羅技 (LOGI) 2010 Q1 法說會逐字稿

Good day and welcome to Logitech's first-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 conference call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech.

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

Teresa Thuruthiyil, Director of Investor Relations at Logitech.

Thank you.

Welcome to the Logitech conference call to discuss the Company's results for the quarter ended June 30, 2009, the first quarter of Logitech's fiscal year 2010.

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 including forward-looking statements with respect to future operating results that are being made under it the safe harbor of the Securities Litigation Reform Act of 1995.

Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from that anticipated in these statements.

Factors that could cause actual results to differ materially include those set forth in Logitech's annual report on Form 10-K dated June 1, 2009, available online on the SEC Edgar database and in the final paragraph of the press release 'Reporting First-Quarter Results' issued by Logitech and available at Logitech.com.

The press release also contains accompanying financial information for this call.

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 is being recorded, including the question-and-answer portion, and will be available for replay on the Logitech website.

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

Joining us today are Gerald Quindlen, Logitech's President and Chief Executive Officer, and Joe Greenhalgh, Logitech's Vice President of Corporate Finance and Investor Relations.

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

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

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

I will address our view looking forward following Joe's comments.

Our Q1 results were consistent with the outlook we shared at the start of the quarter.

In fact, our sales were higher and our operating loss lower than anticipated with gross margin within the expected range for the quarter.

While our sales and profitability weren't what any of us are used to seeing from Logitech, I was actually quite pleased with the quality of our execution during the quarter.

We did a very effective job of reducing our operating expenses, managing our working capital, and helping our channel partners reduce their weeks of supply levels through promotional activities and reduced shipments.

I do want to emphasize that as we saw in the March quarter consumer demand for our products in Q1 did not decline anywhere near as much as the 36% decline of our revenues.

Let me share with you the sell-through in our top five geographic markets, which comprise more than half of our retail sales.

In the US, our largest retail market, our sell-through in Q1 was down by 10% compared to the prior year, a slight improvement from the 11% decline we saw in the March quarter.

In Germany and France we experienced a 3% decrease, while in the UK our sell-through growth improved to 19%.

Furthermore, sell-through was up by 10% in Canada, a significant improvement over the steep decline in the March quarter.

Sell-through at a product category level in Q1 was also relatively healthy across many categories.

For example, looking at the Americas, sell-through of mice was down by 6%, with web cams down by 2%, while PC headsets were up 6%, and stand-alone keyboards grew by 17%.

A major factor in the difference between the sell-through performance and the drop in our sales was the accelerated reset by our channel partners to lower weeks of supply levels.

We make good progress during the quarter helping our channel partners move closer to these levels.

Comparing the quarter ending weeks of supply in the Americas and EMEA to the end of the March quarter we saw a sequential reduction of more than 20% in both regions.

While there is still additional progress to be made this quarter, the reset is on track to be essentially completed by the end of Q2 consistent with what we said during last quarter's earnings call.

Looking at market share in our largest markets, the data continues to show that we are maintaining and, in some cases, improving our position in both revenue and units during this economic downturn.

Similar to the situation we described during our last earnings call, our shares in the mice, keyboard, and web cam categories in the US and EMEA are essentially unchanged from the prior year.

At the same time we have achieved year-over-year share gains in PC speakers, up roughly 4 points in both geographies.

While our remote sales in Q1 were very disappointing, we did continue to gain share in the category with increases of two points in the US and nine points in EMEA compared to the prior year.

When you consider that our sell-through performance was significantly stronger than our sell-in and that our overall market share is stable or growing, it's clear that consumers continue to respond much more favorably to our products, even in this uncertain economic environment, than our top-line results would suggest.

Let me comment briefly on our balance sheet.

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

We ended the quarter with well over $0.5 billion in cash, up both sequentially and compared to the prior year, despite the dramatically worse economic environment.

Our excellent performance managing working capital combined with the tight control of operating expenses clearly demonstrates strong operational discipline across the organization and effective interim leadership from our finance team, even as our search for a new CFO is ongoing.

Speaking of the CFO, I am pleased with the progress we have made in our search.

We have narrowed the list to several promising candidates.

And while I am not going to provide a specific date, we do expect to have a new CFO on board in the not-too-distant future.

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

Thanks, Gerry.

I will start with an overview of our Q1 sales performance.

Please note that the growth percentages that follow are in comparison to Q1 fiscal 2009.

Our retail sales fell by 35% with units down 23%.

Sales were down by 39% in EMEA, by 37% in the Americas, and by 22% in Asia.

The weakness in EMEA's retail sales was spread across all major countries and reflects the combination of weak demand and our accelerated efforts to help our channel partners reach their new weeks of supply targets.

Looking at our regional sales in local currency, the decline was 32% in EMEA and Asia was unchanged at 22%.

Let me supplement the country-specific sell-through data provided by Gerry with the regional sell-through data.

Sell-through in local currency was down by 17% in EMEA, down by 10% in the Americas, and sell-through was flat in Asia.

While sell-through was relatively stable in our largest markets in EMEA, we experienced steep sell-through decline in several middle tier markets including Spain and Italy.

Similar to the March quarter, our sales performance was weaker than our unit shipments in all of our retail product families.

The resulting 15% drop in our overall retail average selling price had a negative impact on our top-line performance.

Difference between our sales and unit performance was driven by a combination of the consumers' continued strong response to aggressive promotions and a shift to lower price points across all product families.

Sales of our products priced above $100 represented 12% of our retail sales in Q1 compared to 19% in the prior year.

The move to lower price points was most notable at ASPs below $60 as their share of the total increased from 62% last year to 75% this year.

It's important to note that the mix shift away from products priced above $100 was primarily related to the remotes category, which was disproportionately impacted by the accelerated reset of our channel partners' weeks of supply, particularly in the US.

Because remotes has historically been one of our strongest growth categories, the impact on our partners' weeks of supply from the steep decline in consumer demand has been more severe for this category than for others.

Remotes was our weakest category in Q1 with sales down by 87% and units by 52%.

We experienced declines in all three regions, but the largest reduction by far was in the Americas which is where we have historically generated the majority of our remote sales.

As an additional data point on the category, the number of new users who have set up their remotes on the Harmony website during Q1 compared to the prior year was down by less than 20% in the Americas and was up in the low double digits in both EMEA and Asia.

The audio category was our best performing product family in Q1 with sales down by just 13% and units growing by 6%.

The category benefited from strong sales of our PC headset line, which grew by 16%.

It was also a relatively strong quarter for unit shipments of our PC speakers with units down by 1% as consumers responded favorably to our lower price point offerings.

We also experienced a boost in the audio category from sales of our Ultimate Ears line of in-ear monitors and earphones.

Let me comment on OEM, where our sales fell by 39%.

The biggest factor in the decline was the console gaming category where our sales fell by more than 90%.

As we have indicated previously, our sales of console microphones are in the latter stages with the typical sales cycle that we have experienced in the gaming category.

As a result, we expect the comparable in our OEM business to be even more challenging for the next two quarters.

Let me now shift to gross margin.

The year-over-year decline in our gross margin, which was consistent with the outlook that we shared at the start of the quarter, was primary due to mix shifts, both between and within product categories, the continued high levels of promotions, the accelerated reset of our channel partners' weeks of supply, and the stronger US dollar compared with prior year.

The most significant mix shift between product categories during Q1 involved retail audio.

This category, which has been our lowest margin retail category for the last several years, gained over 550 basis points as a percentage of our total Q1 sales compared to the prior year.

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

These promotions were driven by the importance of simulating sell-through in a weak demand environment and the actions we have taken both to make room on the shelves for our new products and to help our channel partners move towards lower weeks of supply levels.

Turning now to operating expenses.

Excluding the restructuring charge of $1.4 million, our expenses declined in Q1 by 23%.

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

G&A declined by 36%.

As a reminder, our G&A costs in Q1 of the prior year were unusually high due to significant one-time IT costs.

Now while we do plan for continued year-over-year reductions in our G&A spending during fiscal 2010, the 36% decrease we delivered in Q1 is not sustainable.

Sales and marketing was down by 24% and R&D expenses declined by 6%.

We continue to invest in critical projects related to innovation and new products while sustaining our focus on increasing the efficiency of our product development efforts.

As a final comment on the income statement, our interest income was down by $2 million due to the impact of earning lower interest on our cash balances this year than in the prior year.

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

Our cash position was a $567 million.

Our cash improved by $73 million compared to the March quarter despite the loss in Q1 and it was up by $83 million compared to the prior year.

In comparing 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 $30 million for share repurchases.

Our cash flow from operations for the quarter was $76 million, an increase of $32 million or 73% compared to Q1 of last year.

The two most significant factors in the year-over-year improvement, achieved despite the net loss incurred this year, were the larger sequential increase in accounts payables and smaller sequential increase in inventory that we delivered in Q1 of this year.

Our cash conversion cycle in Q1 was 58 days, five days higher than the same for last year due to slower inventory turns and lower days payable this year, but down 11 days sequentially compared to the March quarter.

Inventory; our inventory was down by $39 million or 14% compared to the prior year and it was essentially flat compared to the March quarter, up by just $2 million.

Inventory turns were 4.2, down from 4.9 in the prior year.

The primary cause of these slower turns was a combined impact of the weak demand environment and the progress we made helping our channel partners accelerate their weeks of supply reset.

DSO; our DSO was at 47 days for the quarter, down by 13 days compared to the prior year.

The lower level of sales was a major factor in the decline versus the prior year and reflects a weak demand environment, the weeks of supply reset, and our actions to make room for upcoming new product launches.

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.

Let me give you a brief update on our restructuring costs.

We booked $1.4 million in restructuring costs during Q1.

$1 million of this total was related to personnel actions that we took in Q4 and reflects an adjustment to the estimates we made at the time.

We expect to book up to $2 million in additional restructuring costs during the remainder of fiscal 2010.

Combining the costs we expect to incur this year with those from Q4 of the prior year, we anticipate that the total cost of our restructuring will be approximately $24 million.

Before concluding my comments, I want to mention that our next Analyst and Investor Day is scheduled for November 11 in New York.

We hope you will be able to join us.

That concludes my comments.

Let me now turn the call back to Gerry.

Thanks, Joe.

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

Let me start by saying it's great to have Q1 behind us.

We projected that Q1 would be a low point of the year for our operating results.

And we are on track to deliver improved performance throughout the remainder of fiscal 2010 starting with a return to profitability in Q2 and a return to earnings growth for the second half of the year.

One of the key reasons for our confidence in improved performances is our exciting lineup of new products, most of which we plan to launch this quarter.

As you would expect, we will introduce a variety of new offerings across all of our product categories that are targeted at the needs of today's consumer.

Let me briefly highlight several of them.

Last month we launched Logitech Vid, a free, fast, and easy way to make high-quality video calls using a web cam.

Vid dramatically simplifies video calling by offering a streamlined set up and a simple, intuitive interface.

While video calling has been around for more than a decade, our research revealed that the biggest reason why people don't make video calls is that they are frustrated by complex software and confusing set of procedures.

With Vid, which was designed exclusively for video calling and is powered by the Logitech SightSpeed network, we have eliminated these major obstacles to making video calls while still providing the exceptional quality audio and video that our customers expect from Logitech.

We have been very pleased with the initial reaction to Vid.

In spite of it not yet been bundled with our webcams, there were still over 400,000 downloads of the software by current webcam owners since the June 17 launch.

We have several new webcams coming in the near future and Vid will be bundled with all of them.

We believe that Vid is a huge step forward in video calling and that it will gradually stimulate incremental webcam sales in the months to come as delighted consumers, many of them first-time webcam users, spread the word.

Let me add that Vid would not have been possible without our acquisition of SightSpeed last year.

The SightSpeed team brought us industry-leading video calling expertise and we are excited by the prospect of more video communication innovations in the future.

Turning now to audio.

Just last week we introduced four new multimedia PC speakers featuring 360° sound, which creates a substantially wider sweet spot for listening.

With prices starting at just $69, these speakers are well targeted at today's more discerning consumer.

As I mentioned earlier, we have been successful gaining share in the PC speaker category in both the Americans and EMEA and we believe these new additions will help us build on our momentum.

Moving now to mice, where our rich history of innovation ranges from laser tracking to hyper fast scrolling to the plug-and-forget nano receiver.

These innovations have been focused on creating ways to help the consumer get more out of the computing experience.

While you will have to wait a few more weeks for the details, we are very excited about the prospects of our next major mouse innovation.

All I can say now is it's significant and it will put us way ahead of the competition.

Continuing on, another factor in our expectation of improved performance for the remainder of the fiscal year is the completion of the reset of our channel partners' weeks of supply.

During last quarter's earnings call I said that we expected the reset would be finished during the September quarter.

And based on the progress we made during Q1, we remain confident in that time frame.

Let me add that the completion of this reset assumes no significant change in economic conditions or consumer sentiment.

In fact, our Q2 plans assume that sell-through in EMEA will get worse before it gets better.

Even so, weeks of supply levels are on track to reach a new normal by the end of Q2 which will lead to much closer alignment between our sales and sell-through during the second half of the year.

We anticipate that the launch of our new products combined with the completion of the weeks of supply reset will have a positive impact on both our sales and our gross margins.

New products and a leaner channel should noticeably reduce the pressure for aggressive promotions.

At the same time we expect that our new products will stimulate demand and in many cases generate higher margins than the products they replace.

That brings me to our financial outlook.

For Q2 we are targeting sales of between $465 million and $485 million.

We expect our gross margin to be between 27% and 29%, and we anticipate a return to profitability with operating income of up to $10 million.

Let me make one additional point on our projected sales for Q2.

Our OEM microphone business reached a record high in Q2 of the prior year, which led to our biggest OEM quarter in the Company's history.

As Joe said earlier, that specific opportunity is near the end of its sales cycle.

As a result, we expect the year-over-year decline in our OEM sales will be worse in Q2 than it was in Q1.

The good news, however, is that we expect the year-over-year rate of decline of our retail sales in Q2 will improve considerably compared to what we delivered in Q1.

I want to wrap up by emphasizing the three critical points from my comments.

The first is that we are effectively executing the plans we have previously shared with you.

Our Q1 results were consistent with our outlook.

Our cost reduction actions have significantly reduced our spending compared to the prior year.

The reset of our channel partners' weeks of supply accelerated during Q1 and is on track to be completed by the end of Q2.

And early in this crisis we said we would prioritize maximizing cash and our cash position at the end of Q1 has never been stronger.

The second point is that consumers continue to respond well to our products.

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

We believe our new products will further solidify the strength of our offerings at the point of sale.

The final point is that even assuming no improvement in consumer demand we believe the worst is behind us.

The majority of our new products launched this quarter.

The channel reset should be completed by the end of the quarter.

We are projecting a return to profitability in Q2, largely driven by the anticipated sequential improvement in our gross margin.

And we continue to expect a return to earnings growth for the second half of the fiscal year.

The economic storm will eventually pass and we are systematically positioning the Company to emerge stronger.

With that Joe and I are now available to take your questions.

Please follow the instructions of the operator.

(Operator Instructions) Jonathan Tseng, Merrill Lynch.

Hi, guys, Johnny Tseng here.

Just want to understand the cost evolution; previously you had talked about $100 million target for cost savings for the year.

Does that still hold?

Yes, it absolutely holds for the year.

Just to be clear that the cost savings was a combination of operating expenses and cost of goods sold; the majority of it would be operating expenses.

Clear.

And that is based on costs including restructuring charges when I look at the prior year comp, is that correct?

Or is that basically cost base excluding the $20 million restructuring you had in Q4 last year?

Well, I think what we said was we would take $100 million out of our cost structure, and yes I think that would be excluding the restructuring.

Then I just want to break down the cost lines here.

You did mention the current cost run rate isn't sustainable, which I think is clear because sales and marketing has to go up during the holiday season especially with new products.

I am trying to think about the other lines, particularly the R&D and the G&A lines here.

You have brought them down.

The have been pretty constant the last couple of quarters.

Is there anything in there which would seasonally mean they would tick up or would be wise to assume they stay kind of flattish in absolute terms?

I don't think we are -- we are not going to provide an outlook by quarter for the rest of the year, but I think R&D there is no reason to expect a significant change there going forward.

Sales and marketing, as you already alluded to, we are probably going to be spending more in that area as we move into that higher volume portion of the fiscal year, which is typically starting a little bit this quarter but then picking up quite a bit as we get into the December and March quarters.

Yes.

And just the G&A line, is there anything in there which would mean a seasonal bump, makes you want to -- I mean, bonuses for the management, example, or for central costs for central personnel, or is that something basically that will be fairly stable?

Is there more seasonality in there?

There shouldn't be much seasonality in there.

Just one thing to keep in mind about all our expenses if you are thinking about the full year, our opportunity for savings, particularly on the variable cost side, are greater in the first half of the year than the second just given the fact that if you compare to a year earlier the economy really started to impact us severely in the second half of the year.

So we began to cut back our expenses then during the second half.

So in the first half I think that you would see more savings from a variable cost standpoint.

As it related to the personnel actions that we took in our restructuring that should be relatively linear across all functions.

Thanks so much.

Thanks, guys.

Yair Reiner, Oppenheimer.

Thank you.

If we look at kind of your experience here in destocking, it looks like it's going to take you almost a full two quarters to get the channel inventory back to where you want it.

That is, I think, a quarter longer than it's taking a lot of electronics companies.

As you go back and try to figure out what happened historically, were there mistakes that were made in terms of maybe putting out too much product into your partners and into your distributors?

And how can you change that going forward?

No, I absolutely don't think mistakes were made and I don't think it's taking particularly long.

The reset is consistent or it's playing out consistently with what we have been saying for a couple of quarters.

I think you have to go back and look at the nature of our product categories and back up a few quarters before the global economy really started to slow down.

Our weeks of supply at our customers and our channel partners is really based on our sell-through growth rates.

Our partners were at that time, frankly, much more concerned about running out of product or not having product on hand than they were the absolute level of inventory.

And because we were very consistent in growing their categories, they were quite willing to take what I would call inventory risk, much more so with us than with other categories that had slower growth than Logitech.

So when the global economy really started to slow down and we saw sell-through drop-off we hit a wall pretty hard and so it has taken us a couple of quarters.

But as we have been saying, it's playing out the way we thought.

The channel reset should be complete by the end of Q2.

But, no, I absolutely do not think anything -- there were any mistakes made.

It really was the nature of our business model.

Going forward, we expect that post Q2 sell-through and sell-in should move much more closely together.

Our real focus will be on generating sell-through growth again.

Great, thank you.

That is very helpful.

Now if you look at the gross margin decline year-over-year there is clearly probably four elements -- there is some discounting, there is maybe some trade down lower ASP products, there is effective foreign exchange, and maybe some negative leverage in manufacturing.

Can you kind of go through those four elements, and maybe there are more, and explain how much each of them contributed, at least directionally, which are the more important elements in the gross margin contraction over the last couple of quarters?

Speaking specifically to what we saw in Q1, I think there is probably three main buckets that I would point to as being roughly equivalent in terms of their impact on the year-over-year decline.

The first one is the level of promotions that we have seen.

And those promotions are related both to the channel reset as well as to just the weak level of consumer demand and the need for promotions to simulate sell-through.

I think secondly, you mentioned it, the FX effect on the stronger dollar on a year-over-year basis; that has had a big impact.

Then I think that the -- thoroughly it has really been a product mix issue, both between product categories and within product categories.

I think we talked about the impact at Audio, which has done relatively better from a sales standpoint than some of our other categories.

But that has traditionally been a lower gross margin category for us.

So that is an example of the impact of product mix.

So I think those three -- as I said, those are roughly equivalent in terms of their impact year over year.

Thank you.

I will get back in the queue.

Alexander Peterc, Exane BNP Paribas.

Hi, thanks for taking my question.

I would just like to understand what will happen with the effect of the OEM evolution with respect to your gross margin.

Is that having a positive effect in the second quarter from the mix perspective?

Well, I am not going to get into the specific impact of OEM within Q2.

I will give you the bigger picture on top line though.

A year ago we hit an all-time high in terms of our OEM sales driven by the success of our microphone opportunity.

As Joe said in his remarks, that is at the end of its sales cycle, it's at the end of its natural sale cycle.

So we actually expect a fairly steep decline year-on-year in terms of OEM sales in Q2 driven simply by the microphone opportunity having run its course.

We said that OEM is at the lower end of the spectrum in terms of margin impact in our business overall and that really hasn't changed.

But I am not going to get into the specific impact of OEM in Q2, but that helps you kind of understand what we are expecting from a sale standpoint for Q2.

And then just a quick follow-up on your product launches.

Are we going to see -- most of the exciting launches are going to happen this year in fiscal Q2, or is there anything major the rest of the year?

Well, we have new product introductions in every quarter, but the two major quarters for product launches are Q1 and Q2.

And Q2 is the largest, meaning that the majority of our products launch in Q2 but we still have some new things coming out in Q3 and Q4 as well.

So we are always launching new products, but it is correct to assume that you will see the majority of our new products will have launched by the end of Q2.

Okay.

Thank you very much.

Ashish Sinha, Morgan Stanley.

Hi there.

Just a couple of questions if I may.

Firstly, on your DSOs and your working capital performance, is the current level of DSOs, is it sustainable?

Or do you think there is a chance it might come back up with your distributor and retail partners kind of nudging you a bit?

Well, I think that the -- first of all, we are very pleased that we have had two quarters in a row of I think our lowest DSO that we have seen ever at 47 days.

And I think part of that has certainly been driven by our cash collection efforts.

However, I think also a major factor in that is just the environment we are in, an environment where our sales are declining double digits, where we have got a reset going on with our channel partners' weeks of supply.

And I think that those factors are having a pretty big influence.

If you look at where our DSO was historically in a growth environment, which is where we have been for most of our history, 47 days probably wouldn't appear sustainable.

And I think if we get back, when we get back to a growth environment I think 47 is probably a little on the low side for a sustainable DSO.

Okay.

And just to clarify on our operating profit guidance, does $10 million include any restructuring charges in there or is that a clean number?

There is the potential there for some restructuring but as we said we are only looking at up to $2 million in additional restructuring throughout the remainder of the year.

Our expectation is that that would be spread across several quarters, so I don't think that restructuring would have a major impact one way or the other.

Okay.

And just one last question, if I may.

On your input and raw material cost trends, could you talk a little bit about those?

Is that a big issue?

I mean, are you hearing anything or what are your expectations on that front?

I don't think there is -- there aren't any major issues there.

I think we have seen some -- compared to where we were going back a year ago, we have seen some favorable trends.

And we would expect that if things stay the way they are today that that would be a positive factor as we go through the second half of the year.

But I don't think there is anything to be overly concerned about at the moment.

It's one of -- the improvement in input costs is one of the reasons that we believe we are very confident in saying we will see a return to earnings growth in the second half.

But as Joe said, the two bigger factors, contributing factors, really are the completion of the channel reset and the launch of our new products.

But input costs are definitely moving in the right direction and they are definitely helping.

Okay, thank you.

Tavis McCourt, Morgan Keegan.

Thanks, guys, a couple of them.

First, on your internal inventory should we still expect that to come down from these levels?

Are there still any kind of accelerated write-offs happening there, or is that at a point where that will start growing again and kind of transition from the older products to the new products?

And if you find of weave into that what that means for gross margins as you launch the new products, should we expect kind of a step-up up to traditional gross margin levels as you kind of wind through the older products and channel resets, or is it still too early to say that you can get back to those levels?

Well, Tavis, I think from an inventory perspective given where we are at in the year right now, I don't think there is any reason to expect any significant reductions going forward.

We are heading into the -- approaching the second half of the year, which is obviously the biggest part of the year for us.

So I would expect our inventory, our internal inventory, to behave with the same kind of seasonality that it has in the past from this point forward.

As far as the impact of new products on our gross margin, we think it will certainly have a favorable impact, I think from two dimensions.

One being we would expect that our new products would be subject to less promotional pressure than the products that are out there now.

I mean a product that has got new features and new functionality is going to hopefully be less promotional than one that has been on the shelves for 18 to 24 months.

I don't think we are in a position to say when it is that we expect to return to the 32% to 34% range.

It's an annual target and as I say, we are not prepared to say when.

I think what we would say is that we don't think that the factors that have pushed it down as low as it is right now, we don't think those factors are permanent.

And I think we've started to give an indication of that just by our projections for Q2 where we are expecting a significant sequential increase in our gross margin.

A big part of that is because we are expecting less promotional pressure both from the completion of our channel partners' weeks of supply reset and the launch of the new products.

I just want to re-emphasize the last point, which is in our mind nothing has changed in terms of our business model.

We believe the 32%, 34% long-term range is still valid.

It is a long-term range.

We have said we will have times -- a year ago we were significantly -- a little more than a year ago we were significantly above the range and now we are below it because of the economy and the channel reset.

But we believe that our business model hasn't fundamentally changed and the range is still valid, and we will get back to it.

We are not saying when because there is still too much uncertainty in terms of the general economic environment, but we absolutely believe it is still a valid long-term range.

Great, and then a follow-up.

I see on the slide you kind of show sellthrough by region.

In aggregate, is it fair to think of sellthrough as down about 10% to 12%?

Well, we don't really look at what I would call an aggregate company sellthrough because it is really not a meaningful number.

So that is why we provide it by region and we provided some individual country data as well.

I don't know if the maps would lead to that figure, so I won't speculate.

But you can see we tried to help you by breaking it out by region so you can kind of see the dynamics, because they are very different.

Europe is a little different than -- what is going on in Europe is a little different than what we are seeing in the Americas, for example.

So I don't really know if the 10% is right because we don't tend to look at it at an aggregate company level.

It is not a meaningful number that way.

And a follow-up which may have the same answer, but can you give us a sense of kind of what your typical aggregate channel inventory is now; maybe weeks of inventory across all product lines?

I'm sure it differs a lot by product line, but just so we have a sense of where it may have been three, four quarters ago versus where it is today or the end of September.

You know, it is a little bit like the answer I just gave on sellthrough.

There is no single level of channel inventory that is typical because it depends on, for example, a retailer's go-to-market model.

In the United States, office supply superstores have a very different model than discounters.

And discounters can operate off a much lower level weeks of supply target than office supply stores -- office superstores I mean to say.

What is consistent is that all of our channel partners have been working with us and we've been working with them to drive it to a lower level.

What I can say is that if you look at where we expect to be at the end of Q2 versus where we were a year ago, and this is a statement about dollar value inventory, we expect that from the September quarter of '10, the ending value that we expect to be at versus September '09, the value in channel inventory will be down about 40%, so pretty dramatic.

Great, thanks a lot.

Simon Schafer, Goldman Sachs.

I wanted to come back to this debate about gross margin.

You clearly outlined that there's really three factors at work in your opinion, one of them being FX.

But we seem to have gone through a three-year period whereby FX really wasn't cited as any reason for strength.

So I was wondering as to why on the way down that tends to get cited as a weakness.

And in conjunction with that, maybe we can just revisit this debate as to whether and how perhaps lower price point products aren't necessarily leading to a lower structural gross margin.

That would be very helpful.

Thank you.

Simon, I think as far as why we have talked about FX and the impact on gross margin now versus why we didn't talk about it in the past, I think that the circumstances are very different.

If you go back to where we were in FY '07 and FY '08, exchange rate changes were much more gradual.

If you take a look at our business model which we've talked about in the past, one of the things that we tend to do in response to exchange rate changes is adjust our prices in local currency.

When exchange rates move gradually, that gives us the opportunity to do that gradually; gave us the opportunity at the time to lower our prices in Europe.

So I think that was that environment, and the environment we have seen since then, if you go back to the fall of 2008, the change in exchange rates, the strengthening of the dollar was steep and it was rapid.

And it would take us several months under normal circumstances to adjust our prices.

However, at the same time, obviously we saw the implosion of the world economy.

And at that point we made the decision that instead of trying to adjust for changes in exchange rates, we would try to optimize our market share.

So I think that is -- in this environment we have chosen not to try to increase our prices extensively in euro in order to offset this.

Instead we have decided to focus on market share.

So I think fundamentally we're talking about very different circumstances.

And back in FY '07 and FY '08, we had the opportunity to respond over an appropriate period of time, and this is just a different environment now.

Then as it just relates to the question with respect to price points, that would be very helpful.

Well, I think as we've said and you've already pointed out, some of our best margin products are lower ASP products.

Think about a mouse that we decide to launch at $19.99, that product is designed with a cost structure that is designed to support that price point.

That is what I would call a naturally low ASP.

Naturally low ASPs for us don't translate into lower gross margins.

It is when we get to unnaturally low ASPs that we have a problem or at least that we see pressure on gross margin, and that is I think a lot of what is going on in this environment.

Use that example, the $19.99 mouse.

If we have to more that price point down to $14.99 to be promotional, to drive sellthrough, to help our channel partners reset their weeks of supply, absolutely that is going to put pressure on gross margin.

I think from our perspective, we don't view that as permanent.

We think that those pressures will ease.

We think they are already starting to ease with the weeks of supply reset.

But I think it's our position that lower ASP products don't mean lower margins.

I don't think we've changed that at all.

Understood.

My second question would be to do with Harmony remotes.

I think from what you are saying, I think you referred to maybe that channel reset as you put it, including remote controls have finished.

But just looking at the sales line, that is obviously much lower than anyone may have expected.

And I was wondering as to what sort of drivers there are that would drive that back up, whether there's anything specific on the product introduction roadmap or anything else?

In conjunction with that, is there any risk that any of the goodwill or any additional inventory may have to be written off as part of that business unit?

Thank you.

On the last part, Simon, no, we are not concerned about the write-offs.

Let me share a little bit -- I won't do this with every product category, but I think it is warranted with Harmony given that it was a very disappointing quarter from a sell-in standpoint.

I'm going to provide some sellthrough data on that specific product category.

Our sellthrough in the US, which is still the dominant market for Harmony, was down less than 20%.

We are not thrilled about that, but very, very different obviously than the rate of change in sell-in.

The sellthrough in Europe was actually up at double-digit rates.

And as I have already indicated in my comments, we gained market share in both the US and Europe.

So we continue to do well with consumers in terms of the competitiveness of our products, et cetera.

What I would say about Harmony is as with the Company in general and the statements we have made, I believe Q1 was a bottom for remotes.

I expect things to improve from here on out.

I'm not saying we're going to return to growth in Q2, but I definitely expect that we will see sequential improvement in Q2.

And I believe the second half will be a lot better because Harmony, to one of the earlier questions, Harmony probably hit the wall the hardest of all of our product categories.

Of our large product categories, it was the fastest growing that we had.

It was consistently growing -- and I'm talking sellthrough here -- 30% plus, in some cases 40% plus a year.

So retailers were constantly bringing in stock and we were bringing out new products all the time.

So when things slowed down, Harmony hit the wall harder probably than any of our product categories.

And we felt the channel reset there more than in other product categories.

But that said, as with the Company in general, I think Q1 was a bottom for Harmony and I expect things to get better going forward.

And the sellthrough picture is not nearly anything like what the sell-in picture looked like, and again, that is consistent with the overall company profile.

Thanks so much, Gerry.

John Bright, Avondale Partners.

Thank you.

Gerry, staying with the gross margin discussion, what are you assuming for pricing for this product introduction cycle versus what you may have assumed in past product introduction cycles?

You know, John, we have products at all price points as with every year.

We may have a few more products at lower price points than in prior years, just to be more tailored to the current economic environment.

But when you think about the breadth of products that we introduce, the number of different categories and the number -- you know, we have products at every single price point, from $19 all the way up to $99 and above.

So there really isn't a dramatic difference there.

Are you assuming that -- are you making any assumption that consumers are going to be more price sensitive on a number of the new product introductions, so that for the new mouse that is introduced, maybe it doesn't come out at the same price levels that it came out before?

Or are you still making those assumptions that similar pricing will hold?

No, we're not assuming that we need to bring out the new mouse at lower price point than we would have in a different environment.

The mouse that I refer to in my comments that we're very, very excited about, that product is highly innovative.

There's absolutely no reason to discount it.

People who are looking for a mouse and who appreciate the kind of innovation that will bring will pay those prices.

So no, we're not assuming that we would have had to introduce it at $99 in normal times and because of the environment, we need to introduce it at $69 or $79.

That's not our assumptions.

Got it.

Last question.

Windows 7 scheduled for release in October timeframe.

Maybe you can talk about helpful benefit to Logitech, and maybe compared to the Vista impact or past rollouts of Windows software.

Yes, I mean we are excited and supportive of Windows 7.

We think as with prior Windows launches we are optimistic that it will have a benefit in the category in terms of getting more people to shop for PCs, and in shopping for PCs to shop for peripherals.

We have a line of products that are Windows 7 compatible, and those products are on target and on schedule.

So we've seen a positive impact from every launch over time, and that's the key thing.

That said, we do not plan or we do not have baked into our numbers what I would call a material impact from the launch of Windows 7.

We think it's a positive, especially in this environment, where we're all looking for ways to stimulate consumer demand.

So that's what I would say.

Joe, two questions for you.

One-time IT costs in June, were they meaningful?

Then the second one is what are you expecting for CapEx in FY '10?

Hi, John.

We're not going to go back and revisit the specifics of the IT costs in the previous year.

They were meaningful enough from a G&A standpoint that we mentioned them.

But as I say, I'm not going to go into the details on that.

The important thing is that they were specific to Q1.

We don't have any comparable issues like that in IT or in G&A as we go through the remainder of this year comparing to the previous year.

I'm sorry, the second question was?

CapEx expectations.

I think our long-term range that we've talked about, 2% to 3% of sales, that's still appropriate.

I'd expect in this environment we should be at the lower end of that range certainly than the other end, and that's probably as much as we'd say on CapEx.

Thank you.

(Operator Instructions) Andy Hargreaves, Pacific Crest.

Just one other clarifying question on the inventory.

This is usually a build quarter for channel inventory.

So in your guys' commentary are you thinking that inventory will fall materially in absolute terms, or is that primarily a days of inventory decline that you're expecting through the quarter?

I'm sorry, Andy, are you talking about our inventory?

Channel inventory.

So your question on channel inventory, would you repeat it, Andy?

Well, specifically, are you expecting channel inventory to fall in dollar terms or just in days of inventory?

The statement I made earlier, the 40%, was a statement about channel inventory dollars.

We expect the weeks of supply will be at a lower level, so we expect both to be down by the end of the September quarter.

That's both year-over-year and sequentially?

Yes.

We mentioned that in Q1, for example.

In both EMEA and the Americas, we were down about 20% in both sequentially, and we expect a further decline sequentially Q1 to Q2.

My comment about the 40% was a September quarter to September quarter comment.

Okay, appreciate it.

Then just kind of a follow-up call, you guys have gotten this before.

But on attachments to QC sales and specifically netbooks, PC unit sales have actually held in the marketplace strong for the first half of the year, and certainly your sellthrough hasn't kept up with that pace.

So can you give us any commentary on what attach rates are on the low end of PCs versus traditional PCs, or just how you're thinking about that?

Is it a function of the mobility of the products, or it is just a function of the economy and people are not wanting to buy a big basket right now?

Our view relative to sellthrough is that it's fundamentally an issue of the economy.

Relative to netbooks, our position just to reiterate it is we believe bottom line netbooks are a positive for the category and an opportunity for us.

I think I've shared this before, but we recently completed a study of netbook owners in the four largest countries -- US, Germany, France, UK -- to understand their needs and their current behaviors.

And we were pleasantly surprised to find out that the ownership of notebook form factor mice among those netbook owners was in the 50% to 60% range.

So we think netbooks are bottom line an opportunity.

We think the other big opportunity with netbooks immediately is with our PC headset line.

And our research also indicates that a lot of netbooks are incremental purchases; they're not substitute purchases.

And they're a channel opportunity because a lot of them are being sold, particularly in Europe, through telecommunications channels.

So it gives us an additional display opportunity.

So bottom line, we believe that they're an opportunity for us, Andy.

Okay, thanks.

Then just last question.

Are there any big driving games coming out for the holidays that might help you guys out on the gaming side?

Well, the big one that we're still waiting on is Gran Turismo 5.

We've had a wheel design for that, and that's been delayed a couple of times.

So we continue to be excited about that imminent launch, and we think that will help quite a bit in terms of our -- we have a wheel for GT 5 that's been available for some time.

So that's our biggest opportunity.

Okay, Thank you.

Thank you.

Nicolas von Stackelberg, Sal.

Oppenheim.

Thanks for taking my question.

My first question would be on the financing of channel partners.

Has that concern been easing?

And maybe you could answer that question by differentiating between the various geographies.

You know, I would say that -- in general, I would say it's been easing in the sense that a couple of quarters ago there was concern about Circuit City.

There haven't been any Circuit City very visible retailer meltdowns.

You know, the place where partner financing or partner access to credit remains an issue is in emerging markets.

And I would say even there, it's eased somewhat, but it has not eased completely.

But in the major markets in terms of large big-box retailers, there haven't been any issues or any concerns for us.

And even with Circuit City, we managed through that I think fairly effectively, and we didn't have any exposures.

Thank you.

Then a second question if I may.

Why are you not restarting your share buybacks?

You've done extremely well in terms of your free cash flow generation in the first quarter.

Granted, the bulk of that came from working capital, and we might see that swing back over the course of the rest of the year.

But still you have any impressive cash pile.

And while you did comment on looking at various opportunities on the M&A side, I would have thought that there was room to continue the existing program.

Or would you wait for the CFO to come back on board for that?

No, it has nothing to do with the CFO.

So I'll acknowledge that early on in this crisis, we like I think like just about every good company out there said, we're going to prioritize maximizing cash, because no one knew how deep or how long this global recession would be.

And we still don't see a clear end in sight.

So I think it was the right decision.

And I'll admit that I was conservative in terms of saying that I wanted to make sure that we focused on maximizing cash, and that's one of the reasons we stopped our buyback and I think it was the right decision.

We are going to start buying back our stock again.

We have $126 million left on the program, the current program.

I'm not going to say exactly when, but I think optimizing our cash in this environment was the right decision.

But that said, we will start buying back our stock at some point in the future.

Maybe you could share with us some of the data points out in the market that you are looking for that would make you change your mind and press the button again.

Well, the thing that we're paying the most attention relative to data points is just what's happening with the consumer and general, I'll say, sellthrough.

That will be the strongest signal to us that the global recession is ending when we see consumers consistently start spending money again, and sellthrough picks up.

But that's not a trigger -- we're not going to, as soon as we see positive sellthrough, go out and start buying back our stock.

As I said, we will start buying back our stock again.

I won't give you an exact timeframe for when.

We've been a bit hesitant to do that because we were looking to get a little bit more visibility in the current environment.

And we've said that Q1 was a bottom, so that's obviously a strong statement from us, and we're very confident about the second half.

So it's one of the reasons we are saying we will start buying back our stock again, because our confidence is increasing.

Thank you.

That concludes our conference call for today.

You may all now disconnect.