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Logitech International SA (NASDAQ:LOGI)

40th Annual J.P. Morgan Technology, Media & Telecom Conference

May 15, 2012 11:20 a.m. ET

Executives

Guerrino De Luca - Chairman and Chief Executive Officer

Analysts

Paul Coster - J.P. Morgan

Paul Coster – J.P. Morgan

My name is Paul Coster. I’m the senior analyst covering applied and emerging technology at J.P. Morgan. This is 40th annual TMT conference, which is pretty amazing, really, isn’t it? I did talk to some old timers about the first conference a couple of year’s ago and it sounded like it was a bunch of hippies in the room, actually.

Anyway, it’s my great pleasure to have Guerrino De Luca, the CEO of – and Chairman, I believe, of Logitech International. Welcome and thank you for making the trip here.

Guerrino De Luca

Thanks for having me.

Paul Coster – J.P. Morgan

So, first of all, just sort of level set and perhaps you can talk about what Logitech does and is and then we’ll talk a little bit about how we got to this point.

Guerrino De Luca

Okay. So, I assume most of you know that we make peripherals, personal peripherals across a multiplicity of platforms, across a multiplicity of markets, geographically as well as from a technical point of view. We come from being the PC guys and, as such, we've been – it has been decided that we're dead, because the PC is dead, and we have to prove that we’re somewhat alive why. We have broadened our portfolio very, very broadly across other platforms, of course, but that’s what we’re known for. We're the [Miles Stegall](ph) and part of being [Miles Stegall](ph) we do much than [Author ID1: at Sun May 20 11:06:00 2012

] (inaudible) 13 different product lines and we offer both in connected devices as well as in applications such as remote control and music.

We also have a business business. We made an acquisition some time ago of a company called LifeSize, which is a player in the video conferencing game and we do have a Logitech business business made up of Logitech products like mice, keyboards, headsets and webcams that are operating in the UC space and the enterprise, as well.

Paul Coster – J.P. Morgan

Okay, so, it’s really been a very interesting time for Logitech, I mean for ten years, if I am right, you clearly had your finger on the pulse of the PC area. You grew dramatically and didn’t do a thing wrong. And, then, you decided to kind of diversify a little bit out of the PC area into other segments, into digital TVs for instance and then to the enterprise under new CEO and my sense is that you may have lost a little bit of… maybe distracted from the core business, which was bringing fabulous products to market.

Is that what happened? I mean, perhaps you could just go through that because it becomes relevant, [Author ID1: at Sun May 20 11:06:00 2012

] I think, because you’re now going through another transition and why is this one going to be successful?

Guerrino De Luca

Absolutely. So, what happened fundamentally was much less the desire to diversify, which was there and is there, [Author ID1: at Sun May 20 11:06:00 2012

] is it’s a sort of a misplacement of the value of products, and particularly magic products, and the success of the company. We make products that nobody really needs, if we make products people want and if our products are not wanted, people don’t buy them. Okay?

And we had missed a little bit of that sense and over the last 43 years our portfolio had become mediocre across the PC space, across the tablet space, across any space, we made a couple of important mistakes that happened in the history of the company.

Our initiative with Google TV was a mistake on our side, although the platform was very promising, but we just went at it as if it was sliced bread and it wasn’t. But those happened, and many such things will happened in the history of any company that is in the lead and wants to grow.

The core mistake was having sort of regard for the essence of Logitech, which is to make products that people want to buy and the first thing I did, as I returned as the CEO was to deeply dive into the portfolio, and understand what was wrong with the road maps and we dropped a number of things we were making. We brought in things that were planned to be much later on and we just repositioned the portfolio with fewer better products and we are beginning to shift sort of the outcome of that review and more of that will happen in the months between now and October. So, by Christmas season, which, obviously, is very important for us, I believe you will see Logitech back to its proud standing when it comes to product across the platforms.

Our weak performance as being the source of all the theories about our fate, the PC is dead, the tablet's going to kill you, we had given reason for these theories to develop by the simple fact that we did not have the right fuel to prove that, in fact, whether PCs win, whether tablets win, whether [Author ID1: at Sun May 20 11:06:00 2012

] Apple [Author ID1: at Sun May 20 11:06:00 2012

] wins, whether Android wins or Windows 8 is going to be a big deal or not, it's almost neutral to our potential because we can serve all these platforms with phenomenal products that people want.

And I'll give you one example of those, and I’m not here to market my products, even though I am, this is one of the children of this new generation. It’s not an iPad, that’s already been done, but it’s a very beautiful little cover keyboard for the iPad. It’s called the Ultrathin Keyboard for the iPad, the best cover keyboard ever made, and I would like you to just touch it. It connects to the iPad through the magnetic side of the iPad, so fundamentally replaces [Author ID1: at Sun May 20 11:06:00 2012

] the smart cover that you might have with your new iPad.

This is a full Bluetooth keyboard, it has magnets also on this little place where you put the keyboard, so its stable when it’s put on there itself, it's Bluetooth. It is $99, but most importantly if you touch it and see it, it's a magic product, you want it. And that's the kind of things that we invent. I may be simplistic, but 90% of what we are is the lack of these things.

Paul Coster - J.P. Morgan

Yeah, which brings me to a bigger point which is that suddenly Logitech feels like it's getting its groove back and it happens to coincide with you rejoining the company. I mean to what extent is this dependent upon the CEO?

Guerrino De Luca

Well, listen, I am no CEO, I am no – and absolutely, in fact, you can blame me for where we are. I wasn't at the Bahamas when the company was in trouble, I was the Chairman, I was actually the Executive Chairman, so I went to the office most days. But there was somebody else that thought that the company needed a structure to grow.

The idea was we had the products, they are the ingredient for growth, now we have to prepare the company to be a $3 billion, $4 billion, $5 billion company. It’s a reasonable thing to do, processes, systems, the way [Author ID1: at Sun May 20 11:06:00 2012

] you operate. But we forgot that [Author ID1: at Sun May 20 11:06:00 2012

] without that fuel, we’ll never get to $3 billion, $4 billion, $5 billion, and so our engineering teams, our products teams were asked questions. They were asked questions about efficiency, about how much money are you spending on developing each product as opposed to only developing the right product.

And this is the same engineering team that was there when I was the CEO and it’s the same engineering team that is there today. So, CEOs don’t make very big differences in the life of a company’s, except asking the right questions. We chosen, our fault, my fault, a CEO that was great at organization, but not a great product person. I’ve learned that lesson. The person that we hired to be the CEO of the company [Author ID1: at Sun May 20 11:06:00 2012

] nine months is fundamentally a product consumer person, which I believe is the person that company needs. The company doesn’t need me personally. I need the company much more than the company needs me.

I think that the understanding through these very painful years in fiscal ’12, the one that finished in March was absolutely the most painful year in the history of our company that I know of and I’m glad it's over.

Paul Coster - J.P. Morgan

Okay. So, there’s a core competence and sort of looking at the DNA, capability inside your R&D labs that you think has now been liberated by being able to ask the right questions again.

Guerrino De Luca

Absolutely. I didn’t design any of these products and you will see, across the board, from traditional mice and keyboards to tablets products and music products and remote controls, things that go into the your living room, you will see that manifesting itself. As a matter of fact, you cannot even begin to think of one individual in the opus[ph]. I have done nothing, I just asked the questions.

Paul Coster - J.P. Morgan

Normally, I don’t, but in this particular case I do think the CEO relationship, it's encouraging that you’re back at the helm at the moment, but it sort of a little bit of the issue that one person can make such a big difference in sort of turning the company around so quickly.

Anyway, moving on. The cadence with which you bring new products to market, it sounds like it's about to, well, there’s going to be a resurgence of new products shortly and then will the cadence increase? Because the other thing which I’ve noticed with some of these smaller companies, the obvious, is that their product innovation is just so quick because of the lack of, your obviously . . .

Guerrino De Luca

You have to be very careful here. The cadence will not increase, in fact the cadence might decrease. My theory is that you're better of with 40 great products that, A, are good products, and that’s what we were doing. We were covering every possible price points, every possible nook and cranny of every possible shelf on the planet, but that doesn’t make you a successful product company.

So, there will be fewer, probably, but they will look more because once you see what they are as they launch for Christmas, you’ll feel like, “Oh, wow. Logitech is great.” So many great new products. It’s because they’re great, not because they’re made and I’m not even buying the notion of quick, quick, quick innovation. Consumers do not change so quickly and you have to get to the heart of the consumer. You don’t necessarily have to get to the heart of the latest technology. Google TV was the latest technology by far and the consumer wasn’t ready for it.

So, you have to be very, very careful of how you apply the understanding of the consumer. You have to think in the mind of the consumer. What are assets that Bracken, the person that will be the CEO brings to the company. Here has a deep understanding of the consumer mindset. The company is rich with understanding technology and industry, etc, in fact, as rich that sometimes being mistaken in believing that technology makes the whole difference is the combination of the consumer and technology that makes the difference.

So, the pace may not be faster, the amount of products may not be bigger, but everything will be much more powerful. Apple computer makes one iPad, actually, two, a black one and a white one. That’s what it needs. So you have to be very careful with what it needs in terms of fast cycles. We have never been a fast product cycle company. Our products live between 18 and 36 months. So, it’s the right product at the right time for the right reason.

Paul Coster - J.P. Morgan

Now my memory may fail me, but I seem to remember that the new CEO was first brought in as president and chief operating officer.

Guerrino De Luca

No, he was the head of sales for three years.

Paul Coster - J.P. Morgan

Oh, he was.

Guerrino De Luca

He was never the president. He was never the chief operating officer.

Paul Coster - J.P. Morgan

Oh, is that right? So, he’s been head of sales for three years at Logitech?.

Guerrino De Luca

The old COO, yes.

Paul Coster - J.P. Morgan

No, no, this...

Guerrino De Luca

Oh, the new CEO, [Author ID1: at Sun May 20 11:06:00 2012

] he was brought in a president.

Paul Coster - J.P. Morgan

Right. He was brought in as president, and almost – [Author ID1: at Sun May 20 11:06:00 2012

] and it didn’t take you very long for you to decide that he was the right man for the CEO role. I mean it took . . .

Guerrino De Luca

He was hired as the CEO.

Paul Coster - J.P. Morgan

Right.

Guerrino De Luca

He was not made the CEO because we, together, decided that a period of nine months in which he could understand the company and could be focusing inside as opposed to coming to these beautiful conferences and talking to intelligent people like you, which is what I want him to do for the coming nine months. My number one job is to help Bracken become the best CEO the company’s ever had.

Paul Coster - J.P. Morgan

Well, you kind of gave yourself an option that, you know, if this gentlemen isn’t . . .

Guerrino De Luca

No.

Paul Coster - J.P. Morgan

No, it wasn’t an option. This was the man, this is the right position . . .

Guerrino De Luca

It's an option as everything in life. I can be fired tomorrow. No, it’s not [aiming for best](ph), [Author ID1: at Sun May 20 11:06:00 2012

] it’s a planned transition that we put together this way because we both felt and the Board felt that it was the best for him and for me and for the company.

Paul Coster - J.P. Morgan

And his mandate is to return to the core values and objectives of this, which is to make great products. Right?

Guerrino De Luca

His mandate is to make great products people want to buy and make money at it.

Paul Coster - J.P. Morgan

All right. Okay. So far so good. There are some things that are outside of your control, though, no matter how wonderful your design team is. There are end markets that go away from you. The webcam market is a clear example of that. I would argue that the TV control, the remote control, universal control market is also moving away from you.

Guerrino De Luca

I don’t think it is.

Paul Coster - J.P. Morgan

What? You disagree? Well, lets talk about it. I mean, there are markets that are stable, keyboards, mice and, potentially, you might even get a little bit of a lift once people start to embrace them for use with tablets, audio is growing. Gaming has been difficult for you and I think that is where some of the new brands have really come at you.

And, then, finally, seems like we disagree on the remote control opportunity. So, lets go through these segments.

Guerrino De Luca

If you look at the entire portfolio, the area that is in mature consumer markets, let’s be very specific, Logitech operates in emerging markets, as well as in the business market. In mature consumer markets, U.S., Europe, Japan, the only category which we're in [Author ID1: at Sun May 20 11:06:00 2012

] today which is structurally challenged and will not grow is [Author ID1: at Sun May 20 11:06:00 2012

] PC webcams. The reason is that in every platform from the iPad to the PC to the Mac, there is an embedded video component and that embedded video component is good enough for the applications that most consumers use. So there will always be people in the consumer market that will buy better webcams because of quality, except [Author ID1: at Sun May 20 11:06:00 2012

] that the core is not going to resort to growth.

That said, webcams are growing in emerging markets substantially and webcams are growing in the business market. The UC kind of trend is such that a combination of [Author ID1: at Sun May 20 11:06:00 2012

] webcam and headsets, which is we’re [Author ID1: at Sun May 20 11:06:00 2012

] [Author ID1: at Sun May 20 11:06:00 2012

] the only company [Author ID1: at Sun May 20 11:06:00 2012

] offering both, by the way. It’s interesting to have Plantronics before us, is a tremendous opportunity and people buy better webcams because that’s what the IT department decides. Okay?

So, but, yes, in the consumer market or developed countries, the web market is challenged, it is the only category in which that is the case. And, by the way, two of the products that we will ship before Christmas are video products. They’re not [Author ID1: at Sun May 20 11:06:00 2012

] – in my opinion, they’re downright[ph] video products. They’re targeting the consumer market in developed countries and they’re not PC webcams.

So, that is – so we are going to redeploy certain skill sets that we had in video and video compression and audio in sort of in different environments, and I can’t be more specific. That said, you talked about remote control as being challenged. I doubt it. We challenge it ourself. We are the absolute maker of the [decline](ph) in remote controls, which is the biggest – webcams and [Author ID1: at Sun May 20 11:06:00 2012

] remote controls have been the worst performing categories for us in the last year, so.

In case of webcams, the reason is structural is inherent. In the case of remote control, the issue is specifically that we have driven Harmony, which is a unique platform, we’ve driven it to the entry point. We’ve driven it to the masses. The product is neither meant to be for the masses nor does it work for the masses, generates substantial calls to customer service when it sold at $30. We can’t afford those calls and it looses its magic.

Paul Coster - J.P. Morgan

Yes.

Guerrino De Luca

Harmony One, which is like probably the best selling remote controls, $150, is the ideal Harmony. Its four years old and there’s 2.5 million Harmony users that use Harmony One that have been waiting since for a reason to upgrade. We’re going to provide them a reason to upgrade. You’re talking about remote controls and smart phones.

Paul Coster - J.P. Morgan

Yes.

Guerrino De Luca

They exist. Remote controls, you know, you can use your iPhone to control your TV. You understand that, first of all, you don’t control your TV the same way you would control it with a phone.

Paul Coster - J.P. Morgan

No. I understand.

Guerrino De Luca

So, you also use your phone for other reasons than controlling your TV and imagine what happens when you get a phone call and you’ve got the volume, it’s not obvious. It’s a gadget. We have Harmony on iPhones. I believe it’s a marginal component of the full remote control category. I believe that televisions… entertainment set-up will remain complicated and you will want to have a device that makes your life easier not complicated.

Paul Coster - J.P. Morgan

My thesis is a little bit different actually. It's not that, no I appreciate a unified remote controller controls an infrared signal and very sophisticated and [Author ID1: at Sun May 20 11:06:00 2012

] is quite – [Author ID1: at Sun May 20 11:06:00 2012

] instead of trying to do with a handset. But I do believe two things. One is that most of those devices in the living room will be IP addressable. So therefore there is a new means of communication with them as we move forward. And second is that some of those OEMs that had relinquished the remote control markets, really, really care about the user interface and wants to recapture the consumer experience.

Guerrino De Luca

I agree with that but all these, two comments. IP addressability is going to happen. It's going to happen on our Harmony. It's a tremendous source of customer information for us, so that's kind of exciting[ph] more than anything else.

Paul Coster - J.P. Morgan

Okay.

Guerrino De Luca

Television makers are going into remote controls, it’s great to see. There's some fun demos out there like waving in front of your TV to increase your volume. Try it. Try it out home and it happens. Imagine you're watching the Super Bowl, try to do that. But the other point is these are all platform specific. So you have a Samsung TV. You have in the house you'd probably have three or four different brands [Author ID1: at Sun May 20 11:06:00 2012

] (inaudible) would probably have a Sony, Panasonic, [Author ID1: at Sun May 20 11:06:00 2012

] Samsung. How do you make the whole work together and that's not easy for any of those manufacturers.

Paul Coster - J.P. Morgan

All right. Well, your point is well taken and it has to be determined in the future.

Guerrino De Luca

The proof is going to be in the pudding. So everything I'm saying here today and I appreciate that I am kind of forward-looking in nature, I'm telling you about a great new portfolio that you've marginally seen. I'm telling you the cost of that in the company. It has not happened yet. So all these things have not happened so I understand the kind of gloomy view out there, but I'm not gloomy.

Paul Coster - J.P. Morgan

No. All right, it's quite obvious. On the OEM front, that feels like it's somewhat de-emphasized.

Guerrino De Luca

Yeah.

Paul Coster - J.P. Morgan

Ca you talk about that a little bit?

Guerrino De Luca

Well, our OEM business is not single digit in our revenue stream. It's a legacy business. It's still profitable. Just for those of you that don’t know, it's probably any of the mice that we sell to PC manufacturers that continue to sell desktops, not a particularly brilliant and healthy kind of segment, but when you have the vast majority of the market share there, and it's a cash flow positive business. And we’ll stay in it until as long as it is and if it's not, we're going to be okay with it.

Paul Coster - J.P. Morgan

LifeSize, growth rates accelerated pretty much massively and is still growing. How important is that business to you now?

Guerrino De Luca

It's important. It's a very high margin business and I still believe it was a great acquisition to make even though I was not the one making it. I was very much supportive of it. I think you have to step back and see what happens in the video conferencing market and everybody has been complaining that something is slowing down a bit, from Cisco to QUALCOMM. What these companies are experiencing is slightly different than what we are experiencing. What they are experiencing is a clear lengthening of the sales cycle at the very high end of the enterprise.

What is happening is that the low hanging fruits of video conferencing room deployment is being taken. Now there' all this video conferencing rooms out there in the enterprise and the IT department is figuring out how do we just glue everything together in UC and collaboration. So, therefore, it's going to take longer for every enterprise to move to the net step. Of course, Cisco can deal with it. It's a great opportunity I think for Cisco because they can broaden. [Author ID1: at Sun May 20 11:06:00 2012

] QUALCOMM maybe more challenged to do it because they don't have that scale. But that is what's happening at the top of the market, which is where we do not really operate.

Paul Coster - J.P. Morgan

Right.

Guerrino De Luca

LifeSize operates in smaller enterprises, smaller companies and there your low hanging fruits of video conferencing deployment is not being [authentic]. So the problem of growth, the decline – the slowdown is again self inflicted and it's driven by the opposite reason the Logitech has a problem. Logitech has a problem because we didn't have enough great products.

LifeSize over the last 12 months has tripled its portfolio. It used to be selling room systems and executive systems, simple things, [Author ID1: at Sun May 20 11:06:00 2012

] now we're selling infrastructure products and bridges, nothing sort of Cisco-ish, but certainly beyond the meeting room, and that requires a sales force that gets it as opposed to going to a customer and say, now look at us, we have all this. It's this is what is good for you. So that translation of the portfolio into specific solutions that our sales force might challenge itself at this end. [Author ID1: at Sun May 20 11:06:00 2012

] It might mean that [Author ID1: at Sun May 20 11:06:00 2012

] it's a growth pain and we’re addressing it. I believe that LifeSize will come back to growth and it's going to be a part of our turnaround, if you will.

Paul Coster - J.P. Morgan

Let me just draw upon one other source for me of confusion. I may have been the only person in the world confused so in which case you can quickly dismiss it. But you were going into the enterprise to some extent. I mean we're [Author ID1: at Sun May 20 11:06:00 2012

] still not quite sure what you said, but LifeSize was part of the beachhead and you clearly in partnering with GM Netcom felt that you could also discover a channel into the enterprise. And then that kind of – there was a little flurry of activity around that. I'm going to say it was a year ago. I may be wrong. And since then that's also been a little bit de-emphasized, or is that still ongoing?

Guerrino De Luca

It is very ongoing, it is being de-emphasized in our conversations for two reasons because our priority has to be the consumer market and we have to strengthen the company in that space. That thing is going on. Secondarily because it's a tricky situation, it's a situation in which because we are using the same distribution channels that we're using for our consumer products except the second tier, the third tier become more targeted to the enterprise, it's hard for us to slip this business in a way that is reportable on a GAAP basis. So because we can’t talk too much about how big it is, we're not capable, we know because we have estimates and we have non-GAAP measures that we use internally, but it's impossible to talk about it so briskly. So it has been de-emphasized in the communication. It's actually a tremendous opportunity. It's growing fast.

We sell business of mice, keyboards, webcams and headsets to companies, okay, in large deals, in small transactional deals to channels like CDW, etc. Channels that buy from our existing distribution, what we've done is create a bigger incentive to a myriad of VARs to actually buy from distribution because they were just…they were not having any incentive to do so. By the way, if you look at studies within the IT departments across medium and large enterprises, and you ask which company you trust most in this class of peripherals, everywhere it's Logitech. So we have an untapped market out there and you're just enabling the market to be reached through channels that are there, you know every bit.

Paul Coster - J.P. Morgan

So it's not then related to the LifeSize or your sales force. And this doesn’t require you to suddenly have a high touch on sales force?

Guerrino De Luca

God forbid, no. We don’t have one individual direct sales force in Logitech. No, we don’t.

Paul Coster - J.P. Morgan

Okay.

Guerrino De Luca

It's all driven through second tiers, and it's all driven through incentive to VARs to buy products from our distributors, the Ingrams and the TechData of this world and these are specific products designed for example, coded for the enterprise, UC compliant, cases that the consumer may not want. We have just one of the coolest fronts that we've introduced lately is a combined super phone and a webcam, which is called ConferenceCam. And it's totally enterprise driven and it's all the rage in IT circles. You may see it because it doesn't translate into a raging Best Buy, but it is actually a cool product. Very good. And by the way, just to be clear, we are the consumer company in the enterprise. We're not the enterprise company in the enterprise.

Paul Coster - J.P. Morgan

Okay.

Guerrino De Luca

We are completely focused on making products that the employees want and the IT people, and make it easy for the IT department to deliver that. That's the concept. We're not changing the line or the position of the company.

Question-and-Answer Session

Paul Coster - J.P. Morgan

All right. So I am less confused. Questions from the audience. Yes, sir.

Unidentified Analyst

Do we need a mic or not necessary?

Paul Coster - J.P. Morgan

No, I don’t think a mic is necessary. We'll repeat it, too.

Unidentified Analyst

So, two unrelated questions. The vast majority of consumers don’t read PC magazines, aren't that really involved in the thinking about getting accessories and don’t buy them. From a marketing perspective, what are you doing differently going forward? I’m making these numbers up. So instead of having 5% or 10% of the install base of tablets and PC users buying Logitech products, could you actually take it up one or two steps because again the products are magical and they also realize they need them. But up until now again, these are people that don’t think and have not bought your products in the past, in essence are you going to invite these brand new users to your family?

Guerrino De Luca

Yeah. Well, talking generationally, you're right. There is a generation of people that, kids that have not bought our products. We have a pretty wide customer base in terms of people who have bought products in the past. But your point is well taken. Logitech has never been a heavy marketer, okay. And I personally do not believe in heavy marketing, okay. Our products, most of our products have to sell themselves, so our strongest market in asset is distribution. We can place anything on any shape on the planet. We can. And in fact, the strength has also been our curse because we have placed average products on every shelf on the planet.

So the moment - the big exposure for use takes place in Apple stores, Best Buy's, Amazon, and [MediaMart](ph). [Author ID1: at Sun May 20 11:06:00 2012

] Now that's where our products will be and increasingly will be in our target and broader channels. In certain specific cases, we will do more marketing, especially when we’re targeting a generation that may not know Logitech or may confuse Logitech with their father's products. In certain cases therefore we will do more marketing, but it's not going to be a structural change for us. Shelf presence of great products that present themselves well is going to be 90% of the market.

The second part of the market is word of mouth. I can tell you if I advertise this on TV, people will buy it. If I sell it to 100,000 people that are excited about it, it will be worth much more than the money I spent on the advertising. Because word of mouth - nobody believes advertising. Nobody believes. Consumers do not believe that. So they believe their friends and the idea is to put in your hands something that they are proud to show their friends and that's one example.

Unidentified Analyst

The second question is I know you're excited about your products going to be introduced in the next 6 to 12 months. Can you embellish a little more? I know you do a lot of internal evaluations of products and rate them. I'm not sure what the rating system is, but can you give us a sense of the products that you will be introducing, how much are rated, and whatever numbers might be a 10, a 9, an 8. I'm trying to get a sense for how good you really think they really are as opposed to [Author ID1: at Sun May 20 11:06:00 2012

] how better.

Guerrino De Luca

Well, whatever I say is just my word. So, let me put it differently. I've been at the company for 14 years and so I've seen great portfolios, I've seen okay portfolios, I've seen bad. Things have not been perfect for ten years and then all the sudden, horrendous. No. But I have never been so unimpressed by a portfolio as I was Christmas last year. I mean, I work for a company that has the (inaudible) being able to buy my products to give my friends. Okay. Many companies don’t do that. Try to be Cisco and give your friends an enterprise device. And I found a couple that I would give to my friends. I will through the same exercise in October this year, I will find 15 that are relatively right.

Paul Coster - J.P. Morgan

Any other questions? Yes, ma'am.

Unidentified Analyst

You mentioned audio is one of your growth components. Can you elaborate on that at all?

Guerrino De Luca

Yeah, we have a traditional audio business, very strong, and kind of flattish to marginally growing in PC speakers. We don’t think that will go away. People will continue to want to hear their music or play their games on their PC. Our biggest emphasis on audio is on mobile phones so we believe that music will be on their phone. You will live with music on your phone and we want to provide you with everything that is needed to take this music out of your phone for your personal enjoyment so a big effort in headset and earphones.

It's all coming from the legacy brand that we bought, [Uniq](ph). [Author ID1: at Sun May 20 11:06:00 2012

] It’s a very high-end brand. They're big earphones, earplugs for stage musicians, people on stage, rock and roll, they could not hear their music without being equipped with [Author ID1: at Sun May 20 11:06:00 2012

] custom in-ear devices. We're expanding that brand to a broader line of headphones and earphones. That's on one side. I call it wearables.

The other side is wireless speaker, both AirPlay, Bluetooth, mostly wireless. The world of docks, iPhones docks, etc., is migrating towards wireless devices. It's happening now, we're jumping on that, and we'll have a broad line of wireless devices both Bluetooth and Wi-Fi, as well as wearables, some of them wireless. And we do understand that this is a very competitive market. There are very established brands like Bose and very new brands like Beats on both side of the spectrum. We believe we have a positioning that fits well in the middle and that's an area which we're betting significantly.

So I've seen the products, I love them, but it's not just the products here. [Author ID1: at Sun May 20 11:06:00 2012

] That's where some marketing will play. It's probably the single biggest new thing we're doing, let's call it digital music as opposed to [BCCs](ph).

Yes?

Unidentified Analyst

You've got more exciting product lineup that you're expecting. Do you think they will be able to increase gross margin?

Guerrino De Luca

Well, we are refraining from providing any form of guidance, and more specifically business model guidance. The reason is that, first of all, I was burned too many times last year with providing guidance there. And, second, the degree of variability here is very high. We are really renewing the portfolio in a major way. That there is 15 points up and down and potential top lines, how do I guide, it doesn’t make any sense. And then we have cost reduction. So there are many things in place, and so we prefer to just deliver as opposed to guidance.

My expectation though is the gross margin in not where you will see the biggest change. It's going to hopefully stay where it is. It's actually pretty healthy right now. And the mix should keep it there more or less, we expect top line and profitability changes when all this kicks in, which would be probably beginning with Q3. What I told some of your colleagues this morning is if you look at our Q3 performance, Christmas work, compare it with last Q3, which was poor as most quarters we had. It's not a particularly bad quarter, let's say. Okay. Just an average crappy quarter as the last couple of years we had. Compare it with that and you will see the difference. If you don’t see the difference, there's something wrong with us. You would see meaningful difference in performance across the portfolio.

Yes?

Unidentified Analyst

You talked about how your products really kind of sell in terms of the packaging and so forth on the store shelves. What makes you confident that the packaging and presentation of your products has becomes much more effective in terms of communicating to consumer and, basically, saying “buy me.” I'm wondering , basically, are we doing a pass buy and more people are necessarily thinking about it?

Guerrino De Luca

Not much in the sense this is still a work in progress. You don’t have to expect that everything with the company will be perfect in October. We will have to continue to develop great products; we'll have to continue to evolve. So this is work in progress. Some categories are more there than others and we're making a tremendous effort. We’re packaging the music products, the new music products because of the particular nature of the audience out there, but it's not a big bang thing. It is definitely part of our presentation.

One of the things we've found in the current simplification of the company we had a disconnected packaging development department, we had an engineering department that did structural packaging, and a marketing department that did sort of the graphics around it. That stopped us from making great package design because we made a great package from a solidity perspective and then we dressed it nicely. That's not what great package design is. You have to take the two things together so we have brought those things together. These are very internal matters but just to give you a sense, this is a work in progress.

Paul Coster - J.P. Morgan

I'm going to call a halt to the session at this point but, Guerrino, thank you so much for attending this session. It was great.

Guerrino De Luca

Thank you.

Paul Coster - J.P. Morgan

Very helpful. Thank you.

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