羅技 (LOGI) 2010 Q3 法說會逐字稿

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

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

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

I would now like to turn the presentation over to your host for today's call, Mr.

Joe Greenhalgh, Vice President of Finance and Investor Relations.

Please proceed.

Welcome to the Logitech conference call to discuss the company's results for the quarter ended December 31, 2009, the third 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 the Safe Harbor of the Securities Litigation Reform Act of 1995.

The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated in the statements.

Factors that could cause actual results to differ materially including include those set forth in Logitech annual report on Form 10-K dated June 1, 2009 and subsequent filings which are available online on the SEC Edgar database, and in the final paragraph of the press release reporting third-quarter results issued by Logitech and available at Logitech.com.

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

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 that presentation slides accompanying this call are also available on our website.

Joining us today are Gerry Quindlen, President and Chief Executive Officer and Erik Bardman, Senior Vice President of Finance and Chief Financial Officer.

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

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

I'm pleased to report that our Q3 results demonstrate we're making excellent progress navigating our way out of the downturn.

Our sales, operating profit and gross margin were higher than the outlook we shared at the start of the quarter.

We returned to generating double-digit year-over-year operating income growth and we continue to demonstrate outstanding working capital management.

A key driver in exceeding our Q3 outlook was better than expected consumer demand for our products across all regions and particularly in the Americas and EMEA.

In fact, we returned to year-over-year sell through growth in the Americas, which was a key factor driving our topline sales growth in that region.

While overall economic conditions continue to be quite challenging, the demand environment in all of our retail regions showed a marked sequential improvement.

A significant driver of our improved sell through growth was the strong reception by consumers to our new products launched in Q3 and prior quarters.

During our last earnings call we said we expected the channel reset in Asia would take one more quarter.

This reset, which was completed as planned during Q3, was the primary reason for the decline in our sales in Asia.

We returned to sell through growth in the region during the quarter, demonstrating that consumers in the region continue to respond much more favorably to our products than our sales would suggest.

In fact, Asia has the strongest sell through growth of our three regions.

There were several notable retail product category highlights during the quarter.

We have said that we expected to return strong growth in the remotes category beginning in Q3 and we delivered 45% growth, reaching our highest sales level in the category in the last two years.

We returned to double-digit growth in pointing devices as we delivered our highest sales quarter ever for cordless mice.

We also saw a return to growth in webcams, with strong growth at both the high and low end of our product offerings.

While it was fully anticipated, I'm very pleased with our return to year-over-year profitability growth.

The growth was the result of a substantial improvement in gross margin and our sustained cost reduction efforts.

We continue to demonstrate excellent cash management, delivering a substantial improvement in cash flow from operations in Q3 compared to the prior year and achieving a record low cash conversion cycle for the second consecutive quarter.

Finally, I'm extremely pleased that during the quarter we were able to deliver solid performance in our core business while simultaneously establishing an exciting growth platform for the future through our acquisition of LifeSize.

I'm quite proud of our organization for completing the acquisition, our largest ever, on December 11 without missing a beat executing on our base business.

I will return in a few minutes to talk more about LifeSize in my remarks on our outlook for Q4.

Now, let me turn the call over to Erik, who will provide more of the financial details.

Thanks Gerry.

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

Please note that the growth percentages that follow are in comparison to Q3 fiscal 2009.

Our retail sales grew by 3% with units up by 6%.

Looking at our regional sales in local currency, EMEA was down by 4% and Asia by 18% compared to US dollar growth of 6% in EMEA and a 17% decline in Asia.

Units were up by 11% in the Americas, by 5% in EMEA and down by 11% in Asia Pacific.

Our overall retail average selling price in Q3 was essentially unchanged from the prior year, down by just 2%, but did increase by 6% compared to the September quarter.

This is the second consecutive quarter where our retail ASP has increased sequentially.

The primary driver of the increase in Q3 was a pointing device in keyboard categories.

Sales of our products priced above $100 represented 17% of our retail sales in Q3 up from 15% in both the prior year and in Q2.

The sequential improvement primarily reflected better performance in the remotes category.

Looking at our sales and products at ASPs below $60, their share of the total was 67%, up from 61% last year and unchanged compared to Q2.

In Q3 the remotes category was our best performing product family with sales up by 45% and units growing by 13%.

The majority of this sales growth was generated in the Americas, although we achieved in EMEA as well.

It was a strong quarter for several of our Harmony remotes, led by the Harmony One and a solid contribution from one of our newest remotes, the Harmony 900.

We returned to double-digit growth in the pointing devices category with sales up by 12% and units by 18%.

The growth was achieved in both the Americas and EMEA and was driven by our cordless mice, with sales up by 20% in total.

We achieved double-digit sales growth across all major cordless mice price bands, led by the V220 cordless optical mouse for notebooks on the low end and by the Performance Mouse MX and the Anywhere Mouse MX on the high-end, both of which feature Logitech Darkfield Laser Tracking for use on virtually any surface.

Our sales in the video category were down 5% with the decline entirely due to a product transition in our digital video security family as we make the way for the next-generation offerings coming later this year.

Sales in our webcam business were up by 5% with units growing by 4%.

We delivered double-digit sales growth in both the high end and the low end segments of the webcam category with overall sales growth in both EMEA and the Americas.

Shifting now to OEM where our sales fell by 38%, as expected the primary factor in the decline was the console gaming category where our sales were down by roughly 75% compared to the prior year.

As we have indicated previously, our sales of console microphones, which were very strong throughout the first three quarters of the previous fiscal year, are in the latter stages of the typical sales cycle that we've experienced in the gaming category.

Now, let me comment on LifeSize, which we're reporting as a separate channel along with retail and OEM.

As you know, we completed the acquisition of LifeSize on December 11.

The $2.3 million in LifeSize sales we reported as part of our Q3 results represents just a two week stub period.

Keep in mind that these sales were also negatively impacted by the need to align LifeSize with our fiscal calendar.

Looking at LifeSize in a pro forma stand-alone basis for calendar year 2009 their sales would've been roughly $80 million.

Let me now shift to gross margin.

Our gross margin improved by 340 basis points sequentially and by 400 basis points compared to the prior year.

Year-over-year increase in our gross margin was primarily due to the weaker US dollar compared to the prior year with the mix shift between retail and OEM also having a favorable impact.

We achieved strong year-over-year gross margin gains in the remotes, audio and pointing device retail product categories.

Turning now to operating expenses, both our engineering and our sales and marketing expenses were essentially flat, up by 2% and 1% respectively.

Our G&A expenses include $5.8 million in one-time costs related to the acquisition of LifeSize.

Excluding these costs our G&A spending declined by 7%.

I want to comment on two additional components impacting our net income.

Our net interest -- our interest income was down by $1.8 million as a result of both the lower level of cash, and earning lower interest on our cash balances this year than in the prior year.

Other income was down by $5 million due to a challenging comparable, as the previous year included unusually high exchange rate related gains.

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

Our cash position was $281 million.

Our cash declined by $244 million compared to the September quarter and was down $199 million versus the prior year.

The decline was entirely due to the $382 million in cash we used for the acquisition of LifeSize, which was completed in the last month of the quarter.

The difference between this $382 million cash outlay and the $405 million purchase price represents the assumption of LifeSize's net debt and transaction expenses.

When looking at the decline in our cash compared to the prior year, it is important to note that in addition to the LifeSize acquisition we also used $101 million for share repurchases during the last 12 months.

Our cash flow from operations for the quarter was $166 million, an increase of $75 million or 82% compared to Q3 of last year.

The key factors in the year-over-year improvement were the sequential increase in accounts payable and accrued liabilities, and the sequential decrease in inventory in Q3 this year compared to movements in the opposite direction in the prior year.

Cash conversion cycle in Q3 reached in all time low just 18 days.

31 days better than the same quarter last year due to Lower DSO and faster inventory turns this year and down 15 days sequentially compared to previous record-low set in September quarter.

I would like to talk about inventory.

Our inventory decreased by $105 million or 31% compared to the prior year and it was down by $4.9 million compared to the September quarter.

Our inventory turns were 6.9, up from 5.2 in the prior-year.

Our turns this year benefited from our channel partner's weeks of supply reset which is now complete across all retail regions.

DSO, our DSO reached a record low of 36 days for the quarter, down by 18 days compared to the prior year.

There were several factors driving the year-over-year improvement including excellent execution by our cash collections team, increased order and shipment linearity due to improved visibility in the channel, and the benefits of having the channel reset complete in our two largest regions from the start of the quarter.

Let me provide you with an overview of the LifeSize intangible assets that were added to our balance sheet in December.

Goodwill is roughly $303 million.

Our other intangible assets are roughly $74 million.

These other intangible assets which include existing technology, customer relationships, patents and trade name are all subject to amortization.

The amortization amount starting in Q4 will be roughly $4.6 million per quarter, with $2.8 million charged to cost of goods sold and $1.8 million to operating expenses.

The amount charged to cost of goods sold will decrease to roughly $2.2 million per quarter starting in calendar 2011.

Share repurchases, due to the significant cash outlay associated with the acquisition of LifeSize we chose not to repurchase any shares during Q3.

We currently own approximately 8.3% of our shares outstanding.

We have roughly $25 million remaining under our current repurchase program, as well as another $250 million approved in a program we have yet to utilize.

That concludes my comments.

Now let me turn the call back to Gerry.

Thanks Erik.

I want to comment now on our outlook going forward.

At the start of the quarter we said we anticipated a return to profit growth starting in Q3.

We delivered that and now we're on track to return to double-digit sales growth starting in Q4.

One of the key reasons for our confidence in delivering strong sales growth is the completion of channel reset.

With a strong product lineup across multiple categories, we believe our retail business is well-positioned to deliver year-over-year sales growth in excess of 20% during Q4, with the potential for double-digit growth in all regions.

Turning to OEM, the difficult comparable in OEM gaming is now behind us.

While we aren't anticipating growth in our OEM sales in Q4, we believe our year-over-year performance will be significantly improved relative to the last four quarters.

LifeSize is expected to make a meaningful contribution our sales growth in Q4, as this will be our first full quarter including their results.

Let me comment briefly on why I'm excited about the addition of LifeSize.

One of the hot topics coming out of this year's CES was videoconferencing.

In addition to a growing focus on videoconferencing for the office, there were announcements from several vendors with plans to bring video communication to the living room.

The growing awareness of and interest in video communication is right in line with one of our four strategic tenets of growth, riding the video wave.

It's clear that video communication is at an inflection point, providing us with a significant growth opportunity.

The acquisition of LifeSize allows us to leverage our combined strengths in high definition, high-quality webcams, ease-of-use and interoperability.

We plan to capitalize on this opportunity by delivering disruptive price performance offerings to both office and home environments.

A great example of this is the LifeSize Express 220 HD system, which was recently named an IDG technology of the year winner in recognition of its superior HD video, audio and bandwidth performance, ease-of-use and low cost.

I'm very pleased with the progress we've made integrating the LifeSize team into Logitech over the last several weeks.

While this is our largest acquisition to date, in many ways it is one of the more straightforward integration efforts that we have had.

For example, one of the bigger challenges and many of our prior acquisitions has been transitioning the responsibility for selling the products we acquire over to the Logitech sales force.

But in this case, we left the LifeSize sales force in place and undisturbed so they can continue focusing on their customers and out-selling their competitors.

We have already identified opportunities for technology and operational synergies with LifeSize over time.

But our focus today is on providing all the support they need to keep growing the business.

Speaking of LifeSize growth, for calendar 2010 we continue to expect that they will generate sales growth between 40 and 60% over calendar 2009.

That brings me to our financial outlook.

For Q4 we're targeting sales of between $500 million and $515 million.

We expect our gross margin to be around 34% and we anticipate operating income including the amortization of the LifeSize intangible assets of between $15 million and $20 million.

I want to wrap up by emphasizing that Q3 marked a turning point in our business.

As we continue to effectively execute the plans we have previously shared with you, our operating results have shown significant sequential improvement as we've progressed through the first three quarters of the year.

Our worldwide market share is stable or growing in all of our retail categories.

We said we would prioritize maximizing cash and we continue to demonstrate very disciplined cash management, achieving a record low in Q3 for our cash conversion cycle and generating nearly $300 million in cash flow from operations on a year-to-date basis.

We returned to year-over-year profitability growth in Q3 and we anticipate a return to double-digit year-over-year sales growth starting in Q4.

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

Yet at the same time, we continue to make the investments needed to drive long-term growth.

The acquisition of LifeSize is certainly the most visible of these investments, but there are several others that we believe are helping us build a solid foundation for Logitech's future growth.

You will be hearing more about these opportunities in the coming quarters.

Finally, as I said before, the economic storm will eventually pass and we're delivering on our goal to emerge stronger from it.

Our focus now is on returning to strong growth in our core business while simultaneously developing several new, exciting growth platforms for the future including LifeSize and others we shared with you at our recent investor day.

As we sit here one year after the worst economic storm in history took hold around the world, our confidence in Logitech's future has never been higher.

With that, we're now available to take your questions.

Please follow the instructions of the operator.

(Operator Instructions) Alexandre Peterc, Exane BNP Paribas.

Thanks for taking my question.

I would like you to expand a little bit on your growth opportunities in China which (inaudible) on the last analyst day and walk us through what has been achieved so far in terms of penetration of (inaudible) [five] cities there?

Thank you.

What I would say about China, what we talked about investor day in New York is a couple of things.

First, we're very happy with our business in China.

We have been successful there.

We have been doing very well.

Our statement about China was really the potential that we see.

One of the things that we said was we really believe that China can be and should be one of our top three markets sometime over the next five years.

And I would say that we're making very good progress to that.

Our real focus is on the top five cities or the Tier 1, 2 and 3 cities as they're called.

But part of the way we will achieve the great potential we see in China is expanding beyond the Tier 1, 2, and 3 cities.

But that is a multiyear process.

We're not try to get that all done at once and we will invest steadily and in a very stable way to get there.

But that is a multiyear process and I'm very happy with the progress we're making so far.

And this is out of housekeeping.

Could you share with us the level of 2009 sales of LifeSize would have been achieved, [if you could confirm with us] on the eventually (inaudible) the gross margin (inaudible) there if you can?

Yes.

I think, to make sure I get your question right, you were asking about LifeSize and their 2009.

So in 2009, LifeSize achieved on a calendar basis, stand-alone basis approximately $80 million of revenue.

We're not going to be disclosing revenue for -- or sorry, excuse me, we will be discussing revenue for LifeSize going forward.

But we will not be providing any guidance separately on LifeSize operating income or profitability.

Okay, thanks very much.

John Bright, Avondale Partners.

Erik, I was looking at the gross margins and it looks like you called out largely due to a weaker US dollar.

Would you give us the impact that had on the gross margins and reconcile that with the previous comments where we said gross margins usually would flush out versus expenses?

So, to give you a little bit of a sense, we don't break out gross margin in that level of detail.

But to talk about it a little bit more, as we said, there was a 400 basis point increase year-over-year driven by FX primarily, but also to some extent our retail OEM channel mix because that has changed.

But what I will also focus you on a little bit is the sequential improvement we've seen in gross margins.

It was 340 basis points from Q2 to Q3 getting us to the 33.9 and that was driven primarily by our retail product mix as well is a little bit of FX benefit.

So we're really trying to make sure we are focused on improving the gross margins over time and we feel good about what we've done over the last two or three quarters.

FX will always be a factor.

That is something we manage in terms of how we operate.

But that's how we think about it.

If I may, Gerry, typically Logitech has been a topline growth story where it looks like we're at bottom, returning to that channel health is improved.

When you talk about year-over-year double-digit sales growth, can you give us a sense of organically what you're expecting either in the upcoming quarter or the upcoming year?

And then, is this a statement we can extrapolate beyond calendar and fiscal, next calendar and fiscal year?

Yes, at this point John we're not saying anything about FY '11.

The first time we will talk about that will be the April cycle for earnings.

What you can conclude from what we've said is I think the most important signal, the two most important signals are that we've talked about getting this channel reset behind us, which has weighed down our topline sales growth, that we've returned to sell through growth in two of the three regions in Q3.

And we expect all three regions to show sell through growth in Q4, and that consumer demand is picking up and our products in particular are performing well.

And our focus is on keeping that trend going.

And if we keep that trend going, I think the topline will take care of itself.

Beyond that, we'll talk about FY '11 for the first time in the April cycle.

Last question.

You mentioned in your prepared remarks about the separate sales force, a bit different on this acquisition.

How is that going?

What are the risks associated with this acquisition and the two separate sales forces, particularly that you're focusing on the enterprise segment?

I would say as I commented during the call, the integration is going very, very well.

And in some ways even though this is a larger acquisition for us or the largest we've done, it is somewhat simpler in the sense that we are not completely integrating their product development efforts.

There's a lot of areas there where we see synergies and we're working on that.

But the sales force we've left it in tact and we said to them, focus on going out and selling because we're very focused on growing this business.

So I would say the integration is going extremely well.

I'm very happy with that.

In terms of your comment on enterprise, one of the things we see as a long-term potential for LifeSize is that they give us a bigger footprint into enterprise.

It's not the reason we bought them.

We focused -- our focus in acquiring LifeSize is really what we shared in New York, which is we really believe that video is the killer app of the next decade and it's at an inflection point.

And the two companies together can really pursue that opportunity.

But, in acquiring LifeSize, we do get a bigger footprint into enterprise.

And over time, I think that provides us a platform for growing our sales of other Logitech products.

Thank you.

[Jonathan Singh], Bank of America.

Just a question on LifeSize, I think when you talked to us back in November you said it was (inaudible) $90 million in revenues, now $80 million in revenues is the expectation.

I know (inaudible) expectations are still the same, just wondering did anything change since you last spoke to us in that business?

No, John.

The real reason I would say that they came in a little bit shorter than what we shared in November I would say is the acquisition itself.

They're still a fairly small company and managing through the complexities of being acquired by much larger company like Logitech is quite a task for the senior management of a small company there.

I'm not worried at all about where they ended the year.

The strongest statement from us is that we still believe in that growth potential between 40 and 60%.

The other thing I would say about how they ended the year is that the customer reaction to some of their new products, and you will get familiar with these products over time just like you're familiar with the Logitech products, but some of their products like a product called Passport, the customer reception to that has been extremely good.

This is a product priced under $5000.

It's one that we believe will be very disruptive in terms of really taking the market to the next level.

But the customer reaction to those products has been very strong.

The other thing I would say is on the day we closed the transaction, I was in Austin for the closing and in the afternoon I spent the afternoon with the management team going through their product roadmap for the next year and it's spectacular.

I'm really excited about it.

So I'm not concerned at all how they finished the year.

You can see we still believe they will grow very strongly in calendar 2010.

And you said before [expect some] neutral to be slightly accretive to operating income in the next year.

Has anything changed on that front?

We've said we still believe that ex acquisition charges, which is we said, we expect them to be neutral to accretive for fiscal 2011.

(multiple speakers) Are there any more restructural acquisition charges to come, or are all of the exceptions done on this thing?

No, actually to give you a little bit of a sense of that, we talked about the amortization of the intangibles.

The other thing I would point out is in Q4 and this is baked into our guidance.

With any type acquisition like this, you have purchase accounting rules to deal with things like deferred revenue.

In Q4 one of the things for us is there's about $5 million of deferred revenue from LifeSize that we won't be able to recognize under accounting rules.

So that would be the only other thing I would point out, but beyond that you have the schedule, the amortization and the balance over time.

So, would that be another $5 million charge effectively in Q4 are you saying?

Or (inaudible) topline, so it would be just slightly weak on the revenues.

Is that in your revenue guidance?

It just won't exist.

It won't get recognized.

It's not an actual write off or charge.

Thank you.

Michael Foeth, Vontobel.

I have a first question on the OEM.

You talked about the impact of gaming consoles.

Can you tell us what the dynamics for OEM in general are and what the drivers for OEM will be going forward?

Is there a structural decline also in that number?

Our OEM business going forward, we talked about the fact that it -- the comparables will be more normal.

We don't necessarily expect it to grow in the coming quarter.

The OEM business will be much more tied to -- it's really focused around PC and the desktop PC.

It is really the core business that you've known for long time which is primarily mice.

So as PC shipments goes, so will our OEM business for the next several quarters.

I think that's how you should think about it.

And just a question on the tax rate, can you give us a sense of the tax rate for fiscal 2010 or Q4 for that matter?

So Michael we're not going to be providing tax rate guidance, consistent with how we have operated in the past.

But I can give you little but of a sense of the tax rate we saw in Q3 which was low compared to historical standards for us.

The things that drive tax rate for Logitech is first the geographical mix of income between lower and higher tax jurisdictions and then also the impact of discrete events.

In this past quarter we actually had a number of discrete events and other things that benefited us.

So the one thing I would say is that 7% is a below normal tax rate for us.

I would expect to see that a little bit higher going forward.

We can't provide specific guidance simply because of the variability of the environment and not being able to predict when discrete events happen.

But that would give you a little bit of dimensionalizing around tax rate.

And then my final one on net working capital.

You did a fantastic job on cash conversion.

How should we think about net working capital going forward?

It should be going up as you start growing.

Yes.

No, I think the last part of your comment is right on the money there.

As we grow the business we would expect our cash conversion cycle would be a little bit longer and that would be consistent with historical trends.

But I would also add we feel very good in terms of what we've done over the last two or three quarters operationally because we've always said and Gerry talked about it earlier, our goal is to emerge stronger as the economy gets stronger.

And we feel the working capital things we've done have helped.

But to your point we would expect to see some growth in that number as we grow the business and grow the top line.

I think what you can expect, Michael, it will be tough to stay at 18 days, but I don't think 18 days is the point.

We're very focused on continuing to improve our use of working capital.

You can see it in the cash from operations we generated this quarter, which we're very proud of.

Wherever the CCC is next quarter or in the future, what you can bank on is we are going to continue to do the right things, the right operational decisions to continue to improve our working capital use.

You've always been cash flow positive in Q4 in the past.

Can we expect that as well for this Q4?

We're not providing specific cash flow guidance.

What I would say is, to Gerry's point, we feel good about the things we been doing from a cash flow perspective and we are going to be judicious in terms of the types of investments we make.

Thank you.

Chris Gretler, Credit Suisse.

Congratulations on a great quarter.

And I just had three questions essentially.

The first two relate to gross margin as well, and I was a little surprised on your comments on currency given that in the past it was said that currencies didn't have an overly high impact on gross margins.

So I was just wondering is you if you look at the order of elements like retail, product mix within the retail business and supply chain costs etc., how that has evolved over the quarter?

That would be my first question.

The second question is with respect to the OEM retail sales mix going forward, how we should think of -- you made some comments about the OEM in the question before, I think, how that is basically in your thinking going forward whether we should see some burden on gross margin going forward.

And the last question is recognizing if you compare selling and sell through for the quarter, the US is basically the first time we see sell in is actually above the sell-through growth rate.

There must be some restocking taking place in the Americas (inaudible) and also the business that (inaudible) when it was the opposite.

Do we see that in OEM systematically or is it just a quarterly blip here?

I will try to take those one by one.

On gross margin, there are always several things impacting our gross margin including FX is one, product mix is one, input costs and the mix of retail and OEM.

What we said in the past that is we believe over time, our long-term range is 32 to 34 and we will manage these various impacts which sometimes they're good, sometimes they're bad, and keep our gross margins in the long-term range.

The strongest statement I can make is that as we go into Q4 we believe our gross margin will remain at the high-end at 34% based on the outlook we've provided.

I'm very comfortable with where we are.

We obviously don't each control exchange rates, but we're one month into the quarter and we feel comfortable with providing that outlook.

So, that's what I will say on gross margin.

The other thing we said in the past is we try and price our products over time to try and address the impacts of gross margin, but we try to do that prudently.

In a weaker demand environment we're not going to try and offset that because it could weaken consumer demand for our products.

We're going to be smart about that.

Relative to OEM, I'll repeat what I said earlier.

I think it was to Michael's question which is we're past these somewhat distorted comps because of the large microphone sales.

And our OEM business is really kind of returning to base course in the sense that it is really around the desktop PC.

It's primarily around mice, also some keyboard sales, etc.

We've always said OEM is a lower margin business for us, but it is profitable and we expect to continue to have it be profitable.

It provides us very strong volumes to put through our factory.

It helps us improve our quality.

It's always been a strategic part of our portfolio and will remain so.

Lastly, sell-through/sell-in.

The key thing to take away there is that we've got this channel reset behind us in all three regions now.

And we expect to get to sell-through growth in all three regions in Q4 and our focus really is on keeping it there.

We believe that sell-in and sell-through will more or less move together now.

They won't always move perfectly together because we will have some quarters where we're shipping a lot of product in for new product introductions, for example.

It's not that they're going to be perfectly aligned but they're going to be much more closely aligned than they have in the past few quarters because of the channel reset.

So, yes, we saw sell-through growth in the Americas.

We're very pleased about that, sell-through growth in Asia and we expect all three regions to show sell-through growth in Q4.

Okay, fair enough.

Thanks.

Simon Schafer, Goldman Sachs.

Thanks so much.

My first question would be related to your thoughts on the longer-term margin structure and growth opportunities for the business.

Now that you've had a few months to assess the growth and margin accretion opportunity of LifeSize, how are you thinking about the structural margin opportunities for the overall business?

Well, we haven't said anything different about our long-term business model Simon.

We still believe -- we're not changing that and we believe that we can still deliver -- we will get back to delivering double-digit growth on a consistent basis.

We still believe that the 32 to 34% gross margin range is valid and we're still targeting to get back to long-term operating margins of 12% or better.

We certainly believe that LifeSize will support that long-term business model over the long-term.

It may even help.

We're not saying anything different now.

If we do, we'll obviously share that at an investor day.

But I definitely believe that LifeSize fits in well with our business model.

But would I be mistaken to assume that perhaps if the growth level at LifeSize is, as you say, close to 50% and clearly the gross margin structure of that business is at a substantial premium, once you have gone through the integration and so on and you have created synergies, shouldn't it be providing you with an incremental margin uplift if the rest is staying the same?

Yes.

I think if you look at LifeSize today it's a fairly small portion of our overall sales.

It's less than 5% of our sales.

But our focus, as you correctly point out, is on growing that business aggressively.

And it does have a higher margin structure than the core business.

We believe they will be able to keep it there through product innovation.

As it becomes a larger part of our business, yes, there is the potential that it could be accretive to our gross margins over time, absolutely.

Great.

Thank you.

My second question would be, and sort of a follow up on a previous, as you showed clearly this differential between sell-through and sell-in is progressing, it's clearly suggesting you are in channels rebuild -- inventory rebuild mode now.

When does that begin to normalize?

When do they actually align with each other?

So when does that whole reset, that whole cycle complete?

In our view, starting with Q4, sell-in and sell-through are going to move more -- and I'm talking about the absolute level of sell-in and the absolute level of sell-through, as opposed to thinking about the growth rates, that they will move together.

And that starts in Q4.

There will be selective restocking by some retailers because maybe they got their inventories too low on an individual product.

But I would emphasize the word selective.

We're not planning on, and I would encourage you not to think about, the idea that there will be a big restocking impact going forward.

We're not encouraging retailers to do that.

We're trying to operate at these new lower levels.

And there is selective restocking as I said, but in general we believe sell-in and sell-through are much more closely aligned now and will be going forward.

I see.

Thanks.

Just as a clarification on that, in a period when channel sell-in is outpacing sell-through, is that margin accretive on a gross margin level?

I would not say that, no.

Thank you very much.

Ashish Sinha, Morgan Stanley.

Hi, guys.

Just a couple of quick questions if I may.

Firstly congratulations on your wonderful quarter.

My first question is relating to competitions, or if you could give us an update on that.

And what I hear -- what I mean specifically is that at analyst day you mentioned the Chinese competitor Rapoo.

So while drafting out your China expansion strategy, what have you taken into account over there?

And are you seeing any recent updates or any recent moves from this particular competitor?

Secondly my question is on the videoconferencing opportunity.

At the CES I believe Skype announced [tying] up with a couple of HDTV vendors offering HD video communication on some enabled TV sets, starting to ship later this June.

So if we could have your thoughts on that, that would be great.

Thanks.

First talking about -- let me talk about competition in general.

As we said in the prepared remarks, our market share across categories on a global basis is stable or growing in every one of our categories, so we're very happy with where that's at.

When you see some of the things we've talked about with success of various products in the quarter, I'm encouraged we will certainly be able to maintain that and possibly even improve it.

We faced competitors like Rapoo in China and other markets in Asia for our entire history.

We've always had the same philosophy, which is good competitors make you better.

There's nothing particularly unique about Rapoo to report.

We're competing with them and a lot of other companies in China.

And as I said to one of the first questions, I'm very pleased with the progress we're making in China overall.

Relative to CES and Skype, a couple of things.

Just to remind everyone, Skype is and remains a very important partner of Logitech's, and by the way they have been and remain a very important partner of LifeSize's.

So we continue to work Rick closely with Skype.

And relative to some of the announcements at CES, all I can say you did not hear us announce anything at CES.

But I would just say stay tuned for the next couple of quarters.

You will definitely be hearing a lot from Logitech relative to this space.

The announcements that were made at CES, what encourages us about that is we think it is an affirmation of something we said relative to LifeSize that video is the killer app of the next decade and it's a large market today and growing.

It's an attractive market and attractive markets attract a lot of competitors and that's okay.

We'll be there.

We'll compete innovatively and you will hear some really interesting things from us over the coming year.

Great, thanks.

Andy Hargreaves, Pacific Crest.

Thanks.

Just kind of an age-old question at this point, but I want to ask the question about attach rates on some of the new, more mobile PCs because it was definitely an excellent quarter.

You guys did a really good job of returning to growth in the categories.

But we had an incredibly strong PC environment and all of your PC categories seemed to underperform what global PC sales were.

So can you just kind of update us on what your thoughts are on attach rates and your ability to extract gross profit dollars on the attach?

Well, I would go back to something we talked about in the call, which is in a quarter where the general economic environment is still somewhat subdued, we had our best quarter ever in cordless mice.

And we did well, as both Erik and I pointed out, at the high end with our new products like the MX Anywhere.

That's the one that features the Darkfield technology.

And at the low end with products like the V220, which is our best-selling mouse.

We took note of fact that there were a lot of Netbooks sold in the quarter.

We've maintained, as you know, from research that we've done that Netbook owners want to go out and buy a cordless mouse, and we believe a lot of them probably did.

We think they were probably some of the drivers of all of those sales of cordless mice we had in the quarter.

I think Windows 7 probably helped, PC sales in general helped.

If you look at webcams, 5% is not where we want webcam sales to be long-term.

But we're very pleased with that number.

And so, and we hit some very good selling keyboards in the quarter as well.

So, I'm very happy with how our core business performed and it's building momentum.

And I think it will be even better certainly in Q4.

Thanks.

Tavis McCourt, Morgan Keegan.

Thanks for taking my question.

Gerry I think the only thing I really want to dig a little more into is the LifeSize expectations for this year.

I want to make sure I have it right in terms of 40 to 50% growth off that $80 million number.

And also you expect to be neutral to slightly accretive, but that excludes the amortization.

Is that correct?

That's correct.

You are thinking about it correctly.

Okay.

And then in terms of the sell-through, EMEA sell-through is still pretty weak, but you mentioned you would expect that up in March.

Is that because just the EMEA region in general kind of entered the recession a little later so there's easier comps?

Or is there new specific products that are coming out for EMEA in this March quarter that gives you that confidence?

Two things.

EMEA was weaker than the other two regions, but it also had the biggest sequential improvement versus Q2.

So, we really saw a big pickup sequentially in sell-through.

The biggest difference versus the Americas is that you still have a bit of a drag in EMEA from emerging markets.

And they are stabilizing, but they were hit the hardest of all of our markets in EMEA.

The larger markets, the UK, France and Germany, have actually performed better and stabilized more quickly.

I think the other thing you correctly pointed out is that EMEA kind of went into this global downturn a little bit later than the Americas and we expect it to come out a little bit later.

But I just see a general pickup of sell-through in customers and I do see that the emerging markets are not healthy yet, but they stabilized and are starting to improve.

You put all of those things together and that's why we think EMEA will get back to growth in the quarter.

Okay.

And then on LifeSize compensation, is there any contingent payouts for performance this year for the LifeSize management team or are they under the same incentive that you guys are on?

Yes, to give you a little bit of a sense of that, LifeSize is under the same incentive plans that we run here at Logitech.

We're not disclosing anything more specific about things we do with them.

But with all of our employees, we've got them aligned with where we want to grow and how we want to run the business.

There's not an earnout, if that's what you (multiple speakers)

Yes, that's basically (multiple speakers)

There's not an earnout.

Yair Reiner, Oppenheimer & Co.

Most of my questions have been answered.

Just on the remote side, a very strong quarter.

Can you talk about how sell-in differed from sell-through?

We don't get into specifics by category.

But one thing I would point to that Erik called out was we had a 45% growth in retail sales at the top line and a 13% growth in units, and that tells you a lot right there.

The main reason for that is we sold a lot of the new Harmony 900, which is a $399 suggested retail price and it was received very, very well.

But we also had good performance with Harmony One which is a more moderately priced product.

So I was very pleased by that.

Got it.

In terms of gross margin, is it -- you were able to rebound to kind of the higher end of your historical levels relatively quickly, impressively so.

Is it time to kind of update where the long-term gross margin target is for the company, especially given the fact that LifeSize is going to be margin accretive over time?

Yes.

In answer to Simon's question, what I said was I do believe the potential is there for it to become accretive over time as it grows and becomes a bigger part of our mix.

But we're not saying anything different about our business model.

If we get to the point where we really want to update our business model we will certainly share that with you.

But for now, we are focused on growing LifeSize and we're very comfortable that the long-term business model is still valid.

One final question from me.

On the gaming side, are there any new major new releases you're looking forward to this year or should we think of that product line as basically being seasonal for the near future?

We have had products out for Gran Turismo 5 for a long time, so we're still waiting like the rest of the world for the release of Gran Turismo 5.

And we have a number of other things that we're working on, but there's nothing specifically to share beyond GT5.

Thank you.

Nicholas von Stackelberg, Sal Oppenheim.

Thanks for taking my question.

Just a housekeeping one is left for me it seems.

Your cash flow statement shows an acquisition related cash out of 389.

If you factor in the acquisition cost you pulled through your P&L, it still leaves about a 10 million to 11 million gap versus the announced $405 million charge for the acquisition of LifeSize.

Does this imply that on your liability side there are some interest-bearing liabilities on your balance sheet now related to the acquisition?

So to answer your question about the last part and I'll come back to the first part, there are no interest-bearing liabilities on the balance sheet.

At the time we acquired LifeSize they actually had some outstanding debt instruments that we repaid post acquisition.

So it's net of debt from that perspective.

So that explains the gap to the $405 million that is featured on your original press release?

Yes, that explains the gap between the $405 million and what we originally released.

And what you're saying is that's something you already paid out or paid back in the prior quarter?

Correct.

So there is no ongoing liabilities, interest-bearing liabilities related to that LifeSize acquisition.

Okay.

On LifeSize, you mentioned at the Capital Markets day but also on today's call that we should stay tuned and look out for new products.

When do you think we will see the first combined product offerings?

Truly combined, fully integrated products from Logitech and LifeSize?

We're already working on -- we've been working since the day the transaction closed on R&D synergies and they'll show up in areas like camera design, firewall traversal, things like that.

LifeSize using our Logitech Vid software platform, particularly for SMB customers.

It's not that you would necessarily see a Logitech LifeSize product.

You will see products where we've borrowed some of their technology in let's say webcam design, or they have used some of our technology in some of their products like the Passport which is the product priced below $3000.

But those synergies are have already been identified in terms of our overlapping roadmaps and I think you'll see them over time in the coming year.

Okay.

And then a final one on share buyback, you have clearly managed your cash flow extremely well again in the third quarter.

What was the rationale from not buying back any more shares in Q3 please?

To give you a little bit of a sense in terms of how we think about share buyback, it's very consistent with what we said at our analyst day and what we said in the past, is with the cash flow that we generate there's two primary things we're going to do.

Obviously we are going to repurchase shares at points in time and we will do acquisitions.

We're going to be opportunistic on both of those.

So going forward we're not going to provide specific guidance.

But what I would say is that trend is going to be the same and you could see us come into the market to buy at different points in time.

You'll see us continue to find opportunities to do acquisitions when they make sense for us, so it will be a combination of both and that will be consistent.

But I think if I heard your question right, you asked why we didn't do in Q3 and the answer quite simply is that we were focused on LifeSize.

And we knew that there was a strong chance we would be buying this company, so our primary use of cash or our priority for cash was LifeSize.

Erik answered our philosophy going forward and we'll continue to use our cash to buy shares when we think it makes sense.

Andreas Mueller, ZKB.

Good morning.

I have a question on OpEx progression going forward excluding the LifeSize intangible amortization.

Looking at China and LifeSize, what will change in the marketing and sales, R&D and G&A items?

And when do you think the long-term goals are really in the cards for these items?

I'm not sure this is what you're asking, but here's how I'm going to answer the question.

Let me talk about what our focus is going forward in terms of financial priorities.

If you look at the past year, where we've used this term about emerging stronger from the economic downturn, we've steadily and systematically focused quarter-by-quarter on addressing certain things, starting a year ago with our cost structure.

As you know we reduced it, we think, dramatically and appropriately to help us get through the downturn.

Our second focus was on resetting the channels in cooperation with our channel partners.

Our third focus financially was to get our gross margin back in the long-term range which we did this quarter.

Our focus for Q4 is on reigniting topline growth.

Q4 would be the first quarter in six quarters where we have grown, and so our focus going forward will really be on rebuilding operating leverage.

What that means is, and we're going to need several quarters to do that, Q4 is the first quarter in six quarters where we will have shown topline growth.

And obviously for our operating margins to start to expanding again we're going to need the OpEx line, and this is how I'm trying to address your question, the spending line to grow less quickly than the topline grows to start to rebuild that operating leverage and get op margins back towards their long-term goal.

So, in the context of these various investments, we will prioritize the ones we see having the potential for the greatest returns, and it means we will be extremely tight on other things like headcount.

We will be adding the headcount in certain areas like China and areas like the digital home where we see a lot of growth potential.

And we'll be very -- severely restraining, for example, headcount and other spending in areas where we see less growth potential.

But we are very focused over the coming quarters to rebuild operating leverage and that means we have to contain the growth of operating expense relative to revenue.

And on the promotional pressures which hampered you in the last couple of quarters, are they completely gone now with the general reset?

Or are there still some promotions out which could ease going forward?

Here's how I'd encourage you to think about that.

There's always a certain level of even in what I would call very normal healthy economic times, there's always a certain amount of promotion in the market place.

Retailers use promotion to bring people into their stores etc.

There is still -- the retail environment is still somewhat promotional in general.

I think it is definitely less -- I know it is definitely less promotional for us for two reasons.

One is we moved quickly to get this channel reset behind us.

That was the biggest thing putting promotional pressure on our products and on our margins.

It's completely behind us now with the APJ, the APAC reset.

The other thing is we were anxious to get it behind us in the largest markets as we have been saying to you so that our new products made it to the shelf.

And you saw how well they performed in Q3.

There's less need for a retailer to promote a brand-new product.

So, we clearly believe we're seeing less promotion on our products because we have more new stuff out there than a lot of other companies.

So, I would say in general, the environment is still somewhat promotional.

It is less so for us for the reasons that I just described.

Thank you.

And my last question on gross margin as well, the guidance of 34%.

Are there the same factors at work, FX, mix and so forth in Q4?

Or is there a change within these factors?

So, to answer your question, the same factors are all at play in any given quarter.

Gerry talked about that a little bit earlier.

But when we go out and put together our guidance we take into account everything we currently know about FX, what we anticipate related to retail OEM mix as well as product mix and all of that is factored in.

So it's nothing different as we look forward to Q4.

The only other thing I would add, obviously we don't control and we don't know where FX is going.

The dollar could strengthen rapidly.

We don't know.

But we're one month into the quarter and we're comfortable giving you an outlook of 34%.

So that tells you how we feel about it.

Okay, thank you.

Ladies and gentlemen, that concludes our conference call today.

You may all now disconnect.

Good day everyone.