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

Good morning, everyone. I'm Samik Chatterjee, and I cover the hardware and networking companies at JPMorgan. For the next fireside chat, I have the pleasure of hosting the Logitech's CEO, Hanneke Faber. Hanneke, welcome to the conference, and thank you for taking the time to attend.

I'll start you off with a few questions and just given that you reported earnings pretty recently, I'll start off with questions on the FY '25 outlook. You had Q4 results in which you essentially had 5% constant currency growth, you provided an outlook for fiscal '25 of flat to 2%. Can you just walk us through what sort of informs that outlook and some of the underlying drivers there?

Yes, sure. And thanks for having me, Samik. Sorry for not recognizing you just -- we just met for the first time. Yes. So we were happy with our fourth quarter back to growth, 5% top line growth in the fourth quarter of our fiscal. We have this odd fiscal that ends on March 31. And we've guided low single digits for the fiscal year ahead. And as you said, we did just plus 5%, why only low single digits. There's definitely reasons for optimism that we see. Demand seems to be stabilizing. Some of our customers are actually asking for more inventory because they're seeing some out of stocks at places like Best Buy and Walmart. And there's a little bit of a PC refresh underway as well, we believe. So those are reasons for optimism, but there's also reasons for caution. Inflation, as we all know, remains stickier than we all thought. The demand recovery is a bit uneven. And then, of course, there's all the geopolitical things that do affect us because we're a company that's present in more than 100 countries. So we're a little careful. We don't want to get too far ahead of ourselves. But of course, should the macros be better, we're ready to take advantage of that.

Okay. Got it. You've also talked about the company being mid-single organic growth in a normal macro, but the fiscal '25 guide that you provided does have you exiting at a more modest growth rate than that. It seems like you're saying second half of fiscal '25 will be below sort of a normal macro-led growth. What's driving that? Because I would have thought you would say, I don't know if this next 6 months look tough, but the next 6 months after that looks more like a normal macro.

Yes. So we are actually -- and we've talked about this in our earnings report. We're -- we are seeing that the first half of our current fiscal will actually look stronger in terms of revenue growth in the second half. That's not because the demand will be stronger. We actually believe the demand will be low single digits throughout the year. But as I said before, our channel inventory is running a little low. We've been decreasing it for 2 years, which is great. We're at really healthy levels now, but maybe even a little bit too thin. And some of our customers are asking for a bit more channel inventory. So we'll be replenishing some of that with a lot of discipline in the first half. And that's why we believe sales in will be ahead of sales out in the first half, and that will reverse itself in the second half of our fiscal year.

I mean -- maybe I'll just extend that question. If you had to project fiscal '26, would you think of it as a normal macro?

I certainly would hope so. Again, we are seeing things stabilize. And I believe that this company should be able to do mid-single digits top line in a normal macro, which hopefully will happen from fiscal '26.

Okay. But we're asking all of our companies to do as well as give us their thinking of how the world looks 12 months from now in terms of demand. And you shared some of that you think -- sort of your thinking about puts and takes, the positives and negatives, but maybe break that down for me a bit in terms of the geographies. How do you think about Americas versus Europe versus APAC? And then maybe a bit more on the product side as well, which products do you think sort of or early in participating in the recovery versus a little bit more later for some of the others?

Yes. I think for our business, it's more about the product categories than necessarily to geographies where or the differences are not so stark. On the product categories, we're seeing gaming really coming back and really looking quite positive already. So we expect that to continue. And as a company, we play -- where we play is work and play. So play is gaming. Gaming is looking pretty strong. On the work side, I think the markets are still a bit -- well, I know the markets are still a bit subdued, and that's true in both personal work place and in our B2B video collaboration space, where we're gaining share. So we're executing very well, but in markets that are more subdued, and we expect that to continue for a little while. However, it's a matter of when that will start growing, not if, certainly, in the video collaboration space, the levels of penetration are still so low. And everyone needs to collaborate. I don't know. There's no meetings anymore than anyone attends where there's not a remote participant. So that will come back. It's just not back yet.

Okay. Maybe just to follow up on that. So when you think about like pointing devices, for example, do you think of them as more sort of tied to play where you have gaming main drivers or do you think of them as more enterprise?

Both. So we have a big mice and keyboard business end point, which was fancy name is pointing devices. But big mice and keyboard business, both on the work side and on the play side. And again, on the play side, we're seeing the markets coming back a little faster than on the work side. But if I look at that business, which is what Logitech is known for historically, again, still a ton of opportunity. We call that personal workspace. If you look at the numbers, I found it quite shocking only -- first of all, less than 50% of people use a mouse or a keyboard, which is just ergonomically not very sound when you [ shouldn't ] do on your laptop. Second, of those who use it the average spend on the desk either at work or at home is $26. I mean that's less than like a Nike T-shirt, and you're using that 8 hours a day. So that's kind of crazy. So we have big opportunities to drive penetration of mice and keyboards, but also to get the ASPs up to products that are actually great for you to use every day, all day.

Moving to a more question about a bit more longer term, I guess, you took over the CEO role recently. Since then, you outlined the strategy and one of the drive pillars that you've talked about is investing in building the brand. Curious maybe if you can outline how do you think about sort of building brand, given your background on the consumer space, how do you think about what kind of investments you need to do to build the brand further?

Yes, absolutely. No. And yes, I -- most of my background is with P&G and with Unilever, and I feel so fortunate to work on the Logitech brand. There's not many $4 billion brands in the world. So this is a big brand already. It's a brand with great awareness, more than 90% awareness in all of our big markets around the world. So people really know it, which is kind of fun. When you're in a taxi in Shanghai, the taxi driver also knows what you're working on, which is super fun. And it's a brand that's known for a few things. So it's known for being reliable, being good quality, being affordable. So those are all good things. It's not yet what I would call really an iconic brand, a brand that's truly loved that you cannot live without. And that won't happen overnight, but it's certainly something that we're going to be working on. And I see a few things that iconic brands do and that we can do. First of all is being super close on your mission and your benefit. So we've positioned that as extending human potential. That's what we do. And extending is a pun on the mouse because the mouse built this house. So you extend your arm. But we really extend human potential. We make you more productive. We make you perform better win that game. We help you connect better. And we do all of that in healthier, more sustainable, more equitable ways. So being super close on your mission is really important to build an iconic brand. Second, a continued focus on design and visual identity. We have a great design capability, more than 200 in-house designers. Just in the last quarter, we won more than 30 design awards. So design is really a core capability, and it's really important if you want to build an iconic brand. And then third, really to partners. You're are a brand as the company it keeps. So we're proud of working with all the big players in tech. So, we work with Google, with Microsoft, with Zoom and with Meta. And with Apple just launched the new combo touch keyboards for the new Apple iPads, two weeks ago. So we're very close to all the big players. I think we still have an opportunity to do an even better job on the right influencers, the right gaming teams, those kind of partners as well. We do it, but we can do it even better over time. And again, that's an important part of iconic brand building. And then finally, of course, there's investment into the brand. We're not going to go crazy. We've guided for OpEx that will remain at about 25% of sales. But within the OpEx, I would like to start shifting money to the [ ES ] away from the [ G&A ] by streamlining.

Got it. You've talked about the opportunity on the B2B side as well. Just maybe share more details around that in terms of how do you sort of size up the opportunity that you have on the B2B side? And particularly, what do you need in sort of S&M expenses to support that?

Yes. So we're really young in B2B, right? The business has doubled since 2019. It seemed that came before me really did a great job. We're happy that it's back to growth. So it grew 2% in the last quarter. So that's good, too, but there's still so much opportunity. Compared to some of the legacy players in B2B video collaboration, we're like teenagers. So there's a lot of capabilities yet to be built. But I would say what I found is a number of really strong things. First of all, great product at a great price. Our Rally Bars are MeetUp 2 just offer a really outstanding quality, easy to use for IT departments product at a really competitive price. So that's important, and that's there. Second, the partnerships that I mentioned is very important that your software works with all the big players, especially in video collaboration, obviously, with Microsoft and also with Zoom, we have fantastic partnerships there. And third, we're a Swiss company. So our standards of data privacy and security, again, in video collaboration, are at the very highest levels and that's important versus some of our Chinese competitors in this space. So those are all good things. Again, we have more capabilities to build in the go-to-market space just because we're younger. Sometimes we're a little hard to use. So making that easier for the big corporate customers is certainly something on our list to do. And then we have an opportunity to just drive penetration. Again, less than 20% of global conference rooms are videoconference enabled. That's really, really low. And that's talking about enterprise and corporations. If you look at education, if you look at retail, if you look at health care, so much more opportunity in this space. So I'm really excited about B2B. We're going to double down on it. And from a numbers point of view, it's accretive to our business. So both on the gross margin and on operating income.

I guess, first, just to follow up then on a couple of topics there. On the sales and marketing expenses that are required -- is it primarily in the channel? Or are there other areas that you need to invest?

No. First is our consumer business, it's actually -- you spend a little less on marketing, you spend a little more on overhead on people in the B2B channel. But compared to our historic or our legacy consumer business, you spend less on marketing and B2B. And we benefit from the spending that we do in the consumer channel on that brand and that product that people know.

Okay. And you mentioned it's accretive to both gross margin and operating margin. I mean I was going to ask you more about the competitive dynamics because it does seem like a different set of players to some extent on competing, but also the enterprise -- or B2B is known for sort of volume discounts. How does that impact the eventual gross margin that you're able to do right now?

Yes. Gross margins are very, very healthy. So we're playing with the channel dynamics, but they're very, very healthy. And it is a competitive space. But we're used to competition. If you look at gaming, obviously, a very different set of competitors, but also a highly competitive space. Here, it's a set of more legacy older competitors in B2B, and I think Logitech has done a nice job disrupting that a little bit.

Okay. Going back to the place where we started, which is talking about the inventory and that you've drawn down over the last couple of years. And -- now you need to put some more back, which ramps in the first half comes back down in the second half. Is that a more permanent change in terms of how investors should think about seasonality for the company? Or just more a dynamic of where we are in the cycle?

Yes. No, definitely, we'll continue to operate with discipline. And I don't think the actual -- seasonality of sellout changes, our third quarter, which is a holiday December quarter, will remain the biggest quarter in terms of sellout. But this year, you just will see a little bit of channel restocking to make sure we have what it takes to have perfect shelf presence, both in bricks and mortar and online.

Okay. Going back to the outlook, again, you've talked about a gross margin of 41% for the next fiscal year. I think fair to say everyone was surprised after the gross margins you've had for the last few quarters. What's driving that? What are you sort of thinking of in terms of headwinds after doing, I think, 43%, if I remember, in the last quarter. Is it mix? Is it promotional spend? What are you trying to budget for?

Yes. So indeed, our last quarter was really, really strong, 43.5% actually, so very strong. But if you go back to fiscal '23, our gross margins were actually only 38%. So for the fiscal, we were just over 41% in fiscal '24. So I think it's prudent for us to be guiding at 41%. There are some -- the big tailwind for next year will be a continued focus on costs and some of those costs are carrying over. So, it's a pretty good visibility of those. So we'll keep a strong focus on cost controls, but there are some headwinds as well, and I foresee those mainly in promotional spend. We need to remain competitive. The promotional environment has been quite benign in the years ahead. And certainly, in both retail and in B2B, we need to be sure that we're at the right price levels and priced right in the key promotional periods, whether it's 618 in China or the holidays in Europe and the U.S. So promotions may be a little bit of a headwind. And then when you look at mix, that can be a headwind or a tailwind. On the product side, if we grow faster in gaming, that's a bit of a headwind because the margins are a little lower than on the workspace and B2B side. And if we grow faster in China, that's again a little bit of a headwind versus the higher margins in the U.S. and Europe. So -- but depending on where those pan out, we'll see. But at 41% is appropriately challenging, I think, for the year ahead.

Okay. Good. I mean the way you characterize it is promotional spend, 618 in China, et cetera. Like when I take that as a -- and sort of take it forward and say, how does that impact your strategy? And how should we think about it? Is it more when we think about how do you balance revenue and margins, you're more inclined to pursue the revenue growth and give up a bit more on margin if required to drive that revenue growth. And probably the way for investors to think is there's more upside on revenue and maybe you're willing to sacrifice a bit of margin to get there?

Yes. I think we really have to walk and chew gum at the same time. So again, we've guided low single digits on revenue. If there's more to be had, we'll be the first to take advantage of it. But getting the business back to sustainable growth is an important thing for us to do in the next year. But at the same time, we've guided for really healthy gross margins at 41%, but also operating margins at 14% to 17%. So we have to operate with discipline to deliver the latter. And we're not going to prioritize 1 over the other. We need this business to grow revenue and deliver great margins.

Okay. Maybe dive down a bit more into the China piece that you highlighted, promotional spend in China. What are you hoping to achieve there? What's the competitive set there? I would imagine you're not running into the same competitors as the rest of the world. But what would you call sort of a success in terms of what market share you want to get to?