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

Perfect. There we go. So let's get started. I'm about a minute late here. So again, for those of you that don't know me, my name is Erik Woodring. I leave the hardware research effort here at Morgan Stanley. Let me quickly read our disclosure here, and then we'll get into our special guests. So before we begin, I need to mention that important disclosures can be found at Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So for the first time at our flagship U.S. TMT Conference, I am pleased to welcome Bracken Darrell, CEO of Logitech. And obviously, today is a special day, 4 hours post Analyst Day. So a lot to get into, but thank you very much for coming.

Thank you so much for having me here...

So again, let's start big picture. You hosted your Analyst Day this morning. Obviously, honored to get to host you after that. But for the benefit of the audience, that might have been tied up in meetings this morning. Maybe just communicate what were the 2 or 3 kind of key messages that you wanted to leave everybody with at the end of the Analyst Day this morning.

We start off by saying, we don't like our numbers this year. We're disappointed. It's been -- the macroeconomic environment has just been a lot tougher than we expected and the currency has been -- was more difficult than we expected. So we don't like our numbers this year. But boy, do we like our business. We're -- from a long-term perspective, we're situated right in the middle of 3 things that are -- 3 or 4 things that are about as big as are happening out there. And for a little mouse company to find themselves in the slip stream with that excitement is kind of amazing. I mean the 4 things are -- the first is the video enablement of rooms. It's still only about 1 in 10 rooms or video enable. And so that tells you how much opportunity is out there over the longer term. And the cool thing about that is that they're also so many ways to increase the value of each of those rooms, whether it's increasing the caliber of the equipment in there to do the video or adding new things in there like whiteboards and things. So that's exciting. The second big trend is the one that we've been talking about for a while, which is esports and gaming. Gaming is just a phenomenon. It's been for a while. If you're in this room and you don't play games, then we won't talk about what age you're probably sitting in or above, but if you're under 30 you are playing games and so young people are playing games. And so that is a long-term trend that's just unstoppable -- about 3 billion people now play games or some kind. But that's a huge trend, and we're kind of like the Nike in that business. And then the third business is the one most people know us for, which is the what we call personal workspace now, it's mice and keyboards and webcams and headsets and all that stuff. And that is exciting because thanks to the pandemic, it was already growing at kind of mid-single digits and then Presto when the pandemic happened, everybody needs something at home. And then when you needed something at home as kind of permanent, it became a lot more relevant and important to you because it's actually part of your home decor or at a minimum became more personal instead of just something black and plastic that was in the office. So we didn't have much in the B2B business back then. Now we do. So that's -- it's really increased the number of spaces that people have and the need to keep upgrading them. And then the last one is this explosion of creators who are making content for other people. And everybody under the age of 20 wants to be a content creator or some kind whether it's YouTube or a stream or something. So all 4 of those major trends, we're in the middle of. We're the leader in most of the categories inside those trends. So it's super, super exciting. We guided next year. I'll get to the point that most of the analysts were waiting for the entire session, which was we only guided 6 months because we've had a protracted period of just very difficult to get visibility on where the future is. But for the first time since I've been here in 10 years, we guided only 6 months. We guided down 18% to down 22% of the top line. And we guided to the bottom line that's kind of commensurate with that. So we basically guided a continuation of what we've seen in the last 2 quarters. And then we said, okay, we're going to -- we're not abandoning the idea of long term -- of our annual guidance. We're going to be back to as fast as we can.

Perfect. So let's unpackage all of that. Right? So maybe just starting with your kind of end market base, right? There's -- we learned today about 35% of revenue is enterprise, the rest is consumer. Just break it down for us as we think about, again, let's talk about the first 6 months of the year, enterprise demand versus consumer demand, what -- I think the message would be consumer maybe started to roll over earlier than enterprise, enterprise is relatively new, but I don't want to put words in your mouth. So help us understand what's going...

Got it. But you described it well. I mean I think the -- we started to see a slowdown in consumer relatively early in the year. And then whoah! when we hit our Q3, so fiscal Q4, we saw a real contraction of the B2B demand really, as companies like us, started looking at the macro environment and decided to pull their OpEx cost down. when they did that, it directly affected what they're buying for their offices. And so that came later. And now we're at -- what it looks like over the last 2 quarters kind of a steady state of that.

Right. Okay. So let's touch on each of the big businesses here. I like starting with VC, it's very topical, obviously, this day and age. I guess my view is like there's a number of crosscurrents, right, weaker enterprise spending. There was a lot of investment over the last few years. There's a shift to hybrid. So what does the office space look like in the world. None of us probably know. But then at the same time, there's still underpenetration of meeting rooms and something that you talked about today, the revenue per unit is increasing. And so am I missing any important factors there? And when I add them all up, what does that mean for VC in your mind?

I think it's fascinating. First of all, if you're in a large company and you're listening or watching this you probably have some kind of a relatively stable situation where you're either working from home all the time because you're a Google or somewhere. Are you working -- you're in the office 3 or 4 days a week if you're in banking. Are you in the office a few days a week or some start-ups here in Site5. Everybody's kind of landed on something. But it doesn't feel completely stable yet, like here's the permanent situation. If you then flow that into the offices and the people who make decisions for those offices, they're facing the same thing, but it gets even more uncertain for them because they're going to go video-enable all the rooms if the space might actually shrink or are they going to video-enable some of them and then wait and see. And that's exactly what's happening. Our company is a good example. We're here in the Bay --our office here in the Bay we're actually closing our office here in the Bay, we're reopening another one. And so we just stopped doing anything really much with our offices. We also stopped trying to really push people to come into the office, and we said, let's just wait until we get the new office open. That's one in a continuum. That's we're exactly one of those. Around the world, we have different situations. We have people go in the office every day. We have people coming in kind of a couple of days a week. So we've got a little bit of everything.

Right. Okay. And then in VC, is there -- where is their white space for Logitech? Where can you collect again, whether it's penetration or more revenue per dollar -- revenue per unit, what's that opportunity?

Well, there's so much opportunity. So first of all, the first piece of white space is only about 1 in 10. Nobody really knows the number of number of rooms, right? This is an estimate that comes from Gartner people, but somewhere between 1 in 5 and 1 in 10 in the rooms that one day will probably be video-enabled are. So that's white space, and we're the market leader in that category. The second area of white space is, I wouldn't call it white space, let's call it a gray space. There's something in there. And often, it's our stuff, but it doesn't have the latest technology. And once we all went remote, the idea of looking into this cavern where you're just looking at this crowd of people and they're talking to each other, but you don't feel very involved. That's no longer satisfactory. The new equipment -- you need new equipment to do that. And so we can upgrade those people with that equipment. There's even a better version coming, which is then we can actually drop -- we have a new product launch in the summer that we can actually drop a camera right in the middle of the table. And then you actually feel like you're sitting at the table with them if you're sitting remote. And it suddenly feels equitable because everybody has the Hollywood Squares pictures on the screen, everybody is equal size. And then there's the whiteboard. We had a customer in from an energy company in Texas that came in and were talking about we have an electronic whiteboard super cool. The difference is it's a camera that just goes on any whiteboard. So it turns any whiteboard into a camera created whiteboard. And so I said, how many rooms do you think you need this?" -- and he said, "I don't know why every room in the world that has a video conference camera in it wouldn't have this because with one push of a button, you suddenly got a whiteboard that's instantly a participant on the screen. That's just a few of them. But you can imagine there's just more and more we can do here.

Yes. No, perfect. So let's shift to gaming. Again, you have a lot of segments. So let's shift to gaming. That's probably a segment that might have faced some more pressure earlier on with the consumer perhaps it then becomes one of the earlier ones to recover at the same time. Is there any data that you're seeing today that gives you confidence in the trajectory of that recovery? Or is it more so kind of the bigger picture trends that you talked about, meaning there's more gamers, it's increasingly important. There's more content coming out. So what's going to come back?

Yes. I mean, honestly, it's that. It's really all the external factors that should drive excitement around that market and give it the next round of juice. It feels like they're out there. The question is when will they have an impact? I mean, this year, there are going to be 10 -- I believe there's 10 big budget movies that will be like ReadyPlayer One, that will feature people in video games, part of video games, playing video games. So it's like -- it's just part of the crowd. There are many other things happening. The Grand Theft Auto, some of the biggest games are racing games, we're the biggest players in racing wheels and stimulates about 20% of our business. Those games are coming out. There's a lot of excitement around those. There's just -- and then anecdotally, when I talk to people in the music industry, I live in California and Hollywood right around the corner. I talk to everybody wants into gaming. I can just kind of feel my gaming person use this incredibly important SAT type work. It's the Zig guys to the moment. You can feel gaming has really become mainstream. It's bigger than the movie industry now, and it doesn't feel like it's going to give you anything to kind of go up.

Right. Okay. So then -- so let's talk about the personal workspace division, the CNP. Delphine made the argument this morning, more workspaces, larger installed base, both tailwinds to long-term growth, completely agree with that. At the same time, I think what we've seen now is post the last maybe few years, replacement cycles have extended. And so what can Logitech do to ultimately reverse that trend shortened replacement cycles because then ultimately, that's the key to unlocking that larger TAM.

For us, it's about innovation. And there's not a person in this room that if I sat down with you or Delphine sat down with you, you're a personal workspace wherever that is, or the 2 that you might have that we could make it a better experience for you, either ergonomically better. So you don't have any risk pain or a little pain cooler looking because we've got some of the coolest things that you've never seen probably, are just very functional are very professional looking or look good in the core of your -- wherever it is now, whether it's your home office. So there's a whole bunch of things we can do there. We keep finding new segments we can go after. So -- and we can add new functionality on a regular base, we can also start to bring together those products from a software standpoint. So there's just a whole range of things from an innovation standpoint that we're very excited about that we believe we can keep executing to drive that market.

So this might not be a key debate whatsoever. But in your presentation deck, you kind of listed rank order the different segments that you expect to perform best to most week, I guess, let's call it. And tablets and accessories was at the very top of that list. Is there something unique about this year? Again, I remember 2 years ago, there were big education orders that came through from Japan. We saw that hard comps over the last 12 months. Is there something that you see in the near-term horizon that gives you some more confidence in that segment relative to others?

It's a great business for us. It's a small business for us. It's tied mostly to Apple and Apple's performance. So we kind of run cycles based on when Apple's launch plans are, and we have to kind of estimate when we think that they might happen. So don't take that as a read on Apple at all. We're not -- it isn't. But it does say we have a cycle that we can kind of see in our business, and we think it will be a pretty good year for Apple.

And then the last segment I want to touch on, again, PC peripheral is gaming, VC, that's 90% of revenue. But there is a music business, it's hundreds of millions of dollars -- and you were a very early innovator in music. It's a very competitive end market. What does it take to stabilize that business? Or is it almost better to accelerate the decline, so it's not as much of a headwind and then maybe refocus and figure out what to do after that?

We've been -- one of the weird but cool capabilities to have and we do have is the ability to optimize the business as it's on a long-term decline. It's not a skill set most people like are yearning to have. But we definitely do that pretty well. There is some point when something gets small, if you say, we just want to get out of it and go. We did that with OEM years ago. But I think the music business sits in that space where we can get the gross margins up, which we have, we can kind of reduce the decline rate relative to what it might be, and we can optimize the cash flow that comes from that and then invest that in things that have higher gross margin and higher growth potential. So that's exactly what we're going to do there.

And then... So we add all of this up, and you talked about your first half guide earlier. Can you maybe just touch on what it is about the visibility today that's harder to interpret perhaps than past years? Is it only macro? Is it more than that?

I mean it would be completely disingenuous for me to say it's harder to forecast today than it was during the pandemic. So it's not exactly just that it's more difficult to forecast. It's the protracted period of challenge. We've really been on a whipsaw. And I think we're just sort of facing the music and saying, look, we've been going through a protracted period. We have pretty good visibility for the next 6 months based on the last quarter this quarter. Beyond that, we're just going to hold our tongue until we have a little more data. And it will level out and stabilize, but we're not going to go out and try to just throw a dart at it.

So something that didn't come up today, but that's important is China. China is 10% of your business. It's a big market, trying to open is better than China closed, of course. Are you seeing that tailwind now? Is that something that perhaps comes further down the line? Talk us through just what that means for Logitech?

Well, first of all, without trying to predict exactly what's going to happen next to China for a market standpoint. I love the China market. It's been amazing for us. It's -- we're the leader in that market. It's also always been a torture test market. If we can't win in China, then our cost position is not low enough because -- and we don't have -- we historically didn't have the same brand strength, and we had some really low-cost competitors there. So we just systematically ported on -- and for 10 years, we've gained share in China. We -- now we do have brand strength in China, and we're performing really well there. So I love the China market. A lot of cool things tend to come out of there. We even get some leading indicators from gaming and other places that we look at, we study and then we put into our products. And we make products in China for China, where we compete directly with local competitors. So China is a great market for us. I think it's going to be a great market for us. There's a lot of geopolitical issues to think about. We manufacture there, too. If you want to get into that. I mean I can go now you... Let's do it. Well...

Let's do it. Well... We have some news today... Yes.

So we do -- we manufacture in China, and we're -- we've been systematically moving some of our manufacturing out of China starting during the early days of the tariffs. And we just keep doing that. So we're in Vietnam, Malaysia, Thailand. We'll probably have something in some other places around the world as we talked about a little bit today. So we're going to keep that going, and we want to be a little bit protected in case there's more things like tariffs and stuff like that, that come out that we're ready.

Right. Okay. And we hear that from A lot of my coverage too. So one, you owe Chuck or Chuck owes you, I should say, because I'm going to ask you another numbers question, and normally, I would grow him...

I've got them on speed though..

But it was getting after the operating income guide for the first half of the year, it implies about 9.5% margin -- and I guess there's just a lot of moving pieces in mix, and you are reducing your OpEx base a little bit more. But I think if you kind of do the math, it does get after maybe a little gross margin pressure. One, is that right? And 2, is that promotions? Or am I misconstruing that?

No, I don't think there is -- I wouldn't construe this gross margin pressure. What's happening there is in the first half of the year, you've got a -- I think Chuck described it really well today, pretty good for 4 weeks, by the way. He's gotten pretty well today. You've got 2 things going on there. One is, as you said, we are taking cost out and the cost that will come out through the year. By the time we get to the back half of the year, I think you quoted that we'll be -- we think we'll be at a kind of a run rate of about $1 billion of OpEx -- so that's a factor. So a little higher in the first half. Second part is there's a natural seasonality to our operating income. It's just a function of the way our gross margins and our OpEx flow during the year. So that tends to peak be highest in Q3 -- and not always, but usually highs in Q3. Those are the 2 factors...

Yes. Okay. Perfect. And then on those OpEx cuts, again, you've shown that you can be nimble to adjust your cost base to react to the environment. Are the costs that you're taking out of the model mostly sales and marketing related, Help us understand, as we go from -- you reduce in 2023 cost OpEx roughly, call it, $215 million, I think it was, as we go to the next phase, where does that next phase come from?

Yes. It's very broad-based, I would say, but we are trying to protect key areas. The areas we're protecting the most are obviously, engineering and R&D, engineering design, R&D expense. I mean that's the lifeblood of this business. The innovation engine that we have. Our go-to-market, which is mostly, as you said, sales, that area, we really are trying to protect. I'm not saying we're not touching them, we will, but we've got to size our business according to the current market, but we're going to touch them. We're -- the areas we go most aggressively after are all those other areas. We've already pulled back the marketing, especially at the top of the funnel marketing. We talked about that a lot on the call today about the top of the funnel marketing relative when you're in a growing market, top of the funnel marketing really at least looks like it pays for itself when you're in a declining market, it doesn't look like it face for itself, so you pull it back. The real executional sales-driven marketing, we keep pouring that in there. So we'll keep that in place. We've pulled a lot of the top of the funnel marketing out. And then we're cutting -- we're cutting expenses in other areas that where we just feel like we've got a size to our current business.

So let's talk about kind of long-term trends initiatives strategy. Today, you guys outlined the leading market share you have in a number of your big end markets, pointing devices in keyboards, combos, 50%, gaming and VC right around 30%. Clear #1. -- there's an argument to be made, I think that if you look at gaming and VC relative to keyboards and combos and mice, you can say, okay, there's a pathway to getting more share. How about in mice and keyboard, -- is there still an opportunity to gain more share as you look again out over multiple years?

When I came here, our share was much smaller in keyboards and mice, and everybody said, well, we can't get a share there, so we need to focus on other places. And we've gained share consistently there. I've kind of come to the conclusion, the best position to gain share from his leadership. And the bigger the leader you are, the more the possibility at least you have to gain share for a couple of reasons. One is you just have strength, you have scale, obviously. So you can drive harder for things like visual space on the Internet shelf space, awareness of your brand, the whole thing. -- innovation knows the bigger one. You have a chance to innovate. You've got a bigger pot of money to innovate with. And by innovating, you can drive higher mix, our average sales price is way up versus 2018 or '19 in that personal workspace. And there's no reason why they can't continue. It's still just a fraction of the business is up at the higher price points, and there should be a ton of it there. I mean, our products are not so expensive and think how much of the time you use them, how important they are to your daily life in a way, there's you're way underpaying for the benefit you're getting, but that's good because it means a good value. But it means it also means we have a lot of innovation room that we can price for.

Good. So AI has been a talk of the conference. I heard AI during the analyst today. So how are you embedding AI in your products? Is that new? Help us think through that?

We really started with building AI into products back in 2014, I would say, in earnest. We put them in some of our earliest cameras. We bought a small company in Zurich that did video AI. They would -- they had -- they were taking the feeds off of the Auto bond. When a car would pull over and start to smoke and somebody would get out of it, it's not a great idea on the auto bottom where you can drive 200 kilometers per hour mile per hour. So they were capturing that feed. We took that, and we then -- we took a little 4, 5 person PhD team, and we put them in rooms. And we said, let's see what we can do if we have them focused on rooms and we developed some really cool products. We've then adapted that and we put it into the conference room equipment. So we keep developing it. And now we're doing AI for a video there and AI audio there, like a lot of companies. And now AI is slowly spreading its way through the whole company. And I think things like ChatGPT and just general Open AI is going to touch so many things in our company. It's too early for us to say exactly what or what impact it might have, but it's going to be big.

Let's talk about adjacent markets. You acquired Streamlabs in 2019, that was kind of your first entrance into streaming. I know it's still relatively small, but how should we think about kind of adjacent markets? And any that you would point to that are either compelling or right for innovation where you think that you have the tools to go in and you can be immediately accretive to the value proposition in that market.

We don't -- as you know, we don't talk about things we're not in yet. But we -- but I can reflect a little bit on the past and just say, if it looked like that in the past, it probably would look like in the future. Things like finding areas, let's take lights. We weren't in light 1.5 years ago, I think, around the desk space. We got into lights, and now we're the #1 lights on Amazon, I think. And that's with just a very first step of a small acquisition and some first step work of innovation. Imagine what we can do when we get to the fall we're doing what we do with mice and keyboards. So every one of our spaces, all those GMs we spoke today have areas around them that in the past, I would have called it. I used to say we have trees, plants and seeds. The little seeds were things that I kind of nurture and protected. Now they have their own seeds. So they all have areas around that they find very interesting and that we're experimenting in. So I can -- I would never guarantee anything. My general counsel would kill me, but -- but I can promise you that we'll get into new things. We've gone from about 15 or 16 categories when I started, it's about 30 or 35 today, and we'll just keep going.

And do you need those new categories to get to that 8% to 10% long-term growth algorithm that you talked about? Or is the end markets that you're in today sufficient enough to drive that growth?

I think those will be relatively small. So I think the -- it's probably sufficient. But they're the buffer. They're the thing to help me always be more assured that we'll get to that long-term growth number.

Something we talked about before coming in here was competition you hear from my world, a lot of your competitors talk about getting deeper and deeper into peripherals. What do you need to do, if anything, to really protect your market share? Again, you grew market share last year. But is competition increasing? Do you see that? Is it a zero-sum game? Or can it actually drive some form of TAM expansion ultimately? And then that's a broad-based question.

It's a great way to phrase the question. Let's start with can it drive TAM expansion? I think the answer is yes. If you think about it, when the -- when we were growing rooms, for example, we are building our room business with video, nobody else is really pushing it very hard because most of the players that were doing conventional-center focus on the big rooms really and the bulk of the business is in smaller rooms where we were. And so we were kind of alone. And during the pandemic, a lot of the same things happening Don't get the wrong Zoom and Microsoft are very excited about growing video conferencing, but they made their money off of seats, not off of rooms. So we were like, okay, this is going to be so exciting. But then we realize we're kind of standing alone as in a few small companies trying to sell rooms. I think that some of the bigger players are and it will help drive TAM expansion. I think there's going to be a legitimate discussion all the time about what are you doing in your rooms? What are you doing in your rooms, -- so I think that's good. I think from a competition standpoint, look, attractive categories have competitors. I mean that's the way it goes. And we don't mind competition. We've had it as long as this company has been around, and it just brings out the best in us. So I'm excited about where we are. I'm excited about the competitors that we have -- we need to compete with, they're good, and we'll have to be better.

So just a few minutes here left. I want to touch on 2 topics. One is you look at your balance sheet, rock-solid balance sheet, $1 billion of gross and net cash, no debt, you generate really solid free cash flow. One can make the argument that the business is underlevered. But is there an argument to be made that you could get more aggressive from a capital allocation perspective or a capital structure perspective? Or how does the C-suite think about that?

We think about it a lot. I mean I think right -- we've never had any [indiscernible] we've always been a good cash generator. We're a better cash generator today, of course, at the current size than we were 5 years ago. And I don't see how we won't be a very, very strong cash generator. Our priority has always been the same: growth, growth, growth, growth. And then we'll pay a dividend that's going to ideally keep growing over time that it has and then do stock buybacks with excess cash. And we bumped up our -- the buyback activity we've had for -- as you know, and I suspect we'll keep that going. But we have plenty of firepower for investing in growth. And if -- as we look at hundreds of things a year, we do things that often don't get public because they're not at scale where they need to. And competitively, we say we don't want to talk about them too much. But -- so we're going to keep doing that, and we'll keep looking at things medium small, medium and large. And if we don't find things to spend that money against, we'll return to shareholders.

Perfect. So we have about 30 seconds. So I want to give you the dance floor. Maybe -- and kind of how we started, which is what do you want to leave everybody within the audience as they step away from this meeting, what's important to know about Logitech about your future Yes.

You know what, instead of doing that, I'm going to suggest to everybody is meaning to do something different. We're really into environmental sustainability. We will be client positive by 2030, we're carbon-neutral now, which means what we carbon negative by 2030. We're carbon labeling every product we put out. We're on a path to doing that. We're one of the first 3 companies to do that, Unilever, Allbirds and us. And we've got competitors and other companies that we're working with who are also on the path of doing the same thing. It's not going fast enough. Carbon labeling can really change the game because if more companies carbon label, it will force other companies carbon label. If you're carbon labeling, you can't bring your next product out and not have lower carbon. It's just not going to happen. It's not because every customer is going to be looking at that label. It's because you don't want whoever is looking at it to publish that your number is worse than somebody else. It's transparency. So I would encourage any investor sitting in this room, start asking companies, start asking people like me, are you considering carbon labeling? Are you considering carbon labeling as all you have to ask, if you just start asking trust me, it will have a ripple effect that will move this faster.

Perfect. Thats the end. Thank you very much for your time.