Joe Greenhalgh - VP, IR
Bracken Darrell - President and CEO
Charlotte Johs - VP, Global Brand Development and Portfolio
Ehtisham Rabbani - SVP, Customer Experience and CMO
Azmat Ali - VP, Tablets and Mobile
Mike Culver - VP, Mobility Business Group
Joern Iffert - UBS
Michael Steger - Belleview
Logitech International SA (LOGI) Annual Investor Conference Call May 23, 2013 3:00 AM ET
Good morning. My name is Joe Greenhalgh, Logitech’s Vice President of Investor Relations and Corporate Treasurer. I would like to welcome you and thank you for joining us for our Investor and Analyst Day today. As you would expect we are going to be making forward-looking statements today. I am not going to read, this an entire slide to you. But there are risk and uncertainties associated with these forward-looking statements and you can see more about those in our SEC filings.
Just to briefly cover the agenda, we will start today with a presentation with Bracken Darrell, our President and CEO. He will be followed by Charlotte Johs who will be talking about PC peripherals and following her presentation we will take a break and we will have the product showcase available which is the room just behind this, here. After the break we will come back with Ehtisham Rabbani who will be talking about gaming. He will be followed by Azmat Ali talking about our Ultimate Ears business and then we will have Mike Culver talking about tablet accessories. Following Mike’s presentation we will have a question and answer session with all of today’s presenters and we will follow that with another opportunity to look at the product showcase and also with lunch served in the room at that point.
And at this point let me turn the presentation over to Bracken.
Thank you so much. First I want to thank you all for coming, and a couple of quick covers. 1. It is really good to be back at Switzerland. Some of you know and some of you may not that I lived in Switzerland for four years. Every time when I come back here I feel like I am coming home, even in bad weather, but it’s not so bad, but it’s a wonderful country. I feel a little Swiss to be honest. I think Logitech is very Swiss. So it’s a thrill to present to in Switzerland and talk about Logitech any time.
I am also really excited to be here for another reason which is I am really excited about the company. I have been here now just over a year, and I really feel like we are now kind of hitting our stride. You probably looked at our financial scope for Q4 and say well what’s he saying, because he has a different view than we do. But actually he thinks you don’t. Because of sitting inside the company, and I really feel the momentum building. So I am very proud of what we are dealing. I think if we do what we have in this presentation, we are not relying on very much luck. So we are not expecting a PC market turnaround, although if I listen to the experts, we are not relying on a growth curve for tablets or for mobility products that’s different from what anyone would expect.
We are simply relying on our own execution, and of changes we have made within the company. So and obviously we can do them. If we do that, okay, it will be a good value creation company. It will be a good value creation business over the next several years. If we do it well, and it will be very good, and if we do it extremely well, I think we are going to create something amazing in Logitech.
I am take just a few minutes now and look back, and I will remind this much and I will warn you that I have the benefit of, they will say the people after the history is done, those people write the history and then you never know if that’s the exact way it happened. So I am one of those. I am looking back on the history now and I will tell you that I am not sure this is all exactly the way it came together. But I think the storyline is about right. And it is important to understand this part of the story as we look forward into what we were doing going ahead.
Logitech has had 26 to 28 years of consecutive, maybe just stronger, but a very strong growth both at the topline and the bottom line. We created a tremendous amount of value for shareholders and we are a great place to work. We made a difference in the world, and it was very focused on the PC ecosystem. So we built that PC ecosystem, one category at a time with the tailwind of a strong PC growth curve. And as we got towards the end of that period we began to try to find another ecosystem in the remote control business so the TV, another one in security business, for home security, another one in video conferencing. So we started to branch out and plan things to see if we could find that next ecosystem.
At the same time we missed something which we were slow to react to the transition that happened with tablets. So as tablets really took on a completely life of their own, we were slow to react and we missed opportunity. The early stage of opportunities in the tablets, we just missed that opportunity. It wasn’t devastating because the market was so small and still relatively small, but it put its line to curve. Second thing that happened was as we were planting these potential new ecosystems out there, we lost something very important. And unfortunately we didn’t lose the capability, we lost the expectation. We stopped expecting to have great products. And we stopped expecting to have great products. The products we launched became not so interesting. And I think we lost a little bit of brand relevance during those two to three years.
Today I am going to tell you, we are back. We have got the capability re-established and we are building more. And I think we are going to start, you are going to see a start to consistently introduce great products again. We are very focused, and you will hear more about this of where we should play. And we are not thinking of plan C to cross a lot of barriers. We're going to really focus where we must win.
And here is a little evidence that what we’re doing is starting to work. First, on bigger and better products. We launched our first real home grown keyboard tablet accessory with the Ultrathin Keyboard and as result of that we grew almost over 300% last year, it became the number keyboard, number product in Logitech, it also became the number one keyboard cover in the world.
So we are off to a good start. At the same time we’re taking some tough medicine on our product line and we reduced the number of product lines we sell by about third. this was a real forced action to get us down to a slimmer portfolio. Meanwhile we decided we must become faster and simpler. We have become the big company that a lot of us didn’t want to be. I have the benefit of spending most of my career in big companies and I know many of you work for what you’ve considered big companies. I learned that I don’t want to work in a big company again.
I see big disadvantages inherit in big companies especially when it comes to consumer products, the bureaucracy creation mechanism is awfully strong in a big company and we adapted some of that to our little small company and we’re headed right back to where we should be which is we are going to be a small company and we are going to be a small company no matter big we get. Small means informal, small means fast in decision making, it means responsive. it just means you’re a learning company. You’re close to your customer. You’re close to you technologies so that’s where we’re headed.
As part of that, I flattened the organization almost right away when I arrived. I now have about 14 direct reports, about half to third of those will new by the time we get to the third or fourth month of our fiscal year, so we’ve changed the organization quite a bit. We’ve also created a way to force ourselves to be faster which is we built the tablet team in Asia that tablet team is kind of self-contained so we do a lot of the design and innovation development here but all the integrated design to the manufacturing all the manufacturing work all the componentry work all done in one close system in Asia, it doesn’t have to go back and forth and back and forth that’s enable to be much faster as you’ll hear.
Last, we changed our approach to how we’re going to be profitable so we decided to make some tough calls and get out of some businesses we’re existing that remote business which is unprofitable, we’re existing the home security business which was unprofitable, and we’re exiting other legacy businesses and that’s largely done all those will in place have done but at time we end this fiscal year and we’re also seeing this fiscal year you’ll start seeing this quarter the benefits of the restructurings that we did in the last year, so those are going to start shift this quarter and they’ll occur throughout the year.
So we’re on our way now little bit about the evolving Logitech, this is five slides and I’ll try to cover them quickly. First, we started with a business that was built around the personal computing and personal computing for us and for all us in the room for many-many years for 25 years personal computing was the PC or the Mac but mostly it was the PC that’s completely changed, so personal computing for the world now and I’ll show a chart on this later is not only a Window-based PC but of course its Mac of course now tablets its Android tablets not just iPads its Smartphone so it’s an evolving growing PC market all of it as you’ll see in the second and you know is growing but the little personal computing part of that is Windows PC based part is stable and is actually declining.
So, what we’ve done about it here is a quick status, we’re really going after mobility part of this focusing first on tablets. We’re well into the Apple and Windows piece and we’re just at the early stages of developing Android products and stay tuned on Smartphone we’re looking at some things right now. So, we’re really evolving ourselves to be positioned to play in the whole personal computing spaces as it is today not as it was five years ago. One of the implications of that is product lifecycles are getting faster. The personal computer product lifecycle was about 24 to 36 months, you know, Dell or someone would launch a new product that kind of refreshed it every year but basically the platform is good for two or three years.
For us that meant if we went with an annual cycle of new products for PC for peripherals that was fine because that annual cycle in fact we can do an annual cycle and leave all the stuff for the prior cycle out for two or three or four or five or more years and that was okay too and so we wound up with a lot of products from a lot of different timeframes and not a very fast development cycle. The new cycle is completely different. When you are dealing with a tablet a tablet life as tablet form life it can be as little as 18 months maybe over the future will even be 12 and on average today it’s probably 24 months at the longest and when it changes all those if it’s a form feeding product, meaning its shaped to the form like our Ultrathin Keyboard cover, it’s no longer relevant the day the new comes in. so that's a completely different dynamic. What it means is we have to be very fast in getting to market when the new form comes out because the life of that product is shorter so to get the best return on investment and have the biggest impact on the marketplace we need to be there almost from the beginning. So when we first developed that ultra-thin keyboard cover that I think some of you probably have. So many people have one of those, if you don’t we need to open up a kiosk outside and sell you.
But when we developed that first ultra-thin, number one selling in the world, we took 13 months. So the iPad was launched 13 months later we launched. Now that was too slow and now our expectations have changed, our process have changed, we put people in Asia. When we launched the mini which was the same product but in the mini size, it took us about 10 and a half weeks after the mini launch to be in market. But that's still not fast enough. So, as we go the next one, we believe that it can be within three or four weeks of the launch of the next iPad and we'll need to do the same thing for the biggest players in Android and that is our game plan.
The third thing that's quite different in the new world of Logistic versus the old, is the whole operating model or supply chain model. In the old model, we would make it, we would design it in California or in Switzerland. We would then start manufacturing in China, we would move that to the port, we put it on a boat, we ship it for four to six weeks to one of our distribution location, it would move to the distribution location.
From the distribution location, it would go into a sales area a retailer distribution and then we finally make it to the store. A very-very long supply chain, okay if you are not, if the life cycle approximately is very long. Now when you bought one, so you wouldn't involve one those device; the whole supply chain work backward. It was replenished so that triggered in order that went all the way back into China and the cycle started again. The tablet business is quite different, that we are sitting on a completely different model. There is a component that has a replenishment meaning if you buy a tablet, it triggers an order but that's the only thing consistent. The rest of it is different.
So we're now making in China, first we're designing and making in China, then we're not putting it on a boat, its flying, so 80% of our business there is on a plan. It lands either directly into the retailer's warehouse or into our warehouse is quickly deployed to the retail store. And often when you go buy your new keyboard, the fabric keyboard cover so the new product, it's not replenished at all.
So it is going to sell through a display that's out there and by the time that sells through, the next product's launching because we're already working on it, so we have two cycles of product launches right now per year; quite different; quite different and I would say we've made huge changes here in our operations model to be ready for that.
Fourth one, in the old logistic model, we in the PC peripherals world and then because there was so much tail wind, so much healthy growth for the PC platform, we were planting other things to see if we could get something to work without particular pressure to make it work because we have enough insurance in the strong PC platform that we will be okay; not anymore. Now we can't afford to call today five or six different things to see what works. We've got a maximized profitability in PC peripherals and guarantee ourselves a place in this mobility universe that very exciting and become the leader and that's where we're headed. So we shifted our investment, we are eliminating the weaker planted businesses out there and we're really putting ourselves in a position to become the Logistic not only a PC peripherals but also mobility.
Finally, in the old world honestly, deign wasn't rewarded to the same extent. It's kind of an internal joke that we always say that the next black mouse that launched. There wasn't a lot of variety or big leap's forward in industrial design on our existing mice and keyboard. We have very good industrial design consistently through the whole period, through the 25 years. Our biggest jumps were really good moves in industrial design.
But now the standards have changed especially as this becomes a mobile product. When you are walking around with something that's one for ours, you are walking around with a cover or something or a music product. It becomes a part of expressing who you are. So you need to be able to deliver not only good physical design but also the integration of innovation and design and engineering has never been even close to as important as it is now. So it's a new game for us. So we are going to move from being Logitech as it's been an engineering led company with a great go to market capability. We’re going to become that but we’re also going to become a design company with the design company that really leverages technology, innovation and consumer insight.
And I think you will start to see this as you look in the next stream of products that we are launching now. They have a higher level of design and we can go a lot further. The ultra-thin keyboard is the first one, it looks like the partner to the iPad, it’s a little too humble to say that but it looks like it belongs to an iPad. Our glass track pads are pretty good, we can do better. The new fabric skin key folios are very nice, they have a lot of the innovation in the keyboard and in the way they look, difficult to do and then these wireless speakers that are mounted around the room are actually mobile wireless speakers we are using to project here and those products have an acoustic skin that is water proof or water resistant. You can put them under the tap and they still play. We also have really neat feel to them and they have tremendous acoustic ability.
So, lot of changes going from the old Logitech to the new Logitech and we’re on our way. Where are we going? Here’s where we’re going. We’re going to get back to creating exceptional products consistently. that’s the most important thing we can do. We’re going to do that and by doing that and because of doing that we’re going to be faster, simpler and more profitable company. We’re more like a small company less like a big company, but we’re going to fast. And we are going to be interesting. And the last thing is we’re going to build this design company leverages technology innovation and consumer insight.
So, let me get more specific by our priorities going forward. I mentioned a picture paints a thousand words. This is a picture of the bottom, the blue here is the desktop PC, green is the laptop PC and then tab what is the purple. And as you can see, the PC peripherals market, while it’s been relatively stable last few years is starting to decline. The actual personal computing device market is exploding. The best years have been the last two or three years and they keep getting better and better.
Now, that’s not all. If you have that which is the Smartphone market then you see that the two areas that we really didn’t play in up until about 12 to 18 months ago, where all of the action was and that’s why it’s critical that we become the Logitech mobility, not just PC peripherals.
So, we got more opportunities than ever, more opportunities that we can possibly get. We just got reinvigorate our innovation engine and focus on this mobility space, bring this design focus and then apply consumer insights.
So, little this is why it intended simply for me to be able to talk to you about what we’re doing on design. We’re doing several things. Firstly, we raised our expectation for what good design is. I think you’re going to see as you enter the room, our design is either well ahead of where it was or its back to where it was a while ago depending on your view about our design in the past but the bottom line is we’ve very, very good products right now. They’re going to get better and better and better.
The second thing is, we’re creating a position (inaudible) designer which we’ll announce before too long. And that again is an attempt to make sure we will stay inside, outside the company as well as a real processing engine to make sure that our design keeps advancing.
And I mentioned that we’re really making big moves on color finishing materials. So, color, finish and materials these are one component of design that are really important. But all this is built on consumer insight. we’ve put in place a new consumer insight leader and the goal here is to become again a design company with a big D, not a little D, so that don’t take fashion, think innovation. A design company that leverages technology, innovation and consumer insight.
Now, let me get specific on the priorities. The first priority here is to maximize PC peripherals profitability and thereby free up opportunities for us to invest in this new growth business, targeted growth business.
Secondly is to grow the mobility business and really create scale there. Third is to return the growth in PC gaming and that may not be familiar to many of you but I’ll go into that in a minute. Third is to manage our operating expense so that it becomes a point of leveraged advantage. First we have to rough cut it and we have so it's down and you’ll see it in this quarter and as we go through the rest of the year. Then we’ve got to continue to manage it for to keep it down as we grow.
And then finally, turn LifeSize into first and foremost a profitable business, get going positive EBITDA by the time we end in this year and then returning it to growth and we go through each one of those.
Maximize profitability in PC peripherals. That does not mean we’re going to milk the business at all. What it does mean is we’re going to innovate in the right places and we’re going to maximize our margin where we can. So, we're innovating at this edge of touch and gesture in the mouse, business of mouse or track pad business, really we’re growing share consistently, we expect to continue to do that, we may have a quarter or two or we don’t but I think we’ll prefer margin over share but I believe we’ll be in a position where we consistently grow share.
And then we’re going to leverage something called unified communications. You may or may not be aware of what that is exactly but it’s basically the two big players in it, are Microsoft Lync and Cisco Jabber. And these are ways to basically bring one standard way to communicate video, audio, oral into the big enterprise around the world. It will start there and it will flow down, it’s its early days but these two systems are going in now and they’re starting to grow. We’re perfect, there is no company better positioned than we are to take advantage of that. When you bring in either Jabber or Lync you generally use webcam. You know the webcam business is declining in retail, you need a webcam in your workplace and we can talk about why in Q&A if you like.
You need a headset because you’re phone is going to go away. You no longer need a conventional phone. You’re going to save the phone and you’ll have headset. Ideally you need a keyboard because the keyboard can actually operate as the keypad on your phone and so people will often use a keyboard and it can be integrated with Jabber program or the Lync program and in fact we have a partnership with Cisco where we actually have a dedicated set of products including a keyboard that works specifically for them and we are working with Lync on the same kind of thing. So, we are really-really well positioned for this. We even made drops (inaudible) into that. So it’s a very-very interesting business for us, we are excited about it, it’s one of the clear growth opportunities here.
Webcams, webcams outside of this unified communication space, on a secular decline. So retail though keep declining, so we are consolidating our position at retail. We have as much as 70% to 80% share depending on the country and we are going to leverage that market leadership from profitability.
And finally PC speakers, which are ones that you hook to your PC and you put around it, that’s the market that's declining. We have been declining much faster because we really haven’t done anything there. So, we are going to upgrade an improvement cycle in the current set of products and we will not only get certainly spin that decline or spin the loss of the share but we may even do a little better than that. But again in that case, we are not allocating a lot a resources to it, it’s very much working with external partners to develop those products.
Mobility, mobility in tablets. Tablet actually is a hot place right now, is a hot place for us, it’s a hot place for retail, and it’s a hot place for consumers. There is a lot happening here for us. We are going to continue to launch great products, large and small tablet products. Right now, we are entering our covers without keyboards for the first time. The keyboard cover market is, actually the keyboard attach, the number of people who buy a tablet or an iPad today and actually use the keyboard with it is very small so it’s somewhere between 8% and 10%. The number of people who probably would if they are aware of it and it was presented to them at retail is at least double that. The attach rates are going, it’s a great opportunity but the truth is in addition that you get this big case market and the case market is important for us to be in because it’s an avenue into the keyboard market and help growing. So we are entering cases, we are in the early days with that right now. We are expanding our offerings so we can start to hit the highest tablet volume keyboard covers and cases for Android and we are creating this business model which is faster and leaner as I mentioned. And finally as I said, we are probably going to enter into some new categories here beyond these or around PC peripherals within the next 12 months.
Music, these products here and I call here Boom. We can take harder look at them later but they indicate what we are doing, we are prioritizing PC speakers, wireless speakers and we are doing that because last year when we launched we have learned a lot, one was that we do pretty well with the PC speaker space partly because we have a pretty good brand for partly because we really have a great technology in it. So we have launched this just recently and it’s a very early stage but this is a very cool product, completely unique. As I said it's water-resistant. You can play them separately, you can also separate them with an (inaudible) play them in stereo and can play together, if buy two of them. So there is a lot of good stuff in here.
PC gaming, I told I will come back to this. How many people have child above the age of 10 or 11 a boy in your house, a few of you, I too. Your kids are probably playing PC games now. You probably trying to keep them off PC games so much, what’s happening is the PC gaming business has been growing steadily for a while, there are some reasons why PC game are more advantage for the long term than console games. The games are virtually free they are easily get into, they are upgraded all the time. So there a lot of nice things about the PC games, they are not dependent for us that is good too because they are not dependent on the PC sale. So, PC gaming comes in and just goes off in existing PC what you need in a PC gaming to be successful, you need a better mouse and a better keyboard and a better headset.
So, we are perfectly positioned here. We really took our eyes off this ball about three years ago. We de-prioritized it and we lost a lot of market share, we are still very relevant to PC gamers all over and we are in the middle of taking this back right now. So we are in the distribution drive right now. We are launching eight or nine products between now and yearend and I think we can make a real difference here. We have a lot of great technology in this space that nobody else has and we are positioning the whole brand around science wins.
I talked about operating expenses, the $70 million we committed to last year will be out and we already continue to manage that over the time as we feel little bit later.
Finally, LifeSize which is our video conferencing business, we are very focused on first getting it to a level of EBITDA positive, so making it profitable and then it will be back in a position to grow again against small and medium size enterprise.
And let me talk a, I am going to get into specific numbers here in the moment so let me set those up. First, we are not assuming something miraculous will happen to PC market in fact we are much more pessimistic in our inceptions than Granter or most of the big experts. We are expecting a 10% decline in our number so you can assume that and we are assuming that we are going to be completely out of these non-strategic businesses as we exist the year and we will be. We are assuming that our attach rate from mice and keyboards against those PC sales will be stable. We have data to support that, it’s actually very stable in fact it’s actually going up in keyboards for reasons I can explain a little bit so net-net we are going to demand strong growth in a couple of areas, one; the Ultrathin Keyboard or the keyboard segment we are assuming we have strong growth there and you will see in a moment what I will say is our growth going forward isn’t nearly as strong as it has been getting two now and it’s getting closer and closer to what the market has done. So we will see if we can outperform that because we are going to expanding in a lot of different ways in this keyboard segment. We are expecting there will be something in the music space a little -- honestly our reliance on that for this financial picture is relatively low because it’s a relatively small business. And we are not expecting anything amazing to happen in the economic environment, we are assuming a sort of a status quo.
We have got three groupings of our businesses, so we got the businesses we are exiting which we have talked about enough, we got the businesses that we are maximizing profit in which were mainly the PC Peripherals businesses, LifeSize is in there for now but as we get that to EBITDA probably it will move over into the growth. And then finally you have got the growth curve which is tablet accessories PC gaming and audio wearables and wireless. The strategies in each of these groupings are fairly consistent with what I have already setup as I said we are not milking this and putting everything in that we are really optimizing our performance here investing very selectively. But going after the big growth opportunities we have improving our profitability. We are certainly going to invest in this UC space and in LifeSize we are going to do what I told you and then on the growth side we are going very aggressively after expanding tablet accessories across a whole range of ways getting PC gaming going and then growing where the opportunity is in wireless and wearables for us in music.
Here is probably the most important page from a numerical standpoint, on top of the P&L our pointing device assumption is that we will decline about 5% which means we drove a little bit of share on the 10% platform decline. If you listen to guidance and they would say they expect growth in the same timeframe so a 15, 16 they would expect 3%, 4%, 5% growth you are kind of flat to a little bit down this year than 3 to 5 we are much more conservative than that. Our PC keyboards and desktops does show growth so low single-digit growth that is because we are seeing it now and that is because the big -- our number one selling product right now in keyboards and desktops is actually a product used for the TV so an increasing number of people who bring their TV talking about the TV bring their computer their laptop connecting up to the TV and then sitting on the couch and surfing this is a phenomenon that started about four or five years ago and it just keeps picking up steam. It is in fact in the U.S. it was 8% of people doing that about three years ago it is 30% doing it now 30% to 31%. So this is going to drive growth in our keyboards.
Tablet accessories as you see we have got a 45% compound average growth rate that is relatively low by historical standards as I said it was over 300% last year the market has been growing at about 30% or 40% cliff. Now we are going to grow a bunch of different ways so we are going to expand right now we are mainly only in the keyboards with the cover one sided cover. We entering as of last month we started entering folios so two sided so you got a keyboard and you have, you close it inside a folio. We are then going to add android to that we are doing the large and the small and then we are going to look another product beyond that. So we have got a lot of things happening in this tablet space. In video the actual video this is the number that all looked the weirdest because the video business has been -- the webcam business at retails has been declining by about 20% consistently secular decline.
We don’t expect that to change it will keep declining why I said this is in Unified Communications is in this number two so on the other side of it you have actually got growth so that growth that is coming in. we just sold our first million dollar deal for Cisco for the Jabber business so this is just getting started but I think it is going to be good.
Audio PC this is the speakers that go with your PC. That is a decline of 7% that is in line with the market, so not better than that. The wireless and wearables as I said that's often a relatively small base, good growth because we have big opportunity and again these products are examples what we are launching here. PC gaming 20% growth the market has been growing at about 28% so this is below the market we also believe we should gain share. Our conservatism is built off of one thing which is what actually would affect the console gaming launches that are going to happen later in the year will have on this market.
Judging by the portfolio of games coming out on the PC gaming, probably no affect but it is hard to say so we believe that 20% is achievable compound average rate over the next three years. LifeSize this outs us back in the return to growth bucket once we get our cost back into an EBITDA positive position and OEM at a negative 10% is right in line with what we think the market through for the PC market is going to do. Gross margins, this is a picture of where our gross margins sit today you can see start with LifeSize it is a very different business so it has a very high gross margin and a higher OpEx and then if you go below that pointing devices videos to webcams and keyboards and desktops and PC gaming are all relatively mature businesses with large scale and very attractive margins they all sit above the means.
The tablet accessories, so this newer business is relatively small today. Audio variables and wireless, again a relatively new business relatively small, in audio PC all have a lower gross margin today. But I can tell you that each of those will improve so you will see these improving as they get more scale. The tablet accessories in particular, I think as we hit the back, a couple of quarters or a year, you will see that to be right above where the keyboards and desktops are.
OEM is a little deceiving. while the gross margins and standard margins are significantly lower than the rest of the business. There is very little OpEx required to manage them, so it’s actually profitable business, reproducing profits. This is what it all rolls up to, so here is what we expect, I hope you can read that. We expect our net sales, by 2016 to go to about $2.25 billion. The gross profit percentage will go up. It should go up about a point over that timeframe.
Our operating expenses, we are going to hold relatively steady, although we are reallocating them for the entire time, moving from profit maximizing into the growth businesses, resulting at an operating income that should triple between this year’s guidance and three years from now. This is fiscal year ’15s kind of a bridge. We told it a bridge because we are not giving it as a visual guidance, but we have a bridge for how we think we get to these goals to fiscal year ’16.
Capital structure; we believe we need about 15% to 20% of our sales in cash to have the right about of operational flexibility, to make sure we have sufficient working capital, to manage the event flow of our year. That leads ample cash for returning to shareholders and doing acquisitions. We spent about $46 million to $47 million a year in capital. Last year we delivered, if you excluded restructuring, we delivered about a $147 million in a very bad operating profit year. You can imagine that we can routinely generate a pretty decent level of cash flow.
So we think we are in a position now where we can afford to pay a dividend. So we announced today our intention to ask the, the board approved, and we are going to ask at the annual shareholders meeting to pay an annual dividend, that dividend will start at CHF0.21 per share, and it’s about $35 million a year. So that will happen in September payoff. That should still leave us on annual basis excess cash that we will either do acquisitions with or need to find another way to return to shareholders.
So to summarize, our results in 2013 were completely unacceptable by any standard. But we are changing fast. The old Logitech and the new Logitech are starting to look pretty different. We are certainly getting faster or back to developing some pretty interesting products. I think we are going to have not only great engineering but great design. We have eliminated a lot of the cost and we talked about, it’s out. And you will see it in the numbers.
Our mission now is to really deliver amazing experiences, products that really deliver amazing experience is consistently across the whole range of computing devices from the old PCs to smartphones though ultimately. This turnaround has just begun but I have a window into it that you don’t, based on just my reach and touch. I feel like we are really, the momentum has slightly changed. Now with that I am going to introduce Charlotte. She is going to talk to you about PC peripherals.
Thank you Bracken, good morning everybody. I am here to talk to you today about business of our PC accessories or PC peripheral. I will speak to you a little bit about the market situation win, our market share position with more than what Bracken talked about. I will share with you some of the latest consumer trends and how consumers actually interact with their computer. I will go a little bit more in detail in what does this new strategy for the PC peripherals mean. What is maximizing profitability mean, and what are some of the longer term growth opportunities in the emerging markets.
If you start looking at the PC market, and I know that as a PC peripherals business, naturally we are always linked to how the sales of the PCs are doing. Mr. Bracken said that the, sort of the official market numbers, shares that just declined in 2012, and still be a small decline in ’13, but then the industry foresees sort of the pick up again from ’14. We do not plan for this trend. We are actually planning for the PC markets to continue to decline between 5% to 10% from a move around to 10%. So we are remaining a little bit conservative, or we like to think more realistic.
So what’s that’s causing these trends in the PC market. If you look at on the downside, the negative side, we have seen that the tablet, and Mike is going to be talking about that, has been penetrating the market with an incredible rapidity, so of course when you, as of how, surely you’ve got a certain available income to spend on technology or innovation, you chose to spend your money on a new mobile phone, a new tablet, and you may want to make your PC last a little bit longer, so actually you would be delaying the purchase of PC, because you’re investing in the new and more trendy sort of gadgets.
If at all what some people are saying could be positives for the industry, it is the consumer are still using the PC. So we know that they’re saying they can do up to 80% of the normal stuff now on the tablet. We know that they’re still doing more complex things on the laptop on the PCs that could be home banking, it could be more complex productivity, task, could be managing your media library whatever, more complex things you don’t want to do on your tablet and also Microsoft has announced they’re going to launch a more user friendly version of Window 8 at the end of the year which could actually take consumers back to the PC industry, but again we’re not counting on this, we want to be remained very realistic.
When we look at the how consumers behave, we hear very often that consumers have been stopped using the PC for going on Internet, they browse the Internet on the train, on their tablet, on their mobile phone, but if we look at statistics actually still most hours on the Internet on the desktop or the laptop because you want to stay long time on the internet it is still much more comfortable to be on your PC.
Then many might think that actually the attach rates are declining, so some people will say well, you know, consumers are using laptop even if they stop using the mouse or keyboard with the laptop but actually that’s not what we see when we look at the data, these data showing the ratios of mice and keyboards sold to the number of PCs sold. What you can see is that the mice attach rate is remaining rather stable both in North America and in Europe and if you look at the keyboard is actually slightly increasing, so the ratio of keyboard sold by PC is actually increasing due to some of the fact that (inaudible) mentioned that consumers are using the keyboard increasingly in the living room to go on their PC which is attached to the TV. that’s a huge consumer trend that I’ll talk more about bit later. So actually attached rates are stable for the moment.
So we can then look at the two key markets that we’re operate in peripherals, mice and keyboards, and we’ll take combination of the declining PC market and the relatively stable attach rate, all the categories, two biggest categories started declining at the end of the calendar year 2012. The decline on mice being a little bit stiffer than again on keyboard again back to the fact that actually the attach rate on the keyboards are slightly increasing, so even though the PCs declined the keyboards remained relatively flat.
And Logitech is still the number one provider in all of the categories we’re playing and we’re market leader worldwide in mice, keyboards, webcams, headsets and in speakers and we actually gained market share in 2012 in these four categories, and our strategy is to keep gaining market share in our key markets that’s part of maximizing the profitability. It’s not about milking the attach rate, it’s actually about performing better in a declining market.
So what are some of the trends that we’re seeing in the way the consumers interact with the PCs or their laptops? We see three key trends I am sure there are many trends out there and we constantly looking all of them but there three big trends that we’re really focusing on. The first one is using across multiple screens. like to see that happening right in front of my eyes here you’ve got two or three screens open many of you, you’re not sort of looking at your only on your laptop, you’ve got your tablet surfing you’ve got one, two, three mobile phones working and that's how much of consumers are actually working today, they’re not stopping at one screen, you can do different things. You can do different things with your screen you can be playing a game which I hope you’re not doing right now, you can be playing a game on your laptop and then you can be listening to music on your mobile phone on your tablet.
You can also be doing tasks that are actually complementary, so you can be booking a hotel night booking on your laptop and your flight checking on your tablet and you want to make sure you’re not booking a hotel night when you can’t get you flight so it's actually complementary. That’s a very big trend and we’re already in there and seen a momentum and I’ll talk more about where we launch keyboard which enable you to jump between devices.
Second big trend that is your living space is changing. Two things are happening one is that your living space and your office space is merging and I don’t know if you can remember back but in the old time you have (inaudible) office in the back of the house and nobody was allowed into the office. Today, the office is the living room so we actually got your stuff out there you got your computer your tablet your phones out there on the kitchen table on the dining table and the family’s interaction. That means two things it means that the devices you are you are connecting need to be easier to interact with the entire family needs to be able to actually you can play with them and them and the second this is that it’s set totally new standards for design so you don’t want ugly things in your living room, you want nice things that you are proud to show to your friends to your family that reflect a little bit your image your personality and that’s why one of the reasons that design is a key cornerstone of our new our strategy. We need products that are beautiful to look at and you can be proud as a consumer and that reflects your personality.
The second thing within the living room is this thing about the TV and its fantastic how that's changed in just a few years so we forgot the numbers; I will show you a bit later from North America's where more than 30% of consumers are now connecting the laptop to the TV. And actually just to give a little bit more detail, most of the customers do that our male between 45 and 65 and they don’t want to get out from the couch. They want to be sitting on that couch controlling their device, their laptop, navigating from the couch and that's why they are using a keyboard.
The third big trends about new technologies and we see new technologies everywhere. Touch of course is a present technology. Consumers want to be for directly touching their content. We see many more exciting things and we're working very hard in this area, we are not ignoring it, while exploring many things and we're trying to find out where this real use case for us to participate in new technologies.
So, if we look at the mouse less screens what consumers really want to do, they want to change seamlessly for one screen to the other. So, when they're doing these different things, they don’t want to be having problems setting out with different devices, they want to be able to switch, we got the even switch keyboards and we are exploring many other opportunities but all our peripherals to actually enable the seamless interactions with mini screens.
And so in a living space, we are working very hard and I think you already seek sub to that a great design, beautiful products and we got in our portfolio, at the moment one some specific keyboard for the CV usage and as Bracken has mentioned that is very quick if it became our number one keyboard and it’s hugely successful with consumers.
And if we look at how consumers interact, new technologies as we're exploring what could be the huge cases for us whereas we can enhance our peripherals by implementing these new technologists whatever they maybe and all our R&D teams are working and we're working with different partners in this area to try to see how can we enhance our portfolio.
So let me just give a few more words to the strategy around PC peripherals which is all about maximizing our profitability. So, we really want to capitalize on this amazing and outstanding you could say leadership position in all our categories to actually go further, grow our market share but also as Bracken had said, optimize our profitability which we see, we got a big opportunity to do.
So the things we're going to do within our PC peripherals is really drive differentiated innovation. so this means you will see much less of refreshing one black mouse, to the second black mouse, to the third black mouse where you see very little differentiation and the consumer can't see much difference.
We want to make innovation which is differentiated for specific consumer segments and we want to look at new consumers that we haven't approached before and in huge cases like for instance the TV area.
We are working to increase our average sign prices. We think we got an opportunity there in a declining market to actually ask more far products if they have got better products. We are working very closely with our retail partners with our regions to drive category management and make sure we got the right products, fewer of them with better products on the shelf in a declining category.
And finally we're working also on reducing our operating costs across all the different areas of our business that maybe marketing, that maybe in go to market and these are product costs and that's across all our categories.
We also get the question sometime, what's the online business going to do to Logitech, does it change in the retail, we know that and we held that a lot of business is now going through the online channel. If we look at Logitech still, less than 15% of our businesses goes through the online channel. We readily expect that number to be grown, we don’t expect 16 but that number would be higher than 20%.
All due to the fact that the cost structure in the online business for us is much less heavy but even though a bigger portion of our business would go online that would have sort of a neutral or slightly positive impact on our profitability.
Looking into specific areas of the PC peripherals as most of you know the pointing devices, the mice business is our biggest sub segment, our biggest sub category. And what we're doing in the mice business is really also they are trying to expand our touch experience, I think you will see next door in a moment, our touch pad which we'll launch both for Mac and for Windows. And we’re going to introduce that touch experience to new form factors, and new product in our mice range.
And as that we’re designing for new consumers. Today we have a very big business with our collection; it’s a huge success, in particular North America and has been a key driver of our market share gain in the U.S. It's actually designing for consumers who want colorful with trendy products so this trend seeker segment is a big opportunity for us.
We want to innovate not only for functional but we also want to sink cost into the signing our products. It’s very different to take a great product and then just pull out feature after feature to make it very cost effective.
We’re going to be innovating the other way around thinking cost from the beginning actually innovating around how can you deliver the relevant consumer features at a cost what I see enables us to drive profitability.
And finally we will continue to drive growth in select emerging markets to makers that are very high up the agenda this year, a lot of course are China and Russia.
So in that context our total collection which is seen and (inaudible) huge successful in North America is enlarging its footprints very much this year it’s also going into China and actually translating to a boarder product portfolio which is relevant to the Chinese consumer and also adapting an international campaign to be in line with a taste of the culture of the Chinese population which is very important. So, actually although it’s a global campaign we have batted locally to fit to the consumer needs.
And you’ll see exciting new innovation, I can’t tell you much today, but you’ll see it coming in the next couple of months some fantastic things that are really great design, built on great consumer in the sides and really bringing some new innovation to the mice category.
On keyboards and desktops is very close to the pointing devices category, but it’s very much in the moment focus is multi-screen usage, more functionality in that area. We want to drive more innovation into TV area and just let me clear we are not trying to do (inaudible) and touch upon it before, we’re not trying to recreate a leaving room ecosystem. That’s not where we’re going with driving keyboards that you’re using with you laptop in your living room and that’s the entry point to our category.
We’ll be expanding our portfolio of keyboards for the building touch, I guess that’s the huge benefit with consumer we see a very good uptake of this kind of products and we’re looking at these new technologies as well as the emerging markets and I think on the screen there you see some keyboard that we’ve just launched or combo that we launched in China and it’s very quickly become our number one combo in the Chinese market. Again, develops the China and develops for specific cost structure that makes us profitable in China.
I mentioned before we launched our easy switch keyboards, we launched this for Mac, beautiful design, illuminated, it’s a fantastic product and you can switch seamlessly between up to three devices so you can actually jump from your tablet to your phone, to your keyboard and as a new thing it works with Apple TV. So, this keyboard is great in the living room illuminated and actually it enables you to navigate on Apple TV. And we launched also the easy switch keyboard and the touchpad for the Windows and for the laptop.
This will do more about the living room, our new campaign we’ll see more of later this year around net navigation between the TV and your computer and just to show you a little bit yourself of that strategy so far what has been leading to as you can see in just three years the number of - these numbers are from North America and actually more than 30% our North American say that they are attaching their laptop to the TV. We know that from different sources that in Europe that number tends to be slightly higher and also you can see direct resells on the right hand of slide what is that due to Logitech keyboard business. So, on a rolling 12 months basis we keep growing and growing our keyboard sale because we’re actually answering this due to consumer needs.
On the webcam, webcam business is definitely a declining business from the home usage perspective and what we’re doing there, we have lot of success in North America and particular is driving to much higher share sales to trying to we’re actually reaching again in the U.S. around 80% share sales and that’s our strategy across the globe to be a clear market leader when the sales space is shrinking.
By reducing our promotional activities because we do not want to invest in a cash way which will consumer retail is declining on the other hand we think a lot of opportunity in this area in connection with smaller businesses, small medium businesses and with the growth of unified communications where the webcams does still have a very large role to play.
When it comes to unified communications, we know that more and more businesses are moving away from the fixed landlines and then of telephones and going on to voice and desktop video and we think that’s a big market out there that we can address with our portfolio what we expect this amount to be growing double-digit close to 20% in the next three years. So, it’s a fast growing market, it’s a profitable market and there again we see our sales as very clear market leader. We’re one of the only providers in this business how have the full portfolio of peripherals that you need for your best times. So, we’re across all the different areas of the mice and keyboards, headsets webcams completely experience you have at your desk.
I also very proud to say we have got great partnerships with Cisco, we have got great partnerships with Microsoft and we are very proud to say we have just signed our first deal with Cisco for a $1 million business deal with them. So we are very proud to be able to announce that.
On the speakers side, we know that we have been doing basically nothing in the last two or three years. We let our portfolio get very tired, so we didn’t put much resources into it mainly because it was, as Bracken showed one of the low profitability areas for us. What we are doing is we are doing two things, we are working on the cost side in terms of changing our supply chain model to be more profitable by outsourcing more of development work and the production work.
So we are doing great design in-house but we are outsourcing all of the heavy lifting on development which makes it more profitable for us and we choose our product line by more than a search. We are chafing out a large number of products that were not performing and we are really rejuvenating and updating our portfolio with nine great products in the fiscal ’14 and ’15.
So, in simply next two years you see a great refresh of this portfolio which will as a minimum keep our share in this market and stop us from declining. We will be moving slowly into the more premium segment with the speakers.
Also again they are providing the wide capability and you see the possibility that also of switching between devices because with music or sound, it's just like actually working. You want to be able to switch from different devices and our PC speakers actually will give you that opportunity.
So, I will not go into detail in terms of talking too much about our channel management, which lies in the region but just wanted to say that we are doing a lot of work across all the regions to see how can we on PC peripherals maximize and optimize our channel management. This actually means because, just because we are PC peripherals does not mean that we need to be slow.
Bracken talked a lot about speed and the speed coming in the tepid area and PC peripherals have a lot to learn in terms of also speeding up and some of the processes in our go-to-market approach. This is the example of EMEA. Where we have some very good production in EMEA is our most complex retail region and there we are working very closely with our partners to get a much more optimized replenishment structure and better accelerated go-to-market approach and an increased focus on our managed accounts and focus on big international accounts and how we are actually interacting with them. We are doing similar programs also in North America in Asia and in China, where we are adapting to the new retail landscape and optimizing how we interact with our customers.
So, just a last thing I want to touch upon is the emerging market. We think there is still an opportunity for us to grow on present and emerging markets. In many of these countries the penetration of the PC is still very underdeveloped. Of course, we have a line of that macroeconomic fact.
You can see of how quickly do computers penetrate the markets but as a market leader we are focusing on this and we think it could be a longer term still growth opportunity within PC peripherals as the whole go-to-market and retail distribution landscape modernizes and gets up to a speed in these countries. For FY14 our two focus markets in emerging markets remain Russia and China.
So just to summarize before we have a small break in terms of what we are going to be doing on the PC peripherals. As we have said we are planning for the PC shipment sales still to decline. We are not building dream scenarios. We remain rather you want to say conservative but realistic in our scenarios but we need to win in a declining PC market and that’s our aim. We really need to win with peripherals as we are the number one in the space.
So we want to continue to gain share by outperforming competition but also want to improve our own profitability in our innovation process and our innovating for cost, reduced cost through the whole chain of go-to-market.
And finally we want to invest in pockets of growth, with really differentiated innovation. So not the main stream sort of just refreshments but actually relevant innovations for customers with new consumers and new used cases that build on the latest consumer trends.
Thank you very much.
Thank you, Charlotte. We are going to take a break now. We are going to come back I'd say at about 10:40 and right behind is here we have the other product showcase area where you are welcome to join us and take a look at the all the products we have.
Welcome back from the product showcase. Hopefully you are as excited about the products that you saw as we are Logitech. My name is Ehtisham Rabbani and I am going to take you through an update on our gaming product line.
So let’s start out with, we will be talking about the market opportunity, we’ll be talking about how we target core gamers, how we engage the PC gaming community. We’ll spend a little time with our product and retail strategy and we will summarize exactly where we are, what our strategies are to win in the PC gaming business.
The most important thing with market options is I need to level set a little bit for you because we use terminology and I want to make sure that we are all on the same page. When we talk about gaming accessories there are three key segments. There is the console gaming segment, which over and above the gamepads that come with consoles into things like steering wheels guitars, microphones, drums boxing gloves a whole bunch of stuff but all of that is on the console gaming peripherals area.
In the middle what you see is core PC gaming products. These are the must have products for any hardcore serious PC gamer. That includes the gaming mouse, the gaming keyboard and the gaming headsets and then on the other end we see other PC gaming peripherals such as joysticks but it also includes gaming pads, it includes special eyewear for gaming, a whole bunch of peripherals.
For us the focus is the strategic focus is on PC gaming, the core PC gaming, what you see in the middle, gaming mice, keyboards and headsets. Everything else in this space is opportunistic. So as opportunities come along we will evaluate them but where we definitely want to win, day in day out right in the middle and the reason for that is pretty simple; core PC gaming has a CAGR of 28% of (inaudible) players.
This product category is growing dramatically and it is growing dramatically for a number of different reasons. The first one is that PC gaming has some inherent advantages versus console gaming. So lets us just go through what the inherent advantages are and why PC gaming and PC gaming accessories in turn are growing.
First of all PC gaming has moved to a free to play model. Some people call it the freemium model where your initial interactions with the game is absolutely free and once you get engaged and emerged in the game, what you are actually paying for are extra levels, are extra characters, are extra abilities for your characters. And so this free to play model has turned out to be a huge win-win for gamers and for game developers and also for us.
The reason for the big win for game developers is because (inaudible), well what they found is that our freemium model actually generates more revenue for them than the pure pay-to-play model. That is the win for game developers.
For gamers its win because it gives them the advantage to try a full bunch of different games before we get immersed in something and for us it is very good because it is growing the (inaudible) of a gamer feel expanded.
So field play has essentially engaged the whole PC gaming environment. PC gaming has an open ecosystem which means that you don’t have license from anyone, you don’t have to get approvals from anyone, which has brought in thousands of independent small developers that continue raising the bar of what PC gaming should be about.
PC gaming is ready for all genres. My favorite genres, which are real time strategy games and turn based strategy games really do not play well on consoles. They play extraordinarily well on PCs. So there is that advantage.
Thousands of players can play simultaneously. Most of you are familiar with the massively multi-player online games, where there are literally servers all over the world connecting people, allowing them to play with each other. This has also been the start of the revolution that we now call e-sports. E-sports is the world’s fastest growing sports and we will talk more about that, but that has come from this PC model, from this PC gaming model.
And finally PC gaming has a stable and active base. On consoles what we see is that console peripherals and console games are cyclical and they are based on when a new console introduced. PC gaming and PC gaming accessories are fairly stable and they are not linked to PCs. So what you see on this slide, the red bar is PC shipments year-over-year in terms of dollar growth. So dollar growth year-over-year.
The while bars are PC gaming accessories year-over-year dollar growth. And what you see is basically there is no co-relation between PC gaming accessories and PC sales. What we find is that there is actually a much greater co-relation with triple A game titles. So when the big must have titles come up we see a bump up in PC gaming accessories and it really has nothing to do with PCs.
The other factor that is also important in here is that a lot of hardcore gamers actually build their own rigs or they upgrade their rigs. They put in a new video card, they put in a new sound card, they actually put in a new motherboard and that's how they stay up to speed with their gaming equipment. So there is an independence over here, and a dependence on triple A games.
Sadly a couple of years ago we made the strategic decision to de-emphasize PC gaming and as a result we lost about 15 share points over the course of three years. And I will tell you as a lifelong hardcore PC gamer myself, this literally makes me weep. And it is something that we absolutely have to and will fix.
There are three key factors that are driving this. The first one is that we really haven’t had any meaningful innovation, which makes sense since we de-emphasized this whole category. Logitech was the key driver of PC gaming peripherals for a very long time. We understood what a gaming sensor was about. We understood that a gaming sensor needed to be very responsive to speed and movement, much more so than a productivity sensor. And we introduced the first gaming sensors.
We understood that the actions per minute, this is the number of clicks that a gaming mouse or a gaming keyboard go through are in the hundreds per minute, and therefore the durability of the switches has to be far greater than regular mice and keyboards. We introduced the first LCDs into keyboards and the list of innovation goes on and on, and then it sort of just stopped. So that's been one of our issues.
The second one is that we have had big portfolio holes. I will give you one example. In headsets we only have been selling headsets over a $100. So as young gamers have been coming into the category, they have had no openings, price point, gaming headset to go to. And that has obviously caused an issue for us. We’ve now plugged that hole. We have got two headsets we have just introduced that now cover-up that spread but we have got other holes to fill and the plan is to fill those.
And then finally we were unengaged in the PC gaming community. A lot of PC gamers felt that we had abandoned them, that we had actually left the business which I guess was partially true. But we are back and we are already hard at work in turning all of these factors around.
When I look at these three factors, none of these really daunt me because I think we are really well-positioned to address all three of these things. The fact is that if you look at the top ten gaming markets and these top ten markets have gone for about 70% of PC gaming accessory sales. We are number one or number two already in six out of 10 and we have a presence in the other four.
So we already have an on-ground game, an on-ground presence to build on. That’s a greatest starting point. We also have unparalleled R&D capabilities. We have been doing gaming mice sensor development for over 20 years, and when you think about a gaming sensor and I'm going to speak a lot about gaming sensors. It’s not just about the hardware. It’s not just about the length. It’s really about the algorithms that convert all that information into action. And over 20 years Logitech’s proprietary algorithm are really unsurpassed by anyone.
So when a gamer has their mouse and they are taking it at flying speed on an x-axis, we don’t lose even a milli-percent of accuracy. That’s what a gaming sensor should do, and we have that. We got testing that exceeds the component vendor’s capabilities. Our mice switches are tested to 20 million clicks. Our keyboard switches are tested to 50 million clicks, because we understand that’s what it takes to make a great gaming mouse and great gaming keyboard. Not many competitors can actually claim that.
We have onsite RF testing chambers to make sure that our wireless capability is unsurpassed. That’s one of the reasons the G700S switches are wired wireless and treats one of our best-selling gaming mice. It’s actually one of the best-selling gaming mice in the world.
So when you go from wired to wireless you have zero, and I repeat this, zero loss in report rate. There is no difference in how that mouse reacts whether it’s wired or wireless. This is something that was almost impossible to imagine a couple of years ago and we have accomplished it because of our wireless capabilities.
And then finally we've got onsite anechoic chambers that help validate our audio designs. So if you are gamer and you got your gaming headsets on, it’s absolutely critical that that sniper that is behind you, that’s outside your peripheral vision, that you hear that sniper creeping up and that’s why the audio drivers become absolutely critical. And these anechoic chambers really help us make sure that you can actually have 360 degree sound. We will talk more about our music capabilities in the next section, but all these things really add up.
Now the combination of being leaders in the category for lots of years and, the capabilities a lot of gamers are aware of has actually been a good thing. What this chart shows is consideration. So the blue bar is Logitech and the green bar is our nearest competitor.
So the question that we asked gamers as they set out on their purchase journey was at the beginning your journey which brand are in your consideration set and what you see over here is Logitech was actually extremely high in the consideration set. So that’s really, really start.
Now unfortunately as they continue their purchase journey we lose them and we lose them for the same three reasons that I’ve talked about. When they start the purchase process they don’t see the innovation from us, they see the portfolio holds and they don’t see us engaged in the PC gaming community like we should be and so we lose the sale. All of those things absolutely will be addressed and the way to address them is by being laser focused against the hardcore gamer.
So let’s talk about the hardcore gamer little bit. We did some research about a year ago to figure out just what’s the total addressable market over here, how many hardcore gamers exist and I bet if I was to poll all of you, you would think that hardcore gamers are a small niche group of consumers.
When we did this research we defined a hardcore as someone who played hardcore games. So these are role playing games, first-person shooters, and played them at least 15 hours a week right. So that was the definition.
And what we found was that in many key markets, in fact in almost all developed markets about of third of adults and by adult it’s 13 to 54, so about third of teens and adults are hardcore gamers by that definition. They play hardcore items more than 15 hours a week. It’s a big market and probably a part of that it’s a growing segment of girls and women who are entering hardcore gaming.
Now, as you look at this number, the other thing that sort of strikes us is that, forget about even brining a new gamer to this existing base, we haven’t even fully penetrated this base as yet. There is a lot of data on this slide, so let me orient you a little bit. Each of the pies that you see are hardcore gamers in the four different countries in the U.S., Germany, Russia, and China.
The blue slices of pie are those hardcore gamers that already own a PC gaming accessory. The grey slice are those that intend to get a PC gaming accessory and the while slice are those that have not decided as yet to get a PC gaming accessory.
So now if you think about all these hardcore gamers, a third of the population, more than 50% of them have not jumped into buying a specialty PC gaming accessory. That’s one of our objective is to convince them they need one, because they need one. It’s better for them, it’s a better gaming experience and frankly they’ll win more. So that becomes part of the strategy.
The good news is that reaching PC gamers is easier than in most categories and the reason for that is they are extremely passionate. Gaming tends to be their primary hobby which shouldn’t surprise folks. If you spending 15, 20, 25 hours on gaming, the chances are you probably don’t have time for another hobby.
They’re highly social. They actively seek those who share their passion. Gamers talk to other gamers and there is gaming language that if you were to sit and listen to, probably would not understand every second or third word. They’re highly engaged. They love that thing beta versions. They try different genres and they’re highly connected. They read gaming blogs and websites. So as a group they fairly easy to reach.
Let’s put some statistics to the core gamer. What you see over here is a breakdown by U.S., Germany, and Russia and you see on average the hardcore gamers playing 20 plus hours. Over 40% of them are young, they’re under 24 years old, so they’re going to be us for a while. They are very engaged in the number of gaming accessories they’re owned and they’re willing to spend. In fact if you look at that last column, which is average anticipated spend in the next six months, it's $290 for the U.S., 244 euros for Germany and $57 in Russia, which is obviously is a lot of rubbles in Russia.
So this is a pretty big deal. To each these highly engaged highly passionate, highly connected consumers we have to stand for something that’s meaningful, something that’s authentic, something that’s data based, something that solves real gamer problem, that enhances their experience and that in a nutshell is our Logitech G mission.
We use science to invent the most intuitive sophisticated gaming interfaces available helping any gamer, whatever their skill play better. So for us it’s really about the science. It’s about real performance real technology, not just flashing lights and a coat of paints.
In two words, its science wins. This isn’t a selling line. This is not a marketing campaign. This is a set of beliefs that everybody that works in the gaming businesses Logitech truly has and its build into our products. It's also built into how we go to market and how we communicate with gamers.
We really believe, I just want to emphasize this. We really believe that when science wins, gamers win. So, now that I have sort of laid out the mission, the question is how do we take that mission and bring it to life; how do we make this real for gamers. And it starts to the engaging with the PC gaming community.
So, we are off to a pretty good start, we've launched worldwide our new Logitech G gaming website and it is live and we're getting some really positive early results. So far, we have already seen an increase of 30% in conversion levels. That is people that are coming to our website and immediately buying from on the spot. That's gone up by 30%.
Now that's the sort of a pretty long road, we've got a lot of work to do. But the early indications are positive. What's going to continue to drive this momentum is having a strong follower base. And what you see over here is that our fan base has grown 7.5 times in the last one year. So 750%. And people actively talking about the brand has grown 650%. So that's going to be extremely-extremely helpful as we build this brand and build the momentum.
The way to keep this going is to be where gamers are. So that means in every key geography being where the key championships are, being at all the key LAN events, being at all the gaming events and so in the U.S., in Europe, in Asia, we will be covering all these events because gamers are going to see that Logitech is in it to be there for them.
E-sports is absolutely critical as well. It’s the fastest growing sport in the world as I mentioned earlier. Some of the statistics over here surprised both. 8 million people viewed the League of Legend's finals last year. Almost 5 million viewers of DotA, which is the Defense of the Ancient's finals and 3.5 million viewers of Heroes of Newerth finals and this was streaming online, this was on TV in several countries and it was in person. The League of Legend's finals happened in Los Angeles at the STAPLES Center and it was absolutely packed. It was like in a NBA championship game, it was just absolutely amazing to watch.
So with our relationships with these key E-sports events, we’re using this to engage with PC gamers but we're also using it to help us at retail. The strategy for us is to shift gradually away from price promotions and more towards value added promotions. And this value added promotions are about providing gamers with some of the premium items, some of the premium access that they so crave with this game titles.
Now engaging with PC gamers would be insufficient if we didn’t have a really strong product and retail strategy. So let me talk briefly about that. For our gaming mice, our strategy is to deliver gaming immersion through precision and natural augmentation.
We've talked a lot about precision, about gaming senses and how important those are. Let me talk a little bit about augmentation. So a gaming mouse really becomes an extension of your hand and we've done a lot of infrared studies to understand what that means.
When you look at your hand and you look at the interaction with the mouse, you will find that there are three key zones. It is the palm, your trigger fingers and your thumb. And so we have now built into our mice, the understanding of that interaction. See your palm is constantly on your mouse and if you are playing for eight or nine hours, it gets really sticky and uncomfortable. So the palm areas of all our new mice have a hydrophobic material that helps prevent that.
The trigger fingers are constantly pressing on the switches, on the keyboard. What that fosters (ph) is build up a fingerprint grind, which overtime is going to actually result in how effectively the switches work. So to avoid that, we've got fingerprint resistant material on the trigger fingers on our mice.
And then finally your thumb. Where your thumb goes after the critical as well. If your thumb slips accidently as you going for that crucial shot, you're going to miss the shot or worse still die in the level and have to start all over again which any gamer knows is quite painful. So the thumb area is all about maintaining a comfortable grip that makes sure that it doesn’t accidently slip.
So this understanding of how does the hand interact with the mouse, how does the hand interact with the keyboards is a key part of our strategy moving forward. Many of you saw our product display and you may have noticed the different zones on the gaming mice. Those zones reflect what I just talked about.
On the keyboards, the strategy is to delight true gamers with relentless certainty of control and what we mean by that, it’s more than words. What we mean by that is there are gaming situations in which you need to press five, six keys simultaneously to get the action that you’re looking for. So if in any game you’re running and ducking as other people are firing at you and you have to reload your weapon and you have fire back that could be four or five different buttons that are pressed simultaneously.
We call that rollover. It is critical that the keyboard recognizes all four or five of these buttons simultaneously. If it misses even one, you’re dead. So, we have now gotten the science of rollover point where our G7s and plus keyboard and 26 key rollover. You can literally press 26 keys simultaneously and get a result from every one of those 26 keys.
The next thing over here is personally configurable controls and commands. Well, if you don’t want to press 26 keys simultaneously or even five keys, we have macros, we have shortcuts all built into our keyboards. You can just program and one button get that same effect.
And finally, enhanced interactive information. So, if you saw our gaming keyboards, you saw the LCD display on there. That LCD display provides invaluable information back to the gamer. So, on the most basic level gamers are looking at things like how is my CPU doing, how is my RAM doing, is my system heating up? All of that information is coming to you from that LCD screen.
But over and above that we are integrated in over 200 games and in these games you are getting additional information about yourself, about your teammates, about what’s happening at that level and so literally we’ve turned the keyboard into a cockpit and that is really the vision for keyboards moving forward and then you’ll see much more of that in the next generation of keyboards.
On headsets, comfort is absolutely critical. Again, you’re wearing these headsets for eight, nine, 10 hours and the problems we hear from gamers is chafing of the ears, just getting uncomfortable, it get hot, it gets grimy and the other thing that happens is that if you play for eight or nine hours every second or so day, can you imagine the dirt and the grime that builds up on the ear cups, it’s not very pretty.
So, in the new G230 and G430 headsets we actually use athletic material that is highly breathable, high comfortable and not only that but the ear cups actually detach and so you can literally hand wash them and put them right back on. So you have a new headset anytime you want. So, this is a new innovation that is in those two headsets.
Audio quality is absolutely critical. I talked a little about it. I’m actually not going to talk more about it because Azmat who comes after me will be sharing some of our amazing music engineering capability. So, hold on to that.
So, that’s our strategy for core headsets, mice and keyboards. This science is built into the eight new products that we've launched worldwide in April and May and this is really just the beginning. There is much more coming. We’ll have some announcements over the holiday season where we’re really looking to unlock the potential of what was thought impossible previously.
We have to solve gamer problems, we have to bring back cutting-edge innovation into this category. Otherwise we won’t be able to live up to the mantra of science wins and we plan to live up to that mantra every single day.
Now, along with the products, the face of the brand is also important. A brand that believes that science wins is basically saying, you know what’s really important, what’s really important is what’s under the hood and that’s what the new Logitech G packaging visualizes.
What’s really important is under the hood and in testing, we’ve tested this packing extensively. The blue bar is Logitech G, the new packaging and the green bar is our nearest competitor. And what you see over here is that gamers have responded really well to the new packaging, especially younger gamers.
So, looks like brand that is cutting-edge, we get a 63%, our competitor gets 19%. Will improve my gaming experience, we get a 53%, our competitor gets 25%. Understands what gamers want, we get a 53% our competitor gets 22%.
We’re on to something here. So we’re feeling that there is a really nice foundation to build on. The next step is to make sure that our retail presence, our online presence is spot on. And so our sales teams around the world are working hard with all our major customers to make sure that we have got leadership shelf base, we have got consistent and powerful brand blocks.
I was just in Beijing a couple of days ago and saw the first of our brand blocks and it is truly-truly impressive in China; full portfolio assortments and in online we need to make sure we have got all the contents that gamers are looking for, videos, tutorials, guide, specs, all of that. So when you got to an online retailer you will see a G shopping definition with all this information on there.
And then a focus on value-added promotions. So I talked about how our strategy start shifting away from by price promotions. Some of our partners for the launch are fairly impressive, actually they are very impressive, being modest, AAA titles. Neverwinter Nights, CS:GO, League of Legends, of course Hawken, Heroes of Newerth and the list goes on. The list actually goes on to a second and third page and we have just been fairly selective about what we've put on this page. So all of this becomes the basis by which we not only talks to gamers, not only provide information about our products but also promote at the retail and online level.
Now one last thought before I wrap up. I am sure this is on many of your minds, which is there are two major consoles that are going to be introduced this holiday season and what impact are they going to have on PC games, PC gaming and obviously our PC gaming accessories business.
The short answers I don’t know but what we have found historically is that PC gaming is directly correlated to big AAA PC game titles. And so we have looked at what’s coming up in Q3, and Q4 fiscal year 14 which is the holiday season and the first quarter of the next calendar year which is when then consoles will be around. And the titles are actually mind-blowing.
So, we finally get Elder Scrolls online. World of Tanks is launching World of Warplanes and World of Warships, WildStar which I cannot wait to play, Star Citizen which is going to be huge. Finally we have get the sequel to Total War Rome. It’s been much, much awaited. Command & Conquer which firstly and frankly I have been playing for over 15 years and cannot wait for the new Command & Conquer and the list goes on.
There is such a strong-strong group of AAA titles coming out in Q3 and Q4 that I am going to just figure out how I indulge my own personal hobby still get my job done. So I think it’s pretty encouraging over here. We will see how the market plays out.
In summary, we are very excited about gaming. It’s a large and growing global markets that’s driven by hardcore enthusiasts and we have unique advantages in the space. We have every right to win in this space. We have the technical knowhow, we have our own manufacturing, and we have a great global distribution footprint.
We have just re-launched the brand with high appeal to younger gamers. We have refreshed and upgraded our portfolio and there is much more innovation to come and we are connecting with gamers. We are connecting with them through E-sports, with our unique sponsorship of League of Legends and other big E-sports events, at big gaming events such as DreamHack and PAX. So it’s a very-very exciting time and frankly we just gotten started. The future is really bright.
I thank you for your attention and I would like to introduce Azmat Ali from the music business group.
Thanks Ehtisham. Good morning. I'm obviously on a different time zone. I am Azmat Ali. I am going to talk with you guys with you guys about the music business and share some of the learning in the music business. So I am just going to share some of the learnings that we have acquired over the last 12 months in the music business. You know what they say you can research a market as much as you like, you only learn about it when you a launch your product and put it in the marketplace and we learnt a ton over the last 12 months. So we will share that with you.
And then I will talk about what the market size and opportunity is and how we have got to that opportunity and from there we will talk about what we are doing specifically to address that opportunity.
One of the things that you will notice and I am going to make a plug for my product, shamelessly plugging, everything around here you are hearing is being transmitted through the speaker. So if you look around there is four here, two here and there is two back there that are actually doing the web conference. Everything that you are hearing is coming off this remarkable product and I am so excited, I haven’t been excited about a product since the first product I launched as I am about this one. This is going to be. I'll will talk more about this as we go through the presentation.
But let us get to the learnings first. So first thing that we all know in this marketplace to succeed in the music space we need to have an authentic music brand. Ultimate Ears, is the learning that we had over the last 12 months it is Ultimate Ears is an authentic music brand. Not only that, it has significant equity amongst the most discerning professional musicians in the world. So we have a really strong brand and it is really respected in most professional musicians.
So one of the things we are going to do, the first thing I want to share with you that we are going to is we are going to drop Logitech in front of Logitech UE and Ultimate Ears we will be the brand that we are going to be using for the music business as we move forward. Okay.
So the second thing that we have learned is this mobile wireless speaker market. When we started looking at this market and we started looking at where the trends are, where this market is going, we started looking at the mobile wireless speaker market has a significant growth opportunity and when we looked at this growth opportunity we saw that this market is growing rapidly and while there is a lot of people playing in this market, it's very fragmented, nobody has done anything remarkable to take a leadership position and we are about to do something very, very remarkable in this marketplace.
The other great thing that we did and this is incredible, I am not sure if you understand or I am not sure if you know about the UE 900. Some of you might have seen it, some of you may even own it. The UE 900 is our premium universal earphone and that was developed from the technology that goes into the custom in ear monitors.
We took that technology, we took all the knowledge. We were able to take it to a point where we could offer that technology at a retail price point to people looking for premium earphone. Every single market that we have introduced that product in has had incredible reviews. Not only that. The other thing that is really exciting is the market where we launched those products, where there is audio files and people really care about premium earphones, we are starting to gain market share and show some leadership. It is an awesome product, we are really well positioned in this premium space and we believe we can win in that space.
And finally another learning and sometimes you got to take the good learnings and bad learnings and make good decisions, this is one of the things we have we have learnt around the headphone. I said the mobile wireless speaker market is wide open, it's growing very fast.
The headphone market is at the other end of the spectrum. The headphone market is at a point where it is fairly mature. There is a couple of big entrenched players and I think I was talking to somebody over the break and she said hey I have got a UE but you know what people really want to wear a brand that's fashionable. You have to figure out how to do fashion marketing.
That is not something that Ultimate Ears is about. Ultimate Ears is about performance and quality. And to compete in this headphone market where you have to rely on fashion and brand marketing, there is just not a space for them to play on, play in a significant way. So we will be scaling back some of the investments in those spaces. Okay.
So from this new learnings we kind of devised what is our go forward path let us sharpen up our strategy a little bit and figure out how we are going to forward. We are going to play in two spaces, two very important segments of the mobile music market. Number one the fastest growing segment which is mobile wireless speakers and number two the highly profitable premium earphone market.
So those are two markets we are going to play. One is the market we have incredible capability we bring to bear and we will talk about that. The other one is basically an adjacency to the custom in ear monitors. So really strong opportunities for us that we can build on, okay.
Before I get into kind of talk about the products let us look at the market size and how we are approaching the sizing of the market. So please get this. So when you look at the platform growth and Bracken mentioned smartphones and the growth in smartphones, this is the platform of choice, this is the platform on which we are basing our growth and this is a significant platform. It is growing for us every single region in the world, it is growing at very high double digits almost 50% CAGR and there is going to about according to IDC and number of other sources, in 2016 there is going to be 1.4 billion smartphones connected.
So you look at that as a platform of growth, that's pretty significant. So let's take it to another level, what is going on in this market. What are some of the things that we think are going to be the drivers. If this is the platform for growth what are the drivers. The first thing we look at is when this device became available in smartphone I am not sure about all of you guys but one thing I started noticing was that mobile music services started to take off and proliferate.
About two years ago and, maybe 2.5 years ago there was one predominant music service in the market that is called iTunes. Today if you look at the market there is Spotify, there is Pandora, there is iTunes and just last week I believe Google made the announcement that they are going to get into this music services space as well.
So when you look at this kind of trends you look at the trends around smartphones, the growth in the platform you look at what is happening around how this platform is being used; this is the platform, this is the product that’s with you all the time and you look at the services that are available.
Since I switched to one of these services, I don’t believe I have ever purchased an iTunes song. I have access to every single song that I need, any time I need it, anywhere I need it, anyhow I need it, through these services. That’s pretty remarkable and that’s what we believe is going to be a significant driver and that will significantly transform the way people consume music.
So you have got this really incredible growth platform, you have got some really incredible trends in terms of transformational kind of moves around how music is going to get consumed. Then the question comes, then you’ve got music on here. You can listen to it through your earphone. That’s great. How do you listen to it out loud? How do you consume music socially in a way that everyone around you can enjoy as well?
And that’s where you have got some of the developing technologies like Bluetooth where it’s going to allow you to easily connect a phone directly to one of the speakers and play music directly to it. Now when you look at Bluetooth, there is no other company in the world I believe that better positioned to take advantage of Bluetooth technology. We are not starting in this space. We have been in this space. We were leaders in looking at Bluetooth and levying that forward. We are going to remain leaders and you are going to see some of the cool things we have done with the knowledge we have that is very unique on this product. I will demo it at the end.
So those are the trends, when you look at that, what does that all add up to? It’s very simple. It adds up to $12 billion of music, accessories, opportunity; so $12 billion. On top of that you look at this, the market that we’ve chosen to play in, highly profitable earphones and the fastest growing segment of this market which is wireless speakers are 63% CAGR. So that’s pretty remarkable. So we have a significant opportunity and we have all the capability to move forward around the space.
Let’s talk about the competition. Everybody wants to know, okay, so how you are going to compete, there is lots of players out there. We look at this competition, we look at the marketplace and there is two key vectors of innovation if you look at the marketplace. There is a vector around lifestyle and brand, and there is another vector around acoustic performance. You look at this grid on the bottom left hand quadrant of this grid, you have got the brand that are really kind of take advantage of this great market through price leadership.
So what do these brands do? They go out there, they look at the components that are available in the marketplace, they will integrate them as quickly as and cheaply as possible, and they are going to go out there at the lowest price point. These are the price leaders if you like.
Then there are other brands who actually do some work around design. They actually spend considerable amount of thought going into how we are going to design the product and then once they have got the design, they will go out to similar type of manufacturers that are some of these price leaders going out too and look at the technology that they can get and the components that they can get to fit that design.
Once they have done that, then they spend heavily on marketing. So this is where you have the endorsement deals with the artists, where you have the endorsement deals with some of the actors and people like that. So this is really where you have got high investment in endorsement deals, investment in design and really, these competitors compete around that space.
In the bottom, right hand quadrant of this grid, you have got the traditional audio brands. These brands have built, their whole kind of heritage is built on the acoustic performance. They are very strong acoustically. Now these guys are seeing a significant growth in this market and they are saying we want to move in this marketplace. So they are moving across with a lot of capability around acoustic performance. However, that’s not all that's going to take to win in this space. You need to be able to step into this space and be able to deliver incredible customer experience.
An acoustic brand in the past, that's just been a speaker that’s been wired to the back of a stereo, does not need to have that incredible customer experience because it's just a wireless connection is up and you just listen to it. So they do focus on incredible acoustics but are unable to step into this other space around design, usability and this whole thing about sound and design quality.
We believe there is a space out there that Ultimate Ear can play in, and that space is the space where obviously acoustic performance, it’s very important, we have some of the best acoustic engineers on our team, we have some of the best acoustic facilities in the world, and with those and the design capability we have, you can see what we are capable of doing when you look at some of these products. So that’s where we believe we can compete.
So let’s talk about the Ultimate Ears strategy. I am not sure how many people know Ultimate Ears very well though intimately. Let me share a little video with you guys of the brand and the heritage of the brand, where does Ultimate Ears come from.
Okay, I think we had a real technical glitch around the video there but just moving, talk a little bit about the thing. The heritage that we have in music is deep. We started at the back of tour van with a sound engineer. So we have deep roots in both music culture and technology. We have accesses to some of the top performing artists in the world. When you look at artists like Mumford & Sons, Cee Lo, I can go on name on few (inaudible) because there few week name and we don’t actually go out there and do big endorsement deals. But there are incredible artists out there that are using our products. They rely on our products when it matters the most, which is when you stand up on stage and perform in front of thousands of people, you need technology and you need capability that’s going to be there and that’s what we’re about.
Through these artists we formed incredible relationship with the sound engineers. So these sound engineers are working with us to help us understand and help us develop the best technology out there. So over 70% of the world’s top performing artists are Ultimate Ears artists. That’s pretty significant. Okay.
Now when you combine that knowledge knowhow in that heritage with some of the world class research and development capabilities that we have around Logitech, that’s when you’re able to deliver this perfect combination of quality, performance, and convenience and that’s what Logitech Ultimate Ears is about. Okay.
So what we’re going do around the earphone? Let’s talk about the earphone strategy. We are going to plan the premium earphone market and we will take a leadership position in that market. We are going to grow our earphone by technology differentiation. We believe we have significant technology differentiation that we can bring to bear this market. It’s going to be leveraged from our UE heritage.
We will establish the UE 900 as the reference product in this phase. It's ready leading out there. We believe there's things we’re going to be doing to have product that’s going to take it even further out ahead of the competition and we will lead in the highly profitable premium earphone segment of the earphone category.
In addition to that we’re doing something really interesting. So little trial. We started this off in Shanghai I believe in March. We launched the first UE retail store and we have a very interesting model there and this is our first kind of trial into seeing if we can take the custom in-ear monitors. We know a lot of people when we talk them about this capability, I wish I could get one of those, where do I get one of those, how do I get one of those. So this is our opportunity to go there and test how big opportunity this could be and move the custom in-ear monitors out into a wider consumer base if you like.
In addition to that that’s going to give a real opportunity to increase the brand awareness of UE as well and Ultimate Ears. So this is going to really important. It’s a trial we’ve got one store and we will be talking about other things we’re doing in phase as well.
In addition to that we’re laying some really solid foundations and selectively looking at how we’re going to extend this product line and expand it for growth and again I just want to remind you we’re going to stay in the highly profitable premium segment when it comes to earphones.
Let’s talk about mobile wireless speakers. This is a really interesting category, it's growing very fast. We will be leaders in this marketplace. We created an incredible product. Two days ago we announced this product and it was amazing because deep down at heart I’m product guy, I love product and I just love it when you launch the product and the feeling okay, how is this going to be received in the marketplace, and I was particularly excited about this one. I think I was talking with Guerrino, and I said, I’ve only been excited about one of the launch more than this one, which was first one and I think this one now I’m excited even more about.
So my first launch over 22 years ago was pretty exciting. This was the one that’s been the most exciting and the reason why this is going to be most exciting you’ll see in a minute but this is a real breakthrough product. So in this space we have the technology, we have the capability, we will set a new standard when it comes to mobile wireless speakers and as we do that we will redefine how people listen to music, where they listen to it and how it’s heard out loud. So we’re moving forward. One of the marketing campaigns we’ll be talking about as we launch this product is make music social and that's really about allowing people to be able to listen to music out loud wherever they are.
So UE Boom, the world’s first social music player that sounds so awesome. I can say it every time. All right, so what’s so cool about this product? Let me tell you first this product was conceived after considerable evaluation of what the opportunity is, looking at what consumers want in this space and how they're starting to consume music. When you look at the demographic we're targeting, it’s the kind of the demographic that you see in this photography here, the young 18-24 and stretching out to 34 year olds
They have a really active lifestyle. They go all over the place and as these people grew up, most of them don't even know what a CD player is, believe it or not. They grew up on the internet. Their access to music is downloading music from the internet through YouTube or whatever are the accesses that have. They only know what the iPod, they don’t even know what an MP3 player is, the iPod is kind of the space that they grew up it. So this is a really interesting segment for us and when we looked at this segment, we knew that we had really developed capabilities that was incredible technology that would appeal to them.
But then you had to stand up to how they live their life. So that's why we believe with this product, we will set a new reference with wireless speaker and from the ground up it's been designed to be life proof. And I will talk a little bit more about that. We're going to run one more video and let's see if this works.
Okay obviously some technical difficulty is there and I will be happy to show you guys a video afterwards as well. But it is a pretty exciting product. Let's talk about the world's first social music player, what does it take to be the world's first social music player. Well when we started talking to people about this, they said that the first thing we want this product to do is we want this to have no side, it should have no favorites. So when you put this in a social group, no matter where I stand, what angle I am at with this speaker I want to hear incredible sound rich sound and I want to hear it out loud. So this delivers 360 degree sound.
So its music from every angle and its incredible acoustics. You can hear it right here, where it's powering this conference, in addition to that the music has a (inaudible) that's just unbelievable. The other thing that said was, well look you guys develop products in labs, we live life; us in the real world. One day I am cycling, the other day I am hiking, I may be going out on rafting, I might be doing all these things. I want a product that I don’t have to worry about putting in some kind of bagging, concealing it and figuring out how this is going to live the life I want to live. I want to be able to live that life without me having to worry about it.
And that's where we said, let's go out and think of a product that's going to be able to do that. We went out then, we searched the world for this skin. We call it the acoustic skin. We went all around the world looking for this acoustic skin. There is a couple of people in here who talked to me earlier who know the answer to this question but I am going to throw it out there. Where you think we found the acoustic skin? Which country in the world?
I will let you know. The one country in the world where we found the only skin that could stand up to being life resistant and allow us the acoustic qualities that you want from the speaker was this country right here, Switzerland.
So, the acoustic skin is actually sourced from a supplier right here, it's actually developed with a supplier right here and we worked very closely with them. So it’s a really exciting kind of thing for us where we gone out there, searched for this skin and got exactly what we wanted right here in Switzerland.
So that's kind of cool. So you can take it out there. It's life resistant, which means it's water resistant, stain resistant and I'll do some demos for you guys later on with ketchup. I'll let you guys spray ketchup all over it and I'll wash it off and the music will still be playing. We will get to that later. That's all the fun and games.
The other cool thing that people tell is you know what, sometimes we are working with; we are out there with five or six people and this is great you know but what if we're out there with 30, 40 people. I want to be able to hear real loud music and have a big party with 30, 40 people. So we went out there and we said okay, how do we address that?
So what we say is, we can double up these speakers and that's a unique feature, nobody can do that, the way we do it and that's the heritage that we have and the knowledge we have with dealing with wireless technology in Bluetooth. We can actually take two of these speakers, pair them up and now you can either have both of them playing stereo and double the sound or you can find left and right stereo. And it's actually pretty incredible when you hear that.
So that's some incredible innovation right there. This is kind of innovation in the cylinder which is remarkable and the amount of innovation that's gone into this is just crazy. I get really excited talking about it as you can guys can tell.
The other thing is they say, well you know what, we live our life 24/7 and most of these things, we have to take out, they we have to keep on charging them. After a two, three, four hours, we have to charge them up and it’s just a pain and a real hassle.
So, what we said is we’re going to go out there and we’re going to give you incredible crystal quality, we’re going to make it life resistant so it can be water resistant and stain resistant and at the same time we’re going to give you 15 hours of battery life. That’s pretty incredible. That’s over 30% better than anybody else out there in the market today and I’m sure they’re going trying and catch us up, by that time we’ll have moved on to something else.
So, this is the type of innovation that exists inside of Logitech. We did not go out and find suppliers and sources to create the innovation. This innovation is sitting inside of Logitech, the design innovation is inside Logitech, the technology innovation is right inside Logitech and this is the excitement that Bracken is starting to see when he is talking about he sees some incredible stuff that’s coming out and this is one of those things that I believe is pretty incredible.
So, with that let's talk about how we’re going to market this product. Now somebody over the break said to be me, yes, but for you to market is going to be really expensive to do marketing. How you guys are going to do marketing on this thing? Well, the first thing is we’re going to get really intelligent, how we do marketing. We’re going to have to go figure out how to market to this audience. We know this audience doesn’t necessarily come to us, we need to go to them.
Then how do we go them? Well, we can go them on our own and present what we have and tell them how cool this is. That’s going to work, that’s going to cost a lot money in terms of marketing. So, we’ve gotten real clever how we are doing marketing. We’re working with partners that have incredible reach into this demographic. So, one of the partners we’re working within the U.S. in a combi network that’s just been launched on YouTube, it's called JASH. We’re working with them and through them we’re able to get incredible reach, very cost effectively and target people online where they are congregating in these communities. So, that’s the first how we're going to do this.
How we’re going to do this outside of the U.S., you ask? So, let me give you an example how we’re doing this right here in Switzerland. In Switzerland, we’re working with Joyce. Some of you may know Joyce it’s a channel that’s been developed specifically targeting this demographic around music and lifestyle and they’ve got some incredible capacities when I was meeting with them yesterday and we believe we’re going to have ability to partner with them to get to this demographic. So, once again getting smart how we’re going to use our marketing dollars and make every dollar count 10x at least. So, that’s kind of some more stuff we’re going to be doing around this.
I'd actually you ask you guys, I’m not going to show the video here because it’s a very interesting campaign, it’s very different to what we do, what we’ve done in the past. So, I’d welcome if any of you have a chance to go out ultimateears.com and check out this social music experiment and check out this social music campaign and you’ll see what we’re doing there.
So, not only are we going to be leveraging partners who can reach to this audience. The other thing we’re going to do is we’re going to go out to our rich base of performing artists. We have an incredible base of performing artists that we can reach out to and we’ll be working with them, not through endorsements but asking them to become social influences for our products.
So, they will be doing some social music experiments and I’m not going to go into explaining what a social music experiment is here, check it out online, ultimateears.com, you’ll know all about it there and they will doing some of these experiments and you'll be seeing roll out. We’ve got a whole bunch of experiments that are rolling out over the next six to 12 weeks.
And then finally around, it’s great to do this online but people want to be able to listen to this product. It’s really amazing. I’m going to digress for a minute. When we started doing testing of this product, we used to go into these places where these people would gather and we put the product down and we watch them and it was amazing because they just couldn’t wait to put their hands on it. So, we’re waiting and they put their hands on it, they touch it and feel it and you’d feel nothing like speaker and they get excited. Then we would play music and that get even excited out of this thing.
So, these people want to really touch, feel and experience the product. So, we’re going to have a marketing campaign where we will be at major music festivals and events driving awareness of this product. One of the big events in the U.S. we’re going to be at is Bonnaroo and there will be other events and festivals we’ll be announcing in Europe as well.
How we’re going to show up at these places? We can show up and say, hey here's a Boom, come and test it, it’s pretty cool or we can do something that’s going to be exciting, that’s going to draw the audience in. Let me introduce you to the UE Boombus. This is an actual bus that’s being created right now and it will be debuted at Bonnaroo in Manchester, Tennessee on June 14th.
So, we’re going to have this bus, it’s going to be driving around the west coast of the USA and we’ll be actually having parties around this bus, we’ll have people engaging with the product, we’ll actually be able to sell the product from the back of this bus as well. So, we have some incredible capabilities. Again when you look at this marketing campaign, I want you to think about cost effectively targeting an audience going where they are and making every dollar count at least 10 times.
So, that’s the type of campaign we are running here, that’s the type of campaign these people are looking for. Tut they want authentic marketing where they can engage rather than marketing where we push and then they kind of sit there and say oh well, just another brand. So that’s really cool.
Let me give you a demo of this product, I am going to finish with a demo and then I will handover to Mike. So let me get this to work and so we will turn this on. I will show you some of the capabilities. So I turn this on, I got my Bluetooth. Your Boom is connected. Now they told me to be careful with some of the songs I play here. So I will go my sanitized playlist.
So it’s really cool. We have a little app that comes with this product as well. It works both in iOS and Android operating systems and you can see that straightway it’s a pink Boom and you can recognize this is a Boom, right here. And the really cool think I love the feature, when you look at this product, you can actually double it up right here from the app. So if you have two, you can connect to then very easily.
Let me turn it down, so it’s not competing with me. So I go into the double up, it shows up as two Booms here. Then I say the starting the doubling up so it's saying ‘hey, this is on a pairing mode, turn on the other one’, so we turn it on. And the app is saying ‘okay, let me find where this other one is right now’. It will take a few minutes here just trying to find this one. Oh it found it and it realizes the blue one, how cool is that! So now you know these two are paired up. So it’s pretty awesome. I'm going to let you guys listen this music for a minute. I need to get a drink of water.
So here it is.
So there you can see straightway how cool this product is. Not only it has got incredible acoustic that comes out of this thing but you can take it anywhere else, you can dip it in water, you can throw in swimming pool. Don’t leave it in there too long because if it sinks to the bottom, you won’t be able to hear the music but it’s a pretty awesome product from that prospective.
If you get any kind of stains, if you spill coffee, ketchup, grime on this thing, no problem, just wash it under a tap and you can wash it whilst you are still listening to your music. Really awesome product, great innovation, we are really excited to be able to bring this to the marketplace and we really excited able to take this and drive real success in the fast growing mobile speaker market.
Thank you very much for your time. I am going to handover to my colleague, Mike Culver, who is going to talk with you about tablets. I'll take my speakers off with me.
Thank you, Azmat. It's a hard act to follow. It's a pretty exciting product and I'm not going to drop water on any of my products. But I'm equally excited as Azmat is about his category to talked about the growth category of tablets for Logitech. This is possibly the largest growth opportunity for Logitech over the next few years.
So to help to understand what is mean for our business I am going to talk about how big is this market opportunity and how can Logitech win in this business. Secondly, it’s a lot about execution and speed. Bracken alluded a lot to how do we take Logitech to a new level that’s on speed and get faster and that’s critical for success in this market and I am going to show you a lot of the products we have introduced in the last 60 years that demonstrate what we were doing and we were capable of and where we are going.
Whenever we look at a category at Logitech we always start with consumer insights. 18 months ago, we did a survey of iPad owners and 70% of them globally said they love the iPad exactly as it is, don’t need anything else, it’s perfect.
We repeated the same survey 12 months later. This time only 30% of consumers said they like the iPad as it is and 70% of them this time said they want more things around the iPad to accessorize it to make it more useful in new areas, in new use cases, inside the house, outside the house, different family members.
This is changing incredibly fast as consumers all over the world begin to see what’s possible with this lightweight computing devices that is designed to do everything PCs used to do anywhere, anytime on the go.
When we looked at what consumers were actually buying when they went to accessorize their iPads, four key things showed up consistently, no matter which country. One; a cover or a folio to protect it and also make it easy to use as a stand. Number two; a keyboard to make it productive as you are using it for email as well as other activities that you are typing in. Number three; pens or styluses most often used simply for selecting individual links on the screen. And number four; earphones or ear buds to enjoy music wherever you are around the world. So dollar wise, how big is this market opportunity? One of the questions we get is yes this sounds interesting but is this really small? How big of a market is it?
For iPad alone, for our fiscal ’14 this is estimated to be a 1.4 billion globally. 70% of this is actually cases. And about 20% and the fastest growing part of the business are keyboards that connect to the iPad and pens and some stands in other areas our emerging used cases that are going to grow as these get perfected overtime.
Android is also an interesting new part of the tablet business. We estimate that's another $500 million market opportunity and looks very similar. Cases as well as keyboards being the two dominant categories and Android represents an even more productivity opportunity compared to iPad.
So combined, our current focus is on these two top categories, keyboards for tablets and cases for tablets. Keyboards between Android and iPad is a $350 million market opportunity. For context last year in our fiscal year we did $120 million in keyboards and this was all related to the iPad. In cases it is a $1.4 billion market opportunity globally and we had no revenue in that last year.
I am often asked how can we compete and why do we think we will be competitive in the case business. We have credibility as the leading manufacturers of PC keyboards in the world to be in the keyboard space. We were one year late to the iPad market and yet when we introduced the Ultrathin Keyboard one year ago, we quickly became the leader, the number one selling iPad keyboard in the world and we proved to ourselves that we could adapt the core technology from keyboards and apply it to the mobile iPad opportunity and be a leading brand in that marketplace. But cases often doesn’t have technology and it is a different business for Logitech. So why do we think we are going to be competitive? Why do we think we need to be in this business?
First reason, over half of the world’s keyboards for iPads are actually in a keyboard folio case. Consumers prefer in many cases to have two sided protection for their iPads in addition to a keyboard. Some, like our Ultrathin Keyboard because it is very thin and light and it easily makes the iPad a great productivity device. Others want more than that. They want protection and an additional ability to use it in different ways as a stand. We have to be in the case business to have the leading position in keyboard cases. So we need cases as a key ingredient.
Second when we look deeper at the case business worldwide what we quickly discovered is it is made up of competitors like Belkin and Target who are very fast to market. So they source things of the shelf and really what they are doing is being very responsive, whatever new product came to market.
The result however was a very fragmented market. There is no clear global leader in cases today. So we think with 60% of consumers actually wanting a case and no market leadership that there is an opportunity for Logitech to play a major role in this category in addition to keyboards. So our strategy for cases is twofold.
At standalone cases we are going to have premium offerings and I will share more of that in a minute. But also what we found is the awareness that keyboards even exist for iPad is still relatively low and when consumers come in to buy a case we are not only going to present them premium cases that will protect their iPads and make them look good, but we are also going to give them the opportunity to see our keyboard product in cases which will increase the overall attach rate and awareness of keyboards in the category in general.
Another thing people do not realize is we have built quite a lot of expertise over the last two years in colors that are on trend and materials that are both technologically innovative as Azmat showed with the new Boom, things that are waterproof to provide the acoustic quality he described. We are also looking at materials as you think about an iPad that ware overtime, whether it is through sunlight normal daily use as well as fashionable.
If notebooks were the true personal computer, iPads and the future smartphone, these are truly things you always have with you and are an extension of who you are and your personality. So you want to dress them up in ways that reflect what you want to be seen with.
So we worked with leading scientists as well as fashion setters in the world to understand what are the next generation. Over the next 12 months, 18 months, what are the fashion trends going on in clothing, consumer products? What are the colors that are going to be in vogue this Christmas, next spring; and we have learned what are the most important things that we need to be looking to as we design our products in the future.
So we believe this is a core competency that we not only needed, but that we think we today to compete globally in this business. So strategy for keyboards is take the success we have had with the Ultrathin Keyboard, the number one selling keyboard for iPad in the world in just 12 months, and continue to build upon that. In that portion of the market segment, today we enjoy 80% share. After being it a year late, we now have 80% share by just developing the right product that consumers want.
But half of the keyboard business, we are not even participating in because half of the consumers around the world want one with a folio as well as a keyboard. So that’s the next extension and we just introduced a couple of products in the last 30 days that I will share with you that address that market. And then finally we are going to expand into keyboard solutions for Android tablets in addition to iPad.
For tablet cases, we are looking at innovative designs, trendy colors and materials, and we've reengineered our development process as well as our supply chain to be able to get the market in the key time windows that new products from Apple as well as Samsung and others in the Android market are bringing the new tablet to market.
No brand is better positioned than Logitech today to win in the tablet accessory business. Our keyboard knowhow and experience is second to none. The on-trend colors and material knowhow is also world class today. And while there is some brands that have had some success in certain counties, there is no brand today that has the global retail distribution that Logitech has with a premium in-store visibility that we have enjoyed for our core PC categories over the years.
So what are the keys to delivering the growth? I want to start like comparing who we have been and how we managed our core PC business with the needs and demands of the tablet accessory business today. The first thing in the middle row is the lifecycle. The lifecycles of PCs are two to three years, as Bracken shared. The lifecycles of tablet accessories are six to 12 months.
As a result the development cycles where we have been able to enjoy 12 months innovation cycles, we can't afford to do that in six to 12 month lifecycles for tablet accessories. So we had to reengineer our overall development cycles to deal with or adapt to three to six month time windows. The good news is the channel of the distribution for tablets around the world are almost identical to the PC channels of distribution that we have built all over the world. So there is complete synergy from a go-to-market strategy standpoint.
So to be successful we simply need to do what we have always done, consumer insight, innovation through a traditional channel of distribution, we simply need to do it at a much faster pace than what we have done in the past.
So to achieve this we have set three keys to executing this today and in the next two years. Number one we just spent last six months reengineering our product development process, to be fast, flexible and innovative and I will talk about that.
The second thing is our operations have to able to adapt to this fast pace that this business demands. And the third, we need to expand on the success we have had with the Ultrathin Keyboard and have a presence at the point of sale similar to what we enjoy today for PC accessories. When you walk in to buy a mouse or a keyboard, you see Logitech as a clear dominant brand and we intend to do the same thing in tablet accessories.
But what does it mean to be fast, flexible and innovative. First thing is whenever a new product is introduced, often times we don’t know final specs. New iPad 5 coming out, we don’t know exactly when it’s going to be out, we think we have an idea of the specs, but we don’t know for sure. What is Samsung coming out with? Is that going to be a 7 inch, is that an 8 inch? What's most popular for consumers?
We need to be able to adapt. No matter which direction does the market goes, what the new use cases are, which companies are most successful, we need to be able to be there at the time that they are introduced.
Yet we still have to offer our true innovation. We aren’t taking off the shelf products that you source from any of our suppliers. We are adding a lot of true innovation based on insights and where we can add value in the use cases. And we have to be flexible.
How we’ve changed this is the interesting part. Six months ago we decided the key to this is developing and introducing a modular innovation approach. So what we do is we create modules that can be reused from generation to generation. So instead of innovating a brand new technology, we can reuse, resize, repurpose different things in package it in different ways that we need to adapt to the different use cases that are emerging or platforms that come out.
But we also at the same time have to truly have an innovation engine. So we decoupled the core innovation that we see and we have a roadmap of new innovation ingredients over the next couple of years and we have those times to be able to come to market that are decoupled from the critical windows that we have adapt to that we often don’t control, so we hit the best of both worlds.
Two examples of this, the Ultrathin Keyboard took us 12 months to develop as Bracken alluded to. The Ultrathin Mini when we really appreciated the potential of the new iPad Mini, we were able to bring this to market in 10.5 weeks. That’s a huge accomplishment, an example of being able to exercise this new development cycle.
Last November we identified the market opportunity for tablet keyboards required the overall folio keyboards as well as being in the keyboard, the folio businesses itself represented a huge growth opportunity. In 16 weeks, we went from seeing the opportunity to introducing five new products that I’m going to go through to illustrate what we have been able to bring to market and I think you will see these are not off-the-shelf products. These are truly Logitech innovative products and at the speed we require to win this new category.
From an operational standpoint, we’ve typically been able to in a two to three year life cycle been able to ramp up our production phase in new products around world in often what's taken taken three to four months.
If a lifecycle is only six months, you cannot take three to four months to ramp production. S we had to learn how to adapt our processes and work closer with our suppliers to have much, much faster ramps. So we’re going to be able to ramp our volume that we need to fill the capacity needed in the channel in three to four weeks and that enables us to be on time within weeks of when a new iPad or a new Android tablet is brought to market.
We also need to be able to do this not just in a couple of retail accounts in United States or in Europe but we need to be able to do this globally within 30 days because the same lifecycles from Apple or Samsung or others they’re, introducing these products globally at the same time. So it’s a six month global lifecycle that we have to be able to launch these products within 30 days of each other globally and that’s something that we have never executed in the past.
And finally the inventory management, the lifecycle management to be able phase in and phase out the products so that we’re minimizing transition cost and more importantly we can get the new product on the shelf and fill the shelf space at the right time with the right products. We have to be able to manage the overall channel inventory and finish goods inventory to adapt theses six to 12 months’ lifecycles.
We introduced the Ultrathin Keyboard and it took us about 3 months to get this globally rolled out. There are 13 countries today that sell 85% of all the iPads. It’s a global business but it’s actually focused and concentrated in 13 countries. In any 13 countries we have over 5000 retailers that we have placed the Ultrathin Keyboard in and have established credibility as a leader in this category. What we’re doing over the next few months is we’re working with the same retailers and broadening our overall placement strategy so that by Christmas in these 13 countries over 5000 retailers will have a full line of keyboard products and cases from Logitech. So when you walk in these retailers around the world you will be able to see presence of Logitech that looks like the leader that we intend to be.
So to help talk about some of the products in show what we mean by what we’re bringing here. If I were to summarize our product strategy for tablets I'd describe it this way. We’re marrying advanced technology with on trend fashion. We will bring functional benefit to consumers as we always have but the key that’s really making these products have universal appeal is doing these in designs that now only functional but are desirable to own.
The Ultrathin Keyboard cover is the number one selling keyboard in the world for the iPad. We market this as the other half of the iPads. Not only is it a great functional keyboard but the magnetic ability to clasp, close, stay closed and it’s lightweight, it's durable and it matches the overall colors and aluminum style of the iPad.
If you take this product and you turn it over, you're hard pressed to tell which end is the iPad and which end is Logitech okay. We adapted that to the iPad Mini as I mentioned in 10.5 weeks. This sounds simple. Here is the challenge we faced. The typing experience on this is one of the reasons we won so many awards. The iPad Mini is about two thirds of the size or the width.
So how do you deliver the typing experience that our customers expect from Logitech without shrinking something to become unusable. Very few people were able to do this. We measured the usage of every single key on the keyboard and we’re able to adapt a layout to presser the same key spacing that we have on the full price Ultrathin Keyboard; got rid of some of the keys that are not used very frequently, so that we could deliver the ones that are with the same spacing in the same form factor of the iPad mini, okay.
Now if we do arts and science with gaming, we are applying the same knowledge of typing know how's; I spent 20 years accumulating this knowledge and we are adapting it very quickly to make this the other half of the iPad mini.
Talking about the Folio, so a lot of our consumers, they love the keyboard technology. But they wanted something that was always with them as well as provided not only protecting the screen but the other scruffy résistancy you get with an iPad. So this was our keyboard folio that we introduced a month ago, okay. We made this with the mini as well as the full size iPad. This time we actually took the keys and spaced them even further. So it's actually the same spacing as you have on our full sized desktop keyboard, okay.
And all of the reviews that we have been getting have been talking about how amazing that the full width typing experience is. And yes, we provided it in a situation that gives you the ability to have a Folio, so you don't have to have a case any keyboard and you're protecting both sides of your iPad so you're going to scratch the bottom, the way it sits, your iPad sits within here, is very durable and protective, so even if you bump it, drop it, it's going to protect your iPad as well as provide the productivity.
The next product we introduced just a few weeks ago is the fabric skin keyboard. There is no product that better exemplifies the marriage of technology and innovation with fashion than the fabric skin key portfolio. This product starts with a major innovation. Our consumers want the typing experience that you get from a traditional scissor key design that we perfected.
But one of the things that when you look at the iPad is we took a fabric and stretched it over that same key design and the benefit of doing that is its crumb proof, you can't get anything that falls in between the keys. Its steel proof and it's easy to clean. You can take a sponge, wipe it off and you can spill water on it or try ketchup, I haven’t tried that one yet. And this gives that unique ability to basically have the same typing experience that you have on a traditional keyboard. But when you are out in the real world and if you expose the real element, it's able to withstand that.
The other thing it does, is it provides a more uniformed look, from a fashion standpoint, that enables it to be there as a keyboard, okay, when you need it, but it actually looks like a pure integrated design.
From a style stand point, this is setting a new standard from a consumer stand point of how do you provide functionality as well as a design that's super sleek as well as fully functional. And then as little magic things that we do, like have magnets at the bottom of the iPad so that it always stays in a position that's comfortable and what you would expect. And the same thing when you close it, it stays close and has a easy tab to make it easy to open.
This is available in multiple styles and designs. They are modern on trend and match different lifestyles depending on different personalities. The last thing is our first entrance in the case business, okay, this is our Logitech Folio for iPad and iPad mini often introduced in the last few weeks and no keyboard. Fully protective; one of the things that we noticed with a lot of cases is it's easy for the product iPad to fall out.
So making it easier to get in but yes fully protecting the iPad and one of the things you will notice in the world of cases today is they all have that same (ditched) look. But the design trends today are around simplicity, clean, simple. We’re the only case in the market that has a material and a process that we've invented with our partners to have a clean, simple look across multiple different fabrics and colors.
And it's designed in a way that's fashionable as well as functional. This is unique in the market place and this is an example of the things that we intend to do in bringing in the market for iPad cases and Android cases in the future.
And it's truly differentiated and it’s a premium case that nobody else has today. This is an example of the color palette and the material palette that we just introduced. And what you'll notice is it has a little something for everybody, for people that want to have a more professional, conservative look, to people that want to have a bolder more energetic look. We have something for everybody, it's not just about one extreme or the other, it's about coming out with the right mix and this is also something when you walk into a retailer and see the land of cases today. You don’t see this kind of an opportunity or offerings in the market place so we believe this is a natural opportunity to differentiate and win in this business.
We just introduced yesterday another interesting product which is designed specifically for the education market for students K312. We worked with Apple and Apple sells 3 million iPad into the K312 in United States alone, 8 million globally. That 3 million a year in the United States, 8 million. These are not, this excludes people that are bringing their brining their iPads in the schools, and these are the schools themselves buying the iPad. Most often what you find is the iPad or you’re got a card, a computer card checked out as needed during parts of the question time and they are increasingly using these for a lot of different productivity uses and keyboards became the natural next step accessory that the cautions they schools want to buy.
But it introduced an interesting challenge, if we take 30 keyboards, take 30 iPads we see lot of in the audience here, take a Bluetooth keyboard off the shelf and try to pair 30 Bluetooth keyboards with 30 iPads simultaneously. What you’ll get, you’ll see all 30 of the keyboards on your iPad. Imagine being a teacher and trying to setup a test or teach that thing and have to go through that activity. So, Apple came to us and said, you know, if we could figure out a way to solve this problem, we think that the education opportunity can be even bigger. And so we designed a corded or wired keyboard for both the (inaudible) for existing older iPads as well as the lightening connector. And this makes it really simple, just plug and play, there is no Bluetooth connectivity required and you’re often able to use the overall typing experience just as you would in any Bluetooth keyboard.
So, this is an example of looking at how iPads are being used. Outside the home, outside personal situations, it’s the first example of products that we’re going to see from Logitech then address real problems that didn’t exist before iPad started being used in new ways in a new environment and there is a lot more of these as you see over the years to come.
And we’re just getting started, whether it’s the art of typing, making it thinner , more comfortable, more fashionable, it’s making our designs thinner to match the lifestyles and the new styles and designs for tablets that are coming out. Colors and fabrics, we’re on trend and makes this addressing to your lifestyle. New materials, new ways of interacting with tablets and the future Smartphones and certainly leveraging our core technologies in Bluetooth as Azmat has talked about, battery power management that you never have to think about whether it’s charged or not. We have all of the things that we think are necessary to compete and really build this over the next few years.
So in summary, no company is better positioned to win in the tablet accessory business than Logitech. We have the products, development expertise, we have the global distribution and a brand that consumers truly want to own when they look at their tablet product.
What was new for us is learning and adopting the speed required to compete in this market and we think we’ve done that. So, what we’re doing this year is just executing. Execute for the products that come out, execute as the market changes and continue to do this cycle after cycle and that’s why we believe that we can compete and we can win in this $1.4 billion market opportunity that we call tablets.
Mike, I was hoping you’re going to dip that in the water. And we’re going to discover that it actually plays music. So, we’re going to move to Q&A now and one suggestion because I don’t know, I’ve been actually standing the entire time, before we start the Q&A just for one minute why don’t you all stand up because if you were me and I was sitting as long as you were I need to stand up for a second. You can sit down whenever you want. You followed directions much better than my team though.
Okay, why don’t we open it up for Q&A, we’ll take quick questions.
Good Morning gentleman, (inaudible) from Barclays. Thanks for taking my question. I just wanted to understand a little bit better what you’re trying to do with, and how you actually trying to improve your margins and while what you’re doing somehow is also starting to shift more towards more standard platforms into many aspects. And I’m thinking to gain my experience with CS 2013 there were plenty of brands, with plenty of products and they all look like a different from the outside but ultimately it was clear that the platform was the same inside. What’s really your strategy is to stand out from the crowd except from focusing more on the marketing and bringing it (inaudible) here there on top of it in terms of platform.
Are you referring in general or to a specific category?
Well, from what I’ve seen today, the UE Boom looks very close to me to what (inaudible) does and a few others are doing like create those values as (inaudible) mentioned I understand that there is a little few things here and there but ultimately it looks pretty similar.
Let me start and I am going to hand off to (inaudible) in a minute and he will talk specifically about (them). But in general I think actually Mike’s presentation at the end captured a lot of what we are doing at Logitech, to improve our margins and ultimately drive growth which is we are going to improve our design we are going to bring technology to the market and integrate it into that design in unique and innovative ways.
And we are going to do it in a way from a cost standpoint that is very, very profitable for us. That is pretty much the story across this whole group. So you heard of the different ways, different flavors the entire time. And I am absolutely convinced that if we do that well, you are going to see good margin improvement story and a good growth story. I am going to hand off to the question on specifically (inaudible) I want to just say one thing though. The Blue Chip speaker market is very new market. It is, we are a part of the group that are giving birth to new products that are entering this market all the time. There is a lot of interesting things coming into it.
What I would say about this product and specifically what’s different right now is, it’s (extremes) it’s water resistant waterproof, its acoustic density is incredible. Now what is acoustic density? You mentioned it acoustic density is the amount of volume and quality from the space. Now why is the acoustic density so good and it is, I encourage you to compare it with other products in the space and you will see it better. The reason is that we have a history of two things that no other company really has, we have this ear monitor business which is all about miniaturization of components. Because we literally put something millimeters from your ear that gives you incredible sound quality. And then we have a speaker business that is a conventional speaker like these putting those together we have really got a methodology to deliver great acoustic density so this a very, very; Azmat do you want to add anything to that?
No I think you hit it right on the head I think the acoustic density you look at this product it is an amazing product. You take the big jam box let us not even compare against jam box take the big jam box and compare that acoustically against this product, and this product is light years ahead of that. So I think that is as Bracken said it just right on acoustic density. And what we have done from an acoustic perspective in this product sets it apart from any other product. That is before we even get into some of the other features like life resistance capabilities that we have built into this as well as everything around the streaming which is not available on any of the product. And those are significant innovations that is why you are not seeing them in a lot of other products right now.
Can you maybe expand a little bit on how your operating model might change as you transition your business? Are you going to outsource more as a percentage of total? Can you give me any update on that?
I can. Currently, we basically, if you start with manufacturing we make about half of what we sell. Now that half of what we sell is going to continue to change. And depending on the amount of protection we would have from a patent standpoint or manufacturing understanding that is going to continue to change. Right now I do not foresee a big change in that but we are certainly going to, we are constantly rebalancing that as we go forward. I suspect we will be rebalancing it more aggressively. If you go to the rest of the value chain, we are going to create more and more of our design capability in-house. So we would still use outside design firms this was developed by (power) alpha base really hot design from (inaudible). But we are going to be doing more design in-house than we have done in the past.
And I would say in terms of outsourcing capabilities the key, thing we are using there for now is to attack some of these categories that we have not really done much to be honest and do not necessarily want to allocate resources. PC speakers, we have really worked together with (inaudible) on that levers there are and deep capability to get more for very little investment. I think that is right because we want to be spending our money against the big growth opportunities for the future.
(Inaudible) from (inaudible) question on the stabilization of the marketing and sales spend over the next three years or of just a slight growth certainly where do you see the main levers to, for the stabilization in (in part) it seems that you have opportunistically spent on new products but also to get maybe products off the shelf and over to expand products on the shelf existing products and can you explain a bit there you want to stabilize these line items?
A couple of areas; one is we talked about that we were reducing the breadth of our lineup. So we cut a third of our total product lines one of the problems with our very complex product lines that cost a lot to maintain from a marketing standpoint so both of the pricing line and at the marketing line you end up investing in something that is really not worth investing in. So by cutting back the number of product lines, we were very aggressive about it this year. We basically think we put ourselves in a position going forward to be more efficient.
We are also integrating a system now in place in our product launch process to force the phase out quickly. So as we launch, we will be phasing out very aggressively, any legacy product that it’s replacing. And again this will be more efficient. And I think in general, we’ve populated the company with people like (inaudible) with the group of people who have a lot of experience in the fast moving consumer goods world of return on marketing investments, getting more for less. This is a very mature business, a very mature discipline in the lot of fast moving consumer goods world. It’s not as mature in our space and we are applying and starting to apply some of our learnings here.
I got a question on gross profit margin. You assume the gross profit margin to gross in the coming years, but I was wondering how you want to achieve this considering that high margin product category such as pointing device and video are on the decline whereas music is rather a low gross profit margin category. So I just want little bit, understand little bit better how you want to achieve that goal of 35 plus gross profit margin?
If you have view it as a chemistry, there is a sort of a set of different elements in that, that all come together and I think we have said it very realistic so numbers in there. So first each categories, each of these segment is improving gross margin within it and the mixture of these new segments that have lower gross margin today are rebound into a bigger share. So, the mixture of those two, improve our overall gross margins.
On top of that the fundamental those growth categories that have had lower gross margins in the past are all coming up. So, tablets just for example, I mentioned in my presentation we are seeing those gross margins especially as we get into the back half of this year and into next year, you will see those gross margin improving and start to look, more like the ones above the line. So the mixture of those two will deliver stronger gross margin.
Joern Iffert - UBS
A question on competition in the tablet and keyboard market, I think a lot of tablets OEMs like some of them offering own keyboard covers what if you hear on the competition level in the next couple of years, do you also have any indications for Apple putting on their own keyboard cover, can you share in more detail how close you are cooperating with them? And then the potential hybrid models coming from Hewlett Packard, could you become OEM suppliers or you like you do with mice and keyboard for example, this would be first part of the session and then one technical question, would you share with us the EBITDA loss of LifeStyle, if it is single digit or double digit and the last question would be will you return to profitability in the first quarter, thank you.
Let me answer the last one first which is we are not giving guidance for the first quarter. So, let me go to the first one now. This is a question that I have often gotten as I talk to the people around the, to investors and groups around the world what will happen if Apple launches a keyboard cover, is that the end of your keyboard cover business. Actually, I think that would be pretty good thing for us. Today, hidden inside all of this discussion and we didn’t hide the issue and underline assumptions, the current attach rate for key board covers is really low, really low. The reason why it’s a bigger part of the market as it is on the chart as it shows the average prices are so high relative to a cover. The truth is the average attach rate is probably in the 7% to 10% range minimum of, that’s for Apple.
If you look at (inaudible) or others, it’s much lower. Now, it’s that because consumers don’t want the experience, the productivity experience, no. It’s because they either out of way of it or the sort of casually aware of it, it’s not the first thing that you think about when they go into store so there is a big opportunity that we are seeing which has started to happen to increase the number of keyboard covers that people are buying. If Apple were to come out and put a keyboard cover out, you suddenly have an attach rate that is skyrocket, we would undoubtedly be a smaller share than we are today but I don’t think we undoubtedly be a bigger business from here we are today because the overall number. It would be the ultimate validation of keyboard covers or keyboards for iPads.
We have tremendous amount of respect for Apple, (inaudible) all these companies and I think they will continue to move forward in the path that they think make a sense for the business and we are playing within that field but I think no matter which direction it goes it’s a good thing for us. It probably better if suddenly keyboards become a real standard if tablets become a real productivity to rise. And to your EBITDA question, whatever we are saying about, Joe we are giving?
Double digit on an annual basis.
Just a question on your UE marketing strategies, I mean obviously the product looks pretty cool but my understanding is that at least in Switzerland nobody knows you, if you go out in street and ask somebody what is UE, nobody has a clue. So the marketing strategy I am still wondering, is it only going to be through those, kind of very, very focused internet campaigns or is there anything else that you will be able to do, because I mean obviously you are saying it’s and when there are top performance artists, they know what it is. But that doesn’t really help us or the big public because they are not communicating with these top performance artists. So what can you really do to create brand awareness for UE and how fast is that going?
Let me take this, you know whether this (inaudible) missed something. The UE brand, you are right, it doesn’t have big awareness. It has a very strong awareness among a subset, in virtually every major country especially the western markets around the world. So there is a group that feels very strongly about it, but they are very small. So we have to expand that. The strategy is pretty simple. The most important thing we can do is to have outstanding products because just like the rest of our business, outstanding products defined brands. There is no other tried and true rule, it’s generally this electronic technologies based great products that will create great brands.
Now that said, underneath that we are going to market in a very-very unique way, very different for us by the way. This is a very grass-root marketing effort, through the internet, very targeted hitting 18 to 24 year old consumer where they are as opposed to doing something that we would, in the past have done. We are going to learn a lot in it and undoubtedly we will be adjusting as we go. I think I am optimistic that we can begin to create this UE brand, but most important thing is making sure that we are learning all the time.
This music business is a relatively small business for us with a large potential. We are not setting the company on it. We are really trying to make sure we learn along the way, and keep going. I am convinced that the way to build a brand in this business is not to turn on big budget advertising. Instead have great products and reach consumers in the way they want to be reached, especially this 18 to 24 year-old. So I think it will take us time to build the brand that way. It will take a lot longer to build brand that way even if we got Dr. Dre and got him to endorse. But it is a much more efficient way to go, and for a product company that simply makes great products, I think it’s appropriate for us.
You mentioned that product development has to become much faster, I agree on that. Then you mentioned that development of the iPad’s mini keyboard as a positive example. The development lasted, it waited more than 10 weeks and then it lasted another four weeks until this product was in trial on Switzerland. Do you think that fourteen weeks is fast enough? Your competitors were much faster
The answer wasn’t our capability. The answer was a decision that we made, that turned out to be the wrong one. We underestimated the iPad mini as a true productivity tool. From the moment we got our hands on it, it became much more natural that carried around, travel with it et cetera; then the full size iPad, and once we immediately recognized that we went into action and got something into the market in ten and a half weeks. So I think it proves both we have to be fast and we have to adapt. We are not wrong, quickly adapting, and now this is headed to be the top selling iPad mini keyboard in the world even though we reacted perhaps three or four months later than what we could have.
If I could add to that, the other give the fact that you probably don’t know is we probably could have been four five weeks faster than that. Our design, the design we created was too thick, so the standing joke that I had internally was that it was the other two third of the iPad mini to the other one, the other half, and that’s okay. And we are learning very aggressively how to anticipate where this market, we got it now. Now when the next one comes out; we’re ready. So I say we are learning very fast, the other thing Mike mentioned in his presentation, I will repeat, is the distribution into the trade now is another area of focus for us, how do we expand into those top retailers, those five thousand store fronts, very-very fast. We know how to do that now. We are doing it. So you know the answer is not, definitely not fast enough. It’s much better than where we were. We are going to be best in class levels on the next iPad launch, and I think we might be able to keep improving beyond that.
Michael Steger - Belleview
Just you said several times, key is to come up with great products and obviously that’s a part of the answer, the other part is anticipating trends correct; and you have shown us also some products that you are coming up. Can you give us a bit of feeling where you believe you have the greatest upsize, and also maybe have a bit of look into your product portfolio where you see the next steps because you cannot be everywhere at the same time, so you have to make decisive decisions just give us a bit the feeling maybe where you see most of them?
Yes actually first, we totally agree that we need to be decisive and make that. And I hope that you see that we’ve done, but we have decided and I have had discussions here just in the last three hours about this that we decided we’re not going to be in the remote control business, we’re not going to be in the security business, we’re not going to be in the dark business for music, we’re just not going to be in a lot of businesses that there is probably somebody is room would say why would they get out of that. Well I’ll tell why we get out of that because we made choices, so we’re going to be really strong in our core PC peripheral business and we’re going to become really strong in this mobility business especially tablets. And then in music we’re going to develop the capability there and develop the business, I think it will be good.
So we’ve made some pretty clear choices. Where do I think that are upsized? I think I’d say if you looked at our chart that I showed that reflects the expected growth rates by category. Each one of the, I see upside I want to be honest. But we’re planning for a realistic scenario. So I don’t want to comment and talk about and get what’s your appetite on all the potential things we can do beyond that. I think that’s the growth map. We delivered that, this will be the kind of the business it should be and we can deliver that.
I just have a little follow up if I may, the first one is on the non-iPad keyboard opportunity, I’m struggling to understand how you can achieve economy as a scale given the diversity of formats and manufacturers and (inaudible) buying a keyboard for a non-iPad tablet is like buying a bag for your (inaudible) it looks daunting to me. So how do you as manufacturer approach that and solve issue, and are you going to have generic 7 inch keyboard, are you going to have generic non-iPad keyboard, how’s going to be work? And the second issue is, can you give us an update on the (inaudible)? And the third one is just I thought on your logo, how’s the felling, it’s just the personal feeling, it’s a little bit dated, are you thinking about the look of it that’s more represented and how it’s going to slightly based to consumers? Thanks.
I’m thrilled to get the first question in my new job as CEO about the logo, this is real (inaudible). Let’s start with the Android.
I think it’s a great question, when you look at the Android market, you see huge numbers compared to iPad but when you look underneath the Android market it’s very fragmented. So that’s why we had not come to the market with that product yet. We’re trying to get the right experiences. And I think that we’ve now identified that, actually last Christmas it started to see little bit of separation for the first time; Samsung what they’ve done in the Smartphone space they’re clearly trying to duplicate in the tablet space and that would be part of our strategy for sure.
I am not going to comment on new products that are coming out, but I will say that we do believe the productivity opportunity around Android tablet is at least as big as it is around the iPad, and I think a lot of the technology, the innovation ingredients that you’re seeing in our current iPad offering we’ll adapt those quickly as the opportunities in these different segments begin to appear. And we see them already starting to become visible who is going to win.
Let me react to the CFO’s search question, you know, I’m in the middle of the interviewing now so we’re interviewing. There are lot of great candidates out there, I’m convinced we’ll end up with somebody terrific. That’s probably the extent of the update I can give you. And on the logo, I’m really unhappy I’ve got the question because the world that I grow up in I don’t expect any revolutionary changes for the logo, I actually think that for Logitech and its logo is pretty powerful. If we change something that will be evolutionary but I like the logo personally and I love the name Logitech.
For PC speakers. Yes I’ll mention it. I will answer. Essentially, we had done no product development last year, we're almost not on that space, and we’re really decided to pull back on it. Now instead of allocating resources into that from an R&D standpoint, we really worked directly with partners. So with partners who have R&D expertise to both develop and design and the manufacturing of those speakers? Do you want to add anything to that?
I think we do upfront design in-house all the great partners and then get the development as Bracken said it’s been an process and then what we added at the end of the process of testing that looks and sounds the Logitech standards or the quality as that’s really important. So we’re actually testing the what comes up at the other end in our internal apps to make it’s not just some kind of not great thing, we have to live up to our standards.
Yes, I would think about this leverage, you can even argue there are a lot of things we do this and whether we do 100%, 90%, or 80%, there is different gradation of what we do in the case of the development of the upgrades in the next round of speakers we've launched. We have just leaned more on the direction of relying on some of the external suppliers we have to help us, finish off the engineering of those.
By the way, if that model works really-really well, we’ll do more of it. It’s a wonderful model because we're going to have great products and it is going to requires less internal resources. So we can put on other growth opportunities. But we're lot more licensed to drive here than we are at our core business, who are on their mobility business.
It’s just a degree of innovation we’re bringing to it. So in this case we’re bringing a lot of innovation; a lot of innovation powered to it. So there is a lot of that goes to acoustic (density) or the whole thing in this one. In the case of the PC speakers, we're bringing more; we're bringing some really good products but they won't have quite that level of innovation in it.
A little bit of question on the amount of sales which have generated with the categories which are now more or less willing to, let's say.
Let go and what do we have to expect and how is it going to be done. Is it going to fade slowly or are you at some point stopping this product and how can you compensate and what is the impact on the costs, more or less?
Let me start the way we; we're doing both so we've got some of these that we call legacy categories that are fading and mostly have faded, those are largely gone. We've got two businesses that we’re selling and those were straight; either selling. And I want to reassure so this doesn't get written up somewhere and get people worried. We're going to support our existing customer base. We're just going to continue to support them so we don’t need to alarm anybody about that. That's part of who we are at Logitech, we are not going to let anybody, not be supportive. But we are going to exit those businesses and we are going to exit them sometime this year. Those will be direct lifts and the associated cost that goes with them will also go.
And speaking about the scenario, where you are not able to have top line growth for the next three to four years, what is your Plan B and for our potential further restructuring and costs savings and what should be on the EBIT margin run rate corridor to add and share the (rate). Thank you.
We're not disposing kind of the Plan B and alternative plan, this is our plan. We feel confident about it. It's not reliant on a strong PC market, it's not reliant on a change in the tablet market, it's not reliant on some capability we don’t have, it's not reliant on anything except our execution and it's built on, I think relatively conservative view of the markets that we're sort of attached to. So this is our Plan A.
If we need to do Plan B, well on Plan B, I think there is always margin expansion opportunities. They're always wasted; we take more cost out, if required and we would do it. Well I feel very strongly that this is the right plan.
Can you talk a little bit of the converge device opportunity around Windows 8 and what do you see from that as a challenge, maybe also for the incumbent PC categories or the tablet categories, converge devices on I mean top screen and the keyboard?
Sure I came out about when I first got into the company, we started talking about Windows 8 at some point. I actually liked Windows 8. I love Apple, I love Windows8, everybody like Android. So I move out of (inaudible) as you can possibly be when it comes to flat ones, I really do like them all, they have different advantages and tradeoff. Windows 8 to me; the nice thing about that is exactly the point you are making is this convergence.
I have a surface growth that I use and I love the fact that it seamlessly operates between your Windows 8 on your PC and your Windows 8 in your service growth. That’s nice. As that becomes kind of integrated I think the opportunity as things like multi touch keyboard, very interesting, it's really cool.
I think our multi device keyboard is really-really cool so that's a great opportunity for us. The opportunity in touch navigation; touch navigation is still on a desktop, touch navigation doing this, it's still a very awkward movement. I don’t know if you've tried it. I have. And it’s a very-very awkward thing to type and touch. So this whole area of continuing to move forward navigation of a touch pad, something like a touch pad using multi product, multi-platform; keyboards is also a big opportunity for us and the more integration there is I think the better because we can sell keyboard covers, we can sell touchpads, we can sell combination lights and touchpad; we can sell; that's a dedicated or separate keyboard, so this is a whole space that this integration happen I think it just opens up more and more opportunities for us. Okay next question.
I had one more question related to Unified Communications and I was wondering why you are not moving more aggressively into that market and what hinders you to become a player like Plantronics or GN Nord Store or something like that.
I’m so glad you asked that question. Let me not confuse you, we are moving very aggressively into that market. So, we have a dedicated team calling on that large enterprise going after that market, we have our line of products that we co-developed with Cisco which dedicated for Jabber. And Charlotte just mentioned last invention we just had our first million dollar deal just within the last two days. With Microsoft’s Lync, we’ve got a dedicated program at a partnership. So, we’re working across this market very aggressively in every part of the world but especially in Europe and AMR.
So, we’re very optimistic about what we can do there. It’s a big market, it’s growing rapidly, it required sort of test and go approach. But I’m very excited about the market, I just don’t want to over sell it right now because I know it’s going to take little time to take hold but I’m super optimistic that we’re uniquely positioned in that market to play well, especially against people like Plantronics and other companies that don’t offer the array of products around the personal experience in an office that we do.
Okay, I think that’s about it. I’m going stop where I started which is to say first thank you all for coming, you’ve been very patient. Second, I hope you got the sense for the enthusiasm that each of these people have for what we’re doing. And we are very passionate about where we are right now. Third, as I said in the beginning. We’ve got a job to do, we’ve got to execute and it’s about at this point the ball is in our court to execute we’ve put on the table here and we feel very good about that.
If we do it, okay, I think it will be a good value creation opportunity, if we do it well, it will be a very good one and if we do it extremely well, I think it could be exceptional. And I came in this company for couple of reasons and most important was I was excited about the idea of helping Logitech become a design company that leverages technology innovation and consumer inside.
I really believe in that. I believe the world needs the Logitech who does that. And that’s the main reason I’m here. The second one is I think there is a really interesting value creation opportunity here. We went through a really tough stretch but we’re back. So, I’ll stop there and I guess you can go next door and experience some of the products another round of it and I’ll be around to answer your questions as well as these guys. Thank you.
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