羅技 (LOGI) 2011 Q2 法說會逐字稿

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

(OPERATOR INSTRUCTIONS).

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

I would now like to introduce your host for today, Mr.

Joe Greenhalgh, Vice President of Investor Relations and Corporate Treasurer at Logitech.

Please proceed.

Welcome to the Logitech conference call to discuss the Company's results for the second quarter ended September 30, 2010.

The press release, a live webcast of this call and the Company 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 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 include those set forth in Logitech's annual report on Form 10-K, dated May 27th, 2010, and subsequent filings, which are available online on the SEC EDGAR database, and in the final paragraph of the press release reporting second results issued by Logitech and available at logitech.com.

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

Forward-looking statements made during this call represent management's outlook only as of today, and the Company undertakes no obligation to update or revise any forward-looking statements as a result of new developments or otherwise.

We would like to remind you that this call is being recorded, including the question and answer portions, and will be available for replay on the Logitech website.

For those of you just joining us, let me repeat that the 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.

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

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

I will cover the highlights of the quarter now, which will be followed by a more detailed review of the financial results by Erik.

Then, I will return to talk about our outlook for the year before we both take your questions.

I am very pleased with our results for the quarter.

We delivered double-digit growth in both sales and operating income, and we achieved the highest quarterly gross margin in our history.

Consumer demand for our products remained strong during the quarter, with double-digit sell-through growth in all our retail regions.

Our regional sales performance was led by Asia-Pacific.

Our sales in this region grew by 38% year-over-year, led by an exceptionally strong quarter for both sell-in and sell-through in China.

We are still in the early stages, but we are making excellent progress toward our goal of growing China into one of our top three markets.

Remotes was once again our fastest-growing retail product category, with sales up by 28% and units growing more than twice as fast.

We also achieved strong sales growth in pointing devices, keyboards, and webcams, our three product categories tied most closely to the PC platform.

And we continue to build sales momentum with our LifeSize business.

During Q2, LifeSize's unit sales increased by 64% compared to the prior year, and reached an all-time high for a single quarter.

We are well on our way to deliver on our sales growth target of 40% to 50% in calendar 2010.

A significant highlight in the quarter was our gross margin of 37.3%, the best quarterly growth margin we have ever achieved.

I was particularly pleased to see that we were able to achieve this record-breaking margin despite the negative impact of the weaker euro.

Overall, our gross margin is benefiting from several factors, including positive consumer response to our new products and operational improvements we made during the course of the last year, but we're focused on improving our profitability as global economic conditions gradually improved.

And finally, a key, non-financial highlight for the quarter was completing the many activities associated with what is arguably the most exciting launch in the Company's history, our product portfolio for the Google TV platform.

I couldn't be more pleased or excited about the potential this platform holds for Logitech, and I will talk more about it in my comments following Erik.

So, let me now turn the call over to Erik to review the financial highlights for the quarter.

Thanks, Gerry.

I'll start with an overview of our Q2 sales performance.

Please note that the gross percentages that follow are in comparison to Q2 fiscal 2010.

Our retail sales grew by 11% and were up by 15% in local currencies.

Units were up by 18%.

Looking at our regional sales in local currency, EMEA was up by 6%, and Asia-Pacific by 35% compared to a US dollar decline of 3% in EMEA and growth of 38% in Asia.

Retail units were up by 13% in the Americas, by 5% in EMEA, and by 66% in Asia-Pacific.

Our overall retail average selling price in Q2 was down by 6% from the prior year and up by 4% sequentially.

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

As Gerry mentioned, the remotes category was our best-performing product family in the quarter, with sales up by 28% and units up by 71%.

Growth was driven by multiple products, with the Harmony One leading the way.

Significantly stronger growth in units reflects the contribution from two of our newer remotes, the Harmony 300, our lowest-priced remote at just $49, and the Harmony 650, priced at $99.

We were pleased with our results in the keyboard and desktop category, with sales up by 19%.

We saw double-digit growth in both sales and units in the corded and cordless categories.

Growth was strongest in the low-end, with sales and units both up in excess of 25%.

It was a very strong quarter in Asia-Pacific, with both sales and units nearly doubling.

Our sales in the video category were up by 18%, with units up by 28%.

We achieved sales in unit growth in both the high end and the low end of the major webcam price bands, with particular strength in the high end.

Sales in the high end benefited from strong demand for our HD Pro Webcam C910, which features full HD 1080p video recording, as well as HD 720p video calling.

We achieved sales in unit growth in webcams across all three regions.

Our recently launched Logitech Alert line of digital video security systems also made a notable contribution to our growth in the video category during the quarter.

Sales in the pointing devices category were up by 18%, with units up by 26%.

Growth was driven entirely by our cordless mice, with sales up by 34% and units by 61%.

We achieved triple-digit sales growth in both the high end and the low end of the major cordless mice price bands.

Sales in the high end benefited from the continued strength of our two high-performance MX offerings, featuring dark-field laser tracking for use on virtually any surface, while sales in the low end were led by two of our attractively priced wireless mice for notebooks, the M215 and the M305.

It was an exceptionally strong quarter for cordless mice sales in Asia-Pacific, with sales more than doubling and units nearly tripling.

Sales in our audio category were essentially flat, down by 1%.

The decline was mostly driven by the speaker category where sales fell by 7%, primarily due to weakness in EMEA.

We achieved strong growth in PC headsets, as well as in our Squeezebox family of streaming media products.

Turning now to OEM, where sales were up by 10%, growth was led primarily by our OEM keyboards, with sales and units both up by 50%, as well as our microphones for console singing games.

Let me now shift to gross margin.

Our Q2 gross margin improved by 680 basis points compared to the prior year and by 200 basis points sequentially.

The year-over-year increase in our gross margin was achieved despite a stronger US dollar, and was driven by a number of factors, with favorable product mix shifts having the most significant impact, followed next by operational efficiencies in our supply chain and then by the contribution from LifeSize.

As an example of product mix shifts, we achieved strong double-digit growth in pointing devices and video, two of our highest-margin retail categories.

While sales were flat in audio, a comparatively low-margin category.

We also achieved significant year-over-year gross margin gains in two fast-growing categories, remotes and keyboards.

Turning now to operating expenses, our operating expenses were up by 33%.

The prior year's expenses do not include LifeSize, which was the single largest driver of the year-over-year increase in Q2.

Excluding LifeSize, our operating expenses grew at a double-digit rate, but still much slower than our growth in gross profit, as we focus on steadily rebuilding operating leverage over time.

The increase spend reflects both the significant improvements in the operating environment of the last twelve months and our renewed emphasis on driving top-line growth.

We are investing in a number of areas and activities, including but not limited to Google TV, that ensure where positions drive profitable double-digit growth in the quarters to come.

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

Our quarter-ending cash position was $308 million.

Our cash was down by $10 million from the June quarter and down by $217 million compared to the prior-year.

Looking at the decline in our cash compared to the prior year, it's important to note that we used $382 million for the acquisition of LifeSize in December of 2009, and another $126 million for share repurchases during the last twelve months.

Our cash flow from operations in Q2 was a negative $1 million, a decrease of $59 million compared to the same quarter last year.

The primary driver of the year-over-year decline was the sequential increase in inventory this Q2 compared to just a 2% sequential increase in Q2 over the prior year.

Note that the absence of significant sequential inventory growth of Q2 of last year was highly unusual and reflected the combination of our channel partners' ongoing efforts to reduce their weeks of supply and our prudent approach to inventory at a time when there was still a high degree of economic uncertainty.

The 23% sequential increase in inventory of Q2 of this year was similar to the increases we experienced in FY '09 and prior years, especially in light of the increase of Google TV-related products.

Our cash-conversion cycle in Q2 was 41 days, 8 days higher than the same quarter last year, primarily due to the inventory dynamic I just mentioned.

Our inventory increased by $103 million, or 43% compared to the prior-year, and it was up by $63 million compared to the June quarter.

Inventory turns were 4.3 down from 5.8 in the prior year.

The increase versus the prior year was driven by three factors, the inclusion of LifeSize and Google TV-related products, the improved demand environment, and our decision to establish an inventory buffer for the holiday shopping season.

The combination of LifeSize and Google TV in Q2 of this year added roughly $23 million more in inventory and 10 percentage points of inventory growth compared to the prior year.

The demand environment has clearly improved over the last twelve months.

Given our channel partners' relatively low inventory levels, by historical standards, we chose to carry somewhat more inventory entering the current quarter so that we're prepared to help them take advantage of any upside during the quarter.

Our DSO was 47 days, unchanged from the prior year.

We did not repurchase any shares during Q2.

We own approximately 7.7% of our shares outstanding, and we have a $250 million Board-approved program that we have not yet utilized.

Before concluding my comments, I want to remind you that our next Analyst and Investor Day is scheduled for November 9, in New York.

We hope that you will be able to join us.

That concludes my comments.

Let me now turn the call back over to Gerry.

Thanks, Erik.

I want to comment now on our improved outlook going forward.

As you saw in our press release, we've increased our full fiscal-year outlook for sales, gross margin and operating income.

Let me start by giving you an overview of the reasons for our increased confidence as we enter the second half of the year before I summarize the changes to our outlook.

Starting with sales, the driving factor in our improved outlook for the remainder of the year is the launch of our line of products designed to create the best Google TV experience for the millions of US households with an HDMI-ready TV.

We are committed to driving a successful launch and a strong adoption rate for this new platform, which we believe has the potential to provide us with yet another sizeable and growing install base to generate incremental sales over an extended period of time.

Our product portfolio for this new platform currently includes the Logitech Revue, a compact plug-and-play companion box that incorporates our Harmony remote control technology and comes with a Logitech keyboard controller.

Also part of the portfolio is the Logitech TV Cam with vid HD service for HD video calling from the living room, the Logitech mini-controller, as well as several iPhone, iPad and Android applications designed for the Google TV platform.

With this initial line of products which we will substantially expand over time, Logitech will have redefine the user experience in the digital living room.

I think it's important to remember that we are at the very beginning of this exciting opportunity.

Our products started shipping in the US just last week.

They are currently available at Best Buy, Amazon, and through our own website, as well as through the Dish Network.

As we move into the March quarter, we plan to significantly expand our retail distribution to include more of our channel partners in the US.

We also expect that the Google TV platform will become available in Europe during calendar 2011.

While it's obviously premature to draw any firm conclusions, we are very pleased with the initial enthusiasm we have seen from consumers and with the extensive coverage in the technology and general media.

We look forward to learning much more about consumers' response to this promising new category in the coming months.

I want to reiterate something that we said last quarter, namely, that we plan to invest the gross profit we generate from sales of our Google TV products this fiscal year into consumer-focused marketing activities to create additional awareness that, we expect, will ultimately lead to future sales.

We therefore expect sales of our products for Google TV to be operating-income neutral this fiscal year as we focus on building the foundation to make this a long-term source of profitable growth.

Thus, our increased outlook for operating income for FY '11 is driven by improvements in our core business and by the growing impact of LifeSize.

Let me now turn to LifeSize.

Just last week, we announced a major addition to our LifeSize product portfolio, the LifeSize Bridge 2200.

the first bridge developed and manufactured by LifeSize, this product enables organization to take a building-block approach, scaling videoconferencing deployments as needed while providing the best high-definition experience available on the market.

Based on a modular architecture, the LifeSize Bridge empowers companies to purchase the appropriate number of bridges to accommodate their current needs with the ability to easily add capacity as their HD videoconferencing needs grow.

As you would expect from a LifeSize offering, the LifeSize Bridge offers disruptive price performance.

In fact, the Bridge 2200 can deliver 7020p 60 and 1080p 30 HD quality at less than one-third the cost of other solutions in the market today, and it's just the beginning.

We will continue expand our LifeSize portfolio of products and services in the coming months with additional disruptive price-performance offerings, designed to make video communication easy and accessible to anyone anywhere, with the biggest opportunities in the SMB and small enterprise space.

Let me focus now on our retail business.

During the September quarter, we launched the majority of our new products for fiscal 2011.

we are excited about this year's product roadmap, and are very pleased with the initial response we've received from consumers and all our channel partners.

We expect these products to make a significant contribution to achieving our increased sales and profitability goals this fiscal year.

Let me highlight several of our innovative offerings, starting with the audio category and the Logitech wireless speaker Z515.

The Z515 delivers great sound from a laptop, iPad, iPod, iPhone, or Smartphone without the hassle of cords.

The speaker uses 2.4 GHz technology to deliver wireless audio up to 50 feet away, delivering full-stereo sound and plenty of bass.

The Z515 also includes a rechargeable battery that can power the speaker for up to 10 hours.

Moving to the keyboard category, we launched the Logitech wireless illuminated keyboard K800.

The K800 features include smart backlighting and motion sensing.

The backlighting automatically adjusts based on the amount of light in the room using ambient light sensors, while the motion sensors approach movement as the user's hands approach, to turn the backlighting on or to turn it off as the hands move away, conserving battery life when backlighting isn't needed.

And then there's the latest addition to the video category, Logitech Alert digital video security, a complete HD video security system.

The Logitech Alert master system comes with a smart HD camera, powerful PC and web software, and free remote viewing on a PC, Mac or Smartphone.

The camera includes a 2 Gigabyte Micro-SD card for storage, eliminating the need for the PC to be on while recording video when motion is detected.

Consistent with our vision to bring HD video to anyone, anywhere, we are excited to be able to bring a completely new video security solution to consumers and small businesses which offers HD video quality and motion-triggered live viewing and recording at attractive price points.

Let me shift now to the demand environment.

As was the case following Q1, our increased sales outlook is not predicated on an improvement in overall consumer demand for our products.

As mentioned earlier, it primarily reflects the impact of the introduction of our line of Google TV products.

If the overall demand environment improves in the second half, that could represent upside to our outlook.

Let me comment briefly on gross margin and operating expenses.

We've been extremely pleased with our strong gross margin performance during the first half of fiscal 2011.

At 36.4%, our first half gross margin was well above the high end of our long-term range and was achieved despite a relatively weak euro for most of the period.

Our confidence in delivering a similar gross margin during the remainder of the fiscal year reflects positive developments in our core PC-related business, independent of the contribution from LifeSize.

Looking forward, we are confident that LifeSize will become increasingly accretive to our gross margin as it becomes a bigger piece of our overall business.

Given our recent performance, as well as our increased gross margin outlook for fiscal 2011, we are re-evaluating our long-term gross margin range, and you can expect to hear more from us on this subject at our upcoming analyst and investment events on November the 9th.

Let me now discuss operating expenses for the rest of the year before summarizing the changes in our outlook.

As Erik said, LifeSize was the biggest contributor to the year-over-year growth in our operating expenses during Q2.

Investing in LifeSize to achieve its long-term growth potential, will continue to be one of our top priorities.

Looking at the rest of our business, we will continue to prioritize our spending in categories, geographies and markets, including Google TV, China, and other emerging markets, that provide us with the highest potential long-term return.

Even with these investments, excluding LifeSize, you can expect that we will continue to grow our operating expenses at a slower rate than our gross profit during the remainder of the fiscal year.

Finally, let me summarize our improved financial outlook.

For fiscal 2011, we have raised our sales outlook from the previous range of $2.3 billion to $2.35 billion, to the new range of $2.35 billion to $2.4 billion.

We have increased the target for operating income from the previous range of $160 million to $170 million to the new range of $170 million to $180 million, and we now expect gross margin to be approximately 36% for the year, up from the previous range of 34% to 35%.

We continue to expect our tax rate to be approximately 16%.

I want to wrap up by saying that I am very pleased by our performance in the first two quarters of fiscal 2011.

We entered the second half with strong momentum, focused on sustaining double-digit growth in our core business while simultaneously developing the LifeSize and Google TV opportunities.

Since the start of the fiscal year, we've increased our outlook for sales by as much as $100 million, the outlook for operating income by $13 million to $20 million, and for gross margin by 200 basis points.

Our improved outlook reflects a combination of our strong first-half performance and the many attractive growth opportunities for us, and I am confident that we are well-positioned to achieve our increased targets.

With that, Erik and I are now available to take our questions.

Please follow the instructions of the operator.

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question will come from the line of Alexandre Peterc with Exane.

Please proceed.

Yes, hi, thanks for taking my question.

I would just like to clarify with respect to your guidance upgrade.

Can you tell us if your previous guidance was already including any of the Google TV impact at all or not?

And then secondly, just from a housekeeping perspective, are you going to report the growth in revenue separately?

Thanks.

Hi, Alexandre.

To your first question, in terms of what was previously in our guidance, we had talked about this last quarter, there was no revenue or sales baked into our guidance previously.

We did talk about the fact that because we had been working from an R&D perspective on Google TV in previous quarters, that had been included, but there was no sales, so our upgrade in guidance now does include everything that's Google TV related.

And could you actually-- oh, what we're going to do is, you'll see it in our digital home group, which is the same place where we report our Harmony remote controls today.

Okay, thanks very much.

And our next question comes from the line of Jonathan Tseng with Merrill Lynch.

Hi, Johnny Tseng here.

You talked about getting supply chain improvements there.

Does that mean that the gross margin is sustainable at these levels if the mix stays where it is, or, so, would you leave it at your 32%, 34% gross margin range anymore?

Yeah, Johnny, so--

Another question from H1 to (inaudible), I think.

Say again?

The kind of questions you were getting in H1 of 2008, I think.

Yeah.

So, obviously, we're very pleased with the gross margin performance, and I think a number of the changes that we made I referred to as things that we did over the past year to improve profitability I think are sustainable.

Let me give you a couple of examples of things that we did that we're continuing to work on and, I think, will be sustainable going forward.

During the past year, one of the things we looked at was, for example, the number of SKUs that we offered, and particularly when we worked with our partners to reset the channel levels, one of the things we looked at was, we had too many low-performing SKUs, SKUs that were generating relatively low sell-through volumes.

And, frankly, we went back and systematically cleaned a lot of those out.

And they help us in a lot of ways.

They help us in supply-chain cost, they reduce the amount of write-offs that we might have for when retailers choose to discontinue those SKUs.

When retailers do choose to discontinue those SKUs, there's a lot of promotional activities.

All those things hit gross margin.

I think in cleaning a lot of those non-productive SKUs out, we've seen a lot of benefits, and we think that they're sustainable.

Another thing that we did, I mean, we did a lot of things, but this is just a couple of them, we really revamped our sales programs with our partners, and we changed them to really focus on really driving more sell-through and incensing more linear purchases from us, and I think we're seeing benefits not only in gross margin, one of the reasons you're seeing improved performance on DSO and on cash conversion cycle is that we are more linear, and I think that, too, is largely sustainable.

So, the last thing I'll say is, we'll be talking a lot more about our gross margin and our business model in general at the investor day in a couple of weeks, so we'll be addressing that question and where we see it going specifically.

And on the demand side, can you reconcile what you're saying in terms of better demand, your stock (inaudible) leverage-- are you ready for that and the fact that year-over-year growth rates appear to be slowing in EMEA and the US.

Now, obviously, there's a funny-- I think if I (inaudible) my phone to, say 24 months ago, the growth trend is still improving, but can you reconcile kind of getting ready for a better holiday season and growth rates slowing?

Yes, let me just clarify.

If you look at the sell-through growth rate in Europe, it was actually very good.

It improved 22% year-on-year, and I believe it was up sequentially versus Q1, but, in Europe, actually, in Europe and in AMR, we did see in September demand happened very late, and I'll talk about each of them individually.

In the case of Europe, I was very pleased with the sell-through growth we saw, but Europe-- since the September quarter is always our most back-ended quarter.

July and August are fairly low months, so it's always a September-driven quarter, and this year, the demand materialized even later than normal, and as a result, frankly, we weren't able to replenish a lot of our customers because some of the demand happened too late.

The good news there is, in the first few weeks of Q3, we've actually seen our shipments up substantially versus prior years, so, I like the momentum that we're carrying into Q3.

In the case of AMR, we were down, I think, from about 17% in Q1 to about 12%.

AMR was similar to Europe in that demand-- well, actually, the quarter started out quite strong in terms of demand, and then we did see some mid-quarter softness, and what we saw was very consistent with what I saw a lot of US retailers reporting and a lot of other tech companies reporting which was that back-to-school seemed to happen very late.

The good news is that September picked up substantially.

We exited the quarter, from a demand standpoint, with very good demand that we carried into Q3, so I'm cautiously optimistic that that will stay there, and that we'll have a good Christmas season, but I-- and I like the momentum that I see so far in Q3.

Thanks, and just one quick last one.

You carry quite a lot of Google TV inventory on the books now.

Is there a risk of missing (inaudible) for various reasons-- is there risk of write-down or risk there, or are you covered on that front?

So, Johnny, just actually to answer that question for you, we feel very comfortable with the level of inventory that we've got related to Google TV.

The thing I would also caution everybody with is, the product has only been shipping for about a week, so we're in the very early days.

We feel very good about the launch of the program and the launch of the platform overall, but we feel that we've got the right level of inventory related to that and then, obviously, as we see details develop over the course of this quarter and into the fourth quarter, you know, we'll be able to vary it as needed.

Thanks very much.

And our next question will come from the line of Ashish Sinha with Morgan Stanley.

Please proceed.

Hi, this is Ashish from Morgan Stanley, just a couple of quick ones.

I was trying to understand what has changed in your guidance for the full year since the last time around.

Obviously, looking at revenues, you have added the revenues from Google TVs.

However, looking at profits and looking at the gross margin, if I presume a 1% increase in your gross margin and that 1% increase coming from, basically, better supply chain management, I would have thought that all of those gross profits would have been falling to your operating profit line, so, given your $2.35 billion off top-line guidance, that would imply roughly maybe [$3 billion] of operating profit.

But you are increasing your operating profit guidance just by $10 million.

I just wanted to understand where the [$13-odd billion] of profits go.

Is it reinvestment in the business, or are there some OpEx associated with that gross margin increase?

Then, secondly, on Google TV, are you assuming that Google TV builds an ecosystem and drives sales of some other peripherals as well, or is it-- the increase in revenue guidance is just the Revue box.

Okay, thank you for your question, Ashish.

Let me start with the second question first.

The increase in our outlook and our view of Google TV going forward includes the impact of both the Revue box, which is the companion box, plus the controller that comes with it, and peripherals like the TV cam, the mini-controller that we'll have at launch, going forward.

As we mentioned in our remarks, we will have a much broader ecosystem of peripherals over time.

So, this is just the beginning, and the real focus, initially, is on expanding the platform and getting it out there and getting consumers familiar with the potential for Google TV, how it's different, and what they'll be able to do with it over time, which is a good segue into the first part of your question, which-- so, as we increase both our top line, our gross margin and our operating income, we're also implicitly increasing our assumption about what we will invest this year, particularly around Google TV.

It's not limited to Google TV, but we are increasing our investment in some variable spending, primarily around Google TV, to build the awareness.

Because we're taking a very long-term view of it and we think it has huge potential, and there is an education job that needs to be done to help consumers really understand what it is, the potential for it, and why it's so exciting for them.

Thank you.

You're welcome.

And our next question will come from the line of Simon Schafer with Goldman Sachs.

Please proceed.

Yes, thanks so much, it's Simon Schafer from Goldman.

I wanted to ask a follow-up question on your commentary on sell-in, specifically in Europe, because it looks as if that's actually down on a sell-in basis year-over-year.

Is that just, as you said, some consumer, maybe, uncertainty throughout the summer months of normal seasonality?

And secondly, it looks as if in the other regions, the sell-in is still outpacing that of sell-through on the year-over-year basis, I know there's an element of restocking and so on which is still required, but any sense as to how you think that's going to be tracking going forward?

A comment on both would be useful, thanks.

Sure.

Good morning, Simon.

Let me take-- it's probably easiest if I take the regions one-by-one.

I'll actually start with the Americas.

You look at the Americas, and the percentage changes with 19% in sell-in and 12% sell-through growth, and, in my view, in our view, you're-- in the Americas in Q2, you're starting to see the alignment we've been talking about.

There's still a 7 point gap between them from a percentage standpoint, but, as we've been saying all along, as we start to get to Q2 and the reset, particularly in America, channel reset was largely over, you would start to see the growth rates align, and while they're not perfectly aligned, we do think that you will see just kind of a small spread between sell-in and sell-through.

There could be quarters going forward in the Americas where sell-through grows slightly faster than sell-in, but in our view, we're largely where we said we would be, but the two are aligned.

In the case of Europe, we did have sell-in growth, it grew 6% in local currency terms, and the 22% of sell-through was also in local currency terms.

The gap there was really driven by the lateness of demand materializing, as I said, in response to Johnny's question.

And I'm encouraged by the fact that we've seen shipments in the first few weeks of the quarter substantially above last year, as we replenish customers given the sell-through materialized at the end of the quarter.

In the case of Asia-Pacific, remember that Asia-Pacific is the one where we said that the channel reset really was over after Q3.

If you go back and look at the specifics of Asia-Pacific a year ago, I believe sell-through was roughly flat and sell-in was down close to 30%.

If I look at the current quarter, the absolute levels of sell-in, sell-through, are largely aligned, and I think once we get past Q3 with Asia-Pacific, you'll start to see the growth rates coming together, kind of like what you're seeing with the Americas in the current quarter, so that's how we see it going forward.

Got it.

Understood.

And then my second question would be, I heard you say that you want to invest the gross profits from the Google TV-related revenue upside in another market activity.

Does that just mean that your marketing spend stays relatively elevated as a percentage of sales?

I'm just-- I guess I'm just trying to understand as to when you may be able to go back to your sort of historical operating margin level of-- in the things, so I guess one element of that would be that somewhat higher marketing spend as re-deploy gross profits from Google TV into that segment.

Sure, and I totally understand the question.

The first thing I'll say is that we're going to be talking a lot more about what's at the heart of your question in two weeks at the Investor Day, and just the business model and how we see it evolving, not just operating margins, but, obviously, the whole thing.

So, specifically-- more specifically, the significant portion of any operating expense that-- additional operating expense is going to Google TV, and the focus of that is really on driving awareness and, obviously, creating demand, but education consumers on what is different about that product.

We're also, though, increasing our investments in the second half of the year on Harmony, for example, and even in China, where we're very, very pleased with the growth we're seeing and we're actually outpacing the plan we built, so we're also making some incremental investments there.

In the case of Google TV specifically, I think it's important just to put it in perspective, we've invested heavily in R&D, for example, well ahead of the revenue, so we're only now, in this current quarter of Q3, going to start to see revenues from Google TV.

We've been spending on marketing activities in Q1 and Q2, and we've been spending heavily on engineering activities since, really, Q4 of last year, with no revenues.

So, as the platform builds, we think we'll start to get scaling.

We're going to continue to invest in it, but up until now, we've had no revenue and only expense, so, going forward, I think you'll start to see the revenue build.

We won't have to maintain the same rate of investment, but we will continue to invest to build that awareness at a reasonable rate.

And how does that translate into your ability to go back to the long-term model?

I think the best answer to give you there is, we'll be talking about that in-depth in two weeks at AID.

Okay, look forward to it.

Thanks so much.

Thank you, Simon.

And our next question will come from the line of John Bright with Avondale Partners.

Please proceed.

Thank you.

A couple of questions for Erik and then, Gerry, a question for you.

First, Erik, on the gross margin, it looks like you're becoming more optimistic on the gross margin, and possibly changing the long-term range associated with it.

Can you talk about LifeSize's gross margin, how are they trending?

And then also, if you would talk about your expectations for Google TV's gross margins?

Sure, John, happy to do that.

So, as it relates to LifeSize, there's a couple of things-- we're not talking specifically about LifeSize individual gross margins, but as we talked about before, and since we did the acquisition, there is a structurally higher gross margin in that industry and you can see gross margins of anywhere from 55% to 70% depending on the product and depending on the size of the player in the industry, and LifeSize is well within that range.

So, they will continue to be accretive.

They are a small percentage of our sales today but growing very rapidly.

As you heard Gerry say in his remarks earlier, we're very happy with where LifeSize is, so they will continue to be accretive going forward, and especially as they grow more quickly.

To your question about what do we anticipate in terms of Google TV gross margins, there's really two pieces to that, I would say.

When you think about our initial companion box, the Logitech Revue, we do anticipate that that will have a structurally lower gross margin than the long-term range that we've talked about before of 32% to 34%, so we do anticipate that.

However, as Gerry mentioned, we are really focused on building out the peripherals for the entire ecosystem, with the TV cam, with the enhanced controllers that we've got available today, as well as, when we see things get developed in terms of applications and other things for the platform, we see that there is a very rich opportunity for peripherals, and all of those peripherals, we anticipate, will have a gross margin very similar, maybe even, in some cases, even higher, than the gross margin we've got today for our PC peripheral business.

That would be how I would want you to think about gross margin as it relates to Google TV.

John, just an add-on to that, I would also just say that, to me, adding on the LifeSize piece plus the moving parts of Google TV doesn't real substantially change what we've been doing for years.

If you think about it, we've been talking to you for years about the fact that mice and webcams have higher gross margins than audio and OEM, and we manage a portfolio of products and categories, and we're comfortable doing that, and I think we've done it effectively for many, many years.

And now we have more moving parts.

We will have LifeSize, which is very accretive to gross margin, we will have the Revue box, which initially-- which certainly will have lower margins, and then the peripherals, we expect to have a range of gross margins.

Some could be higher than our 32%, 34%, some could be lower, and in general, it will probably be consistent with the PC peripherals that we've been managing for years.

So, we've added to that portfolio of gross margins that we've been managing, I think pretty effectively, for a number of years.

Thank you.

Erik, on the inventory side of the discussion, could you characterize the inventory, or is it fair to characterize the increase of inventory as primarily Google TV-related, but beyond that, which segment of the inventory are you probably most optimistic about heading into this holiday season?

I think just a little bit to talk about it, when you look at the inventory build, and I'll sort of give you a sense of it in terms of how we look at it sequentially, we do always see an increase in inventory as we go from the end of Q1 to the end of Q2, because, as you know, we're building for our highest-volume quarter of the year in Q3.

And as Gerry mentioned and I talked about in our prepared remarks as well, we want to put a little bit of additional buffer.

It's not in any one specific place.

It's more related to making sure that we're in a good position to serve our customers if we do see an uptick in consumer demand.

But, let me be really clear.

We haven't baked into our guidance and what we've told you today a large uptick in consumer demand.

We just want to be in a really good service position, if it were to happen.

The other thing I would say, too, when we look at levels of inventory, there's really two metrics that we're focused on internally.

The first is the age of the inventory, okay?

And we feel our channel-- excuse me, our inventory is very healthy today in terms of the aging, and part of the reason for that is we're just coming off of our product refresh cycle which happens over the summer months and into the early Fall, so we've got new products in our warehouses ready to go for our customers, and so we feel very well positioned, and so if that additional higher demand that we're preparing for could happen-- does not materialize, we feel well-positioned that, because of the freshness of the inventory, we would handle that as we go into the end of Q3 and into Q4.

Last question for you, Erik.

You mentioned, in your prepared remarks, that you didn't repurchase any shares in the last quarter.

Give us just your philosophy on when you want to buy back shares.

You know, I think, John, it's very consistent with what you have heard us say in the past and will continue to do going forward.

Our first priority in terms of where we use our working capital is going to be investing to grow the business, and it's actually very helpful to think about it-- if you think about a year ago, versus today, so, a year ago, as we're dealing with the downturn as a lot of other businesses were, it was a contraction environment, versus where we are today with sales over the first half growing 29%, we're in an investment mode for the business.

We're growing the top line, you're going to see growth in receivables, we talked about the investments we're making in inventory and Google TV and other places.

That's going to continue to be the first priority in terms of where we put working capital, and then beyond that, what we're going to be focused on, as we've done in the past, is it will be opportunistically making acquisitions as well as opportunistically buying back shares.

So, no change in philosophy in terms of how we think about that.

finally, Gerry, for you, I've heard from the PC makers that they're focusing their 2011 calendar on all-in-one PCs, desktop PCs.

What's your thought about an all-in-one desktop PC that might come with a higher-end mouse and keyboard and its potential impact on aftermarket peripheral sales.

We're having discussions, John, as we do every year, and they're talking to us about a lot of things, not just all-in-one PCs, but-- I can't give you any specifics, but we're certainly looking at that opportunity and a lot of other ones, and we'll be talking about that as we discuss our roadmap in future calls.

Thank you.

And our next question will come from the line of Andy Hargreaves with Pacific Crest.

Please proceed.

Thanks.

Can you comment at all about the attach rate of cameras and (inaudible) on any of the Google TV pre-orders or early orders?

No, I can't comment on that, Andy.

I can say that I've been very pleased with the-- some of the commentary, people who have tried the TV cam, which we've provided along with the Revue box, and we've gotten terrific feedback on it.

I will say that I think that's a new application for consumers.

Consumers obviously understand that you can do video calling from your PC, that's been around for a decade.

I think creating this new paradigm with consumers that, hey, you can now talk to any other PC or any other Google TV that has a TV cam is a new paradigm, and we have to educate them on that, and that will take time, so I don't expect that we're going to see an instantaneous surge in cash rate.

We have to build that.

That's part of the reason we've talking about investing in market expenses.

But the quality is pretty spectacular, and I think as consumers become aware of that, and the convenience-- the comfort of sitting in your living room doing the call, and you get a much wider picture through the TV cam that we provide, and it's HD-quality, we think that consumers are going to respond to it.

So, time will tell.

And then, just to clarify, absent the change in guidance from Google TV, the revenue guidance would have been unchanged, is that correct?

The majority of it is Google TV.

We'll leave it at that.

The majority of it is Google TV.

Okay, and then, another question on the gross margin.

Can you be more specific at all on a sequential basis for obviously there was a big change there, but the mix, at least from a percentage standpoint, the product mix didn't change a whole lot.

So, can you comment on what the changes were for the quarter?

Yes, on a sequential basis, the primary driver was the stronger euro, but as you heard us talk about and it has been consistent is, we've got multiple drivers there.

The thing that we felt very good about in the ensuing quarters prior to this, and when you look at it on a year-over-year basis, has been the favorable product mix of being able to drive, and we've talked a little bit, and Gerry even gave you some examples of some of the operational efficiencies, as well as the accretion that we get from LifeSize as it continues to grow.

On a year-over-year basis, though, Andy, just to put it in perspective, and I know you asked sequential, and Erik answered that, but on a year-over-year basis, the negative impact from the euro was largely offset by the accretive impact of LifeSize, so those two were roughly comparable and just netted each other out, so the real improvement year-on-year was really driven by operational improvements, mix, and, really, that was the core business.

Okay, and then, lastly, just-- you commented on some of the changes to the marketing programs.

Just from an accounting standpoint, did any of those changes result in dollars shifting from contra-revenue accounts into operating expense?

Okay.

Thank you.

You're welcome.

And our next question will come from the line of Yair Reiner with Oppenheimer & Company.

Great.

Thank you.

First, I think during your Investor Day last year, you talked about a couple of strategic kind of focuses for you.

One of them was China.

We see making good progress there, and TV.

I think you also mentioned something about small touch devices, and ways of making those more friendly and interactive.

As far as I know, we've yet to see anything any kind of significant peripheral activity around the iPad or the iPhone, or Android devices.

Is that something we still look forward to this year, and if not, when, and what might we be looking forward to.

The first thing-- just around, specifically, let me talk about the iPad specifically and then tablets more broadly, I think it is important to keep in mind that the iPad launched during the first quarter of our fiscal year, and at that point, our product roadmap has been finalized for many, many months.

Now, we currently have, as I mentioned in my remarks, we currently have a great wireless speaker called the Z515, which is doing very well and which works with the iPad, the iPhone, and we have Bluetooth keyboard that works with the iPad and the iPhone, excuse me, the iPad, and we have a number of peripherals in our road map for fiscal '12, not only for the iPad, but for the emerging tablet category.

The thing to keep in mind about the tablet category is, today, it's primarily the iPad.

There have been a number of announcements, Samsung and the Galaxy, there are a number of announcements of products coming, and they use different operating systems, some will have USB, some won't, so we're working with all of those folks, we've got a lot of products on the road map, and I know I keep saying this, but we will be talking specifically about the opportunity we see in tablets broadly, not just the iPad, and how we plan to address that.

We'll have an extensive session on that at the Investor Day in New York in two weeks.

Got it.

Erik, I understand the comments you made about the freshness of the inventory.

Is there, nevertheless, an inventory days level that you should try to hit exiting this quarter, and at what level should we be about-- a bit concerned.

Thank you.

I think the best way to think about it is, the way we approach this is, this is, I think, a very appropriate investment on our part in terms of-- and talked about how we were working with our customers to be prepared for if there was an uptick in demand.

We also feel comfortable that we have good operational visibility within our business, so if we were to see two different scenarios, one scenario being that demand is really picking up and we're serving that because we have our own factories, there are some things we can do within a quarter that give us some flexibility.

On the flip side, if some of that were to not materialize, we've got some plans and things that we can do to make sure that we end the quarter at the right place, the appropriate level, and, like I said, because the inventory is so fresh, we feel very comfortable that that sell-through can then pull into Q4 if necessary.

Yes, just to re-emphasize the last point that Erik made, I think the reason he talked about the aging statistics, which is one of the key things that we look at, and it's very, very fresh and healthy inventory is that that gives us a comfort level that, if that upside demand that we're going to put a buffer aside for doesn't materialize, we're very confident that we will be able to sell it in Q4 and we won't be discounting it and taking gross margin hits because it has aged.

So, that's why we're very comfortable with where we are.

Thank you.

Thank you.

Your final question will come from the line of Nicolas von Stackelberg with Macquarie.

Please proceed.

Yes, thanks for my question.

A couple of housekeeping ones.

First of all, could you quantify the impact of FX changes on your gross margin, and specifically, I noticed that depreciation was down quarter-over-quarter.

Was that driven by FX changes?

That would be my first question.

Yes, to your first question, we don't disclose, specifically, FX impacts to gross margin, because I think you may have heard about us talk about a little bit previously is, on a sequential basis, it was the larger driver was the stronger euro.

On a year-over-year basis, it was actually-- we were hurt a little bit by FX, but that was primarily offset by accretion from LifeSize, and so the main gains that we saw year-over-year, which were significant, was everything related to favorable product mix, as well as the operational efficiencies.

And that leads us to the point where, with our current full-year guidance for gross margin, we anticipate to be about 36%, which would be a record for a full-year basis for the Company.

Thank you.

My next question would be on networking capital.

I mean, you clearly invested to get ready for a strong Christmas sales period.

How do you feel about cash flow sequentially, specifically from networking capital changes.

Before Erik goes there, just to be clear about the inventory, we invested to give ourselves flexibility if demand picks up substantially.

I just want to be clear on that.

We just felt it was an investment worth taking, because nobody knows.

Nobody knows what consumers are do this holiday shopping season.

If you look at what we saw this quarter, the demand was solid, but occurred very, very late.

So, we're cautiously optimistic, we put ourselves in a position to serve our customers with additional products if demand is stronger than kind of what we're thinking right now.

Erik, you can take the rest.

And since your question about networking capital a little bit and sequentially and how we think about it is, when you look at our business traditionally is, Q1 and Q2 are typically low cash flow generation or even net cash investment quarters, with our biggest net cash-generating quarters have been this current quarter, Q3, and then Q4 because of the timing of the volume.

So, in an overall basis, that's no different.

So, we feel comfortable that we're positioned well, and as Gerry talked about, we had a number of key investments we wanted to make sure from a timing perspective, Google TV, some of the other things that we're doing with Harmony, and obviously, as we continue to invest in LifeSize, are all things that are big priorities for us.

But, overall, it fits well in terms of how we produce cash in the past and what we anticipate Q3 being a solid cash flow production quarter.

In two lines, what-- for you, what are the key differentiating factors of Google TV versus other factors.

Sure.

Well, I think there's a number of offerings in the market and have been there for a while, and I would say they are primarily streaming devices.

Some of them do more than that, but they're primarily streaming devices that allow you to stream movies or TV shows to your big-screen TV.

Google TV is really-- we continue to say is primarily a platform.

It certainly allows you to stream, but it does a whole lot more than that.

It really enables the full web, and it does so very, very seamlessly.

It enables brand-new activities and experiences like video calling from the living room.

None of these other platforms go nearly that far, and then finally, and I think this is one of the key things, is that Google TV is an open platform, and there is an entire development community out there that will be enriching the platform.

So, we'll talk about Version 1.0 here, and they will be enriching the platform with tailored applications optimized for the biggest screen in your house.

You may have seen the announcement yesterday that Google TV seeded 10,000 Google TV devices with the development community, and that's to unleash their creative juices and get them working on all the great apps that will enrich the platform.

So, it really is a platform as opposed to a number of other devices which are out there today which stream, and do it very well, by the way, but they're more narrow and limited in what they do.

So, it's really a much broader platform, and that's why we're so excited about it.

Okay, and then, lastly, what happened in audio?

I mean, it was not a great performance this year, and what are you going to do about it?

So, in audio, very briefly, it was primarily some softness in speakers, and it was concentrated, it was largely in Europe.

Our-- remember that audio is many things, the way we classify it.

It includes our line of Ultimate Ears headphones.

They're doing great.

It includes PC headsets or voice access, as we call.

Doing great.

It includes our streaming media devices.

Also doing very, very well.

Speakers were a bit soft, and it was primarily in Europe.

Nothing that concerns us.

Thank you very much.

Thank you.

Thank you, ladies and gentlemen.

This concludes our conference call for today.

You may all now disconnect.

Good day, everyone.