羅技 (LOGI) 2011 Q3 法說會逐字稿

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

At this time all participants are in 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 like to introduce your host for today's call, Mr.

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

Welcome to the Logitech conference call to discuss the Company's results for the third quarter ended December 31, 2010.

Press release, a live webcast of this call and the 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 include those set forth in Logitech's annual report on Form 10-K, dated May 27, 2010 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.

We 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.

I now like to turn the call over to Gerry.

Thanks, Joe.

And thanks to all of you for joining us today.

I will provide an overview of the business which will be followed by a more detailed review of the financial results by Erik.

Then I will return with a few closing thoughts before we both take your questions.

I am very pleased with our results for the third quarter.

We delivered strong double digit growth in both sales and operating income, and we achieved record quarterly sales.

Our regional sales performance was led by Asia-Pacific, with sales in this region up by 51% over the prior year.

The growth in Asia-Pacific was primarily due to a very strong quarter in China with both sales and unit shipments more than doubling as we continue to make excellent progress developing China into one of our top three markets.

We also delivered strong double digit growth in the Americas and in OEM.

While sales in US dollars were essentially flat in EMEA, they did increase by 7% in local currency.

The economic recovery in EMEA continues to progress at an uneven pace with strong sales performance in some countries largely offset by weaker markets such as the UK.

As we reached the one year anniversary of our acquisition of LifeSize, I couldn't be more pleased with the momentum in our LifeSize business.

For instance, the latest market share data as of September, 2010 shows that LifeSize had achieved double digit endpoint unit share for the first time ever.

Q3 was also a record revenue quarter for LifeSize, and the first quarter which included sales of our newly launched infrastructure product, the LifeSize Bridge 2200.

This new offering continues a LifeSize tradition of delivering exceptional performance and value.

We also shipped a record number of endpoints during the quarter.

Let me turn to our retail business.

We achieved sales growth in all of our retail product categories with Remotes leading the way, up by 34%.

We also delivered double digit growth in pointing devices, video and PC gaming -- three product categories tied directly to the PC platform.

Logitech Revue with Google TV and the associated peripherals were a major contributor to the growth in our sales for the quarter.

I was very pleased with our execution of the Revue launch.

While consumer demand ramped slowly it picked up in that latter part of the quarter, and we now expect sales of our Google TV offerings to be around $40 million for the current fiscal year.

There was a high level of interest around Google TV at this year's CES with lots of activity in our booth.

TV manufacturers Samsung and Vizio announced plans to launch Google TV devices later this year.

Furthermore, we recently expanded availability of our Google TV offerings in the Americas, adding Costco as well as several distributors to join Best Buy, Amazon, the Dish Network and our own website.

We anticipate continued enrichment of the platform as we collaborate with Google on periodic over-the-air software updates that will add new features and content and continuously improve the user experience.

An open platform and applications will drive the need for advanced peripherals in the digital home, and I believe that Logitech is extremely well positioned to deliver.

To that point, I have been very pleased with the attach rate of our Logitech TV Cam, which has consistently been between 10% and 15% in the three months since launch.

We expect the momentum around Google TV will grow, and we are excited about the opportunity to develop another large installed base for our products, over time.

Shifting to CES, clearly the big story at CES this year was the proliferation of tablets expected to be launched in the coming quarters.

I saw a lot at CES, I talked with a lot of our customers, and my take away continues to be that tablets are an additive opportunity for our business.

While it is unlikely that the market can support the huge number of tablets on display at CES, there is no doubt in my mind that increased variety and functionality in the tablet category will provide more cash opportunities for Logitech.

We have incorporated a tablet focus into our fiscal 2012 product pipeline, and expect that roughly 25% of our retail products in the coming fiscal year will be tablet friendly, including many products designed specifically for use with tablets.

That said, we are confident that the opportunity for PC peripherals remain substantial.

Let me add two supporting data points from our Q3 sales, starting with the Americas, where we delivered double digit year-over-year sales growth in all of our PC related product categories.

Now this was achieved during a holiday season when the iPad took a notable share of the US consumers technology spending.

Additionally, our doubling of sales in China was driven entirely by PC Peripherals and we expect the opportunity will grow as we expand our footprint to additional cities and distribution channels.

Q3 was also a strong quarter for sales in our other developing markets with that growth driven almost entirely by our PC related offerings.

Finally, we have increased our sales outlook for FY 2011 in spite of a slower than expected start for Logitech Revue and we have done that based on our expectation for continued broad based growth in our PC Peripheral sales.

For fiscal year 2011, we have raised our sales outlook from our previous range of $2.35 billion to $2.4 billion, to the new range of a $2.4 billion to $2.42 billion.

Our target for operating income remains unchanged at $170 million to $180 million.

We continue to expect gross margin to be approximately 36% for the year.

And we now expect our full year tax rate will be approximately 14%.

Let me now turn the call over to Erik to review the financial highlights for the quarter.

Thanks, Gerry.

I will start with an overview of our Q3 sales performance.

Please note that the gross percentages that follow are in comparison to Q3 fiscal 2010.

Our retail sales grew by 17% and were up by 21% in local currency.

Units were up by 14%.

Looking at our regional sales in local currency, EMEA was up by 7% and Asia-Pacific by 47%, compared to a US dollar decline of 1% in EMEA, and growth of 51% in Asia.

Retail units are up by 6% in the Americas, by 4% in EMEA and by 64% in Asia-Pacific.

Our overall retail average selling price in Q3 was up by 3% from the prior year and up by 16%, sequentially.

Sales of our retail products priced above $100 represented 24% of our retail sales in Q3, up from 17% in both the prior year and the prior quarter.

The mix shift to more products priced above $100 primarily reflects the impact of the launch of Logitech Revue during Q3.

The digital home category was our best performing product category during the quarter.

This is a new category that combines our Harmony Remotes, the Logitech Revue box, and the associated peripherals for the Google TV platform, such as our high-definition Web Cam for video calling in the living room.

The launch of Logitech Revue and our Google TV peripherals, made a significant contribution to the growth in the digital home category with sales of $23 million for the quarter.

Sales of our Harmony Remotes were up by 34% and units up by 62% with strong growth across all three of our regions.

The growth in Remotes was driven by multiple products with the Harmony One leading the way.

The significantly stronger growth in units reflects the contribution from two of our sub $100 Remotes, the Harmony 300 and the Harmony 650.

Our sales in the video category were up by 15% with units up by 7%.

It was a very strong quarter for sales and unit growth in the high end of the major web cam price bands, with both more than doubling.

Our growth in the high end was driven by our HD Pro Web Cam C-910 which features Full HD 1080P video recording as well as HD 720P video calling.

We achieved sales in unit growth in Web Cams across all three regions.

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

Sales in the pointing devices category were up by 12%, with units up by 23%.

The majority of the growth was driven by our cordless mice, with sales up by 16%.

Cordless mice unit shipments grew over two times faster, up by 43%, and reaching an all time high due to strong demand for our expanded offerings in the low end of the category.

We've been very pleased with the success of these new, value priced mice.

As one example our wireless mouse, M215, originally designed for China, has proven to be a very strong seller not only in China but in EMEA and in the Americas as well.

We were pleased to return to strong growth in the gaming category, with sales up by 28%.

We delivered double digit growth in both the PC and the console gaming segments, with the strongest growth coming in console.

Our console gaming sales were up by 56%.

The majority of this growth was due to the success of our Driving Force GT wheel, which was specifically designed to provide the ultimate driving experience for the Gran Turismo 5 racing game, which was released late in the quarter.

Turning now to OEM, where sales were up 18% as we delivered growth in all major product categories.

The majority of the growth was driven by microphones for console singing games and keyboards.

Let me now shift to gross margin.

Our Q3 gross margin improved by 210 basis points compared to the prior year and was down by 130 basis points, sequentially.

The year-over-year increase in our gross margin was achieved despite a stronger US dollar and was driven primarily by operational efficiencies in our supply chain, along with the contribution from LifeSize.

As one example of supply chain efficiencies, we increased the mix of sea shipments rather than more costly air shipments for a number of our key products.

Turning now to operating expenses.

Our operating expenses were up by 30%.

The prior year's expenses included just a two week stub period for LifeSize, which was the single largest driver of the year-over-year increase in Q3.

Excluding LifeSize, we continue to emphasize investments to drive top-line growth, including but not limited to Google TV and Harmony Remotes, that ensure we're positioned to continue to 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 $461 million.

The cash was up by $153 million from the September quarter and by $180 million compared to the prior-year.

Note that we have added back nearly half of the $382 million in cash that we used in December of 2009 for the acquisition of LifeSize.

Our cash flow from operations in Q3 was $149 million, a decrease of $18 million compared to the same quarter last year.

The primary driver of the year-over-year decline was the sequential increase in receivables this Q3 compared to a sequential decline in Q3 of the prior-year.

Note that the 10% sequential increase in receivables in Q3 which reflects typical seasonality is significantly less than the 30% sequential growth in our sales.

Our cash conversion cycle in Q3 was 24 days, six days higher than the record low set in the same quarter last year due to slightly higher DSO and DSI this year.

Our inventory increased by $66 million, or 28%, compared to the prior-year and it was down by $42 million, or 12%, compared to the September quarter.

When looking at the year-over-year increase, note that we are comparing to a period where we had yet to return to sales growth and our inventory had declined by 31% versus the prior year.

Additionally, the prior year doesn't include any Google TV related inventory.

Inventory turns were 6.4, down from 6.9 in the prior year.

Our DSO was 40 days, up by four days from the prior year but still our second lowest DSO for a Q3 in the last 10 years.

We did not repurchase any shares during Q3.

We own approximately 7.1% of our shares outstanding.

And we also have a $250 million board approved program that we have not yet utilized.

That concludes my comments.

Let me now turn the call back to Gerry.

Thanks, Erik.

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

At the start of this year we emphasized that our top priority was getting back to consistent double digit growth while simultaneously investing in new future growth areas like China, LifeSize and Google TV.

Throughout the first three quarters we've accomplished that, delivering double digit sales growth across our business with a substantial gross margin improvement and strong cash generation.

Our outlook for sales and profitability have increased substantially since the start of the year, and we are on track to achieve our higher targets.

In fact, with our new sales outlook, we are on track for a record sales year for the Company.

I am very confident that we will end the fiscal year with strong momentum that will help us deliver a 10% operating margin in fiscal 2012.

And with that, Erik and I are now available to take your questions.

Please follow the instructions of the Operator.

Thank you.

(Operator Instructions)

Your first question comes from the line of Paul Coster representing JPMorgan.

Please proceed.

Thank you very much.

A couple of quick questions on the Google TV product please.

Can you just give us some sense of how the Channel inventory looks?

And one of the accusations I think thrown at the products was that it's perhaps a little bit expensive.

Do you see, with engineering and scale, pricing coming down in time and for that to be a marketing strategy as the year progresses?

Yes, hi Paul, this is Gerry.

I will comment on the second part of your question and I'll let Erik talk about the Channel.

When we look at what Google TV is and we look at other products that are on the market today we really see it as fundamentally different from those products.

And we think that for all the value that brings it is appropriately priced.

And if you look at the other products that are on the market today they are primarily streaming devices, and they do that extremely well.

I think for consumers who are primarily interested in that value proposition, there are a lot of alternatives.

Our core promise to consumers with Google TV has always been that it is a seamless integration of TV content and the Web.

We have never thought of it as it is a better streaming experience.

Our fundamental focus is on bringing the best experience of the Web and TV together.

Nobody has really been able to do that.

In addition, it also does what those products do very well, which is stream.

And we know that is important to people.

It also enables other experiences like TV calling in the living room, and when the app store comes on, onstream it will enable all kinds of new experiences.

So we think for all of the value that it brings it is appropriately priced.

As time goes on and we build scale, our focus is on bringing the cost down and improving our margins.

And we are going to pay very, very close attention to what is happening in the marketplace in terms of competing products.

We have always expected that there will be other entrants into the market and we will price appropriately.

But right now our focus really is on building the installed base and growing that and growing our Peripheral sales.

I will let Erik comment on the channel.

Yes, and to your question about the Channel as it relates to Google TV, Paul, as you know we launched the product in Q3, and there's an initial process that we go through to stock the Channel.

You heard Gerry talk in his comments about us expanding distribution to Costco and some of our other key partners.

And right now I would say we are very comfort with the level of the inventory that we have there and we think we are well-positioned.

Excellent, and I have a follow-up on China.

Tremendous strength you demonstrated in Asia this quarter.

To what extent do you believe that is really to do with filling out the Channel for the first time in China versus, call it year-on-year sort of pull-through demand?

Well, the sell-through growth in the quarter was outstanding and the sell-in was even higher; and if you look at what we shared in New York at Investor Day as part of our China strategy, we talked about really three elements to the strategy.

We called it go wide, go deep, and go young.

And the go wide really means expanding our footprint in the country because we are primarily concentrated in the larger cities, in what is typically called tier one through tier three.

As we look at building out the footprint over the years, we will be moving into more and more cities, and so we will continue to expand the footprint.

And so I think that the key for us is continuing to drive the sell through.

The sell through was outstanding in the quarter and we will continue to drive it.

But I also expect to see our footprint continue to grow over time as we go wide in the country.

So I think China is poised to continue to grow very, very nicely well into the future.

I am very happy with where we are in China.

Thank you very much.

Thank you, Paul.

Your next question comes from the line of Chris Gretler representing Credit Suisse.

Please proceed.

Hi.

Thank you.

Actually, just two questions.

One is on the ethics impact.

Could you actually break it out for the operating expenses of our operating earnings?

I see that you had some negative impact on the gross margin.

I was just wondering how that impacted you on operating earnings?

And the second was on Google TV, just to come back.

Is the plan still to launch that in Europe, in 2011?

Yes, Chris, to get to your first question on FX impacts, we don't break out FX impact as it relates directly to operating income.

But what I would give you the sense of is that, whatever impact we have on the top line, so whether the Euro is strengthening or weakening, we have an opposite impact on our operating expense line.

And that is because of the fact that we have significant expenses that are denominated in Euro and in Swiss francs from our operations in Europe.

So you see an opposite impact at any one point in time.

What I was wondering the net impact obviously, so?

Yes, Chris, on the second question about Google TV in Europe.

It is certainly our intention and Google's to expand to other markets and Europe, obviously, is the next major region where we want to see the platform.

That is not our top priority at this point and it is really focusing on improving the platform today and continuing to build the installed base.

But it is certainly our intension and Google's to expand to Europe.

We are not going to commit to the date and which countries at this point in time.

But you can certainly assume that that is part of the long-term plan.

And Chris, also I think just to come back to your original question on the FX impact.

I want to make sure that you understand that the opposite impact that we have on the OpEx line does not fully offset.

So, if we have a weakening Euro and it hurts our top line, in that scenario, we would have some benefit on the OpEx line, but it is not enough to fully offset.

So you would in that scenario have an impact of your operating income.

All right.

Thanks.

Thank you.

Your next question comes from the line of Jonathan Tseng representing Merrill Lynch.

Please proceed.

Hey, guys, Jonny Tseng from Merrill here.

Just two questions, one Google TV; two, the cost base.

Google TV, just interesting, picking up on your comments and back to Paul's question, you see the competition in streaming media devices.

I was thinking about Apple TV device, I think it sounds like that there's more (broken) competition which could do Web via calling in app stores, or potentially could do.

I think the question is, how do you compete against that device with comparable [platformability] by a third of the price points.

Or is there something wrong with my analysis here about what it can do?

And I've got a follow-up on the cost base.

Thanks.

Yes.

I think if I look at Apple TV and other products today and I am really referring to what is available today, what the products do today, and what Google TV brings to the market.

I think they are still fundamentally different value propositions.

But - - I think that no other device, no other product, has brought to market what Google TV is bringing, Johnny, which is the full seamless integration, as I mentioned earlier, of TV content and the web.

Streaming is something consumers value, for sure, and Google TV enables that as well, but it is not narrowly focused on streaming.

It also enables video calling and enables obviously the seamless integration with the web and it will bring other applications to market once the Android marketplace comes in a few months.

So, versus today, I think it is really a very, very different value proposition.

What might be in the future, I am not going to speculate on that from either us or from other players.

Erik, you were going to comment on Johnny's other part of the question.

(multiple speakers) I was just going to say go ahead; I know you wanted to ask a question about the cost.

Yes.

You've obviously raised the revenue guidance by some $35 odd-million at the mid-point.

The margin guidance hasn't gone up, that implies a larger cost base.

I just want to understand where the change in the cost side has been, is it gross margin, or are you expecting a lower gross margin or is there more fixed cost investment?

And I was just thinking that given Google TV's a lower GM item, I'm surprised of its gross margin.

So is there more investment you feel is needed on the sales and marketing, or R&D side, for the rest of the year?

Or is it just FX, or something like that?

Let me try and dimensionalize that for you a little bit.

When you at our total Company operating expense, for example on a year-over-year basis, is up about 30%.

But LifeSize is the single biggest driver of that.

Because, as you recall, we did the LifeSize acquisition late in December of 2009.

So there's only about two weeks of activity in the prior-year period versus a full quarter in this current year.

And then even once you take LifeSize out, you've heard us talk about this, and even to your point, our primary focus has been on variable demand generation activities, first and foremost with the launch of Logitech Revue and really getting customer awareness and adoption up.

And we feel very good about that launch.

But that's really tied to the launch, it's more of a one-time nature in terms of bringing that product to market.

As well as you've seen us continue to put variable demand generation dollars to Harmony and some of our other fast-growing categories.

I think the important thing here as well I would say is that, I don't think there's been a change in our cost structure from that perspective, and our focus has really been around the variable nature of what we do.

Over 50% of our sales and marketing expense is variable in nature and we don't see that changing.

We are going to continue to put dollars where we see nice growth that we can drive.

So, Johnny, let me just add something.

We're making some investments in Q4, variable nature as Erik said, in some things that we see will give us continued sales momentum carrying into Fiscal Year 2012.

One of the areas are China.

I am not going to say what they all are.

The most important thing to take away, getting to the heart of your question, we are still very comfortable and committed to driving double-digit operating margins in Fiscal Year 2012.

And that is the most important thing I think you should take away.

Thanks, guys.

Your next question comes from the line of Yair Reiner representing Oppenheimer & Co.

Please proceed.

Great.

Thank you.

First question is on gross margin.

Your full-year target now implies that March gross margin could be down slightly.

I was wondering if you could explain that.

Typically expect in March with LifeSize probably be a larger percentage of the overall revenue, that gross margin is actually trend (sic) up a bit.

So if you could maybe explain some of the puts and takes of the forecast?

Sure, Yair, happy to do that.

When you actually look at our historical seasonality, I think it's even five of the last six years, we have seen a small sequential decline in gross margin as we go from Q3 to Q4.

So this quarter in our implied guidance is very consistent with that.

I think, and Gerry mentioned it, our point we really want you to take away on gross margin is when you look at the full year on our current forecast, we are estimating to get to about 36%.

And that would be an all-time high for the Company.

And then tax rate, you lowered your forecast by a couple of percentage points.

Should we think about 14% as the right number to model, going forward?

At this time we are not providing any forward-looking guidance as it relates to the tax rate.

We will be talking -- we anticipate talking about that in our April earnings release.

But what I would say is you've seen, as we have talked about it, is that structurally we feel very comfortable with the structure we have related to taxes and we will give you more clarity when we get to April, about Fiscal Year '12.

Thank you.

And congrats on the good top line results.

Thank you.

Thanks.

(Operator Instructions)

Your next question comes from the line of John Bright representing Avondale Partners.

Please proceed.

Thank you.

Gerry, in your prepared remarks you talked about 25% of products will be tablet friendly in Fiscal Year 2012?

Can you share with us some examples or maybe give us your vision of what those products might look like?

Yes, I won't talk about all of the products, John, but the reason we shared that statistic is we talked in New York at Investor Day about our overall approach, or philosophy, about tablets.

We think tablets are additive to the category, it's a different device, consumers will use it differently, and we are embracing it as a growth opportunity.

That is why we are calling out the fact that 25% of the products that we will launch next year will be tablet friendly.

What we mean by that is some will be tablet specific, i.e.

they were designed specifically for a tablet, and others are tablet friendly, like a product we already have, which is called a Z515 speaker.

It's a Bluetooth speaker.

You can use it with your Smartphone, you can use it with a tablet to listen to music.

I think a couple of the experiences that are big opportunities immediately are around audio, and we already as I mentioned, have one product, the Z515, and we will have others, and I think keyboards.

I think those are two obvious opportunities and we will certainly be focused on them and we have others.

I am not going to say what they are.

But just to give you two examples, I think those are two areas where there is plenty of room to add value to the tablet experience.

Are you assuming in your forecast or thought process looking forward any negative impact from the boom in tablets for the core Peripheral business, specifically mice, keyboards, and speakers?

Well, let me go back to what we talked about in New York.

In New York what we said was we felt that the tablets would be added to the category, that there was opportunities to attach.

I talked about some of those.

We continue to see growth in the PC category, particularly in emerging markets.

But we also acknowledged that in some of our larger markets we would not see the historical growth rates that we have seen from PC Peripherals, and that was factored into sort of our overall view of what we call the PC and mobile type products where we said we were confident in delivering 10%.

That assumes some rapid growth in emerging markets, and it assumes mid-single-digit growth in more developed markets.

So, that all factors into the tablet phenomenon and it factors in what we and others can see relative to the PC industry.

So that's our view on it.

It really hasn't changed from what we shared in New York.

A few final questions.

One, on your Asia strategy, showing good success right now.

The sense is that you're going into a more stereotypically price-sensitive market.

Why will the gross margin profile hold in that market, versus the stereotype?

Yes, John.

Just to give you a little bit of sense of that.

We have talked about this in the past but there is not a strong correlation for us of lower ASPs and lower gross margin.

As you've heard us talk about, we have categories that are typically slightly lower than our average and categories that are above our average.

But we actually have some very good selling products at low ASPs that provide strong gross margins.

And one thing specific to China, and we talked about this at our Analyst Day, and [dimensionalized] this a little bit, is we are increasingly designing products for the Chinese market place.

And if you do that from the outset you really set yourself up with the right positioning when you go into the market and being able to achieve those gross margins.

So we absolutely feel very comfortable with that process and we don't think growth in emerging markets whether it be China, or elsewhere, will be dilutive to our overall gross margin, over time.

Erik, you mentioned in your prepared remarks the board approval for the share repurchase.

Do you have plans to put that to use anytime soon?

As we've talked about with our use of cash, we are very consistent.

The first and foremost priority for us is making sure that we have adequate cash to run the business, invest in the opportunities right in front of us, and there is no change there.

And then specifically, we have two equal opportunities beyond that and that is opportunistic acquisitions as well as share repurchase.

So, we take all that into account and take that into our planning.

But we don't provide any forward-looking thoughts on share repurchase.

Gentlemen, thank you.

Thanks, John.

The next question comes from the line of Tim Shaw representing Citi.

Please proceed.

Hi, guys.

Thanks for taking my question.

Just one LifeSize.

Obviously you've got some record revenues in the quarter, and when you talk about sort of solid market share gains.

I'm just wondering how sustainable that momentum is in LifeSize?

You are obviously targeting the for the small business segment, relatively low penetration at the moment.

But what happens when the likes of Cisco/Polycom moves down into that area?

And now you're seeing HP coming in.

How do think that momentum can be sustained, going forward?

Yes, so, Tim, a couple comments.

If you look at, we've talked about the fact that it's been about a year since we closed the LifeSize acquisition and in that first calendar year we grew 44%.

In New York we shared that the organic growth rate in the videoconferencing market is about 15% to 20% according to independent experts.

And if you look at our growth rate in this first year we have grown at 2 to 3 times the category rate.

We are gaining significant market share.

If you look at our Q3 sales rate it was more than double the pro forma sales from Q3 a year ago.

So, we've got tremendous momentum and that is without even significantly penetrating the SMB market.

That is really just accelerating what LifeSize is already doing in terms of being primarily an endpoints provider.

LifeSize has now begun to introduce infrastructure products.

I talked about a couple of them last quarter.

So they had a very low share of the infrastructure space but they have got some breakthrough products that are rapidly gaining traction.

So we look at those two things alone, their momentum in endpoints, their ability to grow dramatically in infrastructure where they had very low share and we see the ability to grow just focused on those two areas.

Then if I go to the SMB which you asked about - largely unpenetrated as you correctly pointed out.

And I would just say we - - that is a wide open market and I think we're going to be incredibly competitive there.

And we know we will have lots of competition because it is a wide open space - from HP, from Cisco/Tandberg, and from Polycom.

That doesn't concern us.

We are confident in our ability to get our fair share of that wide open space.

So, bottom line, I would say our ability to grow LifeSize at a substantial rate for the next few years, I'm very confident in it.

Okay.

Thank you.

And just a quick follow-up on your -- you put out in some of your prepared comments that some of the more mature markets were, as you say mature -- slight weakness in the UK.

I'm just wondering, can you categorize that just between overall macro economic weakness, or market share loss, or just absolute slower demand for PC Peripherals in those more developed markets at this point?

It was a combination of the first two, not the latter.

And, frankly, if I look at it by market it would track with what you would expect given the macro economic signals we all see.

So Germany was good, we had a good quarter in Germany.

The northern cluster was good.

Northern Europe was good.

And emerging markets, as I mentioned, was good.

Southern Europe in general and the UK have struggled and they tend to be the markets that are struggling in terms of the macro economic recovery.

And UK has always been an incredibly competitive market, an aggressive market from a market share standpoint.

And so we always have ups and downs in that market from a market share standpoint.

It's really those first two, it's not the third factor that you mentioned.

Thanks.

Thanks, Tim.

The next question comes from the line of the Simon Schafer representing Goldman Sachs.

Please proceed.

Yes.

Thanks so much.

I was interested in your comment that 25% of your products will be tablet friendly, which is great.

I just wondered what your feeling was just in light of high market growth?

Is that specifically tailored towards any particular kind of operating system, or is it Apple aligned?

And depending on where you are positioned, what sort of revenue opportunity do you think you have in the next 18 months or so?

So, it's positioned this way, Simon, certainly a lot of our -- any product that we have that is really focused on Bluetooth would be a great product targeted at Apple and the iPad.

One of the challenges right now with the tablet space is that there's a lot of entrants, you know that, or a lot of potential entrants.

There are a ton of tablets announced at CEF.

And what is not clear at this point is who the winners will be, who will get the distribution at retail.

And of the ones that do get distribution, which ones the consumers will favor.

The one thing we all know is the iPad will be one of the winners.

We certainly have products that are focused on the iPad because we know that will be a winner.

And we are working with all the other tablet manufactures and we have some pretty good insights as to which products we think will win.

We know there will be Android products that are winners.

The different manufactures are taking different points of view relative to whether they incorporate USB or not.

We have a flexible portfolio.

We have products that work with the tablets that we expect to be winners.

It will continue to evolve over the next year is all I can say.

Relative to the revenue we are not going to give a target on that.

But the statement about 25% was meant to say that we really think the tablet is a great opportunity, it's additive, and we're going to go after it.

Understood.

Thank you.

My second question would be just when I look at this differential between selling and sell through, obviously that gap that we saw from barely a year ago is sort of narrowing, whereby sell-in has continued to outpace sell-through a little bit on a year-over-year basis, which is basically disclosing the disconnect from last year.

But I was wondering how you felt about the differential?

Are we now in a more normalized environment whereby effectively sell-in should be appropriately matched with sell through?

Yes, I think in general we are.

I mentioned to one of the earlier questioners comments, I think in Asia, primarily driven by the China effect, you may continue to see sell-in outpace sell through because we are continuing to do a great job building out the footprint as part of that go wide in China strategy.

If you look at Europe, we had the opposite effect.

In local currency terms, our sell through outpaced our sell-in.

And then in the Americas, if you take the Revue out because it wasn't there - - I think there was five or six points difference, which in my mind is largely aligned.

So, overall, I would say we are largely in a place where those two things are going to move together.

There is the possible exception of China over time for the reasons I articulated.

The thing I would add to Gerry's comments as well is we are very focused on the volume that we sell in, in any one period of time and the volume we sell through.

We feel very comfortable with the balance.

You will see some fluctuations as we've talked about in these year-over-year growth rates because of the differences in the year-over-year comparable periods, but very comfortable with the volume levels we've got going in and going through.

Got it.

Sorry, Gerry, you mentioned Revue actually and, obviously, sell-in as you say, is outpacing sell through by a wide margin and you sort of amended your target of little bit.

How should we look at inventory?

And what is the type of thing that you are looking for as this category tends to really get off the ground?

Is it just an agreement from the studios and so on to actually provide content?

What is the biggest missing piece of the puzzle right now that would make you think that that category can take off?

Yes, just to be clear, Simon, what I was trying to say in the prior -- answering the prior question is, I was really talking more about the Americas.

And if you look at sell-in and sell-through dynamics in the Americas and back out Revue which wasn't there, you can get the two rates are largely aligned.

I think they are different by about five points.

So I was making that comment.

To your other comment, I think that the main thing we are focused on and Google is just continuing to improve the user experience, the user interface, build awareness for what is the unique about Google TV and what it does.

Because we continue to see a lot of evidence that this thing we call the core promise of seamlessly integrating the web and TV content is something consumers want.

And so making them aware of it and making sure we make the experience better and better and better.

So, I think it is a good experience today and, frankly, it can get better.

And it will get better as we and Google do these, we call these over-the-air periodic updates that will get pushed out to consumers.

They are free.

And frankly, it doesn't matter if you bought a Revue box on day one or if you bought it yesterday, you will get those free over-the-air updates which means that your user experience, your user interface, new applications are being added all the time, and so you've got a constantly refreshed and updated product.

So I think just building the awareness and continuing to improve the user experience are the focuses.

Thank you.

Thank you, Simon.

The next question comes from the line of Andy Hargreaves representing Pacific Crest.

Please proceed.

Thanks.

You mentioned, Gerry, I think that the demand for Revue improved late in the quarter.

Was that elasticity around the retail price drop or was that the Kevin Bacon ad?

December is when the bulk of our marketing initiative, Andy, kicked in, and including the Kevin Bacon ad which was very well received.

We got a lot of kudos judged by a lot of peoples Top 10 ads of the year.

Some of it was seasonality.

A lot of it I think was the impact of our marketing initiatives kicking in.

I think you were asking about pricing.

We have promoted the product with our retail partners and I forget which weeks they were but there was a week or maybe two weeks before Christmas where it was on promotion with Best Buy.

So we did the normal things you do to promote a product and build awareness when something is brand-new.

And we also had a promotion with our TV Cam bundle just to make people aware of that.

So all of these things I think really helped to drive sell through in the month of December and it was encouraging for us to see that.

And then you talked a lot about improving the experience.

Would you consider building your own gooey on top of that platform or is that something that you will continue to leave to Google?

No, that's something -- I think, remember, one of the key functionalities that we are trying to bring to this experience, Andy, is the search functionality.

The ability to easily search all of the content that is available on the web and broadcast, on your DVR, on your PC and the search functionality is key to this.

And Google is the best in the world at that.

So, we know what we are good at.

We are focused on doing the things that we are good at and we know what they are good at.

So, no, we would not do that.

Okay.

And you mentioned, or Erik mentioned, the variable demand generation and the move to variable.

Can you explain what that is exactly?

Is that in-store promotion, TV advertising, what is that and how does it different from what you used to do?

No, it's really, Andy, I think to your question -- it is a combination of all of those things.

On an individual product or product line we might change the mix.

So for example with Revue we talked about the fact that we use television, we used web enviro marketing, we even used in-store demonstrations with our partner Best Buy and some of our other partners as well.

So, it is a combination of those.

They are really levers that we pull.

But I think what is really important for us and the way we think about it and we want you to understand, is that they are variable in nature.

In other words these are not fixed long-term costs, we can dial them up and dial them down.

So, it's the same as we've done in the past but the mixture will change.

Okay.

Thank you.

Thanks, Andy.

The next comes from the line of Michael Foeth representing Bank Vontobel Group.

Please proceed.

Yes, hi, Gerry.

Hi, Erik.

One question regarding Audio.

Did -- the growth performance in Audio was a bit lagging the rest of the pack?

Could you comment a bit on where you stand in Audio, what happened, and what do you see, going forward?

Sure, Michael.

If you look at Audio, Audio did lag a bit as you said.

And the entire impact with Audio can be really focused on one category in one market.

It was really PC speakers in Europe.

PC speakers as you know is the biggest piece of the Audio category.

We have many things in what we call Audio.

It includes PC headsets, it includes our Squeezebox line of Wi-Fi music players, it includes speaker docks, and it includes our Ultimate Ears line of headsets.

But PC speakers is the biggest piece of it and of course Europe is our largest market.

And growth declined in PC speakers in Europe.

On the other hand, if you look at PC speakers in the Americas and Asia, they grew.

And if you look at all these other categories I mentioned on a global basis, they all grew.

PC headsets grew very well, Ultimate Ears grew, Squeezebox Wi-Fi music players grew and our Ultimate Ears line of earphones grew on a global basis.

So, it was really concentrated on PC speakers in Europe.

Okay.

And maybe a second question.

I am still struggling to understand your inventory increased.

I understand it is seasonal but can you give us a bit of an idea of what is in your inventories and where you see inventory turns going towards the end of March?

Sure, Michael.

I will give you a little bit of a sense of that.

When you first look at it on a year-over-year basis it is up about $66 million.

But the single biggest factor in that is when you look at the launch of the Logitech Revue, because it was not at all in the year-ago period.

But also too, I would say to give you a sense when you think about inventory levels, when you think of Q3 of last year, very different economic environment, right?

Much weaker, we had yet to return to full growth on the top line.

So very different environment this year.

That gives you a sense on a year-over-year basis.

We were down sequentially and we anticipate that we will continue to have the right levels of inventory.

We are very comfortable overall, but to give you a sense of what some of the drivers are.

Okay.

Thanks a lot.

(Operator Instructions)

The next question comes on the line of Stephan Gick representing Deutsche Bank.

Please proceed.

Hi, Gerry.

Another question on the gross margin.

Basically Q3 was historically strong gross margin month but this year around it was down 130 basis points year-over-year.

Could you tell us something about that?

Sure.

Two things to answer your, Stephan.

When you look at our gross margin on a year-over-year basis, it is up significantly, about 210 basis points.

The things that really helped us get there were very good operational efficiencies as well as the impact of LifeSize from a mix perspective.

And FX actually hurt us a little bit on a year-over-year basis.

When you look at it sequentially, I think there are a couple things I would point out is from an operational perspective launching Logitech Revue did have a negative impact to our gross margin because it is a brand new product and we have talked about the fact that it is a lower structural gross margin.

But I think also what is important to remember is when you look sequentially, when you look back at Q2 this year, that was an all-time record are this Company of 37.3%.

And that's not something that we said would stay at that level.

I think how I would want you to walk away thinking about gross margin is that, when you look at our guidance for this year, the 36% would be an all-time record for the Company.

And we feel very comfortable in achieving that.

Okay.

Could the sequential decrease also have something to do with the $40 million inventory decrease?

Because historically the inventories didn't decrease that much sequentially?

No, it is not related to it.

Okay.

Thank you.

That concludes our conference call for today.

You may all now disconnect.

Thank you.