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

Amazing. Good afternoon, everyone. I think we're going to get started. My name is Sabrina Hao, and I'm a member of the U.S. IT hardware equity research team here at Morgan Stanley. Today, I am pleased to be joined by Chuck Boynton, CFO of Logitech. Before we begin, just some housekeeping. I need to mention that important disclosures can be found at Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you've got any questions, please reach out to your sales representative. So with that, Chuck, thank you for joining us.

Thank you, Sabrina. Great to be here.

Great. Maybe to start a little bit more near term. You just reported September quarter earnings, outperformed your expectation or what was implied by your guidance. Channel inventory actually came down versus expectations for it to be flat. So can you talk about some of the drivers of the outperformance? And any trends you saw by segment?

Certainly, both Q1 and Q2 were really good quarters relative to expectations, still down year-over-year, but I would say we're not quite at the bottom yet. We're not quite calling the bottom, But the rate of decline has been better. So the decline is slowing and we're kind of and we're kind of trending towards that breakeven -- or towards that year-over-year flat, and then we hope to grow from there. Last quarter, overperformed on a number of key categories. Our pointing device business, our mice business, kind of what we're known for, the hallmark, we saw year-over-year growth, which was really, really exciting. And our tablet business, we make a lot of tablets for Apple devices and whatnot, that was another kind of really good growth business. And then regionally, Europe actually, in U.S. dollars, had year-over-year growth, whereas the Americas and Asia still had year-over-year declines. I would say in terms of the areas where we overperformed relative to expectations, our PWS business, the personal workplace solutions, traditional mice, keyboards, webcams, kind of the big category that we're well known for, those all performed quite well, and we can get into other categories later.

Yes, absolutely. That's great. Maybe to dig into region. I mean you mentioned Europe was stronger, and a little bit surprising, given lots of our consumer enterprise hardware companies are seeing weakness in Europe. So I guess what were you seeing there? And what maybe makes Logitech a little bit different?

Yes, we're a Swiss company by nature, and so it's kind of our home field. I think Europe for us, it was probably an easier comp year-over-year. I'm not so sure that the penetration is better right now in Europe, but the year-over-year comps were favorable. And they were favorable partially because the -- our Russian business was no longer in the year-ago period for comparison. So that comp was easier. And I think also our business in Europe was a little more muted with the conflict in Ukraine and Russia a year ago. Whereas Americas and Asia, I think versus a year ago, the business is a little bit stronger then. So it's more of a comp, not so much penetration. I will also highlight our sales team in Europe is performing quite well. We started recently selling our direct B2B sales force that sells to the large enterprises. Traditionally only sold video and headsets, and now we've added mice, keyboards, webcams to the toolkit. And that's allowed them to really kind of have more quivers in their arrow -- more arrows in the quiver to go sell to the enterprise. And that really, I think, helped that business, helped Europe and helped our PWS business.

Yes, makes a lot of sense. So you had a great September quarter. You raised fiscal '24 guidance. And for the back half of the fiscal year, you guided to a seasonal December quarter as a percent of annual revenue, but a subseasonal March as you work down some channel inventory. If you look at, I guess, sequential growth, that would imply that both December and March are 8 to 9 points below what you would normally do historically. So is the seasonality of your business structurally changing? And how should we think about that in a post-COVID world?

Yes. Seasonality is not -- I don't think it's really changed from a true sales-out standpoint. At our Analyst Day last year, we articulated that historical seasonality was kind of 24% in Q1, 24% in Q2, 30% in Q3, 22% in Q4. And so that tends to be how the business has operated. Now with the sell-in, with some reductions in channel inventory and whatnot, some of those numbers are a little bit different. And given that we're in a declining environment, that kind of 30% Q3, 22% Q4, think of that 52%, given that we're still a declining environment, maybe that 52% is more like 50%. Maybe it's not quite -- doesn't have the back half growth in the first half or maybe it's closer. It's also really hard to tell right now because this holiday season is our biggest holiday season. Like this is our biggest quarter, and the buying part is just now happening for the consumer. I'd say so far, China has a really big holiday called Singles Day, November 11, 11-11. We just got the results in. And they're -- I'd say they're okay. They're not like great, but they're okay. It's kind of a rounding error for the company. But overall, the promo period was pretty good, but not great. And I think the state of the U.S. consumer, the U.S. is our biggest market, followed by China, the state of the U.S. market, the consumer is kind of still -- we're still cautious on the consumer. I think they've kind of held us through this period following post-COVID, but I would say it's a wait-and-see game right now with how the kind of Black Friday through the Christmas buying period, how that performs. And we just don't know. We're optimistic, but we don't know.

Yes. That makes sense. So how much visibility do you feel like you have into the December quarter at this point?

We have really good visibility on revenue, on sell-in. And everyone here cares about sell-in. I don't. I care about sell-out. That's to me all that matters because that's just timing. So we have really good visibility. We know what we're going to ship. We know what orders are scheduled. We know what -- there's some last-minute orders or cancellations that always happen. But for the most part, we know exactly what we're going to sell in, what's on order. We tried to move things from the air to the boat, and so those get scheduled way in advance. The promotions are planned with Amazon and Best Buy, the retailers around the world. Those are -- the plans are in place. But as far as the sell-out, we don't know how the consumer shows up this year. So we're optimistic but cautious.

Yes. And are retailers, are you finding that they're being more careful channel inventory still? Or what are you seeing there?

They are. Some like Amazon have really pulled back over the last few years on channel -- on in-stock. Amazon has kind of taken a little bit of a notch up, maybe leaning in a little bit. But generally, sort of our philosophy as a company, I've been with the company now for, I guess, about 3 quarters, we've really tried to bring down, lean out channel inventory, lean out on-hand inventory as kind of more of an ethos of how do we improve return invested capital as kind of our true north of a financial metric.

Yes. Makes sense. And then in terms of discounting, obviously, it's the holiday quarter, there's a little more discounting on the consumer side. So how should we think about that relative to past December quarters?

Well, a year ago, I wasn't here. But a year ago, it was a quarter that we discounted, I would say the percent of items that were purchased over-indexed to things that were on sale or discounted. So while the promotional planning was set, the items that sold through were the ones that were promoted, and the ones that were at kind of full retail price or had less promotions didn't sell as much. And that's not a good mix because that mix shifts toward lower-margin items. It's not surprising that with this environment and this economy that people are looking more for value. So we have tried to, this year, dial back the promotions, maybe not discount so much or have -- kind of discount fewer quantity of items with -- to try to drive a little higher margins. We'll see. Again, we don't know until the dust settles where it all ends.

Exactly. Okay. Makes a lot of sense. So when you think about fiscal '24 guidance, what are some of the factors that will put you above or below the guide? I mean you talk about channel inventory, how the consumer is going to show up. Like how would you stack rank those factors?

Yes. I think overall, Q3 is going to be whatever Q3 is going to be based on what we sell out. The real test is going to be what is left in the channel post holiday. And you always have too much of some, not enough of the other. But the way we think about channel inventory is forward weeks on hand. This is kind of like -- I think of this as like the way a good operations team runs a company. You don't look in the rearview mirror. You look in the forward -- look forward and say, what is the demand signal like next quarter? And I want to have a certain number of weeks on hand based on the future demand. And it's a science. It's very complicated because each region is different. But generally, we're going to try to pull down channel inventory in Q4 based on the fact that Q4 is our trough quarter. It's 22% of the year from a sell-out standpoint. So we want to end the December quarter. And hopefully, channel inventories are low enough that there's just a little bit of fine-tuning, but our plan would be to have a further reduction in that -- in the March quarter based on weeks on hand. And then it will grow a little bit because, generally, Q1 goes up from Q4, so you'll bring up channel inventory a little bit and so on and so forth. So it's really active channel inventory management and being very intentional on what the targets are by distributor, by region, by product line.

Got it. That's super helpful. And maybe sticking on the September quarter. So gross margins of 42% came in very strong, materially ahead of expectations. And then you guided margins in the second half of 38% to 39%. So can you stack rank some of the tailwinds this past quarter? And then how we should think about the trajectory through the rest of the year?

Yes. I mean this is a great business. Even though we see revenue declines, we still are having really good, really strong gross margins, really strong operating margins. The 42% exceeded expectations in Q2. There's a couple of one-timers. As we mentioned, we brought down channel inventory, brought down on-hand inventory. And when you bring those inventory levels down, it tends to release reserves, good things tend to happen. And when you have too much inventory, bad things tend to happen. This is kind of a -- it's hard to draw an exact correlation, but so there were some onetime benefits by bringing down channel inventory, bringing down on-hand inventory. We can get that more detailed if you want to later. And so that -- going into Q3 into our December quarter, that's a little bit of a headwind on a comparable basis. However, Q3 is really good because it's our biggest quarter. And so you absorb more of the fixed cost, so you have basically margin expansion just based on more revenue. Now that's offset a little bit because of the mix shift. So we're -- enterprise is about 1/3 of our business. Consumer is about 2/3. But in the Christmas season and the December quarter, that tends to amplify the consumer piece and you're discounting running promotions for Black Friday and whatnot. And so we tend to see a little bit of a margin decline into Q3. And then Q4 has a little similar profile. You have less overhead being absorbed. It's our trough quarter, and there's less promotion. So the B2B helps more. It's more -- it will be a bigger share, so that will help. But generally, though, we're -- we see that 38%, 39% approximately in kind of both quarters. But I think that's still a good base to build from and grow from there.

Great. Super helpful color. Maybe to zoom out a little bit, if we think about your longer-term growth trajectory. During the March Analyst Day, you reiterated expectations for 8% to 10% longer-term revenue growth. And so as we think about your different end markets, C&P, gaming, VC, what segments are you most excited about? And do you think they're going to be the primary drivers of passing to growth?

I think long term, from a TAM standpoint, video -- the B2B side, the enterprise side has the biggest untapped TAM. And that's basically based on the video conference business and headset to a certain degree, but the video business is like 10% to 15% penetrated. Zoom and Teams have sold the licenses in. The enterprise owns the licenses that they need, but you're seeing the enterprise really is not really buying in full force. It's still a good business. We're still doing $100-plus million a quarter in video sales, but it's not at the level that it can be, at the growth rates that it should be based on that huge TAM that we're selling into. Now the question is kind of, what are the catalysts to drive that TAM -- the sell-in growth? It's really kind of clarity on return to office. There's so many people and so many companies are unsure. Is the hybrid here to stay? Are they going to be working in the office 2, 3, 4 days a week, full time? There's a lot of discussion around their corporate footprint. And do I shut offices down? Do I consolidate? Do I restructure certain floors? I think once there's clarity on the office footprint, then I believe every conference room eventually is going to have video. I mean it's just like in the days before there were conference phones, you had a conference room that people went to meet in and there was no phone. And then it would then -- pretty soon, Cisco and Polycom, every room had those iconic star phones in every single conference room. That same trend is going to happen here, where every room will have video eventually. But right now, you're just -- you're not seeing that deployment. You're seeing the licenses are being purchased by the companies with Microsoft and Zoom primarily, but they're not yet really deploying the hardware. And so I think that will come. Today, I think partially, it's probably interest rates and economies, and CFOs are nervous right now. And they're spending on security but not on kind of more discretionary IT, and I think we're kind of in some of that discretionary IT spend.

When do you think VC can get back to growth? I mean, I know it's hard to predict. But is this a few quarters? Is this next quarter -- I mean, I guess, how do you think about it?

Yes. I think there are some encouraging signs in the U.S. on inflation this week or last week, I can't remember when the report came out. So that was an encouraging sign that I -- but it's really hard to predict kind of when that inflection point will be. We've kind of been roughly at kind of a -- like sort of a level basis the last 3 quarters from a revenue standpoint. We have a couple of new products that came out that could provide some tailwinds and some growth, where one is being certified, one is already certified, but it's -- one is a brand-new category. It's called Sight. It sits in the middle of the table. So if you have a large conference room, it will render with cameras the people all around the room on the screen with equal prominence in a Zoom or a Teams screen, which is really a game changer. We'll have to demo that at some point for the team. But it's a really, really cool, new technology. And it's an add-on to the room. So it increases the ASP per room, so that should help. But return to growth, it's hard to say. It's probably still at least a few quarters out.

Yes. Maybe then the last one on VC before we move on. You talk about 10% to 15% penetration. I think there's a debate in the market of what that penetration number is. And so where do you think you may differ versus some of those other market expectations?

Yes. I mean it's hard to say. This is when -- the data out there is all over the map. The last one, I think, it was Synergy, was -- or maybe it was Frost & Sullivan, it was like 40 million conference rooms around the world and some order of magnitude more if you think about offices and classrooms and those things. But just the core TAM in this report was around 40 million, I believe. That number, maybe it comes down because the offices are shut down. But it's -- no matter how you cut it, the penetration rate of video is still very, very low. Whether it's 20 million, 40 million, 80 million, you can -- whatever number you want to use, it's still -- we're in the early, early days of the video deployment in the enterprise.

Makes sense. Really interesting opportunity to watch moving forward. And maybe to move on to the CMP business or the peripherals business. There is clearly a pull forward of some of that demand during COVID just due to hybrid work and work from home. Now we're coming up on 3 to 4 years after that cycle. And so which areas do you think are most ripe for replacement demand? And where could you start seeing that come through?

Yes. I think what's really great about this, we call it the PWS business or the personal workplace solutions, is pre-COVID, people had kind of one kit. They had their laptop and they had their office setup with a screen, a webcam, a keyboard, a mouse. And they would go to the office, they'd work and they come home. They'd sit on the couch and open their laptop and do e-mail in the evening. The pandemic hit. And pretty soon, they were not going in the office. Maybe they went to the office and brought their monitor and their keyboard and mouse home with them. Or maybe not, and maybe they bought like whatever they could find just to work from the kitchen table or create a home office. Now that's kind of becoming part of the fabric of how we work. I mean people are now -- myself included, I have a dedicated place at home that I work, I have an office. And now I've got multiple mice and keyboards. I actually -- I mean I work for the company. So I've got one in my briefcase. I travel with two. But now you're seeing, I think, people have two setups. And so what's happened in that category is the TAM has radically expanded because of COVID. Now certainly, we had this just incredible growth during COVID, and it's come off significantly off the highs. But where the exit point off of COVID, it's still way higher than where it was pre-COVID. So I think this is kind of permanent TAM expansion, and that's great for us. Now to your question on replacement cycle, we're always coming out with brand-new products. Now our strategy is kind of defend the low end and fight to the death on the low end so that we can keep competition out of the category that we generally are the category captain in and then innovate mid- to high end. And this has been kind of a long-term Logitech strategy, and it works really well because we make most of our money in the mid- to high end, and the brand just has such great brand value. People revere it, they love our products, and they are incredible, the engineering, the design. So you can go into the store online and buy a mouse for $10, $20 or you can spend $200 on the MX Master, and it is an incredible piece of technology. And so the whole idea is try to upsell them. The replacement cycle, a lot of times, is not tied to it doesn't work anymore. These things last for a long time. A lot of it's tied to, "I want the next best thing. I want a more comfortable one. I want an ergonomic keyboard. I want an ergonomic mouse." And so a lot of it's just tied to feature updates. And as professionals, I've got kids that are just out of college, one's still in college, and they'll start off with the lower end. And throughout their career journey, they'll be upgrading to those higher-end items as they can afford them. And so I think they're -- I'm -- we've got a great portfolio. And the upsell cycle, I think, is a natural part of our customer base wanting to kind of go to premiumization over time.

Makes sense. Moving to gaming, another area where you have great brand value, high ASP products. How do you think about that growth algorithm moving forward, whether it's the inorganic impact, secular growth in the market expansion to higher ASP areas? And can that business structurally grow over 8% to 10% longer term?

Yes. I mean 8% to 10% is -- over time, is probably a pretty tall order for that category to grow like over 5 or 10 years. You've seen in that category periods of hyper growth when Fortnite came out. It was just -- everyone was buying gaming headsets. And then when COVID hit, it was like everyone was gaming nonstop. That category has had significant growth based on more women entering the market in gaming. Traditionally, when I was a kid and I was 13, was a gamer. My sister has never wanted a game. Now my daughter -- maybe not anymore, but when she was younger, she was. So you're seeing it being more gender diverse. You're also seeing people game later in life. Like my oldest son is 21. He still games with his friends. And so I think what you're seeing is people are gaming later into life, and it's more gender diverse. That's increasing the TAM on gaming. Now could it grow at 8% to 10% for periods of time? Yes, and it has. Long term, I think that's going to be -- that it seems like a tall order without kind of additional categories. Now we look at gaming, and we break it down into kind of 3 or 4 different categories. We will say gamers and creators more broadly. Under that category, the kind of primary thing you all know us for is PC gaming. We're top market share in gaming mice. We have -- we just launched the next kind of killer mouse that sells for about $200. I mean that's a big premium, and it's -- all the professional gamers use it. It's the best product. It's super cool. Gaming keyboards, webcams for streamers. We have software that allows the streamers to stream their -- them gaming to other people that want to watch them game, which is a really cool, new category. Another part is console gaming, and this is a very crowded market. You've got a lot of competitors that make console headsets for PlayStation, Xbox. That category tends to grow a lot when new titles come out. New releases come out, people then buy. Then we have a new product coming out in that category probably early next year, calendar year, probably January, February time frame that I think will help us in that category differentiate ourselves from all the other players. And then simulation is a really cool category. We're the market leader in steering wheels. So people that are fans of Formula One I know we're in Europe, lot of Formula One fans here, I'm sure, we have, I think, it's the best Formula One steering wheel that will work with Xbox or PlayStation. And it's just -- it's a $1,000 ASP. Really good margin, and it's probably the best product in the market, including things like flight simulators and other ones. So there's a diverse set of categories and products. I think you'll see periods where you've got really strong growth like we've seen and periods where it's more flattish. Right now with where the consumer is, this business has kind of been down a little bit year-over-year. So we're not yet seeing that inflection point where it's growing again. But this is, again, our big quarter. So we'll see.

Yes. Great. I mean, so we talked about your 3 main segments. I'd be remiss if I didn't ask you about AI. Obviously, it's a hot topic of conversation. You actually have said that Logitech is the interface between human and machine. And so how do you think Logitech's business changes as AI starts to penetrate the consumer and enterprise markets? And what areas are you investing in today?

We're investing a lot in kind of -- there's many different areas that -- so we've been using AI for a couple of years now as it relates to video processing and audio processing. We have a brand-new headset coming out -- or it was just released, the Focus 2 and it's -- or Zone 2 and it's a killer headset. It does not only have models that get updated every day with keyboard typing and background noise of sirens or dogs barking or kids yelling in the house where you're working. It will filter that out and render on the far side just your audio. So it's not distracting. It's really smooth. I think we're the only ones in the market now that offer this. We run that same audio processing on the far end so the voice that we're talking to is rendered more clearly. And that is a killer new app that is just -- so -- and that -- those are all AI models that it learns like this is not a human voice, let's cancel that signal out when you process it both listening and pushing it out. We did the same thing with our video -- with video -- all of our video gear. So if you're looking at and you're running our Rally Bar with Sight in the conference room, we're constantly updating the models to say that is a human face, zoom in on that person. That person is talking, show them on the screen, how do you divide them and kind of go between shots like -- almost like a movie production where you're basically taking different faces based on who's talking in a conversation. And so the really cool thing is like Tesla, that technology, when you buy that, it gets better every day that you use it as opposed to like the technology gets old and tired. These AI models keep getting updated, and it makes the tech better and better every day and every year. On the emerging side of AI, of course, we're using it internally for coding. We have more software developers than we do hardware engineers, And they use things like CoPilot, which is great. And our teams are using things like ChatGPT like everyone else is for various functions. As you think about like how could our technology partner or work with AI, I'm not going to kind of disclose the areas that we're working on because they're super confidential. But you could just imagine that we are using keyboards and mice and contextual keyboards with a recent acquisition to interface with the computer. There's other ways to do that, too, that some are obvious, some are not that we intend to come out with new products. So we've got -- all of our teams are looking at how do we take advantage of this emerging technology that will, I think, radically transform the communications landscape and the interface to the machine as we say.

Yes. I mean it's an exciting time, and you're really well positioned to benefit from all that. It's also exciting because you just hired a new CEO, Hanneke Faber. So what were some of the factors that drove Logitech to select her? What do you think her strengths are? Maybe what are some areas she'll ramp on over time?

Yes, Hanneke Faber, She's awesome. She's really just a force of nature. She's a real global business leader. And so if you think about who Logitech is, we're a revered brand. People love our brand. We've got #1 market share and roughly 11 of our 15 key categories, so top market share. We're a company that really understands retail and the consumer to a great degree. We're enterprise. We sell to the enterprise. We're truly global. And Hanneke's career is truly that. She spent a decade plus at P&G. Understands brands, understands portfolio management, understands how to communicate with the consumer, spent time building out an e-commerce platform, knows how to sell online, has sold B2B, understands that relationship and at Unilever, ran a $12 billion or $13 billion business and knows how to scale. And we have ambitions to grow and become bigger and bigger and better. And so I think she'll hit the ground running. She's incredibly smart and a great communicator. I can't wait to have her up here because I think she's a more eloquent communicator than I am, and I think she'll be a great face of the company.

Yes, absolutely. We can -- we're very excited to meet her. Maybe to pivot, you spoke about B2B earlier and some of the investments that you've made there and how that's kind of bearing fruit. So how far along are you in that transition? What are some of the changes that you've made? And are there any examples of customer wins on the back of that?

Yes. I mean we're -- we -- I'd say, in the Fortune 500, probably all 500 have our products. I mean almost every company does because we're so ubiquitous in the categories that we compete in. I would say that we have a lot of room to improve on B2B. I think we're good, we're not great. We've invested a lot of money. We've built a big team globally, and we've done some restructuring of that team over time. But we've hired a couple of new leaders recently, and I think we're starting to really see that flywheel start to move. And I think it's -- this is like traditional old-school selling. At salesforce.com, it's what's the TAM, who's the pipeline, where are the leads, how do you do lead conversion, funnel management. I think right now, it's -- there's more of a market issue in B2B than it is sales execution. I think our sales execution is getting better. And I think that as we -- I think success will drive more success. But I think that team, we've added PWS to their arsenal as I mentioned, and so that has been bearing fruit, and we've seen the results there. The video numbers are not yet showing, I think, the effort of the team. Europe has probably done a little bit better worldwide as of late. Asia is pretty far behind. Some countries -- Australia is pretty good. Japan is okay. China is really, really early in the corporate video market. But I think the B2B team is really good. There's still a lot of room to improve.

Yes, definitely exciting area. You -- maybe to talk about OpEx a little bit. So you've pulled back on sales and marketing. And more broadly, think about non-GAAP OpEx at or below 25% of revenue. Moving -- obviously, we're in a more challenging part of the market. We are entering a recovery, but should -- in fiscal '25, if things rebound more strongly, how do you think about holding the line on OpEx or maybe moving above that 25% of revenue?

Yes, I don't think we want to go above 25%. I think we're in -- there's -- I mean every person or company wants more OpEx. They all want more headcount. Let's -- that's just the nature of work. But I think that we've got more than enough OpEx to go around. Now we're focusing on kind of 2 strategic areas, and that's -- this B2B selling and engineering, both hardware and software engineering. Those to me are where the most value is in spend. So I want to protect those two. And we want to -- and we've done things in moving from high-cost locations to low-cost locations. We built a great shared service center in Ireland. We've been hiring a lot there. And as people attrit from high-cost locations, moving those to Ireland. We've got a great business center in Taiwan. And we've got a brand-new office in Silicon Valley that is not that full and probably won't be that full because we don't really want to hire a lot of people there. As far as our ratio goes, our business model, it's really a great model. I mean we talk about 39% to 44% gross margins, call it 40% gross margins plus, keeping OpEx below 25% would generate a 15% or higher operating margin. And I think there's no -- I don't see a reason why we would need to take up OpEx above 25%. You could argue you could go below, and there's room to, but we're investing for the future. We're more focused on that top line growth, how do we drive revenue growth. I think it's by investing in technology and investing in sales and marketing, and I think we'll try to keep that number at or below 25%. Now could it go above it a little bit? Sure. But generally, the model is to constrain it to 25% of the annual revenue, right? In Q3, for example, it will be below because it's a peak revenue quarter. And in Q4, it will be above that 25% because it's a trough revenue quarter. But overall, staying in that at or below 25% is the right business model.

Yes, makes sense. You have a really strong financial model. You also have a really strong balance sheet, over $1 billion of net and gross cash. In terms of capital allocation, you've talked about your priorities being reinvestment in the business, M&A and then kind of a balanced approach between buybacks and dividends. So how do you think about that moving forward? Would you agree? And then how -- what's your propensity to do a more transformational deal? And what are some of the things you'd be looking for?

Yes. I mean so first of all, we'll protect the dividend. We pay a dividend. We increase it every year, and that's kind of like that's just table stakes, and we're not going to come off of that. And then the priority is M&A and then what's left, we buy back shares. We just -- the Board just approved and shareholders approved an additional $1 billion -- or a new $1 billion line to repurchase shares, and we're active in the market every day buying back stock. And so on M&A, historically, we've done more kind of tuck-in acquisitions. We recently did one called Loupedeck, a company in Finland, really great technology. This is a product already on our road map that we were working on. We bought them, and it just accelerates our road map by a year. And it's a really cool, new category, contextual keyboard, right, just completely square in our strategy. Now something transformative. I think not in the short term. First of all, Hanneke needs to get up to speed on the business and the strategy. And generally, a big M&A deal is kind of a bet-your-job type thing for a CEO. So I would expect that would be a ways off, probably not in the near term. Is it possible? It's possible. But I would say right now, we're more focused on kind of tuck-in acquisitions that fit our portfolio and fit kind of either time to market, new categories, new products, new verticals, but nothing transformative on the horizon.

Okay. Makes sense. So nothing in the near term, but maybe potentially longer term if something interesting comes your way.

Absolutely.

Okay. And then with so much net in gross cash, would you think about increasing dividend growth over time?

I think we've been pretty consistent with our dividend growth. I would just -- I think our goal is just to -- excess cash to buy back stock. We've been increasing our dividend kind of on a really good track. It's probably doubled over the last 3 or 4 or 5 years. So we have a good track record in growing the dividend. I don't think we'll come off that. I think we'll primarily focus on buybacks.

Makes sense. As you -- maybe you can wrap, we have a few minutes left. You spoke about AI as an emerging opportunity. What other adjacent markets do you think are compelling or ripe for disruption for Logitech? Are there any opportunities, whether it's software, services, recurring revenue as well over the next 3 to 5 years?

Well, I think services, for sure. I think that's a business that we are under-indexed in. Our customers are telling us we want service. We're willing to pay for it. And the reason why is because the video gear can be complicated. Now it's way simpler than it ever was. I mean for the most part, you or I could set one of these things up. They're not that difficult. But they tend to not want -- the IT departments don't want the volume of calls for the help desk. So I think that's one that we -- it's a very, very small business today. And I think that we can build that into a bigger business with really good margins and good growth. So we are focused on that piece. The other one is mobile. I think mobile is just such a emerging category for us. We've done a really good job building out the tablet business. But there's a lot more, I think, we can do on the mobile side. Again, an emerging trend. People are now moving more towards mobile work, not just office work. And so it's another kind of longer-term trend that I think that we can capitalize on.

Yes, makes sense. And then maybe to take a step -- so global supply chain disruptions have faced every company in our coverage. And so how has that impacted how you think about your manufacturing strategy moving forward in terms of outsourced versus in-house, geography? Just any color would be really helpful.

We've been trying -- I would say if you went back a few years ago, it was primarily China as the locus of our manufacturing. We -- I think the target is to get to kind of roughly 70% into this year, maybe next year, of made in China versus outside of China. We've been moving product manufacturing to Southeast Asia, to Mexico really to diversify. Now we love China. It's our second biggest market. We've got a phenomenal team there, and it's a market that's really important to us, but we do want to have kind of global diversification on the supply chain. It's just been a -- it's sort of a constant theme that you've heard.

Got it. That makes sense. Just maybe pivoting a little bit. But your 3 largest customers have increased fairly materially as a percent of revenue, roughly a little under 50% of total sales. So how do you think about balancing that customer concentration risk? Is that something that's concerning to you? Or...

Well, it's not really concerning because, I mean you think about our customer might be Amazon, but the real customer is the consumer. And how the consumer wants to buy, we want to show up where the consumer wants to buy, whether that's brick-and-mortar or retail, e-tail. The key thing for us is to be out there and available for the customer when they want to buy. And I think you're seeing globally, online has been really growing, but now you're seeing a bounce-back in retail. So it's been good to see both in Europe and the U.S., you've seen retail kind of come back a little bit. And that's -- I think it's healthy for the market overall. You're also seeing really an emergence of social. Like this November 11 holiday in China, we saw TikTok sales were up like 130%. I mean it was huge growth in a channel that we were like barely even participating in years ago is now emerging as a -- now, it's still tiny. It's still a very, very small number, but the growth rates are astounding.

Yes. Makes sense. I mean you talk about online. DTC, I know, has been also an investment area in the business. And so I guess how big is that today? How do you think about the strategy?

We don't disclose the number, but we call it D to X. Us selling to the end customer off our website is we're way underindexed. This is a big opportunity for us to have, to engage with our customers on our website or via apps, have that recurring relationship with a customer and sell to them directly. The margins are better. I think we can have a better relationship and get to know our customers yet even better. It's a small number today, but I think it could be a much more material number longer term. And Hanneke, it's an area that she can really help as well with her experience, but that's one that we are investing in, and we do see opportunity for significant growth there.

Makes sense. In the last 30 seconds, we always like to ask this question at the end. But what do you think is most underappreciated about the Logitech story?

I think overall, it's -- the U.S. investors don't appreciate us as much because we're a Swiss company by nature. I think that's where I think there's more awareness to be done. I know we were marketing -- doing some marketing with you in the East Coast, and I think getting a little bit more awareness from the U.S. investors would be good for us.

Makes sense. Well, you always have a great story to tell. Great business. Thank you so much for coming today.

Thank you, Sabrina. Awesome. Thank you.

It's a pleasure.

Great.