Ben Lu - VP, IR Bracken Darrell - CEO, President and Executive Director Vincent Pilette - CFO.

Tavis McCourt - Raymond James & Associates Michael Foeth - Bank Vontobel AG Jorn Iffert - UBS Investment Bank Andreas Müller - Zurcher Kantonalbank Felix Remmers - Credit Suisse AG Paul Coster - JPMorgan Chase.

Welcome to the Logitech Fourth Quarter Fiscal 2017 Financial Results Conference Call. [Operator Instructions]. This call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech. I would now like to introduce your host for today's call, Mr.

Benjamin Lu, Vice President of Investor Relations..

Thank you, Dan. Welcome to the Logitech conference call to discuss the company's financial results for the fourth quarter of fiscal year 2017. The press release, our prepared remarks and slides as well as a live webcast of this call are available online at the Investor Relations page of our website, 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 quarterly result report on form 10-Q filed with SEC on December 31, 2016 and subsequent filings. The company undertake no obligations 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 from 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 are also available on our Investor Relations website. We encourage listeners to review these items.

Unless noted otherwise, comparison between periods are year-over-year and in constant currency and all reported results and updated outlook are focused on continuing operations and do not include the performance of Life-size which is reported under discontinued operations.

This call is being recorded and will be available for replay on the Investor Relations page of the Logitech website. Joining us today from Zurich are Bracken Darrell, President and Chief Executive Officer; and Vincent Palette, Chief Financial Officer. And now I'll turn the call over to Bracken..

Thanks a lot, Ben and thanks to all of you for joining us. Let me start by talking about few of the products we've introduced this year. It's just a fraction of the total. We launched our first ever completely Pro Gaming Mouse.

We love eSports and we want to be a partner to the people making eSports the most exciting and the fastest growing sport in the world, the athletes and the coaches. The [indiscernible] of eSports will now be an official event of the 2022 Asian Games. Who knows, it might even be an Olympics sport one day soon.

We made listening to music out loud even more social. We upgraded our prior BOOM and MEGABOOM products again and again and most recently with PartyUp, unless you connect really to an unlimited number of speakers together to create an incredible group listing experience.

And just earlier this month we released our latest mobile speaker, the Ultimate Ears WONDERBOOM. It's waterproof, it's practically break proof and the volume and sound quality is as good as the original BOOM 1, all for just $99. We introduced the SmartDock and extent our lineup of video collaboration enabling Skype with a push of a button.

It's a terrific complement to our any-size meeting room offerings. And even as we've entered and now are growing new businesses by double digits, we're not letting up on our regional core. Dolomites, multi-device keyboards and our latest the reinventing of the clicker, all part of our product highlight this year. A minute on that clicker reinvention.

Spotlight we just launched. It's a breakthrough way to present and it's the coolest way to give a presentation. Spotlighting or magnifying instead of laser pointing. Every time I use it with people, as I just did this morning here in Zurich, people come up and ask me, how to buy it.

While we're an organic innovation company, we're sharpening our skills in acquisitions and integration. This is enabling us to accelerate our entry in the seats basis. Jabber and Cytec help us accelerated a Bluetooth earphones in simulation gaming. Both are off to good starts and we're learning a lot.

Now let me give you a quick rundown of this year's performance by business and region. The Q4 and full-year performance are consistent, so I'm going to focus on the year. We grew across all our regions and almost all of our categories. PC peripheral categories remain healthy with sales up 7% for the year.

Consumers continue to use PCs as they add model computing on top of PC usage. We use computers for productivity and we use our phones for almost everything. Keyboards and combos sales increased 12%. This is the 7th consecutive year of growth. Pointing devices rose 2%. And we won't stop innovating in My Sport keyboards.

Webcams grew 9% behind the rise of streaming. Sales of tablet and other accessories category fell 26% in line with performance in the broader tablet market. We expect this steep Q4 drop compared to Q4 a year ago, when we reintroduced in one of the second full quarter -- or the first full quarter of the create keyboard for the iPad Pro.

Video collaboration increased 42%, powerful across all three regions all year long. Mobile speakers sales grew 30%, the head of our regional expectation heading into the year. Despite not having any new hardware product introductions, we leveraged software and our go-to-market capabilities to drive market share gains and deliver that growth.

The Jabber, you might recall last quarter, we mentioned supply constraints that held us back and we committed that we would fix that. We did and now Jabber supply is where it should be. In fact, Jabber contributed 3 points not only to the full year but also in Q4.Gaming sales grew 28%.

Even if we continue to grow well on gaming, there's just a lot of exciting credential in every segment of the gaming business. Now I'm going to pass it to over to Vincent to go through some financial performance detail..

Thanks, Bracken. Very consistently with our performance through the year, we finished the year-end quarter with another strong and board-based performance, double digit sales growth across our regions and our main product categories. Q4 retail sales grew 17% to $496 million and our fiscal year 2017 sales grew 14% to $2.2 billion.

We have not seen this level of growth since fiscal year 2011 and today our market growth opportunities are a lot bigger. On top of that, our Q4 non-GAAP operating profits increased 61% to $36 million and our full year's non-GAAP operating income grew 33% to a better than expected $238 million.

Non-GAAP EPS was $0.21 in Q4 and $1.32 in fiscal year 2017, up 35% versus last year. These results reflect the strength of our business model and our discipline execution. At our Analyst and Investor Day, we laid out our fiscal year 2020 non-GAAP EPS road map of $2. This would be double the level of earnings we saw in fiscal year 2016.

And the $1.32 we just delivered this past year demonstrates our clear progress towards this goal. As we look out to fiscal year 2020, we will continue to push for strong and sustainable top line growth, while at the same time reinvest our gross profits into our 5 key capabilities that constitute the foundation of our long term financial model.

Our Q4 non-GAAP gross margin increased 430 basis points to a robust 37.4%. In fact, our margin remained flat sequentially despite the sequential seasonal decline in sales. This is a great example of how we continue to improve our cost structure ahead of plan benefiting from higher volumes and our design forecast programs.

It puts us in a healthy position to reinvest our gross profit dollars to support our long term growth objectives while continuing to create operating leverage. Our Q4 non-GAAP operating expenses rose 24% to $149 million with Jabber contributing 6 points of that increase.

For the year, non-GAAP operating expenses rose 14% or 10% excluding Jabber as we're making prudent investments to support our growth opportunities. While we invested in R&D and sales and marketing in the year, we reduced the infrastructure costs and drove G&A to below 4% of sales, a metric that we see as an external sign of improving our efficiency.

For fiscal year 2017, our operating expense ratio was 26.1% of sales and on track towards our long term targets. Along with strong operating profits, we also generated robust levels of cash flows. In fiscal year 2017, cash flow from operations reached $279 million, up over 50% from $183 million last year.

Our full year cash conversion cycle remained stable at 23 days, essentially unchanged versus a year ago and right in line with our annual target of 20 to 25 days. In fiscal year 2017, we returned $177 million of cash back to shareholders in the form of $93 million of dividends and $84 million of stock repurchases.

Going forward, we will continue to return our free cash flow to our shareholders through a growing dividend and opportunistic share buyback. And now, I will turn it back to Bracken..

Thanks, Vincent. I joined Logitech 5 years ago this month. Three things stand out as I look back that suggest a very strong future ahead. First, we proved that we can extend our portfolio. We love mouse and keyboards and we intend to have a nice business in them for a long time to come.

But today they are less than 45% of our business as we're growing faster in an increasing number of new categories like video collaboration, gaming and others. Second, we aren’t just innovating in a few categories or countries. We have created an innovation-led growth engine that's growing all our regions in almost all our categories.

This growth capability in retail and e-tail in a growing area of categories around the world is an exceptional strength versus the single category small companies. It's also unique for our size. Third, we proved we can consistently grow our business profitably.

In a world where top line growth with lot of line losses is sometimes viewed as attractive, we have demonstrated that our ability to grow top line sales and increase profitability is possible in Logitech long term. We've almost quadrupled our profits and accelerated our growth over the past 4 years.

But the most exciting fact of all is that the opportunities available to us are expanding dramatically. For 30 years, our primary growth driver was the PC. While the PC industries flattened, mobile services are exploding. And there is and will be an expanding number of peripheral opportunities for these cloud services.

We just gave our outlook for fiscal year 2018 a few weeks ago, so naturally today we're confirming that. And you can be sure that we're working to our long term model.[indiscernible] Vincent and I are ready to take your questions. Operator, please queue up the questions..

[Operator Instructions]. Your first question comes from the line of Tavis McCourt with Raymond James..

So a couple of questions. I guess, first if I do the math on the Jaybird operating expense, I'm assuming it's probably neutral to a little dilutive to the bottom line right now. And I guess, if you could give us a sense on kind of your game plan for scaling that business.

Obviously it's in a big growth category, but maybe kind of the game plan for scaling that business to get it to a meaningful level of profitability? Secondly, Harmony Hub had a great quarter obviously, easy comp, but maybe give us a sense of the sell-through on that and how sustainable you think adding some of these voice assistance is maybe creating a new growth category there for you guys? And then finally, Vincent, just a [Technical Difficulty] if the top line growth continues to outperform how we should think about flow through to operating income this year?.

Okay. I'll take the middle one and let Vincent take both the Jaybird and top line growth..

Yes. So I can take the first one. So, first one on Jaybird, right, so we enter or did the acquisition with the idea of running the business at somewhat a wrong directive point for [Technical Difficulty] investing for the future growth. We were on track.

As you remember in Q3, we had a little bit of a supply issue that lowered the revenue compared to our expectation. We made the decision not to lower our investment because we're very confident in both the market opportunity and our portfolio and so for that reason we slightly diluted for the full year.

But if you exclude that supply bump, if you want, in Q3 which we recovered in Q4, we're on track to our initial plan. For next year investment, it's built into our guidance. We're investing into expansion internationally, investing in Europe, investing in Asia heavily to take that brand off the ground and make it meaningful.

We also investing for the long term, past the 12 months, long term portfolio roadmap where we think we have a lot of opportunity. So, definitely we expect this product line or, set of products if you want, to become more and more meaningful to our portfolio. That's what Jaybird.

In term of the flow through, right, as we continue to grow high single digit and of course work every day to deliver that. We'll continue to expect a very healthy flow through. We achieved a high end of our initial margin target of 35% to 37%.

At this point in time, we plan to use the incremental gross margin dollars if they come through to invest and build even at a more accelerated gross rate. So our focus really is on capturing the gross opportunities.

Now with that said, we have a long term range of operating profit of 10% to 12% on the bottom line and we're just at the midpoint, starting of the midpoint 10.8%, 10.9% and so you will see a constant expansion of that operating profit margin as we continue to build our business..

And on your Harmony question, I think -- I'd say we're guardedly optimistic. The performance over the last couple of quarters been really strong as we have activated through Amazon Echo and now Google Home.

And I think, there are a couple of interesting facts about that, one is that about half of the users that come in are new users who are using -- based on what we can see from activation. So it makes you optimistic that this is an interesting one.

And the other thing is we haven't seen a significant fall off after the first announcement, the first letter that went out from Amazon Echo for example or for Amazon on the integration. So, we'll see. We're not going to make any strong commitments on that, but we're optimistic and it's exciting to see..

Your next question comes from the line of Michael Foeth with Vontobel..

One question regarding your -- the sell-in and sell-through dynamics in particular in EMEA where sell-in was low and sell-through was high and then in the Americas we had the opposite.

Can you maybe just give us a little bit more explanation of what is going on there and how we should see that in the coming quarter?.

Yes, let me answer that first Michael. So, okay, before we talk about it region wide, so sell-in was around 15% U.S. dollars, 17% in constant currency. Sell-through is around 14% in dollar, so overall globally pretty stable. When you look at weeks on hand, whether it's backward looking or forward looking, you'd see them flat or slightly improving.

So we feel really good about position overall in our inventory, somewhere in the midpoint of our target range and very stable to slightly improving year-over-year. So feel good on that one.

When you look at by region, I don't know if you remember last year Q4 in Americas was exactly the reverse which was low sell-in, high sell-through and then this year we have in the EMEA that position. We have -- usually it's a dynamic management of our overall distribution footprint if you want and nothing specific at this point in time.

Overall if you look at EMEA full year, sell-in is around 18% and we exit the year with sell-through at the rate of 19%, so nothing special at this point in time..

Okay.

And may be just to follow on the high growth in the Americas, was that Jaybird or anything else?.

No, no. It's a function of, again, the compare. So at last year, sale in Americas was minus 8% on a positive DCS and therefore now of course you have the 5 that you compare against that very low.

If you look at the trend on the growth rate in Americas, we've been trending at the high single digit, low double digit except Q4 '16 where we voluntarily were cautious on mobile speakers and the overall sale in Americas was minus 8%. So now of course a year later you compare against that..

And then just may be one last one on your distribution.

Can you give us the development of the portion of online sales in Asia versus Americas, how is that developing?.

I couldn't really give you Asia overall because you got a combination of online-only players and then bricks-and-mortar which are harder to judge. What we can see though is in China for example, our online sales we do know pretty well which is somewhere between 65% and 70% now. In the Americas, we believe it's about 35%..

Your next question comes from the line of Jorn Iffert with UBS..

The first one, obvious one, just to read a little bit your fiscal year '18 guidance, I think it's implying no margin improvement.

Is there any specific reason for this? Are you planning any, in brackets, one-off investments or are they just a part of nature which of course would be absolutely reasonable? And second question would be on your design to cost program, I think last time when you updated us, you have reviewed around 20% of your products.

Where do we stand here right now and when do you expect us to finish and what are roughly the proceeds coming out of this in terms of dollars? And last question would be strategic nature.

Would you consider or is this part of your strategic thinking to enter into advanced via partnerships with Amazon or Google for example, not us in the OEM supplier but just as a branded peripheral partner?.

Jorn, let me take first one and Bracken will take the two. And so when you talk about guidance, so on, we've built a reputation on delivering a plan that we have high confidence in and delivering on what we say.

Early March when we gave our guidance for the full year here FY '18, we measure all the risk and the opportunities and developed a strong operational plan, by category, by region, investments and returns expected. I'm very glad that we finished Q4 here slightly better than expected.

I think it's a very good sign as we start the year, but we still have full year to deliver this guidance. So I don't think at this point in time it would make any sense to adjust our guidance.

If we see revenue upside in the year, we may still make the decision to accelerate some investments for better FY '19 and of course will dynamically both manage the business and update the investors on what we're doing here..

On your question on design for cost, in the description you used a 20% of the kind of ballpark number. What I would say is overall our current game plan is we want to take the concept of design cost into everything. We're doing it over time. We're doing it very systematically. It's actually showing up in our new products now. So you saw some this year.

As you said, 20% is not a bad number. You could probably guess it's going to be about the same kind of number or even larger next year. And then over time all our products will be more design per cost. We will always have cost taken opportunities every launch product.

But one of the things that we measure now, we look very carefully at what's the if a product is replacing other product, are we doing it equal or better gross margin. And that is a reversal from what you would have seen 5 years ago when we launched at lower gross margins and then falling back over time.

On your question on would we consider or is there an option to do partnerships with some kind of other players out there, you remember the nature of our business from its very kind of beginning with is to create products that work with other people's products.

We're a peripheral player and we've been a peripheral player and will probably in some ways in most of our categories be a peripheral player. Now we're already doing things in that space consistent with the question we had earlier about Harmony and Harmony is now integrated with both Alexa and Google Home.

And we're always looking for opportunities to peripheralize other products with existing ones or new ones..

Your next question comes from the line of Andreas Muller with ZKB..

Question, can you be a bit specific more on the gross margin? What were the main drivers behind this increase sequentially even I mean it was very good?.

Yes, so I can definitely do that. So it's definitely an operational performance, if you want. There is no big one-timers in that margin.

Similar to what we described in March and similar to what we delivered this year, the single biggest contributor of this gross margin improvement this year is the improvement of the cost structure combined with our ability to hold price value we deliver to consumer. And I think that contributes it to even more gross profit.

With that we then in turn re-invest to a simulated growth at the point of sales..

And then what was the main factor behind this huge growth at video collaboration? I mean was it pure -- was it also pure sell-through or was it coming from the expansion of some channels? And how do you see the growth going forward? I know that you see all these bit small conference rooms, but this 73% going forward, of course, that's probably not really a sustainable figure out, but for this year at least can you indicate what you see there?.

Well, I wouldn't look at 70% Q4 as the number to expect for next year. Yes, we grew 42% this year and I think well, that's the kind of growth we've seen -- on average we saw in the first 3 quarters. That said, I take us out of the quarter or even out of the year.

What's the driver of the overall growth, it's the fact that honestly I continue to walk in every day into small, medium and some big companies and I'm amazed that how many small, medium and even large conference rooms are not video enabled yet.

I would say the vast minority are and so there is just a very large long term opportunity for very affordable video enabled conference rooms and we intend to be in as many as we possibly can be. So no, I don't think you can expect 70% all year long this year, but we expect to have strong growth..

If I can just add, so we had guided the year at around 40% and we delivered, as Bracken said, 42%. Now if you remember, but Q1 voice sales was actually weaker and you had our -- some of you had the reverse questions and then we said this is not a business that deliver the same gross rate every quarter, right.

We commit to develop our sales engagement with various accounts and businesses and we see a very strong long term structural growth. The sales cycle is a bit more aligned to a B2B sales cycles which is slightly different than the core retail..

And my last question on the pointing device category and more specifically the Spotlight, I mean what's the opportunity? I mean could that be kind of substantial within the category like 10%, 20% or really be kind of just a small product within a huge category going forward?.

It's too early for us to say. What I can say with a lot of conviction is we've created a breakthrough in that category that anybody who presents will prefer what we just offered to anything that's ever been made before. What I can tell you is how broadly that will spread across the people who do presentations.

And so our mission right now is to get that in as many people's hands as possible to sample it. And the minute you present like I did today here in Zurich, you've got a room full of people who see it for the first time what could be done with the Spotlight compared with anything they ever saw before. Now how fast it will happen, I don't know.

We just announced our partnership with TED which is the most important, in a way, of public speaking operation in the world. And so we're trying to make sure we get Spotlight into as many people's hands as possible, so that audience, those audiences of few, self-potential speakers are seeing it in action.

And so we'll see and we'll give you an update through the year on how we're proceeding, but we're very optimistic. Thirdly, if you think about it -- I don't want to overstate this, if you think about how many people presenting and how few people own a clicker in quotation marks, there is a big opportunity out there..

Your next question comes from the line of Felix Remmers with Credit Suisse..

Three questions from my side actually. One on PC gaming, maybe here an update on the competitive situation. I read that, for example, Lenovo wants to open a 100 stores in Asia devoted to PC gaming. I think they have a collaboration with Razer. You have other companies talking about bullish about PC gaming.

Have you seen experienced any increased competition in that market so that would be of interest? And then maybe an update on market share in your PC peripherals business. I mean, I'm always surprised how fast you are growing particular in keyboards.

I understand this is also related to market share gains, but how big is still this market share gain opportunity? And maybe lastly on Jaybird, it's a bit difficult to forecast that for us, but given that's in the audio PC and variables category, but the category as a whole, do you foresee growth in this year in that category?.

Yes. So I'll take all three of those. Vincent, you can jump in as you like. For our PC gaming standpoint, is the competition tough? It's always been tough. Is there more -- are there more people entering? Yes, because it's a super high growth category. Do we love our position today? Absolutely. We founded and delivered.

The key tools in that category are mouse and keyboard and that's out today. So we love that spot. And one of the reasons why a lot of activity is in Asia is Asia is just on fire from a PC gaming standpoint, for us and our competitors. So yes, I feel good where we're.

It will absolutely be competitive and that's probably not at all bad, it's helping drive growth in the category. From a market share standpoint in PC peripherals, here we're -- and you mentioned keyboards in particular, we're systematically growing market share. It depends on what you see around the world.

We have grown market share in keyboards and we're going to keep innovating there. Finally, Jaybird, the category of wireless earphones is growing. It's growing rapidly and so we expect that that category will continue to grow and we're going to keep innovating it..

But for the full category report in audio PC and variables, is there a growth? Is that feasible given that the traditional PC speakers are more still under pressure I guess, no?.

Felix, the answer is yes. We obviously done that per every category. We said in the overall music business next year we expect a gross of 10% to 15% and both categories should drive positive growth..

[Operator Instructions]. Your next question comes from the line of Paul Coster with JP Morgan..

So on keyboards and desktops, can you give us more insight into how this business accelerated double digits after growing low single digits in both '15 and '16? What have been the drivers there and what do you expect for '18?.

Sure. Yes, I think at the end of the day, we're just innovating very well there to be honest. The category is still absolutely live and well. And we've gone to multi-device -- first we went to a living room keyboard, then we did multi-device, we launched more multi-device keyboards this year.

Our best top-of-the-line keyboard is a multi-device keyboard with a cradle in and that has had just a lot of appeal. So we have -- the market for keyboard has just done fairly okay and we have grown share within it. I think that's really just what's driven the acceleration.

So looking out into '18, it's hard to predict exactly what's going to happen with PC category. We tend to be more consistent, more conservative in our PC peripherals planning and therefore it puts pressure on us to make sure growing our new engines to grow faster. But you know, I think the PC peripherals category will be okay in 2018..

Okay, great.

And then going back to video collaboration, what has been your go-to-market strategy there? And how do you think about sizing this opportunity or what do you think is the TAM? And also what's the competitive landscape in this space in your respective market share?.

Well, it's really hard to come up with a TAM that you could find reliable because it depends on how you think about it. It's really a new category. And so we size it a hundred different ways. What I would just say is forget the TAM. If you look at our existing growth rate, we should be able to sustain that and it's a very, very big operation.

The drills for market range -- we've come up with anywhere from $20 billion to $40 billion and those numbers are so big honestly that it's a little hard to believe them.

So I think at the end of the day, it's a big market and there are lot of rooms that are not video enabled and we really do believe that over the next 5 to 10 years, most will be video enabled; over 20 years, probably all will be video enabled. That's a big opportunity..

Who do you think your main competitors are there?.

It's interesting. There are couple of ways to look at the where essentially I think the biggest competitor is really the chair in the room. So if you have a room with 6 chairs in it, with the cost of 1 or 2 of those chairs you can video enable the room. And today most people are running facilities or even the CIOs are not thinking like that.

Once that's put in front of them, they kind of scratch their heads especially when they're creating an open office environment outside and think gosh, this is a huge opportunity. And then the question is which video approach do I use, they start to look at costing and pricing and it takes time.

So I think the biggest competitor we have is just the inertia of the reality that video is not yet in the rooms, but it will come..

Thank you and it appears there are no further questions at this time. I will now turn the conference back over to Mr. Darrell for closing remarks..

I'll just close quickly by saying thanks a lot for hanging with us through -- those of you who have -- most of you have through the last year and certainly through the last 5 years that I have been here. We're really proud of the results and it's been an exciting ride.

I always smile when I read or hear somebody say we're priced to perfection or boy, we're executing nearly perfectly because if you sat inside, you'd see how many of just an amazing number of opportunities we have, both operationally and from a growth standpoint that we're not yet getting at it. So we're really excited about the future.

We have so many opportunities ahead of us. I hope each of you will be on for these calls for the next 5 years. And thank you..

Thank you..

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