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

So my name is Paul Chung. I'm the Applied Emerging Tech Analyst here at JPMorgan. I'm pleased to have with me the Logitech CEO, Bracken Darrell. Welcome.

Thank you. Thanks, Paul. Thanks for being here. Now I just want to say for you listening out there, we've got a full -- I mean this room is completely packed with people. Standing room only.

Yes. To start, can you give us like a brief overview of the company and how it's evolved?

Sure. I've been with the company for 11 years. Actually, I've got two people with me today. My COO, who's hiding under a chair somewhere, in case we asked a question about sustainability and Head of IR, Nate and Prakash. But I've been here 11 years, and we've got a -- we've really developed the business. We're worth 10x more than when I started. We've gone from about 15 or 16 categories to about 38, where our primary focus areas are video equipment for rooms or things in companies to enable video communication. We not only do the equipment for rooms that you can make a call or a video call with, but we also make the ability to book rooms on the outside and then we make cameras for your whiteboard. So we do a lot of different things in that space. Second one is the area of gaming. So most people know us for that. If you're under the age of 30, you definitely know Logitech G. And that's been a great business. And then the third big business, I would say, is, I think, we're just going to start calling it something like hybrid work. Because it's really the personal workspace that you go to or you bring with you or you have in your home. Those are the three big areas. And they -- as I said, they capture a lot of categories. They're all great secular growers.

Great. We'll dig in deeper to those as well. But just on the macro, any kind of lingering supply chain constraints you're seeing?

No, we've really -- I think we're really behind that. I mean we are in front of that now. I think it's -- we all struggle with kind of two key things. One was just the -- there are some port issues and things that happened during the peak of the pandemic or post-pandemic when the demand was especially at a crazy high. And then the other thing was just the supply of components. There was just a very difficult time to [indiscernible]. Actually, Prakash Arunkundrum, who's my -- used to be our Head of Operations now as a COO was the kind of the brains behind putting us in a position to grow like we did during the pandemic. Because we grew 74% in the first year of the pandemic when other people were struggling to get supply. And that was really because of inventory bets -- very strategic inventory bets we made, and that paid off tremendously.

And then talk about how your channel inventory is trending. You've had consecutive quarters now where your sell-through has kind of exceeded your sell-in?

Yes, which is very traditional for a hardware business. So when the business is coming down, obviously, the channel needs to come down. So the people -- retailers, e-tailers take capacity out of the channel. That's been going on now for about 4 or 5 quarters. We'll probably have another couple of quarters to go, but we're in a pretty good place, we think, from a channel standpoint of view. We really watch that tightly. I like to be lean, so we'll try to stay lean. And we think we've got somewhere $50 million, $80 million more inventory to come out in this first half. And once that's done, we should be about where we want to be.

And then talk about your key customers and your feedback from them on kind of where they're seeing the macro and how consumers are behaving?

I'd say it looks this -- we only guided the first half, as you know very well, Paul, which I have not done since I've been here in 11 years because we just didn't have enough visibility in the back half. But I would say that looked a lot like the last 2 quarters. So I think when do we come out of the kind of the slowdown of this trough, I don't know. We'll see -- we're certainly -- when we see it, we're going to -- we'll extend our guidance for the full year at that point. I believe that the best metric for that is sell-out. So we watch sell-out like hawks, and we'll keep you posted.

Okay. So let's jump into the segments. So pointing devices has really grown for the longest time, and then -- so a big bump during the pandemic. Now it's kind of against those tough comps, but where are you seeing pockets of strength and weakness across pointing devices?

I love this whole space of pointing devices and keyboards. When I came to Logitech, I came because the people inside Logitech and the Board were convinced that, that was going to be in a long-term secular decline. And that thrilled me because what I really want to do is serially enter new categories using design. When we got the design engine running, a strange thing happened. We realized that actually the problem with the category was us, not the consumer. They were just looking for more interesting things to buy. And so the more innovative we got, the more we sold. And we've grown just throughout that whole period. And I think this is the most exciting time actually right now, even more exciting with pandemic because the pandemic was just a gift. I think the opportunity now is for us to upgrade all those -- the installed base of PCs that were out there before and now are sitting in people's homes in this incredibly packed room. And those of you listening, all of you probably don't have exactly what you need. And so this is such an incredible opportunity for us. And we have done a better and better job of segmenting the consumer, the P&G old-fashioned way of really understanding the different types, the ones that need to have ergonomic issues or might think they have ergonomic issues, the ones who really want high performance. So we have an incredible opportunity ahead of us.

Yes. And then can you expand on kind of how's the launch with the Apple compatible product spend?

It's been really good. I mean we went so many years where our products really didn't work very well with Apple. And it wasn't --it was really -- we grew up -- Logitech grew up in the -- right on the kind of the front steps of Microsoft. When the mouse was really became a standard device for the PC, Microsoft was a great enabler. And so we grew through that whole period. And of course, Apple was the famously walled garden. And it was their garden, and nobody has got in there. And they were never -- well, Apple is always great to us. But our products just -- we didn't do a good enough job of making sure our products work well with Apple devices. Finally, starting about 3, 4 years ago, we figured that out. And since then, we've had an extremely successful run of making products that Apple users like. And I think that's great for everybody. I know -- I think Apple just wants our products to work well. I mean, that's their whole -- they're not worried about us. We're a harmless, capable partner, but they really want our products to work well and finally, they really do.

Great. And then can you talk about across pointing devices and keyboards, the pricing versus volume dynamic and how that's evolved? And I know in the beginning, you were kind of calling the portfolio of lower SKUs and now it's -- I mean, you can buy a keyboard for -- pretty expensive keyboard nowadays so.

Yes. I mean -- and if you think about how much time you spend with a mouse or keyboard if you're in the knowledge working business. It's an incredibly affordable thing still. I mean, in fact, you can buy an incredible keyboard for $100 is really remarkable. And it will last. It will last a very long time, and we wanted to because of the sustainability. And mouses -- mice are even more affordable. So yes, but that said, we've systematically marched our way up on the average price point, and we'll keep doing that. The mix within all of our categories and mix across our categories has been one of the reasons why our gross margins expanded over the years. Right now, our gross margins fall back for reasons everyone knows, inflation and currency. But we really have a fundamentally higher gross margin business because of the intra-category and inter-category mix, and that comes right back to innovation and our ability to innovate at a level that's really rewarded by people who buy the products. And we're going to -- we're pointed on now.

Great. Let's move into gaming. So this is an exciting area. So what kind of industry trends are you seeing?

It's funny. The gaming business has been talk about so much for a decade now. And there's an article in the paper like New York Times or something yesterday, I saw the esports -- the business of esports is, I think, is slowing down or something. And really what they're talking about is there's a tremendous amount of investment going into teams. And I've read the article -- what are the teams and that kind of stuff, and now it looks like are they really going to get a return. That's all true. I'm sure. But the business of esports that relates to our business, of people playing games, is going nowhere but up. Every year, new cohorts come into the category. Kids 8, 9 10, 11, 12 are entering that category and all those 25, 26, 27 year olds who came into the category the 15 years before, don't leave. So this is a long-term secular grower at a level that you just love to have. And the good news is we just think about the shape of the curve. I'm looking across this room, and I'm trying to convince myself, I'm not the oldest person in the room, but I am -- but if I took the people in this room that are over the age of 50, and there's like just one of us. And that person doesn't play games, okay? But in the population, there's a lot. And then you think about all those people under the age of 30, all of them play games, okay? Now just think about the shape of the volume curve that's coming as those 30 year olds grow to be 50 year olds, and all their kids come into the world of playing games. That's what's going to happen to our gaming business. It has been.

And then -- so you had kind of explosive growth during the pandemic. And then what are you kind of seeing now in terms of upgrade cycles for gaming products?

For gaming products. So we think the gaming purchase cycle is somewhere about 3 or 4 years, depending on the product. So a bunch of people bought during the pandemic over the last 3 years. So at some point, they'll come back in and hit another upgrade cycle. But part of it -- our strategy is not really to wait for an upgrade cycle. We're segmenting, and the same thing I talked about on the kind of business or work side. We're doing on the gaming side. On the gaming side, we've cut it into some really interesting groups. So maybe the biggest opportunity we have is to get at all those people. When you think gaming or e-sports, you think of dark room, black products basement. I don't want to go there. I've got to get my son out of there and get him to bed. But the truth is 50% of the people who play games are not that. They're somebody who's a lifestyle gamer, who really wants color, what's fun, it's casual. They're not out there to win, they're out there to socialize. This is the new playground for them. They're socializing with people all over the world, sometimes their friends down the street. But it's a super social event. And so we're starting to create products for them. And this is super exciting. We launched something called the Aurora collection, which is beautiful and fun and nothing like the price we had and done extremely well. So there are lots of ways for us to grow this business beyond the purchase cycle. We really think we can accelerate the purchase cycle or really bring in people who are buying what they had to because they didn't see something really for them. And we'll see. Time will tell.

And then you've kind of expanded beyond the lifestyle and have products tailored towards women. And then you have partnerships with like Fortnite and Grand Theft Auto. And how have those performed? And can we expect more kind of partnership announcements?

Yes, they've always done really well. We love what in fashion would be collabs. Nike collaborating with a Gucci or somebody, or adidas collaborating with Gucci. And our business would be us collaborating with a game developer, having a collection for Star Wars or for, as you said, League of Legends. And those will continue to be a core part of what we do. We do them systematically, regularly every year. We do new things every year. We also collaborate with esports players or figures in the gaming world. Shroud, for example, who are popular and have a strong opinion about what we do and how -- and the products we make. And like Nike, we really -- they contribute to the design of our products. We actually take their input very seriously. And it's been -- that's been a very successful model, and we're going to keep advancing that even as we're adding the lifestyle products we talked to.

I think you did a partnership with -- is that Herman Miller?

We did. We've done 2 gaming chairs now with Herman Miller. They've been super successful. As much time as you spend in any chair, it needs to be [indiscernible] or to be ergonomic, and Herman Miller is terrific. And so we've worked with them. We shared information about what gamers are all about. We really tried to do the classic -- they're a great design company. We really designed the product around the user or under the user in that case.

Got you. Let's switch to video collaboration, talk about the trends for conference rooms, the new kind of hybrid work environment and the trends you're seeing there?

I'd say right now, as of the last 2 quarters, the videoconference equipment is kind of a lull in the act growing. It's not declining much if at all. It's been in that mid-single digits to down mid-single digits. But I really do think the opportunity is coming. There's two things that have kind of paused that a little bit. One of them is the budget has gotten tight. There's been so many discussion of layoffs and things. And when you -- like our company is a good example. We really constricted our OpEx budget as we came into the year. And we started saying, "Okay. Do we really need people to order a new computer?" They -- they're doing the same thing in conference rooms and things. So -- that certainly has impacted it. But think how little it's impacted that we're only like kind of flattish or down single digits in that business. The other side of this is all the discussion to hybrid work. And you can't have rooms without video at some point. It's just not going to happen because you're going to have people outside of those rooms that you need to communicate with and audio is not getting it anymore. It's over. The game is over, audio lost, video won. Just let the game was over, a conference room with no phone in it lost and the audio won in the last generation, we're headed into the next generation. And it's only about 10% or 15% of all the rooms that we think will be video-enabled are. The other cool thing, you didn't ask me this, but I'll just put it out there. The other cool thing is everybody bought some video equipment in the last few years is going to want to upgrade it because the product is very different. It's now a solution. It's not a point and shoot camera kind of thing. So that's really out there. And then on top of that, we're expanding the capabilities we do in the room and the number of products in the room. And still, it's a fraction of the cost of the old infrastructure in the room kind of program. So it's a super, super exciting category. I was just -- just one more thing. I was just on the elevator with Prakash and Nate, and there's a guy in front of me. He turned around his Logitech. He said I'm going to think for a second what my favorite logistic product was. He was the CEO of a company, I'm not going to name it. Now it's a prospect, it's going to the sales force, we're going to be selling. And he said -- and so we talked for a little bit. And he said, "Yes, he said, we're about to rip out all of our old. I won't name the competitor because I don't do that very often, but going to rip out all their stuff. I said, okay, we'll be calling you if you already talked to us. My guess is we're already talking to them. But that's a good example. People are transforming their offices. They're getting it ready for the next [ stack ]. The next [ stack ] is hybrid. They know it. We know it. Whether it's 1 day a week, 2 days a week, 4 days a week, it's hybrid.

Yes. Can you talk about your go-to-market strategy in [ BC ] and the sales force you've built there? And then how you've kind of taken business from incumbents based off of quality and price?

Yes. We got into this business in a very low key way. We started the business by following our webcams. In the earliest days of my tenure at Logitech, I would go to see -- I was obsessed with start-ups because I moved to Silicon Valley. And I go into somebody's little conference room and they'd have a TV on the wall. And then I see a Logitech camera, a webcam, a little tiny webcam. And I remember the first time I saw -- why do you have that up there -- and he said this [ doubles ] as our video conference room? And then he said, look, I just plugged my laptop in like this, and presto, it's a video conference. From there, we started making something -- we said we could do better than that. So we created something looked a little like a [indiscernible]. You've seen the movie. And it was a little bit bigger, a little bit better. And then we kept marching up. And we got bigger and bigger. Along the way, we just sold the same way we sold everything else into a distributor who somehow got it into a company somewhere, usually a small company, sometimes a bigger company, so many big company would want something their IT department didn't want to get around to, and they put it in the conference room, presto, we're inside a big company. But as we got bigger and bigger, we got really big. We're doing more and more rooms. Our products could suddenly fit any size room. We could even do a big old board room. Our products are as good as anybody. It's actually better. And then we realized, you know what, we've got to change. because if we going down this path, we're going to get blocked by the big players because they're starting to realize that we're not just this little webcam company that doesn't have much technology. They can step in and take when the time comes. So then we started building our own sales force. We looked at [indiscernible] and then we looked at buying our own sales force basically, but we ended up building. We started that 6 years ago. We now have a full-scale sales force all around the world. We're still learning how to be a B2B company. I'd say on a scale of 1 to 10, if 1 is we have like no idea what we're doing in B2B. And 10 is we're the best in the world. We're probably 5, but we're making great progress. Think about that, we're a 5, and we're already as big as we are. So if we could keep go to 6 and then at 7, and then at 8, then we'll keep our sights on that 10.

Got you. Let's switch into some of the software products you've acquired over the years and have those like Streamlabs and some others. But where are you seeing opportunities there? And how are you building those or expanding those pieces of the business?