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

Are we good to go? All right. Awesome. Thank you. All right. I'm Stephen Ju the Credit Suisse Internet Equity Research team. I'm subbing in for Serge Rotzer, who's the coverage analyst here for Logitech. Sitting to my right, is Bracken Darrell, who's the CEO of Logitech. So welcome.

Thank you, Stephen, it's so nice to meet you.

Yes, nice to meet you as well.

I'm sorry, Serge isn't here, but tell him, he is missing something.

Yes, I hear you.

All right. So let's start at the very, very, very top. There's a lot of cross currents in terms of what's driving your growth. But help us think about your growth drivers as we look into the near and the medium and the long-term future.

Yes. We have 4 big secular trends we've been positioning the company behind for a while now. And for those of you who follow us, I apologize, but I'll just quickly rattle them off. One is the conversion to video from audio calling to video calling everywhere. We started this in 2012 with our first product, which was this cute little product called [ Orbit AF ] it looked like a desk lamp and up to today where we've got products for every size room and of course, desktops and everything else. The second big trend is the one that everybody is talking about now, which is working from everywhere. So this one we sort of saw coming. We thought of it differently way back then, but it's now really about having some to work at home and some to work in the office. The third one is the drives of gaming is the biggest collection of sports in the world, a participant and spectator. And we started saying this again, back in 2012, 2013, I think. We sounded little weird back then. Now we sound less weird. But I continue to think this will be bigger than any sport in the world, and it will be part of the Olympics at some point. And then the last one is probably our freshest one, which has been 3 or 4 years in and that is the democratization of creating content. So it's no longer the domain of course, of Netflix and Amazon and Apple and big companies like that only. But actually, the majority of the content now is being created by people like us and our kids and friends. And so we enable those people. So all those are -- those big trends are -- we serve them with a series of categories in each one and a growing number of categories.

Yes. On that last one, which is, I guess, called creativity and productivity.

That's actually not just to really confuse you, but it's called streaming and creating. So even sexier than all of that.

It does sound much sexier than what I laid out there, but yes. So I think at the beginning of the year, you gave a forecast of down 10% to unchanged. And this is actually doing a lot better, right? So especially in the first month with reimbursement from mice and keyboard. So why is this category doing that much better? Are we just -- do we just have a permanent sort of paradigm shift in terms of the consumer behavior here? Or what else is driving that?

Well, I'm super excited about that business. I mean it's always done well. We've -- in fact, when I came to the company, the first thing I did 10 years ago was to strip that little category of about 75% of its resources and put the R&D into other things. And that got us into gaming and video collaboration and other things. But meanwhile, a weird thing happened, which is we got better and better at innovating with less and fewer and fewer resources. And so our innovation engine actually has just started to hit its stride in my opinion in the last couple of years. And between that and just the increase in the installed base, I think we just have an incredible moment where our innovation engine has hit this larger installed base, and we are really positioned for long-term growth. So I'm very excited about the business.

Okay. How important is PC growth? It doesn't sound like it's as important. I mean there's different drivers here, which subcategories are desktops, notebooks, convertibles, gaming PCs. I mean are they?

There's probably somebody in this audience somewhere that used to follow us way back when, when we would literally talk about the PC growth and talk about category growth. But within a couple of years of my arrival, we realized there's just no correlation. They're totally disconnected. We're really about an installed base. We have 3 ways to drive growth. We can drive trade up. I mean, replacement and there's mix. And then there's really additional products into there. So we have 3 different ways to grow and they really have separated. So I don't think PC growth is even worth looking at in the context of our business. So the installed base is so much bigger than the number of PCs sold every year that it's not worth really thinking about.

Got you. All right. So let's switch to the Gaming segment. So once again, your initial forecast was down 5 to up 5 or sort of flat. In the first 6 months, you're up plus 39, right? So -- and I think and revenue growth was -- in the second quarter was 11%. You saw some of the others in the industry report down teens type compression. So that's a pretty huge difference. So like what do you think is accounting for the difference there?

Any -- as you go through these questions on the near term, it's harder for me to answer what's really driving them. What I can tell you is that the long-term trajectory is just so strong. We've been gaining share in most of our categories. We're now, I think, the highest share we've been since I got there in the gaming peripherals business. But that aside, it's just a very, very strong category. And I think regardless of what happens this year to any of those categories, it's hard to imagine a scenario where they don't just continue to grow very long term. I mean most of the business is people under the age of 30. It's all you really need to know because that other people who are coming in who are 11, 12, 13, 14, 15, 16 are all playing. And then this group that's under 30 are all going to grow up. And so it's just hard to imagine that category not becoming kind of overwhelming becoming the biggest collection of sports in the world.

Yes. So investors in general should not be worried about sort of the twin boogeyman of, I guess, there's the tougher comparisons against for the gaming sector in general that we're living through this year. And I think the other sort of boogeyman is sort of the regulatory activity in China and what that might do. I think that's the largest gaming market in the world now.

Yes, it is.

Yes. So should we be concerned about those?

I think the -- I'll talk about the second one for a second. That regulation in China is focused on under 18, and our business is over 18 is like 80% or 80% plus is over 18, that's a surprise to some, but it is the case. And I think at the end of the day there's regulation ends up driving a traction later. So I think -- I'm not sure that's necessarily a huge dampener to the long-term trend even in China, and China continues to be very strong for us. I've forgotten your first question about the demand.

The tougher comparisons from all the...

Again, I'm not -- I apologize to so many of you who are probably a much shorter term than I am. I would probably would be a very good CEO of really short term, and I'm not. But yes, we do have tough compares. We have tough compares in the back half in general, but boy, if you think about what we've done just last quarter, for example, if you look at over 2 years, the fact that we've actually delivered that kind of growth and then sustained it and growing on top of it is super strong. And it just shows such an underlying strong secular story. And I think that secular story is just going to keep going.

Okay. Got it. Now Switching gears to title a little bit. How important are new games or game titles? I think you just released a League of Legends addition series of products. So how important is that tie-in?

Well, I think the vibrancy and health of the developer world is super important to the gaming business. That is a must. And the good news is there's a lot of money -- some people don't realize this, but the gaming industry, the gaming developer industry, the gaming, how much consumers are paying not for our products but for the games themselves now is bigger than the movie industry. I mean the biggest titles dwarf the biggest titles of movies. So these people are creating magic in terms of market creation, just like Disney does or Netflix does and Amazon. So it's super incredibly important, and it's -- and the number of people attracted that business are growing. The number of PhD or bachelor's programs and masters programs and PhD programs in colleges and universities around the world are growing. I think that you can expect a very, very good long-term trend in terms of development of new games. And League of Legends is just one. But the famous Fortnite effect. And a lot of people thought, oh my gosh, Fortnite, it's gone up now, the whole thing will collapse next year. It didn't because there are more new games coming on all the time, and I think that will continue to grow.

Yes. I think we cover it on the software side. And I think, honestly, the exposed audience is probably still less than half of the global population, right? So as hardware and compute connectivity becomes more widely available, that should continue to drive the secular growth story for you.

Yes. And it's also kind of cool to think of what's going to happen with more and more cloud-based because with cloud-based gaming, you have lower cost to compute. You still need to -- just like you still need a pair of shoes to play basketball or play European football or soccer, you still need a keyboard, a headset and mouse to play games as the cost of computing moves off into the cloud some, it will just be more -- I mean more money is probably able to be spent on those equipment -- those piece of equipment.

Yes, exactly. And what we're hoping for, I guess, is that it takes away the need for gamers to go out and buy a purpose-built piece of hardware that's going to sit under your desk, to sit under your TV and if all the compute moves to the cloud, then theoretically hope to usher in a new era where the audience growth is probably faster.

I'm not in that business, so I don't want to comment on it much. I really have a lot of respect for the people playing in that business. And so if I've learned one thing from my decade in tech, it's that these obvious trends, it seems like they're going to happen overnight, don't. And things seem like they're going to replace other things, don't. They just get an on-top effect at least is for a very long time. So I'd be pretty bullish in every direction on this one.

Yes. Okay. Right? So there's been some consolidation this year, right? I think HP acquired HyperX, et cetera. So what does this mean for Logitech in terms of market share, price points, access per channel or just generally in competition? How are you positioning yourself to hopefully capture incremental share?

Well, we've got great competitors in every category, and you just named another one and there are more. I think, great categories attract great competitors. I'd rather be in a great category that attract great competitors than a crummy category that doesn't. So I think it's just a sign of how strong our businesses are and how strong the dynamics in those businesses are. Now the pressure is on us to continue to invest and build in an innovation engine and a go-to-market engine and commercial capability that matches or even exceeds those players. And that's really where we've been investing our time. And I love -- I absolutely love it. I mean, we're not in the gaming business because we don't like games. We don't like competition, we love it. And I think everybody does. I mean competition has been the biggest driver of innovation in the world. And so, hey, we love it. I mean more competition will just make us be better.

Yes. Okay. And you have -- I think you have a music segment also or it's a business that's ...

Small and shrinking.

Small and shrinking, all right. So you're reallocating resources there in R&D and marketing to other product categories? I mean what is the future? Well, you're saying it's shrinking, but are there any synergies somewhere else with other categories so you need to keep it? Or how should we think about this category?

For those of you who followed us for a while, if you haven't followed, I assume you haven't, we have -- I started here. I don't know how many categories we have, 13 or 14, now we have a lot, dozens. And as we've done that, we've really tried to call out categories that stopped growing or went into a secular decline or -- and so we're always looking hard at where should we be going into. So we're always working on new category development all the time. And then selectively, should there be things we pull resources away from or actually get out of. Last year, we got out of our Harmony remote control business, which is a tiny business. It was -- and we're on our way to -- we've really said, okay, the music, that Bluetooth speaker business it doesn't look so attractive to us. So we pulled resource off. We put them into other things. There's a lot of good capability in that business that we're applying in other directions, which I can't really talk about now. So that's the nature of our business. It's -- we're a portfolio business, just like everybody here, manage some kind of portfolio or is involved in one.

Yes. Got you. Let's move on to, I guess, video collaboration. I think last quarter, sales were almost flat. I think there were highest -- there was, I guess, high sales in Europe, lower sales in previous quarters and although sales in Asia and Americas were strong, up double digits, I think. So in the second half and especially in the fourth quarter, the comps will be a little bit more challenging. So can you give us a sense of where all these cross currents are going to business?

Yes. I mean I think video collaboration business was just an incredible grower last year, of course. And I think as we came into this year, I think if you can remember back, it's very difficult for me to now for some reason. But if you can remember back to were kind of in April, May, I think we all said, okay, well, we're going back into the office. There's no such thing as a Delta variant and it's going to be great. And I think somewhere along the line, the Delta variant came. And I think that sort of put a little bit of a sludge or slowdown in the decision-making process for a lot of companies, including ours, by the way. We were not really thinking hard about what do we do from a office structure footprint. We're just thinking, man, people are going to be back. We got to get ready. We got to have the lights on. We need to upgrade our stuff. And then we said, wait a minute, now that we're going to push our office open out to September and then later to November and then in some cases, people are going to January now and who knows? I think it pushed the overall decision-making process for, okay, how many rooms do we need to enable? What are we doing about this? What are we doing about that? And I think certainly, the -- there was, for the first time, maybe since the pandemic started. Let's talk seriously about culture, the company culture and how it's going to play out. And it's a real changing environment in companies now, which I think is healthy, but it has probably put a slowdown on the kind of growth we could have expected this year. But I don't think it's changed at all on the long-term secular trend. I mean it's hard for me to, don't know about you guys, but it's really hard for me to imagine that a year from now and 2 years from now, you're going to go into offices and people are going to be suddenly making audio calls. They're going to make video calls. And there are going to be more people not in those video calls than the ones in the office a lot of the time, you're going to have video-enabled. So I think it's just a matter of time. I mean, I think it doesn't change the long-term destination. And remember, these growth numbers are on top of huge growth numbers last year. So these are still super strong.

Okay. think you released a bunch of new products, and some of them are very enterprise-oriented, right. So I would assume the sales motion is probably a little bit different versus dealing with the consumers. So what are the success factors that you're working on to, I guess, cater more heavily to the enterprise?

We're one of those examples of companies that started in the consumer space and then are finding their way into the business space. It started 22 years ago, 25 years ago, 30 years ago. Our mice and keyboards, we didn't actually have a sales force that went sold to businesses, we sell into a distributor. And so we would say, hey, we need an order of and our products will be pulled through. We never really deliberately went out and said, okay, here's our B2B business. It might be hard for you to believe, but here's our B2B program. When we get into the VC business after the first 3 or 4 years and we did pretty much the same thing, of course, we realized we're going to have to go there and so we did. So we've been systematically building out a commercial enterprise business in all its facets. And it's really, really exciting. It's one of the most exciting things that we've done since I've been there. We're still work in progress. We've come a long way. We've got more to do, but I feel really good about it. And I think it's going to open up a whole new series of things we can do and they'll play out over time. So it's an exciting thing. It's really completely adding a whole new opportunity for growth into the company beyond the VC thing. Once you have the capability, there's more to do, there's more you can do.

And you partner with some of the software companies as sort of the official designated hardware services provider?

We partner -- we already partner with Zoom, with Microsoft and Google. We really partnering with everybody. We've -- in fact, one of the things that I always think we never talk about this externally much. We didn't talk about much internally, but I think one of our real strengths is we partner really well with other companies. If you think about how could we exist if we didn't because we made mice, we made mice with HP, with Dell, with Apple. We work directly with Microsoft in development of how the mouse interface with -- as a UI player. And so we've always been in that space, and we still are. And we view those partnerships as really critical to what we do.

Okay. Got it. Now I think the entire market has been struggling with the question of logistics and component costs, et cetera. So I have to ask this question, right? So yes. So tell us about the cost inflation in relation to components and transport costs. And I think in the first quarter, you already increased your inventory levels of components and finished products and already delivered some of that into the region. So where are we now?

Yes. I mean there's -- inflation is probably one of the -- if there are 2 hot topics that I can -- 3 hot topics today, one of them is the new variant, the second would be inflation and third would be logistics. So we'll -- maybe we'll get to the variant in a second. So the -- on logistics, let's start there. I think we're not immune to it. We've done -- we probably did as good a job as any company in terms of managing during the pandemic the supply chain challenges. We made a very large inventory bet within the first month when it looked really dark. But luckily, we had some very experienced people here and we said we can have this feeling, we have a good balance sheet. Our products are not fruits. They don't expire. So let's go for it. And then we kept doubling down that bet. That puts in a position to grow like we did last year, 74%. And I think the reality is now we're in the new phase when a lot of the component stuff is kind of slowly starting to play itself out. And you've got this weird kind of logistics problem where you've got port slowdowns and unpacking and packing slowdowns and all that stuff. We're not immune to that. So it's certainly going to affect us in Q3, Q4. And maybe longer than that, I think these logistics things tend to unwind a lot slower than people think. I have some personal scar tissue from a prior life where I inherited something like that. So we'll see. I'm hopeful it will be better, but I'm sure it will affect it broadly, the broad industry in some way for longer than we think, but we'll see. On the -- so we'll skip the Omicron variant but what was the third?

The transport costs -- I think inventory and placement, et cetera.

Inventory? Well, I think in terms of general costs as a result of this really strange demand situation, in supply, the mismatch in so many areas. We're certainly seeing inflation come through on our costs. I would say we look about like everybody else. Now there are a bunch of ways to deal with that. We're really generally very, very good at managing costs as good as anybody, anywhere I've worked. But we also have other levers. We're looking hard at pricing. If we do pricing, the easiest way to do pricing is to restrict promotion. So we're holding back as much promotion as we can. We had almost 0 promotion year last year. So we're trying to keep the -- about half of that is probably back, we'll just try to keep as much of that as we can. Second is to raise prices on new products. It's pretty straightforward kind of invisible to the consumer. So they don't feel it as much. And then the last one is broad-scale price increases. We've done it before. If we decide we need to do it, we'll do it again. We did it during the tariffs. We did it during the inflationary -- the currency flip plop in Europe a few years ago. We've done it selectively in Southeast Asia. So we know how to do that and we'll see.

Okay. Got it. So it sounds like there's going to be a Christmas for Logitech this year.

There's always a Christmas. There's always a Christmas, there's always a Q3, our Q3 or Q4, but always.

Okay. Got it. So let's talk about your use of capital. So I think you're one of the few tech companies that do a share buyback and pay a dividend, right? I think your cash pile, which surge has forecast to be about $1.5 billion, right? There's still enough cash to do M&A. So I mean can't signal which particular company, but given the market seems to be in a bit of a consolidation phase, like what would Logitech find interesting?

Obviously, as you said, I can't talk specifics, but we've been in the -- we've been working on M&A since the day that I started 10 years ago. And we -- in the beginning, we just didn't have enough experience and the experience we had wasn't good. So we started small. We started doing the process, things just to learn how to do it. Roll forward 10 years, we've been incredibly successful in our M&A, more than -- better than I ever would have dreamed we could be. And our hit rate on -- versus our targets is remarkably high, which says we should be doing more if we can. And so we are actively in the market all the time. We're looking at things. We do acquire things, some things we don't go public with because they're not material, but they're the kernel of something bigger. And this has been our model from the beginning. We're looking at all size things. We look at large things, too. But as you know, large things are really tough to do. All the stars have to align and everything's got to work. It's tough. We wouldn't be afraid to do it. And -- but it would have to be -- everything is going to work out.

Got it. And finally, let's go forward about 12 months from now. We're sitting at the 26th Annual Credit Suisse Tech Conference.

I'll be here.

Yes. And early invitation. Right, so...

Tell Serge, he's lost a role here. You got it now.

Yes. What do you think we're going to be talking about in terms of what you've been able to accomplish over the trailing 12?

I don't know -- when I think about the last 10 years, we're worth 14x more than when I started, 13x more than I started something like that. And we wouldn't have been talking about that in the first 2 or 3 or 5 years. And I'm -- but I think the dynamics today that I'm sitting here right now feeling about the potential of the markets we're in and the potential to enter new markets is unbelievable. I am super, super energized. I mean I can't believe how lucky we are. And we've done a lot of work to enable that luck to be clear. We've got a lot of amazing people in the company who have -- who joined us, who developed. So I hope we'll just be talking about the future. I don't see how there is -- I don't -- I can't imagine a scenario where we don't -- or we're not excited about what we're talking about next year, like I am now.

Got you. And with that, we'll wrap it up there. Thank you so much.

Thank you very much. Thank you so much.

All right. Okay. Great.