Jan 27, 2011
Executives
Gerald Quindlen – President, Chief Executive Officer Erik Bardman – Chief Financial Officer Joe Greenhalgh – Vice President, Investor Relations
Analysts
Paul Coster – JPMorgan Christoph Gretler – Credit Suisse Jonathan Tseng – Merrill Lynch Yair Reiner – Oppenheimer & Co. John Bright – Avondale Partners Tim Shaw – Citigroup Global Markets Simon Schafer – Goldman Sachs Andy Hargreaves – Pacific Crest Securities Michael Foeth – Vontobel Group Stephan Gick – Deutsche Bank
Operator
Good day and welcome to the Logitech Third Quarter Financial Results conference call. At this time, all participants are in a listen-only mode.
We will be conducting a question and answer session toward the end of this conference, and instructions will follow at that time. This call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech.
I would like to introduce your host for today’s call, Mr. Joe Greenhalgh, Vice President of Investor Relations and Corporate Treasurer at Logitech.
Joe Greenhalgh
Welcome to the Logitech conference call to discuss the Company’s results for the third quarter ended December 31, 2010. The press release, a live webcast of this call, and the Company presentation slides are available online at Logitech.com.
This conference call will include forward-looking statements including forward-looking statements with respect to future operating results that are being made under the Safe Harbor of the Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated in the statements.
Factors that could cause actual results to differ materially include those set forth in Logitech’s annual report on Form 10-K dated May 27, 2010 and subsequent filings which are available online on the SEC EDGAR database and in the final paragraph of the press release reporting third quarter results issued by Logitech and available at Logitech.com. The press release also contains the Company’s financial information for this call.
The forward-looking statements made during this call represent management’s outlook only as of today, and the Company undertakes no obligation to update or revise any forward-looking statement as a result of new developments or otherwise. I would like to remind you that this call is being recorded, including the question and answer portion, and will be available for replay on the Logitech website.
For those of you just joining us, let me repeat the presentation slides accompanying this call are also available on our website. Joining us today are Gerry Quindlen, President and Chief Executive Officer; and Erik Bardman, Senior Vice President of Finance and Chief Financial Officer.
I’d now like to turn the call over to Gerry.
Gerald Quindlen
Thanks, Joe, and thanks to all of you for joining us today. I will provide an overview of the business, which will be followed by a more detailed review of the financial results by Erik.
Then, I’ll return with a few closing thoughts before we both take your questions. I am very pleased with our results for the third quarter.
We delivered strong double-digit growth in both sales and operating income, and we achieved record quarterly sales. Our regional sales performance was led by Asia Pacific with sales in this region up by 51% over the prior year.
The growth in Asia Pacific was primarily due to a very strong quarter in China with both sales and unit shipments more than doubling as we continue to make excellent progress developing China into one of our top 3 markets. We also delivered strong double-digit growth in the Americas and in OEM.
While sales in U.S. dollars were essentially flat in EMEA, they did increase by 7% in local currency.
The economic recovery in EMEA continues to progress at an uneven pace with strong sales performance in some countries largely offset by weaker markets such as the U.K. As we reached the one-year anniversary of our acquisition of LifeSize, I couldn’t be more pleased with the momentum in our LifeSize business.
For instance, the latest market share data as of September 2010 shows that LifeSize had achieved double-digit endpoint unit share for the first time ever. Q3 was also a record revenue quarter for LifeSize, and the first quarter which included sales of our newly-launched infrastructure product, the LifeSize Bridge 2200.
This new offering continues the LifeSize tradition of delivering exception performance and value. We also shipped a record number of endpoints during the quarter.
Let me turn to our retail business. We achieved sales growth in all of our retail product categories with remotes leading the way, up by 34%.
We also delivered double-digit growth in pointing devices, video, and PC gaming, three product categories tied directly to the PC platform. Logitech Revue with Google TV and the associated peripherals were a major contributor to the growth in our sales for the quarter.
I was very pleased with our execution of the Revue launch. While consumer demand ramped slowly, it picked up in the latter part of the quarter and we now expect sales of our Google TV offerings to be around $40 million for the current fiscal year.
There was a high level of interest around Google TV at this year’s CES with lots of activity in our booth. TV manufacturers Samsung and Vizio announced plans to launch Google TV devices later this year.
Furthermore, we recently expanded availability of our Google TV offerings in the Americas, adding Costco as well as several distributors to join Best Buy, Amazon, the Dish Network, and our own website. We anticipate continued enrichment of the platform as we collaborate with Google on periodic over-the-air software updates that will add new features and content and continuously improve the user experience.
An open platform and applications will drive the need for advanced peripherals in the digital home, and I believe that Logitech is extremely well positioned to deliver. To that point, I’ve been very pleased with the attach rate of our Logitech TV cam, which has consistently been between 10 and 15% in the three months since launch.
We expect the momentum around Google TV will grow and we’re excited about the opportunity to develop another large installed base for our products over time. Shifting to CES, clearly the big story at CES this year was the proliferation of tablets expected to be launched in the coming quarters.
I saw a lot at CES. I talked with a lot of our customers, and my takeaway continues to be that tablets are an additive opportunity for our business.
While it’s unlikely that the market can support the huge number of tablets on display at CES, there is no doubt in my mind that increased variety and functionality in the tablet category will provide more attach opportunities for Logitech. We have incorporated a tablet focus into our fiscal 2012 product pipeline and expect that roughly 25% of our retail products in the coming fiscal year will be tablet-friendly, including many product designed specifically for use with tablets.
That said, we’re confident that the opportunity for PC peripherals remains substantial. Let me add two supporting data points from our Q3 sales, starting with the Americas where we delivered double-digit year-over-year sales growth in all of our PC-related product categories.
Now, this was achieved during the holiday season when the iPad took a notable share of the U.S. consumers’ technology spending.
Additionally, our doubling of sales in China was driven entirely by PC peripherals, and we expect the opportunity will grow as we expand our footprint to additional cities and distribution channels. Q3 was also a strong quarter for sales in our other developing markets, with that growth driven almost entirely by our PC-related offerings.
Finally, we’ve increased our sales outlook for FY11 in spite of a slower than expected start for Logitech Revue, and we’ve done that based on our expectation for continued broad-based growth in our PC peripheral sales. For fiscal year 2011, we’ve raised our sales outlook from our previous range of 2.35 to $2.4 billion to the new range of 2.4 to $2.42 billion.
Our target for operating income remains unchanged at 170 to $180 million. We continue to expect gross margin to be approximately 36% for the year, and we now expect our full-year tax rate will be approximately 14%.
Let me now turn the call over to Erik to review the financial highlights for the quarter.
Erik Bardman
Thanks, Gerry. I’ll start with an overview of our Q3 sales performance.
Please note that the growth percentages that follow are in comparison to Q3 fiscal 2010. Our retail sales grew by 17% and were up by 21% in local currency.
Units were up by 14%. Looking at our regional sales in local currency, EMEA was up by 7% and Asia Pacific by 47% compared to a U.S.
dollar decline of 1% in EMEA and growth of 51% in Asia. Retail units were up by 6% in the Americas, by 4% in EMEA, and by 64% in Asia Pacific.
Our overall retail average selling price in Q3 was up by 3% from the prior year and up by 16% sequentially. Sales of our retail products priced above $100 represented 24% of our retail sales in Q3, up from 17% in both the prior year and the prior quarter.
The mix shift to more products priced above $100 primarily reflects the impact of the launch of Logitech Revue during Q3. The digital home category was our best performing product category during the quarter.
This is a new category that combines our Harmony remotes, the Logitech Revue box, and the associated peripherals for the Google TV platform such as our high-definition webcam for video calling in the living room. The launch of Logitech Revue and our Google TV peripherals made a significant contribution to the growth in the digital home category with sales of 23 million for the quarter.
Sales of our Harmony remotes were up by 34% and units up by 62% with strong growth across all three of our regions. The growth in remotes was driven by multiple products with Harmony 1 leading the way.
The significantly stronger growth in units reflects the contribution from two of our sub-$100 remotes, the Harmony 300 and the Harmony 650. Our sales in the video category were up by 15% with units up by 7%.
It was a very strong quarter for sales and unit growth in the high end of the major webcam price bands, with both more than doubling. Our growth in the high end was driven by our HD Pro Webcam C910, which features full HD 1080p video recording as well as HD 720p video calling.
We achieved sales and unit growth in webcams across all three regions. Our Logitech Alert line of digital video security systems also made a contribution to our growth in the video category during the quarter.
Sales in the pointing devices category were up by 12% with units up by 23%. The majority of the growth was driven by our cordless mice with sales up by 16%.
Cordless mice unit shipments grew over two times faster, up by 43% and reaching an all-time high due to strong demand for expanded offerings in the low end of the category. We’ve been very pleased with the success of these new, value-priced mice.
As one example, our wireless mouse M215, originally designed for China, has proven to be a very strong seller not only in China but in EMEA and the Americas as well. We were pleased to return to strong growth in the gaming category with sales up by 28%.
We delivered double-digit growth in both the PC and the console gaming segments with the strongest growth coming in console. Our console gaming sales were up by 56%.
The majority of this growth was due to the success of our Driving Force GT wheel, which was specifically designed to provide the ultimate driving experience for the Gran Turismo 5 racing game which was released late in the quarter. Turning now to OEM where sales were up 18% as we delivered growth in all major product categories.
The majority of the growth was driven by microphones for console singing games and keyboards. Let me now shift to gross margin.
Our Q3 gross margin improved by 210 basis points compared to the prior year, and was down by 130 basis points sequentially. The year-over-year increase in our gross margin was achieved despite a stronger U.S.
dollar and was driven primarily by operational efficiencies in our supply chain along with a contribution from LifeSize. As one example of supply chain efficiencies, we increased the mix of sea shipments rather than more costly air shipments for a number of our key products.
Turning now to operating expenses, our operating expenses were up by 30%. Prior year’s expenses include just a two-week stub period for LifeSize, which was the single largest driver of the year-over-year increase in Q3.
Excluding LifeSize, we continued to emphasize investments to drive top line growth, including but not limited to Google TV and Harmony remotes, and ensure that we’re positioned to continue to drive profitable double-digit growth in the quarters to come. Let’s move to the balance sheet, starting with cash.
Our quarter-ending cash position was 461 million. Our cash was up by 153 million from the September quarter and by 180 million compared to the prior year.
Note that we’ve added back nearly half of the 382 million in cash that we used in December of 2009 for the acquisition of LifeSize. Our cash flow from operations in Q3 was 149 million, a decrease of 18 million compared to the same quarter of last year.
The primary driver of the year-over-year decline was the sequential increase in receivables this Q3 compared to a sequential decline in Q3 of the prior year. Note that the 10% sequential increase in receivables this Q3, which reflects typical seasonality, was significantly less than the 30% sequential growth in our sales.
Our cash conversion cycle in Q3 was 24 days, 6 days higher than the record low set in the same quarter last year due to slightly higher DSO and DSI this year. Our inventory increased by 66 million or 28% compared to the prior year, and it was down by 42 million or 12% compared to the September quarter.
When looking at the year-over-year increase, note that we’re comparing to a period where we had yet to return to sales growth and our inventory had declined by 31% versus the prior year. Additionally, the prior year doesn’t include any Google TV-related inventory.
Inventory turns were 6.4, down from 6.9 in the prior year. Our DSO was 40 days, up by 4 days from the prior year but still our second-lowest DSO for a Q3 in the last 10 years.
We did not repurchase any shares during Q3. We own approximately 7.1% of our shares outstanding, and we also have a $250 million Board-approved program that we have not yet utilized.
That concludes my comments. Let me now turn the call back to Gerry.
Gerald Quindlen
Thanks, Erik. I want to wrap up by saying that I am very pleased with our performance through the first three quarters of fiscal 2011.
At the start of this year, we emphasized that our top priority was getting back to consistent double-digit growth while simultaneously investing in new future growth areas like China, LifeSize, and Google TV. Throughout the first three quarters we’ve accomplished that, delivering double-digit sales growth across our business with a substantial gross margin improvement and strong cash generation.
Our outlook for sales and profitability has increased substantially since the start of the year and we’re on track to achieve our higher targets. In fact, with our new sales outlook we are on track for a record sales year for the Company.
I am very confident that we will end the fiscal year with strong momentum that will help us deliver a 10% operating margin in fiscal 2012. And with that, Erik and I are now available to take your questions.
Please follow the instructions of the operator.
Operator
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star, one on your touchtone telephone.
If your question is answered or you wish to withdraw your question, please press star, two. Please press star, one to begin.
Your first question comes from the line of Paul Coster representing JPMorgan. Please proceed.
Paul Coster – JPMorgan
Yes, thank you very much. Good morning.
A couple of quick questions on the Google TV product, please. Can you just give us some sense of how the channel inventory looks?
And one of the accusations, I think, surrounding the product was that it’s perhaps a little bit expensive. Do you see with engineering and scale pricing coming down in time, and for that to be a sort of marketing strategy as the year progresses?
Gerald Quindlen
Yeah, hi Paul. It’s Gerry.
I’ll comment on the second part of your question. I’ll let Erik talk about the channel.
When we look at what Google TV is and we look at other products that are on the market today, we really see it as fundamentally different from those products, and we think that for all of the value that it brings, it’s appropriately priced. And if you look at the other products that are on the market today, they’re primarily streaming devices and they do that extremely well; and I think for consumers who are primarily interested in that value proposition, there are a lot of alternatives.
Our core promise to consumers with Google TV has always been that it’s a seamless integration of TV content and the web. We’ve never thought of it as it’s a better streaming experience.
Our fundamental focus is on bringing the best experience of the web and TV together. Nobody’s really been able to do that.
In addition, it also does what those products do very well, which is stream, and we know that’s important to people; and it also enables other experiences like TV calling in the living room, and when the app store comes onstream it will enable all kinds of new experiences. So we think for all of the value that it brings, it’s appropriately priced.
As time goes on and we build scale, our focus is on bringing the costs down and improving our margins, and we’re going to pay very, very close attention to what’s happening in the marketplace in terms of competing products. We’ve always expected that there will be other entrants into the market and we’ll price appropriately, but right now our focus really is on building the installed based and growing that and growing our peripheral sales.
And I’ll let Erik comment on the channel.
Erik Bardman
Yeah, to your question about the channel as it relates to Google TV, Paul, as you know we launched the product in Q3 and there is an initial process we go through to stock the channel. You heard Gerry talk in his comments about its expansion and distribution to Costco and some of our other key partners, and right now I’d say we’re very comfortable with the level of the inventory we have there and we think we’re well positioned.
Paul Coster – JPMorgan
Excellent. I have a follow-up on China.
Tremendous strength you demonstrated in Asia this quarter. To what extent do you believe that is really to do with filling out the channel for the first time in China versus sort of year-on-year pull-through demand?
Gerald Quindlen
Well, the sell-through growth in the quarter was outstanding, and the sell-in was even higher. And if you look at what we shared in New York at Investor Day as part of our China strategy, we talked about really three elements of the strategy – we called it Go Wide, Go Deep and Go Young.
And the Go Wide really means expanding our footprint in the country because we’re primarily concentrated in the larger cities, what’s typically called Tier 1 to Tier 3. As we look at building out the footprint over the years, we will be moving into more and more cities and so we will continue to expand the footprint, and so I think that the key for us is continuing to drive the sell-through.
The sell-through was outstanding in the quarter and we’ll continue to drive it; but I also expect to see our footprint continue to grow over time as we go wide in the country. So I think China is poised to continue to grow very, very nicely well into the future.
I’m very happy with where we are in China.
Paul Coster – JPMorgan
Thank you very much.
Gerald Quindlen
Thank you, Paul.
Operator
Your next question comes from the line of Chris Gretler representing Credit Suisse. Please proceed.
Christoph Gretler – Credit Suisse
Hi, thank you. Actually just two questions.
One is on the FX impact. Could you actually break that out for the operating expenses or for operating earnings?
I see that you had some negative impact on gross margin. I was just wondering how that impacted you on operating earnings.
And the second was on Google TV, just to come back. Is the plan still to launch that in Europe in 2011?
Erik Bardman
Yes, Chris, to get to your first question on FX impact. We don’t break out FX impact as it relates directly to operating income, but what I would give you the sense of is that whatever impact we have on the top line – so whether the euro is strengthening or weakening – we have an opposite impact on our operating expense line, and that’s because of the fact that we have significant expenses that are denominated in euro and in Swiss francs from our operations in Europe; so you see an opposite impact at any one point in time.
Christoph Gretler – Credit Suisse
But I was wondering the net impact, obviously, so.
Gerald Quindlen
Chris, on the second question about Google TV in Europe, it’s certainly our intention and Google’s to expand to other markets in Europe. Obviously it is the next major region where we want to see the platform.
That’s not our top priority at this point, and it’s really focusing on improving the platform today and continuing to build the installed base. But it’s certainly our intention and Google’s to expand to Europe.
We’re not going to commit to the date and which countries at this point in time, but you can certainly assume that that’s part of the long-term plan.
Erik Bardman
And Chris, also I think just to come back to your original question on the FX impact, I want to make sure you understand that the opposite impact that we have on the OPEX line does not fully offset, so if we have a weakening euro and it hurts our top line, in that scenario we would have some benefit on the OPEX line but it’s not enough to fully offset, so you would in that scenario have an impact to your operating income.
Christoph Gretler – Credit Suisse
All right, thanks.
Gerald Quindlen
Thank you.
Operator
Your next question comes from the line of Jonathan Tseng representing Merrill Lynch. Please proceed.
Jonathan Tseng – Merrill Lynch
Hey guys. Johnny Tseng from Merrill, here.
Just two questions – one, Google TV to the cost base. Google TV, just interested in picking up on your comments back to Paul’s question.
You see the competition of streaming media devices. I mean, think about the Apple TV device.
I think it sounds like that’s more probably competition, which can do web, video calling, and app stores, or potentially could do. And I guess the question is how do you compete against that device with comparable platform ability but a third of the price point; or is there something wrong on my analysis here about what it can do?
And I’ve got a follow-up on the cost base. Thanks.
Gerald Quindlen
Yeah, I think—you know, if I look at Apple TV and other products today, and I’m really referring to what’s available today, what the products do today and what Google TV brings to the market, I think they’re still fundamentally different value propositions. But I think that no other device, no other product has brought to market what Google TV is bringing, Johnny, which is the full seamless integration, as I mentioned earlier, of TV content and the web.
Streaming is something consumers value, for sure, and Google TV enables that as well, but it’s not narrowly focused on streaming. It also enables video calling and enables, obviously, the seamless integration with the web, and it will bring other applications to market once the Android marketplace comes in a few months.
So versus today, I think it is really a very, very different value proposition. What might be in the future, you know, I’m not going to speculate on that from either us or from other players.
Erik, you were going to comment on the—Johnny’s other part of the question?
Jonathan Tseng – Merrill Lynch
Yeah, I—sorry. Go on, Erik.
Erik Bardman
No, go ahead. I know you wanted to ask a question about the cost base.
Jonathan Tseng Merrill Lynch
Yeah. I was just saying, you’ve obviously raised the revenue guidance by some 35-odd million, the midpoint.
The margin guidance hasn’t gone up; that implies a larger cost base. Just to understand where the change in the cost side has been – is it gross margin?
Are you expecting low gross margin or is that more fixed cost investment? And I was just thinking that given Google TV is a lower GM item, I’m surprised at it’s gross margin.
So is there more investment you feel there is need on the sales and marketing or R&D side for the rest of year; or is it just (inaudible) or something like that?
Erik Bardman
Yeah, let me try and dimensionalize that for you a little bit. You know, when you look at our total Company operating expense, for example, on a year-over-year basis, it is up about 30%; but LifeSize is the single biggest driver of that because as you recall, we did the LifeSize acquisition late in December of 2009, so there’s only about two weeks of activity in the prior year period versus a full quarter in this current year.
And then even once you take LifeSize out, and you’ve heard us talk about this and even to your point, our primary focus has been on variable demand generation activities, first and foremost with the launch of Logitech Revue, and really getting customer awareness and adoption up; and we feel very good about that launch. But that’s really tied to the launch.
It’s more of a one-time nature in terms of bringing that product to market, as well as you’ve seen us continue to put variable demand generation dollars to Harmony and some of our other fast-growing categories. I think the important thing here as well, I would say, is that I don’t think there’s been a change in our cost structure from that perspective, and our focus has really been around the variable nature of what we do.
Over 50% of our sales and marketing expense is variable in nature and we don’t see that changing. We’re going to continue to put dollars where we see nice growth that we can drive.
Gerald Quindlen
So Johnny, let me just add something. We’re making some investments in Q4, variable nature as Erik said, in some things that we see will give us continued sales momentum carrying into FY12.
One of the areas is China; I’m not going to say what they all are. The most important thing to take away, because I think getting to the heart of your question, we’re still very comfortable and committed to driving double-digit operating margins in FY12, and that’s the most important thing I think you should take away.
Jonathan Tseng – Merrill Lynch
Cool. Thanks, guys.
Operator
Your next question comes from the line of Yair Reiner representing Oppenheimer & Company. Please proceed.
Yair Reiner – Oppenheimer & Co.
Great, thank you. First question is on gross margin.
Your full-year target now implies that March gross margin could be down slightly. Was wondering if you could explain that?
Typically expect in March, which LifeSize probably being a larger percentage of the overall revenue, that gross margins would actually trend up a bit. So if you could maybe explain some of the puts and takes of the forecast.
Erik Bardman
Sure, Yair, happy to do that. When you actually look at our historical seasonality – I think it’s even five of the last six years – we’ve seen a small sequential decline in gross margin as we go from Q3 to Q4.
So this quarter in our implied guidance is very consistent with that. I think, and Gerry mentioned it, our—the point we really want you to take away on gross margin is when you look at the full year and our current forecast, we’re estimating to get to about 36% and that would be an all-time high for the Company.
Yair Reiner – Oppenheimer & Co.
Okay. And then tax rate – you lowered your forecast, like, a little percentage point.
Should we think about 14% as the right number to model going forward?
Erik Bardman
You know, at this time we’re not providing any forward-looking guidance as it relates to tax rate. We will be talking about—we anticipate talking about that in our April earnings release.
But what I would say, as you’ve seen and we’ve talked about it, is structurally we feel very comfortable with the structure we have related to taxes; and we’ll give you more clarity when we get to April about FY12.
Yair Reiner – Oppenheimer & Co.
Thank you and congrats on the good top line results.
Gerald Quindlen
Thank you. Thanks.
Operator
Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star, one on your touchtone telephone. Your next question comes from the line of John Bright representing Avondale Partners.
Please proceed.
John Bright – Avondale Partners
Thank you. Gerry, in your prepared remarks you talked about 25% of products will be tablet-friendly in FY12.
Can you share with us some examples, or maybe kind of give us your vision of what those products might look like?
Gerald Quindlen
Yeah, I won’t talk about all the products, John, but the reason we shared that statistic is we talked in New York at Investor Day about our overall approach or philosophy about tablets is we think tablets are additive to the category. It’s a different device.
Consumers will use it differently and we’re embracing it as a growth opportunity. And that’s why we’re calling out the fact that 25% of the products that we will launch next year will be tablet-friendly.
And what we mean by that is some will be tablet specific, i.e. they were designed specifically for a tablet, and others are tablet-friendly like a product we already have, which is called the Z515 speakers.
It’s a Bluetooth speaker. You can use it with your smartphone.
You can use it with a tablet to listen to music. I think a couple of the experiences that are big opportunities immediately are around audio, and we already, as I mentioned, have one product – the Z515 – and we’ll have others; and I think keyboards.
I think those are two obvious opportunities and we’ll certainly be focused on them. And we have others and I’m not going to say what they are; but just to give you two examples, I think those are two areas where there’s plenty of room to add value to the tablet experience.
John Bright – Avondale Partners
Are you assuming in your forecast or thought process looking forward any negative impact from the boom in tablets for the core peripheral business, specifically mice, keyboards and speakers?
Gerald Quindlen
Well, let me go back to what we talked about in New York. In New York, what we said was we felt that the tablets would be additive to the category, that there was opportunities to attach – I talked about some of those.
We continue to see growth in the PC category, particularly in emerging markets, but we also acknowledge that in some of our larger markets we would not see the historical growth rates that we’ve seen from PC peripherals, and that was factored into sort of our overall view of what we call the PC and mobile-type products where we said we were confident in delivering 10%. That assumes rapid growth in emerging markets and assumes mid-single digit growth in more developed markets.
So that all factors into the tablet phenomenon and it factors in what we and others can see relative to the PC industry. So that’s our view on it.
It really hasn’t changed from what we shared in New York.
John Bright – Avondale Partners
Two final questions – one, on your Asia strategy, showing good success right now. The sense is that you’re going into a more stereotypically price-sensitive market.
Why will the gross margin profile hold in that market versus the stereotype?
Erik Bardman
Yeah John, just to give you a little bit of sense of that, and we’ve talked about this in the past, but there is not a strong correlation for us of lower ASPs and lower gross margins. As you’ve heard us talk about, we have categories that are typically slightly lower than our average and categories that are above our average, but we actually have some very good selling products at low ASPs that provide strong gross margins.
And one thing specific to China, and we talked about this at our analyst day and dimensionalized this a little bit, is we’re increasingly designing products for the Chinese marketplace, and if you do that from the outset you really set yourself up with the right positioning when you go into the market and being able to achieve those gross margins. So we absolutely feel very comfortable with that process and we don’t think growth in emerging markets, whether it be China or elsewhere, will be dilutive to our overall gross margin over time.
John Bright – Avondale Partners
Erik, you mentioned in your prepared remarks the Board approval for the share repurchase. Do you have plans to put that to use any time soon?
Erik Bardman
As we’ve talked about with our use of cash, we’re very consistent. The first and foremost priority for us in making sure that we have adequate cash to run the business, invest in the opportunities right in front of us, and there’s no change there.
And then specifically we have two equal opportunities beyond that, and that is opportunistic acquisitions as well as share repurchase. So we take all that into account and take that into our planning, but we don’t provide any forward-looking thoughts on share repurchase.
John Bright – Avondale Partners
Gentlemen, thank you.
Gerald Quindlen
Thanks, John.
Operator
Your next question comes from the line of Tim Shaw representing Citi. Please proceed.
Tim Shaw – Citigroup Global Markets
Hi guys. Thanks for taking my question.
Just one on LifeSize – obviously got some record revenues in the quarter, and you talk about sort of solid market share gains. Just wondering how sustainable that momentum is in LifeSize.
You’re obviously targeting the sort of small business segment, relatively low penetration at the moment. But what happens when the (inaudible) move down into that area, and now you’re seeing HP coming in.
How do you think that momentum can be sustained going forward?
Gerald Quindlen
Yeah, so Tim, a couple comments. If you look at—we talked about the fact that it’s been about a year since we closed the LifeSize acquisition, and in that first calendar year we grew 44%.
In New York, we shared that the organic growth rate of the video conferencing market is about 15 to 20%, according to independent experts, and if you look at our growth rate in this first year, we’ve grown at two to three times the category rate. We’re gaining significant market share.
If you look at our Q3 sales rate, it was more than double the pro forma sales from Q3 a year ago, so we’ve got tremendous momentum and that’s without even significantly penetrating the SMB market. That’s really just accelerating what LifeSize was already doing in terms of being primarily an endpoints provider.
LifeSize has now begun to introduce infrastructure products - I talked about a couple of them last quarter – so they have a very low share of the infrastructure space but they’ve got some breakthrough products that are rapidly gaining traction. So we look at those two things alone – their momentum and endpoints, their ability to grow dramatically in infrastructure where they have very low share – and we see the ability to grow just focused on those two areas.
Then if I go to SMB, which you asked about, largely unpenetrated as you correctly pointed out, and I would just say that’s a wide open market and I think we’re going to be incredibly competitive there; and we know we’ll have lots of competition because it’s a wide open space, from HP, from Cisco Tandberg, and from Polycom. That doesn’t concern us.
We’re confident in our ability to get our fair share of that wide open space. So bottom line, I would say our ability to grow LifeSize at a substantial rate for the next few years, I’m very confident in it.
Tim Shaw – Citigroup Global Markets
Okay, thank you. And just a quick follow-up on your—you put it out in the prepared comments that some of the more mature markets were—I should say mature, slight weakness in the U.K.
I’m just wondering, can you categorize that just between overall macroeconomic weakness or market share loss, or just sort of slower demand for PC peripherals in those more developed markets at this point?
Gerald Quindlen
You know, it was a combination of the first two, not the latter. Frankly, if I look at it by market, it would track with what you would expect given the macroeconomic signals we all see.
So Germany was good; we had a good quarter in Germany. The northern cluster was good; northern Europe was good and emerging markets, as I mentioned, was good.
Southern Europe in general and the U.K. have struggled, and they tend to be the markets that are struggling in terms of the macroeconomic recovery.
And the U.K. has always been an incredibly competitive market, an aggressive market from a market share standpoint, and so we always have ups and downs in that market from a market share standpoint.
It’s really those first two; it’s not the third factor that you mentioned.
Tim Shaw – Citigroup Global Markets
Great. Thank you very much, guys.
Gerald Quindlen
Thanks, Tim.
Operator
The next question comes from the line of Simon Schafer representing Goldman Sachs. Please proceed.
Simon Schafer – Goldman Sachs
Yes, thanks so much. I was interested in your comment that 25% of new products will tablet-friendly, which is great.
I just wondered what your feeling was just in light of high market growth. Is that specifically tailored toward any particular type of operating system, or is it Apple-aligned; and depending on where you’re positioned, what sort of revenue opportunity do you think you have in the next 18 months or so?
Gerald Quindlen
It’s positioned this way, Simon. Certainly a lot of our—any product that we have that’s really focused on Bluetooth would be a great product targeted at Apple and the iPad.
One of the challenges right now with the tablet space is that there’s a lot of entrants – you know that – or a lot of potential entrants. There was just a ton of tablets announced at CES.
And what’s not clear at this point is who the winners will be, who will get the distribution at retail, and of the ones that do get distribution, which ones the consumers will favor. The one thing we all know is the iPad will be one of the winners.
So we certainly have products that are focused on the iPad because we know that will be a winner; and we’re working with all of the other tablet manufacturers and we have some pretty good insights as to which products we think will win. We know there will be Android products that are winners, and the different manufacturers are taking different points of view relative to whether they incorporate USB or not.
So we’ve got a flexible portfolio. We have products that work with the tablets that we expect to be winners, and it will continue to evolve over the next year is all I can say.
Relative to the revenue, we’re not going to give a target on that, but the statement about 25% was meant to say that we really think the tablet is a great opportunity. It’s additive and we’re going to go after it.
Simon Schafer – Goldman Sachs
Understood, thank you. And my second question would be just when I look at this differential between sell-in and sell-through, obviously that gap that we saw from just a period a year ago, it’s sort of narrowing whereby sell-in has continued to outpace sell-through a little bit on a year-over-year basis, which is basically just closing the disconnect from last year.
But I was wondering how you felt about that differential. Are we now in a more normalized environment whereby effectively sell-in should be appropriately matched to sell-through?
Gerald Quindlen
Yeah, I think in general we are. I mentioned to one of the earlier questioner’s comments, I think in Asia, primarily driven by the China effect, you may continue to see sell-in outpace sell-through simply because I think we’re continuing to do a great job building out the footprint as part of the Go Wide in China strategy.
If you look at Europe, we had the opposite effect. I mean, in local currency terms, our sell-through outpaced our sell-in; and in the Americas if you take Revue out, because it wasn’t there, I think there was five or six points’ difference which, in my mind, it’s largely aligned.
So overall, I would say we’re largely in a place where those two things are going to move together. There is the possible exception of China over time for the reasons I articulated.
Erik Bardman
The thing I would add to Gerry’s comments as well is we’re very focused on the volume that we sell in in any one period of time, and the volume we sell through; and we feel very comfortable with the balance. You will see some fluctuations, as we’ve talked about, in these year-over-year growth rates because of the differences in year-over-year comparable periods, but very comfortable with the volume levels we’ve got going in and going through.
Simon Schafer – Goldman Sachs
Got it. And Gerry, you mentioned Revue, actually, and obviously sell-in, as you say, outpacing sell-through by a wide margin.
And you sort of amended your target a little bit. How should we look at inventory and what is the type of thing that you’re looking for as this category attempts to really get off the ground?
Is it just an agreement from the studios and so on to actually provide content? What is the biggest missing piece of the puzzle right now that would make you think that that category can take off?
Gerald Quindlen
Yeah, just to be clear, Simon, what I was trying to say answering the prior question is I was really talking more about the Americas, and if you look at sell-in and sell-through dynamics in the Americas and back out Revue, which wasn’t there, you get the two rates are largely aligned. I think they’re different by about five points, so I was making that comment.
To your other comment, I think that the main thing we’re focused on and Google is just continuing to improve the user experience, the user interface, build awareness for what is unique about Google TV and what it does because we continue to see a lot of evidence that this thing we call the core promise of seamlessly integrating the web and TV content is something consumers want; and so making them aware of it and making sure we make the experience better and better and better. So I think it’s a good experience today and frankly it can be better, and it will get better as we and Google do these—we call these over-the-air periodic updates that will get pushed out to consumers.
They’re free and frankly it doesn’t matter if you bought a Revue box on Day 1 or you bought it yesterday – you will get those free over-the-air updates which means that your user experience, your user interface, new applications are being added all the time, and so you’ve got a constantly refreshed and updated product. And so I think just building the awareness and continuing to improve the user experience are the focuses.
Simon Schafer – Goldman Sachs
Thank you.
Gerald Quindlen
Thank you, Simon.
Operator
The next question comes from the line of Andy Hargreaves representing Pacific Crest. Please proceed.
Andy Hargreaves – Pacific Crest Securities
Thanks. You mentioned, Gerry, I think that demand for Revue improved late in the quarter.
Was that elasticity around the retail price drop, or was that the Kevin Bacon ad?
Gerald Quindlen
You know, December is when the bulk of our marketing initiatives, Andy, kicked in; and including the Kevin Bacon ad, which was very well received and it got a lot of kudos – judged by a lot of people as one of the top 10 ads of the year. Some of it was seasonality.
A lot of it, I think, was the impact of our marketing initiatives kicking in. I think you’re asking about price.
I mean, we were—we’ve promoted the product with our retail partners, and I forget which weeks they were but there was a week or maybe two weeks before Christmas where it was on promotion with Best Buy. So we did the normal things you do to promote a product and build awareness when something is brand new; and then we also had a promotion with our TV cam bundled just to make people aware of that.
So all of these things, I think, really helped to drive sell through in the month of December, and it was encouraging for us to see that.
Andy Hargreaves – Pacific Crest Securities
And then you talked a lot about improving the experience. Would you consider building your own gooey on top of that platform, or is that something that you’ll continue to leave to Google?
Gerald Quindlen
No, that’s something—because I think, remember, one of the key functionalities that we’re trying to bring to this experience, Andy, is the search functionality – the ability to easily search all of the content that’s available on the web and broadcast on your DVR, on your PC. And the search functionality is key to this, and Google is the best in the world at that.
So we know what we’re good at. We’re focused on doing the things we’re good at, and we know what they’re good at; and so no, we would not do that.
Andy Hargreaves – Pacific Crest Securities
Okay. And then just—you mentioned, or Erik mentioned, I think, variable demand generation and the move to—can you explain what that is, exactly?
Is that in-store promotion, TV advertising? What is that and how does it differ from what you used to do?
Erik Hardman
No, it’s really—Andy, I think to your question, it’s a combination of all of those things. On an individual product or product line, we might change the mix.
So for example, with Revue, we’ve talked about the fact that we used television, we used web and viral marketing, we even used in-store demonstrations with our partner Best Buy and some of our other partners as well. So it’s a combination of those.
They’re really levers that we pull, but I think what’s really important for us and the way we think about it, and we’d want you to understand, is that they are variable in nature; in other words, these are not fixed long-term costs. We can dial them up and dial them down, so it’s the same as we’ve done in the past but the mixture will change.
Andy Hargreaves – Pacific Crest Securities
Okay, thank you.
Gerald Quindlen
Thanks, Andy.
Operator
The next question comes from the line of Michael Foeth representing Vontobel Group. Please proceed.
Michael Foeth – Vontobel Group
Yes, hi Gerry; hi Erik. One question regarding audio – the gross prompt in audio was a bit lagging the rest the pack.
Could you comment a bit on where you stand in audio – what happened and what do you see going forward, please?
Gerald Quindlen
Sure, Michael. If you look at audio, audio did lag a bit, as you said.
The entire impact with audio can be really focused on one category within audio and one market. It was really PC speakers in Europe; and PC speakers, as you know, is the biggest piece of the audio category.
We have many things in what we call audio. It includes PC headsets, it includes our Squeezebox line of Wi-Fi music players, it includes speaker docks and it includes our Ultimate Ears line of headsets.
But PC speakers is the biggest piece of it, and of course Europe is our largest market; and growth declined in PC speakers in Europe. On the other hand, if you look at PC speakers in the Americas and Asia, they grew; and if you look at all of those other categories I mentioned on a global basis, they all grew.
So PC headsets grew very well, Ultimate Ears grew, Squeezebox – the Wi-Fi music players grew, and our Ultimate Ears line of earphones grew on a global basis. So it was really concentrated PC speakers in Europe.
Michael Foeth – Vontobel Group
Okay. And maybe a second question I’m still struggling to understand.
Your inventory increase, I understand it’s seasonal, but can you give us a bit of an idea what’s in your inventories and where you see inventory turns going toward the end of March?
Erik Hardman
Sure, Michael, I’ll give you a little bit of sense of that. When you first look at it on a year-over-year basis, it is up about $66 million; but the single biggest factor in that is when you look at the launch of Logitech Revue because it was not at all in the year-ago period.
But also too, as I would say, to give you a sense when you think about inventory levels is when you think of Q3 of last year, very different economic environment, right? Much weaker.
We had yet to return to full growth on the top line, so a very different environment this year. That gives you a sense on a year-over-year basis.
We were down sequentially and we anticipate that we’ll continue to have the right levels of inventory. We’re very comfortable overall, but to give you a sense of what some of the drivers are.
Michael Foeth – Vontobel Group
Okay, thanks a lot.
Operator
Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star, one on your touchtone telephone. The next question comes from the line of Stephan Gick representing Deutsche Bank.
Please proceed.
Stephan Gick – Deutsche Bank
Hi Gerry. I have another question on the gross margin.
Basically Q3 was historic the strongest gross margin month, but this year around it was down 130 basis points year-over-year. Could you tell us something about that, please?
Erik Hardman
Sure. Two things to your question, Stephan.
When you look at our gross margin on a year-over-year basis, it is up significantly, about 210 basis points; and the things that really helped us get there were very good operational efficiencies as well as the impact of LifeSize from a mix perspective; and FX actually hurt us a little bit on a year-over-year basis. When you look at it sequentially, I think a couple things I would point out is from an operational perspective, launching Logitech Revue did have a negative impact to our gross margin because it’s a brand new product, and we’ve talked about the fact that it’s a lower structural gross margin.
But I think also what’s important to remember is when you look sequentially, you look back at Q2 of this year, that was an all-time record for the Company of 37.3%, and that’s not something that we said we’d stay at that level. I think how I’d want to walk away thinking about gross margin is that when you look at our guidance for this year, the 36% would be an all-time record for the Company, and we feel very comfortable in achieving that.
Stephan Gick – Deutsche Bank
Okay. Could the sequential decrease also have something to do with the 40 million inventory decrease because historically the inventory didn’t decrease that much sequentially.
Erik Hardman
No, it’s not related to it.
Stephan Gick – Deutsche Bank
Okay. Thank you.
Operator
That concludes our conference call for today. You may all now disconnect.
Thank you.