羅技 (LOGI) 2009 Q4 法說會逐字稿

Good day and welcome to Logitech's fourth-quarter financial results conference call.

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

We will be conducting a question-and-answer session towards 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 or in part without written authorization from Logitech.

I would now like to turn your call over to Miss Teresa Thuruthiyil, Director of Investor Relations at Logitech.

Thank you.

Good afternoon and good morning, everyone; welcome to the Logitech conference call to discuss the Company's results for the quarter ended March 31, 2009 -- the fourth quarter of Logitech's fiscal year 2009.

The press release, a live webcast of this call and accompanying presentation slides are available online at Logitech.com.

This conference call will include forward-looking statements that are being made under the Safe Harbor of the Securities Litigation Reform Act of 1995 including forward-looking statements with respect to future operating results.

The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated in 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 fourth-quarter results that was issued by Logitech and is available at Logitech.com.

The press release also contains accompanying 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 that this call, including the question-and-answer portion, is being recorded and will be available for replay on the Logitech website.

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

Joining us today from Zurich is Gerry Quindlen, Logitech's President and Chief Executive Officer, and in Fremont we have Joe Greenhalgh, Logitech's Vice President for Corporate Finance and Investor Relations.

I'd now like to turn the call over to Gerry.

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

I'm going to start with an overview of our performance and then turn it over to Joe to go into more detail on our Q4 results.

I'll address or view looking forward following Joe's comments.

Our results in Q4 were very disappointing and this was especially true for our retail sales, down by 32% year over year with double-digit declines in all regions.

The primary cause of the year-over-year decline in our Q4 sales was the global economic downturn.

Our sales have been negatively impacted by the combination of weak consumer demand and the accelerating reset by our channel partners of their weeks of supply.

I will touch on each of these along with the impact of the stronger US dollar in this first section.

Our sales continue to be negatively impacted by the consumer's understandable reluctance to spend during the severe economic recession.

Not only are consumers spending less, but they are strongly attracted to the value proposition delivered by the wide variety of aggressive in-store and online promotions.

But the most critical point I want to make from the start is that consumer demand for our products in Q4 did not decline anywhere near as much as the rate of decline of our revenues.

The best evidence for this point is the sellthrough data.

Let me share with you the sellthrough in our top five geographic markets which comprise more than half our retail sales.

In the US, our largest retail market, our sellthrough in Q4 was down by 11% compared to the prior year.

In our three largest European markets, Germany, France and the UK, we actually showed sellthrough growth, ranging from 1% in Germany to low double-digit growth in France and the UK.

Among the top five countries only Canada showed a significant sellthrough decline, down by 33%.

Sellthrough at a product category level in Q4 was also relatively healthy across many categories.

For example looking at the US, sellthrough of mice was down by 6% and video was done by 7%, but standalone keyboards actually grew by 16%.

Equally important, when you look at our share in our largest market the data shows that we're maintaining and in some cases improving our position in both revenue and units during this economic downturn.

Our share in the mice, keyboard and WebCam categories in the US and EMEA is essentially unchanged from the prior year.

Our revenue share in the remotes category increased by 9 points in the US and by 12 points in EMEA compared to the prior year.

We've also achieved year-over-year share gains in PC speakers, up by roughly 4 points in both geographies.

There's only one category, PC gaming in the US, where we've seen a meaningful loss of share, but our share there still remains well above 50%.

The major factor in the difference between the sellthrough performance and the drop in our sales was the significant reset by our channel partners to lower weeks of supply levels.

For years our products have driven profitable growth for our channel partners, moving off the shelves at relatively high velocity.

The consistent growth generated by our products directly impacted our channel partners' weeks of supply calculation resulting in frequent restocking of our products.

The steep and sudden decline in consumer demand which began in the December quarter has caused our channel partners to significantly scale back the number of weeks of supply that they're able to carry across all product categories including ours.

Because the sellthrough velocity for our products has also slowed significantly our channel partners no longer need to carry the same level of weeks of supply that our products had previously earned through stronger growth.

As a result, the destocking associated with the weeks of supply reset has been and will continue to be more extreme for us than for some others whose growth has been slower in the past.

We're working closely with our channel partners to help them reach their new targeted weeks of supply levels as quickly as possible through the combination of promotional activities and reduced shipments.

Promotional activities remain critical in helping to moderate the decline in sellthrough, but these activities continue to have a substantial negative impact on both our sales and gross margin.

Now during Q4 we began to take action on a targeted basis to accelerate the destocking.

We did this by selectively reducing shipments in order to more quickly establish equilibrium in the channel and, more importantly, to position all our channels to embrace the many new products we plan to introduce in the first half of the fiscal year.

The other major factor contributing to our sales decline, and even more so to our gross margin decline, was the stronger dollar.

Excluding the unfavorable impact of exchange rate changes, our total sales, retail and OEM combined, declined by 28%.

The primary impact of the stronger dollar was in EMEA.

While we have adjusted some prices in EMEA to offset the impact, the fact is we have done less repricing than we would have done in a more typical environment.

Our traditional ability to increase local currency prices in response to a stronger dollar has been reduced in the face of weaker consumer spending and we prioritize sustaining and gaining marketshare over offsetting the transitory impact of the stronger dollar.

When you consider that our sellthrough performance was significantly stronger than our sell-in and that our overall marketshare is stable or growing it's clear that consumers are responding much more favorably to our products than our topline results in Q4 would suggest.

Let me comment briefly on our balance sheet.

As I said during last quarter's call, we planned to reduce our own inventory during the March quarter and we did just that, achieving a sequential reduction of over $100 million.

I was very pleased with the continued effectiveness of our cash management.

We ended the year with roughly $0.5 billion in cash, up sequentially even with the loss in Q4 and virtually unchanged from the prior year despite the dramatically worse economic environment.

Before wrapping up my comments on the quarter, I want to address the changes in our senior management team.

As you know, Mark Hawkins, our CFO, has resigned to take a CFO position at another company.

We wish Mark the best in his new role and thank him for his many contributions during the last three years, including leading us through the fiscal 2009 close process.

We've initiated a search for his replacement, but Mark leaves behind a strong team and I'm confident that during the interim we will sustain and build upon the progress that he helped us achieve.

I'm also very pleased that during Q4 Werner Heid joined us as Senior Vice President of Worldwide Sales and Marketing.

Werner's career includes five years at Iomega as well as a variety of senior management positions within Focus, Proxima and HP.

Werner's extensive international background in the high-technology industry, combined with his broad understanding of consumer electronics business, significantly strengthens our senior leadership team.

Let me now turn the call over to Joe to provide more of the financial details.

Thanks, Gerry.

I'll start with an overview of our Q4 sales performance.

Please note that the growth percentages that follow are in comparison to Q4 fiscal 2008.

Our retail sales fell by 32% with units down 23%.

Sales were down by 36% in EMEA, by 33% in the Americas, and by 14% in Asia.

The source of much of the weakness in EMEA was emerging markets in Russia which have been hit very hard by the combination of the liquidity crisis and currency volatility.

Looking at our regional sales in local currency, the decline was 26% in EMEA and 16% in Asia.

Let me supplement the country specific sellthrough data with the regional sellthrough.

Sellthrough in local currency was down by 14% in the Americas, down by 7% in EMEA, and sellthrough increased by 4% in Asia.

We have typically provided an overview of the performance for each of our retail product families.

However, it's difficult to draw any meaningful conclusions about the performance in individual product families as they were all negatively impacted by the same factors that caused our overall sales decline.

Instead I'm going to limit my product-related comments to a few key points.

The decline in our sales was greater than the decline in units in all of our retail product families.

The resulting 11% drop in our overall retail average selling price clearly had a negative impact on our topline performance.

Gerry mentioned the consumer's strong response to aggressive promotions and this was the major cause of the difference between our sales and unit performance.

Sales of our products price above $100 held up relatively well during the quarter.

They represented roughly 16% of our sales in Q4, down around 100 basis pounds compared to the prior year.

The move to lower price points was most notable at ASP's below $60, as their share of the total increased by over 600 basis points to roughly 67%.

Our weakest category during Q4 was remotes with sales down by 50% and units by 34%.

The category decline was driven by the Americas as we delivered double-digit sales growth in the rest of the world.

The extreme weakness in the Americas was primarily due to our channel partners' reset of their weeks of supply.

Weeks of supply is a function of sellthrough -- the stronger the sellthrough in a specific category the higher the required weeks of supply calculation.

Remotes has historically been one of our strongest growth categories, which means the impact of the sudden and steep decline in consumer demand on our partners' weeks of supply is more severe for this category than for others.

Gerry already highlighted our share gains in remotes.

As an additional data point on the category, the number of new users who set up their remotes on the Harmony website during Q4 in the Americas kept pace with the prior year and was up by well over 50% in EMEA.

The audio category did better than several others in Q4, down by 18%.

The category benefited from strong sales of our iPod speakers which were up by 42% due to the success of our Pure-Fi anywhere line.

Let me comment on OEM where our sales fell by 33% due primarily to a steep decline in the console gaming category.

Our sales of console microphones have slowed considerably from earlier in the year as this gaming-related opportunity evolves through its typical sales cycle.

Our OEM Mi sales declined by 11%.

Let me now shift to gross margin.

The year-over-year decline in our gross margin was primarily due to the combination of three factors -- mix shifts both between and within product category; the significantly stronger US dollar compared to the prior year; and the continued high levels of promotion, particularly in the US.

Let me provide an example of the mix shift between categories.

Retail pointing devices has been our highest margin category over the last few years.

In Q4 its share of our total retail sales fell by roughly 200 basis points.

Conversely retail audio has been our lowest margin category during the same time period and in Q4 its share of our retail sales increased by over 400 basis points.

The relatively high level of promotions continues to negatively impact our gross margin.

These promotions were driven by the importance of stimulating sellthrough in a weak demand environment and the actions we took to reduce our own inventory levels as well as to help our channel partners move towards their newly targeted weeks of supply.

Turning now to operating expenses, excluding a restructuring charge of $20.5 million our expenses declined in Q4 by 16%.

The decline reflects a combination of ongoing cost reduction efforts across the Company as well as the initial personnel expense savings resulting from our restructuring during the quarter.

G&A declined by 19%, sales and marketing was down by 16% and our R&D expenses declined by 11%.

Specific to R&D, we've focused on increasing the efficiency of our product development efforts as we continue to invest in critical projects related to innovation and new products.

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

Interest income was down by $2.7 million due to the impact of earning lower interest on our cash balances this year than in the prior year.

Other income was down by $3.4 million compared to the prior year's non-GAAP total of $5 million, with the decrease primarily due to larger exchange-rate related gains in the prior year.

Let's move to the balance sheet starting with cash.

Our cash position, including short-term investments, was $494 million.

Our cash improved by $12 million compared to the December quarter despite the loss in Q4 and it was up by $8 million compared to the prior year.

When comparing to the prior year it's important to note that during the last 12 months we used $64 million for the acquisitions of Ultimate Ears and SightSpeed and $79 million for share repurchases.

Our cash flow from operations for the quarter was $26 million.

The decrease compared to Q4 of last year was entirely due to the decline in net income.

Our cash conversion cycle in Q4 this year was 69 days, 23 days higher than the same quarter last year due to significantly lower days payables and slower inventory turns this year.

The lower days payables was caused by the $203 million, or 56%, sequential reduction in our accounts payables balance as we scaled back our production activities both internally and with our third-party suppliers in the face of weaker demand.

Inventory, our inventory was down by $106 million or 31% compared to the December quarter and it was down by $12 million compared to the prior year.

Inventory turns were 5.2 down from 6.3 in the prior year; the primary cause of the slower turns was a combined impact of the weak demand environment and our efforts to help our channel partners accelerate their weeks of supply reset.

We believe the actions we took during Q4 to reduce our inventory have resulted in much stronger alignment between our inventory levels and expected demand.

Sustaining this alignment is one of our top priorities in the new fiscal year.

DSO, our DSO was at 47 days for the quarter, down by nine days compared to the prior year.

The lower level of sales was a significant factor in the decline versus the prior year.

However, given the continuing intense pressure on our customers to maximize their cash flow, we were very pleased to achieve such a substantial DSO improvement.

Before wrapping up my comments I want to give you a brief update on our restructuring costs.

We anticipate that we will incur approximately $5 million in additional restructuring cost during fiscal 2010 and we expect that the majority of these costs will be booked during the September quarter.

Combined with the cost we already incurred in Q4 we anticipate that the total cost of our restructuring will be approximately $26 million.

That concludes my comments, let me now turn call back to Gerry.

Thanks, Joe.

I want to comment now on our outlook and plans going forward.

The impact of this recession on consumer buying behavior has been extreme, our strategy is to continue to stay close to consumers and adapt rapidly to their changing needs.

Consumers have become more skeptical, more value oriented and are increasingly moving online both to research and purchase products.

Let me talk about how we're addressing these shifts in consumer behavior.

Exactly two years ago we established a sizable organization whose mission was to focus on understanding and improving the consumer's overall experience with our products.

Through the use of Net Promoter Score and other consumer feedback mechanisms we've already helped to drive a number of meaningful and measurable improvements in our products.

What we've learned about the changes in consumer behavior has resulted in some shifts in our product development strategy.

First, we are placing an increasing emphasis on strengthening the competitiveness of our entry-level products.

We've always participated at the entry level, but given the increased price sensitivity among a growing number of consumers and the resulting shift to lower price points, we're taking action to ensure we're also the consumer's first choice at these price points.

For example, we recently won significant new opening price point business at a major US retail chain.

Beyond the entry level we've heightened our focus on providing the consumer with the strongest possible overall value proposition across all price points.

Our goal, utilizing the lessons we've learned from our customer experience initiative, is to maximize the product's tangible benefits and the value the consumer associates with those benefits.

Maximizing this tangible value proposition has become the guiding principle of our product strategy above the entry level.

To give you just one example of this principle in action, I point to the Harmony One, our best-selling remote.

The product design parameters for this remote were driven by extensive consumer research that enabled us to develop a product that was targeted to address specific consumer pain points at a price that was consistent with the perceived value.

The last point I want to address on consumer behavior is online presence.

Consumers are going online more frequently for both product research and purchases in our categories as well as many others.

Given the significant decrease in retail square footage, easy access to a wealth of product reviews and opinions from fellow consumers, as well as the ability to fully explore features and comparison shop we believe this trend is likely to accelerate.

We are already benefiting from this trend and are well positioned to continue doing so in the future.

Amazon is one of our fastest growing customers and the sellthrough of our products by our online accounts in the US during Q4 was stronger than our competitors, up in the high single digits.

One of our priorities for the new fiscal year is to make the Logitech.com site the best possible source for product information as well as a preferred purchasing destination for many of our products.

Our sales on the site are relatively small today, but growing rapidly as demonstrated by the 35% increase in Q4.

Let me add some brief forward-looking comments on our channel partners' weeks of supply reset.

Our channel partners have yet to complete the reset which means that during Q1 we expect it will continue to negatively impact our sales and gross margin due to the combination of promotional activities and constrained order fulfillment.

In fact, based on the actions we plan to take, we expect the impact on our operating results will be at its most pronounced in Q1, leading to improved financial performance beyond Q1 and equilibrium in the channel during Q2.

The reason for a more substantial impact in Q1 than what we experienced in Q4 is the importance of making room on the shelves for the new products we plan to launch this summer.

Meaningful product innovation is more important than ever and we are committed to taking the necessary actions now to make sure our new products reach consumers in the months to come.

Speaking of new products, make no mistake that we are 100% committed to sustaining our investment in driving meaningful innovation during this downturn.

We have an exciting lineup of new products ready to launch for fiscal 2010 and we're hard at work on our roadmap for fiscal 2011.

While the short-term impact on our financial performance from the reset by our partners of their weeks of supply is significant, we expect the process to be largely completed during the September quarter.

At that point with our channel partners weeks of supply at their newly targeted levels, our sellthrough performance will be more directly reflected in our sales performance than was true in Q4.

We'd also expect to see a reduced need for the higher than usual promotional activity benefiting our gross margin during the second half of the year.

The stronger US dollar has had a negative impact on our sales and gross margin during the last two quarters, particularly in EMEA.

One of the levers at our disposal, the ability to adjust prices over time, to offset the impact of exchange rate changes, has become less viable given the pronounced weakness in consumer spending and our stated goal of gaining market share.

As a result we believe that the stronger dollar will continue to weigh down our performance during the first half of fiscal 2010.

Let me briefly update you on our restructuring which was largely completed during Q4 except for a few potential facility consolidations.

Personal actions we have taken have removed roughly $50 million from our cost structure and we plan to eliminate another $50 million in variable spending during the year as well.

We saw some initial benefits from these actions during Q4, but you should expect to see the full impact starting this quarter and continuing through out the year.

That brings me to our financial outlook.

Given the continued lack of visibility in the marketplace it is extremely challenging to provide a credible full-year target.

Therefore, for fiscal 2010 we've elected instead to provide quarterly targets starting in Q1 and continuing each quarter throughout the year.

For Q1 we're targeting sales of between $300 million and $320 million.

We expect or gross margin to be between 24% and 26%.

We anticipate an operating loss of between $40 million and $50 million.

Q1 has always been our smallest quarter of the year for sales which means it's also the quarter were we have the least amount of operating leverage.

The relative lack of operating leverage in Q1 combined with the anticipated steep year-over-year decline in gross margin due to the same factors we identified for Q4 is the reason we are anticipating a sizable operating loss.

We are confident that the first quarter will be the low point of the year for our operating results and that's true even if economic conditions remain unchanged from the present.

I want to briefly look past the transitory impact of the current macroeconomic environment and remind you all of our strategic direction.

We believe that our focus on being the interface between the user and the digital world is more relevant than ever.

The interface evolved as platforms, user models and our target markets evolved.

But the interface's significant for the consumer remains central.

The PC is evolving into the notebook and the netbook is fast influencing the notebook.

Yet the relevance of navigation, interaction, video and audio interfaces and applications remains the same.

Additionally, as form factors shrink comfort becomes increasingly important to the user experience.

All of these factors continue to support an attractive and sizable opportunity for Logitech.

We successfully extended our interface strategy beyond the PC and into the digital home with our market-leading Harmony remotes and, more recently, with our WiLife video security systems and our streaming media offerings.

We believe our strategy is every bit as relevant in the digital home as it is around the PC and the growth opportunity could be even bigger.

Let me wrap up by emphasizing the three critical points from my comments.

The first is that considering the pronounced global economic weakness and its impact on demand, consumers continue to respond well to our products.

Our sellthrough is reasonable overall and even healthy in some areas and our market share is stable or growing for the most part.

The market facing data we receive clearly demonstrates that we're more than holding our own at the point-of-sale.

The second point is that we expect that Q1 will be the low point for our operational performance during fiscal 2010.

As I said, the reset by our channel partners of their weeks of supply should be complete during Q2, benefiting both our sales and our gross margin.

We will see the full impact of our restructuring and our additional cost-saving efforts beginning this quarter and continuing through the year.

Even if we assume no improvement in the economic climate from today we're confident that the foundation will be in place for our return to earnings growth for the second half of fiscal 2010.

The third and final point is that we continue to take decisive actions to position Logitech to thrive in the long term.

Early on in this downturn we indicated that we would aggressively manage our balance sheet to protect cash and we've done exactly that.

We finished Q4 with a substantial sequential reduction in our inventory and a sequential increase in our cash despite the loss we incurred.

Further, in the last three months we moved quickly to streamline the Company, removing $100 million from our cost structure on an annual basis.

Now we are working aggressively with our channel partners to streamline their weeks of supply.

And our commitment to funding new product innovation to drive sales has never been stronger.

We believe these actions will leave us well-positioned to take full advantage of an upswing in consumer demand in the future.

This economic storm will eventually pass and we fully intend to emerge stronger.

At this point I'd like to open the call to your questions.

Please follow the instructions of the operator.

(Operator Instructions).

Tavis McCourt, Morgan Keegan.

First on the gross margin, I was wondering if you could enlighten us on how -- at this point given the revenue level, how much of the cost of goods sold is fixed in terms of overhead and how much does that improve things as the manufacturing capacity comes back in September and beyond.

And then secondly, I was just trying to piece together the guidance and wondering if you could give us a round number for how far down OpEx should trend in June versus March?

I'm going to ask Joe, Joe, go ahead.

Tavis, I think on the fixed portion of our manufacturing facilities, we haven't given it the split between fixed and variable.

I think that we've factored into our Q1 target what the impact is of being underutilized in the factory.

Obviously that will improve over time as demand picks up.

But obviously there's also a significant component of that that is fixed and, again, it's reflected in the Q1 target.

As far as OpEx is concerned, we're not going to give you a number for Q1.

I think that you can come up with your own model between the gross margin and the indicated operating loss target we've given you for Q1.

Let me ask a follow-up then.

I guess the sellthrough trends obviously don't look that horrible.

But I was wondering if you could talk about any linearity in the quarter on sellthrough or by region.

Did it get better from January to March or does it depend by region or did it get worse on a sellthrough basis?

Yes, Travis, this is it Gerry.

There's a seasonality within the quarters, we don't see a constant pattern from month to month.

There are more promotions in some months than others because of holidays and natural events.

What we did see that was very encouraging, particularly at the very end of Q4, was some stabilization in a number of our key markets in sellthrough.

So just to be clear, still in negative territory in EMEA and the US, but several weeks of stability which is a very positive sign to us.

It's not getting better, but the first key that we've been looking for is to see those signs of stabilization and they were in several of our key markets and in several key product categories.

And now what we're looking for is to see that stabilization spread to more categories and to more markets, but in general we were very encouraged by that.

But we don't see a continuous pattern through the quarter; some months have bigger sellthroughs than others just because of the natural seasonality of the quarter.

Got you, thanks a lot.

Jonathan Tseng, Merrill Lynch.

A couple of questions.

First one just on Mark's departure, I just wondered if there's any more explanation for that.

I mean, it looks like a sideways move.

I don't know how much you can speak for him, but Joe and Gerry, what did he say to you when he told you he was moving?

Johnny, it was strictly a personal decision by Mark, he was attracted to the opportunity.

One of the things he shared with me was he was attracted to the idea of a software company versus he's worked for Dell, HP and now Logitech, more hardware oriented companies.

He was excited by that.

There are some additional responsibilities that he has there that were attractive to him.

But Mark leaves on good terms, you're free to contact him.

He's still busy working and helping us wrap some things up, tomorrow is his last day.

As Joe said and I said on the call, he led the close process.

But it was really just a personal decision by Mark.

Cool, thanks.

And just one other question just in terms of when we get to the September quarter how do we think about this when the pressures of the de-stocking and the FX lift away?

In theory should revenue growth bounce back to match up to the sell-out growth?

Should there be some tailwinds as there's restocking with the new products?

I mean, how do we think about the September growth year over year?

As I think we said in the earlier comments, when we talk about getting the equilibrium in Q2, what we're saying at that point is that our revenue changes should move in sync for the most part, not identically, but should move more in sync with the changes in sellthrough.

We're steering clear at this point of making any forecast about when growth, topline growth will return.

It's too hard to call, it all depends really on macroeconomic factors and what happens to underlying demand.

Thanks.

And just one other question.

Could you quantify the levels of channel inventory in terms of weeks of supply, where they were, where they've moved to, what is the bare bones retail can get to before they start to suffer?

Best Buy said they are suffering in the last quarter so I'm quite surprised there's still more restocking to come.

Yes.

First of all, there simply is no single norm for weeks of supply, every one of our retailers has a different target.

And for us they don't have the same target for every product category.

So we had a different weeks of supply category in Harmony than we did on mice, for example.

What I can share with you to give you some -- again, to be more transparent and give you some context of what we're seeing.

From the end of the September quarter last year until the end of September quarter FY '10 our estimation is the channel will take out more than 40% of the dollar value of inventory, so that's how drastic the destocking will be, so it's pretty significant.

Thanks very much.

Thomas Schneckenburger, UBS.

Good afternoon, everybody.

Two questions, one is on the FX impact on your gross profit line.

You quantified an impact on sales of 5% and you said it was a significant driver of margin.

Could you help us -- what percentage was the impact on the gross profit?

And the second one is on pricing.

Is your price reduction rather due to really promotional activities or is there just permanent trading down or list price reduction which would not recover in the coming quarters?

Thank you, Thomas.

I will talk to the second question and I will let Joe comment on the FX question.

What we see in the ASP declines, the evidence that we see is pretty clear that it is the dominating factor is a more promotional environment and more promotional retail environment particularly in the US, as Joe said in his comments.

But we acknowledge there is some let's call it moving down to lower price points by consumers.

It is hard to quantify but frankly there isn't a lot of incentive for a consumer to say in the past when the economy was in more normal times I would have been content to buy this $99 keyboard or mouse with all these bells and whistles and features but I on more of a budget so I will buy this $59 item.

In fact, what is happening is with the constancy and frequency of promotion they can get that $99 item for $79 or something else.

So that's what we mean when we say the environment is very promotional.

We look forward to pulling back from that, but that's not going to happen until core demand stabilizes and we don't need to be as promotional.

We do see that starting to lift, as we've said, because -- particularly after Q1, because we've worked off a lot of our inventory and the channel destocking should be complete within Q2.

That will do -- that will be the biggest factor that helps alleviate the pressures on gross margin.

And I'll let Joe comment on the FX question.

Thomas, just to clarify, on the sales side the impact was 4% rather than 5%.

As far as the impact on gross margin, it was more substantial than it was on the top line, but we're not going to quantify that.

We may choose to do that in the future, but for the time being we're just going to identify the factors that impacted our gross margin and not put a number to it.

Okay, thank you.

John Bright, Avondale Partners.

Thank you.

I guess, Joe, in the slides it says you've got a plan to eliminate another $50 million in variable spending during the year as well as what you've already eliminated.

What areas do you plan to make those reductions?

John, in general it's any spending that we would look at and say it's variable.

So examples of that would be consulting and we've had significant consulting expenses in the past, both in our IT organization and from the supply chain perspective.

T&E is another obvious one.

So I think it's there are a variety of categories like that that we look at across every function in the Company.

We've given each one of the senior managers in the Company targets to reduce their variable spending in those kinds of categories and so it will be from any place where we think we can reduce our spending without negatively impacting new product development and customer touch points.

Okay.

Gerry, bolt-on acquisitions have been a core piece of your strategy for quite some time and I think more recently you've talked about the potential of going a little bit higher in the type of acquisitions.

Assuming no change, what areas now do you think look promising for M&A targets?

We're still aggressively looking for potential targets, John, and we will continue.

And the fact that we continue to do a good job managing our cash gives us the ability to look at an environment like this; a lot of companies are not in that position.

The area I would say -- we look across the spectrum so we're looking at acquisitions that would continue to expand our business around the PC; we still see a lot of room to grow around the PC.

But I would say the biggest focus for us is really in the digital home.

We're looking at a number of different categories within the digital home, I can't get more specific.

But it's very comprehensive and there's a lot of really interesting areas where we see a fit with Logitech that would significantly broaden our position in the digital home.

So that's our number one focus.

Okay.

And we talked about this last quarter and I'll ask again, see if any change in the thought.

But netbooks, obviously there's the rise of netbooks taking place.

Trying to get a sense and feel of where you think or what impact you think that's going to have, continuing to have on Logitech going forward and how you're going to play that?

Sure.

So our view in the quarter is even though netbook, there were some nice sales in netbooks globally, we don't think it really was a material impact in the quarter.

But let me share with you what our philosophy is, our attitude is towards netbook.

Net net, pardon the pun, but bottom-line we view it as a positive, we view it as an opportunity for a lot of reasons.

One of the things that's very attractive about the net book in our view, it's essentially, if you think about it, it's the first sizable Wintel platform in the ultra-mobile world.

Without net books all of the ultra-mobile opportunities, add-on opportunities would be restricted to really the proprietary smart phone platform.

So for us there's actually an opportunity there.

The other thing is we're already starting to plan for I'll say netbook specific products in our roadmaps.

We just conducted a study, it's an internal study that showed that among netbook owners the same percentage of them as notebook owners owned a mouse already.

What surprised us -- pleasantly surprised us was the purchase intent of buying a mouse, these netbook owners versus notebook owners, was about 50% higher.

And that may be because of some of the things we talked about in the script which is the comfort factor.

There are some trade-offs with netbooks in terms of functionality versus notebook and certainly versus desktop.

So the bottom line for us is we do not view netbook as a negative, we view it as an opportunity.

It's going to be a challenge for us, just like notebook was initially a challenge versus our product development efforts to that point which had all been targeted to desktop.

So that's our philosophy on it.

Thanks.

And then the last question is going to be -- any timeline, Gerry, that you have for a CFO search?

Well, we've already begun an external search, John.

Mark leaves a very good team behind and I credit him for that.

We've divided his responsibilities between of his senior lieutenants, Joe being one of them.

Joe is not only Head of Investor Relations but our VP of Corporate Finance, and our Corporate Controller, Tom Fergoda.

So things are in good hands; we're conducting an external search.

I don't have a time frame because really, as you can appreciate, it's all about finding the right person.

Thank you.

Andy Hargreaves, Pacific Crest.

I'm wondering if there was something structural that the retailers are changing that's going to allow them to sustain the lower inventory levels or will they have to build back up eventually.

Well, that's a very good question because most of our retailers are saying, and I hear them saying this about every product category not just about Logitech, is that they view this as a fundamental change, meaning that they want to get to new weeks of supply and stay there.

And I think the proof will be when growth does return in general to the economies and we're back to double-digit growth, we're very confident we will get there in time.

And if they start to see their out-of-stocks go way up I think there may be some easing from these lower weeks of supply.

Right now that's what they're saying and only time will tell.

Okay.

And then the follow-up question I guess is -- and maybe that answers it a little bit -- but why are they pulling back so significantly if sellthrough on your products in particular hasn't changed -- hasn't fallen off a cliff?

Well, one thing to keep in mind -- I think a perfect example that maybe illustrates this whole phenomenon is if you look at what's happened with Harmony.

In the first half of this year our sales of Harmony, our sell-in grew 39% in the first half of the year and our sellthrough grew slightly faster than that.

So the biggest concern retailers had about Logitech Harmony was running out of stock.

So they were more than willing to carry a higher weeks of supply target than they would on other product categories, some of our product categories and certainly other categories in their store, because it's a high-growth category, high retail ring and they don't want to run out of it.

When demand hit the wall and, as we said, it was a very sharp and sudden drop-off in demand, the retailer just completely pulled back and said look, number one, I don't need all the inventory I've got and, frankly, I don't want to stay at the same weeks of supply target, I'd like to go two or three weeks lower.

And you can just imagine what that did to our sales.

In the second half of the year our Harmony sales were down 44th 45%.

But when we get to a new equilibrium they'll start to move together again.

I think the key will be, your first question which is when things get back to normal are we going to see the pressure to take the weeks of supply back up?

Frankly in my mind it's a good thing if we get -- we'll go through some pain to get there, but it will be very good for us and them to stay at these new lower levels.

So the retailer may have to run the risk of more out of stocks than in the past, but I think the Harmony example explains it very well.

Just to follow-up on that last point, are you seeing already an increase in out of stocks at some of the retail partners?

In general I would say yes.

Retailers are more willing to tolerate that risk than they've been in the past just because they would rather run that risk than run the risk of having too many goods on hand.

Now eventually that has to change, right?

I don't think we've hit that point yet, but eventually that has to change.

They're going to start being more concerned about missing sales opportunities and that's when I thank we'll start to see upside opportunities, a little bit of a tailwind, as Johnny said, for sales.

But we aren't there yet.

Thanks.

Alexandre Peterc, Exane BNP Paribas.

I'd like to just ask you a little question on the calendar effect of Easter.

Did that affect in any specific way for example the gaming category?

That would be one question.

The second one is can you give your idea of what's going on in China?

Have you seen there sustained demand as other industries seem to be indicating?

Thanks.

Yes, sure.

The first question we can't point to any material impact from the shift in Easter.

I think Easter was what, two or three weeks later this year.

We saw it in some seasonality of our sellthrough but that's normal.

In China actually we had a good quarter.

In general the emerging markets, as Joe said, were not good in the quarter.

They were not good in Eastern Europe, Russia, not good -- Latin America was weak and it's all due to the factors Joe mentioned which is that's where the credit crisis is most prevalent and then the currency volatility has added to that.

Ironically China was really a standout; we had a very good quarter in China in both sellthrough and sell-in, so we're obviously trying to keep that going.

Okay, thanks.

I'm going to have just a follow-up then on gross margins.

I understand that the promotion activity is a big part of the decline we've seen at the moment.

Can you tell us when we see an improvement?

Will that be primarily driven by the introduction of new products or more by the end of those promotion activities?

The single biggest factor that will ease the pressure on gross margin is what we've been saying throughout the call which is as the channel gets to a new equilibrium into Q2, as we -- the fact that we've worked off a lot of our inventory helps tremendously, but we've got a little bit more work to do there.

I'm happy with the progress but we're not finished.

So I think those are the two biggest factors.

But the new products will help as well.

Frankly, input costs are going in the right direction, but frankly that impact is smaller compared to these other factors.

The first factor I mentioned is the biggest thing that will ease the pressure on gross margin just not needing to be so promotional to stimulate demand or to reset the channel.

Thank you very much.

Simon Schafer, Goldman Sachs.

Thanks so much.

Gerry, just wondering once we're out of this challenging period, just obviously a couple of things that perhaps at some level are changing on a more structural basis.

I was wondering as we move into a more normalized period do you think this online trend and then also this change towards more the entry-level product range and then of course promotional mix arguably stays around for some time.

Does that still allow you to go back to the 32% model range for gross margin specifically including -- assuming that the dollar stays where it is today?

Yes, our view, Simon, is that the 30% to 34% range is still valid.

But we will acknowledge that we don't know when we'll get back there and it will take some time and the most important factor is the global economy stabilizing and consumer confidence returning and things like that.

But we're very confident that it's still a valid range for the long term.

At the end of the first half our gross margin was 34.2%, we were slightly above our long-term range and obviously it went down dramatically in the second half and that was all driven in our view by economic factors.

So to us the long-term range is the best -- the way that we think of it, it's the best metric that we can come up with to measure our ability to effectively innovate over time, to bring meaningful innovation to consumers over time.

And that's why we believe it's still a valid target range because we don't see anything that's happened that invalidates our ability to bring meaningful innovation and allow us to deliver 32% to 34%.

But it will take some time to get back to it.

In terms of online, I do think -- Simon, I do think this is permanent.

I can't tell you to what degree.

We always had consumers coming to our website in big numbers to research products, even if they bought them at retail.

In fact, most people who buy at retail come to our site first to get information.

But I think that the current trends are accelerating that.

And I think this will help us grow our online business, both Logitech.com and our partner's business.

Amazon is already a huge customer and they're getting bigger.

So I think from that standpoint the impacts are more permanent.

But maybe just help me understand how if that online move is really more prevalent and you're moving more aggressively towards the entry-level product range, surely this move towards online somewhere along the line is increasing price transparency.

So how can that be beneficial to your gross margin?

It's positive today, I really don't see the linkage -- I'm not following your line of thinking.

On the question about the low end, I think it's important to remind everyone we've always participated there.

What we're saying is we're adjusting our portfolio because we think consumers are more price-sensitive in this environment.

And we've always made the case that the margins of our products at the lower end are just as good, in many cases better, than some of our products at the higher end.

So we don't see it as a negative if people -- from a margin standpoint if people move to the lower end.

The best thing that will help our gross margin pressure is easing the promotional environment that we're in.

Understood.

And my follow-up question would be more related to the buyback program.

You still I think have the existing program outstanding or ongoing from February (multiple speakers) February '08.

So maybe you could just update us as to what the intentions may be and by how much you may renew -- decide to renew that just in light of the balance sheet strength that you are citing.

Thanks.

Yes.

It's still there and we're still committed to it.

We pulled back and little bit in light of the economic conditions and it's one of the ways we've been able to preserve cash.

We prioritize preserving cash over buying back our stock.

But it's still there and it's still valid and we still plan to move forward with it, there's really no change.

Should we expect another renewal of an additional program then once you finish this one?

At this point we're not commenting on that.

Okay, thanks.

Michael Foeth, Bank Vontobel.

I have two questions.

First one regarding your DSOs, that was down very nicely.

I was wondering how sustainable you believe that is.

And the second question is just a clarification regarding the cost savings, you're talking about $100 million cost savings in total and $50 million in this year for other cost.

Is it right to assume that if I take the OpEx that we've seen for fiscal '09 that we should expect $100 million less in '10, is that right?

Michael, I'll start with your second question first.

That $100 million which is a combination of $50 million in personnel expense-related savings and the rest variable spending, a portion of that is coming out of cost of goods sold.

We haven't quantified the two for you, but you can assume the majority is OpEx but there is certainly a COGS piece that won't be visible to you.

Secondly, DSO, it was a great DSO for the quarter.

In fact, that was the lowest DSO we've seen in a quarter in at least seven years.

I think it's unrealistic to think that's sustainable.

We'll certainly do our best to try and manage our DSO effectively as we've been doing over the last several years in particular, but I wouldn't want to set the expectation that we'd stay at that kind of level going forward.

So is it reasonable to say that there's no structural reason behind that decline and that it should return to a more normal level that we've seen in the past in the long run I would say?

Yes, I think it's reasonable to assume nothing has changed structurally.

Okay, thank you.

[Nicholas von Stackelberg], Sal Oppenheimer.

Thanks for taking my question.

I was wondering whether you could share with us the cash impact from restructuring in the quarter.

Joe.

Yes, I was just pausing to think that through.

The cash impact in the quarter -- I don't think we've got that number available right now.

I can certainly follow up with you and get it assuming we have it readily available.

Yes, that would be very kind, just so that we're not surprised if a larger portion of that were to hit the quarter you're now entering.

And then following on on the question regarding DSO.

Would it be safe to assume that after this fantastic job you've done in working cap -- net working capital in Q4 that there will be some swing back especially as you're preparing to launch new products, so at the end of the quarter?

Certainly if you look historically at what happens with our working capital, the first half of the year is where we make our significant investment given the fact we are launching new products.

So I would assume that from a seasonality standpoint if you look at what's happened with our cash conversion cycle in the past that even though the environment has changed what you'd see in the first half of this year should be similar than what you've seen in previous years at least in terms of the direction on a quarterly basis.

Yes, I take that as a fair comment.

Having said this, the step down was especially pronounced as evidenced by the low DSOs.

I was wondering whether we should maybe get ready for a swing back and a more pronounced swing back in the second quarter.

I think at this point it would be -- there's no benefit for us to start giving targets for the second quarter.

Again I would just go back to what's (multiple speakers).

Sorry, for the first quarter, calendar Q2.

Yes, I think it's -- for our first quarter, I think as far as the balance sheet is concerned, we're not going to give any specific targets.

Again, the only thing I'd say about the balance sheet, I would not assume that you'd see the kind of sequential decrease in inventory that we saw from Q4 -- or excuse me, from Q3 to Q4.

And again, if you looked historically you'd see that that's been true as well.

So I think it's -- I'm not going to give you a specific target, but it's safe to assume that the first half of the year, including Q1, is when we'd start to invest more from a working capital standpoint.

Okay, thank you.

That concludes our conference call for today.

You may all now disconnect.

Thank you.