonder if you can shed some light on your thoughts on channel inventory with (indiscernible) revolution product range, to get a feed on what you think the (inaudible) opportunity of the quarter.

And the second one would be on your sales growth guidance.

You just outlined that you expect OEM to grow double-digit again.

Your sales growth overall was over [18]% in the first half and you are guiding for 17% for the full-year, so where do you expect that (indiscernible) to come from?

Let me address the channel inventory, and then we can have Guerrino touch on the sales growth here.

On the channel inventory I just will say broadly speaking the overall inventory looks healthy around the world on the channel side.

We looked at that, and I think you can see probably some evidence just when you hear our backlog is substantially higher year-on-year in September.

It probably gives you a good feeling for a very strong appetite for the product itself.

But beyond that we certainly don't go, Roger to a product level; we don't go into a lot of specificity in the channel inventory but at a broad level it actually looks good.

And the backlog is a really solid data point to be thinking about.

On the sales growth side, Guerrino, I don't know if you want to touch on that.

Well, we have begun to see the initial sales out data for the MX and is doing phenomenally well.

That's all I can say.

And in terms of what to expect for the second half, remember we are the second half of the year is actually 60% of our revenue.

We've increased our guidance for the top line.

We've increased our guidance for the bottom line.

We will stick to it, and that is all we have to say.

Okay, thank you.

I think one more question.

[Thomas Garmin], ZKB.

I just wanted to ask a question on the OEM going back to the question asked before on double-digit growth.

I don't know if you break down on the product type.

Could you give us some indication on that?

I can give you a flavor of that.

We expect the growth to be driven by cordless desktop, which is a product we are positioned with our major customer in OEM and we expect continued growth with video modules.

We expect that the traditional weakness of the mouse business mouse both with this transition to (inaudible) a big customer that bought mice, now buys mice and keyboards so that's a good thing.

But of course when you measure it mice declines in desktop growth, and also a generic weakness of the desktop PC market which everybody knows about and which gives us this tremendous opportunity in aftermarket notebook retail sales.

Thank you.

With that, let me conclude this call by thanking you all for joining us and I want to make one more observation.

The vision of being the interface between people and technology that was at the foundation of Logitech 25 years ago has never seemed more relevant, pervasive and far-reaching than today.

If you look at broad productline you will not fail to notice how from our new mice to Harmony from our WebCams to our digital music systems, we have developed this vision into a uniquely compelling portfolio of exciting products for the consumer.

And with our growing presence in the digital home I think we're just at the beginning of the ride.

Thank you very much.

Thank you ladies and gentlemen; this concludes today's conference.

You may now disconnect.