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

Welcome back to the conference. I'm Rob Sanders, a European tech hardware analyst at Deutsche. The next company warehousing is Logitech. That's the world's largest peripherals company within electronics. We're delighted to welcome Chuck Boynton, CFO of Logitech. Welcome to this conference Chuck.

Thank you. Great to be here, and I appreciate you having us speak here at this fireside chat, Rob. Thank you.

Great. So yes, we'll -- I'll go through some questions. But of course, if anyone has any questions, please raise your hand, and I'll look through the very bright light to see if I can see you.

So the first question would be, of course, given it's quite topical, HP reported this week, there have been some signs of stabilization in the notebook market recently, at least in the supply chain, even if HP did disappoint this week on its China business, how do you see the potential for your PC peripheral business begin to stabilize. Put another way, when is the most likely year for the COVID hangover to be over.

The COVID hangover, I can't wait until that's fully behind us. We certainly benefited from COVID for sure. Our revenues went up 70% to 80%, and they've come back down and they've started to rationalize. It's hard to say precisely when we kind of hit the bottom and start to grow again. We've been -- the rate of change has gotten better, i.e., less worse. We were seeing 20% declines in revenue year-over-year. Last quarter, it was down materially. And today, we're seeing things are getting better or they're getting less worse, I should say. It's interesting. If you look at HP, and Dell, Lenovo, the PC folks, they've had different views in the market and the outlook. Last quarter when we issued our updated outlook, we were more probably balanced or cautious about the future, cautiously optimistic with the wording that we kept using. And I think right now, we feel like generally, things are pretty good. We look -- I look every week at our business. I look primarily at sellout data. That's to me is the most important is what are the consumers and enterprises buying week-over-week. And that sellout data, I look at 4 weeks trailing versus prior year and 13-week trailing versus prior year. And the obvious thing would be, hey, if the 4-week trailing is better than the 13 week, then you're in a positive trend. And many of our markets are showing those positive trends. So I feel good about that in terms of where we are right now with 6 weeks to go in the quarter. Now I can tell you precisely where revenue is going to be right now because I know what the orders are, what we're going to ship for the next 6 weeks. I won't tell you, but I could tell you. But what importantly is I can see what's happening with the end customer demand. And that is the most important thing. And the consumer looks pretty good outside of a couple of pockets. China, while the numbers are better year-over-year, i.e. today versus a year ago, were in -- were slightly better. The trend is negative, which is interesting. And I think the state of the consumer for us anyways, in China is a little bit -- is not great. Some other markets like Japan, there's some FX headwinds. But broadly in Europe, in Europe, you got to remember, of course, because you live there, but July and August, I don't think anyone is working. So the data...

I live in the U.K.

The data tends to be a little bit like be cautious what you see. But so far, the data would suggest that Europe is looking okay from a consumer standpoint this quarter on sales out. America also, U.S. in general, is looking pretty good from a consumer standpoint. And so I think we're feeling cautiously optimistic about the sellout data. But of course, as you know, Rob, our -- a lot of our consumer business peaks in our Q3 or our December quarter is really where a lot of the year is won and lost.

Got it. And I guess just related to the September quarter, you were perhaps a bit conservative on the September quarter originally in your guidance. You talked about a flattish quarter basically. Have you -- what have you assumed for back-to-school demand? Is that such a big factor anymore for your business?

Yes. Back-to-school is not a huge factor. It's probably more of a phenomenon in the U.S. than it is globally. And again, we're a Swiss-headquartered company, obviously dual listed. We have a primary listing on NASDAQ as well as in the SIX Exchange. So we are a true global company. The U.S. is our largest market, but it's maybe 40-ish percent of the total company. I can't member the exact number, but it's not like the vast majority. Back-to-school, I would say, for a few weeks has a bump. It does -- there is a small impact, but it's nothing compared to like Amazon Prime Day or Black Friday or the big promo holidays that you see throughout the year and especially peaking at the December quarter.

And in terms of the December quarter, looking forward to Black Friday, how is the promotional situation going to look, do you think, relative to last year? How are you thinking, given where your stock is and the channel, et cetera?

Yes. Well, last year, I think it was a tough quarter, a tough December quarter last year. I was not here. I've been with the company now for 7 months, so I was not here for the last December, but it was characterized by, I think it was a relatively -- it was not a great quarter for the company. And we do promotional planning. It starts early in the year. We have phenomenal partners like Best Buy, who if you go out, I would encourage you to go in the stores and just look at the stores and see the aisles. I think we have -- we do -- our teams does a great job. And let's face it, Logitech, we are very, very good at retail, at e-tail. That part of our business is just -- is so good. Our teams are phenomenal. So we have a great holiday promotional activity planned around the world. I expect that those will have the intended lift in revenue. Last year, it was a little more challenging, because generally, consumers bought more of the items that were promoted, less that were not promoted. So the volumes came in lower and the volumes that we did sell were heavily promoted, and that led to not necessarily a great quarter. I think that we can -- we're not going to repeat that same quarter ideally. But the -- I think we're primed and ready to go. Ultimately, what's going to -- what will matter is how do the consumers show up for the holiday rush and how much do they buy or not. And I think right now, if the holidays were today, I think we'd see a phenomenal Q4, but a lot can change as interest rates go up and there's uncertainty and whatnot, a lot can happen, but I think we're feeling pretty good about the state of where things are headed into this heavy promo period.

Yes. And in terms of trading down, you obviously operate at the premium end of the peripheral market. Have you -- Best Buy actually called out some more selectivity amongst consumers, which you could read as being trading down or given obviously the cost of living pressures. Is that something that concerns you at this stage?

No, not really. I would characterize a little differently. Our strategy, and it's important to understand this, and we don't want to see market share at, I'd call it, mainstream, the main -- we don't necessarily compete at the super low end, the cheapest products you can make because we have really core values around sustainability and product quality. But if you go to mainstream, we will fight to the death on market share on mainstream. We have top market share. Nate may have to correct me, but I think out of like 15 categories, we have #1 market share in like 11 of those 15 categories in that range. And we are not going to see market share in those categories. So as new competitors come in, we are not going to allow them to get in and establish themselves in the mainstream because once they get into mainstream, they will move up stack. And our high-end are great products with great margins, and it's a great business and a franchise that we want to protect. And the way you protect that is by the defense at the low-end of the mainstream. And so we will promo there. We will maintain that share. And then we will have our customers move up the stack into the higher value, higher margin, higher ASP. And that has worked really well for Logitech for years, and that is a strategy we will maintain.

Got it. Obviously, please do raise your hand if you have any questions. I just want to switch gears to talk a bit about -- oh, go ahead.

I just wanted a clarification on your comments around China. You talked about the consumer looking good. I think you said China is better year-on-year, but the trend is negative, I'm not sure I...

That's right. So I just -- looking at sell-out data, not sell-in, but sell-out data year-over-year for our business in China -- it's basically up. Remember, they were in lockdown. They reemerged, and so the market there a year ago was more difficult. And so we're up year-over-year in China, but the trend looks negative, like things are -- if I look at the 13-weeks of data versus last year compared to the 4weeks of data versus last year, the 13-weeks are higher than the 4-weeks, meaning it's a negative trend in China. That, hopefully, that's clear.

No, that's great. Thank you.

Okay. So let's talk a bit about video collaboration. Obviously, you come from a background at Poly, where they had a strong presence there. I mean it has been a disappointing business relative to the prior management's expectations. I was just sort of thinking about that business, which is obviously more of a B2B type business, is there any scenario where we could see your strategy for that business may be altered or perhaps trained in? It's clear that expectations of the prior management were a bit overoptimistic despite hybrid working becoming this big thing. So do you think you could maybe adjust your go-to-market strategy? How should we think about that?

Yes, it's a really good question. I would say never, say never, but we are fully, fully committed to this space. In video collaboration, depending on how you measure, and everyone's different ways, we have top market share in this space in the enterprise. We were the first mover. If you look at what happened in the market, Cisco and Polycom had an established franchise of on-prem video gear working with Webex for Cisco and Skype for Business for Polycom. Logitech disrupted that market by offering the first kind of web connected device that became mainstream when Zoom took off. So we've got a first-mover advantage, which is big, and we've got top market share. And we're going to defend that with new products. We have 2 new products coming out, those that were -- with the one-on-one saw them today. Sight is a device that sits in the center of the conference room that renders the participants in the room even they might be in the back or in the side, direct facing shots on the screen with Zoom or Teams or Google Meet or you name it. It is a great new product differentiated. No one has this. It's different, it's unique, it's better. We also now had a gap in our portfolio, the Rally Bar Mini addresses a segment that we had a gap in our portfolio. So those 2 products will come out. We will defend the turf there. Rob, your point on B2B is valid and selling. We could do better. And I think we will do better. We made a big bet or investment before I joined the company, Bracken, and Nate, and the team did on hiring and building out a worldwide enterprise direct sales force. Now we fulfill through the channel. So we're not fulfilling and shipping, but it's a direct sale high-touch model. We just hired a new global lead for this program, and we're working really hard on the blocking and tackling with all of our salespeople around the world. And I think a little more focus, a little more discipline and hard work, and we'll be able to see the fruits of that labor. Now we're not losing share. So it's not a share loss issue. It's really more a matter of are we seizing the opportunity. And I'm also disappointed in our video performance. I think last quarter, we were $130-ish million in revenue, and I think it should be quite a bit bigger than that. It's a big, big market. I have this kind of religious belief that it's not a matter of -- if it's a matter of when the 50-ish million conference rooms around the world and then in order of magnitude more of offices, classrooms, et cetera, will all be video-enabled. I joined my prior company because I saw that same trend where the communication trend went from effectively meeting in-person to conference calls and the next stage of that evolution are video calls. And it used to be, and you all know you had, what's the bridge number so we can dial in. Now it's what's the Zoom code, so I can do my linking via video. The issue right now, I think, is that the companies like ours have a global real estate footprint. We're not prioritizing this investment today because we're unsure who's coming back to the office, when do I close the office down and save that money. Do I invest and put more money into it. And most CFOs, I'd say most good CFOs don't want to throw good money after bad. Why would I go outfit an office to then shut it down because no one is using it. And so I think we're in this -- I don't know when the inflection point is. And we are doing good business. $100-and-something million a quarter is still good business. The margins are great. It is a good franchise, but it's not a great franchise today. And to make it become a great franchise, we've done the product innovation. Now there's a lot of direct selling. And I think the market also has to mature to a point where it becomes a priority again for the teams that run facilities and for them to invest, they need to see what's the usage level in my offices. Am I back to a new normal where I can go make these investments and it's smart. I don't look like a fool for putting a bunch of money into an office that I then shut down. And I think that's starting to happen. You're hearing companies even Zoom, Eric came out and said, recently that he wants his people back a couple of days a week. That's a big statement. I think once that starts to cure, then I think we'll see the move to that, those 50 million conference rooms all becoming video-enabled.

Okay. That makes sense. So moving on to the gaming peripheral business. I think it's around 30% of your sales. Is the biggest chunk, I guess, depending on whether you combine mice and keyboards. So in that business, you built out a lot of share, but you are -- that's probably where the share gain potential is the greatest if you just think that your share is north of 50% in most categories here, you're maybe in the 25% to 30% area. So when you think -- when you look at the landscape in gaming, peripherals, are you seeing at the moment -- we don't know whether we're in a downturn or not. So I'm interested in your view whether we're starting to see a recovery. But also, are you seeing some sort of more desperate moves by some of the competitors, whether it's Corsair or GN or whoever else?

Yes. This is a -- it's a great business. It's a big market. It's huge, billions and billions of dollars in TAM. It's growing rapidly in big markets that are growing, attract lots of competition, and there's plenty of room for lots of competitors. This is not a market that is only room for 1 or 2. Hats off to a lot of our competitors. They've done a good job. The part, I think where I really like our strategy is we are bringing together all of our brands under Logitech. Logitech is a brand that is trusted and loved by our customers and consumers. They love it. People have been using our products for decades. They work. They're done ethically. They're sustainable. We've done things at carbon labeling, and that matters to people. Now if you look at what we're doing on the branding side, we bought ASTRO years ago, and now we'll bring that under the Logitech brand, that should help. Blue Microphones, the leader in microphones. Now that business went crazy during the pandemic, it's come off a lot, but it's a business that's under the Logitech brand, I think consumers will preferentially want to buy that. We have a whole streamers and creators department that's super cool of things that we're doing for the people that are YouTubers and vloggers and TikTokers. They use our software and our technology all the time to create the content that they rely on. And so the gaming and creators, Logitech G is how we would describe this going forward. Logi G as a family. It's now going to be a single brand with sub-brands like ASTRO, probably it won't go away at least initially. But that will, I think, bring more people into this trusted brand that everyone knows and loves. Where we have some work to do is we have -- some of our products have gotten a little bit old. So we got -- we're refreshing, for example, console headsets. That is a really crowded space, Steelseries and HyperX with HP and a number of other players out there. We have great products. We're going to launch new products and defend our turf. And if you look at the other accessory parts of our business, we have an incredible franchise of gaming, steering wheels, simulation wheels that are incredible. Formula One got this incredible boost with drive to survive. It's captivated the imagination of everyone we included. And these steering wheels are incredibly cool. They're very -- they're very high margin. They're expensive. The market was really great a year ago. It's come off a lot, but I think that's a long-term market on simulation that can help carry us through. And then, of course, our -- we are the top market share worldwide in gaming mice. Of course, it's our heritage. We have the best and a huge business globally. Our keyboard technology, it just keeps evolving. What's interesting is, and I know we're going to talk about M&A possibly later, but it's a good time to kind of bring this up. We just bought a company called Loupedeck out of Finland. It's a small software shop, but they do contextual keyboards, very relevant to gamers and creators as well as professionals. And this is like -- it's not going to create a lot of revenue in the short term, but it just shows you the innovation behind Logitech. These contextual keyboards will have effectively small video screens on the keys, they can be customized to effectively an application or a video game and give you a small console next to your keyboard and mouse that would be effectively like the old way you'd program a keyboard of the macro. I want to print, I can code a key to say I hit the key and it will print. Now you've got contextual keys of built-in macros where you can do things like Adobe Photoshop or your favorite game, and you can get the prewired contextual keys, where the keys will change, the picture on the keys will change to match that activity. It's a really, really cool new category, and we're just extending our reach to both gamers, creators as well as mainstream for normal office tasks and office applications. So really, really cool stuff.

Got it. And just on the gaming side, I mean, it feels like it's going to be a very busy kind of Christmas with new games being launched. Is there any sign of this market showing reversion to its old growth path because it was a market that was growing mid to high single digit just 2 or 3 years ago.

Yes. I think this is a long term -- has long-term structural tailwinds. And the reason I believe that is when I was a kid, I played with my Atari. And then by the time I got into junior high, I stopped playing with it. And now my kids, my boys that are in college, they still game. Now you're seeing girls gaming and extending that to where the market now, it's not just boys. It's truly a global market. There are games for everyone, and more people are gaming longer into life. And so you've got like a built-in growth in TAM because of gaming. Now certainly, during the pandemic, no one could visit their friends. Everyone was gaming during the pandemic. And now that's all normalized. Kids are back at school, but they're still gaming. They're still gaming at night. It's very social. And I think it's also great for -- it's great for social connections. The -- so I think that's a business that -- I'm not saying ours, but I think that category of gamers and creators, in the creator economy, that's one that I think has a lot of long-term growth ahead of it.

Hey, any questions from the audience? Otherwise, I'll continue. Oh, go ahead.

To the point of COVID, I guess, peak, do you guys have data on replacement cycles and have they changed over the years? I would presume the more things get wireless and battery operated, they have shorter or faster obsolescence.

Yes, that is a -- I think that is a structural factor. Now we stand where we believe deeply in sustainability. And so the idea that you want to have your technology where you can replace the battery yourself. Like I mean I think that why we all -- there is a flight to wireless. Wireless is awesome. There are standards now, especially in Europe, where things you need to be able to do self-repair and replace batteries, that is great because these things can last for a long time. And we're not trying to push for reduced life span of products. It's not kind of who we are. We want these things to last a long time. There is a big tailwind, though, in that happened in COVID, and I mentioned it a little bit earlier, but as employers are saying, hey, I want you back in the office 2 days a week or 3 days a week, people generally are not going to pack up their mouse, their keyboard, their laptop, their webcam and go home. They're going to leave that kit in the office and have a new kit at home. So COVID definitely had -- there was some pull-in but there was also a period of unprecedented TAM expansion that we're just now starting to see because of people having a kit at home and a kit at work. On the gaming side, for sure, our technology now, the wireless mice have similar response times to the wired, where before the really high-end gamers would only use a wired mouse because of the response time. Now we've got new technology that makes that instantaneous and they like the freedom of that. So I think you're always going to have people that are upgrading and going to bigger, faster, better solutions and gaming is on the forefront of that. On the office side, I think it's more about I want the ergonomic keyboard and mice that are more comfortable, make me more productive, and it's around productivity. And we've seen very large tech companies that we've talked to on the business side, again, direct selling. We go talk to them. And they would order our lowest-cost mice and keyboards for their staff, and we're like, why would you do that when the comfort of these are so much better, and it's not that much more money. For those, a couple of hundred bucks per employee is nothing, and they were spending less than that. They went, and said -- and used them and it made their employees happier and more productive. And it really was just an awareness thing. So I do think that the replacement cycles probably are not going to necessarily change from a technological obsolescence standpoint, but there will be self-selecting and trading up as they learn how these things operate. We've also done a lot on embedding software in our applications to make them more customizable. So Logi Tune, I was in an airplane yesterday using that to change the ratio of noise cancellation on my headset. I felt it was too much and got a little too reverb and it's like dialed it back, and it was way more comfortable. You can do the same thing with our lighting systems and a lot of our streamers and creators use those consoles to adjust their environment, color, tone, hue, light, feedback -- microphone volume, et cetera. So I think it's a technology upgrade. But to answer your question on the obsolescence cycle, that's not a core part of our strategy.

Just picking up on that. I mean, obviously, just mathematically, COVID happened in 2020, 2021, 2- to 3-year replacement cycle. I guess there are some investors that were hoping for the replacement cycle of the products bought 3 years ago to start kicking in. Is that something you think is a realistic way of looking at the business?

Yes. I don't know if 2 to 3 years is the right number. I think if you think about like a computer, people looking at processor power, I would say it's probably longer than that. I don't have a date -- I don't have a number to put out there to say it is 4.1 years or whatnot. I think our PWS business, our Personal Workplace Solutions business, is performing really well right now. And I think it's the design we have, the innovation, the technology is incredible. But I don't -- I wouldn't -- I don't think our view is let's shorten the replacement cycle to grow revenue. It's kind of countered a lot of our philosophy. We want to build great products that last for a long time, build even better ones that want them to upgrade to get better technology, but not necessarily because they are no longer working or the batteries defective or whatnot.

Got it. Okay. Well, just switching to the financials, the gross margin target, 39 to 44, operating margin, 14 to 17. I just -- maybe you could just talk us a bit about your cost control efforts. And also, I'm interested in the manufacturing side as well, given that you've historically had, I think it was 50% in China in-house, and 50% outsourced, but it seems to be that's changed in the last sort of 4, 5 years.

Yes. So on the cost side, and you're talking about heartstrings, now talking about cost. So thank you. But we had -- I joined the company and we had already gone through one round of cost reductions. We did another one and took out a lot of costs. And we protected research and development, and we protected the B2B sales organizations. Those are key strategic investments. We took a significant amount of cost out of our cost of goods sold or product costs, both the obvious ones like shipping that kind of naturally took care of itself as supply chains eased, but also material cost reductions led by Prakash, our COO. The overall margin target of 39 to 44, we said we would get to that place in we thought 4 to 6 quarters. We were there last quarter a little bit because of some one timers. But structurally, we're on the way to delivering what we think are really healthy gross margins. Now every product category has a different profile. Video are quite a bit higher. The B2B products are less price sensitive. Margins are higher in some of the gaming products. It's a little more competitive, margins are a little lower. But overall, that blended number, we believe we can -- will be in that range in 4 to 6 quarters. And some quarters, we might be back in there. We -- in the short term, we expect it to be in the, call it, 38%, 37%, 38% range, slightly below our target model. And it will change each quarter a little bit here and there. On the cost side, we have taken a lot of the manufacturing costs out that structurally will help permanently. Freight has come out. To get to the higher end of that long-term model of 39% to 44%, we need video to come back and be a little stronger. Even if video doesn't come back and the current mix that we have, we should still be in that same range because of continued cost reduction and driving operational efficiency. Our overall model that we talked about was, call it, 39% to 44% gross margins. Less than 25% of revenue in terms of OpEx, leaving an operating margin of, call it, 14%, 18% in that range. We're slightly below there today because OpEx is a little higher. Again, as I mentioned, we're protecting a couple of those key investments. As revenue grows, that OpEx as a percent of revenue will come down, and you'll see that margin expansion on the bottom line.

Got it. Are you seeing any relief on component cost inflation?

We have, yes. There has been a -- there we've seen a lot of release in ICs and whatnot. During the pandemic were incredibly expensive when we had large PPV or purchase price variance, where you're buying above your cost, and that was a net headwind, and that's turned into a bit of a tailwind.

Got it. Just wrapping up on cash flow and use of cash. M&A? Is it a possibility? I don't think maybe you're going to be able to answer that. But obviously, you do have a pretty clean balance sheet. How are you thinking about return of cash and potentially some bolt-on M&A.

So we are proud of our capital allocation model. We've returned over $1.5 billion in cash to our shareholders over the last 18 months, primarily through buybacks. That was largely driven because during COVID, the company's margins expanded and revenue grew so rapidly. We had really incredibly strong cash flows. Last quarter, we had a really strong cash quarter again. This quarter, we pay our annual dividend. The capital allocation priority is sort of first, we pay a dividend, and we plan on growing that dividend kind of $0.10-ish a year. And so we'll continue to mildly grow the dividend. The primary target would be to use that cash for M&A to buy companies that fit within our portfolio. It could be tuck-ins that we've done a lot of recently. We haven't done large-scale ones as of late, not that we wouldn't, but we are very -- we've got a high bar as we should. Our balance sheet is incredibly strong. We're proud of that, $1 billion in cash, no debt. And we have been -- continue to buy back stock. We announced a new $1 billion program last quarter. And so we will take the excess cash that we don't use for M&A after paying the dividends and continue to buy back stock. We will always look out for the right M&A deals to help accelerate growth, accelerate our competitive barriers and to build a great company.

Got it. There's a question.

Try to enter markets or adjacent markets. Anything on that front? And is that more than likely to come greenfield or through M&A?

I think we'll consider all of the above. We're always -- we're screening hundreds of companies looking for the right fit. I would say we have an interim CEO right now. So we didn't talk about that. But the -- as it was an interim CEO, we're not going to go do large M&A. This -- at a point like this. But once we announce a new CEO, then -- and these things take a long time, but we would probably be more active or we will be more active once we have a permanent CEO in place.

Okay. Unless there are any other questions, I'll wrap it up there. Thank you so much for joining us.

Great. Thank you all.