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

Good morning and good afternoon. Welcome to Logitech's video call to discuss our financial results for the first quarter of fiscal year 2024. Joining us today are Guy Gecht, our Interim CEO; and Chuck Boynton, our CFO. During this call, we will make forward-looking statements, including with respect to future operating results under the safe harbor of the Private Securities Litigation Reform Act of 1995. We're making these statements based on our views only as of today. Our actual results could differ materially. We undertake no obligation to update or revise any of these statements. We will also discuss non-GAAP financial results, and you can find a reconciliation between non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC. These materials as well as the slides and a webcast of this call are all available at the Investor Relations page of our website. We encourage you to review these materials carefully. Unless noted otherwise, comparisons between periods are year-over-year and in constant currency and net sales. This call is being recorded and will be available for a replay on our website. I will now turn the call over to Guy.

Thanks, Nate, and thank you all for joining us. It is a pleasure to speak with you today. Before we jump into our first quarter achievements, let me provide some context regarding my role and the Board's search process for Logitech's next CEO. I'm both honored and excited to guide this iconic brand company in the new term. During my 4 years on the Board of Logitech, I have gotten very familiar with the company as I had the opportunity to serve as the Chair of Logitech Technology and Innovation Committee of the Board and to serve as a member of the Audit Committee. I view my role as an interim CEO is to provide the consistent and steady hand to the many wonderful experienced teams working hard across Logitech. I'm singularly focused on making progress and ensuring we do not lose any time in our ongoing execution. Our strategy remains unchanged as do the business plans that are in place. All teams are focused on executing their proven playbook. And my focus is to remove obstacles, facilitate decision-making and ensure we lose no time. Now a few words on the search. As we previously announced, the Board is in conducting a global CEO search, including internal and external candidates. It is progressing well. There has been a lot of interest in the opportunity, and we are pleased with the strong caliber of the candidates we are seeing. Needless to say, the Board views this decision with the utmost seriousness it deserves, and it's working diligently reviewing and interviewing candidates. Given the confidential nature of the search, I will not be able to add more color today. But rest assured that we will update you when we have news to show. Before I turn it over to Chuck to review the team's progress on many important points, let me provide a few of the nonfinancial highlights of this quarter. Assuming Logitech is a global leader in design and innovation, we were awarded the industry's most prestigious Red Dot Design Team of the Year award previously awarded to companies such as Apple, Ferrari and others renowned for their design. We introduced 4 new products in the quarter, including Rally Bar Huddle the newest addition to Logitech's family of conference cameras that turn small meeting rooms into collaboration spaces. And design for esport athletes, our newest Logitech G Pro X gaming headset feature graphene drivers for those that require precision audio technology. And in addition to the products launched last quarter, we are just about to start shipping Logitech site a table top camera with 315 degrees view capabilities, delivers a truly unique video conferencing experience. And the heart of this new system is an AI director like technology that decides which participants should be highlighted on the screen. And from which angle close or far, this benefits both people in the conference room and especially remote participants who otherwise may feel they are not fully involved in the meeting because they're not seated around the table. Our sales teams closed a number of meaningful customer deals in Q1, including Honda, Kroger, TD Synnex and the Proximus group as well as the European Commission. These wins represent multiple industries in both the public and private sectors. And finally, last week, we announced the acquisition of Loupedeck, a small tuck-in deal that is adding a differentiated technology initially in gaming and streaming and later in other areas. We will continue to screen for more deals that will help us accelerate the execution of our strategy as well as bringing our unique technology to new sets of users. These were just some of the recent highlights, although most importantly for today, is that we started our fiscal year with an encouraging set of results and an updated outlook. As we move through the remainder of the fiscal year and lead toward our expected return to growth, you should expect to see unwavering commitment to the principles and capabilities that have become the hallmark of Logitech, innovation to capitalize on the growth trends that fuel our business, which is video everywhere, hybrid work, gaming and digital content creation, design led engineering and product innovation. [indiscernible] focus on lean manufacturing and operations and a capital allocation strategy that is focused on M&A, paying a dividend and share buyback. And we do all of that with continued commitment to our values. As an example, this week, we released our annual impact report where you can read about the progress our teams have been making in the areas of sustainability and social impact. With that, I will turn it to Chuck to provide the financial details of our first quarter and to review the outlook for the remainder of the year. Chuck?

Thank you, Guy. I also appreciate everyone joining us on the call today. First and foremost I want to thanks all of our employees for the strong execution and teamwork in the quarter. It really shows in our results, especially our strong operating cash flows. Before we get into the details on our financial performance, let me spend a minute on some reporting changes we've made to our product category classifications. Our slide presentation and quarterly fact sheet provide additional information as well as a 5-year set of comparables. Many of you have asked for these updates over the last several quarters, so we hope that changes provide a simpler and clearer view of our business. These reclassifications do not impact our previously reported financial statements. Moving on to the business results for the first quarter. Net sales in constant currency declined by 15% to $974 million. Sales out was quite strong, particularly for headsets, tablet accessories and gaming. As we discussed at the Analyst Day and on the last earnings call, we believe in the benefits of lean on hand and channel inventory. For the fifth consecutive quarter, we reduced on-hand inventory significantly with our inventory turns improving to 4.2. We remain committed to our goal of improving to 5 turns or better over the next year or two. Likewise, channel inventory was also reduced in the quarter, and I'm proud of the team for hitting the targets that we set. This has improved linearity and predictability. We plan to keep reducing channel inventory during the seasonally soft months of July and August and then replenish the channel in September, October and November as part of a normal build for the December quarter. Net-net, we expect channel inventory to be roughly the same at the end of Q2 as it was at the beginning. In Q1, gross margins expanded quarter-over-quarter to 39%, slightly better than anticipated as significant reductions in our on-hand inventory drove down or drove some onetime benefits in the quarter. On a year-over-year basis, margins were pressured by FX and mix but partially offset by cost improvement and less reliance on expedited shipping. Again, thank you to our operations team for such amazing execution. Sequentially in Q2, we anticipate gross margins to be pressured. And as a reminder, gross margins in our December quarter have both headwinds and tailwinds. We have the seasonally higher consumer sales and holiday promotions but those are somewhat offset by overhead absorption. While there will be quarter-to-quarter fluctuations, we feel our business is structurally positioned to generate 40% gross margins in the next 4 to 6 quarters. Operating expenses were $271 million in the quarter, up slightly versus our internal expectations. A portion of our operating expenses were attributable to some onetime administrative expenses and the weakening U.S. dollar in the quarter. I continue to be pleased with the team's cost focus and ability to quickly dial up or dial down OpEx based on business performance. Our long-term model is to maintain operating expenses at around 25% or less of revenue. Operating income was $109 million in Q1 and better than our internal expectations due to improved demand and strong gross margins. One big highlight for the quarter was our working capital execution. Cash flow from operations was $240 million, a first quarter record for the company, leading to a cash balance of $1.25 billion. Our capital allocation strategy remains consistent, evaluate M&A opportunities, pay an increasing annual dividend and return excess capital to our shareholders through share repurchases. We are making progress on all 3 fronts. As Guy mentioned, we announced the acquisition of Loupedeck. They provide valuable technology for Logitech G and while modest and acquisition price reflects our consistent and disciplined approach to M&A. In May, we announced a [ CHF 0.10 ] increase in our dividend, which will be voted on by our shareholders at our September Annual General Meeting. And just last month, our Board of Directors approved a new $1 billion 3-year share repurchase program. Our existing buyback program expires at the end of July and in total, we will have returned more than $1.1 billion to our shareholders as part of this program. Our new program will replace the expiring program upon its approval by the Swiss Takeover Board. Moving on to our outlook. We are raising the first half outlook we confirmed in May expecting first half '24 revenue of $1.875 billion to $1.975 billion. Our corresponding operating income is expected to be between $180 million and $220 million. In our last earnings call, we said we plan to revert to full year estimates either this quarter or next quarter. Today, we are updating the first half and have provided full year estimates based on the progress we made in Q1. There is uncertainty with many factors like FX inflation, the state of the consumer. And then in the December quarter, which is typically our largest quarter and so forth. However, now with 1 quarter behind us, we are providing a full fiscal year '24 outlook. We are expecting revenue of $3.8 billion to $4 billion. Our corresponding operating income is expected to be between $400 million and $500 million. I'll close with where I started. Thank you. Thank you to all of our employees for driving such strong execution this quarter and with strong market share and some great new products launching, we are cautiously optimistic. We are going to show a short video on one of our new products, site. Nate roll the video, and then we'll take Q&A. [Presentation]

[Operator Instructions] I will start today with Asiya Merchant from Citi.

Hopefully, you can hear me.

We can hear you well.

Thank you for the color, Chuck and Guy. Great to see you on video, Guy. Chuck, if you think -- and Chuck and Guy actually, this is for both of you, can you guys talk a little bit about seasonality. It seems like at least in the implied guide the September quarter or the calendar third quarter was typically up at least in the low double digit seems to be kind of guided flattish, maybe slightly higher. Maybe you could talk about that. And as you kind of look into the December quarter, if you can kind of talk to us about the visibility that you're seeing and which product segment we feel very strongly about. And then on gross margins, I think, Chuck, you mentioned there were some onetime benefits. Clearly, gross margins came in better than what we're expecting. And in terms of hitting your 40% target, you can talk about some puts and takes to get there as the year progresses.

Yes. Sounds great, Asiya. Thank you so much for the questions. So first, on seasonality, we outlined last quarter, as you'll recall, that if you looked at the last kind of 4 years on average, the quarters were roughly 24% Q1, 24% Q2, 30% Q3, 22% Q4. And I'm not sure that that's going to be this year. Our Q1 was better than we had expected. We performed better than our internal expectations. It was a strong quarter compared to where we expected, both top line and bottom line, and we're cautiously optimistic on the back half of the year but there are still uncertainties. Foreign exchange, the various uncertainties in the environment. Last year, the December quarter had some margin pressure because of promotions. We don't know what's going to yet happen with our December quarter this year, a single biggest quarter. The read-through though, the June 18 holiday in China was quite strong. We don't have the final results back from Prime Day, but it looks like it performed reasonably well. So I'd say we're cautiously optimistic, but we don't want the first quarter here providing estimates for the full year. We want to make sure that we're appropriately providing an outlook that is manageable. The second question on margins. It was a great quarter. 39% is the low end of our long-term operating model. We feel good about that. However, there were some benefits, specifically when we brought our on-hand inventory levels down by over $100 million, that had a benefit to the overall inventory reserves that provided really a strong uplift for the quarter and we see a little bit of pressure going into Q2 on margins. For the back half of the year, we are again cautiously optimistic that we'll be in that kind of that range that's probably a little below 39% or in that range. but we're optimistic there are tailwinds. Freight costs have come down significantly, cost pressures on components. Our operations team has done a great job doing cost reduction and improvement. What we don't know is how the mix will impact. Now we have a couple of new products that are coming out that are going to provide, we think, a nice tailwind and could help on the margin side, but there is still uncertainty in the back half of the year.

Great. Next up, we'll go to Adam Angelov at Bank of America.

Just -- so firstly, on the inventory decline, sounded like that was a bit of a surprise. Maybe you could dig into that and why...

Inventory, I would say it was not a surprise. Our operations team, we have targets. Our operating model, our goal is to operate with on an inventory at about 5 turns. We hit 4.2, which is great progress considering where we've been. But it was not a surprise. It was strong execution. It was deliberate. And the great news is that not only was on-hand inventory reduced, but channel inventory came down as well, significantly high single-digit decline in channel inventory. So if you couple that on inventory and channel inventory are down, we've leaned out the supply chain, and that is great news for us and our channel partners, with lower inventory levels, we make more money, our channel makes more money, and it's good for everyone.

Okay. Got it. That makes sense. And then just a quick one on the collaboration. So I think declined again in the quarter. Maybe you could just touch on how you're feeling about that market into H2. Are you seeing sort of some stabilization from the enterprise customers? Or is it still a lot of uncertainty?

Yes. First of all, not the numbers we want to see on the business side, the B2B video conferencing side. I would say in the last 30 days, I talked to customers and every region met face to face in Asia and North America going to Europe this afternoon. Our brand is strong and the wins are significant. What we're seeing is actually big companies decided to standardize on Logitech and they just deploy at some pace where budget get opened, they deploy us a conference room. So that should play definitely better for the future. The second thing is if you look at the market, there is the high to the midrange. We're actually doing quite well. We grew double digit at that category, where we have some pressure is kind of the lower mid range to the bottom to the lower end, where we didn't have a product for some time, and we are about to launch a product Rally Bar [ Huddle ]. That's a great product. It will play really well in this category, energize ourselves supposed to go in. So between this, and the site that I talked about, this is going to be a really good way for us to come back to customers, try to push deployment, win some more big accounts I feel very positive about the future of this business after talking to channel, after talking to customers. I think the opportunity there is significant. And it's, of course, the -- talking to the margin, this is the best margin category we have, so that will help a lot.

I would just add, we gained a couple of points of share in the quarter. So we feel good about our -- the strength of our position. Sequentially, the video category was down $5 million, so relatively modest quarter-over-quarter. And then with these new products that Guy just mentioned, being launched, we're again cautiously optimistic about our execution in the back half of the year.

Next question will be from George Wang at Barclays.

So firstly, can you talk about gaming in terms of our checks, we picked up some incremental improvement, especially kind of on the downstream, just not sure whether necessarily flow into the gaming peripherals. Just based on your guide for below seasonal 2H, sort of imply the gaming to be down again on a year-over-year basis for the H4Q. Just curious whether you think that's conservative or how much of visibility you have on the gaming side?

Well, we haven't provided specific estimates for gaming for the back half of the year. But clearly, the December quarter is the biggest quarter FOR gaming. Our gaming team has been operating incredibly well. We've got some new products coming out that we think will help. Overall, it was a really good quarter for gaming. The China team executed flawlessly for the June 18 promo, which is a really important event for us in that market. And overall, we've got strength in Japan and elsewhere. But I'd say the real test will be the December quarter for us. That's the biggest quarter for gaming.

Great. Just if I can squeeze in a follow-up. I guess, you guys are always probably looking to expand the new categories, right, just the adjacencies. That's one of the kind of growth pillars. So in a high level thoughts on, if largely to what we're entering into any sort of a brand-new category, which area or which vertical do you think will be most likely in the next or few years?

George, great question. I found great plans in the company to expand the TAM, expand into new use cases where we are going after a higher-value application and use cases. Which is too early for us to talk about it, but you will see in the coming quarters more discussion about this expansion.

Our next question will be from Alexander Duval at Goldman Sachs.

Just a couple. Firstly, on OpEx, it looks like you've made some good strides on cost control in the quarter. I wonder if you could talk a bit about how much further headroom there is for cost control going forward in the remaining quarters. And then I have a quick follow-up on FX. Can you just remind us how much support we should expect to be seeing from FX in coming quarters?

Certainly. First, on the FX side, this quarter, we still have headwinds in the year-over-year comps. That starts to change. Next quarter, it's more balanced with where rates currently are. So I think we should be back into kind of a year-over-year balance starting in Q2 and beyond.

First question was the -- can you remind us -- it's early here, sorry.

Cost control.

Cost control, my favorite topic. So we have done a phenomenal job lowering cost. OpEx for Q1 was a little higher than our internal targets. There was a couple of onetime administrative charges. So I think you'll see sequential improvement on OpEx. Our long-term operating model is to have OpEx below 25% of revenue. We may or may not get to that level this year, but we'll have to wait and see. But we're on that trajectory. And we believe that by the end of the year, roughly, we should be kind of at a $1 billion run rate approximately, but the real long-term target is to be below 25% of revenue.

Our next question is from Ananda at Loop Capital.

No video, got it, Nate. Cool. Yes, so just 2 quick ones, if I could. Guy, and Chuck as well, the decision to give the second half guide today as opposed to 90 days from now. Can you tell us just -- I mean just give some context around sort of visibility that gives you guys confidence in the ability to do that in the thought process around doing it? And then I just have a quick follow-up as well.

Well, on the guide, we deliberated it in what we had outlined last quarter that we would either provide it this quarter or next quarter, and given the strong first quarter we had relative to expectations with 1 quarter behind us, we felt now was the right time. And is visibility better? In some areas, yes. Inflation in the U.S has come down a little bit. It's higher in the U.K. and other markets, but the U.S. inflation has come down a little bit. FX is starting to stabilize a bit. But we just felt that with 1 quarter behind us that it was the right time to update our estimates for the full year. and we're pleased to have done that 1 quarter kind of ahead of expectations.

Okay. That's helpful context, Chuck. And I guess, just bigger picture question. Any thoughts and maybe you guys haven't sort of reached this conclusion yet, but would love any context thoughts on sort of when you kind of renormalize the revenue base. I've just done some quick analysis, it seems like exiting fiscal '24. You could be there, but just would love your thoughts on that. That would be helpful.

Well, I'll start, Guy, you can add color. But as we look at the year-over-year and sequential change, things are starting to stabilize. Like we are -- the year-over-year comps are getting -- they're still not where we want them to be. We're not happy. They're still declining with the rate of change is getting more favorable. Now I can't tell you when we're going to hit bottom for an asymptote, but it feels like things are starting to stabilize, and that's reflective in our cautiously optimistic estimates for the year.

I would say the last 42 days here as an interim CEO, just reaffirm my conviction this is a growth company, in a growth market, with a growth trajectory -- this will come. But let me tell you another thing. We're not just waiting for the market to improve. The team here is working really hard to push whatever we can. New products obviously are going to help, win some share and get to this point where we start to be plus in front of our number again. And just a matter of time, there is a clock in our head. We want to get there. Obviously, it will take some time, but we will get there.

And guys, is the right way to think about -- I mean, I guess like sort of as we sit currently, does the company want sort of the financial community to think about normalized growth go forward the same as we have kind of pre-COVID or different, whether positive or negative?

Look, we -- and you know me from prior life, we always want more. We always want to be a higher growth and we will continue to plan, look at the right acquisition that can accelerate that, look at the right product. There's a lot of potential here. And a lot to build on, this company is super strong. The masters and innovation in design, super strong. The leadership team is super strong. We have a lot to build on. So you know how ambitious I am. And as we go forward, you will hear more, but we certainly like to do better.

Our next question will be from Erik Woodring at Morgan Stanley.

Guy, good to see you again. I just wanted to kind of double click on Asiya's seasonality question because I understand there are uncertainties today, but you're guiding to the worst seasonality in at least a decade, but also telling us the channel is normalized. And so that would, I guess, would imply demand would be worsening, but I don't really hear that from your comments, actually. So I was just wondering if you could kind of help me square that circle and understand really why we were expecting such a below seasonal September quarter? And then I have a follow-up.

Well, I think overall, we haven't provided updated seasonality or targets for December or the March quarter. I would say if the December quarter is really strong, then we would be above the estimates. If the December quarter and the state of the consumer is difficult because of rising interest rates and inflation and in global conflicts, et cetera, then that's a different situation. But I feel like we feel coming into the year, we started off strong relative to expectations in Q1, we feel like we've got a plan that we can manage to and that we're in a pretty good place. And we'll have to just wait and see how the December quarter happens and what happens in the March quarter. March is typically our seasonally worst quarter of the year. So if you look at the outline at what I mentioned earlier, generally, March is -- the March quarter is 22% of the year, it could be lower. We don't know. But, so we're -- I think I'd say we're balanced. And that would be my view. Guy, do you have a different point of view?

I agree with you. Chuck and I were part of a very extensive review, operational review that we have done last week and informed us and decision to issue the guidance for the full year. I would say, Erik, you're spot on, we are not anticipating demand to be worsening. That's definitely not what we're seeing or hearing or planning on.

Awesome. Maybe Chuck, just a question for you to follow up on one of your comments there. In terms of OpEx below 25% of revenue, I think last quarter, we kind of talked about Logitech exiting the year at maybe like a $250 million quarterly run rate for OpEx. If you did do below 25%, you'd get, call it, $8 million to $10 million below that. So just wondering if you are thinking you can cut OpEx beyond your prior expectations? And then secondarily, if you are growing next would you expect to keep cutting OpEx? Or would you kind of then lean into reinvestment and try to grow OpEx base alongside your revenue base? And that's it for me.

Yes, yes. Good questions, and maybe I wasn't super clear. So our target by the end of the year is to have OpEx at a run rate of roughly $1 billion, which should imply an approximate $250 million Q4, maybe a little higher, maybe a little lower, but in that range. We have taken a lot of costs out of the company. We do not have a cost reduction plan in place right now to reduce headcount or OpEx growth, that's not our plan. We're focused on the top line and getting back to a year that has a $4 billion in front of it. And so if you -- if we're at $4 billion in revenue, $1 billion OpEx run rate is 25%. So we are -- if we're below the $4 billion, we're still going to stay at approximately $1 billion in OpEx, a run rate. So the Q4 plan is -- think of that as approximately $250 million if we're below $4 billion. And as we start to grow again, then we would have OpEx be below that 25% of total revenue number. That is the long-term operating model.

So just to be explicit, Erik, when we come back to growth we like the 25% -- and we take the extra investment in growth areas. There's plenty heel opportunities to invest in. But 25% is we like it as a long-term quarter for us.

Our next question is from Jörn Iffert at UBS.

2 to 3 questions, please, from my side. I will take them one by one, if it's okay. The first one is, can you please be so kind and clarify again on gross profit margins? What exactly was the one-off benefit in Q1? And where you see gross profit margins trending to in Q2?

Okay. So if you look year-over-year, gross margins were 39%, down from 40% a year ago. The primary difference there is going to be FX. There's other puts and takes. But if you broadly -- it says roughly 100 basis points. The quarter though was quite strong because of significantly reduced on-hand inventory. So as we look forward into Q2, there will be some pressure because we don't think we can reduce inventory by another $110 million. So of course, there's a lot of dynamics with mix and FX and all those things. But generally, all things being equal, we see a strong gross margin trend here, but there's a bit of a onetime benefit in Q1 that will put a little bit of pressure on the results for Q1. And in 4 to 6 quarters, we see that trend improving structurally to a 40-ish percent gross margin as a company. Our long-term model for gross margins, 39% to 44%. Now to get to the high end, mix shift, more video things that can happen, but in 4 to 6 quarters, we see structurally 40%-ish gross margins. Next question there. You said you had 3. That's the first of three.

Yes, exactly. So it means in 4 to 6 quarters, you will reach the 40% gross profit margin run rate, not in the next 4 to 6 quarters, just to be clear.