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Executives

Joe Greenhalgh - VP, IR and Corporate Treasurer

Guerrino De Luca - Chairman and Acting President and CEO

Erik Bardman - SVP, Finance and CFO

Analysts

Jonathan Tseng - Bank of America/Merrill Lynch

John Bright - Avondale Partners

Ashish Sinha - Morgan Stanley

Alexander Peterc - Exane BNP Paribas

Andy Hargreaves - Pacific Crest Securities

Stefan Gachter - Helvea

Paul Coster - JPMorgan

Michael Foeth - Vontobel

Luc Mouzon - Amundi Asset Management

Logitech International SA (LOGI) F2Q2012 Earnings Conference Call October 27, 2011 8:30 AM ET

Operator

Good day and welcome to the Logitech Second Quarter Financial Results Conference Call. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session and instructions will follow at that time. This call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech.

I’d like to introduce your host for today’s call, Mr. Joe Greenhalgh, Vice President of Investor Relations and Corporate Treasurer at Logitech. Please proceed sir.

Joe Greenhalgh

Welcome to the Logitech conference call to discuss the company’s results for the second quarter ended September 30, 2011. The press release, our prepared remarks and slides, and a live webcast of this call are available online at logitech.com. As noted in our press release, we have published our prepared remarks on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments, and we will not repeat them on this call.

During the course of this call, we may make forward-looking statements, including forward-looking statements with respect to future operating results that are being made under the Safe Harbor and the Securities Litigation Reform Act of 1995. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated in the statements.

Factors that could cause actual results to differ materially include those set forth in Logitech’s Annual Report on Form 10-K dated May 27, 2011, and subsequent filings which are available online on the SEC EDGAR database, and in the final paragraph of the press release and prepared remarks reporting second quarter results available at logitech.com.

The forward-looking statements made during this call represent management’s outlook only as of today, and the company undertakes no obligation to update or revise any forward-looking statement as a result of new developments or otherwise. This call is being recorded and will be available for replay on the Logitech website.

Joining us today is Guerrino De Luca, Chairman and acting President and Chief Executive Officer; and Erik Bardman, Senior Vice President of Finance and Chief Financial Officer.

I’d now like to turn the call over to Guerrino.

Guerrino De Luca

Thanks Joe. Thanks to all of you for joining us today. I’d like to add some color from additional perspective to the predicted market that we posted on the web. Our Q2 results are consistent with the finding I shared with you last month. Part of the business that are not yet performing as well as they need to and other they are doing quite well. I will address that as well as various and I will start with China.

We continue to deliver a very strong sales growth in China. I was in Shanghai just last week, spend time with our General Manager there and I came away even more enthusiastic about the potential and our capabilities in this large enduring market. We have a strong unit price, a sound strategy and I believe it will service well in the quarters to come.

In Q2 we achieved solid growth in our LifeSize business. The growth was constrained somewhat by the uncertain economic situation in several key markets and this is the category that is vulnerable to economic downturns in the rest of our business given the customer base purchasing dynamics, but our long-term outlooks remain bullish. I recently spent time with the LifeSize team as well and had our first time look at their product roadmap which includes a number of disrupted technologies and highly innovative offerings that I believe will provide the fuel for future growth.

Let me turn now to our EMEA and the Americas sales regions. Our business in EMEA is firmly in recovery mode. We continue to drive operational improvement in our sales and marketing organization. Our China partners have been pretty leveled to gradually come down over the last two quarters, they are still are not quite as low as they should be in the current economic climate. I’m pleased with the progress that we have seen and I believe it will continue as we get our largest region back to health.

In the Americas region we have seen an increase degree of caution in the face of economic uncertainty by our channel partners, while our China partners are understandably concerned about carrying too much inventory as we entered the high volume holiday selling season, we believe the level of channel stock is healthy and we are actually becoming concerned about the potential for stock outs in few categories.

Looking at both the Americas and EMEA, probably the most telling fact to note is that the metrics we track point to the underlying level of demand in Q2 being higher than our sales (inaudible). While our sales into the channels in the Americas fell by 1% compared to the prior year the sales through by a channel partner increased by 14%.

Looking at the EMEA region a local currency, we have a gap between sales-ins and sale through was essentially the same as in the Americas. What this tells us is that despite sluggish economic conditions, negative consumer sentiment and a product line that is not as strong as it should be, the dynamics around our market portfolio are healthier than most [might get soon].

So let me shift to our products. Our sales in Q2 confirmed if there are several gaps in our retail product portfolio, regardless of the strategic categories what these gaps have in common is that they leave us with a weak up sale proposition. Over the last few years we have significantly strengthened our low end product in nearly every category providing consumers with a compelling value proposition. Unfortunately, we have too often fallen short of providing an equally compelling value proposition in the mid range and especially in the higher end of these categories.

There is no question in my mind that strength of the entry level and a strong up sale propositions are not incompatible, and in fact it had been a whole market of our portfolio for a long time. We know that consumers are willing to move up to higher price points to buy great products, but of late we have not given an enough reasons to do so. We will fix that.

So the way forward is clear, we need to consistently develop more great product across our entire retail product portfolio, we will do that by reinvigorating our progress on innovation. In addition, as Logitech has never exclusively dreamt about inventing a new technology. It's been about creating and delivering new value propositions that consumers are willing to pay for. One of the conclusions from my recent assessment of our is that in some cases we have not been close enough to consumers. They are sometimes fail to understand the true drivers of consumer demand for driven products, the hidden pain point and the innovative solutions that deliver high value. The good news is that we are added again.

As one of the steps we are taking to improve our product development and performance. During Q2 we implemented a number of organizational changes to the structure of our global product teams. These changes were designed to better align our product development efforts with today’s consumers and his or her new usage models. In addition we have created a small independent group with the mission of incubating new innovation opportunities. We believe these highly focused and flexible team would allow us not only to evaluate more potential innovations but to do so faster and more efficiently.

Just to be clear, these changes are being made within the envelope of our existing product development resources. We are not adding incremental cost to the company as a result. With about 1000 product development staff worldwide, our teams have the fire power to deliver once they progress on the right thing. It's still early but I’m very encouraged by the results we have seen so far. Changes to our product portfolio don’t act in overnight, but you should expect to start seeing some of the fruits of our refocused efforts before the end of the current fiscal year.

Let me wrap up by saying that I believe that over the last few months, we have achieved increased stability across the company. There is much more work still to be done, direction is clear and I’m looking forward to improve performance in the quarters ahead.

And with that we are now available to take your questions and please follow the instructions of the operator.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Jonathan Tseng representing Merrill Lynch. Please proceed.

Jonathan Tseng - Bank of America/Merrill Lynch

Couple of questions on keyboards and video. Keyboards strong ASP growth this quarter and last quarter, how much of that was attributable to the solar keyboard, and to tablets and how much to other products? And secondly just a commentary on the video and embedded web cams being a threat. I don't think I have seen that before. Was there something that has changed in the market that made you put that commentary in? Thanks.

Guerrino De Luca

On the keyboards that’s been our best plastic category growth and guess what it grew on the tablet side and it grew on the PC side. We had great response to our tablet product, but our core business growth sort of growing. And as you noted the main driver of the growth is the solar keyboard, I mean we saw the entire portfolio but this is the classic example of a great up sale proposition listing the entire category. I think this is it; I could not find a better example of what I mean when I say that some products don’t have that. And I’m referring specifically to [mouse] for example, we should have done reasonably well under the circumstances but they could do much, much better once we strengthen the mid range in our end of our product line which we are planning to do. So, just a note, keyboard are supposed to be probably one of the leanest category that the PC is dead who wants the keyboard right, and guess what when you have the right portfolio keyboard dropped, because people do want to be more comfortable to be more productive both on the PC and on their tablet.

On the video side I alluded to the fact that embedded web cams are a reason for consumers not to necessarily want to buy a new web cam, but quality that they get even though inferior to the quality that you would get by using an HD web cam is sufficient for the purpose that they use video calling for. That is not true on the business side by the way. Web cams and general video communication in the business as manifested by LifeSize require higher quality. The emotional content that existed in video calling consumers does not exist in the business world and so quality is essential as appose to just the motion of seeing your buddy on the other side of the call. So, our strategy to web cams is to acknowledge this fact and make sure that our after-market web cams do think that the embedded gets that web cams don’t do. And you will see all this in the course of the coming months what it means in our new offering in the web cam business, we believe we can confront the intrinsic potential decline of the category by shifting our focus in our product development portfolio and shifting our focus of course on providing a profitable business. These are very profitable business today and we want to continue to support it with the right product angle.

Jonathan Tseng - Bank of America/Merrill Lynch

Thanks. Just the last question, this is for your the third thing, you have had tough times launching in the past; 1980s with the scanners, posing tough market in 2003. You’ve been in here for a few quarters now. Just talk us through how this feels versus previous times in terms of the seriousness and nature of the challenges facing Logitech. Thanks

Guerrino De Luca

Well, thank you for bringing me back to our history here. If I understand your question well, it's about scanners. Though scanners I think we sold the scanner business at the end of ’97, so just few months before I joined. So, I participated in the decisions of that we are taking into time. The situation then was very, very different. We have no gross drivers intrinsically in the portfolio and the scanner was a drag. We had just missed the few beats if I recall well and we were focused on certain kind of handheld scanners and things that right now part of museum of Logitech, and the market went to (inaudible) and we couldn’t follow it and we decided, thank God to abandon it. Nothing on the portfolio today looks like that. First of all, we have significant growth drivers both outside the PC and around the PC and even if you frankly equate the video business and scanners nothing to be more different. First of all we have segments of the video businesses in the business market everywhere. And we know what to do in the consumer market. So, I believe that the it's very different it feels different it is different.

Operator

And your next question comes from the line of John Bright representing Avondale Partners. Please proceed.

John Bright - Avondale Partners

Let me stay with the inventory correction. Using the baseball analogy, one, what inning would you say you were in the EMEA markets and, two; could you go over your comments on the Americas market on stock-outs?

Guerrino De Luca

Okay. Well I’m not familiar with baseball, but I will try to serve get you, you got the jest of it, you know I’m Italian. The football the way we call it, it might prefer a metaphor base. I think we are well into recover in Europe, today it's hard to indicate that innings I think we are in the second half if you want to talk football. I think the team has done great in execution, there is a lot today jest but all the metrics we have are positive even margins in Europe are improving which is an indication of some left pressure to just incentivize between a channel inventory. We are not there, we will be there before the end of the year, and whatever they means chippings change all the time and fluctuate, that could be very clear that the profit of overcoming the impact of pricing and terms and conditions changing with our channel that generated that kind of over inventory and complexity in the channel, it's on-going and I’d say we are in the second half.

On the stock out comment, my comment means it relates the fact that while I do understand the concern of our large customers in the U.S. and these are concern that of course does not price specifically to us, they price specifically to the amount of inventory that they are prepared to carry. They are very nervous, I understand them, but then when it comes to the effect of the whale of the concern of their channel on the middle fish that is the Logitech supply, we look at the metrics in the channel and we believe that these metrics are barely manageable in terms of avoiding stock outs. And if demand is as we expected or even marginally better, that we will have to run to make sure we supply what they will eventually need. That’s all I wanted to say, I believe that was more of an indication of health of the channel than anything else, but of course, health gets to a point where it becomes unhealthy. I don’t know if it's unhealthy today in terms of supporting the expected demand but it might. That’s all I wanted to say.

John Bright - Avondale Partners

Second question is on new products and in your organization changes, you mentioned an independent group. Talk about what the focus of the independent group is. Is that only towards the peripheral side of the products? Does it have any application or any focus towards the LifeSize business?

Guerrino De Luca

It's specifically on the non-LifeSize part of the business and it covers though PC and non-PC dimensions. It's the cross product line effort and it's actually funded by key engineers from different parts of the company that transition into this on a month basis, two month basis. This is a fast analysis, fast fail and fast succeed group. This is not in R&D facility that is going to plant the seeds for Logitech product 25 years from now. This is not the way we work, remember I said in the past we are chef, we are not farmers, we don’t develop core technology we develop ways to put together existing mature our new technology together to provide great proposition. This group is (inaudible) we will use our best engineers to rotate them into this group and they will provide seeds to each product line. It is though restricted within the Logitech portfolio.

John Bright - Avondale Partners

Final question, it's two parts. One, talk about the LifeSize profitability outlook, and two, touch on the share repurchase Swiss approval required. Where does that stand? When do you think it might happen? To take your share ownership higher than 10%.

Erik Bardman

This is Erik, on the LifeSize profitability at this point we are disclosing specifics of LifeSizes income statement, but I think suffice it to say that we feel very good about LifeSizes growth prospects. You heard Guerrino talk about not only are they positioned well today, but we feel very excited about the product roadmap they have got. There is a number of things you are going to see over the coming months and quarters. So, LifeSize we feel good about the direction we are going in and where we are headed.

In terms of the share repurchase as you saw in our press release, we have approached this Swiss authorities and ask for an amendment to our existing $250 million buyback programs. So, we have that program that’s been approved, it has about $177 million available to it still. And we really can’t comment on the process, it's pending with the Swiss authorities, assuming that we get approval for that. Then our intent is to repurchase shares on that second trading line something that we can do as a Swiss company. And then in the future those would be shares it will be eligible for us to cancel. And that something that would be only with shareholder approval, which we would plan on doing as part of our normal annual shareholder meeting proxy growth that we would do on an annual basis.

John Bright - Avondale Partners

Is it reasonable to assume any sort of time frame for that approval?

Erik Bardman

If I could say how fast the regulator would move on something, I’d be giving you knowledge I don’t have. We think it's not something it takes real long. We feel well positioned for it, but really can’t comment until we receive that approval and we go from there.

Guerrino De Luca

Again this not something it will happen in 25 years, it's something that will happen in relatively short-term. So, I think that (inaudible) position that well.

Operator

And your next question comes from the line of Ashish Sinha representing Morgan Stanley. Please proceed.

Ashish Sinha - Morgan Stanley

Just two questions from my side. On LifeSize, you did mention about some caution towards the end of the quarter, just trying to get a feel for what’s going on in terms of your pipeline and prospects. Has the pipeline shrunk or is it customers dealing with the decision making? And, secondly, could you give us an update on Logitech for business, please? Thank you.

Guerrino De Luca

Thank you for the question, it will help me to clarify. We have seen a slowdown in closing of deal in the pipeline. We do not believe to have lost any of these skills to any competitor, but we think people are more cautious and that’s an indication of economic concerns. The pipeline is healthy and it just took longer to close than we had expected.

On Logitech for business this is the first time for great we are signing up buyers that were used to carry Logitech products in the past but without any support on our side. And as we signed them at pretty reasonable rate, we are talking in the multiple tens of buyers, we see immediately the business that they do without increase significantly and that’s a great sign. So, all signs are fine, this business is growing and I’m very, very excited given the prospects. Sooner or later we will be in a position to actually break it down and be more specific, we are just positioned right now so that’s the corrugated color I can provide.

Operator

(Operator Instructions) Your next question comes from the line of Alexander Peterc representing Exane BNP Paribas. Please proceed.

Alexander Peterc - Exane BNP Paribas

I would like to understand a little bit more about the channels and what telling us about the fundamentals in your markets. I thought we were going into this year with a channel reset kind of objective, which will be completed by the end of the calendar year. So, this reset seems to be going on with a big mismatch between what you sold in to the channel and what has went out of the channel in the quarter But now you seem to be saying that the channel guys the distribution is getting a little too close to talk about stock options, so is it that the distribution partners of yours, have a better feel, perhaps, for what is going on and they see demand actually declining in the coming quarter? Do you think they are being over-cautious? Thanks.

Guerrino De Luca

Well, let me qualify your statement we are saying that the situation is slightly different in EMEA and the U.S. My reference to our concern about the level of inventory being relatively too low and I want to say what I did believe that the inventory in EMEA is healthy that is normally said. Immediate impact there was no reset maybe for a while; I only said based on what we believe we maybe on the low side. Okay. As you said our distributors and customers may be smarter than we are like it happened in the past. In this particular case I believe that the overwhelming concern is about totality of inventory, the concern cannot be is usually not on specific categories. And so I’d be surprised if they have a better insight of our customer base than we do.

In the case of our participants yes, we were into a significant efforts to lower the weeks on hands and that our efforts have been very successful. But we believe that under the economic situations of Europe, the channel may be still a little bit high and so we are dragging it lower. And we expect it to be lower in weeks on hand as we go forward. So, that’s all I can say at this point.

Alexander Peterc - Exane BNP Paribas

Thanks. I have another question on the video conferencing sector as a whole. We’ve seen some market share shifts there, with one of your large competitors having to report quite weak revenue trends. Do you see any significant market share shifts and is that in your favor, notwithstanding the slowdown in growth we’ve done in this quarter? Thanks.

Guerrino De Luca

It's too early to tell. We are faced with very formidable competitors including the one that you would note, has announced weaker than expected results. It's a very strong competitor and so it's a big fish in this pond, Cisco Tandberg. It's too early to tell. We’re not loosing share, we are not loosing fields, that’s the most important thing to note. Where we play we tend to win or nobody wins, I mean the customer decides to delay. They were interestingly enough; this category should not be as sensitive to economic conference because it's actually a cost reduction category eventually. The problem with ATV price mix and telecommunications approximately is that they have a budget. And sometimes these decisions are made based on the budget and not necessarily on the overall cost savings that it's classic the word isn’t perfect and that’s my reference to the that have cautioned within the buyers community, but no, we are not loosing I guess anybody whether we are gaining it's too early to excel. We have been gaining share over the course of the last 12 months, reports are scattered in terms of market share, so they don’t have my latest one. I do not expect that to have lost share whether we did gain, I don’t know.

Operator

And your next question comes from the line of Andy Hargreaves representing Pacific Crest. Please proceed.

Andy Hargreaves - Pacific Crest Securities

Can you comment on how much ZAGG, or tablet products, in general, attributed to sales this quarter?

Guerrino De Luca

Erik you want to comment on that?

Erik Bardman

Yes, so when operating us the specific details of our tablet peripheral sales this stage, but I think suffice it to say we have been very pleased, you heard Guerrino talk about things like the keyboard case for IPAC 2, very strong teller for us. And when you look at the keyboard in desktop category in it of itself, it was material to our growth. The other piece of it I’d say is well over the coming months and quarters you are going to see it expand our lineup in this part of the portfolio. So not only we feel that it's a significant contribution today, it's going to continue to grow as we look out going forward.

Guerrino De Luca

Let me add some color here. What you are seeing from us today is keyboard and keyboard and cases, it's a tremendous opportunity around iPad. By the way one of the funniest thing that happened in our customer research about tablets, as we try to understand what the consumers want. Do you know what the number one consumer desire for tablet is today? A mouse. It's amazing. People are interested in keyboard, they say why don’t we have a mouse for this thing, because it's when you use a keyboard, of course, you are engaging this combination of typing and touching the screen which is not the most ergonomic thing in the world. But of course, unfortunately to-date iPad does not support function devices, Android does and in fact we have a mouse for Android tablet. As this market grows that’s a very interesting and attractive opportunity. But besides the classic productivity devices, that we classify as create devices as appose to consume devices. You should expect the number of very interesting consume products to come up, let’s say beyond their keyboard and mice to come up for tablet soon. And these are more fundamentally music related and I’m very excited by the pipeline there.

Andy Hargreaves - Pacific Crest Securities

Okay. And, then can you give us any metrics on Logitech for business, and revenue is not necessary, but how many people are part of that effort now? What do you intend to get to, and are there any forecast targets for growth that you could give us?

Guerrino De Luca

It's a relatively small theme against the tremendous opportunity we have. And the reason is small, that’s a very, very leverage business model. And first tier distribution is the same that we have in consumer and the second tier and third tier I mean distributors that are specific to the business market as well as buyers and system integrators, who already somewhat do business Logitech product that’s without any interventions on our sides. So, here it's providing the accelerator. The team is only have to provide the accelerator to specific marketing programs to specific conditions, much more than convincing these customers to carry our products for their customers. That’s a fundamental difference between a new channel development and just an acceleration of our existing channel. This is what the team is charged to. So, we are talking outside the multiple tens of people I will not be more specific which relative to this tremendous opportunity is probably the highest potential profit of the business that we can embarking and we have we got to see the impact of that as I mention before. This area is one that we will go over a little bit more in detail at our Analyst Day, at our Investor Day in New York, so I look forward to you attending so we can have more intelligent conversation about it.

Andy Hargreaves - Pacific Crest Securities

Okay. And then finally, can you give us an update on the CEO search, and comment on whether or not you’re a candidate for the long-term job?

Guerrino De Luca

I’m not a candidate for the long-term, I’m the candidate for the long-term chairmanship of the company unless people get me out. The search is on-going and there is, if there was, there is no deadline. I’m happily driving this shift for now. I want to make sure that it improves as it is, and continues to. I think I still can contribute something and I will continue to do so until I’m confident and the Board is confident that we have the right person to replace me and the long-term CEO of Logitech. There is no expected time of arrival and that’s not the way we are driving the search. We are driving the search looking for the best person and we will update you when the time comes.

Operator

Your next question comes from the line of Stefan Gachter representing Helvea. Please proceed.

Stefan Gachter - Helvea

Thanks for taking my question. I would like to come back to the profitability of LifeSize. I understand, you do not wish to disclose much details as of right now. On the other hand, you are saying that you feel pretty comfortable about the direction of LifeSize. Maybe you’re going to add more color on that topic on your Investor Day, but as of today, could you at least, maybe tell us whether it's a matter of quarters or years until LifeSize will turn profitable? LifeSize is, in my view pretty important to Logitech, and for that reason, I would just love to get a little bit more insight on your targets going forward.

Guerrino De Luca

Yes, I appreciate the curiosity and I understand it. Our growth of LifeSize is to equip it to win in the long-term. It's a fact, it's a strategy we have not, we are exercising or willing to sacrifice return profit to a company that has the size, the momentum and most importantly the footprint in the market to compete. We have seen that every time we compete we win. We just do not compete enough and so we are broadening our ability to compete on a deal-by-deal basis across the spectrum of this space. That’s the primary goal, that’s the driver of the expense growth in LifeSize which had drive to most of the expense growth at Logitech today. With that in mind we obviously have profitability in the line of sites to LifeSize. We just won’t tell you if it's next quarter, the quarter out of next or next year. But we are not talking once again when our children will be adult, LifeSize will be profitable that’s not the intention, but definitely I’m a strong proponent to strengthen LifeSize before we begin squeezing profit out of it. And I think the strategy has been successful to-date and we have seen a reason to change it.

Operator

(Operator Instructions) Your final question comes from the line of (inaudible) representing JPMorgan. Please proceed.

Paul Coster - JPMorgan

It’s Paul Coster from JPMorgan. Guerrino, you’ve come in and quickly mobilized resources to address some of the product gaps and things like that, sort of quickly having an effect. Could you talk about a little bit about the brand, and are you happy with the brand, particularly as you see more life-style type brands, particularly in North America, addressing adjacencies to your market?

Guerrino De Luca

Am I happy with my brand, yes. Can my brand be strengthened particularly in certain sectors that are increasingly strategic for us, absolutely yes. And you will see some manifestation of that pretty shortly I should say. So, I believe that the Logitech brand can expand and be very strong in adjacencies that you referred to. And we intend to do so. So, I’m keenly aware this is you would know and I said many times it's all about products. It's definitely all about products, it's definitely all about great products. However, the brand umbrella is critical and we are not forgetting that.

Paul Coster - JPMorgan

My follow- up question, is on those product categories where you've identified gaps, generally speaking, what is the timeline for filling a gap? Are we talking months, quarters, years?

Guerrino De Luca

Well not year's, I talked about cycle is not so long. But depending we breakthrough our innovation or product get developed in six months and some product get developed in 18 months. So, there will not be a day in which you wake up and say, Logitech is now a perfect product portfolio, that’s not going to happen. By the way it never happened. We never had a perfect portfolio if you ask me. So, you will start seeing some manifestation of this renewed focus on mid-range products and pool products before the end of fiscal. This quarter, next quarter and being (inaudible) so particularly because I want to make sure the product we ship to are absolutely perfect. This is not an issue of filling the self this is an issue of coming out with blockbuster products that can release deliver to the promise. So, we will see some of that in the end of the year fiscal, and we will begin to see a lot of that in the first half of fiscal ’13 and that will be a continuous effort beyond that.

Operator

And your next question comes from the line of Michael Foeth representing Vontobel. Please proceed.

Michael Foeth - Vontobel

Just two questions. First of all, in terms of your share buy-back, obviously, you started to buy back quite some shares, and I was wondering if anything has changed with respect to your policy to make use of cash? You had talked about the cash buffer that you wanted in the past. Or, has anything changed in terms of your focus on acquisitions?

Erik Bardman

To just your question, so no change to our overall strategy in terms of how we use cash. We have been very consistent I think and first priority is always working capital for the business, right that we have the cash to invest in the right places. And we feel we absolutely have that and have the resources we need to that. Beyond that, so once we get beyond the right working capital, help drive an investment in the business it's always going to be a balance of share buyback as well as acquisition. No change to our acquisition strategy, obviously we don’t talk about future acquisitions on a look forward basis, we are going to continue to acquisitive when it make sense looking for a particular technologies or capabilities and we feel comfortable that we got the right balance sheet flexibility to do those things. And then in the case of share buyback when it's the right combination of when we look at having a right cash levels and we also feel that the repurchase of shares is the right value investment, I mean a combination of things. There is no change to the strategy and that’s how we are going to continue to look at it.

Michael Foeth - Vontobel

Okay. My second question, thank you, my second question would be an update on Google TV. I thought, I saw you still had some revenues generated from this side of the business. What is the plan going forward? Are you still putting money into this, what's the next steps?

Guerrino De Luca

You had seen we are selling reviews and we will continue to sell reviews at this product. Remainder of this quarter our price change as painful as it was from a financial point of view with the right thing to do, we had accomplishing exactly the goals that we wanted to accomplish, and Google at some point will announce the availability of 2.0. I think that 2.0 will provide more breathing room to the category. We have no plan to replace review, refresh review, review as is supports 2.0 doesn’t mean we changed in anyway. All the install base to review will be upgradable over the year with 2.0. That we have no plans to build a successor of review, our strategy in Google TV has always been a strategy of facilitating the establishment of an ecosystem and a platform and then taking advantage of it as a personal vendor. We have done what we needed to do to help the platform, I think the platform has a chance to continue to grow and hopefully we will. But we are not participating in the infrastructure if you want on that category growth, of that platform growth. So, for time being we are sitting on the bench and seeing if this becomes a significant peripheral opportunity we will take advantage of it.

Michael Foeth - Vontobel

And the fact that Intel has, kind of, retreated from the business, or does that pose any changes for you?

Guerrino De Luca

I don’t know I think the decision of Intel is independent for what our strategy always has been on Google TV. I think that you should not count Google out of this, this is a very long-term strategic environment for Google and for a number of players. Google is determined to be successful in the platform and I wish them well because if they are successful we are going to take advantage of it.

Operator

And your next question comes from the line of Luc Mouzon representing Amundi Asset Management. Please proceed.

Luc Mouzon - Amundi Asset Management

My question is mostly regarding the gross margin dynamics and what are the underlying triggers, or items, we should look over the next two quarters? Is that recurring guidance will require the portfolio refresh to be accelerated or is that very much independent from the portfolio refresh at this stage, with its 30%, 33% guidance?

Erik Bardman

To give you a stance in terms of the gross margin dynamics when you look at the second half of FY ’12, the single biggest factor in terms of having us improve that gross margin that is implied in our guidance is related to the improvement that Guerrino talked about of getting the healthier business in Europe. We have made good progress to-date, this is everything from things that we have done with our channel partners, new sales execution, promotions, other things all the blocking and tackling that we know we needed to do better in Europe, we are making good progress. And so what you see in terms of that gross margin getting better over the second half that’s the single biggest factor. Obviously the things that we can’t control. I can’t control macroeconomic those types of things. So, we take the current view and we pull that forward, but when we look at the things that we do control, we feel comfortable that we are focused on the right things and executing against from that standpoint.

Guerrino De Luca

To be more specific to your question, the gross margin implies to the trend up in our guidance for fiscal ’12, includes whatever our plans include for product, they used neither an acceleration or deceleration of our product portfolio renewal. They are consistent with what we expect to do over the course of the next months. I think there will be current portfolio across the board have already the potential to deliver higher margin when it comes to, when supported by a cleaner execution in both life regions. So, I think there is nothing section of it you should expect that lift. The margin has it been the continuation of the trend that you are seeing.

Luc Mouzon - Amundi Asset Management

Okay, and just a brief follow up on the Harmony line up. It is difficult to just to figure out from the digital home category, at the moment, with the Revue situation, could you give us a bit of little light on the Harmony product line? Should we expect some new product, as well, coming up from this line, and how do you see this category at this stage?

Guerrino De Luca

You definitely should be expecting products coming exactly a long over do for new products in this category. We just recently announced a very innovative product Harmony link which is very tied to smartphones and tablets. Another version of the Harmony line up to just introduce at the end of Q2, so it's too early to tell, but in general we have focused on the entry level of the category. I’d say enormously successfully, and if you want my opinion too successfully. In the sense that we have provided decreasing up sale proposition for the Harmony user to actually get a better Harmony. So, I might say ironically that our entry level Harmony have become too good. In fact, if the mid range and high end they are not good enough. And we believe we can work there. So, the prospect of the categories are significant. There is still a very low penetration in the base of people that are 3 or more external devices in the reading room and therefore, would benefit Harmony. The penetration levels it's dismally low and so the potential high and we continue to leave the category and share. So, we are the growth driver and engine of the category and we need to strengthen dramatically on mid range particularly in this case in the high end. Our best products are two or three years old, I mean it's not necessarily mean that they are obsolete, but they have not no longer the kind of the exciting line up that they were a couple of years ago. So, we are working on it. You should see something hopefully before the end of the fiscal year it's another one of those categories that were required careful attention and absolutely obsessive focus.

As a matter of side information, in this particularly case our long efforts on developing review for Google TV have sucked resources from the Harmony organization. It comes from the same competence our living room teams, and of course, that hurt this short-term product delivery off of the Harmony team. The Harmony team is back on Harmony fully and therefore, that’s why I’m optimistic that we will see great team from them

Operator

That is all of the question we have for today. I will now like to turn the call over to management for closing remarks.

Guerrino De Luca

So, thank you everybody for being here. And we also foresee many of you at our upcoming Investor Day in November 9th in New York City. Have a good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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