羅技 (LOGI) 2017 Q2 法說會逐字稿

Good day, and welcome to the Logitech Second Quarter Fiscal 2017 Financial Results Conference Call. (Operator instructions.) This call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech.

I would now like to introduce your host for today's call, Mr. Benjamin Lu, Vice President of Investor Relations. Please go ahead.

Thank you. Welcome to the Logitech conference call to discuss the Company's financial results for the second quarter of fiscal year 2017. The press release and prepared remarks and slides, as well as a live Webcast of this call, are available online at the Investor Relations page of our website, logitech.com.

As noted in our press release, we published our prepared remarks on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments today, and they will not be read 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 quarterly report on Form 10-Q filed with the SEC on July 29, 2016, and subsequent filings. The Company undertakes no obligation to update or revise any forward-looking statements as a result of new developments or otherwise.

Please note that today's call will include results reported on both a GAAP and a non-GAAP basis. Non-GAAP reporting is provided to help you better understand our business. However, non-GAAP financial results are not meant to be considered in isolation from, or as a substitute for, or superior to GAAP results. Non-GAAP measures have inherent limitations and should be used only in conjunction with Logitech's consolidated financial statements prepared in accordance with GAAP. Our press release includes a table detailing the non-GAAP measures together with the corresponding GAAP numbers and a reconciliation to GAAP. This information is also posted on our Investor Relations website.

The slides that accompany this call are also available on our Investor Relations website. We encourage listeners to review these items. Unless noted otherwise, comparisons between periods are year-over-year and in constant currency, and all reported results and updated outlook are focused on continuing operations and do not include the performance of Lifesize, which is reported under discontinued operations.

This call is being recorded and will be available for replay on the Investor Relations page of the Logitech website.

Joining us today are Bracken Darrell, President and Chief Executive Officer, and Vincent Pilette, Chief Financial Officer. And I will now turn the call over to Bracken.

Thanks, Ben, and thanks to all of you for joining us. Our Q2 sales were record. Our growth at 14% was the highest in over five years. our margins at 37% are touching the top end of our targets.

One of my friends called last night to say, "Boy, that was a dream quarter," but I don't dream about quarters. Our team doesn't dream about quarters. Our dream is to create an amazing company. And what's exciting to me is that we're making good progress building the foundation of that amazing company we aim to be one day in the future, and that's the most important thing happening at Logitech.

Let's talk about the progress in each of the product categories. Our PC peripherals categories grew 6% in Q2. That still surprises some people. As we've said before, our mice and keyboard sales are correlated to the PC installed base rather than new PC shipments. That installed base remains stable, and we will continue to innovate in this space to capitalize even more on the extended PC purchase cycle.

In Q2, keyboards and combos grew 15%. Pointing device sales were relatively flat, down 1%, and PC webcams grew 4%. We have good momentum, and will continue to innovate across PC peripherals.

In July, we released our newest and first high-end multi-device keyboard, the K780. Design workspace, this is our first full-size keyboard with multi-device capability. Like all our multi-device keyboards, with a touch of a button, you can switch between and type on any three connected devices, and I do mean any, be it your PC, your SmartPhone, or your tablet, using any OS. I love the K780, and I've been using it for months at my desk. It's my current favorite keyboard.

In mice, we just launched our first silent mice, and they been strongly received by the press. We launched globally, and even in our own offices, which are completely open. I had requests to put them out for entire workgroups.

At the end of September, we introduced our latest PC webcam, the C922 ProStream. This allows for full HD streaming and dynamic background replacement, building on the success we had with our webcams for video communications and live streaming. We're not letting up in this space either.

In Q2, our tablet and other accessories sales increased 9%. We launched our CREATE keyboard case for the 9.7 inch iPad Pro in Q2. It's the only keyboard cover for that iPad out there that has everything - a keyboard, a place to store your pencil, and uses the instant-on Smart Connector.

Video collaboration sales group 43%. We just announced our newest product in the space, the Logitech Smart Docket, a solution that was designed in close partnership with Microsoft. With the Smart Dock, users can easily and seamlessly manage, start, and join video collaboration calls using Skype for Business. The long-term growth prospects for video collaboration are really exciting. This business started out as a seed, and in Q2 video collaboration's annual sales run rate top $100 million, with good momentum ahead.

Our mobile speaker sales came in better than we expected, with revenue up 20%. Earlier this month we released our latest over-the-air software update, known as PartyUp. This new feature allows you to wirelessly connect more than 50 UE speakers. In our Silicon Valley campus, we celebrated our 35th anniversary a few weeks ago, with more than 150 speakers connected at once. Not only was it outrageously loud and fun, but it no doubt set a world record, since no other Bluetooth speaker can do even a fraction of this.

Jaybird continued to perform well in the second quarter. Similar to the first quarter of fiscal year 2017, Jaybird contributed about three percentage points to our growth in Q2. In August, we launched two new colors of Jaybird Freedom into the Apple Store. Gaming grew 17%. Our gaming business has grown double-digit in 12 of the last 14 quarters. We grew almost everywhere, with Americas particularly strong. We expect demand for PC gaming around the world to remain robust, and we aim to increase consumer adoption of PC gaming products.

At one end of the market, the pro-gamers themselves, we launched our Logitech Pro gaming mouse, designed in collaboration with, and designed for, e-sports professionals. On the other end of the market, we introduced the Prodigy series, a family of gaming gear for users to play games but might never have bought a gaming peripheral before. The Prodigy line includes a wired and wireless mouse, a mechanical keyboard, and a headset.

In the quarter, we acquired the Saitek line of flight and space simulation game controller assets. This represents a small tuck-in acquisition that extends our portfolio into the simulation controller market.

Now, I'll pass this over to Vincent for some financial performance details.

Thanks, Bracken. Our September quarter results demonstrate that [we] are sustaining the momentum we saw in Q1. Q2 retail sales rose 14% to $564 million, which is a record for a September quarter, while non-GAAP operating income and EPS grew approximately 40% to $65 million and $0.35 respectively.

At our Analyst and Investor Day this past March, we had laid out our long-term business model that called for sales growth of high single digits in constant currency and operating margin of 10% to 12%. We are making very strong progress toward our targeted annual business model.

Our Q2 non-GAAP gross margin rose 360 basis points year-over-year to 37%. Our team continued to execute very well on all of our cost saving initiatives, which were the biggest lever of gross margin improvement. And we're driving towards our long-term financial model that delivers annual non-GAAP gross margins in the range of 35% to 37%. While this past quarter clearly illustrated our ability to achieve those long-term targets for a quarter and earlier than expected, I would point out that historically our gross margins tend to decline in the second half due to seasonality.

For the year, we are forecasting gross margins at around 36%. Also, per our operating model, we will look to strategically reinvest our gross profit dollar [outside] into R&D and sales and marketing to maintain and drive the momentum in the business.

In Q2, our non-GAAP operating expenses reached $144 million, up 14%, driven by Jaybird, investments in new growth initiatives, and increase in variable compensation due to our strong performance in the first half. Excluding the additional OpEx from Jaybird, which we didn't have last year, our office would have increased around 9%.

And while R&D and sales and marketing expenses were up year-over-year, we continued to drive efficiencies, with our G&A representing 3.8% of sales versus 4.2% in the same quarter last year. Our total non-GAAP OpEx to sales ratio was 25.5% in Q2 compared to our long-term annual target of 25%.

We are generating healthy levels of free cash flow supporting our capital return strategy. This was demonstrated in our Q2 results, with cash flow from operations of $74 million, the highest September quarter cash flow generation it's 2007. This also compares to $11 million of cash flow last Q2. The robust year-over-year improvement comes from our focus on improving our working capital efficiencies. In fact, our Q2 cash conversion cycle was 22 days versus 35 days a year ago, as we continued to drive our business to a sustainable level of 20 to 25 days on an annual basis.

And with the robust cash flow generation in the quarter, we spent $13 million on the Saitek acquisition and return $112 million of cash to shareholders in the form of $93 million in dividends and $18 million in stock repurchases.

And with that, I'll turn it back to Bracken.

Thank you, Vincent. I'm really proud of the strong growth and the progress we're making. I'm even more excited, though, about the company we're working to be. As we've articulated before, we will deliver growth in three different ways. We'll participate in growing market, as most of our markets are now. We'll grow market share by leveraging our design-centric innovation engine. And we'll enter new adjacent categories, just as we did a few years ago in video collaboration, and most recently in home cameras, wireless earbuds, and gaming simulation.

And with that, Vincent and I are ready to take your questions. Operator, please queue up the questions.

(Operator instructions.) Tavis McCourt, Raymond James.

First on the Saitek acquisition, I'm not familiar with the technology there. Is that something that's relevant for VR? And also, was that an IP acquisition, or do you acquire people? What exactly was that?

Secondly, probably more for Vincent, obviously we're only halfway through the year, but first two quarters, very good. And I know you mentioned gross margin's typically down the second half of the year. Any reason why we should expect a material step-down in year-over-year growth other than just traditional conservatism?

And then, now that we're approaching the 10% margin target, operating margins, looks like for this year, how do we think about your willingness to continue to expand margins versus reinvesting in the business? Are there longer-term margin targets we should focus on? Do you think you can manage this business, given its quarterly volatility, to continue to consistently raise operating margins? Any comments around that would be helpful.

On the first one, on Saitek acquisition, yes, we think there is potentially a play there in the virtual reality and augmented reality space, but it's way too early to really talk about that as a substantive opportunity near-term. And the acquisition, it did involve people, IP, and an existing business. But, we know that business already because we used to play in this business, so this is what we're pretty familiar with.

Let me start with your third question, which was around operating margin versus investment, and my guess is we'll do both, right? So, we put last March an operating profit margin guidance of 10% to 12%. We raised the range to 10% to 12%. And I think our first objective is drive the business in that range. As you know, last year we were slightly under 9%, and if you take our guidance at this point in time for the year, we'll be slightly under 10%. So, let's move into the range, first and foremost.

Secondly, we will definitely invest in the business to drive top line growth and capture the market opportunities. The investment will be in the gross to net, the point of sales investment in [seeds] and in overall R&D product marketing areas, if you want. So, you will see that spread across the different investment opportunities. That should lead to growth. Once we are in the operating profit margin target that we had set, and we're not there yet, our focus is on growth. So, that's for your third question.

The second one was around the guidance, and we're very pleased about the first half, definitely slightly better than our expectations. Last Q1 in July, we raised our guidance from mid-single digit to 8% to 10% top line growth. We're not going to touch the guidance every quarter, right? We set annual target, and we drive for that. we have the biggest quarter ahead of us, which is the Christmas quarter, and we'll re-assess after Christmas. At this point in time, that's where we are. But, we're very pleased about the momentum exiting Q2.

Felix Remmers, Credit Suisse.

One being on Jaybird, can you share a bit your thoughts on how the market is involving? I think it's quite a new market. Could you also say already tell if you would need to pay the earn-out component on that acquisition, so some thoughts around that market here?

And then, on gross margin, a bit more. It's quite impressive, the gross margin improvement year-over-year. What was driving that? Was it more like pricing, sourcing, so some more color here?

And finally, the euro-dollar seems to be moving a bit again. On which levels would you get a bit more nervous?

On Jaybird, we got into this Bluetooth earphone market because we're big believers that the wire will -- maybe it won't eventually completely go away, but wireless earphones are going to be the future, and the market continues to grow like that, so we expect to be a part of that.

In terms of the earn-out, it's too early to say. I'll let Vincent talk about that, too, but I think so far, so good. We feel good about the business there.

On the gross margin, I'd just quickly say, and Vincent mentioned it, we're having a very good year on cost, both on design, or redesigning the parts and components, and on pricing of those components, but we still have lots of opportunity ahead of us.

So, let me quickly tackle the earn-out piece. So, as you know, it's an earn-out split over two years, and per purchase accounting, you have an overall valuation based on forecast and different modeling that force you to consider what you're going to put on your balance sheet. I want to be clear for investors that model the business here, we have about $18 million of the earn-out on the balance sheet today.

As Bracken mention, it's too early to say exactly what we will pay. We feel good about the momentum, but again, the biggest quarter is ahead of us. And if we end up paying more than $18 million, that will flow through the P&L, as you know. But, at this point in time, on the balance sheet, there is (inaudible) for about $18 million.

On the gross margin side, year-over-year the number one driver, as you mentioned, is cost reduction, and then the number two driver in importance is actually the exit of the OEM business that improved the margin on a year-over-year basis, not on a quarter-over-quarter basis since we exited that business last year already.

On the cost savings, we shared in March that we are changing our approach in cost saving and incorporate costs into our overall design framework. And I think what you see here is the early signs of those initiatives, and we're very pleased about the results. We do intend to continue to try to drive gross margin up to then reinvest that in many different ways. It could be in OpEx or it could be at the point of sales, either in promotion or others, that would then, of course, counterbalance the improvement in that gross margin itself.

And then finally, on the euro-dollars perspective to stabilize everybody, last year euro to dollars was around 1.12. It was the same for last two quarters. Right now it move about three percentage point down. That would hurt us a little bit. We're not concerned at all, but of course that's also factored into our overall annual assessment of what we will deliver and in our guidance, if you want.

To that kind of [volatility], we definitely can absorb. We always told investor, if the dollar-euro goes to parity, we would reassess and apply the learnings we have had a year ago when we raised price.

Juergen Wagner, MainFirst.

I have a question on the OpEx increase. It was up quite a bit, especially sales and marketing. What was organic, and what is driven by Jaybird? There's a mismatch between marketing and sales and R&D. we do not have the same (inaudible). And what should we model at least for the remainder of this year?

Yes. So, overall, OpEx up 14%, G&A flat on a dollar basis and improving as a percent of sales. Sales and marketing up 18%, R&D up 13%, so that (inaudible) everybody on the numbers that you [were] looking at. The Jaybird contribution is about five points of our overall OpEx, and Jaybird, a ratio of sales and marketing versus R&D expenses is about the same than an overall consumer business and most of our businesses we have, which has sales and marketing about three times higher than new R&D. And then, from there, I think you can model.

We did invest also, as you know, in our regional point of sales for all of our businesses as we saw the room that we created with expanded gross margin. That's one comment. And then, the second comment I would say that there is a portion of the growth that come from increased variable compensation. We are running ahead of our plan for the first half, and [that is, of course] some of our compensation plan to pay in excess of what you normally see into our normal OpEx. That has impacted sales and marketing a bit more than R&D.

Ananda Baruah, Brean Capital.

Vincent, I'd just like to go back, start to your comments with regards to an earlier question, really more of a clarification about I think you said expanding both operating margins and accelerating growth. And I wanted to see if I heard that accurately, given that this year you've tracked pretty well above what your stated long-term growth rates are for the Company, and you're essentially at the margin target now. So, appreciate the comments about wanting to drop through the incremental margin into the growth of the business.

But, did I hear you accurately, that you think you can expand the margins from here while also continue to grow the business at a rate that seemingly is above what the long-term growth rate is? And then I have a follow-up. Thanks.

Yes, let me quickly address that one. I think it's an important one for everybody to understand how we pilot the business and where we're going.

Last March we explained our long-term business model, shooting for high single-digit growth rate for the top line, expanding gross margin to 35% to 37% -- last year, FY 2016 was at 33.9% -- and then expanding operating profit margin to 10% to 12%, and last year was 8.9%. If you look at our current guidance for the year, we are at around 8% to 10% top line, which would be at that high end of the range of the long-term model. Gross margin for the year around 36%, so as you can see, we still have more room compared to our long-term model to expand that gross margin.

And operating profit margin, using the high end of the guidance, it would be at around 9.5% of operating profit, (inaudible). So, we still have work to do to get into our long-term range. Some will come from efficiency. Some will come from growth. Once we are in our range, our objective is definitely to continue to improve the profit margin to then reinvest back into the business to accelerate the growth. So, that's how we work the overall business model, if you [want].

And as you guys look out the next couple of years, let's assume that you get sustainably into the long-term business model. At that point, would you prioritize growth while staying in the margin range, or would you look to see what you could do to expand the margin range while continuing to drive the growth?

No. I think if that hypothetical case happened, we would go for growth.

And we're already going for growth to be (inaudible), and I could be today in the long-term operating model, but that's not how we look at the business. We don't want to just do it one year and that's it, want to build, as Bracken said, an amazing company. And [we see it for] (inaudible), it means a sustainable high performance, and so that's how we're driving the business.

To be clear, we think there are just more and more new category opportunities, or existing category opportunities, to really reinvent with the technologies that's out there today, and we intend to be part of more and more of that.

You went through in the beginning of the prepared remarks a handful of what [are then], at least for this quarter I think, some of the more impactful areas of growth in new products. Could you just kind of vet out for us, as we look over the next 12 months, what are the punchiest, in a specific way, what are the key products, or just key product categories on a more granular basis? That'd be really helpful.

Well, it's kind of like asking me which of my children do I like the most right now, because I think we've got a lot of growth opportunities across the board. We've talked quite a bit about video collaboration, and I mentioned that we've now topped $100 million run rate mark. And we're excited about that business. I think we've got a good, strong portfolio out there right now, and now really just trying to build our distribution and the number of places that are trying those products out, because they're really terrific and a low-cost way to really bring video to almost any room or space. So, that one.

Gaming continues to be super-exciting. The PC gaming is going nowhere but up so far, and we don't see any near-term end to that. Even as virtual reality and augmented reality come into play, professional gamers and gaming enthusiasts, and even casual gamers are getting in the act of using hardware for PC gaming. So, it's really exciting. Bluetooth speakers continues to go well, and we've got good things in store, like PartyUp, so that's exciting.

And even PC peripherals, which a lot of people would have looked at and said gosh, they can't be a good business, as I said in my opening remarks, and we've said in [AID] and other places, as the PCs or something sits on your desk and ages, the experience you can create with a new mouse, a new keyboard, a new webcam, can really enhance that experience. And we all spend so much time -- so many of us spend so much time working that it's a small price to pay for a great experience.

So, I'm excited across the board. And the new categories of in-home cameras and Bluetooth earphones, these are all new spaces for us that we're also very excited about. So, there are a lot of opportunities here, Ananda.

And if I can add, Ananda, if you look, we really manage the Company like a portfolio of different businesses with different lifecycle, and we feel really good about the spread of the businesses we have across that lifecycle. So, yes, we feel definitely good across all.

Andrew Humphrey, Morgan Stanley.

If I look at your long-term targets for high single digit revenue growth, clearly you'll achieve that this year. I think that's fairly clear. And that's been the result of very strong growth in a number of categories, some of them quite surprising. If I look out beyond this year, can you maybe indicate how many more years' worth of growth you think your current mix of product categories has? Or in other words, what level of growth you can sustain on a three-, five-year view with your current product categories, and how much perhaps is baked into your longer-term guidance for, say, FY 2018, FY 2019 in terms of -- do you sit down at the start of the year and think, well, looking two years out, I think we'll need another $100 million of revenue from [areas] we haven't launched yet to make our longer-term targets?

When I started the Company, and then when Vincent joined me and so many others who are already here and who came in later, we said our goal is to be a design company. When I said design company, I really meant a company that can innovate well in existing businesses, and then enter new categories with great innovation. And that's really what we've done. If you look back over the last three or four years, that's been the model. And so, it's been a combination of existing categories and new categories, and that's our assumption, going forward.

And so, I assume in that long-term model, we're going to innovate in our existing categories and enter new ones, giving you exactly a proportional mix of how much that'll be over the next three to five years is not something we're prepared to do today.

I think you said it perfectly. Nothing to add.

Michael Foeth, Bank Vontobel.

I was really happy to see the Jaybird Freedom being displayed so prominently in the Apple stores now. I haven't checked in all Apple stores, but can you maybe share in how many stores you are, or if basically you're generally in all the stores, or in how many countries you are? And also, what other major sales channels you're selling Jaybird into other than online?

We're in most of the Apple stores. We're not globally everywhere yet, but we're in most of the Apple stores, and we're excited about being in the Apple store, and anything we go into it with, including Jaybird, so that's been good.

In terms of other distribution, they're the ones you would expect, certainly all the mass channels you know us for, the online channel. So, we're not very, very, very broadly distributed yet. We still have opportunities to continue to expand distribution around the world, especially outside the US. But, we also need to build the brand outside the US, so there's more work to do there. But yes, I would say it's still very early days on that business, and the growth ahead will depend on our ability to execute that into other countries, as well as here.

(Operator instructions.) Paul Coster, JPMorgan.

There's a marked difference in the rate of growth of the pointing devices category versus keyboards. Not intuitively obvious why that should be the case. What do you think the reason is?

I think there are a couple things. I think one is, first of all, keyboards are both keyboards and combos, so in combos there's a mouse in that box. So, that's certainly part of it. We also have a lot of keyboards that we're taking into new use cases, so living room, multi-device is obviously a big one, and that opens up new areas of growth for us.

And the third thing I'd say is what's probably not as obvious, because I don't think we reported volume, is actually the volume growth is up in mice, so the mix is lower this time. And part of that is just the cycle of what we launched. So, you may remember last year we redid really our most premium products, our Mexico MX Master and MX Anywhere, which are our top of the line products, top of the price point.

And so, I think you've seen our overall mix go down some as we finish that year, and now we're comparing to last year when we had a really good high end mix. So, that combination is the driver.

And Paul, if you take the mouse and keyboard and combos, when it's combined, plus the pointing device together, we are mid-single digit growth.

And then, well, you've made this point, which I think is well taken, that there's what, 500 million PCs that are more than four years old, and that that's really presented you with this fantastic opportunity. Obviously Microsoft and Intel and others are working hard to try and spur an upgrade cycle, and I guess soon that's going to happen. You in the meantime have moved away from the OEM business. When that upgrade cycle actually kicks in in earnest, how do you participate at that point? Does a good story get better, or is it actually a little bit of an issue for you as the market kind of tilts in that direction?

It's an interesting question. I see opportunities in both directions. We've stopped attaching to purchased new PCs for all practical purposes a couple years ago, because people would buy a PC, and -- two, three, five years ago, people would buy a PC and they'd often upgrade the mouse in the PC because, to hit price points, it's really difficult to put a full featured mouse or keyboard into a lot of PCs. So, you could upgrade at relatively low cost and get a more fully featured product instead of using the one in the box. And the one in the box was perfectly fine. We were making that, often.

So, if the PC upgrade cycle does really kick in and we start to see PC growth, I think that'll be an opportunity for us.

Andreas Mueller, ZKB.

I was wondering if there is any particular reason behind the reacceleration of growth in video collaboration, particularly in Europe. Is Europe more under-penetrated in general than North America? And should we expect more growth in general from Europe here?

Reacceleration of growth is probably a little deceiving, because actually our growth has looked very steady underneath the sell-in number. Our growth has been quite steady in Q1 and Q2, so we had a launch in the prior year. I think we said that in last call. So, yes, actually growth looks very consistent.

In terms of Europe versus the US, there are really good opportunities in both places. The number of rooms that are being video-enabled around the world, it's happening everywhere. So, I think we've got good opportunities both places, lots of places on our hit list. So, no, I don't see any reason why it would be more or less in terms of growth. We really should be growing both places, and Asia.

And then, in the room controller area, the decline, can you discriminate here between the product categories, remotes and Circle, and maybe the reasoning behind this decline there?

Yes. Circle's not in that category, as you might remember, so it's in a different category, but I'll let Vincent talk a little bit about where you can find [it].

In terms of remotes, the remote business is stable, I would say. If you look at the first half, it's okay. We're working aggressively on several things in that space, and we're excited about what's happening in the Smart home. And at the end of the day, we continue to think our remote business is pretty interesting.

In fact, I don't know if you saw yesterday, but we announced that we're now integrating our Harmony remote, the hub, with Alexa, which as you know, it's Amazon's personal assistant in the home. But, you'll now be able to operate a home hub using Alexa, so you'll be able to manage your business or your entertainment, your living room, your family room, whatever it is, as well as other things, using your voice using our hub. And in fact, you can order the hub right off of Alexa and just say, "Alexa, please order me a Harmony hub."

So, yes, we're excited about the potential there. and I think for the first half, the business did about what we thought.

And my last question on the cash conversion at that 22 days, that's within the target range. Is there any ambition to go below the range at some point, or to reduce the range? Or would you say the range provides you with the optimal net working capital also, going forward, the next couple of years?

Good question. So, every day we come in the office, we're trying to do better than the day before. We're now middle of that range, right, and we'll try to continue to get to a lower range. We have many different strategies we're exploring, but no specific plans that we would be ready to share with you that would lead to new targets.

Rich Kuegle, Needham & Company.

Just one quick question, more of an industry question. Just given your Smart Home initiatives and taking into account what happened last week with the DNS attack seemingly coming from some of these connected devices, can you just talk about how you approach security, your investments in that area, and how you can protect your solutions as they get into the home so that we can all move to more Smart Home configurations? Thanks.

Sure. Yes, I'm pleased to be able to say that none of our cameras were involved in that attack. They were directly connected. Those are cameras that are directly connected to the Internet, so they were vulnerable, and ours are not.

Generally speaking, obviously security of all devices, and including those in the home, is a very high priority for every company, and especially for us. We talk about it at the Board level. We talk about it at our leadership team level, and we're staffing it. So, it's a big deal. We're very focused on it. It's going to be a bigger and bigger deal for us, going forward, and for everybody else. We're certainly working with outside experts and inside experts to make sure we're in a good position, and it's a never-ending battle to make sure that we stay ahead of the curve so that we're not vulnerable where we shouldn't be. And so far, so good, but there's always work to do.

Shannon Cross, Cross Research.

With regard to what's going on in the PC space, as opposed to the $500 million installed base, but I'm just curious, the growth is really in the higher end, the two-in-ones, the high-end notebooks, especially for corporate. Obviously it's still in a slowdown to some extent in consumer. So, I'm just curious as to how your products work with the higher-end notebook sales. (Inaudible) the opportunity?

Yes, we do. We've always attached at all price points to products. People at the high end tend to take the more fully featured experience. Our multi-device keyboards, for example, are a perfect complement to a high-end notebook, where you use it at your desk and you also use it with other products.

And we continue to work on -- we obviously love the high end of the PC peripherals lineup, so we're always aggressively working on what else we could do there. and I think historically we've done well attaching to the high end, and we expect to in the future, if that cycle continues.

So should we assume that it's a higher -- I just want to confirm, it's a higher attach rate? Is it higher attach rate and a higher ASP that sort of tracks a higher notebook or a higher PC sale?

I don't know if I could say that. I don't even know if I have that data. I think in general, though, we've done well attaching to all price points.

And then, Vincent, can you talk a little bit about what you're seeing in terms of valuations for potential acquisitions? Are people more rational? Has it gotten crazy again? I would assume more rationality since the private equity market's a little bit tighter, but just any color you can give there. Thank you.

We've been focusing on also looking at how to use our cash and, as a priority, look at small acquisitions to complement our portfolio, right? And we shared many times that we're looking at a lot of companies on a weekly basis, and constantly discussing with different potential targets. Two years ago, valuation was extremely high, and since then it came a little bit lower. You've seen we've closed Jaybird in a very reasonable valuation ratio. We've done Saitek equally good valuation ratio, and we'll continue to stay disciplined. While not everybody may be crazy, we still see crazy valuation out there, and we'll continue to manage this approach in a very disciplined way.

(Operator instructions.) Tavis McCourt, Raymond James.

Just a quick follow-up on the audio market, so two distinct questions. First, in the Bluetooth speaker category, I think at the beginning of the year you had mentioned you expected that category growth to slow industry-wide to something like 10%, 15%. And obviously you've done much better than that in the first half of the year. And I guess maybe an update on do you think you're taking share, or has there been a little more legs to this category than you would have thought, and maybe a comment on your market share there.

And then, secondly, on Bluetooth headsets because it's a relatively new market for you, if Jaybird's doing 3%, let's call it a $60 million piece of business. How big is that market, and how fast is it growing to give us a sense of opportunities there? Thanks.

Yes, so a couple things. First, on Bluetooth speakers, yes, that market's progressed about like we thought. There's plus or minus something. We are gaining share in different places around the world, and we will continue to innovate there. And our expectations are about the same for the year that where we started.

In the Bluetooth earphone space, I think we said last quarter the market is large. I think we said it's somewhere in the $1 billion range and growing. And we've got our relatively small piece of that globally. We're much better in markets where Jaybird started than obviously the markets where they didn't. And our mission is to innovate in that space so that we can do what we do everywhere else, which is try to carve off our slice of that market based on the kind of functionality, the experience, and the brand that we have. So, that's our game plan.

Thank you. It appears there are no further questions at this time. I'll turn the conference back over to Mr. Darrell for closing remarks.

Well, in closing, we're very proud of the first half of fiscal year 2017, and we're excited about the strong momentum heading into the back half. Our main focus right now is to execute against our plans for Q3 and continue to invest to support our long-term growth. And I'm telling you right now, we are just getting started.

Thank you very much.

That concludes our conference call for today. You may all now disconnect.