羅技 (LOGI) 2009 Q3 法說會逐字稿

Good day, and welcome to the Logitech third-quarter financial results conference call.

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

(Operator Instructions).

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.

Please proceed.

Thank you.

Welcome to the Logitech conference call to discuss the Company's results for the quarter ended December 31, 2008, the third 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 forwarding 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 and subsequent filings available online on the SEC Edgar database, and in the final paragraph of the press release reporting third-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 that this call is being recorded, including the question-and-answer portion and will be available for replay on the Logitech website.

For those you 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 Gerry.

Thanks, Joe, and thanks to all of you for joining us.

I'm going to start with a brief overview of our performance and then hand it over to Mark to go into more details on our Q3 results.

I will address our view going forward following Mark's comments.

Q3 was very challenging as our results fell significantly short of what we had anticipated when we started the quarter, as both retailer and consumer demand deteriorated during the quarter.

The deepening global recession had a dramatic impact on our operating performance as our customers, particularly in the Americas and EMEA, continued to reduce inventory levels in the face of weaker consumer demand.

We were able to deliver sales growth in Asia, but our growth rate slowed significantly from prior quarters as the recession became visible in various countries there as well.

We have long followed a strategy of providing customers with the best products in our categories at all key price points, and the importance of that strategy was visible during the third quarter.

While our retail sales declined by 16%, our unit sales were down 10%.

More significantly, the percentage of our retail sales of products with ASPs below $50 increased by nearly 10 points compared to the prior year while we saw only a modest decrease in the percentage of sales of products with ASPs above $100.

We believe the value of having a broad presence at multiple price points is even stronger during a period of deteriorating economic conditions.

In addition to the drop in our sales, the year-over-year decline in our gross margin was the main cause of the steep drop in our operating income.

The lower gross margin was primarily due to the combination of a significantly stronger US dollar compared to the prior year, and the increasingly promotional environment, especially in the US.

I want to emphasize that we don't view these factors as being permanent.

We have already begun to adjust our pricing in EMEA to offset the stronger US dollar, and we expect that pricing conditions in the Americas will eventually improve.

We believe our long-term gross margin target range of 32% to 34% remains valid.

We were able to significantly scale back our operating expenses during Q3 in anticipation of the challenging environment, and we're taking similar actions, independent of the restructuring, to reduce our spending in Q4.

And despite the worsening macro conditions, we continue to generate positive operating cash flow, and we ended the quarter with $482 million in cash.

Now, let me turn the call over to Mark to provide more of the financial details.

Thanks, Gerry.

I'll start with an overview of our Q3 sales performance.

Please note that the growth percentages that follow are in comparison to Q3 fiscal 2008.

Excluding the unfavorable impact of exchange rate changes, our total sales, retail and OEM combined, declined by 12%.

As Gerry mentioned, our retail sales fell by 16% with units down 10%.

Now sales were down by 21% in the Americas and down by 19% in EMEA, and we delivered 8% growth in Asia.

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

I plan to provide color on individual product performance as appropriate, but I want to emphasize that the rapidly deteriorating retail environment was far and away the biggest single cause of the varying degrees of weakness we experienced across most of our product portfolio.

Retail sales pointing devices.

Sales fell by 20% and units by 19%.

Our cordless mikes were down by 10% with units down 6%.

Sales in cordless mikes category were down by low single digits, except at the high end, where the decline was much steeper as consumers shifted to our value-priced offerings, such as the V220 cordless optical mouse.

The notebook category mice held up relatively well with sales and units down by just 2%.

Retail sales, keyboards and desktops.

Our sales in keyboards and desktop category declined by 28% with units down by 15%.

Beyond the impact of the weak macroenvironment, what we're seeing in the midrange and low end of the category is a product mix shift away from cordless desktop and toward lower-priced stand-alone keywords, as consumers exercise their freedom to pair one of our keyboards with the mouse of their choice.

Sales in our desktop category were down 34%, although the sales of high-end cordless desktops were comparatively strong, following 6% with units down 4%.

Sales of our stand-alone keyboards fell by just 3%.

Retail sales audio.

Audio, which has struggled in recent quarters, was a bright spot in the quarter.

We were pleased to deliver modest growth in audio despite the very challenging environment with sales up by 3% and units up by 12%.

Sales of our PC speakers were down by 14%, but the decline was offset by strong performance in iPod speakers and PC headsets.

Our iPod speakers did particularly well, with sales up by 34%.

The growth was driven by the demand for the new products we launched earlier in the year, particularly the Pure-Fi Anywhere.

The PC headsets was the other bright spot in the audio category, with sales up by 25% and units up by 17%.

Now our wireless PC headset, the ClearChat PC Wireless, made a major contribution to the growth.

Sales of our Ultimate Ear line of in-ear monitors and earphones also contributed to the growth.

Retail sales video.

Video was another bright spot in the quarter, as a turnaround there continues.

Our video sales were up by 6% and units up by 8%.

Now the sales growth was driven by our sales of our WiLife family of video security products.

If you exclude the WiLife, unit sales of our WebCam grew by 6% with particular strength in the mid range of the category.

Retail sales gaming.

Our gaming sales declined by 31%.

The weakness of the broad-based nature of our gaming sales was both on the PC side by 25% as well as the console side by 42%.

Retail sales remote.

Remote sales were down by 41% with units down by just 8%.

The significantly better unit performance was primarily driven by continued strong demand for the Harmony One, which carries a suggested retail price that is $250 less than last year's best-selling remote, the Harmony 1000.

We experienced solid growth in sales in our remotes in EMEA.

OEM sales.

Sales in OEM fell by 11%.

The decline was spread relatively equally across mice, keyboard, desktops, and console gaming categories.

But we did have substantial sales of console microphones that were not quite as high as in the prior year, as the gaming-related opportunities evolved through its typical sales cycle.

Gross margins.

As Gerry mentioned, the year-over-year decline in our gross margin was primarily due to the combination of a significantly stronger US dollar compared to the prior year in an increasingly promotional environment, especially in the US.

We believe the level of promotion will eventually return to normal when retail conditions improve.

But I want to provide an overview of the ramifications of the stronger US dollar, which had a significant impact on the margins in our retail business in EMEA in Q3.

It's important to remember that the majority of our sales in Europe are Euro-denominated, with a modest percent in US dollars.

Our product costs, on the other hand, are largely based in US dollars and to a lesser degree, RMB.

When the dollar strengthened significantly against the Euro over a relatively short period of time, as it did at the end of September quarter, the combination creates a temporary squeeze on sales and margins that gradually dissipates in future quarters as we implement price adjustments.

It takes several months to identify and implement the appropriate mix of price changes on our products which creates a lag effect, even under normal business conditions.

Given the deteriorating demand environment during the quarter, this lag effect was amplified as we carefully evaluated the expected impact of potential pricing actions.

As Gerry said, we have already begun to adjust our prices in EMEA and we believe this will help mitigate the impact of the stronger dollar in the months to come.

Operating expenses.

Our operating expenses declined by 9% compared to the prior year, reflecting the impact of actions we talked about during the last quarter's earnings call in anticipation of a challenging environment.

Sales and marketing was down by 13%, as we significantly scaled back the scope of our discretionary marketing-related activities.

G&A declined by 7% as we slowed or stopped projects in a number of areas.

Our research and development expenses grew by 3%.

While we reduced the growth rate of our R&D spending, we continued to invest in critical projects related to innovation and new products.

Net income.

Let me comment on several of the components of net income.

Interest income was down by $2.1 million due to the impact of earning lower interest on our cash balances this year than in prior years.

Other income was up by $4.2 million compared to the prior year's non-GAAP total of $3.9 million, with increase primarily due to transaction timing that resulted in exchange-related gains.

Our tax rate for the quarter was 23.7%.

As we previously indicated, our tax rate can vary significantly on a quarterly basis.

The higher tax rate in Q3 was primarily due to a shift in the geographic mix of income between different tax jurisdictions.

Cash.

Our cash position, including short-term investments, was $482 million.

While our cash was down slightly from last year's $510 million, it still improved by $24 million compared to September, despite the sequential decline in sales and profits.

When compared to the prior year, it's important to note that during the last 12 months, we used $64 million for the acquisition of Ultimate Ears and SightSpeed, and $161 million for share repurchases.

Our cash flow from operations for the quarter was $92 million.

This was a decrease of $86 million compared to Q3 of last year, primarily due to the decline in net income and increased inventory.

Our cash conversion cycle in Q3 this year was 49 days, 15 days higher than the same quarter last year due to slower inventory turns this year.

Inventory.

Our inventory was up by 34% or $87 million compared to December of the prior year.

Inventory turns were 5.2%, down from 7.4% in the prior year.

The primary cause of the slower turns was the double-digit sales decline in the Americas and EMEA due to the deteriorating retail environment.

Now, while we were able to make modest reductions in production in the latter part of the quarter, as the extent of the demand deterioration became clear, the leadtimes of some of our products made it impossible to quickly offset such a rapid deterioration in demand.

We believe the actions we've taken to better align production with sales will start to be reflected in Q4 and FY '10.

Gerry will talk more about our inventory management plans going forward.

DSO.

Our DSO was 54 days for the quarter, unchanged from the prior year.

Considering the intense pressure on our customers to maximize their cash flow and the severe financial difficulties experienced by several high-profile retailers, we were extremely pleased to hold our DSO constant on a year-over-year basis.

Share repurchases.

We significantly scaled back our repurchase activity during the quarter in favor of maximizing our cash.

In Q3, we repurchased 200,000 shares for $2.9 million.

We own approximately 6.8% of our outstanding shares.

While we have roughly $126 million remaining under our current repurchases program, we will continue to place a priority on maximizing our cash when evaluating potential share repurchases.

That concludes my comments.

Let me now turn the call back to Gerry.

Thanks, Mark.

Let me begin by commenting on what we expect in the short term.

Unfortunately, all indications point to an even weaker retail environment in the coming months.

Holiday sales were the worst for retailers in many years, and there is no reason to believe that consumers are ready to accelerate their buying anytime soon.

Now, our channel partners live with us on a daily basis and have grown even more conservative in setting their inventory levels.

Consequently, our plans assume that in Q4, the year-over-year declines in our sales, operating income, and gross margin are likely to be similar or worse compared to Q3.

We're taking a number of proactive steps to manage the Company through this extended downturn.

Given the current environment, we have temperately shifted our financial focus away from driving growth to protecting our assets, namely our balance sheet, our brand, and our reputation with customers and consumers alike.

But our focus on and commitment to new product innovation remains unchanged.

Now the most significant step we have taken is to restructure the Company.

We plan to reduce our global salaried workforce by between 550 and 600 employees.

This plan is expected to generate annual cost savings beginning in fiscal 2010 of approximately $50 million.

As a result of the restructuring, we expect to incur a charge of approximately $16 million to $18 million during the fourth quarter of fiscal 2009.

Let me provide more detail on our approach to this restructuring.

All functions across the Company will be impacted to varying degrees, including R&D, but we have made it a top priority to minimize the impact on our ability both to drive new product innovation and to support our retail and OEM customers.

As you'd expect, functions that aren't directly involved in new product development or customer interaction will be impacted more extensively.

In the process, we expect to reduce management layers in all functions, building a more streamlined and efficient Company for the future.

Beyond the restructuring, we've also implemented an aggressive plan to reduce our variable spending starting this quarter and accelerating in fiscal 2010.

These savings, which on annual basis, are expected to be similar to the headcount-related savings, will come from multiple categories, including consulting, corporate advertising, and T&E.

As is the case with the restructuring, we will place a priority on preserving essential spending related to product innovation and customer touch points.

We're also taking steps to more closely align our inventory levels with expected demand levels.

As Mark mentioned earlier, we have already scaled back production at our plant in China and we've both canceled and pushed out purchase orders for raw materials and finished products with our third-party suppliers.

We have refocused our sales force so that their number one priority is to sell the products that we already have in inventory.

One of the implications of the weak overall demand, as we saw particularly in the Americas in the third quarter, is that we may choose to discount aggressively to push slow-moving products out of our inventory and off the retailers' shelves.

These pricing actions will translate into continued pressure on our gross margin in the current quarter.

Note that we will also be opportunistic about gaining market share during this time, which may add to the short-term pressures on gross margin.

Overall, we expect to see an improvement in our inventory by the end of this quarter and continuing into the next fiscal year as well.

Let me emphasize that the actions I've just shared with you aren't primarily a reaction to our Q3 results.

We're taking these steps in an anticipation of an environment that will get worse before it gets better.

That's the reality we see, and we're focused on aligning our expense structure, our production plans, and our inventory accordingly.

The steps we're taking are necessary and responsible elements of our strategy to manage through the downturn.

That said, I want to reiterate our commitment to funding new product innovation.

We strongly believe that innovative new products are even more important now than ever before.

They provide a meaningful source of competitive differentiation that works to our advantage every day on the shelves.

In fact, we see the current conditions as an excellent opportunity to gain market share in multiple categories.

Many of our competitors are already unable to match the scale of our financial and engineering resources, and the gap is likely to widen in the months to come.

We have an exciting and robust product roadmap for fiscal 2010 that is well into the development stage and we're making good progress establishing our roadmap for fiscal 2011.

It is both our belief and our experience that meaningful innovation can change consumer buying behavior by stimulating existing markets and creating new ones.

Meaningful innovation has been the core of our strategy from the start, and we believe it will play a critical role in helping us manage through this downturn and emerge stronger as conditions improve.

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

Please follow the instructions of the operator.

(Operator Instructions).

Andy Hargreaves, Pacific Crest.

Can you just comment a little bit more on the retail inventory?

Do you think that most of your big customers ended the quarter at a comfortable level?

Or will we continue to see reductions in inventory coming into this quarter?

Yes, Andy, in general what I would say is that retailers are continuing to be extremely conservative with their inventories, and they will continue to be until they see that I would say consumer demand has stabilized.

In general, while retail inventories came down, in many cases, sales came down even further.

So I think at this point, retailers are taking an attitude of being just very, very cautious about the amount of goods that they are willing to have on hand.

And in terms of my planning assumptions and our planning assumptions, I don't think that's going to abate until they see signs of stability in consumer demand.

And then in terms of your comarketing with them, have you changed the amount of dollars that you are using for comarketing?

And have you lost any shelf space or given up any shelf space to conserve those dollars?

No, we haven't lost any shelf space at all.

And, in fact, I would say we are using this downturn as an opportunity to try and gain shelf space, particularly from more marginal players.

And I will say that retailers in general are starting to reassess their overall space allocation in categories during a time like this.

They will look at a category and say do they have the right amount of space allotted to it in general?

And sometimes they will make the decision to reduce the number of suppliers.

And we think if they do make those decisions, and the smart ones will, that's an opportunity for us because we will always be one of the suppliers that they want to keep because we are the one that constantly innovates.

So we view it as an opportunity going forward.

Thank you.

Jonathan Tseng.

It's Jonathan Tseng from Merrill Lynch here.

Just a couple of questions on the FX.

Now, in the past you always maintained that the moves in the Eurodollar doesn't make a big impact on the margins because of variable pricing.

That seemed to have changed this quarter.

Just wondering what's the difference from what's happened in the past.

Is it just the magnitude of the dollar weakening, is it volatility or the timing around the end of the quarter?

I'm interested in any thoughts on that.

Hey, Johnny.

This is Mark.

Yes, I'm glad to speak about that.

I think part of the dynamic is it's a very different situation right now, as I think we can all appreciate, an unprecedented situation.

The foreign exchange in Q3 was very quick and steep and very disruptive.

And, as you know, what we typically do to have equilibrium in our pricing is we make adjustments over time, thoughtful adjustments that help dissipate the effect, and that's a normal thing that we do.

And we've done it and it's tried and true throughout the years.

In this particular environment, you can imagine it's even more difficult to make those thoughtful adjustments.

But part of the issue is the steepness and the quickness of this change.

The other point to kind of keep in mind in terms of how the situation is so different, Johnny, is if you think about in the past, let's say the past couple of years, you saw very gradual changes over long periods of time where, for example, the dollar was weakening and the macroenvironment was conducive for us making -- taking the time, making the price adjustments to lower in euro, to dissipate the effect on the gross margin, and do that in a very orderly fashion.

And you could see analytically, in our IR days that we've covered, in multiple IR days, how that equilibrium holds up over time analytically.

So I think the difference is a very different circumstance, I think very disruptive, for sure.

Okay.

In terms of the margin, the gross margin impact from FX in the quarter, was it more on top line with the euro-denominated revenues being worth less than dollars?

Or was it more on the kind of -- the rising [coke] side?

Because I thought the cokes have been priced in kind of more historical FX rates.

And is there a hit from that to come in the current quarter?

I think when you think about the effective gross margin, there's really two things to think about, Johnny.

One is the dollar, Euro dynamic at the top line, very specifically, that you're asking about.

The second impact and was alluded to by Gerry and I is the promotional effect was really significant, and it deteriorated as it went deep into the quarter.

I think we can see the retail market, as Gerry talked about, was getting increasingly difficult and the promotional environment got increasingly difficult and certainly bigger than we have seen in the past.

So in terms of your -- the kind of input costs for the products you sold in the quarter, they weren't really effectively new, more expensive dollar rates.

Is that another hit to come?

The input costs were not a major factor in this quarter.

In fact, what I would say even more specifically, Johnny, is that if you think about some of the dynamics and commodities and such, if they hold where they are at, over time, that's going to be a good guy for us.

It just takes a couple quarters to kind of work that through the system.

And this is a little bit of what we touched on at the IR day, but not a big impact in this quarter.

We think that will be something that will be a good guy going forward.

We have factored that into our internal planning.

Thanks so much.

Manny Recarey, Kaufman Brothers.

Thank you.

Good morning, guys.

On the cost-cutting and the restructuring, I just wanted to make sure I'm thinking about this correctly.

You're saying that the restructuring is going to save you about $50 million in fiscal 2010, and then another $50 million or so somewhere in that range [for that] becomes a variable cost cutting that you're going to do?

So kind of a total of somewhere around $100 million.

That -- is that thinking correct?

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Yes, I think you're thinking about it right, Manny.

What we said is that the personnel-related savings from the reduction of between 550 and 600 professional headcount will generate about $50 million in annual savings, and we're targeting a similar amount in what we would call variable expenses, and Mark articulated what a number of those were.

So I would say in general you're thinking about it right.

Okay.

And then the price adjustments that you're making in EMEA, in this type of environment, do you believe it's going to be kind of difficult to raise prices?

Yes, first of all, we have already taken the actions.

It's already been completed.

The thing to keep in mind is we work with our channel partners and we didn't need to make significant increases in order to try and mitigate some of the impact of the stronger dollar.

We did it very selectively.

And the other thing to keep in mind is a number of our competitors have also done the same thing.

Not all of them, but a number of our competitors have also -- they are facing the same headwinds from the stronger dollar and they have also raised prices.

So that's what I'll say to that.

Okay.

Just one last question on the gross margin.

Some of the headwinds is going to be on the promotional side to try to move the slow-moving inventory.

And so the way to think about it is that the offset to that, what Mark just mentioned, about let's say the cost of transportation and input costs, that's not going to -- that positive is not going to start showing up for another quarter or so.

Is that the way to think about it?

Yes, Manny, I think you're thinking right that the input costs, there's a lag effect to move all the way through it.

I think the gross margin again, you called it out -- the promotional activity has been intense.

It's been impactful, and hence, when we talk about our internal planning thinking for gross margin, it's -- it could be similar or even worse in Q4.

So -- but the input costs, there will be a lag effect; that could happen.

And if they stay in place as they are today, we will see some benefit in a quarter or two.

And just to clarify that similar or worse, you're talking it is a -- it's like a 7 percentage point decline from December quarter '07 to December '08, so you're talking that type of magnitude or larger?

That's what you're talking about as opposed to the absolute gross margin level of 30% or somewhere around there?

Yes, Manny, the planning assumptions that we are using for sales for gross margin and for op inc.

are that they will be similar or probably worse, because we said in general we expect that conditions will get worse before they get better.

You know, we're trying to be brutally realistic.

And so across the board, we've said that we think for sales, for op inc.

and for gross margin, that Q4 conditions will likely be worse than what we saw in Q3.

Similar or worse, and I would say probably worse.

Okay.

Thanks.

Thomas Schneckenburger, UBS.

Good afternoon, gentlemen.

Sorry, I have also one question regarding to the gross margin.

Because I thought in the investor's day to come back, you said -- and you showed us the charts on copper price coming back, plastics price coming back, transportation costs coming back significantly, plus your price adjustments in EMEA.

So isn't it fair to assume that this must be really a trough quarter now in Q3?

Or it must have been a trough quarter in addition to becoming better now going forward?

That's one thing.

And then I would be interested in the share of commissions in your personnel costs.

So if you say assuming that say it's going down substantially and remained 20% down, what can you say from top on in terms of personnel costs for your saves for us?

And the last point would be on the component suppliers, and you also mentioned in investors day that you have to support some of your main suppliers, and today you mentioned some of your competitors are in serious trouble.

Don't you think we should expect some pressure on DPOs also going forward because you have to support them stronger?

Thank you.

Okay.

So a couple things here.

I'll try to break this down, Thomas.

One is, you asked about the gross margin and some of the commodity activities that we talked about in the IR day.

Again, one of the things we said in the IR day was that we will get benefit of that if things hold as they are today.

But it takes a while to work it all the way through the system, all the way through the inventory, all the way through the purchase contracts.

And hence, our view is a quarter or two out, and that's kind of the view that we had at the IR day.

In terms of pricing adjustments, we did talk about the equilibrium for foreign exchange and how our pricing adjusts and the fact that if there's things that happen rapidly, it can be disruptive and challenging to pull all that together.

The thing I would emphasize, Thomas, I want to make sure I get right to the spirit of your question, the promotional activity was obviously a major factor in this quarter.

And the deterioration of the retail environment and the promotional dollars related to that certainly had an effect on us.

So I'm trying to make sure I'm hearing -- I'm trying to listen carefully to your question, but hopefully that frames it.

In terms of your commissions, you're right.

When sales are down, that there's less commissions.

Gerry has talked about the bigger picture in terms of the personnel expenses.

We've talked about the fact that there's fewer headcount, let alone the fact that there will be less commissions, at least historically in Q3.

And the last point is on the component supplier, in terms of DPO, I can tell you that in this quarter, our DPO was fine.

In fact, it improved slightly year-on-year.

So analytically, in Q3, we are fine.

We don't give forward-looking targets, but we obviously monitor very carefully how our suppliers are doing financially.

Tom, this is Gerry.

One of the reasons that we believe -- if I heard the beginning of your question right -- that we believe that gross margins will remain under pressure is because the retail environment is going to remain promotional for some time period until consumers settle down and are going back into stores at more normal levels.

And secondly, we finished with more inventory than we want, and we have acknowledged that we'll have to selectively use promotion to move goods there, and that will keep some pressure on gross margin.

So that's one of the reasons we have said that that is likely to be similar or worse than what we saw in Q3.

I really -- I got this.

It's just you might equate -- you made it quite plausible there that it takes a lag effect and we should see first improvements in Q4.

If I remember right, this was the heart of the question.

Thanks.

Tavis McCourt, Morgan Keegan.

Just a clarification.

The kind of $100 million cost savings goal for next year, is that something we should look at for modeling purposes, comparing fiscal 2010 relative to 2009; or is that kind of off of a run rate where you finished last quarter?

And if you could talk about any of the timing of those expense reductions, does it all happen kind of at once or does it happen throughout the year?

That would be helpful.

And then I had a question in terms of how are you guys managing what appears to be increasing bankruptcy risk amongst your retail customer base?

You obviously managed the Circuit City issue relatively well, but are you tightening up on terms with retail customers?

And how do you manage through a situation like that in terms of credit?

Okay, let me take a shot at that.

In terms of the $100 million in cost savings, again, it's truncated into two items.

One is the headcount reduction that largely will happen in Q4, so that will impact our cost structure fairly immediately from that standpoint.

The next part is if you look at the other $50 million, I think the way to think about that is the seasonality related to the way we spend our OpEx historically, think about that other $50 million kind of prorated with the seasonalities that we typically have, and I think that would be a way to think about the OpEx.

And a point I would again like to underscore is on the variable side, of course, we're focusing very much on the things that don't impact innovation and don't impact customer touch points, but rather things that are G&A and other things that are not related to that.

So we're being very choiceful in that regard.

In respect to the bankruptcy, much like we did Circuit City, we have been on high alert in terms of credit for some time.

The team has -- first of all, we have credit insurance in most parts of the world, and that is a helpful dynamic.

Secondly, we manage our terms very carefully.

And one of the things I called out that is actually fairly pleased about in the cash conversion cycle is we held the line in DSO year-on-year, which is not an easy thing to do in the current environment.

We're monitoring very, very carefully, globally, our customers, and we have a very, very rigorous process which is really paying off right now.

We've been focused hard on our credit management over the last three years, and it's really paying dividends right now.

It's not to say we're [an example] but it's paying off.

This is Gerry.

I want to make sure I clarify one thing that I think you were asking.

The savings related to the restructurings, while the restructuring will be completed in Q4, the savings will not begin to be realized until Q1 of FY '10.

Okay.

I just want to be clear about that.

That's very helpful.

And then a follow-up on the gross margin impact, is there any impact from the -- I would presume less absorption from your fixed cost overhead of your manufacturing?

Or are you able to scale that down relatively quickly for kind of the new level of volume?

There is some effect on the lesser volume, lesser scale to a degree, again, because it's in quarter and fairly rapid.

But it is an effect, but it's a second-order effect.

The big dynamic is the promotional activity in a very intense retail environment on a year-on-year basis and then the dollar as we have described.

Thanks, Mark and Gerry, and good luck.

Simon Schafer, Goldman Sachs.

Thanks so much.

And just actually a follow-up question on this point about the health of your channel partners.

I think you went through most of the implications, conceivably, in terms of working capital.

But is there such a sea change happening whereby there could be a risk you are just losing such a high number of channel partners at the retail level that the Company just needs to originate different sales channels and refocus their efforts on something like online or something else?

Is that so structural that we need to think about something else from a cost perspective or finding different channels?

No, I don't think so, Simon.

What we did see in the quarter was I will say a shift in consumer buying behavior amongst channels, but they are channels we already do business with.

For example, the online and so-called e-tail channel was quite strong in the quarter as was discounts, so Wal-Mart did well in general and we did well with Wal-Mart.

We did well with Target.

We did quite well with Amazon, TigerDirect, people like that.

So yes, consumers are shifting their buying behavior, during a time like this, which is not a surprise.

But we are already in those channels and we have a very healthy presence.

I think that there's certainly been selected high-profile failures like Circuit City, but so far, we haven't seen -- other than Circuit City and CompUSA a couple of years ago, I could not point to really too many other retailers that were significant customers of ours that have gone out of business.

Our channel base is actually fairly stable.

Understood.

Thank you.

And then there's a second question again -- I'm sorry to harp on about gross margin.

But presumably, the world doesn't feel as if the sort of promotional spending or the sort of mix skew that we're seeing in the world has any reason to change.

So I guess it's a simple question, do you think there's much of a change with this check with your spouse price points that may have gone down from $100 to something less?

So in other words, is there really a structural change there from a one to two-year perspective, whereby gross margins are say below 30%?

Well, you know, I absolutely still believe that the below check with spouse threshold is what we've always called it, is still valid.

What we are referring to is the fact that we have a very robust -- what we've always said is that we have a very robust portfolio.

We have a different business model in that 85% of our products are sold for less than $100, and in times like this, we are perfectly positioned to take advantage of a more price sensitive consumer.

Now, they may trade down from some of our higher priced mice to some of our lower-priced mice or keyboards or whatever.

But again, we're well positioned to take advantage of that and we see it more as a -- if it happens, it's a temporary shift.

And, we're not necessarily concerned about it because our margins are very strong at lower price points just as they are at higher price points.

But we have always found that if we add meaningful innovation at higher price points, people respond to it.

We saw it with our pro 9000 WebCam recently, for example.

And we don't believe that has changed one bit.

During a period like this, we probably will see some more shift down to lower price points.

We saw it in cordless mice this quarter, I think.

But we still had very strong movement, very strong sales at lower price points.

So we are -- we still believe that that philosophy holds and is valid.

But when the environment returns to what I will call more normal macroeconomic environment, I think consumers who may have moved down to lower price points will move right back up to higher price point, more value-added products.

Got it.

Thanks so much.

Michael Foeth, Vontobel.

I would just have a clarification question.

Gerry, you just answered or gave sided notes about the savings, the $100 million savings, whether we should compare it to fiscal '09 or the previous run rate.

Could you just repeat that?

I didn't understand what you --

Well I think Mark made the comment, but what I was trying to clarify was I didn't -- we have said that the restructuring would be complete, Michael, in Q4, but the savings do not begin to materialize until Q1 of FY '10.

I didn't want there to be any misunderstanding about that.

And the other thing, Michael, is it is for a full year, right?

Okay.

And then I would have two small questions.

One regarding acquisitions -- is that still something you are looking at?

Or has that come to a halt for the time being?

The way we're looking at acquisitions right now, we've said, and Mark commented on it in his remarks, Michael, that prioritizing our cash is at the top of our list.

Now, we continue to scan the horizon for potential acquisitions, but in general, what I would say, our posture is right now, in the last two years, we purchased four companies, including two in the last five months.

We are actively engaged in fully integrating those companies, Slim Devices, WiLife, SightSpeed and Ultimate Ears, fully integrating them into our business model and extracting the full value from those companies.

And so while we continue to scan the horizon from an M&A standpoint, we're taking a cautious approach.

That's what I would say.

Maximizing cash is our priority, and so that's how we're looking at M&A right now.

Okay.

Thanks.

And my last question would be regarding tax rate, I understand it is fluctuating in the quarters, but it was quite a massive spike there.

So what do you expect for full year?

And does your longer-term tax guidance -- is it still valid?

Michael, you're right.

We talk about it fluctuating and it has fluctuated in the past.

But I take your point on the fluctuation.

In terms of the full-year target, one of the things we're not giving full-year targets because we withdrew our targets at this stage.

You should expect when we update our targets, we will do this because it's interlinked with our overall target.

So it's driven by geographic mix and the various countries where we're making income and that's kind of where it's at right now.

But we have seen fluctuation in the past, and certainly this quarter was the case.

But you don't assume that the geographic mix is going to shift massively in the short term?

Yes, again, I'm not prepared to get into too much detail on this thing.

I would just look and say that if you look back, you will see some fluctuation historically.

We've called it out that there will be some historical fluctuation, and I look forward to giving you updated targets.

Okay, great.

Thanks a lot.

Yair Reiner, Oppenheimer.

First, we're three weeks into January right now.

Can you just discuss what the trends have been since the end of the Christmas shopping season and how that maybe compares to prior years?

Well, I mean what I can say is we haven't seen any improvement from the conditions at the end of Q3.

Beyond that, I don't want to say a whole lot.

But we haven't seen any improvement and we've already shared with you what our planning assumptions are for Q4, that we think it will be similar or probably worse than Q3.

Okay.

In terms of the promotional price activity, have you been satisfied with the elasticity?

In other words, when you reduce the prices, are you seeing demand bounce back as you might like?

Or are you sensing the elasticity is also beginning to weaken?

We don't reduce prices.

I don't think that's the way to think of it.

In general, what we are referring to is what I have seen retailers say in general about the fact that in December, for example, in the month of December, the environment got heavily -- even more promotional than it was in the first two months.

And I think as retailers see fewer and fewer consumers come into their stores, they tend to just discount much more heavily, and that affects us and all vendors.

But we think that environment is going to be with us for a couple more quarters, and then things will return to I would say a more normal pattern.

And it's especially acute right now in the Americas, as you expect.

But we are also beginning to see it in EMEA and even a little bit in Asia.

Got it.

Final question.

Have you made any adjustments to executive compensation?

Well, our executive compensation is heavily tied to overall performance metrics of the Company, and we have not made any changes, but we've always had our executive comp directly tied to the performance of the Company.

So that our executives are rewarded when the Company performs well and they feel the pain when it doesn't.

And that has been our operating principle and we will continue to have that as our operating principle.

But our executive compensation is also reviewed by the comp committee of the Board and any changes that are made our obviously communicated publicly and have to be approved by the comp committee and the full Board.

So no, we haven't made any changes though, to directly answer your question.

Fair enough.

Thank you very much.

Chris Gretler, Credit Suisse.

Good afternoon.

I have essentially two questions.

The first relates to this reorganization.

Do you expect this to have an impact on your midterm target of the margin model you've been discussing in the past?

And just to be clear and precise, do you get to know this withdrawal of your targets, you actually did only mean the annual target and not this midterm target; is this correct?

We only provide annual targets.

And at this point, we're not say anything.

We're not even providing Q4 targets.

I want to clarify that.

We're providing our Q4 planning assumptions.

And we're not saying anything about FY '10.

And frankly, we won't make a decision about whether to provide FI '10 targets until April because right now the visibility is just so difficult.

So we don't provide any kind of mid-range targets.

What I will say about our gross margin -- I think I heard you say that -- is that we still believe that the long-term model of 32% to 34% is relative.

And the reason -- we continue to believe that because over 27 years, the business model has performed in that range when you look at the long term.

A year ago, frankly, a year ago the question we were getting asked most often is why aren't you raising your target above 32% to 34% when we had seen several quarters in a row above the 34% range.

And we've always maintained that we think 32% to 34% over the long term best captures our innovation model and the way we run the Company.

But we have always acknowledged that we see quarterly variability, both above and below the range.

And that's one of the reasons we resisted the pressure a year ago to say that we should raise the range.

But we do believe the 32% to 34% long-term range is still absolutely applicable.

Okay.

Very clear.

Thanks.

And the second question was with respect to you know your comment about now the retail inventories.

So basically if I got you right now, you've sold into the channel something like minus 12%, currency adjusted, this quarter.

So essentially it means the sell-out by the retailers was no less than minus 12%, essentially.

So would you basically be able to help me out on the inventory levels these retailers have typically, and where you think they stand right now?

And best is always nice.

You have an inventory days number, but basically just to give us an idea of where we stand and how that relates to history?

Okay, so on a -- Chris, on the channel inventory, one of the things to give you a sense is it declined, both year-on-year and a decline in the major regions of the world and it declined sequentially in the high single-digit percent range.

So that can give you a general sense here.

So hopefully that gives you a little bit of perspective.

Here's the other way I would suggest you think about it.

Just as we are -- we said we're trying to reduce our inventory, retailers -- their two main high-cost items are store personnel and inventory.

And so they are very focused on minimizing the goods they have on hand from all retailers.

It's not nspecific to Logitech.

It's -- we are not being singled out.

It's across the board.

The other thing is even though absolute levels of inventory have generally come down, in just about all cases, in many cases, sales have declined faster.

So as the retailer is looking forward and as you were correctly concluding, making their weeks of supply calculation, even if they have reduced the amount of goods they have from us and other vendors, as they look forward, they might say from a weeks of supply standpoint, if I'm expecting that the categories are going to remain weak, I still have too many goods on hand, and that's what makes them continue to keep pressure on us and other vendors, and buy less.

And so I maintain that this pressure on inventory will not abate until the retailers feel a comfort level in general that consumer buying behavior is returning to a more normal pattern.

So we think this is going to be with us for a while until we see that dynamic take place with consumer buying behavior.

That's very clear.

That's actually our economists is pointing out is that these sales to inventory ratios, they are completely abnormal, so I guess they have to correct first.

Thanks.

Correct, that's the right way to think about it.

John Bright, Avondale Partners.

Thank you.

Gentlemen, video was a bright spot in the quarter.

There seems to be an increased industry focus on video.

Is this an area where we could -- there might be a bright spot for fiscal year '10?

Well John, you're right.

It was a bright spot.

We're not commenting on FY '10 today.

But what I can say is we're pleased that the turnaround efforts that we started several quarters ago continue.

Our acquisition of WiLife is helping.

And one of the reasons we were so excited to add SightSpeed in October to the Logitech family is we think SightSpeed will be a platform to take us beyond -- it will help us go further with PC to PC video calling and it will also enable some very exciting things in the digital living room, which, as you know, is a major focus for us.

So that's one of the reasons we added SightSpeed back in October.

But video is an area that is core for us.

We're very committed to it, and I won't say anything about FY '10.

We're not giving any targets on that as you know right now.

But we will look forward to talking to you more about that in other categories in the future or in April.

Terrific.

And then a follow-up.

What impact, if any, on peripheral sales are you anticipating or have you seen regarding -- from Netbook sales?

They seem to be surging as a percentage of total PC desktops and laptops.

Any impact that you are seeing associated with those?

Well just let me say two things about Netbooks.

We have Netbooks factored into our future roadmaps, so Netbooks has been in our thinking for a while.

Just as we adjusted our roadmaps several years ago for notebooks when it became clear that they were -- that form factor shift from desktop to notebook was fundamental and structural and would be with us.

But also, keep in mind Netbooks has been surging all year.

And if you go back and look at the earlier quarters of FY '09, when, for example, our pointing devices and other key peripherals, sales were quite strong.

That was at the same time Netbooks were strong.

So we weren't seeing any impact.

And we don't -- we cannot point to anything that is happening that is related to -- that is an impact from Netbooks in terms of our current results.

That said, we're building Netbooks into our future roadmaps and we think attach opportunities are there.

All right, and then lastly, back to the M&A question; would you talk about product areas, a focus for M&A?

If you look at the desktop today or if you look at the laptop or the Netbook, you've got most of the peripherals covered.

Are there certain areas that you hope to expand upon and widen the offering within?

The area that we're the most excited about, and you can look at all of our recent acquisitions, or most of them and see the connection, is the digital living room or the digital home, more broadly, that we've always talked about.

And so I think there is a ton of opportunities for us.

That's one of the reasons SightSpeed was such an exciting acquisition.

Both WiLife and Slim Devices, the Squeezebox product line are part of that whole digital home initiative.

So we will continue to be looking at that broad topic.

And it's a broad space.

There's a ton of opportunities for us in that broad definition of the digital home that give us opportunities for growth going forward.

So that's the -- there's a number of product categories under that, but that's the umbrella I would point to, to say that's been a big guiding post for us in terms of acquisition thoughts.

Got it.

Thank you.

Alexandre Peterc, Exane BNP.

Thank you for taking my question.

And maybe just for housekeeping questions first, this will be related to the top products as a percentage of sales you presented a slide there with six months, but I thought maybe you could just give us the first and the second, what is the percentage of total sales (technical difficulty)?

I think, sorry, could you repeat the question because we want to answer it but we're not sure what the essence of it was.

Would you repeat it, please?

I think maybe we lost the caller.

We're trying to get a clarification on that question please.

Could you just repeat that or rephrase that for us, please?

Operator?

(Operator Instructions).

Go ahead, Alexandre.

I dropped out unfortunately.

So just to clarify again, every six months you present a slide with the top 20 products as a percentage of sales.

So could you maybe tell us in Q3, which one -- what was the percentage of your top-selling products and number two as well?

Let me just say generally it's been pretty stable, Alexandre.

I think the 3% to 4% for the top product of all the revenue is typically where it's been.

And the second top product has been less than that.

So we don't have any single product that's overly dominating from that standpoint.

But those are directionally the ratios you should think about.

So we're talking about the top one and top two products.

Yes, exactly.

Is it still the mice is one of the top-selling products or has that slid a bit in the rankings?

Our mice are always in the top five of our products.

I'm probably not prepared to get more specific than that right now.

But it's certainly in the top three, I'm sure.

Okay.

Thanks.

And can you just tell us a little bit about the audio category?

Is your feeling that the actual market for audio is a little bit better than the other markets?

Or is it just that you are coming off a very low base if you look at here and your comparisons in the reported quarter, and therefore, that didn't look as bad as other categories?

Actually what you have going on with audio is a number of dynamics.

First of all, our digital music speakers or iPod speakers performed quite well in the quarter; they were up 34%.

We introduced two great products in the quarter in our Pure-Fi family and they've both done very well.

They're both priced under $100.

That was part -- we talked about this in prior quarters, that we knew that some of our -- we had some product gaps.

We were priced a little bit too high in a few cases and we said we had products coming that would fix that.

There's an example of the innovation strategy at work, up 34%.

Our Squeezebox products contributed to the growth.

Our PC headsets did quite well -- 25%.

And Mark talked about PC or excuse me, ClearChat Wireless, one of our headsets, continues to perform well.

In addition to that, PC speakers, we've said that we -- PC speakers have struggled in the past and they were a big reason why audio was down in prior quarters.

And while the sell-in remains under pressure, we have begun to gain market share back in PC speakers, particularly in the US.

In the September through November reporting period, we did quite well in PC speaker share, and we think some of what's driving that is some of our newer products.

We introduced a product called the Z5 recently, USB speaker doing quite well.

So what you have going on in audio is, frankly, a number of different products.

And it shouldn't forget Ultimate Ears, the acquisition we just made in August.

Small; the base is small, but that's also contributing to the audio results.

So we've got a number of points of momentum I will say in audio.

And while we haven't fully fixed the PC speaker issues, our product gaps are being addressed, and we're starting to gain share there.

So I think those are the reasons audio was one of the bright spots.

So it really was through your own making and the actual improvement of your lineup there?

Do you have any clues to give us on the current quarter?

Are you going to put a particular effort into one particular category?

In Q4, quite honestly, we're putting the effort across all categories, but we've acknowledged in our planning assumptions that we're facing a considerable headwind in terms of the general level of demand.

We will continue to try and build on the momentum we have in video and audio.

And we are -- we've introduced new products in Q4 and we have plenty of great products planned for FY '10, calendar year '09.

So we will continue to innovate through this downturn.

And I'm glad to end on that point.

Because while one of the things I said earlier is we see an opportunity to gain share from weaker competitors.

And one of the reasons is we believe that we will innovate steadily -- we know that we will innovate steadily through this downturn and we think many of them won't be able to.

And that's always served us well in the past.

And you can see some of the results from your question just in terms of what we've done in digital music speakers and PC speakers.

And as we continue to do that in all our categories, we think we will be able to gain market share and come out of this downturn stronger.

Thank you very much.

Thank you very much.

This concludes our question-and-answer session.

Ladies and gentlemen, thank you for your participation in today's conference.

This also concludes the presentation and you may now disconnect.

Have a good day.