Logitech International S.A. (LOGI) Q4 2008 Earnings Report, Transcript and Summary

Good morning, my name is Cara and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter fiscal 2008 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the conference over to Joe Greenhalgh, Vice President of Investor Relations.

Welcome to the Logitech conference call to discuss the company's results for the quarter ended March 31, 2008, the fourth quarter of Logitech's fiscal year 2008. The press release, a live webcast of this call and the company's presentation slides are available on line at logitech.com. This conference call will include forward-looking statements that are being made under the Safe Harbor of the Securities Litigation Reform Act of 1995 including forward-looking statements with respect to future operating results. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from that anticipated in the statements. Factors that could cause actual results to differ materially include those set forth in Logitech's annual report on Form 20-F dated May 25, 2007 and subsequent filings available on line on the SEC EDGAR database and in the final paragraph of the press release reporting fourth quarter results issued by Logitech and available at logitech.com. The press release also contains the company's financial information for this call. Forward-looking statements made during this call represent management's outlook only as of today and the company undertakes no obligation to update or revise any forward-looking statements as a result of new developments or otherwise. I would like to remind you this call is being recorded including the question-and-answer portion and will be available for replay on the Logitech website. For those of you just joining us, let me repeat the presentation slides accompanying this call are also available on our website. Joining us today are Jerry Quindlen, Logitech's President and Chief Executive Officer and Mark Hawkins, Senior Vice President of Finance and Information Technology and Chief Financial Officer. I would now like to turn the call over to Mark.

Thanks, Joe. Let me start with an overview of our Q4 performance. We experienced continued strong demand resulting in double-digit sales growth. Our sales growth accelerated to 17% reaching an all time high for Q4 with exceptionally strong growth in Asia and OEM. We improved our profitability. Our gross margins increased by 110 basis points compared to the prior year and reached an all time high for Q4. We also set new Q4 records for operating income and net income. We ended the quarter with $486 million in net cash and we generated $103 million in cash flow from operations in Q4. We achieved our full year targets for year-over-year sales growth as well as upwardly revised goals for operating income growth. Let's go to gross margin. Our gross margin reached an all time high for Q4 at 35.6%, topping last year's previous record of 34.5%. The gross margin improvement was driven by a combination of ongoing product cost reductions particularly in the pointing device and PC speaker category as well as supply chain efficiencies. Operating income and net income, our operating income grew by 20%. Our net income excluding a $6.9 million write-down of the remaining CDOs in our portfolio was $67 million and this was up by 20% compared to the prior year. Now let me also point out that our other income included a $4.9 million gain related to favorable exchange rate movement. Let's move to the balance sheet. Cash. Our cash position including short-term investments was $486 million. Our cash position improved by $75 million compared to the prior year. The increase versus the prior year is even more impressive when you consider that during the last 12 months we used $12 million to pay off short-term debt, $22 million for the acquisition of WiLife, and $220 million on share repurchases. Our cash flow from operations for the quarter was $103 million. It was an increase of $12 million over last year and for fiscal 2008, our cash flow from operations was $393 million, up $89 million or 29% over the prior year. Our cash conversion cycle was 46 days, an eight day reduction compared to the same quarter last year. This reduction was primarily driven by improvements in our days payable and I'm pleased to say this was the seventh consecutive quarter of year-over-year improvement in our cash conversion cycle. Inventory. Our inventory was up by 13% or $28 million compared to March of the prior year. Inventory turns improved to 6.3 compared to last year's 6.2. DSO, our DSO was at 56 days for the quarter, up slightly compared to the 54 days in the prior year. Share repurchases. During Q4, we repurchased a little more than 3 million shares for $82 million. We owned approximately 6.5% of our shares outstanding and we have roughly $205 million remaining under our current repurchase program. Now please note that the growth percentages that follow are in comparison to Q4 fiscal 2007. Now let's discuss net sales by product family starting with retail. Our retail sales grew by 15% with units up by 8%. We achieved growth in all regions with the Americas up by 8%, EMEA by 13%, and Asia's growth accelerating to 58%. We experienced strong demand in a number of product categories with mice and PC speakers demonstrating strength in all regions. Retail sales pointing devices, Q4 was an outstanding quarter in the pointing devices category as we delivered the strongest growth we have seen in over three years. Our sales growth accelerated to 38%. The primary growth driver was cordless mice with sales and units up by 58%. We experienced very strong growth in both the low end and the high end of the cordless mice category. Our sales in the high end tripled compared to the prior year led by the continued success of our VX Nano cordless laser mouse for notebooks. Now our sales in the low end nearly doubled primarily due to the sustained strong demand of our V220 cordless optical mouse. We also had a strong quarter in corded mice with sales growth accelerating to 24%. The growth was driven by a combination of notebook mice and our portfolio of gaming mice. Let's turn to retail sales for keyboards and desktops. Our sales in the keyboards and desktops category grew by 6% with units up by 17%. It was a solid quarter for standalone keyboards with sales growth up 17%. Now while desktop sales were flat, we achieved 10% growth in unit sales and we are pleased to note the sustained demand for our innovative cordless desktop wave. Our notebook stands continued to make a contribution to our growth in the keyboard category as well. If we turn to retail audio, we achieved a return to strong growth in the audio category with sales up by 15% and it was an outstanding quarter for our speakers with the sales increasing by 24%. We experienced double-digit growth in both the iPod and PC speaker categories. Now the sales of our iPod speakers were up by 48% with growth being driven by the success of our Pure-Fi Anywhere. Our PC speaker sales grew by 21% and we achieved sales growth across all major PC speaker price bands with the vast majority of the growth on the high end where sales increased by 80%. Sales of our PC headsets were essentially flat, down by 1%. Let me turn to retail video. We were very pleased to achieve a turnaround in the video category with sales growth of 9%. The sales growth was driven by a particularly strong quarter for our high-end webcams. Demand for our QuickCam Pro 9000 and QuickCam Pro for notebooks helped us increase our high end sales by more than four times compared to the prior year. Retail sales for gaming, gaming sales declined by 18%. Our console gaming sales declined by 17%. Now this decline was experienced primarily in the game pack category while we achieved strong growth in the steering wheel category. PC gaming sales also fell, down by 18%. While most PC gaming categories were down, we achieved growth in keyboards due to the sales of our G15 and G11 gaming keyboards. Retail sales remote, we achieved 12% growth in remote with units up by 22%. Our newest remote, the Harmony One, generated strong initial demand and made a major contribution to the growth. Our growth in the category was restrained by an 8% decline in the Americas reflecting a very challenging comparable to the prior year which included the launch of the $499 Harmony 1000. It was an excellent quarter for remotes in EMEA as sales tripled over the prior year. OEM sales. It was another very strong quarter in OEM with sales growth up 34%. The vast majority of the growth was once again in the console gaming category driven by microphones for singing games of the major three console platforms. Keyboards also made a major contribution to growth with sales up by more than 50% and I might add our OEM mice sales were also up by 2%. Now let me wrap up the comments with four key points. First, it was our best Q4 ever for sales, operating income, net income and gross margin. Second, we achieved sales growth in multiple product categories with especially strong demand for pointing devices and speakers combined with outstanding performance in OEM. Third, Q4 was our seventh consecutive quarter of year-over-year improvement in our cash conversion cycle helping us deliver $393 million in cash flow from operations for the year, a 29% increase over the prior year and it outpaced the 24% growth in our operating income. Fourth, we achieved a full year target for our year-over-year sales growth as well as our upwardly revised goals for operating income growth. Now before concluding my comments, I want to remind you that our next analyst and investor meeting is scheduled for May 22nd in New York. The agenda will feature a number of our senior executives reviewing our strategies and opportunities for fiscal 2009 and beyond and we do hope you'll be able to join us. Let me now turn the call over to Jerry.

Thank you, Mark, and thanks again to all of you for joining us. I'm very pleased with the company's performance both in Q4 and for the full year. 2008 marked another record year for Logitech with our strongest financial performance to-date and our tenth consecutive year of double-digit sales growth. For the full year we delivered the highest gross margin and the company's history and increased our operating margin by 90 basis points to 12.1% of sales. Our net income excluding the impairments related to our short-term investments grew by 23% and our net margin increased by 80 basis points to a 11.9% of sales. Our cash generation was outstanding and we ended the year with a very solid balance sheet. Now let me comment on our Q4 performance. We delivered record sales, profit and gross margin. The 17% growth in our sales demonstrates the combined power of our broad product portfolio and our geographic reach. And we generated strong cash flow by continuing to focus on improving the effectiveness of our working capital. There were a number of highlights in the quarter. This was the seventh consecutive quarter where we delivered a significant year-over-year improvement in gross margin. Our strong gross margin continues to provide us with a powerful source of flexibility and competitive advantage and demonstrates our ongoing focus on innovation and leveraging our growing scale. I'm extremely pleased with the performance of our mouse franchise. Our retail mice sales growth accelerated to 41%, a strong confirmation that meaningful innovation drives impressive demand and improved margins in a category where we've been a market leader for many years. It was great to see the return to a solid growth in video. We plan to continue our activities aimed at driving growth in the category but we believe we've turned the corner and expect to build on our momentum throughout fiscal 2009. Looking at the performance of our regions, I was pleased to see growth in all our sales regions and especially with the sustained growth in OEM and the exceptional growth in Asia. Q4 was a very strong quarter for sales of our higher end offerings in a number of categories especially cordless mice, PC speakers and webcams. Despite an economic environment characterized by weak consumer confidence, our results demonstrate that consumers continue to respond favorably to the affordable luxury appeal of our broad product portfolio from the high end products like the Harmony One to the hugely successful V220 optical mouse on the low end. The versatility of our portfolio is an incredibly potent lever in challenging market conditions. The last highlight of the quarter that I wanted to address was our performance in the remotes category. While 12% growth is modest for a high growth category, Q4 was a solid quarter for remotes. EMEA delivered their second best quarter ever and despite the tough comparable, we saw very strong sellthrough in the Americas driven in large part by the success of a dedicated advertising campaign we launched in January. In fact, when you look at sales of Harmony remotes for Q3 and Q4 combined, our sales grew by 40% compared to the same period last year. Now let me comment on fiscal 2009. Our strategy remains to position Logitech as a premium supplier in our categories, offering affordable luxury to the consumer while continuing to aggressively compete from the entry segment through the high end. We enter fiscal 2009 focused on several priorities with continued double-digit growth at the top of the list. We plan to launch an exciting set of new products during the year to take advantage of growth opportunities across our broad portfolio of markets and categories. And we won't hesitate to use our healthy gross margins to help drive that growth and sustain category leadership whenever appropriate. FY08 was an exceptional year for our mice and keyboards with sales for both growing in excess of 20%. We expect to continue to deliver double-digit although somewhat slower growth in these categories for FY09. Innovative products like the VX Nano Mouse and the Wave Cordless Desktop played a key role in fueling that growth and continue to validate our strategy of growing our categories and market share through sustained innovation. With penetration of cordless mice and keyboards still in the mid 20s, we are extremely confident of our ability to grow our category by giving consumers a compelling reason to trade up. Another growth enabler is the surging popularity of notebooks. The switch to the notebook form factor has created significant opportunities for us in a number of categories particularly in mice and keyboards. Sales of all of our products targeted for notebooks grew by 42% in FY08. We plan to build on this momentum in FY09 by continuing to target the growing base of notebook users with innovative new offerings. We also see significant opportunities for our mice and keyboards in the business market. Products like the Wave keyboard with its emphasis on ergonomics and user comfort have generated strong interest from enterprise and SMB customers. We have already established a solid foundation in EMEA to go after this segment and we have a strategy in place to ramp up our presence in the Americas as well. We were pleased to see a return to double-digit growth in the audio category in Q4. Given the opportunities created by the growing penetration of digital music, we believe our strong presence on the shelves combined with our lineup of innovative new products will allow us to continue to generate growth in the speaker category in FY09 with growth expected in both PC and iPod speakers. In addition to our traditional audio categories, we are very excited about the potential for our streaming media products. We've been quite pleased with the initial market response to our newest offering, the highly acclaimed, Squeezebox Duet. And we plan other major product introductions in this space in time for the holiday selling season. With our strongest streaming media systems product lineup ever, we expect our momentum in the category to accelerate during FY09. Turning now to video. We saw a number of encouraging signs in Q4 including double-digit growth in the Americas and Asia. We have yet to return to growth in EMEA but the year-over-year decline in Q4 was significantly lower than in prior quarters and we believe we are poised for a turnaround there as well. Now our strategy for FY09 remains largely the same with a sustained focus on in-store marketing, new products and partnerships. We believe our return to growth in Q4 validate that this approach is working. We continue to expect double-digit growth in the video category during FY09. One of the key long-term growth drivers for our video business is WiLife, the acquisition we made in late 2007. We believe that WiLife's easy-to-use plug-and-play offerings represent a revolutionary solution to the consumers' growing quest for security solutions. In fact, we believe WiLife has the potential to do for home security what applications like desktop publishing did for publishing in the '80s, moving the application out of the professional domain and turning it into a plug-and-play mass solution. We expect WiLife to generate growing momentum in the video category as we progress through the new fiscal year. Moving now to gaming. We expect our retail gaming business to return to double-digit growth in FY09. We're particularly excited about the opportunities on the console side. We expect that the launch of Gran Turismo 5 for PS3, the first major title for this platform will dramatically boost our sales of console wheels led by the recently announced Logitech Driving Force GT Wheel. Remotes was our fastest growing retail product category in FY08 and we expect that to be the case in FY09 as well. The launch of the Harmony One generated considerable momentum that we've carried into the new year. During FY09, we'll continue to focus on improving every aspect of the user experience to further increase our already high level of customer satisfaction while expanding the potential universe of Harmony users. And we have plans to replicate the success of our U.S. advertising campaign and other markets to help expand the category and grow our share. Let me shift from a product view and look at our sales regions. On the retail side, we expect double-digit growth across all regions. The opportunities in mature markets such as Western Europe and U.S. remain sizable and we continue to gain momentum in emerging markets such as Eastern Europe, Latin America and Asia. OEM is coming off a truly spectacular year, primarily due to the success of our microphones for console singing games. Now we do expect growth in OEM in FY09 but the title driven nature of the console OEM business translates into tough comparables beyond Q1 of the fiscal year. As an offset to the expected decline in OEM gaming, we do anticipate strong sales of webcam modules for notebooks and we will continue to pursue opportunities to bundle our microphones with other popular console singing games. That brings me to our outlook for fiscal 2009. The macroeconomic picture obviously continues to receive a great deal of attention in the media. What we saw in Q4 and still see today as well is sustained strong demand for our products. As one indicator of that demand, our retail shipments through the first three weeks of the quarter are well ahead of the same period last year. For fiscal 2009, we continue to target both sales and operating income to grow 15% compared to the prior year. Gross margin is expected to be above the high end of our long-term target range of 32% to 34% and we expect our effective tax rate to be around 12%. Fiscal 2008, was the best year in our history and we've entered fiscal 2009 well positioned to continue on our path of sustained growth and profitability. With our most exciting product roadmap ever targeted at substantial growth categories combined with strong retail and OEM relationships and a powerful global brand, we are confident in our FY09 outlook and look forward to updating you on our progress. At this point, I'd like to open the call to your questions. Please follow the instructions of the operator. Question And Answer

[Operator Instructions]. Your first question comes from the line of John Bright with Avondale Partners. Please go ahead with your question. He is unavailable for questions. We will move to the next questioner and the next questioner is Simon Schafer with Goldman Sachs.

Wanted to ask about the split in your retail sales between laptop versus desktops. Could you just remind us and maybe I didn't catch it, what was the percentage of your retail sales in fiscal '08 that was desktop versus laptop?

Hey, Simon, this is Mark. Let me try to give you some information. We don't actually split that typically in that manner. However, one thing I think you will find interesting is 42% growth in our notebook solutions for fiscal '08. So that will give you a sense of the growth in notebook solutions over the course of the fiscal year. Okay?

Got it. Thanks Mark.

You're welcome.

And just to clarify on webcams, I think you commented U.S. and Asia, you recovered your growth but EMEA is still a little bit weaker. Could you maybe just provide some more color as to what market share would be, how that progression is coming along, whether pricing has changed any meaningfully? Is that just a euro issue or is that going on elsewhere? Just some color there would be appreciated.

Sure, this is Jerry. So in the Americas, our share in Q4 was stable with Q3 and actually is at an all time high. So we are back to the pre-Microsoft entry level of share, so we are very, very strong there. In Europe, it's a little bit of a different situation. We have yet to recover the share that we lost following Microsoft's entry into the category. However, our share has been stable for several quarters in a row. So in general, the situation form a share standpoint is that we are stable in both the Americas and Europe. We've fully recovered in the U.S. not quite back to pre-Microsoft levels in EMEA.

Great news. Just a very basic question, in your outlook statement for the 15% profit growth, what type of euro exchange rate would we have to assume as part of your guidance?

One of the things, Simon, I would say is you shouldn't assume any particular number. We're not going to give a particular number here. The one thing I would say to you is if you look at our... over the last ten years of course, this is the tenth consecutive year of double-digit growth on a fiscal year basis. We've seen dollars appreciate, we've seen dollars weaken and ebb and flow and even during the quarters of the year. That is not the primary driver of our business growth. The primary driver really comes back to the resilience of the model, the mass luxury products in the adjacencies that we are in plus the global distribution. Those are the real big drivers that do that. But that is kind of our position on that one.

Got it. Thanks so much, Mark.

You're welcome.

Your next question comes from the line of Ted Chung with Bear Stearns.

Thank you. Mark, just to clarify, can you give more details regarding what you are currently seeing in terms of the overall macro demand environment? I know you were mentioning that the push through weeks were ahead of last year but you would expect that to be so. Are you seeing any tentative purchasing behavior by your customers or channel inventory draw downs or any of that nature?

Hi, Ted, it's Jerry.

Hi, Jerry.

And Mark may want to comment as well. But what I can tell you is that as Mark said in his remarks and so did I, we continue to see strong demand and sellthrough for our products in a majority of our categories with particular strength at the high end. We do not believe that our sales in the U.S. or frankly any geography has been significantly impacted by consumer slowdown during Q4. And we haven't seen anything yet to believe that it will become a major factor in FY09. In fact our sellthrough in the U.S. during Q4 was quite strong. And then the last point I think we'd reiterate is that we actually accelerated our momentum as we exited Q4. If you go back to Q3, our retail sales growth was 9%. That accelerated to 15% in Q4 and our total sales growth accelerated from 13% to 17%. So we actually exited the year against a murkier environment, external environment, with increased momentum. So that is kind of the picture as we see it.

Have you gotten any initial indication from retailers regarding your fiscal '09 product portfolios at all?

Well, as a matter of fact, we have some major meetings coming up with both U.S. and European retailers in fact with the U.S. it is two weeks from today I think and Europe is shortly after that. We share with them a lot of things including not only our product portfolio but some of our plans for the future. But in general every year our customers have been quite pleased with the products that we've introduced and we don't expect this year to be any different. We have a very, very exciting lineup of new products.

Great, thank you, guys.

Thanks, Ted. You bet.

Your next question comes from the line of Matthew Yates with Merrill Lynch.

Just firstly, Mark, can you talk a little bit about the level of marketing expense in the quarter? It looks slightly high, higher than what you've done in the past in terms of percentage of sales and I just wondered is this in response to a tougher consumer backdrop?

Actually, Matthew, a couple of things to take into consideration. First of all in terms of our marketing, you see some spend that happens in terms of OpEx like you are pointing out on the P&L. There is also things in terms of soft dollars between gross to net that we use so we go back and forth depending on the particular circumstances. So that is just one point to call out that there is a couple of moving parts. The second thing is we are ever so pleased to be able to step up and make investments. Some of them are short-term some of them are longer-term and yet still get the kind of operating leverage that we delivered in terms of profitability for the quarter. I'd say the other thing just to keep in mind is we did have a campaign that Jerry talked about in terms of... that has more lasting kind of impact in terms of Harmony and so that had some impact on it. But by and large you know we always try to scale our OpEx in juxtaposition to our gross profit and we did it nicely again for the quarter and certainly for the year. I hope that helps.

Sure. Just as a second one, in the past at some of the investor days you talked about the drivers of your gross margin. I just wondered if you could give us a bit of an update what you are seeing in terms of labor costs, plastic costs and transportation and how you are dealing with those sort of headwinds?

Yes, sure, I would be happy to do that. I think the number one driver I would say full stop is the degree of innovation. You heard from Jerry in terms of the way people are just responding to our products in general, that is really what gets us excited and helps really drive the ultimate gross margin. I think beyond that, I think in this particular quarter, we saw two primary factors. One was continued efforts in our product cost reductions, particularly in the pointing devices and audio categories, Matthew that really helped us. And then we also sell some supply chain efficiencies that have continued to bring us goodness there. That's more broadly speaking for the quarter. In terms of labor, keep in mind labor is 8% to 9% of our product cost which means it's an even smaller part of our total cost structure and what you see are moving parts there but also productivity efforts and continuous improvement efforts. So that has largely worked as we would have hoped and then again, plastics nothing of a material nature. I think you can see with the posting of record gross profits in terms of both for the quarter and for the year, I think in general that is well in hand.

And just a last one perhaps to Jerry. We've heard from a lot of companies as we went through Q1 that things got increasingly tougher in March as consumer confidence fell. Is that something that you also see?

It is not, Matthew, actually. Our sellthrough and I'm going to talk more about the U.S. because I think that is where a lot of the focus is. Our sellthrough and of course definitionally [ph] this is the actual sales of products in retailers that consumers are taking away, point of sale, our sellthrough was strong throughout the quarter, a very consistent January, February and March. And so we were obviously very pleased by that. Mark I think you have

Yes. Just one additional thing that also to keep in mind is the first three weeks of the new quarter we're actually are well ahead of last year so that is maybe something that touches closely to the point you are looking at, Matthew.

That's great. Thanks for taking the questions.

Absolutely.

Your next question comes from the line of Thomas Schneckenburger with UBS.

Good afternoon, gentlemen.

Good afternoon.

My first question is on the growth target of 15%. Could you also confirm that there is not an external share of growth included in this target because, Jerry, I think you on several occasions mentioned that this year could be the year of a major acquisition? So is there anything included in this target? And the second thing would be on the OEM share. You had an excellent year on the OEM business, the share is increasing. In the past if I remember, there was a negative margin gross margin impact of the OEM business. Would you say that there is still a negative impact of gross margins in OEM and overall gross margin would have even been higher or do you think this has changed going forward?

Yes, so, on the first question, the assumption about 15% does not assume anything about an external acquisition or anything like that. That is an organic growth assumption. So we absolutely see when you factor in the momentum we've carried from Q4 into FY09, when you factor in things like the fact that our video business was down 24% in FY08, our console, the console portion of retail gaming was down 13. Voice access was mediocre in terms of its performance and yet our forecast for '09 is a return to double-digit growth in video, a return to double-digit growth in retail gaming and a return to solid growth in PC headsets. These things give us tremendous momentum also as we go into FY09, and we were able to achieve the 15% target growth in '08, even with some of those drags on the business. So the assumption is around organic growth. On OEM, what we are assuming about growth, the first thing to recognize is even after frankly an incredible year in OEM where we surpassed $300 million in sales, we still project growth in OEM in FY09. It will not be at the same rate of growth, and frankly, we don't expect it will be as rapid as the 15% growth we are projecting overall, but we do expect OEM to grow. And relative to gross margins, I think your general assumption that OEM is less margin rich than the rest of the portfolio is still true. But it did not have a significant negative impact on our business overall, and it's more of a testament to the overall strength of our gross margin story that even with OEM growing 36% in the year, we were able to achieve 35.6% for the quarter, 35.8% for the year.

And perhaps you could still elaborate a bit on external growth or potential acquisitions with your $400 million net cash position. Do you see any potential targets for '09, or acquisitions?

So let me reiterate what our approach to acquisitions has been and we'll be going forward. We have always seen acquisitions as a way to gain access to new technologies and emerging spaces. I think the best examples I can point to of that are the acquisition of WiLife in November 2007, which as you heard through our comments we're very bullish about. Same thing with the acquisition of Slim Devices at the end of 2006. We have never had a criteria that's particularly size driven. Our criteria first and foremost is that any acquisition we undertake, we have to believe it will create value. We have to believe it fits with the overall Logitech model and strategy. And we've been prudent and disciplined about acquisitions and we will continue to do so going forward. So we don't have any particular size goals and we're always looking at acquisitions. That is one of the two main ways we deploy our free cash flow, the other being share repurchases. That will continue going forward. So we are actively looking at targets all the time. And again, our assumption for growth in 2009 is based strictly on organic growth.

If I may, just to clarify to make a point. So it's not true what was written in this local press here that there's been a change in strategy to focus less on bolt-on small acquisitions as once you mentioned towards major acquisitions. So it's

Yes, that is not true actually that is not accurate, because I think there was misinterpretation and I'm happy to have the opportunity to clarify. What we did say was that certainly as we've gotten bigger and as we have compiled a more significant cash position, we have the ability to do larger acquisitions; meaning that we are a larger company, we could absorb a larger acquisition. We have no long-term debt, and obviously $500 million of cash gives us the ability to do larger acquisitions if they fit those other criteria; if we believe they will be value creating over the long-term, if we believe they fit our strategy, etcetera. So that was actually what the quote was. And I also said that the smaller bolt-on acquisitions that like WiLife where we play the role of market maker are always going to be part of our strategy, but we won't pursue four or five or six of those simultaneously. That is actually what I said because we can't play the role of market maker as we are doing with something like WiLife where we are hoping to stimulate, create the actual market. We can't do that with too many small acquisitions. So that was actually what the quote is. I'll go back to what I said, our focus on acquisitions really hasn't changed. We will use it to help advance the strategy we've talked about. We're looking at them all the time and the assumptions around '09 do not have any specific assumptions about a bolt-on acquisition or any other kind. It's organic.

Okay, thanks a lot and congratulations again for your excellent quarter.

Thank you very much.

Thanks a lot Thomas.

Your next question comes from the line of Tavis McCourt with Morgan Keegan.

Thanks, first, Mark, can you repeat what you said about the puts and takes in other income this quarter?

Sure, happy to do so. We basically have two fundamental things going on. One is some favorable foreign exchange which is about $4.9 million; on the other side is a mark-to-market short-term investment of $6.9 million. Those are the two major dynamics that kind of net it out.

Got you. And then can you run through... I think you mentioned unit growth per pointing devices maybe one other category. Can you run us through the unit growth for all the categories?

In fact, I can give you that. I surely can. So for Q4, in terms of... I think some of this stuff also might be in the some of the packages there but just in case. So for pointing devices, we had unit growth of 22%. For keyboards and desktops, it was up by 17%. For video, it was minus 8%; audio minus 7%; gaming, minus 31%; and then remote controls plus 22%, that will give you a sense there. Overall, up 9% for the quarter.

Great. And then I wanted to delve if possible a little deeper into the strength in pointing devices. Was the March strength a result of just extremely strong sellthrough in the holiday season and kind of rebuilding those channels or was there specific product launches this quarter that drove accelerated sellthrough in the March quarter itself?

As you know, we've had a strong year in mice, the full year. We had one of our strongest years ever. As Mark said, it's the strongest year we've had in three years. And certainly I think what you saw is the efforts throughout the year peaking because our product introductions had been in the market longer at that point. So without a doubt I think there was a bit of a crescendo at the end of the year but frankly our performance in pointing devices throughout the year was pretty spectacular.

But nothing new in terms of new product launches in the March quarter itself?

No, of the two best performers within pointing devices were the VX Nano which has been in the market for a couple of quarters. That's the more high end product that features the mini USB receiver. And the other great performer was more at the low end which was the V220 Optical Mouse. I think Mark called that out which doubled volume at the low end in the quarter. But those have been in the market for a couple of quarters and I think it takes time to get full distribution, etcetera. And so you sort of build to a crescendo and I think we saw that crescendo in Q4.

Okay. And my final question is on the iPod speaker business. If I remember correctly that was a little bit weaker last quarter at least if not for a couple of quarters. Seemed to have turned around this quarter. Was there any specific driver behind that?

Yes, let me take a shot, and Jerry might add to it. One is that we have some new products that were launched there, Tavis, our Pure-Fi Anywhere really did a... was nicely received basically and that helped contribute to the 48% growth. We are doing some product refresh in the iPod area and it is just nice to see the response from a marketplace standpoint.

Great, thanks a lot and congrats on a great quarter.

Thank you.

Yes, thank you, Tavis.

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

Yes, good afternoon, good morning. Two questions. Starting with Asia, you had very strong growth in Asia. Could you eventually give us a bit more insight into which countries and what products drove that growth? That will be the first question.

Sure, this is Jerry. I'm pleased to say that the growth in Asia was very broad based. I won't go through every single country but I could tell you that for example in China, we just had a stellar quarter. We had a great quarter in India and the broader cluster we refer to as South Asia which includes India. The other markets included in that would be Malaysia and an example, Thailand. We had a great quarter in a more developed market, Australia, New Zealand, which would be more like Western Europe or the U.S. We just had an absolutely spectacular quarter. So it wasn't just emerging markets within Asia that had great performance, it was more developed markets like Australia, New Zealand and we had a great quarter in Japan. So after a couple of quarters of some speed bumps in Japan, we've been on a steady, a very steady path there and we had an excellent quarter in Q3... in Q4. From a product standpoint, if I look at Asia it's a little bit different depending on the market but in the more emerging markets, the strength is largely in control devices so mice and keyboards. We're also seeing building momentum for webcams, as broadband penetration comes into markets like that. For example, in China, there is a tremendous amount of interest in the Internet with the focus on the Olympics and so there is a lot of interest in webcam. In places like Australia, we had strength across our whole portfolio, so speakers, SMS, webcams and of course, control devices. So that gives you a flavor of it.

Okay, great. Second question on video. I mean I understand that your high end video devices or the webcams sold well and ASPs are up but unit sales are still down. Are you seeing a change in the structure of the market or the consumer behavior or is it related to WiLife? Can you elaborate on that?

It's not related to WiLife, the impact of WiLife in the quarter was fairly minimal. It really reflects more of a mix shift. We quadrupled the sales at the high end for products like the QuickCam Pro 9000. This is the one that features the Carl Zeiss lens and another product, the QuickCam Pro for notebook. So a shift in terms of more dollars but fewer units. Also part of the challenge with Europe is Europe has a larger portion of the market that is at the low end where there are more units. And we have not yet seen the recovery there. A big part of that is we don't yet have the right product mix although we think we've addressed that. So that is a big part of the dimensions around the unit shift. So as we have addressed that, we think that will get corrected over time.

So you expect unit sales to turn positive as well sometime soon?

Yes, I mean the forecast that we are making is that we will return double-digit growth for the full year 2009 in retail webcams.

Okay.

Go ahead.

Last question would be just on the book keeping side. The tax rate, can we calculate was 12% longer term as well or just for 2009? And the second one would be CapEx, what do you expect for '09?

So a couple of things here, Michael. One is, I think the 12%, around 12% is a good number to use for '09. Beyond that we really haven't typically gone out beyond that period of time so I would just stick with that range right now. And then for CapEx, look for 2% to 3% of revenue. In FY08, we landed right in the middle at 2.5% of revenue so we are really... it seems to be a pretty good target to think about going forward, Michael.

Okay, great. Thanks, congrats.

Thank you.

Thank you.

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

Thank you, good morning, Mark. Good morning, Jerry.

Good morning, John.

Good morning, John.

The three big concerns out there in your stock in order are one, macroeconomic impact, why is Logitech immune and doing as well as you are? Two, will the marketing and selling... spending that you seem to accelerate in this quarter need to continue? And three, are you giving an FX benefit today that might hurt you in the future? If you wouldn't mind maybe taking those three, I would appreciate that.

If I might take a shot at the FX and the OpEx side of it and maybe if I could take

I will take the macro piece.

Yes, leave the macro with Jerry. But on the FX side, John, just to kind of lay it out there, we get impacted up and down the P&L, right, for FX. You can imagine whether it is OpEx, whether it is production, sales whatever the case might be. But I think I know you know our company really well as well we never have come over the ten years of delivering double-digit growth on top line and this bottom line growth, we have never made FX a major point because there is so many different factors that tend to create an ebb and flow over time. So I just don't want to oversimplify the thing. We have a lot of different factors that impact us right now. That would be the biggest point that I would call out to you. Secondly, you are aware we have global pricing and that we try to true up our European prices in parity with our U.S. We have that flexibility that's another point to note. I think the other point that I would like to shift gears on is the OpEx. I think the one thing that we're really pleased about as a company is the discipline and the agility to step up and make investments that are going to propel us for the long-term and at the same time always scale our OpEx in sync with gross profit. We've done that repeatedly year-after-year and even in shorter time periods, for example, in the quarter. So there are investments that we've made in this particular quarter that showed up more in the OpEx line as opposed to the gross to net line. But I would say if anything you can count on continued incredible discipline there. Let me just stop at that. Maybe I can turn the economic one over to Jerry.

And John, I'll add a couple of things to Mark's other points. I think kind of more to your question on OpEx, is there something structural there? No. The answer is no. One thing that was in the quarter that is very on strategy for us, as Mark said in one of his comments, we will make investments in the quarter that are both in quarter investments and also others that are more longer term in nature. The Harmony ad campaign was absolutely the latter category of more long-term in nature but non-recurring. I mean we are looking at other markets where we may replicate that success but in terms of is this a structural signal? No. And so let me turn the question more about momentum. There's a lot of things going on, but I'd point to three or four things that we've talked about before but we believe are true. Number one, we are carrying significant momentum out of Q4 and into the new year which maybe a lot of companies aren't doing. As I mentioned earlier, we actually saw our sales growth accelerate as we went from Q3 to Q4. And Q4 I think we would all agree was a tougher quarter in terms of things going on at a macroeconomic level than Q3. So we carried significant momentum into the new year. From a portfolio standpoint, we've often talked at investor days and on these calls about one of the strengths of Logitech is our portfolio of categories and markets and the resilience and versatility that provides us. Really if you boil that down, what does that mean? It really means that we have the ability to manage through and meet our targets if one product or market or customer for that matter, is down or going through a down cycle. We can compensate and have compensated in the past with others. You have seen that this year with video. Video was down 24% for the year, retail console gaming down 13% and yet we are able to achieve the 15% with strength in other areas. We see a return to growth in some of those product categories that were more anchors, more drags on the growth this year and yet we still see growth in the other areas. So that portfolio resilience has always served us well. We see building momentum for our new acquisitions which are not yet adding a lot to the top line but we believe will as we go forward, talking about WiLife and SMS. And the fourth point really has to do with consumer, less about the portfolio, more about the consumer. It's this concept that we believe deeply in that we've talked about before, we call it mass luxury. In essence what it refers to is in difficult... it's really two parts to it. It's the fact that we compete across a broad range of price points, gives us enormous flexibility in difficult times. The fact that we have products at the mid and upper range and an aggressive portfolio at the lower end. You see that this quarter in our pointing devices results with the great performance of the V220 at the low end, the great performance of the VX Nano at the high end. And this whole idea of mass luxury is that if consumers are curtailing other higher end purchases, we have seen that often translate into a benefit to us because they don't hesitate to spend on the best possible mouse they can get for $99 or the best possible remote they can get for $199. And we call that not having to check with the spouse philosophy. So we believe all these things are at work, John, and that is why we are very confident in the outlook.

So let me wrap that up then on the outlook. The 15% top line expectation for fiscal year '09, three year old thoughts here. One, I think you said earlier this is all organic growth expectation, correct?

There is no assumption about that's correct, there is no assumption about acquisitions in there.

Okay. And then two, I heard during the conference call you are talking about maybe a move into the enterprise first in Asia and then potentially in America. Did I hear that correctly as well?

What we said was that we already have a presence in EMEA actually. We have a team, considerable team of people already dedicated to it. We see that we are underpenetrated in the enterprise market. We do business there today, John, but we see that we are underpenetrated. So we have been increasing our resources, primarily feet on the street against that market opportunity and we are doing the same thing in Asia Pacific and the Americas as well.

Okay. So then the last piece of it when I look at the 15% top line growth relates to your product portfolio today and the potential acquisitions in front of you. When I look at the product portfolio that you bolted on over... very successfully, over a period of time regarding the desktop, regarding the laptop in place, where do you see the potential additional acquisitions? And what type of products do you think might fit best into your portfolio looking forward?

We are constantly scanning the landscape for acquisitions and we are looking both at acquisitions that would push us further into the digital home, WiLife fits that example or fits that definition. But we're also looking at acquisitions that complement our core, acquisitions that complement mice and keyboards, webcams. And so we don't limit ourselves, we are really looking at both. And we see potential in both and we've been looking aggressively over the past year and you'll just have to stay tuned because I really think there is potential in both areas.

Last question, what was Asia as a percentage of sales in the quarter?

It was 60%.

Thank you, gentlemen.

You bet.

Thank you, John.

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

Hey, guys. Just wanted to follow up on the enterprise commentary and wondered if you could give us a little more in terms of how much of your sales mix that is right now? And just conceptually, how much could it grow to become?

Let me take a shot at that Andy. One is that this is part of the business that we haven't disclosed in terms of the proportionality of it. We think of it as Jerry called out, we think it's a great opportunity. At this stage we haven't broken that out uniquely but Jerry has kind of talked to you about where in the geographies it is right now. But we do see that as an exciting opportunity but let me turn it back over to Jerry.

Yes, Andy, the only thing I would add is that we are already doing business there. But we know that we're underpenetrated in both enterprise and small business. And we also understand that it's a different sell cycle. In some ways it's closer to the sell cycle or strategic OEM than retail where your enterprise will take a longer time to make a decision about buying huge quantities of the keyboard or a mouse. So it's a different sell cycle. We haven't necessarily in the past approached it that way so we are realizing it takes sort of a different selling approach. But we are there today as we look at the size of it and our penetration levels, we see a lot of room to grow in all of the market. So it is definitely going to be an area focus for us on an ongoing basis.

Now on the gaming side, I think you said it already but would you mind just repeating when the Gran Turismo release is and what you expect in terms of the seasonality of the growth there?

Gran Turismo is the... I'll call it the lead product and I'm really talking about of the wheel is the lead product to take advantage of the launch of Gran Turismo 5. And I actually don't have a date. We are saying broadly spring but we need to be more specific. That's something we will have to follow up with you on, Andy. But that's I would say the most visible example of one of the things we think will help really drive return to growth in console. Because the PS3 installed base is still fairly low compared to PS2. And that's one of the reasons that we haven't seen the full return to growth. So I will leave it at that.

Thanks.

I think we have time for one last question so this will be our last question.

Your final question comes from the line of Manny Recarey with Kaufman Brothers.

Thanks, just getting under the wire here. Two questions. One on the video side, returning to double-digit growth, is there anything going on in the market that is going to help drive that or is this more a function of having the products that you were talking about in Europe on the lower end? Is there anything going on in the market or is it more product related?

Manny, we've been talking consistently over the last few quarters that there is kind of a three point plan that we've been following, product innovation, you've seen examples of that with for example, the QuickCam Pro 9000 that we've talked about so many times. That is the one featuring the Carl Zeiss lens. So product innovation, more in-store marketing to tell consumers about the benefit of video communication There was a big emphasis on that in the current quarter and we saw the payoff. And then partnerships like the Skype partnership we announced at the end of October, for Skype high quality video. So the return to growth in our mind is tied to all three, not just one or the other. In Europe specifically, one of the things we know about that market where we need to do better and we believe we've addressed it is Europe has a larger low end segment than AMR, than the Americas. And we know that we haven't had the strongest lineup at the low end. We believe we are addressing that and we think that will be one of the ingredients that help us get to a return to growth in Europe.

Thanks for that and then the second question is just to touch back on the end products. You are talking about the difference sales cycles, sales approach. On the distribution side, are you going to have to add or go through different distribution channels do you feel to reach that segment?

No, not necessarily. I don't think it really requires a lot of changes there. What it requires is a different marketing approach because it's not the same as marketing through retail. You are reaching a different decision maker etcetera. So it goes back to something I said which is I think we have we've approached it too much like the retail business that we know so well. So to increase our penetration, we realize we have to have both a different selling approach and a different marketing approach to that segment.

Okay. But it's not going to be big investments. It's going to be incremental investments for a longer term outlook?

No, I mean incremental, this does not require a big structural investment. No, you should not think of it that way.

Okay, great. One plug-in for your tie-in webcams with Skype. I now use it so I can talk to my kids when I'm out traveling.

We like it. Well done Manny. We love it. So thank you all very much. I just want to close with a brief statement. And I thought I would make a short observation about one of our more traditional businesses which is absolutely at the core of Logitech, the mice business. We've talked about it a lot today. Fiscal '08... in fiscal '08, our retail mice sales growth accelerated to 22% with cordless growing by 30%. I find this a very strong indicator of something we mean when we talk about being able to reinvent our categories. Delivering growth like this in a category that frankly many outside Logitech viewed in the not to distant... in the recent past as mature, we think is a testament to our ability as a market leader to create new growth dynamics in our category. So we thought it was only fitting that in this year, the Chinese year of the mouse, we actually expect to cross a pretty incredible milestone for our mouse business. We plan to ship our 1 billionth mouse before the fiscal year end. So it just gives you a sense of why we remain so excited about our growth prospects in this business. With that, I would like to thank you all for joining us and that concludes our call.

That concludes today's conference call. You may now disconnect.