Logitech International S.A. (LOGN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Erik Woodring. I am a part of the U.S. IT hardware equity research team here at Morgan Stanley. I am pleased to be joined this afternoon by Logitech's CEO, Bracken Darrell. Bracken has been Logitech's CEO for nearly a decade now. And in his time as CEO, Logitech's revenue base has more than doubled while its profit base has increased more than tenfold. So pretty impressive stuff. Prior to Logitech, Bracken held a number of senior management roles at Whirlpool at P&G and at GE. So with that, Bracken, thank you very much for joining us today.

Erik, it's so great to be here. Thank you. So to jumpstart, I'm sorry, I'm not sitting next to you in Barcelona. That will be really good but...

I wish we're both in Barcelona, to be honest. So -- and I just want to remind everyone on the webcast, if you would like to submit a question, please feel free to do so. You can do so through the webcast, and I'll save some time at the end of our discussion for those questions.

So without further ado, I think kind of the best way to start is to almost look back. And Bracken, fiscal '21 was such a strong year for you guys. Clearly, we know that the pandemic helped accelerate demand for a number of products that you sell that enable working, learning and playing from home. But your performance across nearly every segment was far in excess of market growth. So maybe on this look back, can you just kind of talk about what allowed Logitech to be so successful over the last 18 months?

I think we made a -- first of all, we have before the 18 months, we got behind these 4 secular growth trends that we stayed on, which were video going everywhere, gaming becoming the biggest collection of sports in the world, really people working for many different workspaces and then the creation of streaming and creating as a cultural reality for millions and billions of people. So we really positioned ourselves behind those things over the last 6 or 7 years, and they've all -- those secular trends just continued. When we hit the pandemic, so we're already growing at or near double digits for the last 5 or 6 years. Sorry, somebody outside my door [indiscernible] with that, but that's true. But the -- during the pandemic, I think a couple of things happened. One was a lot of people struggled just to get enough product. And we were lucky that, in the very beginning of the pandemic, I have a very seasoned leadership team, we made some bets on inventory. So we probably had more available than a lot of other companies, which enable us to grow faster. And the other thing is our -- and we still didn't have enough in many areas. And -- but the other thing is our innovation engine, which we'd really revved up in those areas just continued to fire on all cylinders. So it was a very, very good year for sure.

So you mentioned inventory and supply chain, and I'm sure those questions come up fairly often. So I just want to get them out of the way so we can spend time on the fun stuff. And so maybe if I just start first was -- has the environment over the last 12 months and what's happened with the supply chain gotten Logitech to rethink its manufacturing strategy at all, meaning changing your direct manufacturing presence, dual sourcing more components, shifting the geographic focus of your manufacturing footprint? Anything there? Any thoughts that you can share there as it relates to the supply chain?

I think our fundamental manufacturing strategy hasn't changed. I think we've changed things around the edges and inside of a little bit here and there. Actually, starting with the tariffs, we started moving some manufacturing and flexibility outside of China because we needed to. So we have manufacturing now in and out of China for more and more products. The second change we've made was because of component availability, we had to really dual source, and we were forced to. We have some great long-term relationships with some of the key component suppliers we have, but we just had no choice but to qualify alternatives. We couldn't get them. And so that -- up until, I would say, over the last 1.5 years has been -- has required a lot of time and effort, but we're largely there. So I'd say those are the 2 key changes. But overall, our manufacturing strategy has kind of stayed intact, and we make about half of what we sell, unlike a lot of companies. So we're a raw manufacturer, but we're also working with other companies to manufacture.

Right. Okay. And then kind of secondarily, when we think about the supply chain, I feel like at least over the last earnings period across the consumer hardware landscape, there's kind of been 3 dynamics that have popped up: Component constraints, manufacturing disruptions and then logistics delays, obviously, very complicated supply chain everywhere. But maybe can you talk about, for Logitech specifically, which of those 3 dynamics are having the most significant impact today? And then any line of sight into when things -- when conditions can improve?

Yes. I would say we're not immune to any of them. So I mentioned the first on the component supply issue. The second one you mentioned, we're still working through the last of the component supply constraints that we had. But luckily, it's down to a pretty short list. The second one you mentioned, which was manufacturing disruptions, and I think you're probably referring to China, where they've really turned on and off factories and really power, that certainly has had an impact. But I wouldn't say it's nearly sizable as the last one you mentioned, which is logistics. That's a surprise one for me, to be honest. I mean I didn't see the -- those last 2 coming. The -- it's really unusual to have a logistics system kind of bottled up. And as I said to a few investors earlier today, my only experience with this in my past is usually self-inflicted, where we end up with a supply chain or a logistics issue that you just didn't plan well or you -- whatever happens. And that's just not the case here. It's affecting very broadly everyone, and it's getting things in and out of containers and there are containers sitting there waiting to be unloaded and taking too long to be loaded. And my experience in that is that takes a little while to unravel. So I think the whole world is going to have an unraveling period to get that really cleared up.

I actually -- as a quick aside, I actually saw a statistic, on Twitter nonetheless, that said over the last few weeks, the number of port -- the number of containers sitting on the port in Long Beach has come down by 29%. So I hope Logitech products are in those containers.

Me too.

Just let's -- the supply chain is out of the way. I think -- so I kind of want to touch on the various segments that you have and so starting with creativity and productivity. I think that the performance of mice and keyboards has really positively surprised investors in recent quarters. The consensus view in my mind has been Video Collaboration and Gaming are more of the secular growth trends, whereas PC Peripherals have greater cyclicality because of the PC market. But you have outperformed, and these product segments have been very strong for you. And so can you make the case for why they can keep growing rather than decline even off of this higher kind of COVID base that was set last year?

It's really interesting, Erik, and you know I've [indiscernible] for a while. I think I've been -- I think when I -- I didn't know when I first came on to the job. When I first came on the job, I actually came here partly because I thought those categories wouldn't start growing. And I think the company did too, the Board at this time. And so I was coming out. I was excited about entering new categories. And so I wanted to use design to enter new categories and then boost the innovation engine inside. But I was more excited to move actually 75% of the resources out of the mouse and keyboard business and into new things. And little did I realize that actually, that core business, mice and keyboards, could keep growing. And it has actually through the entire time. I mean we've had -- I think we have growth every single year, almost every year over the last 7 or 8 years. And it's kind of -- and keyboards have been a little stronger than mice, but they've both been there. In the last little while, I've got -- say, 3 or 4 years, I've gotten even more bullish, I think, regardless of the pandemic, A couple of things about it is, one, is we've gotten to a scale where we're approaching 40%, 50% of those categories, 60% in some cases. And we've been able to scale up our team. So our innovation engine is way beyond what it was when I got here. We're innovating in those categories in a level and in pockets that I don't think we even realized those growth engines -- those growth opportunities existed before. So I am super excited about the growth potential around the world, kind of major country by major country in mice and keyboards. And that's -- and if I seem a little surprised, I'm not now, but I was 3 or 4 years ago when our team really said, we think there's a real opportunity here. So I really think that's the -- if you ask me what's the reason I'm so bullish, I think we have an opportunity to gain market share and because we're the leader in the market to grow the market. So it's pretty exciting.

That's awesome. I guess my follow-up to that would be, year-to-date, this kind of collection of segments and creativity and productivity is up just shy of 30% year-over-year. The guidance that you set last -- or earlier this year in March was for C&P to be down roughly flat to down 10%. So I realize compares get more difficult in the back half of fiscal '22. So hey, maybe you can expect growth to slow somewhat. But would you say the business is outperforming the expectations that you kind of set 6 months ago? Or is there more to come in the back half that we might not be aware of?

No, I think it has outperformed in the first half. I think if you looked at the mix of our business, we've outperformed. And some businesses performed on others and underperformed in others. So -- and we'll probably get to that as you go through the segments. But yes, I would say it's outperformed. And again, maybe we shouldn't be surprised by that. I expect a good performance but we had such strong growth last year that I thought [ one of ] those bases -- I mean I don't know how we can match those. We still have a great year if we just match them, but we're beating them. So that's great.

Yes, I consider myself a proud owner of a mouse, a combo and the kind utility keyboard that I use for my iPad, all purchased last year all sold by Logitech. So have all worked out great for me. So...

You know what's really cool about that, Erik, is I can't guarantee it for you because I don't know but I can guarantee you if we had everybody on this call, take a picture of their setup and then send it into us between ergonomics, aesthetics because it's now part of your home decor, in many cases, performance. We've got some really hard [ point ] things and just general lifestyle. Of that there's not a -- maybe there's 5% of the people on this call really have the optimal setup for them, which just tells you how much opportunity there is for the next level of [ trade-out ].

And I should have mentioned that I'm being broadcast live here through a Logitech webcam. So had to throw that in there, too. So all right, let's transition to Gaming. A common question that I hear from investors is I understand the secular growth thesis behind the gaming market. There's more people gaming. They're spending more time gaming. There's more content coming out. All of that requires or likely requires some form of peripheral to have high fidelity gaming. But just curious, have you been surprised by kind of the consistent strength of the Gaming business? And I say that from the perspective of the business has essentially quadrupled over the last 5 years. And so what do you think is kind of driving the longevity and growth across multiple cycles across multiple years?

Yes. I think the most important thing is this is really, as you call it, a secular trend, and it's a big one, is that if you're under the age of 25 or even 30, gaming is a big part of your life. And that network effect, if it's part of my life, it's part of your life, if I'm on Discord, you're on Discord, if I'm playing -- and you probably -- many of the parents who are out there watching us or maybe you, yourselves, you realize that a lot of people are getting together and play and virtually in a gaming world. So they literally get on and have the discussions while they're playing games. And that's equivalent kind of the playground in the past. And I think it'd be tempting to say, gosh, that that's a function of the pandemic, people couldn't go out, except that's what's happening before. And so it's just continuing right through. And so I really think it is about that simple. Now there are new exciting games coming all the time. The gaming world -- this blows my mind, the gaming world, the revenues of the biggest games are bigger than the revenues on the big movies now. And this is true pre pandemic. And so you've just got such incredible interest as new games come in. And you can imagine how many thousands of developers are working on the next exciting new game to play. And that just drives interest in the category. And having good equipment, just like anything else, is valuable which you are more interested. So that's really what's happening.

And what can Logitech do? Because I'm thinking of a scenario and, unfortunately, I'm not under that 25 and underage bracket. But I was someone that bought a gaming device during the pandemic and kind of have put it down as I've gone back to work or whatever it may be. But just curious, from your perspective, what is Logitech doing? Or what can Logitech do to kind of entice or incentivize that user that may have stepped back over the last 6 months to say, "Hey, you need a new peripheral," or "There's something in the future that we have for you."

The best thing we can do is keep innovating. And so we're innovating like crazy. We're probably doing slightly fewer new products, but they're bigger and they're better. And so that's the most important thing we're doing, and we have so many good things out and a lot more coming out. So that's probably the primary thing. The other thing we're doing, though, is we're really trying to widen the -- our perspective. I think there were big -- there's a big population of gamers that are left out of the picture, especially these lifestyle gamers who were not really into eSports that were out there and competing to win or even competing with play-hard. They're out there to talk and to have fun. And I don't think we did a good job of really serving them. I'm not sure the industry at all did a good job. And so we started to serve them all. And we're very optimistic that, that market segment alone, it's just an opportunity to bring in new users who had something but they really haven't been thoughtfully served, and so we're trying to thoughtfully sort them out. So I think between the core business that will continue to turn over and upgrade, it has a shorter repurchase cycle. And these new users that are coming in, I think we're going to continue to see great growth over the long term.

Great. Now that's awesome to hear. So let's turn to Video Collaboration. During your September quarter earnings call, you made a comment about VC potentially not growing up to the 10% to 25% rate you had guided back in March. Can you just help us understand at a high level maybe where the incremental headwinds have come from that kind of helped contribute to that view?

Yes, absolutely. It's hard to describe it as a headwind because if you look at the numbers from a year ago, you got a 2-year growth number. It was so big. And of course, you have to be sustaining that kind of sales because we don't sell a SaaS business. So this is -- or selling a new [ SaaS ]. So it's still a very, very large category. A lot of new rooms going in, a lot of new people getting webcams. So it continues to be super strong. I do think that it is growing slower than I thought, though, this year. And I think the key factor has been really, we all sort of saw -- first of all, it's difficult to predict, let's be honest. But we saw this return to work coming, and as we ended last fiscal year, we're looking at March and said, "Wow, everybody is going back to the office in the early summer." Delta variant was just -- people had barely heard of it. And we thought, okay, there's going to be this rush to video-enabled rooms and then people are going to be working in hybrid, and it's going to happen fast. I think what happened is as the Delta variant kind of made its way choppily through Europe and through the rest of the world, I think the decision makers had a chance to kind of pause and say, well, in many cases, we're not going to be as fast. Even where we are, we're going to take it a little slower in the decision-making. And I think that's really what's happened. And the decision making for -- I'll give us this example because it's always good to have an anecdote. I think the decision-making we made on how are we going to arrange these desks, how are we -- because we got more people now than we have before we left, and we don't have enough desks even, how are we going to do this? So we're going to have some hoteling. We're going to have some -- we're going to need all the rooms enabled. We had them all enabled before. And how is all that going to work? And we sort of slowed down and said, "Okay, let's be even more thoughtful than we would have been." I think other people are doing that with rooms, too. And they're saying, "How many do we need video enabled right away? I don't know. I'm going to start slower than I thought and let's play it out." So I think that's really where we are. And now if I look forward, at some point, I'd say we're on video calls all the time. We're doing this on video. I'm not on audio calls anymore. I just don't do them anymore. Very few people do. So it's hard to imagine people are going to go back into offices and get together in the office and have somebody somewhere else and do an audio call. So there's probably going to be video happening in rooms at a much higher rate than before. So over time, we're going to video enable all those rooms, I mean, sooner or later. I don't know if it will be 100%, it's going to be a very high number. So there's a lot of rooms left to be video enabled. So I think I'm very confident about the long-term growth rate. But I do think we've got this slower growth that's going on now that's probably going to go on until everybody starts to get back into whatever the new hybrid looks like.

Right. That's fair. I actually also just saw today, Apple announce their return to work is starting Feb 1. So potentially, you might get that -- you might get more announcements early next year. So I guess another follow-up question I would have to that, too, is how have you -- or how has Logitech thought about the potential for enterprises to almost rationalize office space. And perhaps with the growth of hybrid say, maybe we don't need this remote office and XYZ or the satellite office. Have you contemplated? Is that something that you've seen or that you've heard? Or is that really not an effect that's taking place yet?

I've heard it a lot. I don't think it's happening quite yet, but there is a lot of discussion around what is the office structure that you need for us, too. We're actually -- don't tell anybody, except that this is global and available anyway. We're looking really hard at our office footprint for the future. I think we'll end up with multiple -- rather than shut down offices, we'll probably have more offices because there are going to be some people who want to work kind of locally and don't want to drive as far to work. They're used to it. They like it, but they kind of want to get out of the office. So more of that once or twice a week, go somewhere set up. And at the same time, we're going to need the primary place. I think more and more office space is going to turn into collaboration space. And then there will be people who work there permanently and there are other people kind of hotel and in out of there. So I think most people are going to gradually move to that. Real estate never moves that fast. We all know that and it can't because there are contracts and leases and they go on for a while. It's expensive to break them. Plus, I think everybody is going to be in a learning mode for the next 6 months to a year, maybe even more. So yes, I do think there will be a churn in the real estate market. There's been a lot of discussion around what's going to happen to commercial real estate. Things never play out as extreme as people think. So I imagine it will look different than it does now. But in 2 or 3 years, it won't be radically different. Continue, might be. And then my guess is you're going to have a lot more collaboration space, a little less space to sit down and just work permanently and more space that I come in and out of kind of hoteling.

Right. That makes sense. I guess, last question here on VC is I know over the last, call it, 12 to 18 months and even before that, Logitech was really in this investment mode in terms of building out your direct to enterprise sales force to better go after enterprises specifically for the VC market. So just curious where you guys are on that journey. If this was a baseball game, are you in the seventh inning stretch? Or are you still in the middle innings? Or where would you guys think you are today?

Because we're -- since we're really in an international market, [indiscernible] headquarters in Europe, I'm going to switch the analogy to a ladder. Let's say it's a 10-step ladder. I would say maybe we're on the seventh step, somewhere between the sixth and the seventh step of building that out. We've been really working on this for 5 years. We've come a long way. We've really got a very large global enterprise sales force now. And I feel super excited about where we've gotten to. And we've got further to go and really building out the sophistication and everything, but it's really come a long way. So my compliments to everybody who has been involved in building that. And we've got further to go. We'll keep refining it, getting better and smarter. We've got a lot of people who came out of the enterprise world, came out of selling to the enterprise world. So it's -- yes, it's -- you're never done, but I feel really good about where we've gotten to.

Okay. Good. No, that makes sense, especially getting enterprise guys, I know, obviously, it's a different selling motion than the consumer world. So obviously important there. You mentioned something earlier, and just in the back of my mind, I've seen so many more Logitech kind of alerts coming out in terms of product launches recently. And you've had some really neat products come out. I was joking with Nate after earnings about the new dock that you guys had launched. I would have loved it 18 months because my dock currently isn't exactly working as I'd like it to. But maybe -- can you highlight some of the products that you -- that Logitech -- that you'd be especially proud of that have come out recently and where you think some of these products can really be different makers in the market?

Yes. I'll just mention a couple. I think there's a product that I bet not many people here have seen yet called pop switch, which is a completely different kind of keyboard. We launched it first in China, which is probably most of the people -- haven't seen it. It's now launching into the U.S. and Europe. And it's a very colorful, very vibrant mechanical keyboard that's not for gaming. And I think as things accelerate in China and they get more and more sophisticated, what I believe is likely to happen is things are going to originate in China and move around the world. It used to be -- going back a few years, it used to be everyone would say, well, China knocks it off and they do it fast, but they do it cheaper, and it's not quite as good. Then it was, well, China knocks it off, they did a really good job, and it's -- and they're really fast. Now I think a lot of the innovation is happening in China. We have teams in China. We're excited about China. We're trying to build more in China, for China. But I think that's actually going to be end up being built more in China, for China and the rest of the world, not in every case, but in some cases. And that's an example of that product.

Okay. That's helpful. And then maybe if we just kind of round out the product conversation, I think something that flies under the radar is sure you sell devices, but there's obviously software and services and whatnot that goes along with it. So can you just touch on the efforts that you're making in software and services and recurring revenue? What could these opportunities look like in the next 3 to 5 years? Obviously, you have Streamlabs, but maybe just a little elaborate on things that might fly under the radar a bit.

Yes. If we're -- if you go back to the 10-step ladder analogy, we're probably on step 1.5 on software and services. We probably are hiring. I can't guarantee this, but we're probably hiring more software engineers today than we are hardware engineers by a long shot. We've got teams working throughout every part of the business on software and on services. We -- I would say, Streamlabs is really the only scaled service business today, and that is a super interesting business, and we -- and it's a learning lab for sure. But we have service businesses building out in virtually -- really in all of our major businesses. So it's going to be exciting to see. I wouldn't commit to a percentage of our business that will be in the service -- SaaS or service area yet. What I would say is I think it's going to have a little bit of a torque to it. It will be very small in the beginning, and then it will start to grow. And then at some point, it will pick up strong -- really strong steam. But I'm really excited about it, both because -- everybody likes the profile of a service business for the financial purposes of high margin and high stickiness. But also, I just think it's going to bring a new dimension of experience to our users that we have not unlocked before. And now that we've got teams inside, whether the designers or engineers or product managers who really understand it, it's exciting to me what might be possible. I think stay tuned, Erik. I think this is something we'll be talking about over the next 3 or 4 years. I think it's going to get more and more interesting.

Good. That's awesome. And I was going to ask -- the next question was really going to be about you acquired Streamlabs in 2019 to become a bigger player in the streaming market. Is there an opportunity for streaming to become a more important driver over time? Are there other markets that might be compelling from an adjacencies perspective? I don't want you to give any -- away any secrets, obviously but any comment that you could share there would be great.

Yes, we're working very aggressively on that. We are really excited about the stream and creating space. It's the smallest of the secular trends or the smallest of our businesses of the secular trends I talked about before that [ last ] for the democratization of content that creators like you and me and our kids and friends, us watching other people creating stuff rather than Netflix or Amazon. Netflix and Amazon and Apple will be fine, but thank you very much HBO. But I do think even more and more content, the larger percentage of the growth will come from individuals creating stuff for each other. And I was with -- I was talking to my son last night, and he's got to stream up, and I won't give his name out so this is his first one. So he's worried he is going to be humiliated by it, but he's in learning mode. But there are so many people like him, and I think all of them need tools, and Streamlabs is a tool. We've got microphones which is a tool. We've got cameras, which is a tool, but there are more tools to come, both hard and soft -- hardware and services. So I just love this area. I think it really sits right in the slip stream of where the world is headed. Just like gaming did kind of 10 years ago, I think we're there in streaming today. And when you might feel like we're, it's already so developed that could be at best stage. But I think it is at best stage, so early. I mean the amount of streaming improves going to go on over the next decade is going to dwarf anything we saw before.

All right. Maybe let's pivot a little bit just to competition. One thesis that we've had internally was as you've gone through this period of market expansion, and you've seen your TAM grow, it's logical to think that the next step would be new entrants coming to the market to try to capitalize on that value. But do you find that the markets you participating -- that you participate in are more competitive today? I know some of them are already very competitive. But do you find that some of them are more competitive? Where are you seeing those competitive pressures coming from? Is it from the top down? Is it from the bottom up? Is it incumbents? Is it new market entrants? Anything you could share there?

It's really, really interesting. We're in so many different categories. We're in dozens of categories now. And it's kind of a different game across -- as you'd expect, across them. But if I -- if you want me to, I'll just rattle through those, those kind of 3 or 4 big [ secular ties ] and talk about that because it's fun to talk about. I'd say the keyboard and mouse business looks very much like the keyboard mouse business did pre pandemic or even 2 or 3 years before that. There actually are players. Most of them are the same. You didn't have some people flow in and out during the pandemic. But the ones that were kind of low-end players will flow back out again, and I don't think it will be very different, which is interesting because we're the leading player there, and I think we can drive market growth. So that's an unusual case, where I think the market has grown. I think the market can continue to grow but I don't think it's going to attract a lot of new competition there that's going to be really substantial. You never know. I mean you've got to be ready for that. If it is, it's probably a good sign that the markets can grow even more. The Gaming business is not exactly the same. There have been some changing players in there changing hands. Companies have bought stuff. But I'd say the dynamic is the same. It's very much a gaming market that it is rich with growth and it's attracting strong players. And I think, again, I think that's good. I mean we're a low share relative to the C&P business at 30% or like 50 or where we have market share growth potential. So I'm excited about that one. If you go to the VC business, the VC businesses, as you'd expect, we always thought where we're going to have more and more competition in there, and we've got more and more competition in there. They just -- it keeps flowing in. I think it's really a sign of how hot that market is going to be. I think that's the -- you want the best evidence that this is going to be a very large market long term. It's just that it's attractive, and it's attracting other players. I think that's overall a good thing. I think competition -- one of the best things about competition is it drives awareness and makes you think, gosh, what am I missing. And so I think more people out there talking about the need to have high-quality video conferencing in more and more places and more and more spaces and more and more desktops. That's a great thing. So I think it's a very positive thing. And then the stream of creating is kind of a wild west right now. We've got the leading share in the key categories we're in. But we see other category potential. The categories we're in have lots of growth potential. So yes, it's a fun dynamic company because we do have so many different markets we play in and, therefore, different competitors. It's dynamic.

Right. Right. That makes sense. And maybe as a follow-up to that question but a slight pivot here is I remember when I was first initiating and doing my work on Logitech, and I was going through your background as you have this design background, which is very different than a lot of the CEOs that I might interact with at other companies. But you've tried to kind of instill this mentality of leading and differentiating with product design. Would you still say you have a leg up on the competition when it comes to your technology and design? Do you find that you're seeing competitors trying to copy some of what you're doing? Yes, I guess, I'll leave it there and...

Yes. I think the whole world has gotten better. We've gotten better. Everybody is getting better at design all the time. I always say there's 3 stages of design companies. There's people who kind of view design, if they view it at all, as decoration kind of at the end. There's the next level, which are people who really view design as the big opportunity to build products around the user. Forget about aesthetics. Build products around the user. So it's easier, it's faster, it's better for them. And then there's another level of design, which is not just that but also bring design inside the company and designing for your own users and for your suppliers and for investors and analysts and really viewing yourselves as a pure design company. That's where we're headed. We have a long way to go there. I know the other companies that are really there. In that big second stage, I think a lot of companies are in there at different levels. And I think we're -- we continue to get better. I was just with my head of design yesterday. He's just so excited about where we -- where we are now and where we're going next. And I think everybody else will get better too. So I think that's just a reality. I think great design unlocks the power of engineering. And the most important thing we're doing is we're -- I think we're doing a better and better job of making products that are relevant, which is making our engineering even more relevant and effective.

Of course, of course. Makes sense. Let's shift gears a little bit, talk about OpEx. For a few quarters now, I feel like you've talked about moving from this pull model to the -- to a pull model from the push model, relying less on promotions to drive demand, ramping the use of sales and marketing to drive demand. Maybe can you explain to some people that might not be as familiar with the story, but why is that so important for Logitech.

Yes. I mean if you think about -- maybe the easier model -- for those of you who follow fast moving consumer goods companies like Procter & Gamble, Unilever, [ Racket ], most of those companies have a pull-oriented model. And so what they do is they have a lower level of promotion, a higher level of gross margin, higher level of marketing spending and as a result of higher -- and when you add all that together, it winds up being a higher level of EBITDA and a higher level of growth, at least higher than you would expect. And so that's the model that I'm really aiming for. And I really believe -- I believe that before I got here. It's hard as hell to get to that model because to get to that model in normal times, you to have to slowly reduce promotion, slowly increase kind of advertising or marketing and then slowly eke up your operating margin. And then hopefully, you'll see it in the growth. The thing that gives me -- 2 things happened. One is we had a model. And the place we ran the play was in gaming. So we really did this in gaming, and it's been super effective. We now have a very strong brand in gaming, we get -- where our gross margin expansion has been phenomenal since we started. I think when we started, I remember the gross margins in their low 30s or maybe 32, 33, now we're way up there and we've gotten very high growth, and we've grown a lot of market share. We become the market leader. So I feel like the model is kind of -- but the risk is saying, okay, it's proven over and out. It's not. But that's a pretty good example of what can happen. Now the question is can we do it in the other place. The second thing that happened was the pandemic. The pandemic made that systematic graduals brick-by-brick try to do it over a 10-year period like we did with Dell with gaming, maybe we can do it a lot faster. And so that's the ideal way to do it because you don't really lose too much there. And -- but the key is you've got to prove it. So I think it's going to take us a couple of years to really feel like, okay, we have a model that really works where, whose marketing has got high ROI, the kind of ROI we have in gaming. And we've got the growth rates we're looking for the gross margin expansion or in this case, holding on to the strong gross margins we have and then delivering strong operating margins. And that's the play. So it's really a flywheel. And then the higher the growth you get, the better the gross margins you get, the more room you have to invest in marketing, the higher the operating margins, and the more room to invest and you keep driving it. So this is what we're aiming for. I think Apple kind of has that model going. And they have a lot of other stuff going too, of course, but I think they have that model going. I think if you can get that model going and you have a great innovation engine, it's almost unstoppable for a while.

Right. Okay. And maybe as a follow-up to that, your sales and marketing budget has nearly doubled from pre COVID levels. Of course, your revenue base is almost doubled as well. But you're still spending, call it, roughly 20% of revenue on sales and marketing. It's a little higher than pre COVID. Should we think of -- this might be a Nate question, but should we think of sales and marketing as being 20% of revenue going forward? Should we continue to see sales and marketing spend ramp over time? Or are there times where you do have some variability there and you can pull it back to get maybe some efficiencies, for example, out of past branding campaigns, something like that?

I think there is some point where it starts to scale again. And you say, okay, hey, I've got -- now we're a -- today, we're a $5 billion company one day, we're big enough that you say, okay, there's a scale there. I mean you certainly have that with Apple, and Apple's got such scale. So I don't know exactly when that happens. But I think making sure that we reserve enough of the capacity to invest in market so that you can get that margin expansion is key. If we can -- I wouldn't be shy about spending money on sales and marketing as long as we have strong gross margins. And I've always thought the most important number on an income statement is the gross margin because the whole story is in there somehow. And then the next most important one is your growth level. And obviously, if you don't make money, you're in trouble. But if you got those 2 things working, then the rest is you can really think through, okay, how much do you flow through to the bottom line. But I'm really fixated on those. So we're going to keep a very close eye on there over the next several years. And if we can drive strong gross margin expansion, protecting where we are, drive strong growth, and then flow enough through the bottom line, we'll certainly invest back. And I think it will be a great story.

Awesome. So I'm going to give you one more question and then I'm going to open it up because we have a few questions here from the audience. But the last one is just on capital allocation. You have over $1 billion of net and gross cash. You're more cash generative today than you were pre COVID. I know there's a little kind of transitory impact with investing in inventory in the near term. But you're clearly committed to buying back more stock today. How should we think about your approach to M&A? Has it changed at all? Are you more willing to target bigger acquisitions? Would you be willing to lever up, for example, if a big transformational acquisition opportunity came along? What's changed now with your new financial profile?

To be honest, nothing. I really would have said we would have been -- I would have been willing to lever up before. We looked at -- we took a stab at something bigger before, and I certainly would again. Big deals are so hard to get done unless you're cavalier about them, and I'm not cavalier about anything, especially about high-risk stuff. I'm very willing to try almost anything but I'm into risk management. I don't like gambling. I'm not a gambler. I hate Las Vegas, sorry to those gamblers out there. I'm figuring the odds are with us in the games we play here. I don't like games where the odds are against us. So I think we will continue to look at large plays. They'll continue to be hard to get done. We're also looking at medium and small. And we've been extremely successful and are much more successful than honestly, I thought we would be in the -- when I got here. We did it slowly -- so we still -- we do 3 or 4 or more things a year now. They tend to be small, but they're very high ROI, very high return. And so probably we haven't done enough relative to what we could do, certainly relative to our capacity. But we'll continue to be judicious about it. I mean you can screw things up pretty fast with a bad investment decision of any scale but especially for large scale. So we'll look hard and I'm excited about some of the things that are out there, but I'm honest with myself. They're hard to do.

All right. So here's a question from the audience. It actually gets back to one of the first questions that I asked you about C&P, but can you provide more detail on what is driving growth in the mice and keyboard market so continuously?

Yes. If you think about it, there's a couple of things. So first, I think -- I'll just talk at a very, very high level. If you think about how little you think about your mouse and keyboard, most people and how much time we put in and try to make them better at a very, very micro level, we can actually -- you can get a kind of a wonderful lift in your day if you just get a better product. And so that's probably at the highest level, one of the drivers for it. Now in the pandemic period, what's really happened is most of -- I don't know about you guys, but I didn't actually have a dedicated computer at home. [indiscernible] I'm in this business. I did not have a dedicated space. I would bring my iPad or my laptop home. I kind of work from home on my lap or I didn't even had an office. I just come in and drop it in like my clean desk, so I didn't have one. Now I've got -- now I've got like 2 or 3 setups in my house and the same things happen for most people. So it's really just increased the number of workspaces dramatically. And that's done 2 things. One is it means that there are more things to upgrade over time. And the second thing is that it's made you more aware of that. Because if it's sitting in your house, sitting out all day, you're more aware of the aesthetics and just aware of the product category. So our category, kind of the awareness of the category is kind of modestly important to you, has gone up. And so I think that's -- all those things are contributing to a greater potential for us long term. And as long as we innovate well and do really cool stuff and do -- and keep making it even cooler, I think we've got really good prospects there.

I'm going to sneak one last question in here, even though we're close out of time. And that is just -- the other question from the audience is what do you make of some of the big PC OEMs announcing -- allocating more resources to the peripherals market.

I'm not at all surprised. I think it's -- we've always -- they've always been in the market, and they've come in and invested more over time, and I expect that great markets attract competitors. And I think it's a good indication of how exciting that market is, and I don't blame them. I'm super excited about it. Again, I think the more -- I'm not exactly the more the merrier, but I think more attention on this category but will drive more growth in the category. It's almost inevitable because awareness is low of what you can really get now.

Right. Well, that is a great place to end here, Bracken. As always, thank you for your time. Thank you for your honesty. And hopefully, we'll be in person next year in Barcelona doing that.

I hope so. I'm ready. [indiscernible]

Yes, exactly. So thank you for everyone for joining us, and Bracken, thank you for your time.

Thank you so much, Erik. And thanks to everybody.