羅技 (LOGI) 2011 Q4 法說會逐字稿

Please stand by for realtime transcript.

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

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

We will be conducting a question and answer session and instructions will follow at that time.

This call is being recorded for replay purposes and may not be reproduced and 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 Investor Relations and Corporate Treasurer at Logitech.

Welcome to the Logitech conference call to discuss the companies results with for the fourth quarter in full year ending March 31, 2011.

The press release, our prepared remarks and slides and a live webcast of this call are available online at Logitech.com.

As noted in our press release we have published our prepared remarks on the website in advance of this call.

Those remarks are intended to serve in place of extended formal comments and we will not repeat them on this call.

During the course of this call, we may make 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 risk 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 with are available on line of the FCC Edgar database and the final paragraph of the press release and prepared remarks reporting fourth-quarter results available a Logitech.com.

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.

Joined us today from Zurich is Gerry Quindlen, President and Chief Executive Officer, and here in Fremont is Erik Bardman, Senior Vice President of Finance and Chief Financial Officer.

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

Thanks, Joe.

Thanks, everyone for joining us today.

We realize it is been frustrating for you to have to wait several weeks since the pre-announcement for a thorough explanation of our Q4 results.

We regret it having to signal the change in outlook without providing more detail.

But we thought it was appropriate to let the market know as soon as possible the impact of what we were seeing even though we had not yet started the financial close process.

Now we know that you have many questions, so I will limit my opening remarks to just the high-level overview of what we reported today.

So that Erik Bardman and I may get to those questions.

The very disappointing conclusion to the year, which resulted in lower-than-expected full-year sales, operating income and gross margin was due to weaker than anticipated demand in the second half of Q4 for our products and our EMEA retail sales region.

The weakness in EMEA was the result of two factors - lower-than-expected demand late in Q4 and poor execution of pricing and channel programs in the region.

We understand the factors that led to the shortfall in the EMEA and we are taking steps to address the ones under our control in order to improve our performance.

We estimate that will take up to two quarters to fully implement the necessary changes.

Our prepared comments which are posted on our website contain additional information and what happened in EMEA and the action plan for improvement.

As disappointed as I am with the conclusion to fiscal 2011, the were several full-year highlights.

We achieved sales growth of 20% and our operating income nearly doubled.

We saw meaningful returns from our strategic investments in our life-size video conferencing business and our China initiatives.

We also delivered double-digit growth in our Americas and Asia-Pacific retail sales regions.

Let me briefly address our outlook for fiscal 2012.

First we are extremely focused on getting are at EMEA sales region back on track.

Beyond getting EMEA back on track we also focused on rapidly re-aligning our resources and prioritizing our spending to support what we see is our most promising growth opportunities in new fiscal year and beyond.

These opportunities include China and emerging markets more broadly, tablet peripherals, life-size, Unified Communications and the Next Generation of Goggle TV.

I do want to emphasize that a key planning assumption underpinning our outlook for fiscal 2012 is that we expect to experience a decline in sales of our PC peripherals in mature markets.

We therefore expect the majority of our sales growth to be driven by this promising new growth opportunities that I just mentioned.

For fiscal 2012 we are targeting sales of around $2.6 billion.

We expect our gross margins be around 35% and our operating income to be roughly $185 million.

We target our full-year tax rate at approximately 15%.

I want to wrap up by saying that we ventured our new fiscal year with very clear priorities namely get our EMEA business back on track, leveraging our most promising opportunities for future growth, re-aligning our resources to support those growth initiatives, and delivering on our fiscal 2012 financial targets.

I look forward to providing you with updates on our process throughout fiscal 2012.

As promised from Erik and I are now available to take your questions, please follow the instructions of the operator.

(Operator Instructions).

Your first question comes from the line of Ashish Sinha at Morgan Stanley.

Please proceed.

Hi, thank you for taking my questions.

Just a couple if I may.

On your growth expectations for fiscal '12, could you talk about some of your expectations for each of the focused segments in the context of the 10% organic revenue growth you are talking about?

I'm talking about China, LifeSize and Google TV.

Example in China, is it just China our do have plans of expanding into other emerging markets in fiscal '12?

And then LifeSize and Google TV, what are some of your growth expectations there?

And then secondly on topic [benfellows], could you talk a bit more about your recent distribution agreement with Zag which is probably the first exclusive tablet peripheral and in this context, should we be thinking more about collaborative deals in the future and what is the revenue profit sharing agreement with Zag on this deal?

Thank you.

Sure.

(inaudible) This is Gerry.

So on the growth, breaking down the growth into the focused segments.

I will give you some directional I am not going to go into too much detail.

But what LifeSize as you know from our investor day we shared that we were very bullish on the prospects of LifeSize we felt that business as we looked out over five years could support a growth rate of 25% or better.

I'm very pleased with the first full year we turned in with LifeSize.

I think it was an outstanding performance.

And I'm very comfortable with those long-term growth expectations.

I won't give you a specific number that we are targeting for fiscal year '12 but it is consistent with the long-term model.

On Google TV, we are anticipating Google coming out with a software upgrade in 2011 which will add features and functionality and we think that's the key.

You probably noticed in our remarks that we've reduced the price of the review box by $50.00 to $249.

Even with that, we have what I think are pretty prudent expectation for Google TV, in terms of our 2012 growth expectation.

We are not leaning in significantly until we know we've got the user experience right and then we and Google and other partners will expand that to other markets.

I think we've got a very prudent assumption for fiscal year 12.

On China, we just put in - we just wrapped up a spectacular year in China.

Our first full year from implementing our China -- our big China initiative and as you heard, we more than doubled our business in that fiscal '11.

And I don't necessarily expect that growth rate -- I don't expect to double every year but I definitely seen a skinny traction in our strategy and I see the ability to grow China very, very quickly.

Now we've been going in the other emerging markets, Russia has been a good market for us for years, but in general, I think the emerging markets are where we will go PC peripherals business.

You heard me mention that we are actually planning that PC peripherals in the highly penetrated mature markets, the US , Canada, Western Europe, will decline this year.

We think that's a prudent assumption given all the moving parts but we think we can grow emerging markets and a very healthy growth rate.

I will say north that 20% on average and that's the direction that we are very comfortable with.

And we know we've gotten a lot of learnings from China that we can apply to those other emerging markets.

So that gives you a sense of those things.

On the tablets, the timing of Zag -- I will tell you what about how Zag came about.

It really was just an opportunity that brought together mutual interest.

We are both looking at the space, they had a successful product with Apple.

You're going to see several announcements from us starting in just a couple weeks in May.

And you're going to see a steady stream of news from Logitech on tablet peripherals throughout fiscal year '12.

In general, we are designing most of the products but we are very open to this kind of arrangement because I think since tablets is a category that's growing very quickly and the whole industry has gotten interested in tablets in a short period of time.

By that I mean suppliers as well as retailers and peripheral makers like ourselves, time to market is key.

So I will prioritize time-to-market over being the exclusive provider of it.

I'm happy to partner with the great company like Zag.

It is obviously in their interest because they are expanding their distribution so we will continue to design most the products we bring to market for tablets but I'm absolutely going to continue to look for partnerships like Zag.

I'm not going to go into the details of our financial relationship but it works for both of us or we wouldn't be doing

Thank you.

Thank you.

The next question comes from the line of Paul Coster with JPMorgan.

Please proceed.

Thank you.

First question really is on EMEA, how quickly do you think you can resolve the issues that you've experienced over there and to what extent do you think that the problems there weighed on gross margins in the fourth quarter, can you quantify that at all?

Sure.

But, this is Gerry.

I will take the first part of that about how long and Erik can talk to the gross margin piece.

And we can definitely help you understand a little bit about how it impacted the overall company.

As we said in both the posted prepared remarks and as I alluded to in my opening statement, we're giving ourselves at least a couple of quarters to implement the changes we think are necessary.

I believe those changes will start to fix the issues quickly.

I'm not suggesting that everything will be completely addressed by the end of the first two quarters of the year but I think we will have gone a long way.

This is not something where I think this going to drag out throughout fiscal year '12.

I think we will be able to address most of it pretty quickly, meaning in the first half.

I definitely don't see dragging on the on fiscal year '12 so we are moving quickly.

I definitely don't see it dragging one beyond fiscal '12.

We are moving quickly to address it and most the benefit will I think occur -- in terms of fixing it -- will occur in the first half of the year.

And Erik?

And Paul, to your question about gross margin in Q4, the single biggest factor causing the decline in our gross margin was related to the weak performance in EMEA and to give you a sense to dimensionalize that a little bit, if you looked at just the EMEA retail sales region and the decline of gross margin in that region, it declined about 1000 basis points year-over-year.

It was by far and away the single biggest factor impacting the total Company gross margin for the quarter.

Okay, --

Paul - let me just add one thing to what Erik said.

If EMEA had hit the plan that we had for Q4 the Company gross margin would have essentially been about flat with last year at 35%, [7358], that's a big an impact it had on the overall results.

That's helpful, thank you.

And then your guidance for the year is 35%, that presumably assumes a gradual recovery in the margins from EMEA?

Yes.

That's exactly to Gerry's point.

As we looked up at the first few quarters as we implement the changes and as we get EMEA too much healthier level, that's going to be a near-term drag on gross margin and factored into our guidance for fiscal year '12.

Okay.

Quick question on Unified Communications.

You see a catalyst there, once this business starts kicking in, how are you going to define it?

Is going to be a separate category or is it going to be folded into-- for instance, audio?

If you will, Paul, let me talk about the bit about, UC has really gotten a lot of traction inside the Company in a fairly short period of time.

As LifeSize became a bigger part of Logitech we found more and more customers as you know, let me back up.

As you know, Unified Communications is really about bringing voice and video together with data sharing and chat.

As LifeSize became a bigger of Logitech, we found more and more companies approaching us feeling us out on -- we're very interested in UC, we would really like to deal with a single company, we don't want to get headsets from one player, conference room end points from another player, desktop solutions with Web Cams from somebody else, you guys seem like the one player that has it all and we said that's right.

So we're getting more and more interest, and we're getting more and more traction in terms of working with outside firms.

I think your going to see a lot of announcements from us.

We've already made a couple.

In the course of the next six months where we are doing more partnerships to raise UC, Erik, I don't know if you want to add any comments on Paul's question about how we will report UC going forward.

I don't know that we have worked it out.

No.

We will have to clarify that in time.

I think post some of the announcements in the market and as we talk to you more about that, we will give you more clarity as to how to evaluate it and metrics we'll provide.

Got it.

Last question.

Are there any catalysts ahead for Goggle TV.

Can you sort of point to anything that's going to happen this year that might promote the use of the review product?

I think the main thing is, just to repeat what I said relative to Ashish's question, we did lower the price and I think that will only help.

$50 to $249 and you know you can imagine, we will be promoting with an everyday price at $249.00 we will be promoting at $199, and it makes the product even more attractive so I think that will be catalysts on its own.

But the most important catalyst is Google, it is planning to update the software in 2011.

They are focused on that.

That will be key in terms of new features and functionality, a new user interface and just enhancing the user experience.

I think that is the single most important catalyst, and they are still very focused on that.

Thank you.

The next question comes from the line of Andreas Muller with ZKB.

Please proceed.

Yes.

Can you hear me?

Yes?

Thank you.

I was wondering what was distinctively different in the pricing in China management programs in EMEA versus say the part promotional activities used during the 2009 recession in other regions.

What was the distinction at this time it didn't really work first of all to identify basically consumer transcendental so in setting the right price points.

Andreas, I will take a crack at that and Erik if you want to add anything at the end, you can.

Let me level set just by reminding you that it was really both a weakening of demand and some -- I would call perfect storm of softening demand and some poor and ineffective execution.

We responded to the weakening demand we saw particularly starting in February by trying to promote to both the retailer and the consumer to drive more business, the right thing to do.

But I would define it as ineffective because it didn't drive the results we wanted.

It wound up lowering price, you heard about the impact that it had on margin.

But it didn't really drive any additional business, so it was ineffective.

It wasn't the wrong thing to do, but it was ineffective.

In addition to that, we have been trying to change our channel programs starting a few months ago.

To improve visibility into frankly change the incentives for our channel partners.

To incent them more on to drive sellout and consumer pull and to incent them less on when they purchase from us.

And we referred to that in the script if you have a chance to read it.

But we had poor execution on that.

We had a lot of complexity.

I think we went to broadly and too fast, in some cases, and that poor execution happened at the worst possible time when demand was weakening.

On top of that we had other execution issues on a spotty basis which where we lost market share in several countries and in several customers and I would lump that under poor or ineffective execution.

So we really had this perfect storm of weakening demand in these various elements of ineffective or weak execution.

And all together resulted in double-digit decline and our gross margins really crashing.

I think Gerry captures it well.

The other aspect is that we had a relatively backend loaded quarter in our EMEA retail region and as Gerry talked about it, as we saw weakening demand in the middle of the quarter, particularly towards the end and in the month of March and if you have a back end loaded nature, that has an impact.

And as he talked about, when you run a promotion, you obviously have an impact on your top line and bottom line probability, but if you don't get the full pull through on sales, if you don't get the lift with the consumer, it has an exponentially bigger impact on your bottom line and that's what did see in EMEA in Q4 and it's the combination of the weak demand and poor regional execution.

Okay, thank you.

Then a question on LifeSize.

Where are operating margins right now relative to the group.

Are they around the 6% you made in -- 2011 already.

Or has it already exceeded say the group average LifeSize?

Just to give you a sense, Andreas, on LifeSize - a couple things - one, we are very happy with how they performed in just over the first year of the joint partnership with Logitech.

From a profitability standpoint we are not providing specific profitability numbers on LifeSize moving forward.

But what I would say is that they're exactly on track with where we want them to be on a growth perspective.

Our focus is really investing in their business and helping continue to drive growth.

You heard Gerry talk a little bit about the powerful things that they are doing that not only in video conferencing but things that relate to Unified Communications as well.

So we're very excited about LifeSize, more than meeting our expectations both from a growth and profitability standpoint.

Okay.

Thank you very much.

Thank you, Andreas.

You next question comes from the line of Michael Foeth with Bank of Vontobel.

Please proceed.

Yes.

Hi gentlemen.

Two questions from my side.

The first one regarding basically your midterm targets.

Your guidance doesn't really imply significant leverage as suggested by your midterm targets and I was wondering how committed you still are to reaching 13% to 15% operating margin over time, that will be the first question.

And also, well basically, the other metrics, which would be the mid teams gross.

Any second question would be, you said that you're realigning resources to tackle the problems that you've seen.

I was wondering which position or positions in the EMEA management have you actually replaced and what kind of control do you from top management have on these channel programs and the pricing policies and how fast can you [rack] from top management?

Okay, so Michael, a lot of questions.

Let me take the business model question and the realigning of responsibilities in Europe and Erik, you can chime in on the end on the controls.

In terms of the business model, we remain committed what we shared in November.

And you correctly point out, that we reiterated that we see ourselves as a mid-teams growth company and we also said we believe we are going to get there, get to the mid teams growth goals in a very different way.

We also reiterated something we always say about our long-term model which is not annual targets it's what we are managing to over the long run.

So even though we are talking about 10% in fiscal year '12, that's partially due to the fact that EMEA is going to be a bit of a drag at least for the first half.

Also look at '11 and '12 together you're looking at about 15% on average and so we are still committed to that.

If I look at the other elements of the business model, we said that we felt we could become a more profitable company over time and we raised our long term targets on gross margin and as you know, operating margin.

The main reason we said that was because we were feeling - and we still for very bullish about LifeSize.

I would say we feel even more bullish after this excellent first year we have had, which I think exceeded even our own expectations.

And we said LifeSize should be and will be very accretive to both gross margin and operating margin in time, as they scale the business.

And even with this unfortunate Q4 disruption I would say that is even more true given the excellent first year that they had.

So we don't see that that has been undermined at all by the unfortunate Q4 results.

Relative to replacing the Head of Europe Sales and Marketing - that has already happened.

There's a new sales leader who is already in place.

And the other thing we were talking about in realigning resources hade more to do with, as we look at PC peripherals in mature markets which drove a lot of our growth in the last five to ten years, we do not see that driving a lot of our growth going forward.

We are realigning a number of our financial resources and investment resources to immerging markets, to LifeSize, to Digital Home, Unified Communications because we see bigger growth opportunities there.

Because that's where we will get the scaling of our operating expense over time.

That's what we meant when we talk about realigning resources.

Erik, I'll let you talk about the controls question.

So Michael, let's talk a little bit about your question around controls is - first and foremost as a company we are always looking very closely at the controls and procedures we've got in place and all of our operating units around the world.

We are working very closely with the EMEA regional management team to make sure we have got the right controls and [proficies] in place here.

And you always want to learn from situations like this to make sure what would you do different operational and those types of things.

And to your question about what a handle at the headquarters level versus what we handle at the regional level, we have a framework in place for every one of our operating regions in terms of the programs they run and what they operate within.

What I would say here is this not a breakdown of controls that occurred in the quarter.

But we give our region is they have a certain regional leverage that they can pull as Gerry talked about when you manage a channel program or you manage a pricing program you are working very closely with your customer, you are trying to respond to competitive situations, you are trying to make sure creating pull-through for your consumers, etc.

But what we did have is that we had poor execution on some of these newer programs that clouded some of our viability, complicated some things for our customers and then on top of it, we had dramatically weakening demand particularly in the second half of the quarter that really exasperated a poor execution situation and led to the poor performance we had within the quarter.

Great, thank you very much.

Thank you, Michael.

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

Please proceed.

Thanks.

I just want to ask about the PC peripherals expectations and how much of that is driven by your expectation for PC sales versus your expectations for [metrics] going forward.

Well I would say the assumption Andy, breaks or incorporates both of those.

So as we look at the highly penetrated markets, the mature markets as we've been calling them, and we look at some of the developments -- there's obviously much more focus -- there's a lot of emphasis on tablets right now.

And we are trying to be prudent in our planning and so we made the assumption that are not going to see growth.

I'm not going to quantify what the rate of decline is that we model, but we are making the assumption that we are not going to see growth in fiscal year 12 and we are using that to force the redeployment of resources to the other areas where we do see growth coming from.

It is a -- it is sort of fact -- it factors in both attach and underlying PC sales.

Okay.

And then on the Zag deal -- don't expect you to comment on the finances obviously -- can you comment , is this just for this specific product or is there an ongoing relationship here where you guys are going to go co-develop future products as

I think for now it is just this product, but I think Zag was obviously very, very attracted to the ability to get expanded distribution from Logitech.

We were looking - one of the tablet peripheral consumer needs that comes out very strongly is the need for protection and they had this wonderful product that combines an input device with protection in a very elegant solution.

And we've got our own excellent keyboard products coming out that we have developed but this was a great addition to our lineup and it brings a more comprehensive set of tablet peripherals from Logitech and retailers were thrilled that we were doing this.

We are looking at this as let's see where this goes and, as I said, if it works for both of us, I think we're both going to look for other ways to partner and we are looking at ways to partner with other companies because as I said in response to Ashish's question, I think speed is more important than anything right now.

It is a brand-new category, retailers are re-setting their shelves quickly, no one quite knows how consumers are going to respond.

And we want to have the broadest possible offering.

So speed is of the essence, so as I said, we will see where it goes.

And then just last, of the inventory side, it is a little high for this time of the year, are you guys comfortable with the aging there?

Yes, so Andy to talk about inventory a little bit, it was up on the year-over-year basis I think to your point.

I'm not going to break out the exact numbers, but the most significant factor driving our increase in inventory year-over-year was the Goggle TV related inventory.

It is primarily for the reason that there wasn't any in the years prior period.

To your point about aging, we feel comfortable with the aging.

It is something we look at pretty actively every quarter.

And we will continue to monitor going forward.

But single biggest factor, again, was related to having Google TV inventory in this year and not in the prior year.

Okay, thank you.

Thank you, Andy.

You next question comes from the line of John Bright with Avondale Partners.

Please proceed.

Thank you.

Gerry, Erik, what assumptions are you making in the - for PC industry growth for your fiscal year '12 guidance?

John, it really is regional.

For emerging markets, and we are using as our guideline, the third party data that I think everybody looks at.

We add to that some of our own research but we obviously look at what some of the experts say.

And for emerging markets, we expect that we are going to see very, very healthy growth.

Continually trying to past years in what I've been calling the more mature highly penetrated markets, it is a much - it is in-line, let me just say, it is in line with the publicly available data from the well-known sources.

It is very much in-line with that.

Okay.

For the emerging markets, specifically China, you have talked about being able to maintain your gross margins in China and you have talked about doing that by manufacturing or assembling the products for the particular market.

Given that you're already assembling in China, for the other markets and it is a stereotypical price sensitive market, what are you doing to accomplish that?

I think the main thing that help us beat the competition are our brand which we have been in China from a physical presence stand point for a long time.

We have been there with a manufacturing presence since the mid-nineties.

And we have very strong brand in China and that allows you to price a little bit better than competition.

And as I said several times we had a good business in China before, meaning we had a sizable business and now we seem to be on the growth trajectory that's making it bigger much faster and it's giving us volume and scale benefits.

And I think it is only going to help margins, or give us more flexibility against competition.

I think if you look at our continuous rate of innovation, we are constantly changing over products and moving to the next one before some one's had a chance to copy our old one.

You look at the strength of our brand, which is only getting better.

And if you look at a rapidly building scale it allows us to keep very attractive margin structures.

Okay.

And just to add to it, what Gerry said, and you even mentioned it John, we have talked about increasingly designing products uniquely for the Chinese market, not only because it appeals well to Chinese consumers, but also because when you do that from the very initial idea phase of a product, you are able to engineer it for the right price point in that particular market.

Because remember, there is not a correlation between low ASPs and low gross margin for us, we are able to achieve very nice gross margins at different ASPs across the spectrum and we continue to be able to do that in China and we see a path we're being able to that as we grow in other emerging markets.

Next question.

On Unified Communications, I assume the products we're talking about are video products, speaker products and headset products.

Headset products would be -- actually you did put out an announcement I think late last year, beginning portion of this year on headset products.

The two main headset players Plantronics and GN talk about certification with the likes of Cisco and Microsoft as being very important.

Have you achieved certification with the CISCO and Microsoft's of the world for headsets?

Yes, let me just add one thing to your opening statement.

I think the key products are certainly audio headsets, some sort of desktop solution which is typically going to be a Web Cam.

We have a lot of people coming to us for that and we get a lot of people wanting a video endpoint solution and the refrain we hear constantly is we don't want to buy these from two different players.

I think that is one of the reasons we are getting a lot more people knocking on door.

They see that we have all three and obviously they know Logitech quite well.

Relative to your other question, absolutely certification is key.

We do have certified products, we have certified headsets and you will actually see a lot of additional announcements in the coming weeks and months around that.

So you're absolutely right and we have some and we will have more.

Thank you first for the pre-prepared remarks in advance leaving more room for Q & A.

That was very helpful.

Thanks.

Thank you John.

That is why we did it.

That's why we did it.

(Operator Instructions).

The next question comes from the line of Yair Reiner with Oppenheimer.

Please proceed.

Yes, thank you.

Question about EMEA there is a pretty big delta in the quarter between the [seller] to the channel which was quite weak, and sale through, which was pretty much flat year-on-year.

It suggests that you worked down some channel inventory but I guess the guidance suggests that maybe there's still some more channel inventory to work down.

Is that the right way to look at it and to what extent is price protection a part of your expectations for weaker gross margin in the next couple quarters?

Yes.

Let me give you a little bit of a sense about a way to way to think about it.

If you go back and look at from the end of Q3, to the end of Q4, in our EMEA retail sales region our channel inventory came down about 11%.

However, one of the biggest drivers for that was quite frankly as you know with the seasonality of our business from our first quarter of the year is by far and away our lowest volume quarter of the year.

So we would expect to have the channel come down.

Now because we saw such a dramatic slowdown in sale through -- and to give you a sense as to how much, it obviously came in at minus 1%.

The first three quarters of fiscal year '11 in the EMEA region we averaged about 20% year-over- year sale through growth.

So then when you go from that sort of run rate and that's the expectation we started out the quarter with is that we would have pretty healthy consumer demand, you had a dramatic drop off in the minus one over the course of the quarter.

And you heard us talk about not only did it happen during the quarter, but it is especially acute as we got into February and into the second half of the quarter.

So when we are looking at inventory in this particular sense with channel, we've got a forward-looking weeks-on-hand estimate that always has an estimate around what type of sale through you anticipate going forward.

So given those variables, we ended the quarter with more channel inventory than was healthy given the dramatic slowdown in consumer demand.

So that's why we've been talking about it will take us a few quarters to work through that with our partners and get back to a more healthy level so it is partly related to what happened and also factoring in the seasonality that we have in our business.

Okay, that makes sense.

Very helpful.

The question on the remotes business.

It looks like, excluding Google TV, remotes were a bit down year-over-year.

Any updated thoughts about the prospects for the remotes business and how we should think about that moving forward?

Sure.

I mean -

Yes I mean -

Go ahead, Erik.

From an expectation, or what we factored, is as we are looking forward into fiscal year 12, we feel very good about the remotes franchise.

We've got some very nice products that you are going to be seeing from over the next few months and that's all factored into our fiscal year '12 guidance as we look forward.

Okay, and one then just one quick one, if I may.

For products like the Zag deal.

Should profitability in gross margin on those type of products be closer to retail products or OEM products?

Go ahead, Gerry.

I would say it is not an easy question to answer because each one of these things is unique.

I'm not trying to be evasive, it doesn't lend itself to an easy answer.

It is not OEM margins, but it depends on the nature of the product and what kind of deal we have.

The deal with Zag is a Global distribution deal for them, so they are getting a lot of value added.

So each one of these deals is a little bit different and I wouldn't tell you even if --it is not appropriate for us to share the details of that - but these things are all unique.

The other comment I wanted to make, is building on your last question, which Erik answered.

The main thing in our remotes business in Q4 was the weakness in Europe.

I think we were down 31% or something like that, we can check that number and make sure that is accurate number, but Europe dragged down everything else.

Our units were still up even with Europe being weak.

But Europe was down something like 31% and dragged everything else down.

We had a record year in harmony, I believe we are up about 45%.

So I still feel very good about the franchise.

And still expect big things from it.

Thank you.

Thank you.

Next question comes from client of Nicholas von Stackelberg with Macquarie.

Please proceed .

Yes.

Thanks for taking a question.

My question is about the share buyback program that you had approved, I think , two years back, $250 million.

You haven't bought back any stock all of last year, while I think when you look at your cash flow statement you actually had a cash end related to share option exercises over last year - $46.5 million, if you include the exist text effect.

And we also see that your share count is starting to tick up.

What are the prospects here?

You have now given guidance --that may not exactly match your midterm targets, but what has changed to, for you to come back to the market and buy stock?

Thank

Yes, Nicolas.

To give a little bit of sense and to answer question.

Our priorities, and we have talked about them and actually we spent some time talking about this back at our analyst day back in November, our priorities when it comes to utilization of cash, first and foremost for the business is about making sure that we are adequately funding the working capital of the business and we are going after the growth opportunities and particularly some of things that Gerry's been talking about with opportunities in emerging markets, LifeSize things in China and other places.

We are absolutely focused on that being the first priority for where our cash goes.

We have further dimensionalized a little bit that we think the appropriate range of cash to have available to run the business effectively and go after growth opportunities is to have between 15% to 20% of our trailing 12 month sales as a cash balance and we are essentially there today.

With the cash balance I think we ended the quarter at about $478 million.

Beyond that as we get to cash levels above that level, we are opportunistically looking at two things and they are equal in terms of how we think about them.

It is obviously what you mentioned, the opportunity to go back into the market and repurchase shares.

We do have the approved program of $250 million, that's there for us to take advantage of when we choose to do so.

And then the other piece is to continue to be opportunistic when it comes to M&A.

No change from our overall strategy and philosophy, but we are very focused first and foremost on making sure that we are adequately funding the business and then we will look at those two other opportunities beyond that.

Okay.

And then another inventory related question if I may, you're prepared remarks contained a hint that the most significant factor year-over-year in the increase was Google TV related inventory.

Sales I think were $6 million, if that's correct.

Can you share with us an absolute dollar amount in your inventory that is related to this product category and as and when Google does update the software will that have any bearing on your product configuration?

Yes, two things, consistent with how we've always approached it, we won't disclose any individual product line inventory levels.

But it is absolutely true that the single biggest factor in driving our inventory up on the year-over-year basis was the Google TV related product inventory and simply because it wasn't in a prior-year period.

To come to the second part of your question, does changes of the software platform by Google TV impact us?

Actually that is one of the very nice design things about the review set top box is that if you bought your review - the very first one we sold or if you but one 2 or 3 months from now -- the hardware does not have to change at all for the consumer to receive the benefits of the new software, those are free over the air software updates that are pushed to the device.

And it also for us creates very minimal obsolescence risk as relates to the hardware box.

Okay, so you would exclude that you may have to take an inventory write on the product that you currently have in stock specifically in this product category?

You know, I'm not going to comment specifically on that type of speculation because at any point in time looking forward there's lots of variables and factors that go into a product whether you'd have to make adjustments.

But there's nothing different or unique here as to all the products that we manage our channel.

And actually I think the obsolescence risk is, as I mentioned, a little bit lower than it is in certain other types of hardware just simply because of the way in which new value is delivered through the softer updates.

Got it.

Thank you.

The next question comes from the line of Michael Studer with Bellevue.

Yes, one question on your guidance for sales, do expect return to the usual seasonality in full year '11, '12 and also how was the start to Q1?

In terms of what is the first part and Gerry can add any additional comments if he wants.

From a sales perspective on fiscal year '12, we would expect that the seasonality would be relatively normal.

Obviously having the EMEA region start out the year weak does create some slight different comparables for us.

But I would say overall in the year on balance it would look like our normal seasonality.

And on the Q1?

We are not in a position to comment specifically on the quarter.

We are just a couple of weeks in but as we said and Gerry talked about and it was in our prepared remarks as well, we very focused on a couple of things as we come into the quarter.

First and foremost is getting the EMEA region back to a healthier level.

We know that there's certain things we are putting in place right away in terms of some of the things that we want to change.

But we also know that to work through with our Partners and channel inventory and those things can take up to a couple quarters to accomplish so we are very focused on that.

We are very focused on the growth opportunities that we talked about that would be scaling in LifeSize and opportunities in China, other emerging markets, very excited about the tablet road map that we have in front of us.

Those are our priorities right now.

And obviously we are keeping our eyes very closely tuned to consumer demand levels.

I would point out that as we look forward into our guidance there's nothing there that assumes any dramatic pickup in consumer demand in the EMEA region.

That's something that we are going to watch very closely.

All right, thanks.

(Operator Instructions)

You're next question comes from the line of Mr.

Chris Gretler with Credit Suisse, Please proceed.

Yes, thank you, good afternoon or good morning.

I have a few questions, first of all with respect to your OEM business.

Now I was a bit surprised by the approved reduction in sales on a sequential basis.

Now it is [basically allowed, expect] to continue given the general weakness in the PC market.

That would be my first question then secondly, I was a bit surprised I mean, given you remarks about no promotional activities.

It did not work out as expected.

I mean, You have been around fro ages in the first space and you have tremendous experience how to stimulate demand, what exactly did not work our relative to your original expectations?

That would be my second question.

And the last one is on the (inaudible) country, less then Europe, quite a mixed bag generally, if you look around.

Is there any countries in particular or did you experience that across the board?

Okay, thank you, Chris.

The first question on OEM, I would say with OEM, we would say that a lot of the weakness was just a slowdown in PC shipments.

As you know, our OEM business it is primarily tied to mice and those mice are tied to desk tops disproportionately.

Secondarily keyboards.

So it is going to tie and track closely to PC shipments.

It is a piece of our business that does track the most closely to how PC shipments go.

We are not going to give you the specific number but our planning assumption for fiscal year '12 really tracks back to John Bright' s question, really tracks to what the PC market looks like.

And what the outside experts are saying is going to happen.

So I think we have a pretty prudent assumption there.

We are not forecasting a major deterioration but we are not -- we don't have an aggressive assumption there at all in OEM.

On Europe, I would really repeat what I said to one of the earlier questions it was essentially a perfect storm of not just promotions but weakening demand in effective promotions.

They didn't stimulate demand we will looking for.

So the only effective if he had was to our profitability and margins.

We did have some poor execution of some new pricing programs that I talked about.

And then I also talked about market share losses which I also lump in under poor, ineffective execution.

In terms of the countries, I would say it was really all of Western Europe including for the first time all year, Germany.

Germany has been performing well for us up to now and the factors in Germany were multiple.

It wasn't one thing, some of that was competition.

Some of it was some signals from our retailers of weakening demand.

It was other factors.

But the Nordics performed well and the emerging markets of Europe performed well.

They performed well all year.

Other than Nordics and emerging markets, all of the other countries, Southern Europe, of course, Germany, they were all pretty similar and pretty weak.

Okay.

Thank you.

Thank you, Chris.

The last question comes from the line of [Brett Kaiser with Chevero].

Please proceed.

Good morning.

One question for my side please.

On the marketing and selling expenses, the percentage of sales.

I mean, clearly those were at the level we haven't seen for quite some time.

Were there any factors in there that we should expect go away?

And then on the trend of that in fiscal year '12, should we expect those to trend up further more in the first half of the year and then gradually decline in [h2]?

Let me start and then I will ask Erik to comment a little bit on the Q4 specifics.

Let me talk more about the trend and how we are thinking about it for fiscal year '12 and how we are going forward.

I do want to take you back to what we said a year ago as we were looking at fiscal year '11.

We were coming out of six quarters of contracting revenue.

And we made it clear that are top priorities as a company was getting back to double-digit growth.

That we were executing against the different strategy a new strategy with some new areas where we felt the growth would come from.

And that we were going to invest to generate that.

So we did invest heavily not only in sale and marketing for the full year but also in R & D.

And obviously we invested heavily in LifeSize.

If you look at the guidance for fiscal year '12 and what it implies for operating expense, what we are saying is that operating expense will grow in the low single digits, in the four to five range.

We've also been saying consistently in both our prepared remarks and on this call that we are very focused on re-aligning resources.

Which is moving them from being against things that aren't going to grow or going to shrink, to areas where we believe we will get healthy growth rates going forward.

Within a 4% to 5% that's implied in fiscal year '12, there's a lot of moving parts.

Things growing very quickly, like LifeSize in China, and thing shrinking.

So behind the 4% to 5%, you can not see all the moving parts, but that's the broader focus that we have because we are committed to rebuilding operating leverage and we took a couple steps back with the disappointment in Q4 but we are still very committed to rebuilding and the key to that is getting more disciplined about the redeployment of resources within our investment envelope.

Erik, I will let you talk about the specifics of sales and marketing in Q4.

Sure.

And to give you a sense in Q4, there were a couple of drivers as to why sales and marketing expenses is up the way that is was.

First and foremost it was advertising related to our Harmony line of remote controls as well as Logitech review.

But then also and you heard Gerry talk about it, was also in our prepared comments.

We continue to invest in building out our sales team and sales capabilities for the growth opportunities in China.

As well as in the LifeSize business, because we want to make sure that we are absolutely maximizing on the growth opportunity there.

But those were the big drivers of year-over-year increase in Q4.

Okay, that's helpful.

Thanks.

That concludes our conference call for today.

You may all disconnect.

Thank you and have a good day.