羅技 (LOGI) 2009 Q2 法說會逐字稿

Good day everyone and welcome to the Logitech second-quarter financial results conference call.

At this time all participants are in a listen-only mode.

We will be conducting a question-and-answer session toward the end of this conference and instructions will follow at that time.

This call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech.

I would like to introduce your host for today's call, Mr.

Joe Greenhalgh, Vice President of Investor Relations at Logitech.

Mr.

Greenhalgh, please go ahead, sir.

(technical difficulty) 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.

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 10-K dated May 30, 2008 and subsequent filings available online on the SEC EDGAR database and in the final paragraph of the press release reporting second-quarter results issued by Logitech and available at Logitech.com.

The press release also contains the Company's financial information for this call.

The 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.

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

Joining us today from Zurich are Gerry Quindlen, Logitech's President and Chief Executive Officer; and in Fremont, 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.

Thank you, Joe.

Let me start out with an overview of our Q2 performance.

We delivered double-digit sales growth in what has become an increasingly challenging environment.

Our sales grew by 12% reaching a record high for Q2 with the growth led by OEM in Asia.

Our sales growth was restrained by an 11% decline in the Americas.

Our operating income was essentially flat compared to the prior year.

The 6% growth in our gross profit was outpaced by the 9% growth in our operating expenses.

We ended the quarter with $459 million in net cash and we generated $40 million in cash flow from operations.

Gross margins, our gross margin was 34.3%.

It was up 20 basis points sequentially but down from 36.3% last year.

The gross margin decline was primarily due to a combination of two factors.

One, higher labor and material input cost and two, more OEM sales and the overall sales mix.

Let's turn to operating and net income.

The sales decline in the Americas was a major factor in our flat operating income.

The September quarter is typically our most back-end loaded quarter of the year and the extent of the weakness of our sales into the channel and the Americas didn't become fully evident until the last month of the quarter as our channel partners reacted to the softening economic conditions.

As soon as we became aware of the situation, we took the appropriate steps to moderate our spending across the Company.

The impact of some these actions to moderate our spending was evident in Q2 which had the lowest growth rate in more than three years.

But because it was relatively late in the quarter we were not able to achieve complete alignment between our operating expense growth and our gross profit growth.

The full effect of our actions to moderate spending will be evident as we move through the second half of the fiscal year.

If we look at net income, we delivered $72 million which was down by 8% compared to the prior year excluding last year's short-term impairment loss.

The decline in net income compared to our non-GAAP net income in the prior year was due to the combination of earning less interest income, having lower other income and a slightly higher tax rate of 12.1%.

Now before commenting on the balance sheet, I want to briefly address exchange rates.

In Q2 excluding the favorable impact of exchange rate changes, our total sales retail and OEM combined grew by 9% notwithstanding our ability to modify prices in local currencies over time to maintain parity with the US dollar.

Cash, our cash position including short-term investments was $459 million.

Our cash position improved by $92 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 $56 million for the acquisition of WiLife and Ultimate Ears, and $202 million for share repurchases.

Our cash flow from operations for the quarter was $40 million.

Now this was a decrease of $61 million compared to Q2 of the last year, primarily due to the dramatic improvement we made in our cash conversion cycle in Q2 of the prior year.

As a reminder, our cash conversion cycle in Q2 this year was 47 days, one day higher than the same quarter last year and six days lower sequentially and that is compared to in Q2 of the prior year, we delivered a 24-day sequential improvement which was a rate of change that was clearly unsustainable given the significant improvements we made in our working capital management over the last two years.

Inventory, our inventory was up by 23% or $60 million compared to September of the prior year.

Now inventory turns were 5.4 down from 5.8 in the prior year and one of the factors causing the slower turns was the late quarter weakness in the orders in the Americas.

DSO, Our DSO was 63 days for the quarter and that was a one-day improvement compared to the 64 days in the prior year.

If we turn to share repurchases, during Q2, we repurchased 1,051,000 shares for $27 million.

We own approximately 6.9% of our shares outstanding and we have roughly 129 million remaining under our current repurchase program.

Now please note that the growth percentages that follow are in comparison to our Q2 fiscal 2008.

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

Our retail sales grew by 5% with units up by 8% and we saw continued strong double-digit growth in Asia with sales up by 35% while sales in EMEA grew 8% and the Americas declined by 11%.

Now retail sales pointing devices, it was a strong quarter for pointing devices with sales up by 16% and units by 21%.

The primary growth driver was cordless mice with sales up by 25% and units by 26%.

Now we achieved double-digit growth across all major price [bands] led by sales in both the low-end and the high-end of cordless mice.

The low-end growth was driven by sustained strong demand for our V220 cordless optical mouse while two of the key growth drivers in the high-end were the VX Nano and MX1100.

And one of her newest notebook mice, the V550 Nano also made a solid contribution to our cordless mice growth.

We had a solid quarter in corded mice with sales up by 14% and units by 21% with the growth driven by notebook mice.

If I turn to retail sales, keyboards and desktops, our sales in the keyboard and desktop category declined by 5%.

The weakness in the category was most pronounced in the Americas where sales fell by more than 20% with the biggest decline coming in desktops.

Nonetheless, there were several bright spots in the keyboard and desktop category as well.

For example, we experienced strong growth at the high end of the cordless desktop category driven primarily by our cordless desktop MX5500 Revolution and our new cordless desktop Wave Pro.

Also it was our best quarter ever for the standalone keyboard sales with sales up by 19% and both EMEA and Asia delivering strong growth.

And we had a solid contribution from the sales of diNovo Mini, our cordless mini keyboard optimized for controlling PC entertainment.

Retail sales audio, the sales in the audio category declined by 6% while units were flat.

The decline was in speakers where our sales fell by 14% due to weakness in both the PC and iPod speaker categories.

Let me expand.

Our PC speaker sales were down by 15% with a decline experienced across most of the price bands and particularly at the high-end of the category.

PC speakers were especially weak in the Americas.

Now sales in our iPod speakers declined by 6% with softness both in the Americas and EMEA.

It was a solid quarter for our PC headsets with sales increasing by 11%.

Our wireless PC headset, the ClearChat PC wireless made a major contribution to the growth.

And it was our best quarter yet for our Squeezebox family of media streaming products.

I might note that we are pleased with the initial demand for Squeezebox Boom, our all-in-one network music player which debuted in September.

Our recently acquired Ultimate Ears line of in ear monitors and earphones made their initial contribution to sales in the audio category.

If I turned to retail sales for video, our video sales were up by 9% and we experienced growth across all regions.

It was another very strong quarter for our high-end web cam, the QuickCam Pro 9000.

We saw accelerating momentum with our WiLife family of video security products with sales nearly doubling sequentially as we launched the products in EMEA.

Retail sales gaming, our gaming sales grew by 9% with growth in both PC and console.

Now our PC gaming sales increased by 2% and we experience strong double-digit growth in the gaming keyboard category led by the sales of our G15 keyboard.

Turning to our console gaming, that was up by 40% and the majority of this growth in the category was generated by steering wheels led by our GT Driving Force Wheel.

If you look at retail sales for remotes, it was a solid quarter for remotes with sales up by 17% and units by 49% and we delivered very strong growth in both EMEA and Asia.

Now the growth was primarily driven by continued strong demand for Harmony One.

If I look at our OEM, it was our best quarter ever for OEM with sales up by 56% and the majority of this growth was once again in the console gaming category driven by microphones for singing games.

And I might note that our console microphone sales more than tripled compared to the prior year.

And the sales of embedded video modules for notebooks also contributed to our growth in OEM.

So in conclusion, it was our best Q2 ever for sales.

We achieved 12% growth in a very challenging environment with growth restrained by a decline in the Americas and we ended the quarter with a very strong balance sheet including a cash balance in excess of $450 million.

Now before I conclude my comments, I want to remind you that our next analyst and investor meeting is scheduled for November 12 in London.

We hope you will be able to join us.

Let me now turn the call over to Gerry.

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

On balance, I am pleased with the Company's performance in Q2 and particularly with achieving double-digit sales growth in what has become an increasingly challenging operating environment.

There were a number of highlights during the quarter.

Starting with sales, it was great to see us deliver our best quarter ever in OEM.

We also continue to see very strong growth in Asia with our fourth consecutive quarter of growth in excess of 30%.

When you add in the growth in EMEA, we more than offset the decline in the Americas.

This is a compelling example of the resilience of our geographic and channel diversification.

Remotes was our fastest growing retail category.

What I was most pleased with in this category was the rapid unit growth with units growing nearly three times as fast as sales.

This is a clear indicator that demand in the category remains strong.

I was also pleased to see the continued double-digit growth in EMEA as well as accelerating momentum in Asia.

We delivered double-digit growth in pointing devices with the majority of the growth driven by our sales of 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 by 24% compared to the prior year.

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

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

And our ability to manage this complexity was a major enabler of our topline performance.

I was also very pleased with our ability to deliver a gross margin of more than 34%.

The decline in our gross margin compared to the prior year obviously restrains our gross profit growth.

But that really says more about the unusually high level it reached last year than it does about our performance this year.

Now rising input costs are having some impact on our margins but we continue to do an effective job of managing these increasing pressures wherever possible.

As was the case in Q1, during Q2 we utilized our strong gross margins in a targeted way to stimulate demand in select product categories and markets.

During the second half of the year, we expect to continue to take advantage of the flexibility our strong gross margin provides us to drive sales growth through targeted promotional efforts wherever appropriate.

Let me spend a minute talking about the Americas which had a disappointing quarter.

There are two primary factors that drove the decline.

The first is a pronounced weakness in the PC speaker category.

Our PC speaker lineup performed very poorly in the Americas during Q2 down in excess of 40%.

As we discussed during last quarter's call, we understand the issues in this product category and we are addressing them.

But it will be fiscal 2010 before we fully rolled out our improved product offerings.

The second factor was our customers' response to the rapidly deteriorating economic conditions which had an impact across multiple product categories.

Now as Mark has already indicated, the September quarter is our least linear and many of the orders that we expected to receive late in the quarter didn't materialize as our customers became increasingly cautious about taking on additional inventory given the uncertain economic climate.

The good news is we did experience solid growth in the sellthrough of our products during the whole quarter.

Let me comment on what we see going forward.

The state of the economy and its impact on consumers is not something we can control.

What we can and will do is focus on leveraging our competitive strengths while prudently adjusting our spending plans to reflect the environment we are in.

In our core markets, we typically enjoy the largest shelf space in most of our categories which provides us with a key competitive advantage.

Our experience during previous economic downturns is that our retail partners rely on us even more to help them drive strong performance at the point of sale.

They depend on and appreciate our willingness to sustain our innovation focus during challenging times and our track record for consistently driving growth.

Our mission has long been to provide the consumer with the best product at any given price point.

With more than 80% of our retail sales coming from products selling at price points below $100 during the first half of fiscal 2009, we are very well positioned to offer consumers premium products at a wide range of affordable price points even during an economic downturn.

Let me shift to our products.

We launched a number of new products during Q2.

I am personally very excited about the potential for these products to drive growth in the months to come.

I want to briefly address the opportunities by category.

We've had strong success in pointing devices for the last several quarters primarily driven by our line of cordless mice for notebooks.

During Q2, we launched our latest mouse targeted for notebook users, the V550 Nano Cordless Laser Mouse for notebooks featuring both our innovative Plug-and-Forget Nano Receiver as well as the Clip-and-Go Dock.

This unobtrusive dock lets you conveniently clip the 550 mouse to your laptop and then take it with you.

We also introduced the MX1100 cordless laser mouse, an elegantly contoured full-sized mouse designed for maximum comfort that features adjustable dpi.

The MX1100 is also included with our newest cordless desktop, the cordless desktop Wave Pro.

The second generation of the popular Wave Pro keyboard features improved wireless technology that delivers a three-year keyboard battery life as well as 128 bit AES encryption for advanced security.

We also launched the rechargeable DiNovo Edge Mac Edition, the first ultra slim and stylish diNovo keyboard specially designed for the growing base of Mac users.

On the standalone keyboard side, we also introduced the Logitech illuminated keyboard which features optimized backlight technology and our thinnest design ever.

Moving now to audio, the softness that we identified in Q1 continued in Q2 and continues to be related to product gaps in PC speakers.

The so-called 2.0 form factor featuring two satellite speakers but no subwoofer is the fastest-growing segment of the PC speaker market and we have begun to improve our competitive positioning in this segment with the Q2 launch of our Z-5 Omni directional stereo speakers.

We also strengthened our product line-up in the iPod speaker space with two new offerings, Pure-Fi Express Plus, a high-performance docking station and Pure-Fi Anytime, a premium alarm clock for iPod and iPhone.

All of these speakers are affordably priced below $100.

We continue to see accelerating growth with our Squeezebox products, with our newest offering Squeezebox Boom generating strong initial demand.

During Q2, we also acquired Ultimate Ears, the leader in professional in-ear monitors and consumer earphones for music listening.

We believe Ultimate Ears is the perfect fit for Logitech in our audio business, enabling us to provide consumers with even more options for portable music listening.

We are already using our worldwide distribution network and operational efficiencies to grow this business as we make this superior listening experience available to a much broader audience.

Turning to video, I see us sustaining our momentum.

Our current product lineup which we refreshed during the June quarter is quite strong.

Our primary opportunity in WebCams remains to grow the overall category.

We plan to continue doing this in a variety of ways including utilizing marketing programs designed to raise consumer awareness of the simplicity and richness of video communication.

And momentum continues to build on our digital video security category.

We continue to deliver growth in the gaming category primarily due to strong demand for our steering wheels including our new racing wheel for Gran Tourismo 5.

During Q2, we expanded our offerings for the Wii platform with the launch of our Speed Force wireless racing wheel.

We also announced a collaboration with Activision to develop and market premium instrument controllers for Guitar Hero World Tour.

Now while you will have to wait a bit longer to hear the specifics on the retail side, during Q2 we saw the initial fruits of this relationship on the OEM side as we shipped our first microphones to be bundled with this upcoming title.

Turning now to remotes, the Harmony One continues to be well received and we are making solid progress growing the category in EMEA and Asia.

We remain focused on both further improving the consumers set up and usage experience and raising consumer awareness of our category leading offerings.

We continue to use the flexibility provided by our gross margins for targeted promotional efforts aimed at driving topline growth.

Shifting to a regional perspective, we have yet to see indications that conditions in the Americas have improved compared to what we saw at the end of Q2.

Our plans currently assume that this relatively weak macroeconomic environment will continue for the remainder of our fiscal year.

Our outlook anticipates that the economy will have an impact on the European consumer as well.

We don't expect the same level of softness we see in North America but we believe it's more likely than not that the European consumers will become more cautious in their spending in the short term.

Given our reduced expectations for growth in the retail environment, we have taken steps to significantly moderate our spending through the remainder of the fiscal year.

We are planning for most of this containment to be in the sales and marketing and GNA functions.

I do want to emphasize that we have no plans to significantly limit our investment in R&D.

Developing innovative new products is at the core of our strategy and we are firmly committed to sustaining our investments in R&D to drive future growth.

That brings me to our outlook for fiscal 2009.

The far-reaching changes in the financial industry over the last several months have left the economy in uncharted territory.

How all of this will play out and how it will impact consumer buying behavior remains to be seen.

Given the pervasive economic uncertainty both in North America and Europe, we are tempering our outlook for growth for fiscal 2009.

We now target growth of 6% to 8% in sales and 3% to 5% in operating income, revised from our original target of 15% growth for both.

We continue to expect our gross margins to be above its long-term target range of 32% to 34%.

Let me close by highlighting the most important points I would like you to take away from my comments.

Our lower targets are a direct reflection of unprecedented macroeconomic conditions but we remain focused on driving profitable growth in the current fiscal year.

Our long-term business model is sound.

We remain bullish on and committed to the opportunities across all of our product categories and we are very well-positioned to return to annual growth in the midteens when conditions improve.

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

Please follow the instructions of the operator.

(Operator Instructions) Jonathan Tseng, Merrill Lynch.

Two questions.

One of your guidance base in -- you hold back on your S&M and your OpEx quite a light lot in [Asia] too.

That's what you've done in the past.

I was wondering if you can just flesh out some of the actions you are taking on the sales and marketing and the G&A side?

Second question obviously very strong OEM side of things, I guess (inaudible) Asia for looks of it.

How sustainable is this?

Does this business carry on a similar kind of run rate next quarter or is it lumpier than that?

Thanks.

This is Gerry.

Thanks for your question.

Let me make sure I got the second part.

You were asking about Asia and the sustainability of the --?

Yes, the sustainability on the OEM side of the business (multiple speakers) given by the microphones and games?

No problem, thank you for clarifying.

Yes, I will start with the second part.

We have had an unprecedented and terrific first half in OEM driven by microphones mostly.

We grew about 38%.

When we started the year we expected OEM to grow, we said that it would grow less than the original Company target, overall target growth of 15%.

And obviously we have gone well beyond that.

We are very pleased with that.

But as I look at it, the comps that we are coming up against in the second half make it much tougher to sustain that growth.

So as we have modeled it going forward, I do continue to expect OEM to grow in the second half.

I do not expect it to grow at that 38% rate.

In terms of OpEx and the places we will go for in the reductions, the first place that we look to restrain the growth of OpEx frankly is in keeping our head count flat or increasing it very minimally.

We are a growing company; we tend to add people.

And that is a good sign, that is a healthy sign.

But the best place that we can go to keep our OpEx under control is restraining headcount.

We plan to do that.

The second thing is that there is a lot of places in GNA where we think we can get savings and we started to see some of the effect of that as Mark said in his comments toward the end of Q2, we began to throttle back.

This is just one example but we have dramatically restricted our travel and entertainment for the balance of the year and we have taken other steps.

What does holding back on sales growth do to your revenue growth through Q4?

Is there a penalty to be paid there on the sales and marketing costs?

I am sorry, Jon, can you repeat the question?

What does holding back sales and marketing costs imply for revenue growth in the holiday selling season?

Is there their penalties to be paid there if you are spending less on marketing?

No, the targets that we've shared for the second half on both operating expenses -- the assumptions we made on both operating expenses and the revised targets are consistent.

So we believe that with the spending plans we have in place we can achieve the revised targets.

Thanks.

Manney Recarey, Kaufman Brothers.

In the guidance, you are saying 6% to 8% on the top line but then you are going to be really focusing on managing your costs.

What is going to be driving the operating income growth being lower than the revenue growth?

It is really two things, Manney.

First of all, it's the lower sales overall.

And the other thing as I'm mentioned in my comments, while we are restraining operating expense particularly in things like sales and marketing and G&A, we do not plan to restrain the growth of our investment in R&D.

So we lose a little bit of the leveraging effect there.

Okay.

Can you talk a little bit more about the audio sector?

I know you are talking about you had some product gaps there but was it driven more by the product gaps or was it was weakness in that sector on an industry level?

Yes.

No, it's really product gaps.

And it's not really any different from what we saw and shared in the Q1 call.

It is not a competitive issue.

We are not seeing the category contract.

It really is related to product gaps and it is across all of the segments.

There's really three segments we always talk about.

We call it the 5.1 segment; that means five speakers and a subwoofer, 2.1 is two speakers and a subwoofer and the 2.0.

We have gaps in the upper segments, 5.1, 2.1 mainly because we have some products that have performed very well but truthfully they are tired and we need to refresh them and we have plans to refresh them.

But our refresh plans won't fully take effect really until the end of this year and even the first quarter of 2010.

The 2.0 segment, as I said in my remarks, is the fastest growing segment in speakers and we are really just starting I think to bolster our lineup there.

There's a lot of competition in that segment.

We are getting our fair share but we've had some gaps.

We launched a product that I referred to earlier called the Z-5 Omni Directional speakers that I think is going to do very well.

But it is really a product gap issue.

Meanwhile other parts of audio are performing well.

The Squeezebox line is doing very well as Mark said in his comments.

I'm quite pleased with that.

I'm very optimistic about what's Ultimate Ears, the earphone lineup will do.

Our PC head sets had a good quarter, so really it's an issue of PC speakers.

Okay and then just one more question if I could, Mark.

Your gross margin in September quarter was impacted by two issues, the product mix and the higher input costs.

Can you give me any color on which had a bigger impact or did they both impact the gross margin by a similar magnitude?

I think they were pretty close to being similar, Manney.

It was sales mix just to be clear with the proportionality of OEM being significantly higher this quarter than it was in the comparable quarter last year.

The second thing the input costs again, it was on a similar kind of magnitude, if you will.

Okay, thanks.

Andy Hargreaves, Pacific Crest Securities.

Were there any material changes to channel marketing expenses in the quarter?

I would say no.

Mark, I don't know if you want to comment on that.

I don't believe there were.

I would say no as well.

And are there any expected for the rest of the year?

Does that change at all with this kind of environment?

There is some seasonality just as a normal course with channel marketing activities above the line and the gross to net, Andy.

But I wouldn't call it anything particularly significant.

Okay.

And then just in terms of your commentary about having not seen an improvement so far in October.

Has it gotten worse in October and then also just as a point of clarification, are you talking about sell in there or sell through?

Andy, we are really talking more about the kind of the general signals.

The main thing that has caused us to temper our outlook, quite friendly, is cautiousness from our retail partners.

We saw them act very swiftly at the end of Q2 in the Americas, not because our sell through was poor, it wasn't.

But in fact they were quite concerned about the unraveling economic situation in the US due to the credit issues.

And they dramatically cut back on their purchases and on their inventories.

We have not seen any -- we've not seen any change there and if anything some of the signals that keep coming out the September retail sales things like that I think only make them more nervous.

So our sell through remains fine.

People -- our new products are being well received by consumers.

Our categories remain healthy.

But our retailers are very, very cautious right now and we are reflecting that in our forecast.

And as I said in my comments, I think we are going to see that percolate to certain key markets in Europe as well.

Okay, great.

Thanks.

Thomas Schneckenburger, UBS.

Good afternoon, gentlemen.

(multiple speakers) Four questions.

First question is on your guidance.

What FX assumptions you have put behind your assumption because it seems that they are quite detailed modeling behind.

So did you base on a flat FX for the year or do you still have a (inaudible) impact they are?

Let's take them, Thomas, if we may one at a time.

I know you've got a few.

We will just kind of bank those one at a time there.

First off on our guidance our targets for the fiscal year, the bigger overarching factor that we looked at for sure and Gerry is calling this out is the economic uncertainty and in particular our channel partners response to that.

As Gerry said, sellthrough was decent and really it's the economic environment and the retailer's reaction to it.

That is the single biggest factor that went into our look at and our guidance.

And obviously we then assimilate a lot of other assumptions.

And a secondary assumption would have to do with foreign exchange.

We put in some reasonable assumptions there but that is clearly a secondary issue relative to the bigger picture.

But you can not comment if it was zero FX growth assumption?

I am not going to go into that level of detail.

But second point goes in a similar way.

Could you try to quantify what the external gross impact is like from Ultimate Ears or WiLife which could provide a bit of confidence that some of the growth stems from small bolt-on acquisitions you made?

Well, I can make the comment, Thomas, that I see very nice momentum from all three of our most recent acquisitions.

So Slim Devices or the streaming media business unit, WiLife and Ultimate Ears.

Now Ultimate Ears is just getting started.

We had a very minimal impact in the current quarter but all three of them performing it very nicely.

Now the base is very small.

But we are very optimistic and very pleased with the progress that we made with all three of them.

I mean Ultimate Ears, I can't say that yet because we are just getting started but with Slim Devices and with WiLife, we are very optimistic and I'm optimistic about the long-term impact of Ultimate Ears as well.

And then the next question would go on like your inventories.

Because inventories were up quite substantially.

Is it the case that there is kind of consignment stocks at your retail partners that you sold -- sell to them but they were not able to sell them through and this is why your inventories went up and you only get paid or you can book it as revenues as soon as they sell (multiple speakers)?

Not at all, Thomas.

Not at all.

We do not do consignment with any retailers.

There are two factors that drove our inventory higher and I think Mark commented on them during his portion.

Number one and by far the biggest one was this late quarter fall off in the Americas.

We built product that we expected to sell in Q2 and retailers again cutting back when they saw what was happening in the US financial markets.

And as Mark said, it's a very, very -- it's the most back-ended or least linear quarter that Logitech has.

That was the number one factor by far.

There was a secondary factor smaller in overall impact.

We had some inventory associated with a quality issue from a supplier.

It was a chip supplier.

We had to rework that inventory frankly that has already essentially been dealt with.

So it is not an issue we have to deal with going forward but the primary one was the America's sales shortfall.

Okay, but no consignments.

We do not do consignment.

The last question is on your other income (inaudible) component which is lower than in previous quarters, could you remind me please what that is and --?

Well, what the circumstance is there, Thomas, is last year we took a foreign exchange gain and we did not have that this year.

Thanks a lot.

Robert Sanders, Dresdner Kleinwort.

Maybe if we just first question on the gross margin, you seem to be a assuming that your gross margin will head up toward around 36% in the December and March quarters.

That is in the context of slower sales, seemingly weaker mix and maybe a bit of adverse FX impact.

So is that something that you are looking at gross margin similar to last year in the second half?

Let me just speak to this, Robert.

First of all, I actually take a different point of view here for you.

The gross margin number that you need to think about for the fiscal year is the target that we put out at the beginning of the year and we continue to reiterate it is it will be the above the range of our long-term business model.

Our long-term business model is in the 32% to 34% range.

That is the information that you should use and operate on when you look at your numbers.

Sure, but you are -- I mean are you therefore saying that your OpEx will decline in the second fiscal half versus last year?

What I want to call out to you is gross margin is not the end game.

The end game is driving revenue growth and operating income.

That is really kind of a key philosophy for us, Robert, that we continue to reiterate every chance we get.

Gross margin is a tool to the end.

So what we always provide targets on typically is the top line and the bottom line.

We just happened to give you also a fiscal year view for gross margin.

Just second question on the blended ASP, that seemed to decline for the first time in about I think 10 or 11 quarters.

What are you expecting for the remainder of the year?

Are you seeing any mix effect with consumers trading down, for example, within your portfolio?

Well, first of all, we are actually pleased -- there was a slight decline in ASP; year on year was down minus 3%.

We are actually pleased at the retail level to see the units growing slightly faster than the revenue.

So we think that is a good sign in terms of penetration, first and foremost.

Secondly, in terms of the trading up and trading down, it's interesting.

I was studying -- there's a whole variety of different examples.

It's really a mix, Robert, to be perfectly honest with you.

We saw, for example, cordless desktop MX5500 Revolution as more of a high end, did well.

Wave Desktop Pro did well on the keyboard side, more high end.

WiLife, Slim Devices, remote controls, VX Nano, even our QuickCam Pro 9000 or even in gaming our GT Driving Force wheel, those are all toward high-end products that actually did quite well in Q2.

We have other examples at the low end.

We were very pleased to see some of the performance in our corded mice as well as, for example, our V220.

So I think it's really a mixture, but overall we were actually encouraged to see the unit growth.

Okay, thanks a lot.

Michael Foeth, Bank Vontobel.

Yes, hi gentleman.

I have several questions.

Let me start first of all, the decline in sales in the US, is that across all price spans or is there some granularity that you can provide?

Michael, it was primarily concentrated in a couple of pockets and the biggest one was audio.

And both Mark and I spoke to that in our comments.

We did see strength in a number of key categories in the US.

For example, we had good unit growth in Harmony remotes which was up 22%.

Our revenues were flat but that is because we were comparing against a sale of Harmony 1000 a year ago.

But Harmony was very strong in the US as an example even with this late quarter issue that we dealt with.

It was primarily -- if I was going to single out a weak spot, it was audio.

So you can't say whether it was expensive products that led the decline or rather all --?

No, I would actually go back to something Mark was saying which is -- now this is not a US statement, but it's for total company.

For the first half of the year, more than 80% of our products were sold below $100 and we did quite well.

We did very, very well in mice and keyboards in the $19 to $49 range.

We saw very strong growth in just about every region.

So, no, I don't think there is a conclusion or I think it would be wrong to draw a conclusion that it was one particular trend.

Okay.

The second question would be regarding wage inflation.

Can you quantify how much wage inflation you are seeing and how you address that problem?

Michael, I can't give you a specific quantification.

Obviously there is different regions of the world, manufacturing -- aspects and then there is the OpEx aspects around the world.

I can't give you a specific quantification.

That was a factor that we experienced as part of the input cost pressure that we had and the cost of goods sold.

Okay.

And then maybe to follow up, can you give us some update on how your brand building program is going, the (inaudible) promote story?

Is that still running at full speed or have you hold back on that?

No, yes it is, it is running at full speed.

We have made the initial investments there, Michael, and the investments were largely around creating an organization, it's not a huge organization, but creating an organization of people.

And I would say a lot of training within the company.

And then thirdly, processes.

So we now have processes where every new product gets an MPS score and is compared to the product that it is replacing.

So I would say in general that process is well established with us now and as we manage our expenses very tightly for the second half of the year, that is not the kind of thing that is in jeopardy or that we would cut back on.

Okay and then just finally.

Are you seeing any areas where your market share is going down or are you maintaining your market share in this crisis?

In general our market shares are good and very stable.

We have so many categories in so many markets we always have dynamics.

We have shares going up, shares going down.

But I can say in general we feel very good.

For example in Asia, we are doing extremely well in just about every product category we are growing and we are growing share.

And I will say that as tough as we see the second half outlook being, we see this as a great opportunity to take share from weaker players.

And we will do smart things to do that.

So we expect to come out of the difficult say next couple of quarters with even stronger market shares.

Great, thanks.

Tavis McCourt, Morgan Keegan.

We kind of delved into PC speakers a bit.

I was wondering if we could delve a little bit into the keyboards and desktops which were also down.

Was that more of a channel inventory issue or is sellthrough there being impacted by some kind of new competitive dynamic?

Not at all, Tavis.

In fact I would say there's really two things there.

One, we called out during the remarks and that was in the Americas we did see a decline in particularly in cordless desktops.

Now some, like some of our higher end desktops I think Mark said did very, very well.

But in general, we saw a pretty steep decline in the Americas and we believe that was related to this overall late quarter weakness.

I think there is another dynamic going on that I'm not particularly concerned about and I am glad you asked the question because it deserves a little bit of discussion.

Desktops declined overall but we had as we called out, we had a record quarter in standalone keyboards.

We believe what is happening right now is we are giving consumers an unprecedented set of choices around standalone keyboards.

We have a lot of innovative keyboards out there.

We just introduced a number of new ones like our new illuminate keyboard at $29.

So we give them the choice to buy a standalone keyboard and then buy a mouse right then and there or later on.

Truthfully we are indifferent whether they do it that way and create their own bundle is the way I like to think about versus a desktop which is a bundle we have prepackaged for them if you want to think of it that way.

So the fact that we had a very healthy record quarter in standalone keyboards and a very strong quarter in mice up 16% and 25% fun in cordless mice is very reassuring to me.

So if consumers want to choose on their own, I am fine with that.

We had this other dynamic with cordless desktops particularly in the US.

I don't think it is particularly concerning.

We will watch it but that is really what I think is going on in that space.

Okay, makes sense.

And then if could kind of differentiate between the Americas and EMEA -- I don't know what is more surprising whether Americas was down so much or that EMEA wasn't down, given that it seems like the consumer environment is pretty similar in both geographies.

Is it that you are not seeing the channel inventory declines in EMEA?

Is it that you just don't have maybe audio issues in EMEA that you have in the US?

And kind of what are you factoring in for channel inventory readjustments in that geography in the holiday season?

So let me differentiate between what I saw in Q2 and then what we are saying about on a go-forward basis.

I was for a happy actually with our EMEA performance in Q2.

Revenues were up 8% and units were up a very healthy 13%.

Just about every category was healthy.

The sole kind of weak spot was audio and once again, it was really related to PC speakers.

I think we have talked about that.

It's a fairly narrow and isolated problem we really believe we are taking the right steps to fix it.

So I was very pleased with that 13% unit growth.

We just launched digital video security as Mark said, so that provides upside.

Harmony continues to grow nicely so a lot of good momentum.

The concern we have got is that the things we talked about with the Americas and particularly the retailer caution that we are already seeing in the Americas, we do believe that we will start to see that in select markets in Europe in the second half.

Not every market and we don't necessarily think it will be to the same degree as in the US.

So markets like the UK and France and Spain, markets that also have seen housing bubbles and are facing credit problems.

I think we are going to see similar issues with consumer psychology and that is going to translate into retailer caution and we are reflecting that in the outlook.

But there is other factors in EMEA that make us a little more bullish versus the situation in the Americas.

One is the brand.

We have a stronger brand in Europe than we do in the Americas.

We've just been doing business there longer.

It goes back to our European roots.

And frankly, the second one is unlike the US, or I like AMR where you have a monolithic market, one big market, the US, Europe is much more fragmented.

We have emerging markets in Europe that are doing quite well.

Our business in the Middle East and Africa is excellent, it's frankly on fire.

Russia is doing quite well.

Eastern Europe is doing quite well.

So we have some buffering -- we have some buffering factors there, Tavis.

So I do think we are going to see some of these concerns that have started to play out in the Americas reach certain markets in the Europe, that is reflected in the revised targets.

But I was happy with Q2 and there are some of the reasons why I think the two markets will be a little bit different.

Great, very helpful.

Thanks.

Bennett Notman, Davenport & Co.

Good morning.

A couple of questions for you.

First with some of the difficulties that retailers like Circuit City are having, are you having any debt collection issues or what is the quality of the receivables looking like relative to the past?

Well, let me just speak to that, Bennett, just generally speaking in terms of bad debt expense, we have not seen any unusual trends heretofore.

We are extremely diligent in managing our credit situation right now, as you might expect.

Circuit City is a customer of ours and certainly that would mandate that we are very, very careful on the receivables and the payment terms as it relates to them.

But we have not incurred any unusual bad debt expense at this stage.

By the way, just a last point, we do use credit insurance in most parts of the world as well.

Okay.

Would you disclose how significant a customer Circuit City is?

I won't get into real specifics.

They are a good customer, certainly not one of our biggest but they are a good customer.

We will leave it at that.

Okay.

To the extent that you are seeing retailers less willing to hold inventory, do you think that is a reflection of their lack of access to credit or really just caution on the consumer environment?

I would describe it as the latter, Bennett, it's caution.

I guess for some retailers it could be credit but I think the broader answer -- I think the most applicable answer is the second.

I think it's a general sense of caution.

They are concerned about what is the consumer state of mind and are they going to shop, things like that.

Okay.

And then given that you had the slow down at the end of the quarter and that drove a little bit of an uptick in inventory, do you think we are going to see your inventory build in the next quarter or two or have you been able to adjust your manufacturing pipeline for that already?

What I would say on that one is that certainly Q3 is the biggest quarter of the year for us so it is a good opportunity to go ahead and work through some of the transitions in inventory that Gerry had talked about.

We feel confident that our team is on that and working that.

He also called out one unique one-off item that will be worked through by the end of the quarter.

So we think inventory is fresh and we will adjust accordingly.

And did I understand then that you guys on the OEM side you would expect the OEM percentage to stay roughly where it was in the current quarter and therefore that might keep gross margin going forward roughly where it was in the current quarter?

I don't think we said that.

And if you construed that, that is not right.

I mean what I said I think in answer to the very first question was I was asked about what do I see, what do we see for OEM going forward?

OEM grew 38% in the first half of the year which was spectacular.

I do not expect it to grow 38% in the second.

I do expect it to grow for the full year.

You know we are coming up against the beginning of the comps that included microphones in the second half.

I'm not going to give you a specific figure but I expect OEM to be healthy in the second half not grow at 38%.

Other than that, I'm sorry I can't give you more specifics.

Simon Schafer, Goldman Sachs.

Thanks a lot.

Just coming back on this geographic point, under a scenario whereby the European region actually slows more significantly and the same is the case for let's say Russia and Eastern Europe, how much more sales decline should we bake in under a scenario whereby that happens?

I seem to understand that perhaps your projection doesn't include such a scenario.

I was just trying to get a sense as to what the potential haircut could be in case those regions also slow down.

Simon, I think you misunderstood.

Let me just clarify.

The revised targets that we have today factor in everything we can see today and obviously it's a very difficult situation not only for Logitech, for a lot of companies to assess in terms of the state of the consumer, retailers' state of mind.

We do believe that the US will be a very challenging market for the entire second half and that we will see some of that begin to affect Europe, particularly the retailer consciousness, not all of Europe.

We are not projecting a slowdown in Russia and places like that.

But the targets revised targets that you have reflect everything that we can see and we are in the biggest quarter of the year.

So we are going to know a lot more about all of those things the state of the consumer, the state of retail at the end of the December quarter.

Understand but I think your comments also said you don't expect the European consumer to get as bad as the US.

Hypothetically I know we can't really see it today but under a scenario whereby that happens to the European consumer, is there another shoe to drop?

I just want to make sure I'm not missing something here.

No, you are not missing anything.

In fact, our assumptions assume that in a number of key markets in Europe that we see very similar dynamics with the US consumer in the number.

We did not assume that it was the same in every single market.

And we also think we have some things going in our favor like just a general level of momentum in emerging markets and the stronger brand will help us more than it helps us in the US.

That is really what I was trying to say earlier.

Got it, okay.

And my second question would be, just recalling from memory, your -- the gross margin and your retail business is somewhere between 10 and 15 points perhaps lower -- I'm sorry higher than it is in OEM.

Is that still the case?

I'm just trying to get a better sense as to what the gross margin sales could be?

Let me -- yes, Simon, let me speak to that.

First of all, I won't confirm the ratio that you had but let me say something differently.

Let me just give you the range from a different context.

Clearly OEM is one of the lower gross margins in the Company and then we have some things that are more toward the higher end.

It is toward the lower end but I will not confirm the range itself.

Understood.

Thanks so much.

John Bright, Avondale Partners.

Thank you, batting cleanup I guess.

On keyboards, Gerry and Mark, they were down 5% year-over-year.

Are you seeing any negative implications or do you have any concern that the shift from desktops to laptops might be impacting keyboard sales?

You know, John it's possible that there is some impact.

But you know at this point, no, we don't really see it.

We see that consumers are continuing to buy keyboards and we don't believe those are all going to desktops.

In fact, we have some evidence that they are clearly not.

So that record sales that we had in the quarter for keyboards, up 19% we know a lot of that people are buying sort of a more comfort keyboard, we call it, to use with their notebook computer.

Okay.

And then on gross margins, can you remind us what percentage of your manufacturing is outsourced, number one?

And then number two, I assume, Mark, you are assuming -- you are baking into your expectations that higher input costs from labor particularly in China is going to continue.

Is that fair?

John, first off, the outsourcing it continues to be roughly 50-50, 50% in internal, 50% external.

So that is the first answer to your question.

And what we have done and our targets for the year we have factored in all that we can see including some of the input costs on labor in China into our target.

So I think it is fair to say that we have considered that in our targets.

Last question, inventories been quite a bit of discussion on the call.

In the US, any way that you would characterize how lean the inventories are at this juncture from what the information data point you have got?

Well first of all what I was trying to convey is that we feel our inventory is fresh.

Gerry has called out one of the issues is that we had a specific rework where we had to hold inventory due to a vendor issue and that is being worked through in Q3.

We had a few bits of inventory in the Americas that didn't ship because we had the cautiousness that Gerry talked about from retailers at the very end of the quarter.

This is all fresh inventory.

We are heading right into the biggest quarter of the year we are in now and we think we are going to be able to move through that.

So inventory I am fine with, John, just to be very clear.

John, were you talking about channel inventory?

I was, Gerry, I apologize --

That's okay, that's okay.

I thought as Mark got into his answer I thought maybe that is what you meant.

My apologies, John.

No problem.

I think as we look at it, John, and it won't surprise you at all if you look at the various retailers we deal with and how they go to market, their individual aims or targets for inventory are all over the map.

There are some who are able to operate at three weeks of channel inventory.

That is normal for them.

So cutting back one week is a big deal down to two.

There are other retailers who are simply not as efficient that have to operate on let's say low double digits.

The point is they are all cutting back regardless of what their starting point is, they are all cutting back or managing it more aggressively.

It's not even just what they keep on hand but it is other things that are important at this time of the year like what's typically called off shelf display.

So goods that they bring in promotionally to put on an end cap.

So they are much stingier, I would say, not just with us, with everybody in terms of how they are managing that.

So it really is different retailer by retailer but the common denominator is they are all managing it much more tightly.

So very lean, very lean in the channel?

Yes.

Gentlemen, thank you.

And with that, ladies and gentlemen, we will conclude our conference call for today.

We do appreciate your participation and you may disconnect at this time.