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Logitech International SA (NASDAQ:LOGI)

Morgan Stanley Technology Media and Telecoms Conference

November 14, 2012 10:45 a.m. ET

Executives

Guerrino De Luca – Chairman & CEO

Analysts

Andrew Humphrey – Morgan Stanley

Andrew Humphrey

Hello everyone. Very pleased to welcome Guerrino De Luca, Chairman and CEO of Logitech to the stage. Before we dive into Q&A, I want to conduct a little experiment if that’s okay. Can you – I’ve seen a lot of iPads around, can you raise your hand if you’re taking notes from the conference on an iPad or other tablets of any description. Francois, I don’t think Francois is taking any notes.

Okay, so we maybe got 20 in the room and if you all – can you keep your hand up if you’re using a keyboard of some kind to do that? Okay, one, two, three, okay, so 15% thank you. And a final question, is that keyboard a Logitech keyboard? One, okay, 30% no, 60% market share on a 15% touch rate.

Guerrino De Luca

That’s pretty good. Everybody else you should buy an iPad this time and hopefully connect with this beautiful keyboard that exists in white and black in the perfect Apple tradition, that’s the white version, sells 40 to 60 in white. Gives you an idea of what Apple is selling today.

Question-and-Answer Session

Next question who is using a mouse with their iPad?

Guerrino De Luca

[You guys buy] [ph] these are not profitable but with everything else it is.

Andrew Humphrey – Morgan Stanley

So how is the launch of the iPad keyboard been? Is that sort of a touch rate consistent with your experience that you’re seeing across the business or…?

Guerrino De Luca

Well, we – the launch has been great, the product has been out since April. It’s been available in the Apple Stores probably not for three months or so, three, four months before that was available in apple.com, is doing wonderfully in the Apple anecdotally you go to an Apple Store, you buy an iPad, if you utter the word keyboard, they will just tell you that this is the one you should get.

Before anybody says anything that means before Apple makes one of these, right. Also the usage of keyboard on tablet computing is much higher than what this product would indicate. So it’s the single largest keyboard used on iPads today is not Logitech, so it’s not any other third-party, is the Apple Bluetooth keyboard, which is not made for the iPad but it’s used with the iPad. And we expect that for tablets in general not only Apple, non [on] [ph] fitting keyboards will play a significant role as that category develops well beyond the [advert] [ph].

We’re seeing kind of the very unusual situation in the tablet market which is there is a single player dominating it and the single player is highly vertically integrated and totally closed. This is not the way computing platforms have developed in the past, then I don’t expect this is the way computing platform will develop in the future. You already see in the smartphone which is a completely different dynamic, it’s more influenced by carriers, which is not the case for tablet computing.

And even there Apple has lost its market share lead to Android devices and I believe that even more dramatically this will happen in tablets over time, not because Apple is not good, Apple is fantastic, they will always have the best product, but it doesn’t make it necessarily for the highest market share.

Andrew Humphrey – Morgan Stanley

So the product, the Ultrathin Keyboard anyway launched in April, you started stocking it in the Apple Online Store later in the year. How much of an extra bump has that been in terms of the extra exposure to that channel’s model?

Guerrino De Luca

Well the product has accelerated dramatically in the Apple Store. It’s also available outside the Apple Store in more traditional retailers. So obviously the Apple Store component is high. This is most natural Apple product, so it is currently our best-selling retail product which is kind of another first for Logitech. We never had a retail product as number one which was linked to a non-Wintel platform and the fact that the fact that you see Apple is particularly unusual.

We’re thrilled with it. There is other product that we sell around the [globe] [ph] that are doing very well that are kind of somewhat [channeled] [ph] by this, the folio of the portfolio is also doing very well in the Apple Stores and elsewhere and there is more to come. So this is a portion of our strategy to broaden our presence well beyond this traditional Wintel world into the sort of mobile screens world particularly the tablet world.

Andrew Humphrey – Morgan Stanley

Do you think it was an advantage I guess with best form factor specifically the iPad 3 was the same as the iPad 2 in terms of hardware design, you had time to work…

Guerrino De Luca

Not only, the iPad 4 is the same as the iPad 3 which is a good – it gives us a breathing room and space to sell more of it. As you know the cycles will accelerate. And as I said before, the form fitting class of accessory is a subset of the accessories that we are considering and Bluetooth is the next USB in general for especially for mobile platforms and so that gives us a lot of other opportunities on the iPad as well as other tablets form factor.

Andrew Humphrey – Morgan Stanley

So next question where else could this happen, where else if you got the opportunity to have this kind of blockbusters?

Guerrino De Luca

Well there is a kind of nascent industry around Android tablets. It has not done as well as Android has done on smartphones, I think that the biggest opportunity around Windows 8 is around tablets. It’s not an accident that Microsoft sort of embarked on a hardware effort by themselves with Surface. So I think that the next target for this kind of productivity devices is the Windows 8/Android ecosystem. One of the biggest differences the iOS ecosystem and these are the two, well first of all, one is totally vertically integrated and closed, the other two are not, but also the other two have not made the philosophical choice not to support navigation devices other than your finger.

Apple decided that the only navigation device for your phone and your tablet was your finger. There is benefit there. There is, kind of issues there for certain class of applications and certain class of users. Android and Windows 8 have not made that choice and so the opportunity exist to add navigation devices. MyTouch enabled mice touchpad around these form factors that doesn’t exist around the iPad.

Andrew Humphrey – Morgan Stanley

How does that lead to any changes in terms of how you think as an R&D organization in terms of product design? I guess we’ve got used to thinking of PCs and Wintel in particular is perhaps having limited innovation on the peripheral side.

Guerrino De Luca

Yeah, I think what is happening at Logitech in what sort of the way to describe where we are today, we had created an incredibly well oiled machine for a particular class of business. I don’t think there is anybody else in hardware that has done as well around Wintel in fact. We capture a lot of value around that platform. Microsoft, Intel captured the majority of that value, but the makers did not capture any value or virtually any and the accessories and particularly our class of accessories captured a lot of that. So we’ve oiled that machine around a glacially slow changing platform and a vast sort of installed base. That has been the reason why Logitech has grown as much as it has and has been significantly profitable.

It is clear that there is a number of things that have to do with the Wintel platform that can be replicated elsewhere but there is a number of things that are profoundly different, the cycle is different obviously, the nature of the opportunity is different and we are increasingly separated our development effort around the PC platform and I’ll talk more about it if you give me the chance from our development effort around both the tablet and the smartphone platforms.

The go-to-market, the product cycle, but also the entire supply chain infrastructure is different. We’re used to a repetitive business that is appropriately forecasted and planned. This is very different and so even the less visible part of the company are adapting to this, this other two platforms that are not the same as the PC.

The idea in total, the PC peripherals is still a very profitable part of the company and we – while we do not believe that the PC will be going back to where it was we also do not believe that the PC has done a permanent decline of sales. We’ve seen a tremendous stall over the last six months, most of the reason for the stall was the expectation around not necessarily Windows 8 but the new PCs that would come with Windows 8.

If you’re a PC user with a sort of classic dinosaur level laptop why would you want to buy a new one because you know that there will be slimmer lighter products coming up that may resemble the Mac Air and may sort of fulfill your Mac Air envy that you couldn’t fulfill because it’s too (inaudible). So that has created the stall and new PCs are coming out. So we believe that the PC platform is maybe not growing, but we’re planning on a sort of flat performance of the PC over the next three years. Within that flat performance we have an opportunity to increase our profitability and take advantage of our leadership position. That is number, priority number one.

Priority number two is to create and develop businesses around these mobile screens that I mentioned before, smartphones and our play there is music. And I could say more about that and tablets and our play there is productivity.

So the notion is how do we balance keeping the profitability or hopefully enhancing that on the PC platform, knowing that it is in secular relevance decline and probably flat from the sales perspective. How do we take advantage of our great position there as we fund the growth of these other businesses around that and how do we create in total a more profitable and growing company.

Andrew Humphrey – Morgan Stanley

Maybe just sticking with PCs for a second and I think you’ve indicated in your most recent guidance that you would expect limited, I guess, unusual uplift from Windows 8 over the second half of the financial year. Clearly we’ve seen some very weak PC data coming out over the last few weeks and even in the last few days, some companies indicating October sales down 30% month-on-month ahead of the Windows 8 launch. I mean…

Guerrino De Luca

Yeah, well what happens ahead of the launch is now clear. There is sort of everybody freezing and everybody has bought a PC in the last six months had a very, very unique reason to do so. The upgrade incentive from Microsoft were not good enough to convince me to buy an old fashion PC, so people are waiting for a new PC and not for a new operating system. In fact they see the operating system that’s more of a source of concern. Yes, they get this new beautiful PC but I have to get used to this new operating system that’s kind of a tricky situation which I believe will have a short-term impact on the actual pickup of the sales.

So what we said was that even though, this is Christmas, but it was Christmas last year too. We do not expect the pickup of the PC market in the short-term. So the only thing we said is that, we expect significant headwinds from there when it comes to all of our PC businesses. We have become very tied to that sales profile and we believe that that is prudent to plan for a second half that does not see any spike.

That said, simple arithmetic would suggest that fiscal ‘14 will be a year of growth for the PC unless you believe that the PC is out the door, I don’t believe it. I believe that there is way too many PCs and the average selling prices for PCs is significantly lower than the alternative which is the Mac and people who wanted to jump on the Mac already have. People that are ready to spend $1,200 on average have spent it as opposed to spend for $400 or $500 on a PC. So I believe that for simple arithmetic the fiscal ‘14 will be a year of growth for the PC, but the three year scenarios are flat.

Andrew Humphrey – Morgan Stanley

So if you were (inaudible), looking ahead, would you expect to see a greater proportion of Windows 8 sales in an ultrabook form factor or in a tablet hybrid form factor whether that’s Windows (inaudible).

Guerrino De Luca

When I refer to the PC, I mean everything that runs the traditional Wintel architecture. And therefore ultrabooks are part of the PC; increasingly PC sales will move towards lighter and thinner form factor, there is no question about it. They already moved from desktop to laptops ages ago and they will move increasingly into what consumers actually want which is lighter, more presentable object that I can take out if somebody doesn’t look at me as if I was born two centuries ago.

So that is going to be the prevalent form factor in Wintel and then this tablet. So Microsoft with Windows 8 is trying to make this as seamless as possible including the phone. It’s a very laudable strategy. It may work to an extent, remains to be seen. It’s a significantly ambitious goal they have.

The reality for us is that Windows 8 PCs including Ultrabook will not be in a position to take full advantage of Windows 8. The vast majority will not. Think about, again what I said about average selling prices. PC’s average selling prices may increase a little bit because of thinner products and they’d be more expensive, but they’re not going to grow to the level of allowing every single one of these Ultrabooks to have touch screen in a very acceptable touchpad, it won’t.

20% of the PCs will have that at best, 80% of the PCs will not. Now Windows 8 being a profoundly touch driven architecture, they will under-deliver without something that takes that touch opportunity out. And the PC makers will not have that, nobody would dare betting on a $900 PC full featured as opposed to and abandoning the $500 space which is what everybody is buying PCs.

Remember as you get close to the Mac, the chances of buying a Mac remains high. So why do I have to, so in that case the opportunity for us particularly with pointing devices is very high. We have just introduced a line of touch enabled mice and touchpad. We have by far the best touchpad in the PC industry. Those of you that use the Mac are used to a great touchpad, both embedded in your laptop or as a standalone device. Apple has done a tremendously wonderful job with touchpad.

[Audit End]

Nobody else has in the PC market. The products that we have just introduced do that. But if you add $65, $69 to your $400 PC, you’ll have a fully-enabled touch sensitive gesture recognition PCs that you would not otherwise have. So in the context of the flat industry and in the context of an expectation for flatness in our PC peripherals pointing devices maybe an exception and so, the view in general is, oh now with Windows 8 it’s all about touch and nobody will want the mouse anymore.

First of all, not true and second is particularly not true because of the structure on the industry. If you believe that PCs will all be equipped for the best and it’s likely that mice will have a or a pointing devices in general will have a lower relevance, I don’t believe this is going to be the case.

Andrew Humphrey – Morgan Stanley

Maybe we could talk about a couple of other areas out. Can you talk about the traditional peripherals that (inaudible) is narrow where you even out a lot of new product recently.

Guerrino De Luca

Yeah.

Andrew Humphrey – Morgan Stanley

Recently, you’ve indicated that you play on mobile market in particular. Is there a kind of a clear change of, I guess, A strategy and B sales mix away from the bull commoditized PC?

Guerrino De Luca

Yeah, this question allows me to sort of clarify what are the complexities with the company in transition like that. The way we describe our business is around certain categories and audio being one and the disclosure architecture reflects the nature of our PC business, we have working devices and keyboards and speakers, and so we classify around those. The situation is as the company is in transition between focusing fundamentally exclusively around the PC and focusing around multi-busier platform is that these categories are bored.

If you look at that audio category it contains PC based devices like PC headset and PC speakers which will follow the trend that I mentioned before, it’s going to be – the connector tape will not change much and they’re going to go with the PC platforms. It also contains categories that I best into the client because the industry is going away from their Docking Stations. We have a changed connectors from Apple and the changing usage model, people will use Docking stations at best on their nightstand but in general they will not use Docking station to listen to music but they will use wireless devices to listen to music and they would just charge their part the way they usually do.

So these are also in that category, so if you look at that category as Legacy PCs something that is in transition out and then it has the large line of this is what you mentioned that our wireless Bluetooth speakers, our wireless and wired headset and wear those and you can hear as well as our Smart Radio, that category is growing very fast and in studying in a group that also see some flatness or defines.

So we will have to change that, overtime we will just make life easier to everybody by more clearly identifying by platform our business as oppose to all the buys that have general functionality in the audio.

Andrew Humphrey – Morgan Stanley

And if there is I guess a migration to the high end and some of those areas like audio with the streaming speakers, how do you find that space I guess as a very established player in the peripherals market generally but possibly a newer and kind of into the higher end of that way…

Guerrino De Luca

Well, one recognition that the rules of the game around the Smart Phone and among Tablets are not the same and the rules of the game around the traditional Intel platform is what we decided to do with music. First of all, this initiative is not a generic music initiative. It’s an initiative around the Smart Phone. It’s based on the notion of that all of the music bits you’ve meant, that you hear about is on your phone or in the cloud. On your phone because you bring it on your phone and the cloud is because of this (inaudible) and the Pandora’s and all the sort of music services out there.

And we believe that the phone is the center of UI for these devices and providing seamless connectivity both to your own ears as well as through a shared environment is equates tremendous opportunity, but this is not a market but nobody plays, that is an enormously established and run on player like those which covers all the elements of this with a few exceptions that they’re mostly fragrant and both of this is jugging out, those have different stores, it has a recognition for great audio, better or not it doesn’t matter because it really doesn’t matter. It has a significant direct marketing sort of operation, it’s the jugging out there, we do not expect to beat those, we expect to live with those in a certain segment of the market particularly as a wireless segment.

But we’ve also decided to play in this market through a modified brand, as you may know all of our new music products carry the Universal Ears UE logo and brand. They’re sold in the Logitech UE packaging which is slightly different than our traditional Logitech packaging. And on the product which has the badge said UE, Ultimate Ears. Ultimate Ears is an acquisition we made ages ago, a super high end in-ear monitor company that is great at making miniaturized high quality audio.

It is currently the choice of virtually all performing musician in the world when they’re on stage, able to hear what they’re playing, they use custom made Ultimate Ears in-ear monitors. And so we’re using that legacy to create a music business that carries the Logitech Legacy for certain, in certain areas but is not forward by the your old, your grandfather mouse kind of branded Logitech brand.

So the Logitech brand extends beautifully on Tablets because it’s a computing platform and we have a reputation for great products and computers that we deserve that reputation ages ago, we’ve just been if-we on products over the last two or three years, but we’re back with great products and this is clearly an example of one.

So the Logitech brand extends beyond the PC on the Tablet, we believe that it needs to be repositioned for music and only generationally, we’re not targeting the kids, this is not a beat scheme, this is – people who love music game and live for music game, so across generations but we believe that it’s better to decapitate from the legacy. So we’re making a brand investment as much as we’re making a music investment and we’re totally concentrating on Smart Phone.

And again people think iPhone, this is way more than iPhone, it’s a Bluetooth platform so it works with your Blackberry, with your Android devices and anything that carries back Bluetooth.

Andrew Humphrey – Morgan Stanley

Maybe thinking about product margins for a second, I think this is something we did asked about a lot. To me it would be self-evidence that a $100 iPad keyboard would be high margin products because it’s in that premium segment than say the $25 amounts that I might buy – I don’t know how reasonable that is but…

Guerrino De Luca

Well, let’s clarify. First of all, we make more money, it’s not necessarily a higher margin percentage product at all, in fact one of the myth about Logitech is that our regular price product for low margin they have high percent most of them, many of them, not all of them, at high percentage markets.

So what happens with the iPad keyboard particularly that it’s carried mostly, it’s not exclusively, the most expensive channel you can get which is the Apple Store. I think monopoly an Apple Store is kind of expensive to play there, it is been incredibly useful to be there and we’ve chosen to be there with our music products exclusively for almost two and a half months. We only now are deploying our Logitech UE product outside the Apple Stores, but we’re making almost a marketing investment there.

So there is no reason why over time these products will not get the same margins than our traditional PC products at a higher price points which means more dollars, but currently that’s not the case because of the high prevalence of the Apple Store in the mix.

Andrew Humphrey – Morgan Stanley

And do you, when you’re kind of looking at new products to launch do you have a sort of hurdle rate for gross margin, you think that product can achieve…

Guerrino De Luca

We always did, the problem with our product sort of strategy we have moved from the well PC machine where the goal was to take advantage of the growth in every possible need which means multiple the number of products to address the uniqueness of that particularly need because there was enough space and you end up with 25 keyboards that all look the same.

So in a declining or flat market this is exactly the opposite of the strategy you want to have, you want to have a strategy with fewer products in which the step up is clear for the consumers, especially I said at the beginning we want to take advantage of our leadership positioning in these categories and what does it mean. It means that every PC peripheral sheaf to self strength we become increasingly the only or one of the two players there. In that situation it’s easier if you have the right assortment to move people up.

Let me give you the extreme example, the worse of our business is today’s webcams because not only if we reflect to the decline of the PC platforms but it’s also within the PC platform is less, less of an interesting device because most people are happy with the integrated webcams they have.

Well in that particular case, there is still a market to webcams and there is no reason why we would sell webcam for $15. You have a $15 webcam in your PC, you actually probably better than that, so why would you want to buy a $15 webcam, that’s what we’ve been promoting. So people would buy better webcams at $49 or even higher prices, wireless webcams but people who wants webcams will go there, so there is no attempt to grow the webcam market but it’s certainly, it’s a classic example of how we take more money out of a shrinking market.

The webcam case is an extreme, the PC related markets are not in structural decline as webcam but the logic is same, fewer players on the shelf, better assortment and clear good, better and best strategy which means fewer products which means that the hurdles in general for new products have become higher, because it’s more difficult to justify to insert a new product in a four product assortments than in the ten product assortment and that is influencing our product decision cycles.

Andrew Humphrey – Morgan Stanley

So, I mean you’ve had a great six or nine months in terms of new product introductions without the keyboards, you’ve had the Ultimate Ears range, you’ve had mouse for Windows 8. Does that mean, I mean should we take it as understood to the next six or nine months will be a bit less frequent in terms of new product introduction?

Guerrino De Luca

Well, we spherically evidence to use our products in ramp towards strictness, but I mean there is nothing coming it’s not really overly simplistic. I think that we are half way through the new month of the portfolio, we’ve gone from probably 300 active products in the catalog across the board to about 150, there is still a lot of those, we’re still not done with simplification and this simplification is not on the achieved through elimination you just – it’s how you’re, when you introduce a new product if you place this two other ones in that kind of fashion. Without there I think we’ll end up being, we’ll never end up being like an Apple that three products or four, but certainly 150 is not the goal it’s probably more close to an 100 and so that will drive product introduction as well.

But I think we’ve done a tremendous work today, we should also see a – what you see a music today is our first wave, you’ll see more coming. Even in that space it’s about iconic products that go individually, past individually or $100 bar. We’re not going to come with a full assortment of 27 years it doesn’t make any sense, we need to concentrate that effort but that’s kind of maybe too detailed answer for your question.

Unidentified Analyst

Maybe we can talk a little about restructuring as well and then what’s going on there, I mean you’ve reiterated targets both cost savings recently $80 million by the end of the financial year in March. I think more recently you’ve also indicated actually quite a fellow look in terms of which businesses you need to be involved in longer term. Maybe we could start by discussing the plan that you announced six months ago, is that now – does that hold in terms of the scope…

Guerrino De Luca

Yes, and for some reasons that maybe we have to do with the way we describe it’s kind of not, I cannot even begin to believe that the risk factor and by market as the way we describe it. We’re fully on track to have a run rate exiting fiscal ’13 which is the current year which is March that enables us to save $80 million on a yearly basis over our cost base of fiscal ’12 which is when we’ve referenced that, we’re pulling on track to do that. That should add $80 million to the bottom line, okay that’s what we’re doing.

The reference to a relook at the businesses is additional to this. Bracken Darrell was the future see of the company which we kept secret for a while because we wanted to give him the opportunity to learn little bit more about Logitech and the business and decide where he wants to go and get. He is coming up probably it’s going to January with the earnings call, he is going to become the CEO on January 1st and I expect that he would just say more about what he is doing.

We’ve been working together, me and I and other people on the company of course into relooking at every business in which we’re in, from the mouse business to the Multi-phone business, to the OEM business every single thing we do and figuring out what make sense to keep and what make sense to let go and what make sense to invest and what make sense to work.

And this is done under the new assumptions we’re making on the PC platform growth or laptops etcetera and on the first six months we get from our new businesses the Tablet business and the music business. And so he will certainly begin to address what else we’re making to make the company immediately more profitable and starting with an opportunity to grow right away. If this will mean starting from a slightly lower base, so be it, if we decide to let some business go it’ll just the dust on the top line so that’s the right choice to make for Logitech and I look forward to hearing sort of declare the spends and make all the decisions we need to make that happen and share with our investors and shareholders.

Unidentified Analyst

And does that than most part your various activities include I guess people that haven’t – the areas that people haven’t read in the associative view within the past, maybe looking at LifeSize I mean that seems to be a bit of a business part at the moment.

Guerrino De Luca

I’m not in a position to be more specific about any of our businesses but it does include everything. One of the characteristics of LifeSize and we can spend an hour talking about LifeSize is that, we kept it as a separate entity which leaves every option of it. Like said, conferee towards the general feeling about LifeSize is it’s a phenomenal asset that is being plateauing after tremendous period of growth and plateauing the way the entire industry is being plateauing and I don’t believe that that’s a secure thing, I believe that the industry is undergoing a number of digestive issues including how to, especially in the mid to high end of the enterprise how the new UC platforms impact the point of the video conferencing, this is something that is causing an normal problems at Cisco, some problem at Telecom and little bit problem at LifeSize.

I mean most are being working on doing to the infrastructure and to the cloud these two does worrying that people use a lot with video conferencing space, what we have done one point. The reason why LifeSize even exists is that in 2005, 2006 they disrupted the end point market for video conferencing from $15,000 to $5,000, does it sound like great but it’s a point, okay.

We’ve digested that and that generated a tremendous amount of growth, so how do we replicate that on the front of the infrastructure which is where the most look at the market is, and as customers we grade infrastructure to infrastructure plus cloud, okay. And there is being investment in R&D to do that and you will see the manifestation of these investments shortly.

So we’re treating the asset the way it deserves that it is part of the same review as everything else at Logitech. Maybe if there are questions from the call we can take a couple.

Unidentified Analyst

A company like Plantronics have a higher market kept the new despite they have a much lower revenue because they have a duopoly with your net income. Why have you never really try to tap into that profit pool?

Guerrino De Luca

Actually long ago we did on the mobile phone side and we were in a sort of enterprise’s doing mobile headsets, mobile Bluetooth headset for mobile phone. But where Plantronics get most of its business is on Call Center and business deployment of headsets. I wouldn’t exclude that, we have a free solid PC headset business which the market doesn’t value as much up trying evidently, but the question about the value is in the highs would be older. There is an entire – I’ve mentioned you see, which is, this kind of platform that is happening in business mostly driven by Microsoft Lync and also by Cisco Jabber from two different perspective that’s a tremendous vehicle for webcam and headset in the enterprise. And I wouldn’t be surprised if you saw us playing a bigger role there.

But in general the notion that there a big profit bull why don’t you jump on it, it’s not the way I like to look at Logitech because there is a number of things that we’re better not to. In the past we’ve done more mistakes in things we’ve done and in things we’ve not done and so I would be very careful into picking on next battle. For the time being, winning on the mobile screens both tablets and smartphones is priority one and two for Logitech together with keeping a healthy profitability of the core business around the PC which funds the rest. That’s probably as simple as I can put it.

Unknown Analyst

The tablet market seems to be moving smaller, seven inch and eight inch tablets I don’t have many, just wondering your thoughts on that. Do you think where is that market is going to be larger than the 10 inch tablet market in terms of units? And do you think it’s much less applicable for peripherals?

Guerrino De Luca

First of all the answer to your second question is no and you wouldn’t be surprised to know that there is already things in the making for the small iPad, it’s a trickier market though, first of all nobody knows what this market is going to be even Apple doesn’t know. Apple clarified, they made the first line extension since Steve Jobs rejoined the company. The iPad Mini is the line extension that they are not done before. I mean you can count the iPod Touch that way, but the iPod Touch was a very different animal from the traditional iPod when iPad Mini is a small iPad.

Even Apple has been searching as to what’s going to happen there. We are edging our bets. I do not believe that the successful tablets will be small form factor in general. I believe that the form factor established by the iPad makes the tablet a potential productivity device. With a smaller form factor, the tablet will be fundamentally a consumption device and so the opportunities therefore for peripherals vary depending on where it goes.

That said, it took us two years to catch up on iPad and we’ll not lookup for the years to sketch up on the iPad Mini. If that happens, I’m next on it. We’re edging our bet positively there. We’re doing something, we’ll see.

Andrew Humphrey – Morgan Stanley

Okay now that’s like it. Guerrino, thank you very much.

Guerrino De Luca

Thank you very much.

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