Joe Greenhalgh – VP, Investor Relations Bracken P. Darrell - President and Chief Executive Officer Vincent Pilette - Chief Financial Officer.

Youssef Essaegh - Barclays Tavis McCourt - Raymond James Joern Iffert - UBS John Bright - Avondale Partners Andreas Müller - ZKB Michael Foeth - Bank of Vontobel.

Good day and welcome to the Logitech's Second Quarter Financial Results Conference Call. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session and instructions will follow at that time.

This call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech. I'd like to introduce your host for today's call, Mr. Joe Greenhalgh, Vice President of Investor Relations and Corporate Treasurer at Logitech. Sir, you may begin..

Welcome to the Logitech conference call to discuss the company’s financial results for the second quarter ended September 30, 2014. The press release, our prepared remarks and slides as well as a live webcast of this call are all available online at logitech.com.

As noted in our press release, we published our prepared remarks on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments today and they will not be read on this call.

During the course of this call, we may make forward-looking statements including forward-looking statements with respect to future operating results that are being made under the Safe Harbor of the Securities Litigation Reform Act of 1995.

The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated in the statements.

Factors that could cause actual results to differ materially include those set forth in Logitech’s Annual Report on Form 10-K dated May 30 2013, and subsequent filings, which are available online on the SEC EDGAR database in the final paragraphs of the press release and prepared remarks from Logitech reporting second quarter financial results for fiscal 2015.

The forward-looking statements made during this call represent management’s outlook only as of today, and the company undertakes no obligation to update or revise any forward-looking statements as a result of new developments or otherwise. Please note that today’s call will include results reported on both a GAAP and a non-GAAP basis.

Non-GAAP reporting is provided to help you better understand our business. However, non-GAAP financial results are not meant to be considered in isolation or as a substitute for or superior to GAAP results.

Non-GAAP measures have inherent limitations and should be used only in conjunction with Logitech’s consolidated financial statements prepared in accordance with GAAP. Our press release includes a table detailing the non-GAAP measures, together with the corresponding GAAP numbers and a reconciliation to GAAP.

This information is also posted on our Investor Relations website. The slides that accompany this call include both GAAP and non-GAAP measures and are also available on our Investor Relations website. We encourage listeners to review these items. This call is being recorded and will be available for replay on Logitech website.

Joining us today are Bracken Darrell, President and Chief Executive Officer; and Vincent Pilette, Chief Financial Officer. I’d now like to turn the call over to Bracken. .

Thanks, Joe, and thanks to all of you for joining us. I am very pleased with our Q2 performance. First, our retail sales demonstrate consistent growth. Excluding the non-strategic retail products that are in last year’s base but are essentially gone now we grew retail sales 4% and have grown our retail sales for six consecutive quarters.

Second, our profitability continues to improve strongly, creating more capacity to invest to drive more growth ahead. And third, cash generation is simply excellent. We delivered our highest Q2 cash from operation in five years and generated $250 million of cash from operations over the past four quarters.

Vincent and I will look a little deeper into our Q2 performance and then I’ll come back to discuss our outlook. Sales in our growth category increased by 27% compared to the prior year.

One of the benefits of having the portfolio of growth products is that we can deliver sales growth without the need for the product categories to all grow at the same rate. This quarter our mobile speaker business was the strongest performer and we expect continued strong growth in the coming quarters.

Looking at each of the categories within our growth portfolio, PC gaming grew 10% and we believe this business is positioned for much stronger growth ahead.

The PC gaming markets are very strong and our sale out to consumers is significantly stronger than our sale in as we saw our channel inventory levels fall as a result of constrained supply of several key components products. We're gaining share in our Americas region.

While in EMEA, we've improved our in-store presence dramatically, driving stronger underlying performance. We're very excited about our product portfolio, especially our new mechanical keyboard we just announced. The new Logitech G910 Orion Spark Mechanical Keyboard launches later this month.

It features our exclusive new Romer-G mechanical switches that deliver significantly faster actuation than any other mechanical switch on the market.

With this recent addition of the most advanced mechanical gaming keyboard in the world, we filled the hole in our lineup, and entered the holiday selling season with our strongest PC gaming portfolio ever.

We still face component constraints for some of our key products through the holidays, but we'll be well positioned to grow in all PC gaming categories. We now have the fastest mouse in the world, the fastest keyboard switch in the world, the longest lasting wireless mouse in the world with up to 20 times the battery life of its nearest competitor.

And all three of these are relatively new products. We're designing great products for this growing market where speed, accuracy and science win. Let’s discuss mobile speakers. Our mobile speaker sales more than doubled for the six consecutive quarter, as we benefit from our broader portfolio and continue to gain share in this growing category.

This strong momentum continues to be primarily driven by UE BOOM which was our best selling product in Q2 and it is the foundation around which we're building an exciting mobile speaker portfolio, more to come there. Finally, it was a weak quarter for our tablet and other accessories.

While I am pleased with the early results of our keyboard covers designed for the Samsung platform, our sales in the category continue to be negatively impacted by the decline in the market for iPad shipments. Of course, we'll have new offerings shortly for the new iPad's announced by Apple.

And during Q2, we continue to reduce channel inventories in anticipation of these new iPads. I look forward to improve performance for our iPad line up starting in Q4 when our new offerings will benefit from a four quarter of sales. We also expect sustained momentum from our Samsung offerings in Q3 and Q4.

Let’s move to the profit maximization category, which is primarily composed of the PC peripherals, where our sales declined by 2%. We continue to plan that our sales in this category will decline at similar rates to the market for new PC shipments.

Within profit maximization, we experienced strong growth in the remote's category in Q2 driven by the launch of our exciting new line up products focusing on broadening Harmony’s position to be a Home Control Hub. While it’s very early, I’m excited about our long-term potential as home control becomes more common place in more homes around the world.

This is the very beginning and we combined our expertise and leadership in universal remotes with expanded home automation product capability or compatibility. We delivered 3% sales growth in our retail video category but there are two stories underneath this.

One, a continued steep decline in the webcam category that was more than offset by very strong growth from our video collaboration offerings.

Our Logitech branded product portfolio for video collaboration delivers a compelling value proposition and I expect the market adoption of affordable, high quality video collaboration solutions to continue during the reminder of the fiscal 2015. Sales in our PC keyboards and desktops category were essentially flat.

But we’re well positioned for the second half with a strong line up including our new Bluetooth, Multi-Device Keyboard K480, the first desktop keyboard designed for use with up to three devices on any major operating system at the same time.

Before handing it over to Vincent, I just have to say how pleased I am with our non-GAAP operating margin of 11.1%, the best for our Q2 in the past six years and a reflection of our commitment to drive increased profitability through improved operational execution. Vincent now has further detail on the quarter..

Thanks. As Bracken mentioned in Q2 we continued to make good progress in improving our operational execution and reducing our cost structure while delivering once again sales growth for our retail business. We delivered a record high non-GAAP gross margin of 38.8% in Q2, an improvement of 270 basis points over the prior year.

Please note that about 100 basis points of this improvement is related to the unusual situation of our books still being open for Q4 of fiscal 2014 and Q1 of fiscal 2015. Even without that one-time benefit, we are very pleased with our Q2 gross margin performance.

As planned, a key driver of the improvement was the success of our cost optimization initiative in our profit maximization category combined with a solid improvement in the mobile speaker category.

The improvement in mobile speakers reflects the benefit from the economies of scale that were focused on delivering in any fast growing business within our gross category. While we don't guide on gross margin, we continue to see up to a point of margin upside to fiscal 2015 compared to our long-term model of 35%.

This gross margin enables us to improve our operating profit margin while investing in new products and accelerating a long-term growth potential. Q2 was the sixth consecutive quarter of year-over-year reductions in our non-GAAP operating expenses, demonstrating our focus on disciplined spend management.

As a percent of sales our non-GAAP operating expenses were at 27.8%, an improvement of the 130 basis points compared to the prior year.

While we continue to drive reductions in our indirect procurement spending as well as our global infrastructure and related processes you should expect our spending during the second half to grow on a year-over-year basis as we selectively ramp our investments to drive future sales growth.

Note that our non-GAAP operating expenses in Q2 of the current year exclude $8 million in G&A costs related to the recently completed audit committee investigation. The improvements we have made managing our working capital continue to drive strong cash generation.

In Q2 we generated approximately $33 million in cash flow from operations delivering our best Q2 in the last 5 years and in the last 12 months we delivered approximately $250 million in cash flow from operations doubling the prior year. Our quarter-ending cash balance of about $500 million was up by $205 million over the prior year.

Our cash position the highest level in nearly four years enables us to drive a healthy capital allocation strategy moving forward, focused on small acquisitions as a priority, annual dividends and finally share buyback.

Let we wrap up by saying that the audit committee investigation is now closed and we expect to be current with all of our financial fillings as soon as possible. Once our fillings are current, our 250 million share repurchase program will be available again for our use. And on that note, I'll turn it back to Bracken. .

Thanks, Vincent. Looking at the remainder of the year, we're confirming our outlook for Fiscal year 2015 of approximately $2.16 billion in sales, assuming relatively stable exchange rates and approximately $170 million in non-GAAP operating income.

I am really excited about our progress and momentum through the first half of the fiscal year, which positions us well to achieve our full year objectives. We have many outstanding products and many more to come. We're gaining share in most of our categories.

We're performing well in the PC peripherals score and have positioned ourselves for sustained growth in our growth businesses. And we are behind the scenes, creating engines for new growth.

With the holiday selling season just getting started, I am particularly excited about our product portfolio, which continues to improve as we execute our strategy of creating fewer, bigger products. The runaway success of the UE BOOM is the perfect example of this strategy and execution.

And we are creating similar potential flagship products in the quarters to come. And with that, Vincent and I are available to take questions. Please follow the instructions of the operator. .

Thank you. (Operator Instructions) Our first question comes from Youssef Essaegh with Barclays. Your line is open..

Hello, thanks for taking my question, actually a very short one, regarding the gross margin. I understand that you are a bit stretched at the high end at the moment in terms of what you can do with your gross margin.

The fact that you just pretty much guided for it to be at 36% for the full year implies a huge decline in the second half of the year, much more than not having any more the support for the [open books] [ph] and even wider volumes.

So, can you just give us a little bit more detail to help us understand what’s going on there?.

Yeah, absolutely. Good morning, Youssef, this is Vincent. So, gross margin this quarter 38.8% about a point of this, one time event or subsequent event as you mentioned as soon as we are on file we won't benefit from that one time change. It still leaves second half gross margin that is lower than first half.

Per the historical trends you can see last year also our first half gross margin was about a point or point plus higher in the first half versus second half and that’s because we used some of that gross margin to stimulate the sales growth as we get closer to the Christmas season.

So that’s definitely one aspect of the gross margin and then you have the normal mix impact that will also drive the margin down in the second half. .

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We don’t give that information publicly, but I can say it’s, Apple is an important customer for us, especially in the US market, around the world, and certainly our exposure to any of our customers is relatively limited in growth, I mean no single customer would be particularly significant to be honest. There are a few that would be bigger.

But Apple would be one of those and it certainly wouldn’t be our top customer by any stretch. Yes, the reference you made to what’s happened within the Apple Stores, there are always changes happening within Apple. We feel very good about our performance in Apple now and we expect to continue to do well there ahead. .

Thank you..

Thank you, Youssef..

Thank you. Our next question comes from Tavis McCourt with Raymond James. Your line is now open..

Hey, guys, thanks for taking my questions..

Hi, Tavis..

Good to talk to you Bracken. My first question is just a housekeeping for Vincent. On the GAAP income statement, there doesn’t appear to be a restructuring charge, but if I look in the non-GAAP there is an $8 million special charge.

Where does that show up on the GAAP income statement, is that split between the different product components?.

It’s really a G&A and this is $8 million related to the audit committee investigations made up of lawyers, accountant and forensic accountant type of expenses. .

Okay.

So that’s primarily G&A?.

Yeah..

And do you have a capital spending number for the quarter and for the year-to-date?.

Year-to-date, we are roughly the same than last year. We spend about $40 million in CapEx on an annual basis..

Okay.

And then Bracken if I was kind of hearing the qualitative comments around the growth categories for next quarter, it sounds like the tablet keyboard business probably doesn’t really turn around the business of the March quarter, but we should expect stronger growth in the computer gaming business as the product availability becomes better on these new products.

Wanted to make sure I was hearing that correctly? And then on the mobile speakers, anything you’re willing to give on – you basically have a home run product here. It looks like that category will be doing $150 million, $200 million in revenues this year.

What are the plans to expand that product category whether its distribution expansion or expanding beyond kind of the one SKU which I suspect or the one product that I suspect is the majority of the revenues?.

Yeah, relating to your first question, I think you characterized it about right. You know, I think, yeah, I won't repeat what you said. But, yeah, I mean, we expect music to continue to be strong. I think PC gamming will be strong.

I think that our tablet and accessory business this quarter will probably be similar to last quarter, but at we head into Q4 we've got a full line up and we've – you really drained out the prior product inventory. I think you should see a significant improvement in Q4.

In terms of the music portfolio, you know actually music is already a more balanced portfolio then you might suspect. But there is no doubt the UE BOOM is a home run product. And we're certainly working to make sure that we have future home run products in every one of our categories, including music. So stay tuned..

Great. And Bracken anyway to frame what the recent exchange rate movements will impact the December quarter by relative to previous. I know year-over-year in the September quarter it was kind of flattish.

But I suspect that it starts to becoming a headwind, is that going to be a noticeable in the results or was it manageable based on your forecast?.

I am going to let Vincent answer that one..

Hey, Tavis, so as you know in Q2 on a year-over-year basis there was not a lot of currency impact on a global basis, compared to when we give guidance last time, you know that the US dollars appreciated about 8% compared to the euros.

We've assumed a middle of the road for the exchange rate moving forward in second half and obviously volatility may impact that. Our euro based revenue is about 20% to 25% depending on the quarter of our total revenue and you can understand what it is.

We feel pretty good about the operating profit commitment as we have multiple levers in our P&L to drive the business..

When you say you’ve assumed a middle of the road that mean kind of a euro exchange rate with the dollar that’s halfway between where it was and where it is today or….

Yes. That’s correct..

Okay..

Yeah..

Thanks, Tavis..

Thank you. Our next question comes from Joern Iffert with UBS. Your line is open..

Yeah, hello. And thanks for taking my question. The first one would be on the share buyback. Assuming you are resuming it shortly and is executed over the next two to three years as planned.

Can you give us a feeling if there should be any EPS accretion at all or are they all be used for the long-term incentive plans of the management? And if you also could help us, what should be a fair base case according to your current view for the number of shares outstanding and of the fiscal year? Then the second question if I may is a follow-up on FX again.

I mean, taking the transaction risk you have with the US dollar and the euro, I mean if the euro stays here weaker versus the US dollar on the current spot rate, can you just give us a rough sensitivity on what is the impact here on the earnings for the second half and versus your midpoint you just mentioned? And then maybe the last question if you can just give us a feeling as you have done in last conference calls on what you expect roughly on the Christmas quarter.

Is it a flattish top line, a slight declining top line or slight increase? I mean, this would be appreciated. Thanks very much..

Hey, thanks Joern. Lots of questions here, let’s take a – let me take a few that are more financially driven. So on the buyback right as soon as we are current in our filing we will be able to resume our program. You know that the Board approved $250 million program to buy back share in opportunistic way over the next coming years.

The goal really is to create value for the shareholder. Management is not compensated on EPS. In other words management compensation is not affected by the buyback, it’s really a Board decision and one of the multiple ways for us to return cash to shareholders.

When it comes to currency and spot rate, I mentioned that 8% appreciation in the US dollars, when we gave our initial guidance the US, euro currency rate was 1.36, it finished the quarter at 1.26. We assume for our forecast going forward at around 1.3.

I mentioned that about 20% to 25% of our sales is in euro and I think you can quickly do the math and if you do the math depending on your model you'll see that if it goes to 1.26 to 1.25 you could have a $20 million to $25 million impact on the top-line, that gives you enough for your modeling.

Obviously those things may change based on the different revenue mix we may have in the quarter. When it comes to guidance for our second half, you remember last year Q3 was a very strong quarter and then Q4 was a little bit weaker.

We obviously on a year-over-year compare we are going to have – the opposite compare we are going to have Q3 from a year-over-year growth perspective a little bit less strong than Q4 and I would advise to model that way. Flattish to slightly positive would be our guidance today. .

Thanks very much. .

(Operator Instructions) Our next question comes from John Bright with Avondale Partners. Your line is now open. .

Thank you, Bracken, Vincent. Strategically speaking there seems to be a growing attach rate to tablets with mice and keyboards.

A, are you seeing that growing attach rate and how much of an opportunity do you see in that looking forward?.

You know the attach rate on mice and keyboards or tablets I think has been very, very low up to this point. There might be some growth there and we certainly keep an eye out for that in case it happens. We'd obviously be extremely well-positioned if we do see a growing attach rate in mice and keyboards. And I think it could happen.

On keyboard there is no doubt, let me break upon it. In keyboards there is no doubt there is been a growing attach rate and we're seeing it growing right now for Samsung products and its already at a pretty good rate in for iPad price. So let me just say, keyboards there is no doubt.

On mice we haven't seen that yet, but it could happen and when it happens we'll be very well-positioned and regardless, you know, we continue to sell this quarter. We had a – the nice thing about tablets and PCs that they seem to play kind of in combination to each other, if the tablet market is soft, the PC market needs to be stronger.

And we have something for both. So we're trying to make sure we're really in a neutral position depending on which one grows, if they both grow we'd be even in better spot. .

Operationally speaking, you talked about some component constraints during the quarter. I think it was related to the PC gaming category.

Can you flush out some, what are those components? Was it only PC gaming or were there others and how big of an impact was that?.

Yeah, I can't give you a specific impact, what I can say is – there were a few constraints we had throughout the business. What I would say is within the gaming segment we continue to be very constraint on mechanical switches for mechanical keyboards.

I think we'll start to solve that this quarter as we get into Q4 and we're selling products with our own mechanical switches as well as others. I think we'll really unlock that. So we should start to finally have a good look that what unconstrained supply gives us from a business standpoint in the mechanical keyboard part of PC gaming.

We also have a couple of other constraints and components within the PC gaming segment. They are less severe but they are there. And I suspect we'll see those ease as we get into Q4. So we're in a good shape as we going to Q3 in PC gaming in general, but we'll be in even better shape as we go into Q4. .

Final question for – I think it’s probably presented, Vincent on the guidance front.

You are not passing through the operating income beat in the quarter, I suspect that’s because of the predicted gross margin change, am I correct in assuming that?.

Yes, you're correct. So in Q1 we had gross margin upside, we passed that through an increase in our profit guidance for the year. This quarter we have a gross margin upside.

We are using in two ways, one is obviously the second half gross margin will be used to stimulate growth and then secondly we are going to ramp up OpEx and invest to position us as well for FY 2016. .

I am going throw one more and its final.

On the inventory front, it looks like you really have a pretty healthy inventory level at this juncture, the channel as well?.

Yeah, that’s correct, right. You can see that on our slide that were posted on our website. Our sales tool was up 6% this quarter for selling of 2%. When you look at the year-over-year basis and total dollar basis we are done and we feel pretty good about the positioning change in the OpEx. .

Gentlemen, thank you. .

Thank you, John..

(Operator Instructions) Our next question comes from Andreas Müller with ZKB. Your line is open..

Yes, thank you very much. Hello, good afternoon. .

Hi, Andreas. .

I’ve got a question on the cash conversion cycle which was 28 days.

Can you drive that stock truly further down? Or are you apart from seasonal effects already there you wanted to be having the goal, whereas in past below 30 days?.

Yeah, so as you know cash conversion cycles, first from a league perspective is impacted by new customer good sold or high margins. Margins in the second half will be lower and I would use when you model it at 35% to 36% gross margin to calculate that.

I would go back to the operational improvements which significantly made our own inventory more efficient, our supply chain more efficient, lowering the own inventory and that does enable us to improve our cash from operation in the quarter, last quarter and in the last 12 months.

You know that in March we gave a long-term target of cash from operations at about one-time. Non-GAAP operating profit will be slightly above that, but I wouldn’t model much higher than that at this point in time. .

Okay.

And then a follow-up, can you discriminate between mobile speakers within America which was tripling between North America or in particular US and then the countries in South America?.

North American software? Or North American….

Yeah, in fact was it the same growth or was it different?.

Okay. Yeah, no, we would have had lower growth in South America much lower base. That’s a relatively much, much more mobile speaker market. But the overall mobile speaker market around the world is growing very rapidly. We're going faster than the overall market, so we're growing share.

We think we're very well positioned so far to continue to gain share and there is more in the oven so to speak cooking for the future in speakers. So we're really excited about the category..

Okay.

And my last question will be on the OpEx side, can you share with us a bit more where you want to invest and what kind of product, maybe also markets?.

Yeah, we're going to continue to invest primarily in our growth products. So the growth products that you see in the growth, the potential growth products that you don’t that are not out yet. So those are our two areas of investment. In terms of markets, most of our investment right now is going into mature markets and that will probably continue.

But as we see the emerging market start to come back, we'll start to throttle down little more into them too..

Okay. Thank you..

Thank you. Thank, Andreas..

Thank you. Our next question comes from Michael Foeth with Bank of Vontobel. Your line is open..

Hi, Michael..

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Yes. So on LifeSize you know that last year we took a restructuring. We right sized the cost structure to the opportunity we stabilize sales and then LifeSize really embarked into its biggest transformation. They've launched a cloud solution and are migrating the customer declines with a more software approach with the clouds offering.

It was launched a few months ago, very good beginning, too early to really translate into financials. But from an interest perspective, from a lead perspective, definitely a very promising. In the meantime as you know the hardware infrastructure on premise that used to make some of the revenue is going down as this migrate to the cloud.

We maintain efficient cost structure running the business at about breakeven and really pushing into the cloud offering. .

Okay, excellent. Thank you. And maybe just one follow-up regarding this gross margin impact there that you see from the book still being opened.

Can you re-explain exactly how that is going to impact the gross margin once you close the books?.

So once books are closed, normally any adjustments to accrual estimate falls into the normal periods. We have about a one point $4 to $5 million that are push back into the last open period which at this point in time would be Q4 or Q1.

As soon as we are on file we go back to a normal cadence of driving a quarter, closing it and then moving into the next, not having to reevaluate it, that's longest period. And we can more technically follow-up in our call later on. .

Okay. Thanks. .

Thank you. It appears there are no further questions. At this time, I'll turn the conference back over to Mr. Darrell for closing remarks. .

Thank you very much. Well, thanks, thanks to all of you for joining us today. I am really excited about both the progress we've made today, that the things we control and about the potential ahead of us. Of course we faced short-term challenges that we discussed on the call, currency fluctuations and component supply, shortages in gaming products.

But I am really, really optimistic about the future. And I believe we'll continue to execute a winning formula here for long-term growth, great products and more to come. I look forward to keeping you updated on our progress. Thanks a lot for joining us today. .

That concludes our conference call for today. You may now all disconnect. Thank you..