羅技 (LOGI) 2009 Q1 法說會逐字稿

Good morning. My name is Amanda, and I will be your conference operator today. At this time I would like to welcome everyone to the Logitech first-quarter 2009 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 the call over to Joe Greenhalgh, Vice President, investor relations. Please go ahead sir.

Welcome to the Logitech conference call to discuss the Company's results for the quarter ended June 30, 2008. The first quarter of Logitech's fiscal year 2009. The press release, a live webcast of this call and accompanying presentation slides are available online at Logitech.com. This conference call will include forward-looking statements that are being made under the Safe Harbor of the Securities Litigation Reform Act of 1995, including forward-looking statements with respect to future operating results. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from that anticipated in the statements.

Factors that could cause actual results to differ materially include those set forth in Logitech's annual report on form 10-K dated May 30, 2008 available online on the SEC Edgar database, 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 management's 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. So if you are just joining us, let me repeat the presentation slides accompanying this call are also available on our website.

Joining us today are Gerry Quindlen, Logitech's President and Chief Executive Officer and Mark Hawkins, 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. Let me start with an overview of our Q1 performance. We experienced continued strong demand resulting in double-digit sales growth. Our sales growth accelerated to 18%, reaching a record high for Q1 with growth in all regions led by Asia. We improved our profitability. Our gross margins increased by 40 basis points compared to the prior year, and we set a new record for Q1 operating income. And we ended the quarter with $484 million in net cash and we generated $44 million in cash flow from operations.

Gross margins. Our gross margin was 34.1%, up from 33.7% last year and our gross profits grew by 20%. The gross margin improvement was primarily driven by a combination of ongoing product cost reductions and favorable mix, primarily within the pointing devices, keyboards and remotes category.

Operating income and net income. With gross profits growing faster than operating expenses, our operating income grew by 24%. Our net income was $29 million, up by 15% compared to the prior year. The slower growth in net income was due to the combination of earning less interest income and having lower other income compared to Q1 of the prior year.

Now before commenting on the balance sheet I want to briefly address exchange rates. One of the data points that we are asked about most frequently is the impact of exchange rates on our sales growth. In Q1, excluding the favorable impact of exchange rate changes, our total sales, retail and OEM combined, grew by 12% notwithstanding our ability to modify prices in local currency over time to maintain parity with the US dollar.

Let's now move to the balance sheet. Cash. Our cash position including short-term investments was $484 million. Our cash position improved by $118 million compared to the prior year. Now when comparing to the prior year it is important to note that during the last 12 months we used $22 million for the acquisition of WiLife, and $217 million on share repurchases. Our cash flow from operations for the quarter was $44 million. This was an increase of $31 million over the last year, and our cash conversion cycle I might add, was 53 days, a 17-day reduction compared to the same quarter last year and our best Q1 ever.

This reduction was primarily driven by improvements in our day's payable, complemented by lower DSO. And this was the eighth consecutive quarter of year-over-year improvement in our cash conversion cycle.

Inventory. Our inventory was up by 18% or $43 million compared to June of the prior year. Now inventory turns were 4.9, which is the same as the prior year.

DSO. Our DSO was 60 days for the quarter, a four-day improvement compared to the 64 days in the prior year.

Share repurchases. During Q1 we repurchased a little more than 1.5 million shares for $49 million. We own approximately 6.7% of our shares outstanding, and we have roughly $156 million remaining under our current repurchase program. Please note that the growth percentages that follow are in comparison to Q1 fiscal 2008, so now let's discuss net sales by product family starting with retail.

Our retail sales grew by 19% with units up 12%. We achieved double-digit growth in all regions with EMEA up 20%, the Americas up 10% and Asia up 41%. We experienced strong demand in a number of product categories with cordless mice and remotes delivering substantial growth in all regions.

Retail sales pointing devices. We sustained our strong momentum in the category in Q1 with sales growth of 34%. The primary growth driver was cordless mice with sales up by 59% and units up by 58%. Now we achieved very strong growth in the low end and high end of the cordless mice category, with both more than doubling compared to the prior year. Now the low end growth was driven by strong demand for our V220 cordless optical mouse, while at the high end of our VX Nano cordless laser mouse for notebooks continued to be the main growth driver.

It was our best quarter yet for the MX Air, our unique, rechargeable, cordless air mouse which also contributed to our growth. I also might note we had strong -- I had a strong quarter in our corded mice with sales up by 15% and notebook mice making a nice contribution also to this category.

So let's now turn to retail sales, keyboards and desktops. Our sales for keyboards and desktop category grew by 15% with units up by 16%, and there were a number of highlights in this category during the quarter including strong growth at the high end of the cordless desktop category. And this was driven primarily by our cordless desktop MX 5500 Revolution and also continued success in stand-alone keyboard sales with double-digit growth in all regions. And I might add a solid contribution from the sales of our diNovo Mini, which is our cordless mini keyboard optimized for controlling PC entertainment. And lastly, sustained demand for our notebook stands.

Let's turn to retail sales audio. Sales in audio declined by 11%. Now the decline was in speakers where sales fell by 15% due to weakness in our PC speaker category. Let me elaborate further. Our PC speaker sales were down by 20% with the decline experienced across most price bands and in particular at the low-end and high end of the category. Now on the other hand we were pleased to achieve 15% growth in our iPod speaker sales with a strong contribution from our Pure-Fi Anywhere speakers.

It was a solid quarter for our PC headsets with sales increasing by 12%. The growth was driven by two of our newest USB headsets and that would be the Clear Chat Pro and Clear Chat Comfort; and we continue to build momentum with our Squeezebox family of media streaming products with sales up substantially and reaching a new high for the quarter.

If I turn to video, we were very pleased to deliver accelerated growth in the video category with sales up by 21%. The sales growth was driven by another very strong quarter for our high-end webcams. Demand for our QuickCam Pro 9000 and our QuickCam Pro for notebooks helped us increase our high-end sales by nearly four times compared to the prior year. Now our WiLife family of video security products made a strong contribution to the growth as we build momentum in this very promising category.

Retail sales gaming. It was a very strong quarter in gaming with sales up by 37%, our highest quarterly growth in over three years. Our PC gaming sales increased by 24%, and this growth was driven by strong sales in both our G15 gaming keyboard and our G25 racing wheel. Now on the console side of gaming sales were up by 61%. The star of the console category was our GT Driving Force wheel, which started shipping during Q1 and has been met with very strong demand. And also contributing to growth were sales of our headsets and microphones for console gaming.

Retail sales remotes. It was a great quarter for remotes with sales up by 74% and units up by 77%. And frankly, it was the best growth we've had in the last five quarters in this category. The growth was primarily driven by strong demand for our newest remote, the Harmony One, and we saw very strong sales across all three regions with EMEA sales more than tripling compared to the prior year.

OEM sales. We continued to deliver double-digit growth in OEM with sales up by 15%. Now the majority of the growth was once again in the console gaming category, driven by microphones for singing games. Our OEM mice sales were up by 5%.

So in conclusion, let me wrap up the discussion with three points.

One, it was our best Q1 ever for sales and operating income. Two, we achieved double-digit sales growth in all but one product category with especially strong performance in remotes, gaming and pointing devices. And three, Q1 was our eighth consecutive quarter of year-over-year improvement in our cash conversion cycle, helping us more than triple our cash flow from operations compared to the prior year, significantly outpacing the 24% growth in operating income.

Before concluding my comments I want to let you know that our next analyst and investor meeting is scheduled for November 12 in London, and we hope you will be able to join us. Let me now turn the call over to Gerry.

Thank you, Mark. I am very pleased with the Company's performance in the first quarter of fiscal 2009. We delivered our best ever Q1 for sales and operating income, and we generated strong cash flow by continuing to focus on improving the effectiveness of our working capital. And most impressively in my view, we did this in a very challenging operating environment.

Now there were a number of highlights in the quarter starting with the acceleration of our retail sales growth to 19% during a period of heightened concern, not only about the US economy but increasingly about the situation in Europe.

Our ability to deliver double-digit growth across all regions and in all but one product family demonstrates the benefits of our product and geographic diversification as well as the continuing appeal of our offerings. Looking at the performance of the regions I was very pleased to see growth in all of our sales regions and especially with the continued exceptional growth in Asia. I was also quite pleased with the strength and resilience of our business in the Americas. We had a solid quarter for both sell-in and sell-through in the Americas, and we achieved sales growth in every category except audio with remotes leading the way with a 40% increase year over year.

I am extremely pleased to see the second consecutive quarter of growth in video and a return to double-digit growth in that category. We achieved growth in all regions with a return to growth in EMEA's video sales for the first time in the last six quarters.

Q1 was another very strong quarter for pointing devices with sales up 34%; with the majority of the growth driven by our sales in mice for notebooks. We continue to leverage the opportunity provided by the popularity of notebook computers as sales of our family of notebook peripherals increased 58% compared to the prior year.

I was also very pleased to see the strong performance of our gaming business up 37%. The strongest performance in three years as Mark noted earlier. It was particularly gratifying to see a return to growth in both retail PC and console gaming complemented by our ongoing momentum in OEM with microphones for singing games.

Without a doubt another highlight of the quarter was our strong gross margin performance. The year-over-year improvement in our gross margin is even more impressive when you consider the increasing pressures on our input costs, which thus far we've managed to largely absorb. Our strong gross margin continues to provide us with a powerful source of flexibility. In Q1 we were able to effectively use our strong gross margins in a targeted way to stimulate demand in select product categories and markets. For the balance of the year we plan to continue to take advantage of the flexibility our strong gross margin provides us to drive sales growth through targeted promotional efforts wherever appropriate.

Now let me spend a minute talking about our audio business which had a disappointing quarter. As Mark mentioned the decline was entirely in PC speakers. Our digital music business performed well, and our streaming media business is growing rapidly and beginning to contribute nicely to audio's overall results. There were several factors at play in the PC speaker category with the most notable being a product line that is in need of a refresh at a number of key price points. But these are factors that are largely in our control and we are addressing them.

Let me comment on what we see going forward. The September quarter is traditionally when we release the majority of our new products and we plan for that to be the case again this year. As you would expect, we will introduce a variety of exciting new products across all our product categories.

We've had very strong success in pointing devices for the last six quarters, the last several quarters, primarily driven by our line of cordless mice for notebooks. During Q1 we launched our latest mouse targeted for notebook users, the V450 Nano cordless laser mouse for notebooks, featuring our innovative plug and forget nano receiver. And there is more to come including a wireless mouse that is incredibly easy to bring along wherever you take your notebook computer. We will also continue to strengthen our lineup of mice for desktop PCs.

You can expect to see innovative new offerings in the keyboard category, as well. Our cordless Desktop Wave has been a key contributor to our growth in this space, and we plan to build on this momentum in the months to come. We will continue to target notebook PC users with the products to enhance their comfort and their productivity. We also expect to launch appealing new offerings designed specifically for the growing base of Mac users.

Moving now to audio, as I indicated, we believe that much of the softness that we saw in the PC speaker category during Q1 was related to product gaps or transition. And we are already beginning to address that this quarter with new products. We also expect to significantly strengthen our product lineup in the iPod speaker space with several new offerings.

We were quite pleased with the sales of our Squeezebox products in Q1, and we believe that our momentum in the streaming media space will only accelerate as we expand our product lineup.

Turning to video, I see us continuing to build strong momentum. This quarter's results reinforce that our three-point plan focused on new products, improved in-store communication and strategic partnerships is working. We believe our current product lineup which we refreshed during the June quarter, is quite strong. Our challenge in webcams remains to grow the overall category. We plan to continue doing this in a variety of ways and particularly by utilizing marketing programs designed to raise consumer awareness of the simplicity and richness of video communication. Our strong gross margin also provides us with a powerful source of flexibility for promotional efforts in the video category. We will continue to take advantage of that going forward.

WiLife sales in the Americas made a solid contribution to our growth in video during Q1, and we expect that to continue as we move forward. And we plan to launch our WiLife product family in EMEA this quarter. We believe that European consumers will respond well to our easy-to-use plug and play security monitoring products, helping us build on the momentum we established during Q1.

We were very pleased with the growth we achieved in the gaming category during Q1. Our success in the console space was due to the extremely strong reception to our new racing wheel for the Gran Turismo 5, but we aren't stopping there. Just last week we announced several new exciting new products including a cordless keyboard for Wii licensed by Nintendo, and our first-ever wireless force feedback wheel. We are looking forward to entering the holiday shopping season with our strongest PC and console gaming lineup ever. At the same time, we are also exploring opportunities to leverage the success we've had with singing game peripherals in OEM into our retail channel.

Remotes was our best growth category in Q1. We continue to be very pleased with the strong demand for the Harmony One. We will refresh several of the products in our remotes line during Q2, but we are primarily focused on both further improving the consumer setup and usage experience and raising consumer awareness of our category leading offerings. In fact, along with video, remotes is the other product category where we plan to use the flexibility provided by our gross margins for targeted promotional efforts aimed at driving topline growth.

The macroeconomic situation obviously continues to receive a great deal of attention in the media. In some ways the challenging retail environment coupled with our strong performance at the point-of-sale, has made our retail partners count on us even more than usual for their growth. They depend on and appreciate our willingness to sustain our innovation focus during challenging times like these, and our track record for consistently driving growth.

Now we recognize that economic conditions could change, but what we've seen in the last few quarters and still see today, as well, is sustained demand for our products. As one indicator of this sustained demand, our retail shipments through the first three weeks of Q2 are well ahead of the same period last year.

That brings me to our outlook for fiscal 2009. We continue to target 15% growth in both sales and operating income, and we expect our gross margin to be above our long-term target range of 32% to 34%.

In summary, we just delivered the best Q1 in our history during a period of significant economic uncertainty. Achieving 19% topline growth in retail despite the tough retail environment and macroeconomic turmoil, demonstrates the broad appeal and the increased resilience of our product portfolio. While Q1 is not the most pivotal period of our year, the momentum from our first quarter performance combined with our strong lineup of new products starting to hit the market as we speak carry us into the second quarter confident that we are well positioned to deliver on our fiscal 2009 targets.

At this point I would like to open the call to your questions. Please follow the instructions of the operator.

(OPERATOR INSTRUCTIONS) Manny Recarey, Kaufman Brothers.

Mark, can you go over the impact of the exchange rates? Did you say it was excluding exchange rate it was 12% year-over-year sales growth?

Manny, that is correct, yes.

If I remember you typically say that exchange rates don't have a big impact on the growth in -- did that change this quarter?

Well, I would say, Manny, again, we don't consider this a huge impact from that standpoint. It is 12%. We tried to disclose that just so you guys would have better insight on that. We try to help you provide a lot of information both at the IR day and such, as you recall in terms of the nature of the sales mix of our company. And I think when you look at that you can look at that and the exchange rates that have been fluctuating in the marketplace and get a pretty good proxy. I think what we've just tried to do is provide a little bit more clarity for you. We think people have been asking the question and hence we have tried to provide additional data for you.

Okay, thanks.

By the way, we still believe it is important to note, Manny, that we still believe that you don't want to take the percentage and let it be an oversimplification. I want to believe that we don't want to oversimplify the situation because we still retain the right to change our regional pricing to match up with US pricing to ensure global parity over time. So that opportunity is particularly available during new product introductions from that standpoint. So I think with the sales mix and this it just gives people a chance to triangulate and validate their models. Okay?

Okay, thanks. Gerry, at the end of your comments you have mentioned about the retail shipments being up nicely year-over-year for the first three weeks. What do the retailers kind of coming back and talk to you about for the second half of this calendar year going into the holidays, they start thinking about the holiday season? They being more cautious than you would expect?

Yes, I think it is fair to say that in general retailers are a bit more cautious at this time, Manny, than they would have been say 12 months ago. But what I can comment on relative to some of our discussions with them is doing Q1 we held our, what we call our showcases in Europe and in the Americas, and this is where we share with them the product lineup that is coming out in Q2, Q3. And the feedback -- and they are a key point of feedback for us. The feedback that we got from them on the product lineup was very, very positive.

I think the other thing that has been a key during this time period is that we have been able to consistently grow their business. If you look at the results we announced today and just focusing on the Americas, for example, we grew our business 10%. We grew sell-through for our retailers at double-digit rates, 40% growth in Harmony, 23% growth in video; and this is all in the Americas during a time of a very, very challenging retail environment. So I think our retailers are looking at us, as I said in my comments as an even more valuable partner than usual. So they are more cautious, but remember the thing the retailer is looking for more than anything else is growth.

They are looking to bring customers in their door and they are looking for vendor partners who can help grow their business, and we did that very, very well. And we've got great products coming so I think that they are even closer to us than usual is the way I would characterize it. But yes, they are more cautious than they were 12 months ago. But that is natural.

One last question just looking at the gaming sector, the revenue was up 37% but units were down 17%. Obviously the product mix shifts there. Can you give us some more color on kind of what is driving that?

Let me address that. A couple things here. One is that we had fewer sales in our PS2 gamepads; and then also our PSP accessories would be one of the dynamics. Then as you called out obviously the mix is a big factor if you look at our GT, our Gran Turismo steering wheel is a higher ASP, for example. Our G15 gaming activities as well as our G25 steering wheel, these have a higher ASP. But I think those are the combined factors, both mix and those other two items.

Okay, thanks.

Michael Foeth, Bank Vontobel.

Good morning, guys. A few questions from my side. Just to clarify the ForEx situation, you have just given us the negative impact, or the positive impact that FX had on sales. Any impact on your margins? I mean, any impact on the operating profit margin that you could quantify?

Let me just say, Michael, that we wanted to provide this at the revenue level again after benchmarking and having this be a frequent question and such. What we are not doing is disclosing this at the operating income level.

A couple of points I want to call out that I think you are aware of just from the IR day, and such, is that we do have a substantial -- if we focus -- you talked on gross margin and operating income -- on the gross margin side keep in mind that we have cost in local currencies. For example in Asia that have an impact also on our total gross margin in addition to the topline side that we talked about. So we want to make sure that we don't neglect to kind of call that out.

Also, we talked about having a major -- if we take it down to the operating income side -- we also have a major cost base that we disclosed in reference to the Swiss franc, also in the euro from an OpEx standpoint as well. So all this does now flow to the bottom line. All this does not flow to the gross margin alone. There are several factors that we look at from that standpoint.

Okay, thanks. And another question regarding those first three weeks you've been talking about the retail shipments were very strong. Is that in terms of sell-through or sell-in to the.

I'm talking about shipments.

Shipments, okay. In terms of the growth in Asia, can you maybe give us a bit more color on which regions in Asia fueling the growth and what the trends later in the quarter have been?

What I can say is that this is the third quarter in a row of growth in excess of 40% in Asia. In Q1 we saw excellent performance, frankly, in every market in Asia but the standout performances I would say were Japan. We struggled in Japan a few quarters back, you will remember but we are back on a very good path there. Feel very good about where we are in Japan. China continues to grow very, very nicely. Frankly Australia, New Zealand has been a star for several quarters in a row. But even if I went below that to India, Korea, etc. I was very pleased across the board.

If I look forward and I am talking about the future for the emerging markets in Asia in particular, the fundamentals are very attractive. And I have talked about this at investor day. We continue to say that what drives our business model, as you know, is the upgrade cycle and the install base of PCs. And the install base of PCs is growing very, very rapidly in all of the emerging markets and certainly in Asia. And more importantly, what is really driving the demand, the fundamental demand for our products is the fact that consumers in these markets are very, very anxious to use the Internet, for example, to connect.

They are very enthusiastic about leveraging the possibilities that things like the Internet brings to them in terms of video communication, accessing content over the Internet and that is where the real demand for our products is coming from. So I think that we see broad-based strength in Asia and in all emerging markets, and we continue to focus on those areas as a key growth driver.

Okay, and the last question from me if you could just lose a few comments on the transportation costs with the higher oil price, I know you have like fixed door-to-door rates but at some point that is probably going to change.

Michael, what we talked about in the IR day is that historically, at least as we related to the prior year we have been able to contain some of our freight costs as a percent of our revenue. And actually do a good job with that; some of that has been with breakthroughs like we talked about in terms of repackaging our audio, designing that for a smaller form factor to make improvements. That is just one typical example. But that is what we've disclosed; annually we haven't planned to disclose that quarterly. We will talk about that again on an annual basis.

Okay, thanks.

Tavis McCourt, Morgan Keegan.

Just a couple of follow-ups, and great quarter considering the economy, I think. In terms of the G&A expense was up a little bit more than I would have suspected sequentially, was there anything one-time in there or are there a lot of beginning of the year accruals in that number, or kind of explain what is going on there.

Tavis you are spot on. It was a one-time investment in G&A. It was actually related to some IT expense, and you should expect as you go forward throughout the year that you will continue to see the trend that you've been seeing, at least the prior few quarters of G&A continuing to grow at a rate slower than the rest of the Company's OpEx, and again pointing toward the long-term of the long-term model for G&A.

Okay, and then a follow-up on the strength in APAC. It looks like units were strong in APAC, but sales were much stronger than units. I wouldn't think you are getting much of a currency benefit over there. Is there a mix shift difference in APAC in terms of what sells over there? I would have thought that kind of the lower end stuff would sell over there better but is there something I am not thinking about?

No, I think the way to think about it, is just that we have -- the fundamentals are just very good, and we are seeing strength in every market, particularly for control devices, particularly for keyboards and mice. And we are seeing strength across price points, too. So I think as I said in my earlier comments, to I think Michael's question, the fundamentals are all moving in the right direction relative to emerging markets in Asia in particular.

And North America obviously had a fantastic year last year growth north of 20%, a little slower growth this quarter. Was that primarily the speaker business, or is it some of these the larger pointing device and keyboards somewhat weak in that market and is that something you would expect. I guess is the bigger picture question would you expect this North American market now after a couple of good years of growth to slow down a little bit this year, or do you think that will pick up as this year progresses?

I was very pleased with our performance in the Americas in Q1 given, as you or someone else said, the challenging operating environment, 10% growth and double-digit sell-through growth. Audio was a drag, a disproportionate drag on AMR, but as I mentioned in response to somebody's question -- I think it was Manny's -- 40% growth in Harmony, which tends to be a higher ASP category for us; 23% growth in video, very strong growth in pointing devices. But 10% growth overall against a pretty challenging backdrop.

So I was very happy with it, and we will continue to leverage our new products which are really just hitting the market now as I think you are all aware. Q2 and Q3 are the quarters for us when we really -- we introduce new products all year but Q2 Q3 are the two big new product quarters, and they are just really hitting the market now and so I think that will certainly help not only in the Americas but across the board.

Thanks, Gerry.

You are welcome.

John Bright, Avondale Partners.

Mark first, specifically on the quarter, audio we've talked about a couple times. Characterize this at how much of it is category weakness, market share shift relating to products you are cycling out of?

I will take that one. As I look at audio, and Mark said this in his comments, if you look at audio broadly I was pleased with digital music double-digit growth and PC headsets, 12%. So we had good quarters in both of those elements of our audio business. So the weakness was completely related to PC speakers and frankly I would characterize the weakness really as related to some product gaps and some product transitions. There is nothing going on in PC speakers in terms of competitive dynamics that are out of the ordinary. There is nothing going on in terms of market growth that is out of the ordinary or in a particular market.

It really is related to some gaps in our product portfolio. They are factors under our control. We are addressing them already. Some of the products that will come out in Q2 will start to address this and then some products that we have planned in terms of refreshing and addressing some price point issues in future quarters will also help to address it. So I would really characterize it as a product related issue in PC speakers and nothing to do with category growth or unusual competitive dynamics.

We see the phenomenon of laptops overtaking PC sales. What is your thought, Gerry, as far as the adoption of speakers for laptops going forward?

Well, it is an area where we are very focused and as you know, we think we have proven our success at transitioning in other categories, for example in webcams, I talked about the desktop to notebook transition. Certainly in pointing devices we've done this very, very well. You look at, for example, the last two quarters notebook mice have grown almost 60% in both quarters. So we believe that we know how to do this. We have a very robust product lineup focused on PC speakers that are really targeted at notebooks. And so just as we've welcomed the transition in other elements of our lineup we are embracing it here, as well. So it is not a dynamic that concerns us in any way, John. We see it as an opportunity.

Last question. You've talked in this conference call and other conference calls about the gross margin being above your historic average and your projected long-term average of 32% to 34% in achieving that above in this fiscal year. Is there any way you can characterize how much in this particular quarter you needed to use your strong gross margin to drive sales?

I would say it wasn't anything -- first of all, it tends to be a little bit more category specific. So we've used our strong gross margin in video now for a couple of quarters to help stimulate awareness. For example, we've said repeatedly there is three -- we have a three-point plan that we are following in video. It is new products, it is in-store marketing, it is partnerships. We have not hesitated to use our strong gross margins to help fund ads with retailers to create more awareness for video. That is part of what in-store marketing is all about. So we have used it in a very targeted fashion in categories like video.

In other categories like pointing devices where our innovation story is extremely strong, we don't need to use it, and we don't. So we are selective by category. We are selective by market. If there are some markets, some countries out there that are not growing as fast, we will use it there more. So we are very targeted in our approach. The big picture answer to your question is I don't think we did anything in this quarter that was out of the ordinary.

On the remote side you mentioned in your comments that you might use it for your remotes looking forward. Is that more because the margins are solid in the remote category more so than you are seeing anything unusual there?

I will give you a couple comments, and Mark you may want to add to this. But we are not necessarily talking about promotions in a price oriented sense there. We are talking more about marketing support, marketing programs when it comes to remotes. And I will talk about the kind of thing we did with the Harmony -- we called it Harmony on steroids -- but the Harmony advertising campaign we did last quarter. So we are talking more about marketing support, and the reason is with remotes, which is what we told you that it will be our fastest-growing category in '09 as it was in '08. It is a category that still needs a lot of awareness building. And so that is an area where we will provide more marketing support on an ongoing basis. That is really what we meant by that; Mark, I don't know if you want to add anything.

I agree with that, and John, you are correct that the Harmony remote does have one of our higher gross margins, as well. You are correct.

All right. Thank you, gentlemen.

Simon Schafer, Goldman Sachs.

I was wondering just wanted to come back on this question about input price inflation. I realize maybe you don't want to comment as to when certain things may be up for renewal as far as freight costs are concerned. But what about some of the other input variables such as plastics and your direct labor costs in China? What type of inflation should we assume just trying to get a better sense as to how big the gross margin tailwind may be?

Simon, first of all we see the same thing that you see. We certainly acknowledge the rising input pressures that are out there. You can see it in oil for transportation, things of that nature, different commodities and different dynamics, some of which you have called out. So we see the same thing from that standpoint. I certainly wouldn't guide you on the factors going forward. Those are pretty hard dynamics to project. Everyone will make their own call right, on where those things are heading.

The one thing that I will say, though, is at least as it relates to Q1 that we were able to go ahead and meaningfully offset those, as you can see with our gross margins for Q1 being pretty strong and an improvement, again, year over year. So I think there are input cost pressures. We see those; in Q1 we were able to mitigate a good majority of those and still deliver the gross margin up year on year.

Simon, the only thing I would add to that is to Mark's point, we are looking at all the same signals and filtering them through our filter and we are also adding some other information that, like our retailers' response to our new products. And we factored all that in and we have reaffirmed that we believe our gross margin, we have reaffirmed our gross margin targets for the full year.

Understood. That's very helpful. My second question would be more on the balance sheet, yet another quarter of great performance on the cash conversion there. But in light of the excess cash situation on the balance sheet, and perhaps some potential targets of acquisitions that conceivably have become cheaper in price, should investors brace themselves for a larger element of M&A going forward to sustain the growth on the model?

I will reiterate what we have said consistently about our approach to acquisitions because really nothing has changed. We continue to use a number of criteria in evaluating acquisitions first and foremost, do we believe a potential acquisition regardless of size can create value. That is the number one criteria.

Second, we are looking for acquisitions that perhaps give us entry into a space that we think is attractive or will be attractive. If you look at our last two acquisitions they are perfect examples of this; Squeezebox and WiLife. We look for the opportunity to bring leverage. Our global distribution footprint, our global brand, our capability in product development, etc. And we continue to be active in looking for opportunities out there. And we will continue to do that going forward. But nothing has really changed.

Got it. Thanks so much.

Thomas Schneckenburger, UBS.

Congratulations again for the strong cash flow that seems to be business as usual. But the question from my side is why have you stopped buying back shares later on in the quarter? Why you are not so much convinced of the attractiveness of the share price, or is there any other reason? And the second question is -- okay.

Let me mention a couple things here, Thomas, from that standpoint. One is keep in mind there is a window of which we have a blackout window in terms of even when we buy shares. That is certainly one commentary. The second thing is that we tell -- people have asked me this before they try to predict the timing because for all of you that are on the phone we actually post every two weeks our share buyback on the Swiss exchange. And as you might guess, we try to be as unpredictive as possible for obvious reasons for the benefit of our shareholder.

We bought 1.52 million shares for $49 million. Again, that is a substantial share buyback, and we bought $217 million over the last 12 months, so we think share buyback is proving to be a great thing for our investors. You will see more share buyback in the future. But I hope that gives you a little bit of color, Thomas.

And the question, the second question is on a follow-on on the manufacturing costs. Our indications are that Chinese manufacturing costs are up 25% over the last 12 months. Also I think your Logistics renewal was up for Q1, as well, so perhaps you also you contracted kind of peak end to end rates. So I really am wondering what the impact on the gross margins for next year's gross because that seems to be the central pressure. And also could you provide some flavor on does this mean that you are moving light manufacturing in the Chinese hinterland or to other countries?

And the next question would then be on the investor's day you provided your 1515 target also for the midterm, so you extended it, and you said you see the 5 billion company on the horizon. Given the significant downturn in consumer confidence in the macro environment the base effect increases, foreign exchange drops. Would you still reiterate the 1515 target for the midterm or would you be more cautious now?

Let me break this into -- there is a lot of questions there but I will take the question about the targets, Thomas. When we reiterated the targets we factored in all of the available information, and the available information in terms of the economy and absolutely the input pressures, input cost pressures. We reaffirmed our 1515 guidance, as well as the gross margin guidance. And so that is the short answer to that one.

I want to address several of the points of your questions, but as Gerry said, the 1515 -- the one key point that I want to make Thomas, as you talked about the yearly guidance, you also mentioned the foreign exchange. Again that has been a topic of question in the past. Keep in mind over the last 10 years we've delivered double-digit growth for the last 10 years in a row, uninterrupted when foreign exchange has been up, foreign exchange has been down, all over the place. So we don't see foreign exchange as the key driver in our ability to drive growth for the Company as evidenced in the last 10 years. So that is the context of why we again believe it is important not to oversimplify that. But as Gerry said, 1515.

So let me move on now to the manufacturing cost questions that you had. You had several of them. The most important message I want to share to you is that we are reconfirming that our gross margin will be above the range, our long-term business model range for fiscal 2009. So that is what we are reconfirming with everything that we have seen and understand. So that is that.

In terms of China and the last 12 months, Chinese cost in terms of -- we absolutely see input costs rising as we've tried to call out earlier in the call. We see a lot of what people in the market see. Again, if you look at the last 12 months, if we talk about that retroactively keep in mind you've seen what has happened with our gross margin over the last 12 months, as well.

In terms of logistics, you've talked about renewals and such, pretty much disclose what has happened in the prior fiscal year; again we will do that on an annual basis in terms of more detail on logistics. But most importantly we are reconfirming our gross margin for the year.

Let me add one point of color on manufacturing. Just to remind everyone, we maintain a flexible manufacturing model. We manufacture roughly half of the units that we sell, sometimes it is a little more than that, sometimes it is less. And one of the reasons we do that is so that we have maximum flexibility as conditions change. In some cases we may manufacture more things in-house because we have cost advantages versus suppliers; in other cases we may use suppliers more on some products than we have in the past. And that is one of the reasons we maintain the flexible manufacturing model. So you need to keep that in mind.

In terms of manufacturing moving more towards the hinterlands of China I think you said, we don't see that happening. But we continue to look for the optimal solution in terms of manufacturing efficiency.

Andy Hargreaves, Pacific Crest Securities.

I was wondering if I could ask a follow-up on the working capital. Just the pace of reduction, is that sustainable, and where do you think your working capital days can get to ultimately?

A couple things here. One is that we are certainly pleased to see the improvement. I would say that with temper that you shouldn't expect the rate of improvement that we've been seeing to go from 70 to 53 is quite a big improvement.

I think that you should -- with that being said, I would temper the rate of improvement, but there is no structural reason why we cannot continue to improve our working capital efficiency. I will call that out, as well. Don't expect it at the same rate and don't expect it every single quarter, but over the course of time we are going to continue to be very attentive to our cash conversion, and that is what you should expect.

Okay, and then in terms of the 50% topline target, I wonder if you could give us any qualitative or quantitative breakdown on your expectation of OEM versus retail within that?

Well, what I can say is that at the beginning of the year when we set the targets, we said that we thought that OEM would not grow at the same rate as the Company average of 15%. We thought it would grow, but given that the comps were very strong due to a lot of the success with microphones in '08, we said that OEM would grow. Probably not grow at the same level, meaning 15%.

Now, I was very pleased to see that in Q1 we actually grew at 15% in OEM, so that is a great start. But we believe OEM will grow, and you have the 15% overall guidance for the top line for the full year for the Company.

Thank you. Just last I'm wondering, can you give us any more detail on WiLife in terms of its size right now or its growth rate?

I will start, and I will let Mark add a comment at the end. We got off to a very good start with WiLife. It is adding to our overall business. We are very, very pleased with the reaction we got from customers. For example, I mentioned our showcases earlier. Our customers see why we entered this market, and they are already -- many of them are into this space.

And they are very glad that we have entered it because they see us being able to bring the things that Logitech does very well, things I mentioned earlier like our brand and our distribution and our marketing capability, and most importantly our product innovation. So we are off to a very good start. Mark, I don't know if you want to add anything to that.

I totally agree with you. I think we don't disclose the exact size of it, but one thing to consider, Andy, is that video -- it is part of the overall video category, and video would have still been double-digit growth irrespective of that. It added onto it, but as Gerry said, it is a very promising and exciting business for the future.

Thank you.

Roger Steiner, Landsbanki Kepler.

Two small add-ons, I think both for Mark. Just an off one on the working capital; obviously very, very good progression there. There is definitely no sort of one-off or specific item in payables if I got that right, because that was sort of the main driver for the decrease.

Payables was a significant part of the driver, but also we improved our DSO by four days, Roger, so those were the two primary dynamics. Our inventory turns were equal to what they were last year. So it was really payables primarily, but also in the receivables.

No one-off for specific items in payables then?

No one-off things. We have been -- over the last eight quarters of driving this improvement, we've been trying to address this structurally and with three different legs. So it is not a one-off.

Okay. And then on your cash pile, I mean you have obviously added your cash pile and increased the cash pile within an off year quite, quite considerably, and it reached a level where I think there is definitely some excess cash on the balance sheet.

Assuming there is not sort of a bigger acquisition sort of imminent, do you have any sort of second plan, what you would do with that cash; I mean, a share buyback or any other way to return cash to shareholders?

Let me speak to that. There is three key things that we have -- you know, we use cash. But before I even say that first of all it is very, very good to have cash these days. And also I think our cash is reflective of really the kind of similar profile that blue-chip Tier 1 companies have in terms of cash balances in the field that we are in. But if you think about how we are using our cash Roger, I would really say there are three primary goals. The first thing is to fund our business and to fund our growth. We are fundamentally a growth company. That is number one.

Number two is as the opportunities present themselves M&A is a good use of cash and WiLife, we bought a $22 million company is a great example. And then thirdly is share repurchase; and if you look at the last 12 months, for example, we spent $217 million on share buyback. So we are using the cash. The thing is, as you've called out, we just continue to fairly substantially improve our cash conversion cycle. So it is a nice problem to have, so to speak. But that would be the commentary on that.

Okay, thank you.

As far as bigger M&A, I think Gerry has called out the three criteria we have for M&A. So size is not the criteria.

I think we have time for one more question.

Yair Reiner, Oppenheimer.

My question is on ASPs, it looks like ASPs for the product portfolio as a whole were down year on year for the first time in a long time. I was wondering whether that reflects kind of where the strength of the overall portfolio is right now. Or is it really some kind of macro indicator about where consumer appetites are? And if it is, do you feel that your product portfolio is positioned well for what looks like continued macro headwinds?

So let me say the following thing. First of all, just to clarify, our ASPs are up. Year on year they are up by 6%. And obviously it varies by category but in aggregate they are up by 6% so that is probably the most important factual point to put out there. And secondly, I would remind you and remind everybody that when we see ASP changes, mix is a major factor with ASP changes. One should not conclude that ASP changes are related to pricing changes, per se. Typically they are within the mix between families and across families, if you will. So our ASPs are up from that standpoint.

And when you talk about just macro economic responses in terms of ASPs, one of the things to note, too, is we've got great response to some of our higher ASPs, for example our remotes are growing 74% year on year. So it really, we are getting good response overall from that standpoint.

The only point I would add is that we continue to reiterate that one of the strengths of our portfolio is, is its breadth, that it spans categories. It spans multiple price points. In the current quarter, and frankly this has been true for several quarters for example, if you just look at pointing devices, one example, we saw great performance at higher price points with products like the VX Nano and the best-performing mouse we have these days, the selling mouse is the V220 which is an optical mouse in the $20-$29, EUR20-29 price range.

You could extend that analogy into keyboards and other product categories, so we continue to have and we continue to bring out products at multiple price points. It gives us a lot of flexibility. And as Mark said, we did extremely well in one of our highest ASP categories, Harmony, and did extremely well in pointing devices at both the high end and the low end. And it is that versatility I think that gives us strength in challenging times like these.

If I could just ask a follow-up, in terms of inventory, how are you seeing channel inventories right now and are you comfortable with the levels ahead of some product refreshes?

Our channel inventories, we view those as normal.

Okay, thank you.

Thank you for participating in Logitech's first-quarter fiscal 2009 earnings conference call. This does conclude today's conference. You may now disconnect.