羅技 (LOGI) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter financial results conference call for Logitech.

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 in whole or in part without written authorization from Logitech.

I would now 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 first quarter ended June 30th, 2012.

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 our 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.

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 30th, 2012, which is available online on the SEC EDGAR database, and on the final paragraphs of the press release and prepared remarks reporting first quarter results, available at logitech.com.

The forward-looking statements made during this call reflect 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.

This call is being recorded and will be available for replay on the Logitech Website.

Joining us today are Guerrino De Luca, Chairman and Chief Executive Officer; Bracken Darrell, President; and Erik Bardman, Senior Vice President of Finance and Chief Financial Officer.

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

Thanks, Joe.

And thanks to all of you for joining us today.

I obviously cannot be pleased with the operating loss that we generated in the quarter.

But, I'm encouraged that our results were consistent with our expectations, reflecting the modest performance of the product portfolio that is mostly made up of our older products.

When I isolate some of the factors that negatively impacted our profitability, it's clear to us that our results are similar to the prior year, which is what we expected at the current stage of our turnaround.

Our restructuring-related costs totaled roughly $34 million in Q1.

This is essentially the same amount as last year's write-down of our Logitech review inventory.

This year, we also incurred $4.3 million in costs associated with the exit from our old campus in Freemont, California, and another $4.5 million related to the acceleration of our product portfolio simplification efforts, which Bracken will address shortly.

All these changes will positively impact our operating results in the future.

I want to specifically mention two highlights in the quarters.

First, I was very encouraged with the growth we achieved in EMEA, with sales up by 28% in local currency.

We're well positioned in EMEA for a significant improvement in sales and profitability during the remainder of the fiscal year compared to the prior year.

I was also pleased with the double-digit growth in both the desktop and keyboard and the audio product categories.

The strong initial sales of the new generations of products recently added to our portfolio were significant factors in the growth achieved in both categories.

I will now turn the call over to Bracken.

And I will return after him to comment on some elements of the proxy we filed earlier this week and on our strategy going forward.

Thanks, Guerrino.

I want to comment briefly on the restructuring initiatives we announced in late April.

As painful as the process of restructuring is for any organization, I was really pleased with the speed and the quality of our execution.

We moved aggressively.

We moved with precision as we laid the foundation for a cost structure that will improve our profitability and support our future growth initiatives.

We're confident that the restructuring will result in a reduction of approximately $80 million in annual operating costs, with the positive impact on our financials becoming fully visible in the second half of this year, this fiscal year.

The vast majority of our restructuring actions are now behind us.

And we're focused on improved performance.

A critical element in our improvement efforts is the simplification of our organization and our product portfolio.

There's still much work to be done.

But, let me update you on the progress.

One example of our simplified organization involves marketing or our marketing function.

We've completed the consolidation of our brand management and product portfolio management under the leadership of the business groups.

This change provides us with clarified ownership and accountability and a greater consistency of brand and product marketing in each of our business groups.

While the benefits of this change will become fully visible in next fiscal year, you can expect to start seeing the benefits as we roll out our new music products later this quarter.

I've invested a significant portion of my time over the first 90 days here, taking a deep dive into our product roadmap for the current year and beyond.

And I'm really encouraged and excited.

We have many innovative products coming.

It's very clear to me how important it is to simplify our existing portfolio to ensure that these products get a chance to shine over the next 12 to 18 months to get the visibility in the channel they deserve.

With that in mind, I'd like to accelerate our efforts to reduce the number of products in our portfolio.

While we're not planning to exit any major categories, we are streamlining our portfolio to spotlight our strongest offerings in each product family, thereby offering clear and more compelling value to consumers.

We believe this should result in stronger differentiation and better upsell proposition over time.

We'd initially planned to slow our transition process.

But, I came to the conclusion that the more we can accelerate our cleanup, the better.

We're now focused on completing the cleanup by the end of the fiscal year.

To achieve this, we expect to take opportunistic pricing actions to move older products that are in our warehouses and in the channel.

In Q1, our planned pricing actions reduced our gross profit by roughly $4.5 million.

It's possible we may see impact from similar actions as we move through the remainder of the current fiscal year.

Our goal is to enter fiscal 2014 with a simpler product portfolio that has fewer but significantly better products.

And we will continue to prioritize a leaner, more muscular product portfolio over time.

I look forward to updating you on our progress during the year.

Now, let me turn the call back to Guerrino.

As you know, we've asked our shareholders to approve a one-time dividend in the amount of roughly CHF126 million.

Historically, we've awarded our shareholders with strong financial performance and growth in our share price.

In fiscal 2012, we delivered poor financial performance, and our share price declined significantly.

In view of this, we determined that we could best reward our shareholders by taking advantage of our strong cash position to offer a one-time distribution that is not subject to Swiss withholding tax for any of our shareholders.

Assuming we receive shareholders' approval for this proposal in September, by the end of Q2, between repurchases in Q1 and the proposed dividend, we will have returned roughly $220 million to our shareholders during the first half of the fiscal year.

We view share repurchases and the one-time dividend as being similar vehicles to return cash to our shareholders.

Given the anticipated size of this distribution, you should not expect to see a continuation of our aggressive share repurchase activities during the current quarter.

There's only been one other year in our history when we have exceeded the amount we expect to return to our shareholders in the first half of this year.

And that was over the course of a full fiscal year.

We have $4 million remaining in our existing program and have no plan to request approval for a new program for the time being.

Regarding our turnaround strategy, I want to emphasize that nothing has materially changed from the plans we shared with you last quarter.

Our execution is focused on great products in hot categories, reduction in our cost base, and the simplification of our product portfolio and of our company.

We're pleased with the initial results of the newest additions to our product portfolio and the audio and desktop and keyboard categories.

And we eagerly anticipate the launch of the majority of our new products later this quarter.

We believe these products address strong consumer trends in music, tablets, touch-driven navigation, and the digital home and will significantly strengthen our offering across all categories.

In addition to the stronger new products, we expect to benefit from the simplification of our organization, processes, and product portfolio from cost saving from the restructuring.

As planned, the modest initial savings we have already seen from the restructuring are expected to grow significantly as we move through the fiscal year.

We remain on track with the plan we set a quarter ago to deliver improved performance starting in the second half of fiscal year 2013.

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

Please follow the instructions of the operator.

Thank you.

(Operator Instructions).

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

Please proceed.

Thank you.

Guerrino, Bracken, can you quantify what were the impacts on the gross margin in the particular quarter and then, looking forward, talk about what kind of impact we might expect from the streamlining of the product portfolio and how quickly the $80 million in cost reduction might materialize over the year?

Hi, John.

This is Erik.

Let me touch on both of your questions there.

In terms of the gross margin in the quarter, what are the factors impacting it, there's a couple of things.

And I think the theme I'd really emphasize here is there's multiple things that we've chosen to do in the business, given where we are in the turnaround and where we want to take the business, that reflect themselves in the gross margin.

A couple of those, we mentioned and Guerrino touched on it, made the decision to be opportunistic and accelerate some of our efforts to streamline our portfolio, reduce some of that clutter.

That was about $4.5 million impacting gross profit in the quarter.

There was also a piece of our restructuring.

So, we had a total of $34 million of restructuring-related costs in the quarter.

$3 million of that is related to products and things that we decided to exit related to the restructuring.

And that also had a negative impact on gross profit in the quarter.

We also had a small element related to a likely patent settlement that we needed to accrue for in the quarter.

Those were all things that you would see impacting our gross margin.

And then if you looked at it, we have normal seasonality if you looked at it on a sequential basis when you go from a Q4 quarter, which is a much higher-volume quarter than Q1, which as you know is our lowest-volume quarter of the year.

All those factors are impacting our gross margin as well as some product mix that we normally see in a quarter.

So, but, like I said, for us, we took a couple of deliberate steps that really impacted it.

But, we think they all position us very well for what we're doing in the turnaround and where we're going.

I think to your second question, where you asked about how fast does the $80 million of annual savings materialize, the thing we feel good about, and I think Bracken touched on it, is we feel very good about our execution.

We've taken those initial steps in the turnaround in terms of the people cost reduction, the other things that we needed to do to simplify the business.

Now, it will take some time for those to start to materialize.

You will really start to see them in the second half of the fiscal year.

And what I would say is our exit rate, when we exit FY '13, we will be on a full run rate to realize that $80 million.

And we fully expect to see that throughout all FY '14.

You asked another sort of forward-looking question about what to expect with margin, John, if I recall.

We're not providing any guidance on any element of our P&L.

But, from what Erik and Bracken said, you should expect on one side the elimination of certain one-offs that will not be there.

And on the other side, some elements of the simplification that will continue to manifest itself, as Bracken said, as we take opportunistic actions.

Now, the actions we've taken this quarter relate to products that we will sell.

So, there is a forward-looking component in the actions we have taken this quarter.

We make -- price protection, for example, is related to products that we will sell.

So, you will not see that again in a way and is sort of in anticipation of something.

Now, there may be more of that as we complete the transition.

Bracken wanted -- and I fully support -- to make sure that we completed that transition by fiscal '13.

And so, some of that will occur in Q2 or maybe in Q3.

So, it's very hard to anticipate.

But, let's say that there are several unique elements in this gross margin.

They don't -- we don't expect them to repeat themselves.

We expect our gross margin to improve.

By how much and how fast is part of the fact that we're not providing the tail guidance.

Three follow ups on that, if I might.

What -- how would you characterize gross margin normalized for the events in the quarter, one?

Two, maybe characterize the LifeSize gross margin and whether competition played a factor in the gross margin for LifeSize or the peripheral segment.

And then, three, you talked about the new products in your prepared text, such as Harmony, several new pointing devices associated with Windows 8 with navigation capability and then other digital home-type products.

What is -- what do you think those gross margins look like relative to the corporate gross margin?

So, are we replacing new products with better gross margins?

Those are the three follow ups.

Okay.

Let me talk about LifeSize for a second quickly.

There is nothing to report on LifeSize, very sold margin performance.

We don't see any particular impact of competitive or other positions in the gross margin of LifeSize.

So, kind of that is a constant as far as that we have seen.

Regarding -- I will let Erik talk to you about a normalization of the gross margin of the events of the one-off events.

When it comes to new products, we've said we're going to announce products in music and the digital home and pointing devices.

It's -- they all are a very different blend of margins.

And this has been a portfolio company forever and will continue to be.

So, I -- we don't expect structural changes in the profile of the gross margin of the Company as far as we can see today.

And thus, I will leave it at that at this point.

Yes, and I think, to your other question, John, if you're going to normalize for all the one-time impacts and gross margin in the quarter, no, we don't simply break out individual components of that.

But, what I would say is, directionally, is if you move the one-time items that we talked about, the price protection and the other things we've taken to move products through faster, products that we will sell, the restructuring component, the likely patent settlement accrual that we needed to make, you'd be pretty close to normal seasonality of going from a Q4 to a Q1 and would put you more in a normal range of gross margin for us.

When you look at it on a year-over-year basis, the one thing you need to normalize for is, last year, we had the Logitech review charge.

If you actually were to remove that, our gross margin did decline a little bit year over year.

But, all of that was driven by a significantly weaker euro on a year-over-year basis.

Are we still talking about -- go ahead.

I'm sorry.

So, basically, just the net of this is that, if you take review out of last year, the gross margin -- and you take the impact of the euro away, the gross margin [are] rather stable relative to last year.

Which on a long-term basis, Guerrino, I think you mentioned no major change in the portfolio.

I know you're not providing guidance.

But, when we think about the peripheral segment of your business, should we still think about it as a 32% to 34% gross margin business?

Well, it's nice that you indicated this range, which actually is -- it's actually much lower than the range we had in our latest tabled business model, which we said forget about it.

So, we haven't gone back there.

And I -- John, what can I say?

I think it's not far from a reasonable assumption.

But, I won't confirm or deny it.

Thank you.

And our next question will come from the line of [Alex Faher] with Exane.

Please proceed.

Hi, there.

Thanks for taking my question.

I have a couple, actually.

First one related to this patent dispute or patent settlement you're trying to sort out in Q1, there's been market chatter this morning on this side of the pond that it might be with -- related to Apple and thereby somewhat questioning what your long-term success with Apple's peripherals.

I don't know if you could give us a bit of color on that.

And second one would be on sell-in versus sell-through in Europe and Middle East and Africa.

It sounds that it has been a bit of channel inventory rebuilding here, if you could help us understand what's going on, that would be helpful.

Thank you very much.

Sure.

On the first point on the patent settlement, we -- in our preparation for this call, we had discussed that we would not go into detail on the settlement.

But, based on that speculation that you mentioned, I have to say that [it's] absolutely [nothing to do with about] the fact that this settlement might be with Apple Computer.

I can't deny it more firmly than that.

Thank you.

And to your other question, Alex about the sell-in versus sell-through and the differences that you're seeing in EMEA in this quarter, it's really driven by one primary thing is that, when you compare year-over-year growth rates like that, last year, we have a very favorable comp when you look at this quarter versus last year for EMEA.

And just to give you some perspective, first quarter of last year in EMEA was a very, very difficult quarter for the region.

We had two high levels of channel inventory.

We had very high level of returns.

And so, when you compare the two, it creates this big gap.

I think the better way -- and to give you a sense I think to your main question here is, are we starting to build too much channel inventory in Europe?

The answer is absolutely no.

When I look at my absolute levels of channel inventory in EMEA in the quarter, it was down 2% year over year.

And it was down 2% sequentially.

And when you also look at my sell-through trends for the last couple of quarters in EMEA, they've been relatively stable.

So, I think the long answer to your -- or the short answer to your question is, no, we're very happy with channel levels in EMEA.

And we think we're well positioned, given where we are in the year and how we go forward from here.

And maybe just a last one on my side if I've got time.

Regarding Windows 8, let's say touch mice or sort of new peripherals, do you think we'll see any of that in the current quarter, or this is too early, considering that Windows 8 will launch at the very end of October?

By the fact that these are going to be touch mice is a speculation on your part.

We're not discussing which products we're introducing with Windows 8, but it is too early to talk about Q2 because Windows 8 ships hopefully or maybe at the end of October.

And it would be a little bit kind of out of place for us to introduce products before the product -- the main platform ships.

Okay.

Thank you very much.

Our next question comes from the line of Simon Schafer with Goldman Sachs.

Please proceed.

Yes, thank you very much.

Guerrino, actually, I was interested in your description of new generation of products and, obviously, some bigger ramp there to come towards the second half of the fiscal year.

I mean, in your mind, what percentage of the business today is what you would consider legacy versus sort of new generation?

And how -- what might that mix look like towards the tail end of the year?

That would be helpful.

Let me answer this.

And I hope I can catch the spirit of your question.

We don't consider anything legacy actually.

There is a few categories of marginal amount of our categories that have PC Webcams for the consumers that are kind of like a C probably speaking.

We have to fight to maintain the decline or to manage the decline properly.

We don't expect those categories to grow.

But, the majority of the categories have potential one way or another and I wouldn't consider legacy.

If by legacy you mean PC related, I would say that there will be a decline on the mix of PC related.

And when I say PC, I say Windows -- I mean, Windows platform really.

Now, on the other side, after a lull in sales of PCs, which obviously has impacted everybody, which is -- has to do with waiting for Windows 8, who knows what's going to happen when Windows 8 starts and whether the PC legacy will be revitalized?

We certainly believe that something will happen on that.

And we want to take advantage of it.

But, structurally, we are bringing the company beyond the traditional platforms.

The entire music launch is focused on that.

And it's not insignificant.

It's actually centered around the model of smart phone and tablet.

We believe that people will increasingly carry their music or stream their music from their phone or tablet.

And so, as such, it becomes our number one play around the fact that's growing platform out there, which is the smart phone.

And if we are successful, it'll definitely change the mix.

But, so, directionally less of our business will be related to the Windows platform.

But, I am one of those people that say I want to grow the Windows side of the business and grow the non-Windows side of the business.

So, what -- who knows where the mix will end up being?

The uncertainty regarding the effects of Windows 8 on the PC platform and meant in the most expanded way possible -- who knows what the PC will look like when Windows 8 ships -- that uncertainty is probably the single largest factor for us to be sort of reluctant in telling you where exactly we expect to land.

We want to be very ready.

And we are very ready.

I think I'm very pleased with the ramp up and the development of all our products for the PC and not.

And we have to be extremely light on our feet to figure out where the market is going because it's very hard to anticipate what the impact of that will be on the PC market.

Got it.

Very clear.

Thank you.

And my second question is more financial in nature.

It's going back to the sort of gross margin discussion.

I guess you sort of said the euro obviously has been a major impact.

But, the unfortunate reality is that, of course, the euro's closer to 1.20 than the average that you, of course, recorded last quarter.

So, I guess in context of what you said in terms of mix effects and these one-offs that you saw in terms of the streamlining and so on, I mean, should we expect much of a gross margin recovery just on a sequential basis, or are we looking at a rather flat picture, given the euro is doing what it's doing?

Thank you.

Let me talk about the euro for a second.

Yes, not only the euro has been deteriorating, but it has been deteriorating fast.

And this has always been a yellow flag that we've pointed to you all and to our shareholders, saying, if the euro moves slowly, it can go from 1.50 to one without any impact, material impact on what we do because of the ongoing pricing actions that we take.

When the euro deteriorates very fast, that is not possible to do.

On the other hand, we are on the verge of introducing several new products.

And of course, we have a one-off opportunity to price them.

And of course, those pricing will be made keeping in mind both the market conditions and competitive dynamics and the euro.

Now, the good news is that most if not all of our competitors are dollar denominated.

And therefore, the world will go that way no matter what.

In terms of whether we expect a sequential improvement excluding the one-offs or not, I would refrain from answer.

Okay.

Thanks so much.

And our next question will come from the line of Paul Coster with J.P. Morgan.

Please proceed -- .

-- Taking my question.

You're shifting your focus a little bit to the Apple platform it sounds like.

And of course, you get less visibility into their product roadmap relative to the Windows world in aggregate anyway.

Can you just talk a little bit about how you design in anticipation of what Apple's bringing out?

For instance, if they bring out an iPad Mini, how would you respond to that?

Does it matter to you what the format is?

And does this impede your ability to respond quickly?

In certain cases, especially for form-fitting products, which is part of the way we address all platforms, obviously, a change in the shape of the platform impacts our need to be fast.

Let's put it this way.

So, there's no other way than running very fast and making sure you're close to it.

We are in no way handicapped vis-a-vis anybody else.

Now that the Apple platforms are squarely front and center in our priorities, believe me, we can do wonders.

And the example of the ultrathin keyboard is -- there couldn't be a better example.

For awhile, we've been just dancing around with the iPad and with source products, etc.

And now, finally, we've put the muscles in place, and we did wonders.

The good news on the Apple platform, though, and you hear the rumors and you see what the market is doing, is that it's increasingly a wireless platform.

And that is tremendously important for us.

It's -- the connectivity will be increasingly wireless.

Bluetooth and Wi-Fi and AirPlay will significantly grow in importance for the platform.

For example, the rumors and speculation that I have no idea if they're true that Apple will change their connectors and etc., etc., now, if this world was a world of dockable products -- and we have some -- this would be a significant change.

But, this world is increasingly a world of wireless products.

You will see in our products, in our music roadmap, that wireless plays a major, major role.

And that should help sort of somewhat decouple those changes that Apple will bring to the market from our roadmap.

So, it's been kind of a mixed answer.

For some products, we just have to run fast and be opportunistic.

For others, I think that the secular trends would help in a way all accessories makers and certainly us.

Okay.

I -- just going to guidance, I realize you're not going to comment upon things.

But, let's just sort of go back to January 25th, which is the last time you commented on what might happen this year.

And you at that time talked of the revenues not being down.

Now, since then, obviously, the macro environment's deteriorated a bit.

But, I think internally you are now culling your product line, which I think makes it a little bit tough to achieve that.

Can you just talk about the puts and takes since you last commented on overall revenues?

And do you think that -- I mean, you're welcome to state that revenues won't be down this year.

But, it sounds to me like that's a bit of a stretch now.

Well, I'm not making any statements of revenues.

I don't think I did make statements on revenue in the past.

But, I might.

Hey, I don't have a perfect memory.

First of all, the simplification of the portfolio has nothing to do with revenue.

Let's face it.

There may be some short-term impact here and there.

But, in the grand scheme of things for a company that generates more than $2 billion in revenue, those are nits.

Okay.

These are not a significant component.

So, take out of your mind that simplification of product line equals less revenue.

Simplification of product line will equal long term more revenue because it will make it easier to launch powerful products and to select them on the side of the consumer.

That's a fact.

It's a long-term statement.

And you might remind me in two or three calls that I said it.

In terms of this year, there are headwinds that have to do with the euro, certainly.

But, we have dynamite in the portfolio.

And we are very hopeful that the consumers will respond well.

As I said, I'm not going to say more about what we expect.

But, we expect improved performance in the second half.

And I leave it up to you to figure out what that means.

All right.

Thank you very much.

And our next question will come from the line of Andrew Gardner with Barclays.

Please proceed.

Thanks very much.

I had a question regarding the pricing action you said you've taken in the prior quarter and are likely to continue taking for certain parts of the portfolio.

In the slides, you presented the average selling price you're quoting is down but not significantly.

So, I'm just wondering about the size of the cuts that you were making or the -- perhaps the amount of the product portfolio that it was affecting and also I suppose if -- which segments it hit more than others.

Just a bit more detail around that would be helpful from both the quarter as well as perhaps how you see it in the current quarter.

This is Bracken.

Little hard to be really specific because it's fairly broad based in terms of what products it affects.

As Guerrino quoted in the beginning, this is really about reducing our -- some retail pricing as we go forward, price protection to move some of the products out across the board that are frankly just weaker performance that need to be exited from the portfolio.

Yes, and to add some additional color to that, Andrew, is it was in EMEA and AMR we mentioned was $4.5 million.

And as Bracken mentioned, it's for products that -- a little bit of products that we were selling in Q1, but they're mostly for products that we're going to be selling in Q2, Q3, Q4.

And it just accelerates, creating that space and that visibility so there's less clutter when the consumer gets there and our new products rollout and it's better visibility.

Let me make a sort of a forward-looking statement regarding ASPs in a second so that we break the rule of not talking.

The small decline that you've seen is in part due to these actions and mix and everything.

But, moving forward, you should expect our new portfolio to actually lift the average selling price up relative to the historical norm.

Okay.

That's helpful.

Also, just on the Americas, and I suppose sort of opposite to the question on EMEA earlier, where in the Americas, you have seen the channel -- your channel inventory shrink, again, is that broad based?

Is it something you're directing through some of these actions, or is it more the reaction of your channel partners?

Yes, no, I think, Andrew, to that one, what we're seeing in the Americas, you're right.

Our channel is down about 3% sequentially and about 12% year over year.

I wouldn't say that there's anything structurally different with our channel partners, right?

I mean, we all read in the news what our channel partners are facing from an end consumer perspective.

There's no change there.

We think that we've got about the right level of channel in the Americas.

And as we've talked about, we're really focused on making sure that we've got the right positioning as we start to go through this season over the next call it two to three months, where we're going to be releasing a whole host of new products.

Okay.

Thanks very much.

And our next question will come from the line of Tavis McCourt with Raymond James.

Please proceed.

Great.

Thanks for taking my question.

Guerrino, we talked a bit about gross margin on the call.

What I'm wondering is, historically, on your more PC-centric peripherals, it's been a pretty good industry structure with you guys kind of as the borderline dominant industry player.

On a lot of these Apple peripherals, it's a different market, right?

You've got a lot of competition, albeit a lot of them small without a ton of brand recognition.

But, I'm wondering how do you view that in terms of the potential gross margin profile over time in these iPad and smart phone peripherals versus what you've enjoyed in the PC space?

I was hoping to have answered this question before in the sense that it's a mixed bag.

Okay.

In some cases, the competitive dynamics of the new markets we're going to enter are different.

You're right.

We've been borderline dominant.

And we are borderline dominant in a number of categories today and around the PC.

We're becoming -- and I hate to say that in a public call -- but, relatively dominant in the iPad, sort of the keyboard accessory market.

We seem to be doing well.

In some cases, our new products will just bring us to lower margins.

And in other cases, our new products will bring us to higher margin.

And I would say that there is -- it's too early to tell where structurally the gross margin will fit.

I am -- again, that's another reason why, again, our business model is tabled.

We need more data and more actual results to figure out this matter.

We conceptualize the same way you do.

But, we also know what we can do with cost and we can do with effectiveness and efficiency and what we can do with great products.

So, I'm not in a position to answer firmly to this question.

I think you should just -- you should not expect a structural change in the way our model will look like.

But, whether this is going to be 31 to 33, 32 to 34, 33 to 35, way too early to tell.

I got it.

And then, a follow up, you mentioned earlier in the call that the restructuring activities are largely over.

So, I'm trying to harmonize that with the commentary that we won't really be seeing the full impact of -- in the P&L until we exit the year.

Is it that you're using some of these savings near term to reinvest in other areas, or kind of help me harmonize those two facts.

Yes, no, Tavis, this is Erik.

To give you a sense of it, it really comes down to tactically the bulk of what we did, right?

So, of the $34 million of restructuring-related costs that we recognized in the quarter, $31 million of that is primarily related to personnel, reduction in personnel.

And just to give you a very tactical example, here in the US, we made that decision.

We made that announcement in I think it was the first or second week of June.

It's about 60 to 70 days in many cases before those employees would actually -- those impacted employees would leave the payroll.

So, it's actually in Q2 when you'd actually start to see some of those costs come down.

So, it's really that.

And then when you look at other places in the world, where we've unfortunately had to impact employees in Europe, it takes even a little bit longer for that actually to play out.

So, that's probably the single biggest factor why you will see the savings start to show up.

It's certainly not that we're taking some really near-term savings and investing them in a different way.

Just to complete Erik's answer, we -- part -- the restructuring is not exclusively personnel related.

We are saving and changing things in a number of other parts of the Company.

And we talked about an $80 million net saving, which means that some of the saving will be bigger than $80 million on an annual basis, and some of that will go back into initiatives to strengthen the growth of the mark -- of the categories that we see have potential to growth.

The timing of all these things may confuse the quarter-by-quarter results.

In that sense, you're suggesting that some of that money may be invested.

Yes, some of that money may be invested in the short term.

We remain on track to save a gross $80 million on an annual basis.

And that's all there.

It's personnel.

It's other things -- net, sorry -- personnel.

It's other things.

And it's reinvestment.

Sorry, correction, I meant a net $80 million.

And then finally, Bracken, you mentioned, obviously, one of the things you want to do is decrease the SKU count and complexity.

I was wondering.

Do you plan any big changes on the supply chain strategy as you go through this restructuring?

No, we don't have any major plans in the supply chain strategy, no major plans to changes to supply chain.

What we are doing and we have done over the last 18 months is continue to improve the efficiency of our supply chain and actually lower our cost there.

And I would expect that we'll be able to systematically lower our inventories over time as we get a more -- a tighter and tighter portfolio over the next couple of years.

Great.

Thanks a lot.

And our next question will come from the line of Michael Foeth with Bank Vontobel.

Please proceed.

Yes, hi, gentlemen.

Three questions, the first one relating to CapEx.

You had I think a bit above usual CapEx spending in the quarter.

And I was wondering what it's for and what we should expect going forward.

And then if you could maybe address how you will deal with the decline in your OEM business and how we should look at that business going forward.

And then eventually, if you could give us an update on how your enterprise business or B2B activity of retail product is doing and progressing.

Thank you.

So, Michael, this is Erik.

To your first question about CapEx, there wasn't anything structurally different that we did in the quarter.

I guess the best way to look at is we don't anticipate that our full-year CapEx spending would be anything outside of our normal historical ranges.

So, that would continue to be consistent.

Sometimes we get something where something happens very late in one quarter or early in a following quarter.

So, no change, and I would expect it to still be consistent with historical averages.

On the OEM, let me take that one.

As a -- first, there's a lot to like about the OEM business actually because it's sort of the birthright of the Company and that, what I've been able to see very clearly is it's driving a cost-conscious frugality mentality that pervades everything.

So, it's a really nice component of the business.

And I'm not particularly worried about the OEM business over the near or medium term.

I think we've got things going that will make it so that the OEM business will be just fine.

On the B2B side, we're not disclosing yet exactly what performance we're showing on the B2B business.

But, we feel very good about what's happening there.

We've got a nice array of products out and coming.

And we expect to continue to see good strong growth there.

All right.

Thank you.

(Operator Instructions).

And our next question will come from the line of Andrew Humphrey with Morgan Stanley.

Please proceed.

Hi, thanks for taking my questions.

Firstly, on the cost-saving program, you're speaking very confidently about achieving that $80 million run rate by the end of this financial year.

I think that your last update when you also gave guidance on the one-offs, you indicated you'd identified 60% of those savings from personnel reductions.

Can you give us an indication of what's given you confidence on the remaining 40% and the sort of one-offs associated with that?

Secondly, on the patents, I can understand that you wouldn't want to try and prejudge any settlements on that.

But, can you give us an indication of what area that's in, in terms of which product area?

And finally, on LifeSize, we saw a bit of an improvement compared to the previous quarters' year-on-year growth rates.

Can you give an indication of whether you're viewing that as an inflection point or whether conditions are still pretty tough as far as corporate investment cycles in that area are concerned?

Okay.

Let me take the patent question.

I answered very clearly about this not being with Apple.

In fact, we have no pending litigation with Apple that I know of.

This has to do with remotes.

And I will not go further than that.

Regarding LifeSize, with that part of the question, too early to tell.

I think that the Company is in the middle of a refocusing of what the competitive differentiation is and where it applies and how it's sold to our small to medium enterprise customers.

They've made some progress.

I'm definitely not yet happy that they're on the right track.

But, they're directionally doing fine.

But, there is nothing more substantial to report.

And, Andrew, to your first question about what gives us confidence about the cost reductions, so, you're right.

The first step that you can visibly see is the reduction in personnel.

And that's taken place.

But, simultaneous to that, this is not just an effort, obviously, as you've heard us talk about, of just changing our costs for a quarter or two or just personnel reductions.

This is a comprehensive effort across the Company led by Bracken to really look at how are we going to position the Company, and how are we going to change the cost structure to where it needs to be, not just now, but cost structure a year, year and a half from now?

And so, when we did that and we came up with those detailed operating plans, personnel reduction was a piece of it.

But, at the same time, we were looking at how do we simplify things within the Company?

How do we streamline?

How do we go after operational savings?

So, those plans were done at the same time.

You will see the benefits of those over time.

And we said primarily in the second half of the year and for sure in the exit rate.

But, we have confidence because it was a comprehensive plan done together, executed at the same time, and you're going to continue to see us update you on how we're doing.

I'm not sure if I heard you ask the question.

And maybe I heard something wrong.

But, let's -- so, I may answer a question that you did not ask.

But, you were sort of alluding to one-offs.

The one-off that you've seen in restructuring and in personnel, mostly personnel, but not only personnel related, we don't expect these one-offs to be repeated for the rest of the savings.

If that was the question, it's that some of those do not require write-offs or anything.

And maybe to add to that, so, if what you're also trying to understand is how much more restructuring do we anticipate -- .

-- Yes, of charges -- .

-- Yes, exactly.

So, it was a total of $34 million that was related to restructuring this quarter.

I would say it was somewhere between $2 million to $4 million spread out over the next three fiscal quarters would be my current estimate, just to give you a sense.

And I -- like I say, it could be slightly higher, slightly lower than that.

But, that is the totality of what we anticipate would be restructuring related this fiscal year.

Thanks.

That's very clear.

And our next question will come from the line of Corey Barrett with Pacific Crest.

Please proceed.

Yes, thank you for taking my questions.

First, could you just quantify how much revenue in the quarter came from products that are being discontinued and how much came from or as a result of the aggressive pricing actions?

First of all, I don't think that -- in fact the aggressive pricing actions reduced the revenues, rather than increase it.

The point that Erik was making about a $4.5 million impact on the gross profit of the Company due to this price action is also reflected in the top line.

So, it's strictly a top line change.

But, in terms of the impact, first of all, the vast majority of the products that we plan to discontinue contributed marginally to our revenue.

They contributed to our confusion.

They contributed to our supply chain.

And they contributed to the pain on the shelf.

That they did.

And they contributed to our needs to move them aggressively because they're slow movers.

Yes, they did.

They did not -- they ended up not contributing in any significant way to the top line.

Okay.

Thank you.

And then back on OEM sales, should we expect a rebound there relative to the sequential decline that we saw this quarter?

For the time being, the OEM sales follow strictly the pattern of sales of PCs.

They are, as you know, very related to desktops, certainly not the most favored PC format these days.

So, a rebound in desktops definitely would improve the performance of our OEM currently.

Will there be a rebound in desktop?

We don't anticipate that

What Bracken was referring to was that there's more that we can do in OEM with these customers or some of them.

And -- but, it's too early to tell when and how much this will improve our performance in OEM.

I am a strong supporter of the business.

As Bracken says, it's not only the roots of the Company, but it's the source of an enormous visibility on the PC market and an enormous visibility in cost.

And that is an intangible that is very hard to report in a segmented view of what the OEM sales are for the Company.

That said, we're working on those sales, too.

Okay.

And then lastly, can you provide detail on the puts and takes of the impact on gross margins from product mix in the quarter?

Yes, Corey, let me touch on that a little bit.

We don't breakout the individual impacts.

But, what I would say is it was not the largest impact by far in terms of impacting the gross margin.

And just to spend a second on it, when we talk product mix, what you're going to see is that's changed within a product category.

So, we might have an individual SKU that has a higher gross margin than another one.

And so, that changes from time to time, and then also between categories.

We have some structurally lower gross margin categories in our portfolio and some that are very, very high.

And when sales mix between those as well as within, that's what we mean when we talk about product mix.

We do see it every quarter.

Sometimes we benefit from it.

Sometimes it works against us a little bit.

And that was actually the case this quarter.

But, it certainly wasn't one of the one or two biggest variables this quarter.

Okay.

Thank you.

(Operator Instructions).

And our next question will come from the line of Joern Iffert with UBS.

Please proceed.

Hello, gentlemen.

Thanks for taking my question.

It's a question for the Apple peripherals.

May I ask if you are aware that Apple has patents surrounding and iPod keyboard covers?

This will be my first question.

And the second question, are you even aware that Apple is potentially launching an own-branded iPad keyboard cover?

If we knew what Apple plans to do, we would be richer people.

No, we're not aware of either of those.

All right.

Thank you.

Ladies and gentlemen, that concludes our conference call for today.

You may all now disconnect.

Thank you.