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Logitech International S.A. (LOGI

Q1 FY09 Earnings Call

July 22, 2008, 8:30 AM ET

Executives

Joe Greenhalgh - VP, IR

Mark J. Hawkins - Sr. VP of Finance and Information Technology and CFO

Gerald P. Quindlen - President and CEO

Analysts

Manuel J. Recarey - Kaufman Brothers

Michael Foeth - Vontobel

Tavis McCourt - Morgan Keegan

John Bright - Avondale Partners

Simon Schafer - Goldman Sachs

Thomas Schneckenburger - UBS

Andy Hargreaves - Pacific Crest Securities

Roger Steiner - Landsbanki Kepler

Yair Reiner - Oppenheimer

Operator

Good morning. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Logitech First Quarter Fiscal 2009 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.

I would now like to turn the call over to Joe Greenhalgh, Vice President, Investor Relations. Please go ahead, sir.

Joe Greenhalgh - Vice President, Investor Relations

Welcome to the Logitech conference call to discuss the company's results for the quarter-ended June 30th, 2008, the first quarter of Logitech's fiscal year 2009. The press release, a live webcast of this call, and accompanying presentation slides are available online at logitech.com.

This conference call will include forward-looking statements that are being made under the Safe Harbor of the Securities Litigation Reform Act of 1995, including forward-looking statements with respect to future operating results. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from that 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 30th, 2008 available online on the SEC EDGAR database, and in the final paragraph of the press release reporting first quarter results issued by Logitech and available at logitech.com. The press release also contains accompanying financial information for this call.

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 statements as a result of new developments or otherwise.

I would like to remind you this call is being recorded, including the question-and-answer portion, and will be available for replay on the Logitech website. For those of you just joining us, let me repeat the presentation slides accompanying this call are also available on our website.

Joining us today are Jerry Quindlen, Logitech's President and Chief Executive Officer and Mark Hawkins, Senior Vice President of Finance and Information Technology and Chief Financial Officer. I'd now like to turn the call over to Mark.

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Thanks Joe. Let me start with an overview of our Q1 performance. We experienced continued strong demand, resulting in double-digit sales growth. Our sales growth accelerated to 18%, reaching a record high for Q1 with growth in all regions led by Asia. We improved our profitability, our gross margins increased by 40 basis points compared to the prior year. And we set a new record for Q1 operating income. And we ended the quarter with $484 million in net cash, and we generated $44 million in cash flow from operations.

Gross margins. Our gross margin was 34.1%, up from 33.7% last year and our gross profits grew by 20%. The gross margin improvement was primarily driven by a combination of ongoing product cost reductions and favorable mix, primarily within the pointing devices, keyboards, and remotes category.

Operating income and net income. With gross profits growing faster than operating expenses, our operating income grew by 24%. Our net income was $29 million, up by 15% compared to the prior year. The slower growth in net income was due to the combination of earning less interest income and having lower other income compared to Q1 of the prior year.

Now before commenting on the balance sheet, I want to briefly address exchange rates. One of the data points that we're asked about most frequently is the impact of exchange rates on our sales growth. In Q1, excluding the favorable impact of exchange rate changes, our total sales, retail and OEM combined, grew by 12%, notwithstanding our ability to modify prices in local currency overtime to maintain parity with U.S. dollar.

Let's now move to the balance sheet. Cash. Our cash position, including short-term investments, was $484 million. Our cash position improved by $118 million compared to the prior year. Now when comparing to the prior year, it's important to note that during the last 12 months, we used $22 million for the acquisition of WiLife and $217 million on share repurchases.

Our cash flow from operations for the quarter was $44 million. This was an increase of $31 million over the last year and our cash conversion cycle, I might add, was 53 days, a 17-day reduction compared to the same quarter last year and our best Q1 ever. This reduction was primarily driven by improvements in our days payable complemented by lower DSO. And this was the eighth consecutive quarter of year-over-year improvement in our cash conversion cycle.

Inventory. Our inventory was up by 18% or $43 million compared to June of the prior year. Inventory turns were 4.9, which is the same as the prior year. DSO. Our DSO was 60 days for the quarter, a four-day improvement compared to the 64 days in the prior year. Share repurchases. During Q1, we repurchased a little more than 1.5 million shares for $49 million. We own approximately 6.7% of our shares outstanding and we have roughly 156 million remaining under our current repurchase program. Now please note that the growth percentages that follow are in comparison to Q1 fiscal 2008. So, now let's discuss net sales by product family starting with retail.

Our retail sales grew by 19% with units up 12%. We achieved double-digit growth in all regions, with EMEA up 20%, the Americas up 10%, and Asia up 41%. We experienced strong demand in a number of product categories with cordless mice and remotes delivering substantial growth in all regions.

Retail sales pointing devices. We sustained our strong momentum in the category in Q1 with sales growth of 34%. The primary growth driver was cordless mice, with sales up by 59% and units up by 58%. Now we achieved very strong growth in the low-end and high-end of the cordless mice category with both more than doubling compared to the prior year.

Now, the low-end growth was driven by strong demand for our V220 Cordless Optical Mouse, while at the high-end is our VX Nano Cordless Laser Mouse for notebooks continued to be the main growth driver. It was our best quarter yet for the MX Air, our unique rechargeable cordless air mouse which also contributed to our growth. And I also might note, we had strong... we had a strong quarter in our corded mice with sales up by 15% and notebook mice making a nice contribution also to this category.

So let's now turn to retail sales for keyboards and desktops. Our sales for keyboards and desktop category grew by 15%, with units up by 16%. And there were a number of highlights in this category during the quarter, including a strong growth at the high-end of the cordless desktop category and this was driven primarily by our Cordless Desktop MX 5500 Revolution and also continued success in standalone keyboard sales with double-digit growth in all regions, and I might add, solid contribution from the sales of our diNovo Mini, which is our cordless mini keyboard optimized for controlling PC entertainment, and lastly, sustained demand for our notebook stands.

Let's turn to retail sales, audio. Sales at audio declined by 11%. Now the decline was in speakers where sales fell by 15% due to weakness in our PC speaker category. Let me elaborate further. Our PC speaker sales were down by 20%, with the decline experienced across most price bands, and in particular, at the low-end and high-end of the category.

Now, on the other hand, we were pleased to achieve 15% growth in our iPod speaker sales, with a strong contribution from Pure-Fi Anywhere speakers. It was a solid quarter for our PC headsets, with sales increasing by 12%. The growth was driven by two of our newest USB headsets and that will be the ClearChat Pro and ClearChat Comfort. And we continue to build momentum with our Squeezebox family of media streaming products with sales up substantially and reaching a new high for the quarter.

If I turn to video, we are very pleased to deliver accelerated growth in the video category with sales up by 21%. The sales growth was driven by another very strong quarter for our high-end webcams. Demand for our QuickCam Pro 9000 and our QuickCam Pro for Notebooks helped us increase our high-end sales by nearly four times compared to the prior year. Now our WiLife family of video security products made a strong contribution to the growth as we build momentum in this very promising category.

Retail sales, gaming. It was a very strong quarter in gaming with sales up by 37%, our highest quarterly growth in over three years. Our PC gaming sales increased by 24%, and this growth was driven by strong sales in both our G15 Gaming Keyboard and our G25 Racing Wheel.

Now on the console side of gaming, sales were up by 61%. The star of the console category, with our GT Driving Force Wheel, which started shipping during Q1 and has been met with very strong demand, and also contributing to growth with sales of our headsets and microphones for console gaming.

Retail sales, remotes. It was a great quarter for remotes, with sales up by 74%, and units up by 77%. And it was... frankly, it was the best growth we've had in the last five quarters in this category. The growth was primarily driven by strong demand for our newest remote, the Harmony One, and we saw a very strong sales across all three regions, with EMEA sales more than tripling compared to the prior year.

OEM sales. We continued to deliver double-digit growth in OEM, with sales up by 15%. Now the majority of the growth was once again in the console gaming category driven by microphones for singing games. Our OEM mice sales were up by 5%.

So, in conclusion, let me wrap up the discussion with three points. One, it was our best Q1 ever for sales and operating income. Two, we achieved double-digit sales growth in all but one product category, with especially strong performance in remotes, gaming, and pointing devices. And three, Q1 was our eighth consecutive quarter of year-over-year improvement in our cash conversion cycle helping us more than triple our cash flow from operations compared to the prior year, significantly outpacing the 24% growth in operating income.

Before concluding my comments, I want to let you know that our next analyst and investor meeting is scheduled for November 12th in London, and we hope you will be able to join us. Let me now turn the call over to Jerry.

Gerald P. Quindlen - President and Chief Executive Officer

Thank you Mark. I'm very pleased with the company's performance in the first quarter of fiscal 2009. We delivered our best ever Q1 for sales and operating income, and we generated strong cash flow by continuing to focus on improving the effectiveness of our working capital. And most impressively in my view, we did this in a very challenging operating environment.

Now there were a number of highlights in the quarter, starting with the acceleration of our retail sales growth to 19% during a period of hike and concern, not only about the U.S. economy, but increasingly about the situation in Europe. Our ability to deliver double-digit growth across all regions, and in all but one product family, demonstrates the benefits of our products in geographic diversification, as well as the continuing appeal of our offerings.

Looking at the performance of the regions, I was very pleased to see growth in all of our sales regions, and especially with the continued exceptional growth in Asia. I was also quite pleased with the strength and resilience of our business in the Americas. We had a solid quarter for both selling and sell through in the Americas, and we achieved sales growth in every category except audio, with remotes leading the way with a 40% increase year-over-year.

I'm extremely pleased to see the second consecutive quarter of growth in video and a return to double-digit growth in that category. We achieved growth in all regions with the return to growth in EMEA's video sales for the first time in the last six quarters.

Q1 was another very strong quarter for pointing devices, with sales up 34%, with the majority of the growth driven by our sales of mice for notebooks. We continue to leverage the opportunity provided by the popularity of notebook computers, at sales of our family of notebook peripherals increased 58% compared with the prior year. I was also very pleased to see the strong performance of our gaming business, up 37%, the strongest performance in three years as Mark noted earlier. It was particularly gratifying to see a return to growth in both retail PC and console gaming, complemented by our ongoing momentum in OEM with microphones for singing games.

Without a doubt, another highlight of the quarter was our strong gross margin performance. The year-over-year improvement in our gross margin is even more impressive when you consider the increasing pressures on our input cost, which thus far we've managed to largely absorb. Our strong gross margin continues to provide us with a powerful source of flexibility. In Q1, we were able to effectively use our strong gross margins in a targeted way to stimulate demand in select product categories and markets. For the balance of the year, we plan to continue to take advantage of the flexibility our strong gross margin provides us to drive sales growth through targeted promotional efforts wherever appropriate.

Now let me spend a minute talking about our audio business, which had a disappointing quarter. As Mark mentioned, the decline was entirely in PC speakers. Our Digital Music business performed well and our Streaming Media business is growing rapidly and beginning to contribute nicely to audio's overall results.

There were several factors at play in the PC speaker category, with the most notable being a product line that's in need of a refresh at a number of key price points. But these are factors that are largely in our control and we are addressing them.

Let me comment on what we see going forward. The September quarter is traditionally when we release the majority of our new products and we plan for that to be the case again this year. As you'd expect, we will introduce a variety of exciting new products across all our product categories. We've had very strong success in pointing devices for the last six quarters... for last several quarters, primarily driven by our line of Cordless Mice for Notebooks.

During Q1, we launched our latest mouse targeted for notebook users, the V450 Nano Cordless Laser Mouse for Notebooks, featuring our innovative plug-and-forget nano-receiver. And there is more to come, including a wireless mouse that is incredibly easy to bring along wherever you take your notebook computer. We'll also continue to strengthen our line up of mice for desktop PCs.

You could expect to see innovative new offerings in the keyboard category as well. Our Cordless Desktop Wave has been a key contributor to our growth in this space, and we plan to build on this momentum in the months to come. We will continue to target notebook PC users with the products to enhance their comfort and their productivity. We also expect to launch appealing new offerings designed specifically for the growing base of Mac users.

Moving now to audio. As I indicated, we believe that much of the softness that we saw in the PC speaker category during Q1 was related to product after transition. And we are already beginning to introduce... to address that this quarter with new products. We also expect to significantly strengthen our product line up in the iPod speaker space with several new offerings. We were quiet pleased with the sales of our Squeezebox products in Q1 and we believe that our momentum in the Steaming Media space will only accelerate as we expand our product lineup.

Turning to video. I see it continuing to build strong momentum. This quarter's results reinforced that our three-point plan focused on new products, improved in-store communication and strategic partnerships is working. We believe our current product lineup which we refreshed during the June quarter is quite strong.

Our challenge in webcams remains to grow the overall category. We plan to continue doing this in a variety of ways and particularly by utilizing marketing programs designed to raise consumer awareness of the simplicity and richness of video communication. Our strong gross margin also provides us with a powerful source of flexibility for promotional efforts in the video category. We will continue to take advantage of that going forward.

WiLife sales in the Americas made a solid contribution to our growth in video during Q1, and we expect that to continue as we move forward. And we plan to launch our WiLife product family in EMEA this quarter. We believe that European consumers will respond well to our easy-to-use plug-and-play security monitoring products, helping us build on the momentum we established during Q1.

We were very pleased with the growth we achieved in the gaming category during Q1. Our success in the console space was due to the extremely strong reception to our new Racing Wheel for the Gran Turismo 5. But we aren't stopping there. Just last week, we announced several new... exciting new products, including a cordless keyboard for Wii, licensed by Nintendo, and our first ever wireless force feedback wheel. We're looking forward to entering the holiday shopping season with our strongest PC and console gaming lineup ever. At the same time, we're also exploring opportunities to leverage at the success we've had with singing game peripherals and OEM into our retail channel.

Remotes was our best growth category in Q1. We continue to be very pleased with the strong demand for the Harmony One. We will refresh several of the products in our remotes line during Q2. But we are primarily focused on both further improving the consumer set-up and usage experience, and raising consumer awareness of our category leading offerings. In fact, along with video, remote is the other product category where we plan to use the flexibility provided by our gross margins for targeted promotional efforts aimed at driving top line growth.

The macroeconomic situation obviously continues to receive a great deal of attention in the media. In some ways, the challenging retail environment coupled with our strong performance at the point-of-sale has made our retail partners count on us even more than usual for their growth. They depend on and appreciate our willingness to sustain our innovation focus during challenging times like these and our track record for consistently driving growth. Now we recognized that economic conditions could change. But what we've seen in the last two quarters and still see today as well is sustained demand for our products. As one indicator of this sustained demand, our retail shipments through the first three weeks of Q2 are well ahead of the same period last year.

That brings me to our outlook for fiscal 2009. We continue to target 15% growth in both sales and operating income, and we expect our gross margin to be above our long-term target range of 32% to 34%.

In summary, we just delivered the best Q1 in our history during the period of significant economic uncertainty, achieving 19% top line growth in retail, despite the tough retail environment and macroeconomic turmoil, demonstrates the broad appeal and the increased resilience of our product portfolio. While Q1 is not the most pivotal period of our year, the momentum from our first quarter performance combined with our strong line-up of new products starting to hit the market as we speak, carry us into the second quarter confidence that we're well positioned to deliver on our fiscal 2009 targets.

At this point, I'd like to open the call for your questions. Please follow the instructions of the operator.

Question and Answer

Operator

[Operator Instructions]. Your first question is from Manny Recarey with Kaufman Brothers.

Manuel J. Recarey - Kaufman Brothers

Thanks. How are you doing guys?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Good morning, Manny.

Gerald P. Quindlen - President and Chief Executive Officer

Good Morning, Manny.

Manuel J. Recarey - Kaufman Brothers

Mark, can you go over the impact of the exchange rates? Did you say, it was excluding exchange rate, it was 12% year-over-year sales growth?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Manny, that is correct. Yes.

Manuel J. Recarey - Kaufman Brothers

If I remember, you typically say that exchange rates don't have a big impact on the growth and... did that changed this quarter?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Well, I would say Manny, again, we don't consider this a huge impact from that standpoint. It's 12%, we try to disclose that, just so you guys would have better insight on that. We try to help you provide a lot of information, both at the IR day and such as, as you recall, in terms of the nature of the sales mix of our company. And I think when you look at that, you can look at that and the exchange rates that have been fluctuating in the marketplace and get a pretty good proxy. I think what we've just tried to do is, provide a little bit more clarity for you. We think people have been asking the question and hence we try to provide additional data for you.

Manuel J. Recarey - Kaufman Brothers

Okay, thanks.

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

By the way, we still believe, it's important to note, Manny, that we still believe that you don't want to take the percentage and let it be an oversimplification. I want to believe that we don't want to oversimplify the situation because we still retain the rate to change, our regional pricing to match up with U.S. pricing to ensure global parity overtime. So that opportunity is particularly available during new product introductions from that standpoint. So I think with the sales mix and this, it just gives people a chance to triangulate and validate their models. Okay?

Manuel J. Recarey - Kaufman Brothers

Okay, thanks. Jerry, you'd... at... in your comments you'd mentioned about the retail shipments are being up nicely year-over-year for first three weeks, the... what if the retailers kind of coming back and talk to you about [inaudible] second half of this calendar year going into the holidays, just asking about the holiday season. This being a more cautious than you would expect?

Gerald P. Quindlen - President and Chief Executive Officer

Yes, I mean, I think it's fair to say that in general, retailers are a bit more cautious at this time, Manny, than they would have been, say 12 months ago. But what I can comment on relative to some of our discussions with them is during Q1, we held our... what we call, showcases in Europe and in the Americas, and this is where we share with them the product line that's coming out in Q2, Q3.

And the feedback, there are a key point of feedback for us, the feedback that we got from them on the product line, it was very, very positive. I think the other thing that's been a key during this time period is, that we have been able to consistently grow their business. So, if you look at the results we announced today, just focusing on the Americas for example, we grew our business 10%, we grew sell through for our retailers at double-digit rates, 40% growth in Harmony , 23% growth in Video and this is all in the Americas, during the time of very, very challenging retail environment. So, I think our retailers are looking at us, as I said in my comments, as an even more valuable partner than usual. So, they are more cautious, but remember the thing that the retailers looking for more than anything else is growth. They are looking to bring customers in their door and they are looking for vendor partners who can help grow their business and we did that very, very well and we've got great products coming. So, I think that they're even closer to us than usual, is the way I would characterize. But yes, they're more cautious than they were 12 months ago, but that's natural.

Manuel J. Recarey - Kaufman Brothers

Okay. Then, one last question. Just looking at the gaming sector, the revenue was up 37%, but units were down 17%. Obviously they had product mix shifts there, could you just give us some more color on kind of what's driving that?

Gerald P. Quindlen - President and Chief Executive Officer

Yes, Manny, let me address that, a couple of things here. One is that we had fewer sales in our PS2 game pads, and then also our PS key accessories would be one of the dynamics. And then as you called out obviously, the mix is a big factor, if you look at our GT, our Gran Turismo Steering Wheel is a higher ASP for example, our G15 gaming activities as well as our G25 Steering Wheel. These have a higher ASP. But I think those are the combined factors, both mix and those are the two items.

Manuel J. Recarey - Kaufman Brothers

Okay, thanks.

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

You're welcome.

Gerald P. Quindlen - President and Chief Executive Officer

Thanks, Manny.

Operator

The next question is from Michael Foeth with Vontobel.

Michael Foeth - Vontobel

Yes, good morning guys.

Gerald P. Quindlen - President and Chief Executive Officer

Good morning, Michael.

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Good morning, Michael.

Michael Foeth - Vontobel

Few questions from my side. Just to clarifying the FX, forex situation there. You have... just given us the negative impact, more or less had a positive impact that FX had on sales. Any impact on your margins, I mean, any impact on the operating profit margin that you could quantify?

Gerald P. Quindlen - President and Chief Executive Officer

Yes. Let me just say, Michael, that we wanted to provide this at the revenue level again after benchmarking and having this be a frequent question as such. We are not going to disclosing this at the operating income level, a couple of points I want to call out that I think you are aware of just from the IR Day and such is that, we do have a substantial, if we focus, you talked on gross margin and operating income.

On the gross margin side, keep in mind that we have cost in local currencies, for example in Asia, that have an impact also on our total gross margin in addition to the top line side that we talked about. So, we want to make sure that we don't neglect to kind of call that out. Also we talked about having a major... if we take it down to the operating income side, we also have a major cost base that we disclosed in reference to the Swiss franc, also in the euro, and from an Opex standpoint as well. So, all this does not flow to the bottom line, all this does not flow to gross margin alone, there are several factors that we look at from that standpoint.

Michael Foeth - Vontobel

Okay, thanks. And another question regarding those first three weeks, you've been talking about the retail shipments were very strong. In fact, is that in terms of sell through or it's selling to the...?

Gerald P. Quindlen - President and Chief Executive Officer

I'm talking about shipments. Shipments, Michael.

Michael Foeth - Vontobel

Okay. And in terms of the growth in Asia, can you maybe give us a bit more color on which regions in Asia is fuelling the growth and what the trends later in the quarter have been?

Gerald P. Quindlen - President and Chief Executive Officer

Sure. What I can say is that, it was the third quarter in a row of growth in excess of 40% in Asia. In Q1, we saw excellent performance frankly in every market in Asia, but the stand out performances, I would say, were Japan. We've struggled in Japan a few quarters back, if you remember, but we're back on a very good path there. We feel very good about where we are in Japan. China continues to grow very, very nicely. Frankly, Australia and New Zealand has been a star for several quarters in a row. But even if I went below that to India, Korea, et cetera, I was very pleased across the board.

If I look forward, and I'm talking about the future for the emerging markets, and Asia in particular, the fundamentals are very attractive and I've talked about this at Investor Day. We continue to say that what drives our business model, as you know, is the upgrade cycle and the installed base of PCs. And the installed base of PCs is growing very, very rapidly in all of the emerging markets, and certainly in Asia. And more importantly what's really driving the demand, the fundamental demand for our products is the fact that consumers in these markets are very, very anxious to use the Internet, for example, to connect.

They are very enthusiastic about leveraging the possibilities that things like the Internet brings to them in terms of video communication, accepting content over the Internet, and that's where the real demand for our products is coming from. So, I think that we see broad base strength in Asia and in all emerging markets and we continue to focus on those areas as a key growth driver.

Michael Foeth - Vontobel

Okay. And the last question from me, if you could just give us a few comments on the transportation costs, with the higher oil price. I know that you have like fixed door-to-door rates, but at some point it's probably going to change?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Yes, Michael, what we talked about in the IR Day is that, historically a list as we related to the prior year, we've been able to continue some of our freight costs as a percent of our revenue, and actually do a good job with that. Some of that has been with breakthroughs like we talked about in terms of repackaging our audio, designing that for smaller form factor to make improvements. That's just one typical example. But that's what we've disclosed annually, we haven't planned to disclose that quarterly, we'll talk about that again on an annual basis.

Michael Foeth - Vontobel

Okay, thanks.

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

You bet.

Gerald P. Quindlen - President and Chief Executive Officer

Thank you Michael.

Operator

Your next question is from Tavis McCourt with Morgan Keegan.

Tavis McCourt - Morgan Keegan

Just a couple of follow-ups, and great quarter considering the economy, I think.

Gerald P. Quindlen - President and Chief Executive Officer

Thank you.

Tavis McCourt - Morgan Keegan

In terms of the... the G&A expense was up a little bit more than than I'd have suspected sequentially. Was there anything one-time in there? Are there a lot of beginning of the year accruals in that number or kind of explain what's going on there?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Tavis, you're spot-on. There was a one-time investment in G&A, it was actually related to some IT expense, and you should expect as you go-forward throughout the year that you will continue to see the trend, even seeing at least the prior few quarters of G&A continuing to grow at a rate slower than the rest of the company's OpEx. And again, pointing towards the long-term of the long-term model for G&A.

Tavis McCourt - Morgan Keegan

Okay. And then, a follow-up on the strength in APAC. It looks like units were strong in APAC, but sales were much stronger than units. I wouldn't think you're getting much of a currency benefit over there. Is there a mixed shift difference in APAC in terms of what sells over there. I would have thought that kind of the lower-end stuff which sells over better, but is there something I'm not thinking about?

Gerald P. Quindlen - President and Chief Executive Officer

No, I think, the way to think about it Tavis is just that we have... the fundamentals are just very good. And we're seeing strength in every market, particularly for our control devices, particularly for keyboards and mice. But we're... and we're seeing strength across price points too. So, I think, as I said in my earlier comments to I think Michael's question, the fundamentals are all moving in the right direction relative to emerging markets, and Asia in particular.

Tavis McCourt - Morgan Keegan

Okay. And then in North America obviously had a fantastic year, the last year growth north of 20%, a little slower growth this quarter. Was that primarily the speaker business or was it some of the larger pointing device and keyboards, somewhat weak in that market. Is that something you'd expect as a bigger picture question is, would you expect that North American market now after a couple of good years of growth want to slowdown a little bit this year, or do you think that will pick up as this year progresses?

Gerald P. Quindlen - President and Chief Executive Officer

I was very pleased with our performance in the Americas in Q1, given as you or someone else said, the challenging operating environment, 10% growth and double-digit sell through growth, audio was a drag, a disproportionate drag on AMR, but as I mentioned in response to somebody's question, I think it was Manny's, 40% growth in Harmony, which just tends to be a higher ASP category for us, 23% growth in video, very strong growth in pointing devices, but 10% growth overall against a pretty challenging backdrop.

So, I was very happy with it, and we will continue to leverage our new products which are really just hitting the market now as I think you are all aware. Q2 and Q3 are the quarters for us where we really... we introduce new products all year, but Q2, Q3 are the two big new product quarters, and they are just really hitting the market now, and so I think that will certainly help, not only in the Americas, but across the board.

Tavis McCourt - Morgan Keegan

Okay. Thanks Jerry.

Gerald P. Quindlen - President and Chief Executive Officer

You're welcome.

Operator

Your next question is from John Bright with Avondale Partners.

John Bright - Avondale Partners

Good morning.

Gerald P. Quindlen - President and Chief Executive Officer

Good morning John.

John Bright - Avondale Partners

Hi, Jerry, Mark, Joe. Mark first, specifically on the quarter, audio, we've talked about a couple of times. Characterize this at how much of this category weakness market shares shift relating to products you are cycling out of?

Gerald P. Quindlen - President and Chief Executive Officer

Yes, good morning, John. It's Jerry. I'll take that one. As I look at audio, and Mark said this in his comments, if you look at audio broadly, I was pleased with digital music, double-digit growth in PC headsets 12%. So, good quarters in both of those elements of our audio business. So, the weakness was completely related to PC speakers.

And frankly, I would characterize the weakness really as related to some product gaps, and some product transitions. There is nothing going on in PC speakers in terms of competitive dynamics that are out of the ordinary, there is nothing going on in terms of market growth that is out of the ordinary or in a particular market. It really is related to some gaps in our product portfolio. They are factors under our control. We are addressing them already, some of the products that will come out in Q2 will start to address this, and then some products that we have planned in terms of refreshing and addressing some price point issues in future quarters will also help to address it. So, I would really characterize it as a product-related issue in PC speakers and nothing to do with category growth or unusual competitive dynamics.

John Bright - Avondale Partners

Okay. We see the phenomenon of laptops overtaking PC sales. What's your thought, Jerry as far as the adoption of speakers for laptops going forward?

Gerald P. Quindlen - President and Chief Executive Officer

Well, it's an area where we are very focused and as you know, we have... we think we've proven our success at transitioning in other categories, for example, in webcams, I'm talking about the desktop to notebook transition. Certainly in pointing devices, we've done this very, very well. You look at, for example, the last two quarters, notebook mice have grown almost 60% in both quarters. So, we believe that we know how to do this. We have a very robust product line up focused on PC speakers that are really targeted at notebooks, and so just as we welcome the transition in other elements of our line up, we are embracing it here as well. So, it's not a dynamic that concerns us in anyway, John, we see this as an opportunity.

John Bright - Avondale Partners

Okay. Last question.

Gerald P. Quindlen - President and Chief Executive Officer

Sure.

John Bright - Avondale Partners

You've talked in this conference call and other conference calls about the gross margin being above your historic average and your projected long-term average of 32% to 34%, and achieving that about in this fiscal year. Is there anyway you can characterize how much in this particular quarter you needed to use your strong gross margin to drive sales?

Gerald P. Quindlen - President and Chief Executive Officer

I would say what... it wasn't anything... first of all, it tends to be a little bit more category specific. So, we've used our strong gross margin in video now for a couple of quarters to help stimulate awareness. For example, we've said repeatedly there was three... we've a three-point plan that we're following in video, it's new products, it's in-store marketing, it's partnerships. We have not hesitated to use our strong gross margins to help fund to add with retailers to create more awareness for video, that's part of what in-store marketing is all about.

So, we've used it in a very targeted fashion, in categories like video. In other categories, like pointing devices, where our innovation story is extremely strong, we don't need to use it and we don't. So, we are selective by category, we are selective by market. If there are some markets, some countries out there that are not growing as fast, we will use it there more. So, we're very targeted in our approach. The big picture answer to your question is I don't think we did anything in this quarter that was out of the ordinary.

John Bright - Avondale Partners

And on the remote side, you mentioned in your comments that you might use it for your remotes looking forward. Is that more because the margins are solid in the remote category more so than, you're seeing anything unusual there?

Gerald P. Quindlen - President and Chief Executive Officer

Yes, I will give you couple of comments and Mark you may want to add to this. But we're not necessarily talking about promotions in a price-oriented sense there. We're talking more about marketing support, marketing programs, when it comes to remotes, and I'm talking about the kind of think we did the Harmony, we called it Harmony on steroids, but the Harmony advertising campaign we did last quarter.

So, we're talking more about marketing support and the reason is with remotes, which is... we told you that, it will be our fastest-growing category in '09 as it was in '08. It's a category that still needs a lot of awareness building and so that's an area where we will provide more marketing support on an ongoing basis, that's really what we meant by that. Mark, if you want to add any?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

No, I agree with that. And John you are correct that the Harmony remote does have one of our higher gross margins as well. You are correct.

John Bright - Avondale Partners

All right. Thank you gentlemen.

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

You're welcome.

Gerald P. Quindlen - President and Chief Executive Officer

You 're welcome John

Operator

Your next question is from Simon Schafer with Goldman Sachs.

Simon Schafer - Goldman Sachs

Yes, thanks so much. Good morning. I'm wondering just wanted to come back on this question about input price inflation, I would realize, [inaudible] you don't want to comment as to when certain things may be up for renewal as far as freight cost is concerned. What about some of the other input variables such as plastics and your direct labor costs in China? What type of inflation should we assume just trying to get a better sense as to how big the gross margin tailwind may be?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Okay. So, Simon, first of all, we see the same thing that you see. We certainly acknowledge the rising input pressures that are out there. You can see it in oil for transportation things of that nature, different commodities in different dynamics, some of which you called out. So, we see the same thing from that standpoint. I certainly wouldn't guide you on the factors going forward, those are pretty hard dynamics to project. I mean, everyone will make their own call right on where those things are heading.

The one thing that I will say though is... these stats [ph], it relates to Q1 that we were able to go ahead and meaningfully offset those as you can see with our gross margins for Q1 being pretty strong and an improvement again year-over-year. So, I think there are input cost pressures we see those in Q1, we're able to mitigate a good majority of those and still deliver the gross margins up year-on-year.

Gerald P. Quindlen - President and Chief Executive Officer

Simon, the only thing I would add to that is... to Mark's point, we are looking at all of the same signals and filtering them through our filter and we are also adding some other information that like our retailers response to our new products and we factored all that in and we've reaffirmed that, we believe our gross margin, we reaffirmed our gross margin targets for the full year. So...

Simon Schafer - Goldman Sachs

Understood. That's very helpful. My second question would be more on the balance sheet, yet another quarter of great performance on the cash conversion there. But in light of the excess cash situation on the balance sheet, and perhaps some potential targets of acquisitions that conceivably have to become cheaper in price. Should investors praise [ph] themselves for a larger element of M&A going forward to sustain the growth on the model?

Gerald P. Quindlen - President and Chief Executive Officer

Yes, so, I'll reiterate what we have said consistently about our approach to acquisitions, because really nothing has changed. We continue to use a number of criteria in evaluating acquisitions, first and foremost, that we believe the potential acquisition regardless the size can create value. That's the number one criteria.

Second, we're looking for acquisitions that perhaps give us entry into a space that we think is attractive or will be attractive. If you look at our last two acquisitions, they are perfect examples of this, Squeezebox and WiLife. We look for the opportunity to bring leverage, our global distribution footprint, our global brand, our capability in product development, et cetera. And we continue to be active in looking for opportunities out there, and we will continue to do that going forward. But nothing has really changed.

Simon Schafer - Goldman Sachs

All right. Thanks very much.

Gerald P. Quindlen - President and Chief Executive Officer

You're welcome.

Operator

Your next question is from Thomas Schneckenburger with UBS.

Thomas Schneckenburger - UBS

Good afternoon gentlemen, and congratulations again for the strong cash flow. It seems to be competent as usual, but the question from my side is, why have you stopped buying back shares later on in the quarter? Why you're not so much convinced of the attractiveness of the share price or is there any other reasons, and the question for you... okay.

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Yes. Let me mention a couple of things here, Thomas, from that standpoint. One is that you had to keep in mind, there is a window of which we have a block out window, in terms even when we buy shares, that's certainly one commentary.

The second thing is that we've... people have asked me this before, they try to predict the timing because for all of you that are on the phone, we actually post every two weeks our share buyback on the Swiss Exchange. And as you might guess, we try to be as unpredictive as possible for obvious reasons for the benefit of our shareholder.

We bought 1.52 million shares for $49 million. Again that's a substantial share buyback and we bought 217 million over the last 12 months. So, we think share buyback is proving to be a great thing for our investors, you will see more share buyback in the future. But, I hope that gives you a little bit of color, Thomas.

Thomas Schneckenburger - UBS

And the other question, second question is on... a follow-on on the manufacturing costs. Our indications are that Chinese manufacturing costs are up 25% over the last 12 months. Last also, I think your logistics renewal was up for Q1 as well, that was perhaps you also... you've contracted kind of peak end-to-end rates.

So, I am really wondering on the impact on the gross margins for next year, because there seems to be substantial pressure. And then also could you provide some flavor on... does this mean that you're moving light manufacturing in the Chinese hinterland or to other countries. And the next question would then be on the Investors Day, you provided your existing [ph] targets also for the mid-term.

So, you extended it and you said, you see the 5 billion company on the horizon. Given this significant downturn in consumer confidence in the macro environment, the basic net increases, foreign exchange drop, would you still reiterate the existing 15 [ph] target for the mid-term or would you be more cautious now?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Let me break this into a…

Gerald P. Quindlen - President and Chief Executive Officer

There's lot of questions there, but I'll take the question about the targets Thomas. So, we've reiterated the targets. We've factored in all of the available information, and the available information in terms of the economies and absolutely the input pressure, input cost pressures. And we've reaffirmed our 15-15 guidance as well as the gross margin guidance, and so... I mean, that's the short answer to that one. Mark?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Okay. Yes, and I'm going to address several front points of your questions. But as Jerry said, the 15-15, the one key point that I want to make, Thomas, as you talked about the yearly guidance. You also mentioned the foreign exchange, and again that's been a topic of question in the past. Keep in mind over the last 10 years, we've delivered double-digit growth for the last 10 years in a row uninterrupted when foreign exchange has been up, foreign exchanges has been down, all over the place. So, we don't see foreign exchange as the key driver and our ability to drive growth for the company as evidenced in the last 10 years. So that's the context of why we again believe it's important not to oversimplify that.

But as Jerry said 15-15. So, let me move on now to the manufacturing cost questions that you had, you have several of them. The most important message that I want to share to you is that we're reconfirming that our gross margin will be above the range, our long-term business model range for fiscal 09'. So that's what we're reconfirming with everything that we've seen and understand.

So that's that. In terms of China and the last 12 months, our Chinese cost in terms of... we absolutely see input cost rising as we've tried to call out earlier in the call, we see a lot of what people in the market see. Again if you look at the last 12 months, if we talk about that retroactively, keep in mind you've seen what's happened with our gross margin over the last 12 months as well. In terms of logistics, you've talked about renewals and such, we've pretty much disclosed what's happened in the prior fiscal year, again we'll do that on an annual basis in terms of more detail on logistics. But most importantly we're reconfirming our gross margin for the year.

Gerald P. Quindlen - President and Chief Executive Officer

Thomas, let me add one point of color on manufacturing. Just to remind everyone, we maintain a flexible manufacturing model, we manufacture roughly half of the units that we sell, sometimes it's little more than that, sometimes it is less and one of the reasons we do that is so that we have maximum flexibility as conditions change. In some cases, we may manufacture more things in-house because we have cost advantages versus suppliers. In other cases, we may use suppliers more on some products than we have in the past. And that's one of the reasons we maintained a flexible manufacturing model. So, you need to keep that in mind. In terms of manufacturing moving more towards the hinterlands of China, I think you said we don't see that happening, but we continue to look for the optimal solutions in terms of manufacturing efficiency.

Operator

Your next question is from Andy Hargreaves with Pacific Crest Securities.

Andy Hargreaves - Pacific Crest Securities

I wonder if I could ask a follow-up on the working capital. Just the phase of reduction, is that sustainable and where do you think your working capital base, can you get to ultimate range [ph]?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Andy, this is Mark. Couple of things here. One is that, we're certainly pleased to see the improvement. I would say that with temper [ph], that you shouldn't expect that the rate of improvement that we have been seeing to go from 70 to 53 is quite a big improvement on that. I think that you shouldn't... with that being said, I would temper the rate of improvement, but there is no structural reason why we cannot continue to improve on our working capital efficiency. I'll call that out as well, don't expect it at the same rate and don't expect it every single quarter, but over the course of time, we are going to continue to be very attentive to our cash conversion and that's what you should expect.

Andy Hargreaves - Pacific Crest Securities

Okay. And then in terms of the 15% top line target, I wonder if you can give us any qualitative or quantitative break down and your expectation of OEM versus retail within that?

Gerald P. Quindlen - President and Chief Executive Officer

Well, what I can say is that, at the beginning of the year, when we set the targets, we said that we thought OEM would not grow at the same rate as the company average of 15%, we thought it would grow. But given that the comps were very strong due to a lot of success with microphones in '08, we said that OEM would grow probably not grow at the same level, meaning 15%, now it's very pleased to see that in Q1, we actually grew at 15% in OEM, so that's a great start and... but we believe OEM will grow. And we have the 15% overall guidance for the top line for the full year for the company.

Andy Hargreaves - Pacific Crest Securities

Thank you. And then just last I wondered, can you give us any more detail on WiLife in terms of its size right now or its growth rate?

Gerald P. Quindlen - President and Chief Executive Officer

I'll start and I'll let Mark add a comment at the end. We got off to a very good start with WiLife, it's adding to our overall business. We're very, very pleased with the reaction we've got from customers, for example, I mentioned our showcases earlier. Our customers see why we entered this market and there are already many of them into this space and they are very glad that we have entered it because they see us being able to bring the things that Logitech does very well, things I mentioned earlier, like our brand and our distribution and our marketing capability, and most importantly our product innovation. So, we're off to a very good start and Mark, I don't know, if you want to add anything to that?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

No, I totally agree with you. I think, the... we don't disclose the exact size of it. But one thing they consider, Andy is that video, it's part of the overall video category and video would have still been double-digit growth irrespective of that. It added on to it, but as Jerry said, it's a very promising and exciting business for the future.

Andy Hargreaves - Pacific Crest Securities

Well, thank you.

Gerald P. Quindlen - President and Chief Executive Officer

Thank you.

Operator

Your next question is from Roger Steiner with Landsbanki Kepler.

Roger Steiner - Landsbanki Kepler

Yes, good morning guys, thanks. Just two small add-ons. I think both for Mark, just an off one on the working capital, obviously a very, very good progression there. There's definitely no sort of one-off or specific item in payables if I got those right. Do you guess that what sort of the main driver for the decrease?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Payables was a significant part of the driver, but also we improved our DSO by four days, Roger. So, those were the two primary dynamics. Our inventory turns were equal to what they were last year. So, it was really payables primarily, but also in the receivables.

Roger Steiner - Landsbanki Kepler

No one-off for specific items in payables then?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

No one-off. Thanks. We've been over the last eight quarters, we're driving this improvement. We've been trying to address this structurally, and with three different legs, so it's not a one-off.

Roger Steiner - Landsbanki Kepler

Okay, and then on your cash part, I mean, you have obviously added your cash balance, increase the cash bal [inaudible] quite considerably, and it is reaching over, I think there is certainly some excess cash on the balance sheet and assuming that there is no sort of a bigger acquisition sort of imminent, I mean, do you have any sort of second plan what you would do with that cash, I mean, commensurate [ph] the share buyback or any other way to return cash for shareholders?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Yes, let me speak to that. There's three key things that we've... where we use cash on, but before I even say that, I mean first of all it is very, very good to have cash these days and also I think our cash is reflective of really the kind of similar profile that blue-chip tier-one companies have in terms of cash balances in the field that we are in. But if you think about how we are using our cash, Roger, I would really say there is three primary goals. The first thing is to fund our business and to fund our growth. We're fundamentally a growth company, that's number one.

Number two is, as the opportunities present themselves, M&A is a good use of cash in WiLife. We bought a $22 million company is a great example. And then thirdly is share repurchase. And if you look at the last 12 months for example, we spent $217 million on share buyback. So, we're using the cash, the thing is, as you called out, we just continue to fairly substantially improve our cash conversion cycle. So it's a nice problem to have so to speak. But that would be the commentary on that.

Roger Steiner - Landsbanki Kepler

Okay--.

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

As far as bigger M&A, I think Jerry has called out the three criteria we have for M&A. So, size is not the criteria.

Gerald P. Quindlen - President and Chief Executive Officer

Amanda, this is Jerry. I think we have time for one more question.

Operator

Thank you. Your final question is from Yair Reiner with Oppenheimer.

Yair Reiner - Oppenheimer

Yes, good morning. So, my question is on ASPs. It looks like ASPs if you look [ph] on the products portfolio as a whole, we are down year-on-year for the first time in a long time. I was wondering whether that reflects kind of where the strength of our overall portfolio is right now, or is it really some kind of macro indicator about where consumer appetites are, and if it is, do you feel that your product portfolio is positioned well for what looks like continued macro headwinds?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

So, let me say the former thing. First of all, just to clarify, our ASPs are up year-on-year, they are up by 6%, and obviously it varies by category, but in aggregate, they are up by 6%. So that's probably the most important factual point to put out there. And then secondly, I would remind you and remind everybody that when we see ASP changes, mix is a major factor with ASP changes.

One should not conclude that ASP changes are related to pricing changes per se. Typically they're within the mix between families and across families if you will. So, our ASPs are up from that standpoint. So... and when you talk about just macroeconomic responses, in terms of ASPs, one of the things to note too is, we've got a great response to some of our higher ASPs. For example, our remotes are growing 74% year-on-year. So, it really... we're getting good response overall from that standpoint.

Gerald P. Quindlen - President and Chief Executive Officer

And the only other... this is Jerry. The only point I would add is that we continue to reiterate that one of the strengths of our portfolio is breadth that it spans categories, it spans multiple price points. In the current quarter, and frankly this has been true for several quarters.

For example, if you just look at pointing devices, one example, we saw great performance at higher price points with products like the VX Nano, and the best performing mouse we have these days, best-selling mouses is the V220, which is an optical mouse in the $20 to $29, €20 to €29 price range. You could say, you could extend that analogy into keyboards and other product categories.

So, we continue to have... and we continue to bring out products at multiple price points, it gives us a lot of flexibility, and as Mark said, we did extremely well in one of our highest ASP category is Harmony, and did extremely well in pointing devices at both the high-end and the low-end, and it's that versatility I think that gives us strength at challenging times like these.

Yair Reiner - Oppenheimer

Great. And if I can just ask a follow-up, in terms of the inventory, how existing [ph] channel inventories right now and are you comfortable with the levels ahead of some product refreshes?

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Our channel inventories, we view those as normal.

Yair Reiner - Oppenheimer

Okay. Thank you.

Mark J. Hawkins - Senior Vice President of Finance and Information Technology and Chief Financial Officer

Thank you. Thanks a lot.

Operator

Thank you for participating in Logitech's First Quarter Fiscal 2009 Earnings Conference Call. This does conclude today's conference. You may now disconnect.

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