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

Hi, everyone, and thank you for joining us. My name is Shannon Cross, and I'm the IT Hardware Analyst here at Credit Suisse. I am very excited to be joined today by Darrell Bracken, who is Darrell Bracken -- Bracken Darrell.

It works both ways. It's reversible.

Sorry, this is the first time I looked at this intro. Anyway, I got through all of these until this. Bracken Darrel, CEO of Logitech. So I'll note that Logitech is covered by my colleague, Serge Rotzer, who is out of Switzerland. So he could not join us today in Arizona, but he would be available for any further information if you might need it. So anyway...

I like that. Carry on

Bracken, can we first start with maybe an overview of your segments? And what are you seeing in terms of demand from the consumer? Obviously, there's a lot that's up in the air right now, but how are you thinking about '23?

So first of all, I want to say 2 things. One is that my name really is reversible. So I'm Bracken Darrel or Darrel Bracken otherwise or either one. I don't even notice it anymore. But the second thing is I'm so excited to be interviewed by you, Shannon, because you and I have been running around the same circle since the Vincent and Pallets first day, and I kind of was hoping that eventually you cover us, but it's -- you're close. What are we seeing with consumer demand? So remember, our business is a kind of 75% or 70% consumer. The consumer demand is really good. It's like it's been an incredible 2 or 3 years. If I look forward into next year, so hard to predict. I'll say the same thing that anybody would say, which is who knows? I mean I love where are, though, because we're -- if you look at the 2 sides of our business on the consumer side, our products are so affordable that if you think about it, I mean, for what they do and for what -- for the -- what you do for a living, that we're really more recession resistant. I would say that most businesses would be. We're probably not recession-proof, but recession resistant. I went back and looked at past recessions, and I feel pretty good about what we could expect. And then on the business side, we're -- for us, I mean, the price of our products is just astronomically high. But for the businesses, it's incredibly low. So the cost to video-enable a room is so low. If you use us, it's like $120 of what it used to be $130. So I feel pretty good about when I look out into '23 and beyond, but who knows. There's a lot of macro weirdness.

So how do you think about enterprise and commercial versus consumer -- and from a long-term perspective, I mean, HP bought Poly and you're seeing more of a focus, I would say, on peripherals and things that go along with the PC or with the mobile device. How do you think about it in terms of your growth perspective, maybe even a couple of years out if we ignore whatever we're heading into right now?

R I'm super excited about it. I mean I think the -- probably our -- and I'll put it in a plug now for, come to our Analyst and Investor Day in March, which I'm sure we'll have. So I'll be -- I have a feeling we'll be talking a lot more about that exact question. But I'm really excited about it. And I think we are fundamentally in our DNA, a user company. We focus on the user, making it easy, designing for users, designing around users. But boy, we spent the last 6 or 7 years understanding now how B2B works, how the selling motion works, how the go-to-market motion works, what the products are, how the IT department really thinks, how the IT decision-maker thinks, how many people are influenced by the role the VAR, the role of distribution. So I am so excited about that business. When I talk to some of my strongest people in the field, they're as excited as I am. We just -- we all feel like, gosh, we've kind of got the consumer side figured out. This other side is really, really interesting. And there aren't too many companies in the world who've managed to be kind of 50-50 their consumer business. And I think what we will be is in our DNA, will be a user company and our results will be both.

How do you think about hybrid work? And one of the things in talking with companies over the last couple of years actually is the idea that whoever can solve the challenge of making the person who's at home not inferior to the person who's at the conference table is the -- I mean they'll win. Like that's the big thing. As we move more and more to hybrid work and it becomes ingrained in how we approach things, people aren't going to be willing to sort of be second fiddle at the table because they're remote.

And they shouldn't be. I am so excited to be able to tell you, Shannon, that if you come visit our little room in 224 in this building, you can see what I think is the answer, which is when you go into a room, you're going to have a video. We announced it about 30 days ago. You're going -- when you sit in a small conference room or whatever, you've got the normal equipment that you can buy from us, and it will video-enable the room has a camera, a speaker phone, microphone, maybe some mic pods down the center of the table. The problem we have, as you said, is if you're zooming in from somewhere else or teaming in from somewhere else, you are seeing the side of our hedge right now. And so what we've got now is we've got a product that's sitting -- we have a prototype is sitting in our table or actually more than our prototype -- you can put it right, it goes right in the mill of the table like a mic pod. And now what it's doing is it's capturing us face-to-face, like looking right at it. It will show it on the camera for the person on the other side. So we really think that is a huge step forward, and it will suddenly make the person on the other side feel, like almost like they're in a Zoom meeting with everybody in Zoom.

No, I think...

You've got to come see it. Promise me you'll come see it.

I will come see it, yes. And all my free time in.

Anybody else can come too, 224.

How exposed are you to PC demand at this point? We took our PC forecast numbers down. Dell is talking about a lot of pressure. HP is down 10%, so probably somewhere around $260 million for next year. But in the conversation I just had with Chuck Whitten, I think he had a really good point, which is that there is a difference between units and value. And a Chromebook is a lot less value and probably a lot less value to you even -- maybe I'm not sure, then a commercial PC would be. So what is sort of the attach? And how do you think about how your business moves along with PCs? .

And if you ask me that question when I first joined Logitech, and I didn't understand our business, except what people told me from before, I would have said, we're pretty correlated. We have these programs with Circuit City, where we -- where when you buy a PC, we try to upgrade you. And the reason for that was the total installed base of PCs back there have been vetting a number was maybe $200 million or something. And so maybe probably more than that probably, let's say, $250 million. It was a lot out there. And so then every $50 million more that were sold in was a huge increase in the installed base. Today, the installed base is $1.4 billion. I mean we don't even have those programs anymore. We're totally about upgrading an installed base. We don't correlate with the PC. We correlate with the installed base and the potential there. And if you think about what's happened over the last couple of years, in your home. You've all -- now everybody has got some kind of a semipermanent setup instead of a notebook that just brought home and sitting on the desk or sitting in the dining room. And whatever semi-permanent thing you set up, I guarantee you, you can send me pictures but I can tell you how you should upgrade it, not just for my interest, but for yours because you probably scramble to get whatever you got. Maybe you brought that black plastic thing home from the office kind of looks like in your home or you -- or whatever you got isn't as good as what we have. And so we have such an opportunity to upgrade people in that installed base, and the installed base is bigger. And then in the office, I don't know about you, but our offices all over the world are just changing. We're changing them to adapt to what we think hybrid work is like. And so that's a big opportunity for us to upgrade. So we've got lots of upgrade potential. That's not related to new PC sales.

So, How do you educate the installed base who may not know about Logitech or may not know of your capabilities? And how do you think about the go-to-market, the channel, the advertising?

It splits into 2 sides now because we're really both -- we're both a consumer company and a B2B company. We are -- I would say our marketing on the consumer side is the best it's ever been by far and still has a long way to go to be -- to get to where I think we can get to. And so we're really trying to explain to people things like that the ergonomics matter. And so -- and we have the best ergonomic products you could buy. I mean if anybody in this room has a problem with pain in their hands from the fact they're sitting in front of a PC, feel free to let me know separately, I'll be glad to tell you which products to buy. It really is -- we really do have the best answer. And that's just in ergonomics. If you're a 19-year-old Gen Z China women today are man who wants the coolest thing, but would actually prefer mechanical keyboard even though you're not really playing games that much, we've got the product. So we're bringing those to market now in different ways and all the ways you'd expect it to from a consumer side standpoint. I grew up in the consumer packaged goods world. So marketing is something that I've grown to appreciate. And I think we're starting to really make a difference there. And you can see it in our awareness, our impact, our growth, market share, everything.

So how does -- on the consumer -- like how do you think about gaming these days? I mean it's a growth opportunity, but there are a lot of other companies that are getting involved from a peripheral standpoint. So how does Logitech sort of stand out? How do you think about pricing and positioning?

I love gaming. We started into this 10 years ago, and there were already other peripherals companies in there and everybody who's already interested and they came in and they kind of went away and they came back and then -- and we've stayed in it and we keep innovating and we keep learning more about the customer. We keep gaining market share. When I think when I came in the company, we were about a 20% market share in gaming. We had -- or maybe less. Today, we're 32%, 33%. We're just continuing to invest, go up and to the right. We are -- this is one of those big juggernaut long-term secular growth trends that isn't going to stop. If you're under the age of -- everybody under the age of 10 becomes games. They don't call themselves gamers anymore. You just game. If you're over the age of 45, you don't game. If you're into the age of 20, you do. It's that simple. And so that math is pretty simple. You're going to keep -- as these 20 year olds grow up, they're going to play with their kids. The extreme version of that is evident today where my head of gaming is a 50-year-old who was a hardcore in the basement in the dark gamer when he was young. And now he plays, he's got 2 little girls and they -- on Friday nights, they game. That's where the world is headed. So gaming is going to continue to grow. We love our competitive positioning because we've really invested strongly in building the brand. We have a very strong brand in gaming. And yes, so I feel super optimistic. And great categories always attract competition. They help grow the market and they make you better.

And what -- when you think about your product portfolio today versus where it will be in a couple of years, again, ignoring the recession and whatever happens there, but just in terms of the development, do you see it shifting more and more from a margin perspective higher? And again, probably mix more than anything? Or is it the big opportunities are more to grow volume versus value?

I mean I'm so excited about our gross margin, and I'm excited about our gross margin, not because it was 38.6% last quarter and our long-term target is 39% to 44%, and we have 500 basis points of headwind from currency and inflation, which will eventually moderate. So that means think about that. That's a very attractive gross margin potential number. That's not why I'm excited to our gross margin. I'm excited because the underlying dynamics of our cross-category mix are so strong. The parts of our business that are growing the most and will grow the most have the best gross margins. And so I'm a gross margin fanatic. I mean it's the most important number on the P&L. It drives everything. So I feel very, very good about that.

How much of the gross margin improvement have you -- that you've had comes from pricing dynamics around pricing for inflation, pricing for currency in international markets as opposed to mix benefit?

Minimal. It's mainly mix. I mean we really -- our -- now don't get me wrong, we have -- we have 2 kinds of mix core. You have a lot of various mix, but 2 most important kind of mix are across category mix. We have categories that have much higher mix that are great long-term potential well. And then we have mix within categories. And then the third thing that's driven our gross margin is just we continue to have a very strong focus on gross margins. The same thing I'm saying to this crowd, I say inside, which is gross margin is the most important thing in the P&L. So we've -- when I got here in the company, I think we had 31 points of gross margin. Today, we're if you look at this say, pre-pandemic, we're at 39, 40. You already heard me say that we just delivered almost a 39 with 500 basis points of headwind. So you do the math, that's a huge improvement, but the underlying dynamics are even stronger. So I feel very, very optimistic that we've got all -- lots of different levers driving our gross margin now.

How do you think -- again, most kind of gross margin, but how do you think about from a manufacturing standpoint, your manufacturing footprint, your ability, component costs, obviously, in various ways have come down, but some have been inflationary, freight costs have obviously been inflationary finally coming down. How has the pandemic changed your thought about where you manufacture, how you manufacture and how you handle inventory?

I'm not sure that pandemic has changed how I think about where we manufacture, but the -- certainly, the macro world has. And so starting with tariffs back in 2018, '19 whatever it was, and that -- we were highly -- so we were making about 50% of what we sold back then, maybe 55% in our own factory and then the rest was going to somebody else. But we always -- and I always felt as a such an advantage of having our own factory because we can use that as leverage with external suppliers. If we want to manufacture, we manufacture. If you can't make this for $0.26, then we can. So we'll do it. And then usually, we get $0.25 from somebody and we make something else in our factory. So we -- that was really a powerful thing. But then when the tariffs happened, we said, "Gosh, this is really inconvenient" because we're totally in China. So we moved most of the U.S. manufacturing out. So we -- then we suddenly have 17% in Southeast Asia. And then as we've watched the macro and geopolitical picture unfold, we've moved -- we made a decision to move more and more -- give ourselves more and more flexibility outside of China. So by the end of the year, it will be somewhere between 25% and 30% outside of China. And the most important thing about that is having the footprint where you can scale it up. And if -- and over time, we'll go higher than that, much higher than that. So we'll give ourselves a position of flexibility. We still love China. I mean it's a fantastic place to manufacture. We've got heavily automated facility there, but we also have a lot of options beyond that.

What is your revenue exposure to China at this point?

We're about 10%, I think, revenue. .

Okay. So is that -- I mean, who knows what's going on over there. So I'm not going to that one. I guess how -- maybe from the standpoint of M&A, I remember, again, we met many years ago. So I've sort of watched Logitech on the peripherals.

That was a nice one.

For a long time. But I remember back then, it was always sort of a build versus buy decision on technology or new products, and you're always looking for new products to purchase. You're sitting on some cash right now. I would assume valuations are coming down or at least they will. How do you think about augmenting your product portfolio? ?

When you and I first met, I think in about 2015, but starting in 2012, April, when I arrived, I think it was in about May. We did our first due diligence on a little tiny thing. And we've never stopped being in the market. I mean because my whole theory on M&A is people who do it once in a while are terrible. People who do it very often are usually pretty good. And so we want to do it very often. We are doing it very often. So we've done 3 to 4 a year for the last 5 or 6 years. We do -- they tend to be very small. The other thing I've learned about M&A is valuation is not near -- it's like the third order priority. The most important thing is strategic fit. The second most important thing is can you integrate it well and a third, which is both the acquiring thing and yourself, it goes back to how many you do. And the third one is, are you getting the right price. And usually, we have not walked away from things on price. So pricing certainly is better now. That's good. But I think the more important thing is do we see things that strategically fit as well. We're looking very hard across everything. We look at hundreds of things a year, all sizes. We have not pulled the trigger on anything really large. Stars really have to align to make that work. But we only see lots of things in that small and medium size range that are attractive, can help us accelerate things or you talked about potentially bringing it, make versus buy. We always make first and then buy that if we do that, if we do buy things. So we do very small internal projects. We call them seeds between 5 and 20 at a time. And we do that so we have experience in the category because the worst thing you can do is buy into something you really don't understand. And we have -- before I got here, we had a track record of doing that a few times. It didn't end well. So I got to learn from the past. But Yes. So we'll see. I mean, I'm as optimistic about M&A today as I have ever been. But I've always been optimistic about M&A.

How do you think about your channel. And again, this kind of goes back to your reach to your customers. Are things -- the online stores, obviously, are incredibly important. Is -- how do you balance sort of bricks-and-mortar locations versus what you can do online and maybe even is there a way to enhance or increase the leverage of logitech.com as a way to sell?

Well, so first of all, a little history on our online. We were terrible online probably 10 years ago. And we had this horrible thing that happened in about 2014 when the IT malls, which were the strange, you remember, Shannon, with they still exist in India and other parts of Southeast Asia where they are the strange buildings that were like, like almost look like insurance buildings, but when you went inside the -- there would be hundreds of kiosks, all selling either the same or similar products. And in China, they were basically operating as both selling directly to consumer, but also selling to sub-distributors, people who would go buy a bunch of stuff and then go back to their home and somewhere else in China and sell them. And so the terrible thing that happened was they just collapsed one year because the Internet had grown so much it started to put pressure on their pricing and they just couldn't afford. They couldn't make it work anymore. The wonderful thing about that was it flipped the whole business for us. We went from almost in one year, I think it went from 13% online in China to 70%. And we had to become really good at being online with Alibaba and JD.com. And we became suddenly our Head of China became an online expert as opposed to a retail expert. And that capability which we watched to grow over the next few years. We then took over to Europe and now we're taking it in the U.S. And we've been going very strong. And we have not done the same thing with our own DTX, direct-to-consumer, direct-to-business. We've been very measured about what we do there because I love it as for the information you get. I also realize you don't want to be competing with your channels that you end up disrupting your margins. Maybe one of the reasons why our margins are very attractive. So we're going to continue to grow that DTX. We're going to do it in a measured way.

And how have you been looking at, again, this slowdown, whatever we're in right now, how are you flexing the model to think about what you could do from an OpEx perspective, fixed versus variable costs, just sort of insurance policy, I guess.

Because you don't follow us closely, we ramped up our marketing spending quite aggressively during the pandemic because we grew so much and we said, "Gosh, this is a luxury that we might not get again where we can invest and build brand equity that will last for the long term in a period where we can afford to do it and still deliver great gross margins, of course, and great operating margins." And maybe most importantly, we're going to give ourselves flexibility. If the world slows down some, we can pull it back out variable cost. That's why we were one of the fastest companies in pulling our costs down as we saw things start to slow coming into this year as a macro environment is different as retailers need to hit the brakes on their own inventory. We pulled back and we dropped our OpEx by 15% overnight. It's because we had that flexibility. We built it into the model. And I think -- now you could say, well, what -- okay, was that money -- how do you think about that long term? I still believe in the power of building this pull model. But I do think -- you don't want to be heavily investing in to pull marketing when you're in the middle of a slower economic environment. So it's going to -- we're going to bring it back up and bring it down when it makes sense. So what we brought it down for now. We'll probably slowly ease it back up over time. We have an envelope of OpEx we believe we need to operate in, and we're going to stay in that and make sure we deliver good solid operating margins.

What do you think is most underappreciated from an investor perspective, if you look out next couple of years for Logitech?

I think if you look at -- I think a lot of people look at us and say, okay, you had this -- okay, we were rolling at or at double digits or close to it for the 5 years before the pandemic and then the pandemic we just took off. And then I think everybody looks at us as, oh man, this is the big -- there's a retraction and there's this reversion of the main story that surely it will pull all the way back, and then we'll get back to the same kind of growth we have. I agree with that. I think we'll get back to the same kind of growth we got. I think the pull all the way back part is the part that people are scratching their head on is what is really happening out there. And I -- and I think -- I personally don't think that storyline of the strong pullback that's going to last a long time and eventually one day will grow again. I think that's the part that's misunderstood. I believe we just grew our installed base dramatically. We've got -- I'll just give you one example. Video conferencing, which is 20% of our business. We have 3 ways to grow in that business. The first one is only 10% to 12% of all the rooms are video-enabled, okay? And yet, isn't it hard to imagine that most of the rooms won't be video-enabled over time, sometime. Secondly, we -- when we -- prepandemic, the average cost per room that we sold into is probably about $600 to $700. We're low cost -- I mean, it's really affordable to our stuff. Today, you really will want -- you want one of these things that you come back in 2024 and you'll want one of those things that goes in the middle table. You'll want our video conference equipment that goes in the front. You'll want -- everybody according to quote -- I'll quote a energy facilities director, who is in our house today, who said -- he said, "Your whiteboard camera should be in every video room there is because you don't have to learn how to use a new whiteboard. It just goes right over a whiteboard. You push a button on the side, it becomes a participant in Zoom." It's so easy. It's $995. So today, what used to be $500 or $600 or $700 for a room can be $4,000 to $5,000, that's still probably 1/5 of what they used to be in the old kind of infrastructure world. So I think that's -- the misunderstood thing is we just raised our installed base. We have so many ways to grow. And it's across multiple categories. So we're kind of distributed and protected in terms of having a portfolio that's diversified.

And I know that you can't -- it's very hard to generalize this, but I'm wondering, you sold so much during the pandemic, and that's one of the arguments that the PC industry is going through right now or one of the challenges is that they arguably sold in, and now you have to wait until it's time for a refresh before you -- so what is -- again, this is not going to be fair. But what is the average life of one of your products? And when do you think you'll start to see -- and maybe you can go by category or something, but...

So I'll just quickly capture by category. Let's -- and don't hold me to these numbers, but I this will be approximate. So you can lease get a range. Probably in video conferencing, it's 3 years in a normal -- but right now, it's not 3 years because nothing you bought before really works in a world where of inequitable meetings. So you need to upgrade -- everybody needs stuff. Gaming, probably about 3 years. So that one's probably a legitimate 3 years, but there's so much new people coming in all the time. So you're probably -- we're in a really nice cycle. It's not like we triple during the pandemic. We grew about 60%, I think, total during the pandemic. So we -- that refresh cycle is already coming. You already see our growth kind of moderating or decline or moderating this last quarter. And then you've got the personal workspace. And that's probably a 5-year 5-, 6-year refresh cycle. But there are so many people who didn't really get the right product to start with. Now that they're looking for or they're going into the office, they did get the right product at home, but the office -- the one in the office now is not very good. So we've got -- so I think that's smoothing this period where you bought in a lot. And I think for us, in this peculiar set of categories we have, it's kind of smoothed it out, and I think we're going to have very strong growth over the -- in a much shorter time frame than the refresh cycles would indicate -- would suggest.

And then with the gamer your average gamer, is this a slog I should probably know this, but does Logitech sell into the high-end gamer? Or is it more the mass market gamer where you're getting your kids to game on a Friday night?

We really do both. This is one of the magical things about us. We're the leader in almost every category we're in, including gaming. And we have the best gaming mouse in the market, and we have the mainstream mouse in the market. So we really hit them all. .

And -- is there a category -- again, you're not going tell me because...

We have a 52% share in gaming...

But your customers are I'm just -- I'm remembering was it UE BOOM , which just like took off like hazy. I mean everybody had to have one -- have you had categories like that or ones -- do you see -- do you see the opportunity, and you don't have to tell me where it is, but do you see opportunity for areas where maybe there's an unappreciated consumer-like device from a technology perspective that would fit in really well in the next year or 2? Or is this -- again, I'm trying to think of the portfolio that you're with right now, if there's something sort of hidden gem that we should be watching for, without you telling us exactly what that is?

We're always working on between 5 and 20 new categories at a time, and we do that with a very small team. So we often bring in entrepreneurs to run them. And so that churn out there inside our company is always happening kind of gurgling. The cool thing about our business, though, is we don't need one. I feel so good about the categories we're in right now. I feel the best I've ever felt since I joined Logitech. We're really in the secular growth categories that have so much potential I love the UE BOOM. It was incredible and it boomed. I would much rather have a very strong long-term growth trend that didn't have one boom and then a bust And so that's really, I think, where we are now. We've got lots of long-term mini booms and they're going to last for a very long time.

Is there like a reuse, recycle kind of angle that you guys can play at some point? And how do you work with that?

Yes. So we have -- in environmental sustainability, we define it as a value of the company, and it's built into the purpose statement, which is we're going to be -- we're enabling people to pursue -- all people pursue their passions in a way that's good for the planet. And the good for the planet part is really important to us because as we started -- we've been working on environmental sustainability for 15 years, but we really got focused on it 4, 5 years ago, we said, it doesn't feel very good. It's not inspirational to be less bad. So how do we become good. And so we started really thinking about how we could do that. And the first step we took was we said, well, you know what, it starts with data. Let's just label and put it out in public everything, every single product, how much carbon are we putting out. So we committed to that. We, in all birds and Unilever are all committed within 48 hours of each other, and we're doing it. So you'll go look at our products how one by one, we're putting -- we have a label on there. We've got a proprietary approach to doing that, that we're open for everybody. We're sharing with lots of companies, and they're starting to do it. So we believe in that. It's a carbon is a new calorie. The second thing we started to do is design our products, lowering carbon. So we have a very strong design capability. We then said, okay, our design group is super into this. And so we said a good -- now we're going to start dropping the carbonate impact. So we did a new headset recently. It took 40% of the carbon out. Then we said, okay, we want to be using recycled plastic because you can't -- it's lower carbon and it doesn't go on landfills. We're probably the #1 player in tech in recycled plastics, nobody reports their numbers, but I'll tell you mine. One of every 3 of our products has recycled plastic in it, 70% of the mice and keyboards do, and we'll bring that across our whole portfolio, and we're increasing the content is recycled all and we've broken through into new colors and things that were never done before. So we're doing all those things and we're planting trees and or reforesting across the world to try to get ourselves to negative carbon impact. And there's a lot of discussion around that. But at the end of the day, carbon capture has to be part of the story here. So we're solely into this, Shannon.

Well, I think that's a really great way to end this conversation because care for the earth is important. So thank you very much. Thanks for joining us and I look forward to continuing to watch your story.

Thank you. Thank you very much.