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

Good afternoon. So my name is Paul Chung. I'm the applied emerging tech analyst here at JPMorgan. I'm pleased to have with me the CEO of Logitech, Bracken Darrell. Welcome.

Thank you, Paul.

Yes. So for those that don't really know the firm, can you talk about a brief overview of the firm, kind of the evolution since you took the helm and how it's changed?

Okay. So we're -- I started 10 years ago, and we've -- we went from really being mostly a PC peripherals company to now we work in mainly 4 broad areas that have multiple categories within each one. One of them is video collaboration which, everybody in the room, if you're here, you're probably with that. So we video enable more rooms than anybody. The second one is workspaces. This is one most people are familiar with it, the mouse, the keyboard, the webcam, headsets. And then the third is gaming. And that one we got into when I -- both video collaboration and gaming, we really entered for the most part, when I got here. And then the last one is our newest one which is streaming and creating, as we call it, which is the collection of categories that help creators, which includes things like cameras but also microphones and a company called Streamlabs, which is a total service business. So those are our 4 big areas. And what's changed, I guess, most since I got here is the combination of the portfolio we're in, but also the -- our orientation to design. So I had worked at a design company years ago called Braun which is not really a design company, but they thought of themselves that way. And I dreamed of running a company that could become a design company. And I had this chart for investors that Paul might remember me talking about, even shown him once that showed the return of design companies relative to other companies, and it was 3x return to shareholders. And the design companies included companies you would think but some you might not know about. But I really believe that putting the customer at the center of everything you do could create incredible value, and it has. And I think there's so much value ahead of us too. So it still very much holds true.

Okay. And then just to kind of talk about what everybody else is talking about, but what's your current view on supply, components, how are you kind of managing cost inflation? And I'll ask a couple more follow-ups on that.

Well, that will take until the end of the session. No, the -- in terms of supply and components, I feel like every year since COVID started, we have a new chapter of this completely surprising story. And the first year was, oh my gosh, we don't have anything. We don't need anything because we don't sell anything because COVID come, and retail shuts down and the world's ending. Then it flipped back the other way, and we grew 74% the second year. It's -- now we can't get anything. And everybody is suffering on components and on everything. And we somehow managed to scramble our way through and build our own inventory and buy ahead of everybody else, and we did pretty well. Now we're in the third year, we're suddenly surprised. China is the one actually shut down instead of the rest of the world. And now how do you get stuff in, how do you get stuff out? How do you make things, how do you sell in China? And so every year has been different. And I think that's just the reality. The other big macro stories you talked about are relatively new, inflation. It's one of the things people are talking about most of this conference. Inflation looks like it's here to stay for a while. So that's a factor. And that -- the only answer for most people is price and cost. And that's the same thing for us. We have to raise prices and lower our costs. The second one -- where we can. And then the second one is the continued like crazy logistics pricing, which especially express or airfreight, express vouchers, crazy pricing. It's been out there for a while. It looks like it's staying for a while. That's a very unwelcome guests like the rest of these. And then the last one is currency, which we're -- like most people you're probably hearing here, we're dollar-denominated when we report. And so we report constant currency on the revenue line and dollars on the bottom line. So obviously, with our footprint, currency affects us just like it does everybody else. So those are all macro headwinds that are unwelcome guests, but every year we've had unwelcome guests we've had to deal with, and we just try to outperform everybody else.

Can you talk about the disruptions in some of the manufacturing facilities and expand on what your footprint is like now? And I believe you're vertically integrated and how has that benefited you?

Yes. I think I'll go back to the tariff days when the -- which seems so long ago, but it was only 3 years ago. When we first headed into tariffs, we had 100% of our supply came out of China. So we immediately started -- one of the skills -- skill sets and capabilities we've built is the ability to move things in and out of our own factories. So we have our own factories in China. We also buy from other people in China, always have. So we were -- at the time, we were about 50-50. So we immediately moved as much manufacturing as we needed to into Southeast Asia, mostly into Vietnam, Thailand, Malaysia. And so that's kind of where we sat as we entered the pandemic. And as we entered the pandemic, we moved a little bit more out of there and a little bit more out of our factory as we just move things in and out of -- within China and outside of China. That's kind of where we are today. And I would say the supply chain challenges that everybody else has faced, we faced. The semiconductor shortages, the parts shortages, and the latest batch of challenges in China. So we're kind of in the same boat as I think just about everybody else.

Right. And I mean, like everyone else, you have some elevated inventory levels, but that's also giving you the flexibility to keep the shelves stocked. Talk about kind of competitive advantage of that where at a Best Buy you have so many different SKUs and how that's helped you.

Yes. We really -- in the first weeks of the pandemic in 2020, we made a -- I've been in my job for a while. So I have the advantage of being one of the probably more senior CEOs out there and I -- or at least on that end of the curve. And I really had a feeling that even though our business was tubing that it would come back strongly. And so we made a pretty big inventory bet -- 50% bet on growth, even though we were declining probably 30% to 40%. And I sat out with my CFO and my Head of Operations, and we all agree, let's make the bet. It's -- it feels like it can be risk managed because we can always turn it into product and we'll sit in inventory for a while. Well, we didn't sit in there for long. So it all worked, and we grew 74% that year. Then we kept doubling down that bet because we got ahead of it. So we said, well, let's -- every little while, we'd keep the bet. And then as we saw supply chain challenges emerging, we use that -- our balance sheet strength to make sure that we were sitting in a position where if we did have another supply problem, we could maybe not completely offset it, but manage it better. And so we've been there all the way through. And I think it's really helped us a ton. And then at some point, we'll no longer need to do that. But I think that's really been an advantage that we've played out throughout the pandemic.

Right. And then I guess on the flip side, on the demand side, you're hearing some cracks in consumer sentiment across Europe and North America. What are the trends you're seeing from where you sit?

Well, we're in this very luxurious spot where if you're a -- I mean, if you're a short-term investor, it's hard for me to give you a really satisfactory answer to this, but if you're a medium or long-term investor, we're -- those 4 trends I talked about in the beginning, you really couldn't ask for a better kind of complement of things that drive your business long term because video is going to be everywhere. I mean we're all -- this was how we got it in the first place. And we said, gosh, actually all audio calls will be replaced by video at some point. So let's be in the middle of that. And that's happening, and it's still got a long way to go. I mean most of the offices that you're working in are not -- they may be in front of yours, but the average is about 1/10 video-enabled. So that means there's a lot of video enablement left to do. If you're looking at gaming, as much frustration as a lot of parents have about esports and gaming, that cohort below the age of 25 is not going to stop gaming. They're basically -- that's their playground now. That's their social meeting house, their clubhouse. And so they're just going to grow up and the new ones that are coming in are doing it even more. So that's a great place to be. The workspace is a really interesting place. When I came to the company, I joined Logitech because I thought the mouse and keyboard were dead. They were going to go on to this long-term secular decline and the company would have to grow into new areas, which is what excited me the most. Little that I know at the time but I've learned quite quickly that actually we just -- our innovation engine kind of run out of steam, if we just targeted better and then innovated, we could actually grow that business. And we did all the way up until the pandemic and then it grew even more after the pandemic. And now we just have a lot more workspaces to upgrade, which is what we were doing before. And I bet very few people in this room have a workspace that's really well enabled for them. I mean I'm almost positive. I could take orders right now. You send me a picture, and I can tell you what you really need. And it would cost you a little bit, but not much. So -- and then the last thing is this growth of streaming and creating. And I mean we are watching more people of each other create stuff. And we're helping them create stuff. We're giving tools for that. And we're watching Netflix, Amazon, all those combined. So this is the future. We're going to have more and more of that. Amazon, Netflix will be just fine, by the way, keep investing. But I think the growth of the individual creator, the creator movement is unstoppable. So sitting in the middle of those 4, I'm just super optimistic.

Great. Yes. So let's dig a little bit deeper into the segments. So pointing devices, you saw a surge during the pandemic. These are kind of outfit your workstation at all costs very quickly. You have tough comps ahead, but where are some kind of levers for growth. Talk about also the price versus volume dynamics as well?

I think the cool thing about a mouse, for example, is that it's actually not much money. So it's -- and it's pretty crucial to most people's work. So it's a great thing to trade up on. And if you can -- and a lot of people have an average or below average mouse, the vast majority of people, so there's a lot of trade-up opportunity. About 4 years ago, we started really trying to look at it more discrete audiences kind of back to my consumer product base. And what we discovered was there were lots of different needs in these audiences. And so as we've -- we just kept mining those needs, and we're finding more and more opportunity all the time. That's why I'm so confident that I could take anybody in this room and probably upgrade your entire workspace. I mean, I'm sure dramatically, and you'd probably be a lot happier. I know I would be. But I'm sure that some of you probably have a little bit of pain when you use a mouse or keyboard. We've got something for that. Some of you have kids in your house, who love the cool colors and or mechanical keys or, today, we launched a mechanical keyboard for you, by the way. So that it's actually a quiet keyboard, but it gives you that mechanical feel of almost a typewriter. So we're finding ways to innovate across that and it's driving our growth, and I think we'll keep doing that.

Yes. So just on the keyboards, it's seen a little bit of relative strength versus the kind of pointing device. I guess there's some function of kind of pricing more so as well because these keyboards aren't cheap, and they're actually very high quality. So talk about kind of the price versus volume more so on the keyboard side, which has seen some strength.

Yes. Just generally, we're a mix engine. I mean we've -- we're engineered throughout my entire history, my career, I've really focused on mix because I learned a long time ago, gross margin is the most important number on your -- on an income statement. And the way to drive gross margin is to create real value for users and the way to create real value for users is spend a little more and charge a lot more or spend a little more and charge a little more plus -- enough but not so much that it's no longer worth the value. So this is what we do. And we did it before I got here, and we do it better now. So we're constantly driving mix. We will -- in almost every category. The only period we probably had some negative mix within the category was the early pandemic and we just ran out of products, and we were selling too much low end, we couldn't help it. We ran completely out of -- we had a mix story the other way in webcams for a little while because we had just no C270s which was the low end of our webcams, we were selling all high-ended. So that's the only period we really had, I think, a negative mix story. We also have a great mix story across our categories. So if you think about it, the average mouse probably sells for $25 from us to where we're selling it. The average VC product sells for well over $500. So you can imagine that we would trade that any day of the week.

Okay. Switching to kind of audio, PC and wearables. You have Blue Microphone in there, which was an acquisition, drove some strength. Jaybird saw some pressure. Kind of state of audio and expectations for the year.

Yes, it's a tough one to look at because it actually combines a lot of heterogeneous things into that line item. But Blue Microphone is a powerhouse sub-brand within its own right. We're going to bring it into the Logitech brand this year, but it's a very powerful brand in the audio space. It's the leader in microphones, for podcasters or creators in general. So it's a very, very cool product. And it's more than doubled, I think, tripled since the beginning of the pandemic, and now it's down versus a year ago, but it's off super high numbers. The other things in there, PC webcam, Bluetooth speakers, they're really categories we've completely deemphasized. So we have a pretty systematic way of looking at our portfolio, and we ride the waves and we pull back when they -- if something is coming down. I don't like declining businesses. So I don't -- we don't invest in them. We really -- but we are pretty good at optimizing contribution margin on them. So we often won't just shut them down or spin them off. Eventually, we have shut them down and we shut down a lot of things. But for the -- but there's a period there where it's kind of a sweet spot of you can actually drive a lot of contribution margin out of a declining business. And we got a couple of small ones that are.

Okay. Switch to PC webcams. So very, very strong during the pandemic. You kind of sustained it into '22. Kind of as we look beyond the pandemic, what kind of drives growth from here or a big surge during the pandemic?

Yes. I think 2 things. One is the same thing that drove the business before the pandemic, which was -- it had settled down into a business that was just kind of a stable kind of slow decline and it was a replacement business where if somebody needed a better webcam, they bought it if their webcam weren't there, whatever. So that business remains. I think the other reality though is that I doubt if there's anybody in this room that loves the idea of looking at themselves off and on all day on your PC. And if your PC doesn't have a good webcam and most in the installed base do not, the vast majority, you actually can't improve the appearance by upgrading your webcam. And so that's one thing that will drive that business long term. And the second thing will be innovation. And I won't say any more than that, except that we think there is innovation to be had there.

Yes. And then you just introduced the -- is it Litra...

Litra?

Litra Glow. Just talk about how that came about and I know as recently as a couple of weeks ago, it's sold out on the website. So what's the demand been like on that product? And how that kind of came out of the pandemic and drove like a new category for you?

Yes. Litra is a light. So it's the first light that looks like a webcam, you literally plug it in the back, just like you would a webcam to your USB port. You just hang it on top of your screen and you've got a much better look. It gives you kind of that evening glow look all day long. And that came out of really us really trying to understand what people were looking for during the pandemic. And we have actually -- our existing cameras do a good job, but you -- lighting -- there's no replacement for good lighting. And so adding lighting to it does make a difference, and it has done extremely well.

Okay. So tablet accessories, kind of ebbs and flows with some of the iPad cycles and everything like that, but you saw some very strong educational demand. Where does this kind of new business go from this new base?

We've learned -- I say learned, but we've learned to love that business. I mean I always liked it because I liked -- I was always really impressed with Apple. And I loved being able to do something that complemented one of their products. Just like we complement the cloud platforms that are in all of our products. This one complemented a physical product as well, which was their iPad. So I love the association and also just what we learned from it. And it turned into a good business over time. It's become a good, solid, predictable, strong business, very strong in the last couple of years. We had extremely strong growth from -- in both education and the general retail business. But it's a little hard to look at in the last year because we had 1 particularly enormous education deal in Japan that was in last year's base. But if you pull that out, it continues to be a really good business for us. And I like it a lot because it also led us into education. And we probably should have always been there. There's a monster opportunity for us in the education space, and we really had not done anything to get after it, and now we're starting to.

So let's talk about mobile speaker. So this business was kind of engine of growth years and years ago. So I guess if you could just expand on how you pivot and kind of move those resources elsewhere and also kind of how you're able to kind of move quickly on trends and then kind of reallocate resources?

Yes. I think it's a good example of a few things. So first, it's a great example of design. When we -- the first Bluetooth speakers look like rectangles, like a speaker does next to the wall. And when we entered the category, we launched a few of those, and they didn't do very well. And then we really try to design one with the user in mind first instead of what the product was. I always think of it is we design -- instead of creating a product for the user, we created a product around the user. So we watched how users were using Bluetooth speakers, and they would also sit together, 2s or 3s. But more often than not, it was -- at least once in a while, you do it with 3 people. But when you have 3 people or more around a Bluetooth speaker, if it's a rectangle, somebody feels left out. So we -- our team decided it had to be a cylinder. And the engineering team said, "Well, it actually cannot be a cylinder because we can't make it sound the same from different sides". Yes, somebody always feels left out and the sound quality even if the perception is that it's not. So we found a way to do it and we launched the first cylinder Bluetooth speaker, and that business just took off. And we learned a lot from it. It was a very, very good business for us for many years. But I think it's another illustration of we're not afraid to cut ties when things don't go -- don't look good in the future. And we just decided, actually, this doesn't look like a great category for us for the future. We also made a choice in the early days because the Logitech brand wasn't strong enough that we branded it Ultimate Ears, which is another brand of ours. But during the pandemic, the Logitech brand has gone back up to its status probably where it was back in the heyday of the brand around the PC, where it's really become a brand that you would accept a very wide range of products from. So now while we're phasing out of the Bluetooth speakers, it's also giving us confidence in the future, we could launch new categories and use the Logitech brand, and we will.

Cool. Switch to gaming. I know you're very passionate about this. So talk about kind of the mix. What drove the outsized growth during the pandemic in terms of which products and then we're at a new base of revenues. So looking forward, what are kind of the growth levers you can pull?

Yes. The cool thing about that category, all those main 4 big kind of secular trends I talked about, this secular trend of gaming is -- will be the biggest driver of growth for us long term and it will not let up. But the levers that we have and what made our business advantaged during the pandemic was a couple of things. One is we've always done a very good job of mixing up. And so our drive towards wireless products in the gaming business and our advantage technologically in that space drove us up big time. So our wireless products, both in mice and keyboards did well, our wheels did very well. I think it's interesting. I was just noticing just -- we're sitting here in the U.S., I was just noticing how much discussion there was, and I'm wondering if anybody in this room did, about the Formula One in Miami this year. And I had never heard of Formula One being in Miami. I knew it was, but I never heard real discussion about it, this year for the first time, hearing it all left, right and center. It seems like people are talking about Formula One a lot. And I think we were seeing that in our Wheels business. During the pandemic, and we're still seeing it now. People are interested in.

Netflix show, yes.

Yes, maybe it was the Netflix show exactly. So I'd say we really have some very attractive segments within our category, we're advantaged from a mix standpoint. We really -- from a technology standpoint, we're probably the best in the combination of wirelessness and power management, which is the ability to make a product last for a very, very, very long time on very little power. And the multiples on this are really amazing actually. If I -- some of the stats, we -- some of our -- we have a keyboard or mouse that will outlast multiples of our competitors because of our ability to manage power.

Okay. So that's kind of one part of the competitive advantage. What else are you seeing there in terms of what differentiates the product? Because the gaming competition is quite strong as well. You have very passionate people at different firms as well.

Yes, I think -- actually, one of our advantages is that we have this brand that is both Logitech G, which is if you're a serious hard core gamer and you have kids in gaming, they'll talk about Logitech G or Razer or Corsair. On the other hand, we're also Logitech. And if you're a casual gamer or you don't really think of yourself as a gamer at all, but you do want a game because you do want to socialize, we fit. And we've been able -- where we've taken it into more casual gaming. So you'll see, if you look up -- some of our more lifestyle-oriented products like Pop keys. If you look at Pop keys in mechanical keyboards, it's not actually positioned for gaming at all, but it's bought by -- it's predominantly women, girls. And you'll see it's a beautiful cool keyboard and it has an accompanying mouse also. So we have this advantage of being a very broad brand who can play across multiple segments even to nongamers and casual gamers and women and also a serious gaming brand, where we're the #1 brand in the esports world of the products people use.

Right. So it's mostly been kind of the story has been a switch from wired to wireless, and that's an ASP increase, helps your contribution margin. The Wheels have been quite expensive in some of those rigs. And how is the headset business been trending? That's been pretty competitive. But besides the headset business, if you could expand on other future opportunities in gaming?

I think we're -- all those existing businesses are future opportunities because people are going to keep upgrading. And they're and the purchase cycles are shorter in the gaming business than they are in probably in any of our businesses. So that's just a continued opportunity. But we're always looking for pockets around there, and we're -- we've -- you could argue that Streamlabs was really an extension of our gaming business. We bought that about 3 years ago, it's a super interesting business. We don't report it in gaming. But I don't think we do. Do we? No, I don't think so. But it's a fascinating business. And it's mostly still -- but expanding. It's mostly still people broadcast themselves on to Twitch, using -- playing games. And so it's the spectator sport of gaming. And -- but if we've expanded beyond that now, we're moving into all kinds of different creators using it. But -- so that's a fascinating space. And I think the gaming industry keeps developing and evolving. So we see more and more opportunities, and we've got other things we're working on now. So I'm really optimistic about gaming long term.

Okay. Switch to video collaboration. So you saw a lot of strength during the pandemic, like the webcam business, for example, is very, very strong. The business before the pandemic was growing about 40% CAGR for quite some time. So now that you've had this kind of surge in demand and now as we look forward, what's that pace of normalized growth we can expect from this business?

It's -- I wouldn't -- I won't quote a number here that I haven't quoted already, but I would say if I look at the long term, you've got -- I'll just paint the picture. If 9 out of 10 rooms are not video enabled and the purchase cycle, let's say, on upgrading the existing rooms is kind of, let's say, every 3 to 4 years, that's a lot of rooms. Now our existing number, as you know, is about 1/3 webcams and 2/3 conference room cameras. So the webcams, I don't know, that's declined a lot since the pandemic still much bigger than it was. It's running much bigger than it was pre-pandemic more than double. But let's say, it's just the conference cam business. I don't see why the conference cam business won't be multiples a lot -- many multiples larger than it is today over time.

All right. And talk about kind of the trends of the on-prem conference cam switch transition to more cloud-based and how you stand to benefit?

Yes. So before the advent of -- actually, we and Zoom kind of started together in a way, we -- in fact, Eric Yuan first came into our offices 2013. And I didn't meet him then, but my team met him. And that was the very early days of Zoom. And we were already -- we had followed the webcam into little start-ups also where they had a webcam on top of a TV, and that was their video conference room. So we said, well, we can do better than that. So we made something called the BC950, which is a really s*** name and a good product that it was about $250. And it was -- it just was a better webcam but bigger and it was separated physically from the TV, you could set it out in front. And then we just kept marching up the curve there and as we marched up that quality curve, we went further and further into it. What we're really doing, without talking about it that way, was the combination of Zoom or, later, Microsoft Teams and us, was disrupting the existing video conference room because the existing video conference room costs you $30,000 to video-enable, required a big server on-premise and had a lot of service and very expensive service behind it. And now for -- but people were wanting more and more videos, they wanted in these small little rooms, so they didn't want to pay $30,000 or $40,000 for that. So we were -- we started in those small rooms and then we made our way up into middle-sized rooms and then now we're in every size room and now you can replace your entire on-premise system with Logitech plus Teams, Logitech plus Zoom or both or Google Hangouts. So that revolution, that disruption is well underway. And now more people video-enable their rooms with Logitech than any other brand. And I don't see really how that won't -- that disruption will continue.

Yes. And the larger conference rooms are a big opportunity as well given the higher ASPs and whatnot. What's your trends there and how you're kind of getting into the mix there?

To be honest, I want to have products that work phenomenally well from the largest room to the smallest, but I'm very agnostic about what size. The margins are great in all of them. There's a lot of rooms to video-enable, a lot more smaller ones to bigger ones. So we're just going to try to perform in every room at the best level.

Okay. And then so HP is going to kind of moving into the space a little bit more meaningfully with their acquisition here. But how does that impact the overall competitive environment in your view?

Well, I'd say, first of all, it's very difficult to -- for me to say anything except that I have a lot of respect for them. I have a lot of respect for all of our competitors, including the other ones you name here in gaming and elsewhere. We've always had good competitors. I think in this particular case, it's nice because it's going to bring a real spotlight in the IT department to the need. And I think it should drive faster growth in the market. I think having another player who's already in the enterprise, too. And now we're -- we've got a bunch of people calling the enterprise, having many people out there talking to the same story, really trying to drive this category will drive the category -- will drive the overall growth of the category. Second thing is, competition is great. I mean it just makes you better. You can bet that we're going to keep upping our game because we want to make sure we perform. And if this had happened 5 years ago, 6 years ago, I would have been really worried because I would have said, "Gosh, we don't have the go-to-market, we're still new in the category, we don't really know how this place works". We're not new in the category. We have a go-to-market structure globally, and we definitely have an innovation engine that works. So I'm excited about the future, and I think there's plenty of room for growth for this business.

Yes. On the go-to-market, you invested quite heavily in kind of your sales -- enterprise sales force a couple of years ago. So you're pretty comfortable where your sales force sits today on the enterprise side?

Yes. I feel so much -- so good now that we're -- we've actually got a big global sales force. But we're never going to stop improving it, just like we've done anything in our business. When I talked earlier about being a design company, that fundamentally to me means you're constantly iterating and reinventing what you got. It's not just about users, it's also internally. And so we're going to keep improving the way we work and learning and growing and expanding. And so we've got a lot of work to do in every part of our business, including that one, but I feel really good about the trend line. We're so far along now, and I never would have dreamed 10 years ago that we'd be -- we'd have a B2B sales force of this size and caliber. It's really exciting. And we can do more with it because we don't just have to sell video collaboration equipment, which is all we're doing now. We can put other things through that pipe, and that's going to be exciting, too, and that's ahead of us.

Great. So let's jump into the income statement, P&L a little bit. So 2 to 5 points of growth, you do have FX and supply you're kind of weighing as we look beyond some of those may be temporary cost, but what's kind of a normalized growth rate longer term that we can kind of expect now from this kind of revalue the base of revenue?

Pre-pandemic, we were growing -- I think we grew at or near double digits for about 4, 5, 6 years in a row. And that's always my goal. I want to grow at double digits plus. And -- so our long-term model is 8% to 10%. I don't know what year that is. We're not guiding for next year right now. So -- but growing that 8% to 10% feels very doable to me, especially with the complement of categories we have. I think we should do that. I mean that's absolutely within our capability. And then what year is that? Is it next year? I don't know, but I'm very optimistic that we have the engine that can do that.

Okay. And then your margin mix, I mean, if you have more VC, which is VC and gaming, which are some of your more faster-growing segments, you do have that boost in gross margins. So how are you thinking about the gross margin profile?

Our long-term model is 39%, 44% gross margins, which I think is a healthy place to be for a hardware business. It's on the high end of the curve for most hardware businesses, but I think it's sustainable for us. We're now at a scale where we can do that. And I'm excited about that because I think that gives you enough room that you can build a brand at the same time drive more pull. I mean this is a model that Apple's demonstrated better than anybody else in the world in the hardware space. But we can do that, and that's our game plan.

Okay. Let's finish on cash. We've got a minute here so very strong cash flow, but inventory levels are a little elevated, so you might have some harvest a little bit later on, but talk about what you're going to do with the excess cash? I mean, you got a lot of investment particularly specific investments that have kind of revalued lower. So talk about the M&A pipeline, cash usage and all that good stuff?

Yes. Well, first, the ideal use for cash to me is M&A. We've been -- I've patted myself on the back a lot today. So you'll have to bring me back down to earth later. But on this particular point, we've been very successful in M&A. Our hit rate is super high. And we've done a lot of it. We haven't done a lot of large M&A, no large M&A. It's all been medium and small. So -- but when we've done it, it's really worked, and we're just regularly doing M&A, most of it not material, so you don't hear about it, but it's a kernel of something that we can expand on or accelerate the technology or brings us a new thing that we can bring to market over time. So I'm super excited about that. And one way to look at that is we're not doing enough M&A if our hit rate is that high. I'm used to -- I've never worked in a company that have hit rates as high as ours is, and that you could argue we should be doing more of it. But I think that really -- it's more a testament to how focused we are on synergies, risk management and making sure M&A is successful. I didn't want to do M&A in the early years that investors would look at and say, "Oh, sometimes they're okay, sometimes they're not, okay". I wanted to be consistently successful. So investors would say, "Hey, this stuff really works on our board". Now -- we are aggressively looking at stuff all the time, small, medium and large. It's hard to get a large thing really everything to line up. But I would say that's the #1 usage. Now last year, we returned almost $600 million to shareholders. So it's through buybacks and dividends. That's quite a bit for a company our size. And I think that's good. And I think we're -- we have a buyback program in place, we'll continue that, always second on our priority. We just announced last week that we're going to seek another 10% increase in our dividend. So we're going to keep -- we're going to be a good cash generator. We're going to be a good cash generating company, and we're going to hold enough cash that we have plenty of room for M&A when the deals do come -- the valuations are good, but it never stopped us before. So I don't want them to see you as someone who, because prices are down, want to go out and go on a shopping spree. Honestly, I think maybe one deal we didn't do because of price, it almost never happened.

Okay. Great. Well, with that, we'll call it a wrap, and thanks for coming.

Thank you very much. Thank you. Thanks a lot, Paul.