羅技 (LOGI) 2008 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Logitech first-quarter fiscal 2008 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).

Mr.

Hawkins, you may begin your conference.

I would like to welcome you to the Logitech conference call to discuss the Company's results for the quarter ended June 30, 2007, the first quarter of Logitech's fiscal year 2008.

A press release, a live webcast of this call and the Company 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 25, 2007 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 statements as a result of new developments or otherwise.

I would like to remind you that this call is being recorded, including the question-and-answer portion and will be available for replay on the Logitech website.

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

Joining 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.

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

Thank you, Joe.

I will be -- (technical difficulty).

Sorry.

We had a little technical difficulty.

Thank you, Joe.

I will begin with an overview of our Q1 performance.

Our sales grew by 9%, reaching an all-time high for Q1 with strong double-digit growth achieved across most of the retail product portfolio and in OEM.

Our sales growth was negatively impacted by steeper than expected decline in webcam sales, particularly in the European region.

Our gross margins increased by 300 basis points compared with the prior year.

This improvement was achieved despite a significant shift in our sales mix between video and audio.

We ended the quarter with a strong net cash position and we delivered five days improvement to our cash conversion cycle compared to the prior year, so you are seeing a continued trend in that respect.

Our comments during the call will be based on GAAP numbers that include FAS 123(R) costs in both periods.

Let's discuss the gross margin.

Our gross margin was 33.7% and this is a substantial improvement over the 30.7%.

The improvement was achieved despite a significant shift in the sales mix.

Let me explain a little bit more.

The retail video.

A relatively high-margin category for us.

It declined only 11% of our sales compared to 19% in the prior year.

While the retail audio, an improving but lower margin category compared to the video, increased from 17% last year to 22% this year.

The gross margin improvement was broad-based with strong gains in audio, gaming, pointing devices and keyboards, primarily driven by higher margins associated with many fiscal 2007 new product launches combined with ongoing product cost reductions.

We are pleased to note that our PC speaker margins continued to improve both sequentially and year over year.

Now please note that our growth percentages that we will follow are in comparison to our Q1 fiscal 2007.

Our operating income grew by roughly 1%.

Our operating expenses -- they grew 24% and they did outpace the 20% growth in our gross profit.

The first quarter is traditionally our smallest of the year and this year, our sales fell below our expectations.

Given the investments that were made in our infrastructure during the prior fiscal year, mostly in headcount and systems, we had significantly less leverage opportunity in the quarter than we expect in the remaining quarters of the year, especially I might note in Q3 and Q4.

Now let's turn to net income.

Last year's net income included a gain of $5.8 million after-tax for the sale of the shares of [Inodo].

Excluding that gain from the prior year, our net income this year would have grown by 5% and our earnings per share would have been $0.01 higher than last year's adjusted EPS of $0.13.

Let me add one other comment to our income statements.

Our interest income was $2 million higher than the prior year as we earned higher rates of return on our higher cash balances.

Let me turn to tax.

The rate for Q1 was 11.2%.

As we said before, we anticipate our effective tax rate will vary on a quarterly basis.

We expect that our tax rate for the year will be around 12%.

Let's move to the balance sheet.

Our cash position was $367 million, which includes $139 million reported as short-term investments.

Our net cash increased by $134 million compared to the prior year.

Now this increase versus the prior year -- let me talk a little bit more, it is actually even more impressive when you consider that during the last 12 months, we paid off $14 million in short-term debt, spent $20 million for the acquisition of Slim Devices and $165 million on share repurchases, buying back our shares at an average of $26.

Our cash flow from operations for the quarter was $12 million.

Now this is down from $19 million last year.

The decline was primarily due to a sequential decrease in our accounts payable in Q1 this year versus an increase in the prior year.

Our cash conversion cycle, I am actually pleased to note, was 70 days, a five day reduction compared to the same quarter last year driven by improvements in our DSO and DPO, so you see that continued trend.

Inventory.

Our inventory increased by 7% or $14 million compared to June of the prior year.

Inventory turns were very slightly down to 4.9 compared to five turns last year.

DSO.

DSO was 64 days for the quarter, a reduction of three days compared to the prior year.

Accrued liabilities.

Let me speak to this a little bit.

During Q1, we adopted FIN 48, which addresses the treatment of tax reserves per US GAAP.

Now compared to March of 2007, the adoption of FIN 48 in Q1 resulted in a significant shift of our reserves out of accrued liabilities and into other liabilities.

So when you are looking at the balance sheet, you will see that.

Share repurchases.

During Q1, we repurchased 1.94 million shares for $51.9 million at an average price of $26.75 and that translates into us owning roughly just a little bit over 5% of our outstanding shares.

We have roughly 122 remaining on our current repurchase program and you might recall that we've recently announced that our Board has approved a new $250 million program to take in effect once this current one is completed.

Now let's discuss net sales by product family with retail and as noted at the investor day for those that were at the investor day, we updated our product family and my comments will reflect those changes.

Our retail sales grew by 8% while units were flat.

Excluding video, our retail sales grew by 21% demonstrating health in the rest of the portfolio.

It was a strong quarter for the Americas with growth of 17%.

We met our goal in terms of the return to double-digit growth in Asia where sales were up by 13%.

The growth in both regions were driven by audio, remotes, pointing devices and keyboards.

Our retail growth was constrained by the result of our EMEA region where sales declined by 1% primarily due to the webcam category where our sales fell by 62%.

Outside of webcam, there were many bright spots in EMEA with double-digit growth in audio, keyboards, pointing devices and gaming.

In fact, excluding video, our sales in EMEA grew by 20%.

Let me continue with pointing devices.

We delivered double-digit growth in the retail pointing devices where sales were up by 14% with units up by 3%.

It was a very strong quarter for cordless mice with sales accelerating to 31% and units up by 25%.

Now we experienced double-digit growth across all the major price points with the strongest growth at our high end reflecting the success of our MX Revolution cordless laser mouse and our VX Revolution cordless laser mouse for notebooks.

We also continued to see strength in the notebook category with sales for cordless mice of notebooks growing by 41% and units by 43%.

Now our 3D connections offering also made a solid contribution to the category with sales up by 24%.

If I speak about audio, audio had an excellent quarter.

Sales accelerated to 39% and units were up by 14%.

Our speaker sales grew by 46% with units up by 37% with all the growth coming from PC speakers.

Now the sales of our iPod MP3 speakers declined by 7% reflecting a relatively soft market condition, particularly in the US, but they did increase 29% sequentially.

Our PC speakers grew by 63% and units were up by 42% with growth across all the major price bans with particular strength I might note in the high end and the value segment of the category.

PC headsets also grew by 11%.

Our growth in audio also benefited from the sale of our Slim Devices streaming media products, which we acquired during the third quarter of fiscal 2007 and you recall us speaking about that acquisition.

Retail sales -- keyboards and desktops.

We enjoyed a strong quarter in keyboards and desktop category with sales up by 21% and units by 5%.

Standalone keyboards increased by 39%.

We had a strong contribution from Alto, our portable notebook stand with an integrated keyboard.

We continue to be pleased with the sales of our high-end cordless keyboard, the diNovo Edge.

Desktop sales also grew double digit with sales up 16% and units up 14% and we had a particular success I might call out in the midrange of the cordless desktop category.

Let's speak to video.

It was a disappointing quarter for webcams with sales down by 38% and units by 33%.

While we anticipated a decline in this category, the decline was much steeper than we expected in our European region where sales fell by 62%.

The decline in EMEA was primarily due to a slower than expected market that resulted in inventory levels at our channel that negatively impacted our sell-in during the quarter.

The channel inventory levels had decreased significantly by the end of the June quarter.

This is an important point.

The webcam situation improved in the Americas region and we were encouraged to see that as sales declined by only 3% and increased 46% sequentially.

Our market share in the category appears to be relatively stable in both regions with little movement during the last quarter.

Looking at the overall video category, we also experienced double-digit growth in sales and units in the high end reflecting the success of our QuickCam Ultra Vision.

Now if I go to gaming, we achieved growth in both PC and console gaming with sales up by 14% and units up by 6%.

Our PC gaming sales increased by 8% with very strong growth in steering wheels.

Our console gaming sales grew by 23% with the growth driven by a number of products led by the Logitech cordless media board, our innovative keyboard for the PS3.

Our sales were essentially flat in terms of remotes and if you stand back and look at that, they were essentially flat with units down by 17%.

The lack of growth was entirely due to a decline in EMEA.

I want to step back from this a minute and speak that we have recently reorganized our team in EMEA to specifically focus on market development activities to take advantage of the growth potential for the category in Europe.

The majority of the remote sales, as you are aware, are generated in the Americas where we delivered very strong double-digit growth demonstrating the health of this category in the Americas region.

The Harmony 1000 made a major contribution to the growth of the Americas.

OEM sales.

It was a very good quarter in OEM with sales growth of 16% and units up by 6%.

Keyboards were a major growth driver with sales up by 71%.

We also had substantial sales growth in the console gaming category led by several peripherals, including microphones for singing games for PlayStation and the Wii.

[OMI] sales were up by 4%.

Let me wrap up my comments and say the following.

One, even with a steeper than expected decline in webcam sales, it was still our best Q1 ever for sales thanks to our double-digit growth across the majority of our retail product portfolio and in OEM.

Two, gross margin was up substantially over the prior year despite a significant shift in our overall mix.

Three, we delivered a modest growth in operating income and excluding the gain from the sale of the Inodo shares in Q1 of last year, also in net income, but we see increased leverage opportunity in the remainder of the year.

And fourth, we delivered notable year-over-year improvement in our cash conversion cycle and ended the quarter with the second highest net cash balance ever.

Now before concluding my comments, I want to let you know we have scheduled our mid-year investor meeting for November 1 at the Reuter building in New York City.

The agenda will feature a number of our senior executives and we hope you will be able to join us.

Now let me turn the call over to Guerrino.

Thank you, Mark.

Thanks again to all of you for joining us today.

I have mixed feelings about our Q1 results.

I am not pleased with the single-digit growth in our retail sales caused by the webcam situation in EMEA or with the modest growth in our profit, which shows that the first quarter is characteristically the least leveraged of our quarters.

But I am very pleased with several other aspects of our Q1 results.

We achieved impressive growth in multiple retail product categories, including cordless mice, keyboards, PC speakers and console games.

We had double-digit growth in the Americas, Asia and OEM and by the way, in Asia, we returned to double-digit growth after quite some time.

We delivered a substantial improvement in gross margin and we continue to demonstrate strong balance sheet management.

Mark has covered the details for Q1, so let me now comment on our products and plans for the remainder of the fiscal year starting with how we plan to address the webcam situation.

Our strategy to reignite the webcam market growth has not changed from what I shared in our last earnings call.

It is based on three pillars -- new products, partnerships and marketing activities focused on the consumer.

Last month, we announced our two newest webcams, the QuickCam Pro 9000 and the QuickCam Pro for notebooks.

Both of these premium webcams, which are now shipping, feature lenses designed in an exclusive collaboration with Carl Zeiss and establish a new standard for webcam image quality.

There are more exciting new products lined up for the webcam space, specifically several new entry-level webcams that we plan to introduce later this quarter to strengthen our offering in that segment, especially in Europe.

The second pillar of our webcam strategy is partnership.

We expect to announce a significant new partnership before the end of the calendar year that we believe will broaden consumer awareness and expand the potential user base for video communication.

On the affect of refocusing our marketing towards the consumer benefits of webcams, I am encouraged by the situation in the Americas.

The strong sequential increase in the seasonally weak Q1 in the AMR region validates that the in-store marketing activities we have begun to roll out are having an impact.

And while our webcam sales in EMEA in Q1 were very disappointing, we believe the worst is behind us as the reduction in the region's channel inventory places us in much better shape ahead of the holiday selling season.

We remain enthusiastic about the opportunities in the webcam space and we expect to return to double-digit growth in this category by Q4 of this fiscal year.

Let me move on to mice.

We are very excited about last week's announcement of our MX Air cordless air mouse, a breakthrough laser mouse that works on the desk and in the air.

This highly innovative offering redefines the future of PC navigation, allowing a user to hold the mouse in any orientation, point in any direction and enjoy effortless, intuitive cursor control.

The MX Air features a striking design that makes it equally comfortable to use on the desktop or in the air and it is a perfect companion in the digital living room.

The initial trade reviews have been very positive.

The products should be in the stores next month.

The MX Air mouse is just the start of our new mice announcement.

Before the end of the month, we plan to announce our most appealing mouse for notebooks yet, the first of several offerings focused on strengthening and broadening our notebook mouse lineup.

We are also looking forward to bringing significant innovation at the high end of the gaming mouse category.

We are doing great in keyboards and here, we also have a major new product announcement planned for this month.

We will unveil corded and cordless offerings that feature a groundbreaking design that is a significant evolution of the familiar straight keyboard.

We believe this innovative design will significantly enhance the competitive differentiation and value of our offering.

As is the case for mice, we have aggressive plans to broaden our line of keyboards and stands targeted at the high-growth notebook category.

Last month, we announced two new notebook stands, the Logitech Alto Connect and Logitech Alto Express, that allow people to enjoy the convenience of the notebook PC without sacrificing comfort.

These stands complement the already successful Logitech Alto, our notebook stand with an integrated keyboard, in our notebook accessory lineup.

Stay tuned for more to come in this increasingly attractive segment.

Audio was our fastest-growing category in Q1 and we have an exciting product roadmap that should help sustain our momentum.

You can expect to see new PC speakers targeted at a number of segments, including notebook users, hard-core gamers and music lovers.

We also plan to broaden our iPod speaker lineup with several exciting new offerings focused on where people listen to their music.

And we have new PC headsets on the way to address the growing popularity of VoIP applications.

We are making good progress with our Slim Device product portfolio.

The Squeezebox now carries the Logitech brand and we are developing new channels in the US and Europe for these easy-to-use, feature-rich offerings that deliver wireless streaming of digital content from the Internet or the PC throughout the home.

Moving now to gaming, we are pleased to see a return to double-digit sales growth in Q1.

We are also pleased to launch our first Wii peripheral, an OEM version of a microphone for singing games.

We're looking forward to announcing several new products targeted at the PC platform, as well as the PS3 later this year.

And as the only company licensed to make USB peripherals for Wii, we continue to explore product opportunities for this hot platform.

Moving to remotes.

We believe the steps we've taken in EMEA will improve the situation in that region going forward.

The market in the US remains vibrant and the opportunity in this category is substantial across all geographies.

Our focus during the remainder of the year will be on improving every aspect of the user experience to further increase our already high level of customer satisfaction while significantly expanding the potential universe of Harmony users.

In addition to launching, shipping and supporting our new products, another key priority for the Company during the remainder of the year is to more closely align operating expense growth with gross profit growth.

To this end, we have made adjustments to our planned spending level to provide us with increased flexibility during the remainder of the fiscal year.

Yet, our business has tremendous opportunities ahead and we are committed to support our growth.

This brings me to my outlook for fiscal 2008.

We continue to target 15% growth in both sales and operating income and we expect our gross margin to be at the high end of our long-term target range of 32% to 34%.

In Q1, our retail business, excluding webcams, grew by 21%.

This was the best growth for that portion of our business in the last eight quarters demonstrating that the majority of our retail portfolio is as healthy as ever.

With the webcam business approaching stabilization and eventual improvement, combined with the launch of the most exciting new product lineup in our history and our plan to more closely align operating expenses growth with gross profit growth, we believe we are well-positioned to achieve our financial goals for fiscal 2008.

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.

Ted, your line is open.

Yes, hello?

Hi, Ted.

Hello, there.

So I am just drilling down on your Harmony sales in Europe.

Is there anything specific that occurred?

Well, if you look at the comparable year over year, what happened a year ago, we placed very successfully the product in a few stores.

We captured very quickly the bunch of early adopters that just were waiting for that.

But then we did not follow up properly in broadening that distribution and making the in-store support and training that we did in the US.

We know that.

We are working on it.

We have a dedicated team that focuses on a subset of our portfolio, particularly Harmony, and we believe that is going to help us a lot in Europe.

On the other hand, our sales in the US continue to be very vibrant.

We grew I believe more than 40% in the US this category year over year, which proves that the offering is very compelling and the opportunity is great.

So we are working the European angle.

We understand what is happening and we are tending to it.

Would you still be targeting Harmony to be roughly around a $100 million business for the end of this year?

Well, first of all, Harmony was close to $100 million at the end of last year and we continue to believe that it is going to be a double-digit growth product substantially this year, yes.

Just focusing on the webcam slowdown, is there any particular reason -- can you explain more in detail what happened with the channel inventory?

Well, let's look at this.

We have seen in the April and May timeframe a decline of the webcam market in Europe.

The beginning inventory or by channels, our partners were not expecting that level of slowdown.

In fact, we were not expecting that level of slowdown either.

So what happened is that the beginning inventory was matched to a flatness of the market.

The market was worse than that and therefore, they took a longer time to sell what they had, which reduced our selling opportunities.

As Mark mentioned, the situation also created a reduction in channel inventory sequentially, which bodes very well for the future, but it is the mismatch between the channel expectation of growth and the actual market growth that we experienced in several countries in Europe.

And within the US, you haven't seen anything abnormal related to video cams?

Actually I think that if you look at where the category was a quarter ago, there is a substantial improvement there.

A sequential improvement of more than 40% in Q1 is unheard of for any category.

Of course, we come from painful Q4 in webcams across the regions, but it indicates that what we are doing in marketing.

In the US, we rolled out several point of sales initiatives, which follow the kind of strategy that I have tried to apply and they seem to be working.

So I believe that the situation in the US -- well, I look forward to the fact the situation in the US is in anticipation of what we will see hopefully in Europe over the coming quarters.

Great.

Thank you.

Matthew Yates, Merrill Lynch.

Hi, guys.

A couple of questions.

Perhaps just take one at a time.

Just following up on the last point on webcams just to understand this right.

Have you been a lot more proactive in point-of-sale marketing in the US than you have been in Europe over the last three months or so?

We have been more proactive in the US than we have been in Europe, but also the European market had a slowdown, which the US market did not, so there is a combination of the two.

I believe that the substantial reduction in channel inventory in Europe, as well as with the increased rollout of our marketing actions at the point of sale in Europe, as well as the other elements that I mentioned, our new products, as well as the new partnership that will come shortly, will [have] particularly there.

We have great new entry-level webcams.

Europe is more of an entry-level market than the US is and we believe that will help as well.

There is a combination of things that will happen in Europe that make us look forward to the coming quarters as a recovery period for that business there.

Okay.

Second one, perhaps for Mark.

In light of some of the recent exchange rate movements -- I know in the past you've always said that currency is a relatively unimportant influence on your margins, but would you just remind me of what percentage of your cost base is dollar-linked?

Matthew, I think you certainly got kind of our view in generally correct.

The way we look at the foreign exchange is we try not to over simplify the matter first and foremost in the sense of never kind of stepping back and saying that we have got undue benefit or undue cost out of the whole equation partly because we do so much new product introductions.

We refresh so quickly and we have a chance to, with new products, reprice and keep our parity in the various exchange rates.

So I think you understand it on the revenue side quite well and we have been very consistent on that approach.

On the cost side, and again it is a little bit of a different equation in terms of the cost.

It's not a situation that we really disclose in detail.

I mean that is pretty much the situation there.

Okay.

And then can you talk about why there was such a big increase of CapEx in the quarter?

I can, Matthew.

I'm actually glad you asked that.

We made a significant investment in China in a surface mount technology capability that we now have there and so basically that is what is the major driver for our CapEx step-up in this particular quarter.

But I still stick to the point -- I think you are well-tuned to this.

We say in our long-term model of 2% to 3% of revenue is the target for CapEx.

That is still something that you should look toward.

Okay.

And last one for me, when you talk about realigning the rates of operating expense growth, are you primarily talking about the other expense line or are you also addressing marketing and R&D?

I am talking about the entire OpEx structure, Matthew, from that standpoint.

One of the things that you can count on for us is that we will continue to show the discipline that you expect from us just like you saw in FY '06 and FY '07 where OpEx will scale commensurate to our gross margin.

Now you might recall in FY '06, there's lumpiness during the quarters, but by the time we ended, even when the margin growth was slower in that year, we landed at about 14% dollar margin growth.

Our OpEx came in at 13%.

In FY '07, we had more of an expansion in gross margin profits, good expansion at 24%.

Our OpEx came in at 23%.

You would expect that same precision discipline over the course of the year for OpEx management aggregately, all OpEx included.

Okay.

Thanks for taking the questions.

You bet.

Yves Kissenpfennig, UBS.

Yes.

Hello, guys.

I just wanted to get back to that last question.

I mean at what point this year do you expect to see your gross profit growth begin to outstrip the growth in your operating expenses?

Yves, if you are asking for a detailed guidance by quarter, you know we don't talk about it, but I would say that it is going to be a gradual improvement spread all over and there is also some comparable things here.

We did some substantial infrastructure investment and what I mean infrastructure, I mean people and systems over the course of the last nine months and that hit the comparable for us.

We don't expect to be at that level of increase of those kind of assets and infrastructure moving forward.

So you will see that the yearly comparable will start to look different.

So it is a combination of moving forward discipline, which we always had, and of the fact that the effect of this ramp in headcount and systems will impact less the yearly comparable.

Okay.

So it is not as if you are guiding that potentially given the spending rate you saw in the Q1 that me in fact see a gross margin for your full-year that is above the 34%?

We didn't say that.

We didn't imply that.

We stick to what our goals for the gross margin.

Remember the gross margin is an asset for us and we can use it when and if necessary, but no, we continue to be focused on top-line growth and operating profitability.

Okay.

And then maybe one final question on the -- it's clear in the video business that you are going to see a difficult comp.

It's going to get easier as the year goes on due to your efforts.

I mean where do you see your marketshare sort of stabilizing key plus one out and what kind of growth do you expect for this market once -- given the drag that we may or may not see from integrated webcams or given the drag that we may or may not see from Microsoft being more active in this segment?

Do you think you can still get up into the high double digits or perhaps 20 plus or do you think we are going to see a structural downshift in terms of the growth rate for webcams?

That is a very difficult question to answer when you look at the long term.

I believe -- let me do what I can.

Marketshare -- as we said, market share is stabilized.

I think that the run rate effect of the arrival of Microsoft in August last year is behind us.

We've maintained a strong market leadership position.

We are fundamentally, depending on the regions, in the 50% to 55%, maybe 45% in some places or 60% in others, but that is the kind of place where we are.

Microsoft is in the 15% to 20% depending on the regions and the quarter and the week and the month in which you to the measure.

We believe that is of course we cannot anticipate competitive actions from Microsoft and Microsoft will be as competitive in this business as they are in every business in which they compete with us and we have seen that in the past.

But I believe that the structural impact, the fact that they weren't there and now they are there is behind us.

So in terms of long term -- so as I said, we expect that our own webcam sales will get to double-digit growth in Q4.

The question is what is the market going to be over time.

I am a profound believer in the attractiveness of the application for which the webcams are used.

The problem -- the current problem with the market is that the market has -- the potential user base for webcams has -- is the instant messaging user base of a certain number of platforms.

We need to expand that by broadening the number of platforms and eventually by not necessarily associating instant messaging and webcams.

That is a longer-term proposition.

In that case, the embedding of webcams into notebooks -- it is actually a great opportunity because if it is true that the issue of webcams is what do I do with them, once you have it in your laptop, you may even try and then at that point, the dynamic becomes the typical Logitech dynamic.

You have a basic device in your computer.

You know what it is and then you look for something that does it better as an aftermarket that are image quality, more flexibility, better software and the many myriad other things that we have done in other productlines that are embedded in platforms.

Will this generate high double digit, below 20%, above 20%?

It is very hard for me to anticipate.

Structurally, this should be a pretty broad peripheral that everybody eventually will use, but it is very hard to give you fact on that perspective.

Great.

Very comprehensive.

Can I just -- one follow-up on that.

Did you say that you were looking to expand webcam sales into other platforms?

No, I said that I am planning to expand the software platforms that we use and the user bases that we target.

To date, our core fundamental user base is MSN, instant messaging user, Yahoo!

instant messaging user and to some extent Skype users.

So we want to go beyond that, go deeper in that.

That is the first step.

The second step is we want to look at the broader market.

Not everybody uses instant messaging, right?

But I believe everybody can be attracted by video and I will leave it at that.

Great.

Thank you very much.

John Bright, Avondale Partners.

Thank you.

Good morning, Guerrino, Mark and Joe.

I'm going to stay with the webcam question, guys.

This is the second quarter in a row we have seen difficult comps on the webcam.

How much do you think this is the slow market growth versus Microsoft's entry and did you underestimate Microsoft's impact or overestimate what your expectations were on the market growth?

I would say the latter definitely.

We did not underestimate the impact of Microsoft at all.

In fact, as you may recall, last quarter, our biggest concern is that we were too much focused on Microsoft on sort of fighting the marketshare battle with Microsoft and less focused on expanding the market.

So definitely, definitely, it is a market situation and we are addressing that specifically.

I think that the competitive play is less relevant.

I never underestimate Microsoft or any of our competitors for that matter, but if you look at the General dynamic, it is market ignition and not share.

The share -- we are fine.

We are very fine.

In your slides, Guerrino, Mark, you mentioned that you have got some partnerships in the works to try to reignite the marketplace for webcams.

Can you talk about those partnerships and what you are hoping to accomplish through those partnerships?

Well, first of all, a new partnership is one of the elements of our strategy.

Don't forget the importance of new products at the high end because they will generate replacement into the existing base, which is quite wide and at the entry level that will create new opportunities for people that are hesitating just to get into [carry].

So these two are very important and I wouldn't underestimate those, as well as I wouldn't underestimate the marketing actions in the point of sales that for example have had a tangible impact on our performance in AMR.

You wanted me to tell you more about this partnership.

It is important, it is major and I will leave it at that.

It will allow us to target a broader base of potential users both in terms of -- both technically, as well as from a communications perspective, i.e., from a marketing perspective.

But I can not and I won't talk more about this as this is pretty sensitive competitively.

Thank you.

Guerrino, do you think it is going to be -- is this something that's a global partnership or is it directed towards EMEA or the Americas?

It is a global partnership.

Global partnership.

One final question if I may?

Mark, if you could talk again specifically about the operating expense leverage opportunities as we look out for the remainder of fiscal '08.

You mentioned I think in your slides increasing headcount through the calendar '06, '07 fiscal year.

What is it that is taking place that is going to give specifically those leverage opportunities as we look out for the remainder of the year?

A couple of things here.

John, as you know, this is the smallest quarter of the year.

You have tracked our business for a long time.

These investments that we've made in the prior three quarters both systems-wise, infrastructure-wise and people-wise, basically that run rate is now there in our base and as you would expect, this is the smallest quarter as we go forward.

We will obviously manage our run rate sequential change and operating expenses and you will see a nice leverage as you would expect.

So I think it is really a function that we've made these investments and that's a good thing.

Okay?

Just to be clear, this is going to enable us to grow and take this business to the next level and now what we have to do is just go ahead and let the bigger quarters of the year, which are the next three, really help us get the leverage that one would expect and John, I think as you certainly have tracked this business for a long time, you should absolutely expect, as we always have done, that by the end of the year, we give the annualized kind of ratios you are going to see the OpEx growing less than gross margin dollars and that is just what we do and you know that it gets lumpy by quarter.

Thank you.

You are welcome.

Simon Schafer, Goldman Sachs.

Thank you very much.

I wanted to ask a question -- a follow-up question about FIN 48.

Perhaps you can be a little bit more precise as to what exactly got moved as part of this accrual to long-term liabilities?

Thank you.

What happens -- I don't know how to just kind of address it a little bit more specifically here, Simon, because I don't know how briefed everybody is on FIN 48.

But effectively, FIN 48 is geared toward the disclosure of reserves, okay, and reserves for tax in particular and they are geared towards tax positions.

You have to make tax positions all over the world and so basically what happens is with FIN 48, it allows people to see clearer the size of your reserves effectively.

And so that is what has happened very specifically if you look at the difference between the -- and the liability sections -- the movements there from the two areas that I talked about.

You will see a very specific dollarization that is intended to give you a little bit more visibility of our reserve.

It is as simple as that.

It really didn't impact our tax rate for the quarter in our particular case.

And should we expect the move or an additional portion to be moved in future periods or is this the only adjustment?

This is a -- I mean fundamentally, this is an adoption at this point and basically we have implemented it.

So I would not expect any material change at this point.

Thank you.

You are welcome, Simon.

I was wondering about your efforts in the headset industry, whether you could comment on your positioning there right now and how you are looking at the industry as far as growth prospects (inaudible)?

I suppose you are referring to mobile headsets.

We are the market leader in PC headsets.

We think that this is a healthy category.

It continues to grow at a steady pace, voice over IP using the PC is great.

So I assume you are not talking about that and we are very excited about it.

On the mobile headset, our efforts are absolutely minimal at this point.

Two or three years ago, we thought we could get a position there.

We realized that fortunately we were not successful, let's put it this way, in the sense that that market is a bloody market in which the first party is the headset.

The handset manufacturers have the upper hand big-time and so we believe that that is not where our growth will be.

Thank you very much.

Manny Recarey, Kaufman Brothers.

Good morning.

Thanks.

Go back to the webcam business.

I am not sure if you spoke about -- you said that EMEA was -- the market was weak.

Was there any particular cause for the weakness that you could identify?

It's very hard to -- the fact is that the market was declining in some major regions in Europe.

I believe that the effort of communicating the webcam proposition has never been as significant in Europe as it has been in the US and therefore what you capture is you capture the earlier adopter.

So the challenge will be, as it is in the US, to go beyond that and you go beyond that by explaining what you do with webcams.

That doesn't mean that you have to spend a fortune on marketing, let me be clear, but it means that you need to focus your marketing much less on the functionality of the webcam and much more of a specific webcam model if you want and much more on what do we do with it, well how do I use it.

And that is what we have been doing in the US recently, but in general for a long time, we paid more attention to that kind of user education in the US, which I believe is -- I believe has had an impact on the market itself.

I believe it is absolutely possible and within our means to do that in Europe and we are working at it.

Okay.

And one more question.

Your revenue was up 9%, but units were up 3%.

Is that due to just product mix?

Manny, let me speak to that.

We -- a lot of times you see this.

Number one, the answer is yes; it is product mix.

Number two, we have just had some really nice success in a number of offerings and let me reference a few because I know you track this business carefully.

The diNovo Edge keyboard, high end, very nicely responded to.

The Harmony 1000, very nicely responded to.

The G25 steering wheel.

Where we didn't have an entry, we have a very high-end entry, very, very nicely responded to.

MX Revolution, VX Revolution.

So what we see is a really nice attraction in that particular case is one thing that I would call and I think it is very much mixed.

The only point that I want to call out to you is in our product lifecycle management, there is different ways and when different things come in.

You certainly should expect us to have other ways that come in so that we are competitive on all price points and that is the only point that is more of a long-lasting point.

But you've got it nailed in terms of your assessment.

Okay, thanks.

Tavis McCourt, Morgan Keegan.

Hey, guys.

Just want to follow up real quick on the channel inventory comments.

Mark, I think you mentioned channel inventories in EMEA for webcams were lower at the end of June than they were the previous quarter.

I wonder if you can make any commentary as it relates to channel inventory in the Americas region.

I think that was an issue in the March quarter.

Tavis, you are correct.

The channel inventory dollars were definitely down and we are encouraged in the EMEA range.

Overall, let me just speak about channel inventory in aggregate.

It looks fine in aggregate.

And when I look at the entire Americas, Europe, the entire world, I think we are overall in a good space for total channel inventory.

And in terms of the OEM business kind of growing mid-teens here for a couple of quarters, you obviously have a lot more visibility into that than we ever could.

But in terms of the OEM opportunities you guys see out there, is that a sustainable level of growth for that business?

And then I think in your analyst meeting, you mentioned something about potential OEM opportunities for the Harmony remote line.

I wonder if you could expand upon that if you could.

Yes.

We believe that double digit is -- the rate we see today is on the high end of the short-term opportunities in OEM because there is an underlying sort of weakness in the core OEM business of mice for desktops.

However, we were very successful in complementing that with gaming and keyboards.

We are broadening our portfolio of OEM offerings because that is what shows the 15%.

It is hard.

Gaming is actually an important element of that by the way.

And so is video, so it's not particularly significant this quarter, but this is another additional video modules and other additional sort of elements of our portfolio for OEM.

So I believe that OEM can continue to be double digit, maybe not at the level at which you have seen it this quarter.

On the Harmony opportunity, yes, we actually rolled out our first partnership with a service provider in Canada, a company called TELUS.

We are -- this company is actually providing both the product and the installation and support for Harmony when they roll out interactive TV set-top boxes in Canada.

It is a small thing for the time being, but it is an indication of where we want to go with that kind of OEM.

We want to partner with those advanced offerings in which the service provider sees an opportunity to complement or even stimulate its sales by using Harmony as a special or as an add-on to a basic configuration.

We are working on others, but that is the kind of OEM you should expect for Harmony.

Great.

And then a final follow-up in terms of Slim Devices, should we expect in this holiday season pretty substantial distribution of that product?

Yes, I would say that the answer is only a mild yes.

We are working on several opportunities in the US and Europe.

I would say the product will be probably fully distributed to our satisfaction in next year, but I would say that from a comparable point of view, yes, you are going to see a lot of growth this year too, but we would not be done in our channel expansion this year.

Thanks a lot.

Michael Foeth, Vontobel.

Yes.

Hi, gentlemen.

I have a question concerning your gross margin guidance.

The 34% guidance that you are giving seems really conservative given that in your weakest quarter you already achieved almost 34% despite an unfavorable product mix.

So I am wondering what is going to drag that gross margin down in the coming quarters?

Well, Michael, it's a good question.

I think one of the things that -- we are actually -- one of things you are pointing out to is we are actually very pleased with our gross margin for the quarter and especially you and I -- we all kind of look at the mix of our product offering and the fact that we were able to deliver this with the product mix we had with video being down was actually quite encouraging and a point that we do recognize.

But at the same time, we look at the entire fiscal year.

We take our targets very seriously in terms of delivering that [15-15] that we talked about and therefore, we think it is prudent to just continue to focus on the fiscal year, continue to focus on the targets that we have given you in terms of where you should expect gross margin for the year, but I do think it is fair to say we are encouraged by Q1.

Let me add to that because you might say these people are dancing around this and they have a stratospheric gross margin in the making and they want to keep it for themselves.

The truth is that we are not focusing on improving gross margin.

We will use every opportunity to improve top line and bottom line by selectively utilizing the extra gross margin to compete more aggressively, to give incentive to the channel, to make us sort of a healthier growth engine.

So yes, the gross margin is very healthy, which means that we have a set of arrows on our back that we can use and we will use.

So we will not waste money and lay money on the table, but the nature of the competitive dynamics of our market give us this chance and we will certainly use it.

Okay.

And then I would have another question on the operating expense side.

I mean you said that you will focus on aligning this OpEx gross with gross margin -- gross profit growth, sorry, but still you seem to be running slightly ahead of your business plan here.

Is that correct and can you comment on that?

Well, I don't know exactly what you mean by ahead of our business plan.

Well, basically the guidance, the ranges that you gave.

Well, you don't -- the ranges are yearly ranges.

You cannot look at our business model on a quarterly basis, particularly on a Q1, which is by far our smallest quarter.

So if you take a yearly view, which is one of the reasons why we continue to focus on the fiscal year, you will see that what you see this quarter is fully within the ranges for some marketing R&D and G&A that we indicated.

I would just caution you not to look too narrowly to this quarter because if you do the same in most of Q1, you will find that the numbers are outside the ranges of our long-term guidance for a yearly mix.

So no, I am not -- I don't think that there is any anomaly in there.

There is only the impact of the fact that over the last nine months, we have substantially added to headcount systems and infrastructure.

That is what we wanted to do and we will continue by the way to support our growth and make additions, but not to the extent that we have in the last nine months.

I was just saying that because the seasonal pattern seems to look somewhat quite different from the past.

Let me -- but let me say something that I should have said and I apologize for not having said that.

We did sell less than we expected and it is a fact.

It is a fact.

We were not expecting to be 62% down in EMEA in webcams and that is a huge swing if you think about what it means numerically.

We are talking a substantial amount of revenue that we left on the table.

So 21% growth of the rest of the portfolio tells you everything about what immensity was that 62%.

So that created lower sales than we expected and of course had some impact on the metrics that you referred to and on the comparable Q1 to Q1.

Yes, (inaudible).

Okay.

And just a final clarification on the CapEx, you were saying at the investor day that similar level to last year is what we should expect and I was just -- I didn't really understand what your investment in China was.

Could you just repeat that for me?

Sure.

Certainly, Michael.

It is surface mount technology.

Basically it is a capability that we have in-house in China that we have created and implemented and is now operational.

So this is a good thing for manufacturing.

It is an investment we feel very good about.

We think there will be a good return for this investment long term as well and that happened this quarter.

So, again, I go back, Michael, to the London investor day, go back to our long-term business model.

I know a lot of people don't give guidance on CapEx.

We think 2% to 3% of revenue, you will definitely find us within that range and I think there is a little bit of lumpiness, but by and large, we feel good about the CapEx here.

Okay, thanks a lot.

You bet.

Luc Mouzon, Exane.

Yes, good afternoon.

Thanks for taking my questions.

Just on the gaming business, could you just comment about the size of the console-related business and could we anticipate an acceleration when it comes to the PS3 and as far as I understand from the Wii product over the second part of the year?

Yes, Luc, first of all, we are very happy to see that our console -- retail console business is growing and in solid double digits.

Also, are pleased to see that our OEM business is helped by some gaming OEM.

So we had said in the past that we anticipated the wave of consoles to come back and it actually is coming back.

We have both announced and unannounced product for PS3.

We continue -- that is the richest platform for us to target and we believe that the recent price reductions that Sony implemented will help us.

I think that the rumors of the death of PS3 are way, way overstated.

On the other hand, we are very pleased to be the only licensed USB peripheral manufacturer for Wii.

We have a product for Wii today.

We are considering a lot of opportunities there working with Nintendo, so that will certainly help -- as a potential to help our overall console business.

So the short answer is that we believe we are at the beginning a good cycle for consoles and we are looking forward to it.

Okay.

Just as a brief follow-up, could you tell us when the QuickCam, the new product will come and which shelves?

Is that already the case by early July?

The high-end products that we introduced are actually available.

We had marginal sales of those products at the very, very tail-end of Q1 and I am referring to QuickCam Pro 9000 and QuickCam for notebook Pro and those products are available.

So they are rolling -- you may find it in the store nearest you or you will find it in the store nearest you in the coming days.

The entry-level products are going to come later this quarter.

Okay.

Thank you, very much.

You are welcome.

We will take the last question, operator.

[Luis Sabatier], Cheuvreux.

I have no further questions.

Thank you.

Thank you then.

Let me close this call by thanking you for being with us today and of course at this time of the year, it is fitting that I close the call with a comment on our holiday lineup.

The new product launch season that just started will once again demonstrate our ability to reinvent our categories and delight the consumer.

Our channel partners saw the new products in June and gave it an enthusiastic reception.

I could not be more excited by the opportunities this portfolio, our marketing activities and our track record of execution provides to Logitech in the coming months.

Thank you very much.

This concludes today's conference call.

You may now disconnect.