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

So let's get started. Happy day 4 of the TMT Conference. My name is Erik Woodring. I lead the hardware coverage here at Morgan Stanley. Before I introduce our speaker, let me just read my disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So I'm very pleased to be joined this morning by Matteo Anversa, CFO of Logitech, first timer at the conference, been to our Euro TMT conference. But Matteo joined the company in September of last year, came from the autos world, has a kind of auto tech background. And so thank you for joining us today.

Well, Erik, thank you so much. It's great to be here. And again, thanks for also joining us yesterday at our Investor Day.

No, of course. So again, big week for you guys. Had your 2025 Analyst Day yesterday. Kind of honored that we can do like a postmortem the day after. So thank you for that opportunity. And maybe to start at a very high level for those of you that weren't there and didn't get a chance to listen in, maybe let's just start very high level, kind of the messages that you -- the key messages that you and Hanneke kind of communicated yesterday, quantitative, qualitative, we'll go from there.

Absolutely. So a couple of things, I think, that I would like to resonate out of the discussion yesterday, number one is that we are a $4 billion to $4.5 billion company, and we are playing in spaces that are, in total, have an addressable market of about $24 billion. So really, we are super excited about the organic growth opportunity across all of our spaces that we play in. And when I look at the $24 billion, basically, around $10 billion is the Logitech for Business or the B2B space; $6.5 billion is gaming, which is for us is another great space where we play in, as you know; and the rest is the personal workspace, excluding the portion that goes into the enterprise channel. So number one, great opportunity to grow, particularly organically. We can talk more during the session. The second aspect is we are a technology company. So for us, really continued focus on driving innovation. Innovation is at the core, is the heart of what the company really does. And in addition to that, not only we have a great position today and market leadership in the spaces where we play in, but all the AI is a phenomenal tailwind for us. I hope it came across yesterday. And we see it fundamentally in a couple of ways. Edge AI, so the artificial intelligence that we put in our products, latest example in the video conferencing is Sight, this new AI-driven switch feature where, if you are not in the room, and I am still splitting my time half in Michigan with the family and half here in Silicon Valley, so I have several meetings with my team where I'm still stuck at home, and you're really feeling you're part of the team in the room. And that's all AI-driven. This is almost having like a producer inside the room. Then we have agentic AI, where we really use and develop AI agents that can help you in gaming as you are playing a game or competing with some of your gamers competitors or can help you create content; and then multi-modality. So AI for us is a huge, huge tailwind. We have an operational powerhouse, and we continue to drive execution around cost control, and we can talk more about how we are dealing with the news of the day, on tariff later, I'm sure it's going to come up. And overall, we're very proud of the plan that we outlined yesterday, which is an acceleration of our growth to 7% to 10% on the top line and an increase on the profitability compared to what the old plan was, to a 15% to 18% operating margin rate. And then we are a very disciplined, financially disciplined, company. We like to have a strong investment-grade balance sheet. And since we have a good $1.5 billion of cash in the balance sheet, that gives us the proper flexibility but, at the same time, allowed us yesterday to announce an accelerated share repurchase plan that we can talk more. So I think these are the top 3, 4 messages that hopefully resonated at the Investor Day yesterday.

No, that's great. And we'll get into each one of them. And kind of the way I'm going to work it is, chronologically, let's kind of start with now, work into fiscal '26 and then long term. So you reiterated your fiscal '25 guidance. It ends in 25 days. Just characterize first kind of the demand environment today and kind of if you could parse that between the consumer side and commercial and how that translates then into how you're thinking about '26.

So no big difference from what we discussed at the earnings call in January at the end of our third fiscal quarter. We continue to see strong demand on the consumer side. So if I look at our business group, that would be fundamentally gaming, which remains very strong and the personal workspace. On the enterprise side, I would say the waters are a little bit more choppy right now, fundamentally driven, we think, by some of the uncertainties that we are seeing in the market and the macroeconomic environment. But overall, when you take everything into -- you add everything together, no difference from what we said at the earnings call. So we are confirming our outlook of growth about 6% to 7% at constant currency for the year and our OI of between $755 million and $770 million. So really, things are progressing, I would say, as we outlined and we were expecting earlier in the quarter.

Okay. And then turning to fiscal '26, you guided to about 1% growth, revenue growth, at the midpoint. You also guided to $750 million of operating income. I know it was kind of a unique time for you guys to be able to guide, not necessarily a ton of visibility a year from now, but you talked about kind of the prudence that you tried to embed. So can you maybe talk to us about maybe how you approach the guide, some of the underlying factors that you contemplated or kind of embedded as you thought about that guide?

So the way we look at it is almost 2 different factors. One is what we can control, and then the external environment. So let me start with the first one. What we know is that -- if I can walk through the income statement line, right? So starting from the top line, we continue to see good demand, as I mentioned earlier. And actually, this pace even further accelerated during the current fiscal year. So that's a good tailwind as we enter 2026. We will continue to be extremely diligent on the promotional activities and pricing as we have done now for the past several quarters. We will continue to work on cost management and cost control on the supply chain side. You had the feeling yesterday, Sree presented an example of, what we call, the value engineering activities that we have always ongoing with our supply chain team that really means taking cost out of the bill of material. So all this will continue as well as the accelerated diversification of our manufacturing footprint, which will help us weather the storm of the tariffs that we will face in 2026. And then continued strong diligence on OpEx, right? And on OpEx, as you know, Erik, we are obviously prioritizing all the development, all the innovation. But at the same time, we are really maniacal on how we drive efficiency on the G&A. So this is what we control, and that's all factored in. Then we had to layer on top of it the reality that we are facing on the macroeconomic. And for us, it's a couple of things. It's the stick inflation and how this may impact the sentiment both on the consumer and on the enterprise side. Then we have the volatility of the exchange rate. And for us, primarily, it's how the U.S. dollar behaves compared to the euro. That's the primary driver. Then we have, obviously, the unpredictability of tariffs. So when you layer all this together, right, this is how we came up with our framework and outlook for 2026 of growth, 1% to 5% in constant currency year-over-year on the top line; and the $720 million to $780 million range on the bottom line, which is a little larger than what we would normally do, but it really factors in all the broad range of all these variables that I just mentioned that we had to factor in due to the macroeconomic conditions. So all in all, we are very pleased that, notwithstanding all these challenges that I just mentioned, we will still grow the business, and we will still grow it profitably, right? So when you look at the range on the OI, we're still talking about a 16% to 17% of operating margin rate, which is pretty much in the middle of the 15% to 18% range that we gave for the long term. And I think it's a testament to the resiliency of the business, of the model and of our teams that tend to thrive under turbulent times as we are facing today.

So you mentioned the unpredictability of tariffs. I think you are, maybe of all the companies that I cover, probably the most direct about how you're incorporating that into your guide. And so again, for the benefit of those who weren't there yesterday and couldn't listen in, just can you talk about how you are embedding that tariff impact into your fiscal '26 outlook?

Absolutely. So first of all, I think I have to give immense credit to our supply chain team, Sree and Prakash, on how all the work they have done now since 2018 in diversifying the supply chain that really puts us in an advantaged position today. If I go back in 2018, pretty much all of our products were produced in China. Today, we're much more diversified. We are in 5, 6 different countries. And this really allows us to weather the storm. Now in the outlook that we provided yesterday that I just mentioned right now, we factored in what we know as of yesterday morning, which is 20% of tariffs on the U.S. imports for the product coming from China and 25% on the U.S. imports from Mexico. And so on an unmitigated basis, right, this would translate on about, call it, a 200 basis point gross margin negative impact. Now obviously, we have all these actions, the diversification that I just mentioned, commercial actions that we are taking, that will help us mitigate a good chunk of this pressure. And that's why notwithstanding this assumption of the tariffs, we're still able to maintain the OI rate between 16% and 17%. But that's fundamentally the assumption, and we'll see what happens. We will have a quarterly earnings call, and we'll keep you appraised. And hopefully, if things get more clear, then we'll narrow the range as we progress through. But I think, ultimately, we think that the outlook that we provided, while I understand is wider than what maybe we would like under normal circumstances, is a prudent and understandable framework considering that we are more than 14 months out from the end of the next.

Yes, at the end of the year, right. One kind of end market I wanted to quickly ask on, before we spend some time on the long term, is China. Because China was challenged for a period of time. Last quarter, it was very strong for you guys. It's a very heavy gaming market. Just talk about the sustainability of what's happening in China with you guys. And maybe underlying that, what is kind of market versus Logitech-specific?

We are overall a big believer in China. China, particularly for the gaming market, is a huge market. So let me start with some data. You're right, the third quarter was very good. APAC grew double digit, and we don't break out China specifically, but China was the key contributor of the double-digit growth year-over-year of APAC in the third quarter. So I have to rewind a little bit the tape to about September, exactly when I joined, we decided to address some of the challenges that we faced in the China market by creating a China for China team, which basically, we redirected some of our engineering resources to focus specifically on China and focusing on launching products for China at China speed and with the intent not only to continue to grow our business in China, particularly on the personal workspace and gaming, but also then to take this innovation and then move them later to the other part of the world, right? And so it's a little early, I would say, to call victory. But the initial results that we had, particularly the one that you just mentioned in the third quarter, are positive. We are launching new products, particularly on some of the lower end of the market. And gaming remains a key, key space. To the latter part of your question, in the third quarter, we saw not only growth from Logitech, but fundamentally, the gaming business in China has also been growing very strongly. It's a form of entertainment, gaming, that is really taking a lot of footings in China. In a way, since the economy maybe is a bit bumpier than in the past, gaming is a relatively cheap form of entertainment. It is cheaper than going to the movie and to the restaurant. And more and more people are becoming gamers in China. And our products are exactly in the sweet spot of that.

Okay. Good. So let's shift to long-term commentary and dig into a handful of those moving pieces. And when I heard you guys yesterday, the message didn't deviate a ton in terms of what is driving this business. The one thing that I thought that was incremental was you kind of digging into Logitech for Business as an opportunity, not just for growth but for TAM expansion. Can you just kind of talk through the opportunities that you're seeing on the business side of your business and then where that TAM expansion kind of comes from the business side?

We are super thrilled about the opportunity in B2B, in Logitech for Business. A couple of reasons. First, let me start with where we are playing today, which is primarily in the areas of people like you and me that work in the office. And so not only -- if you look at the history, and I compare what Logitech for Business is today to what it used to be pre-COVID, the business almost doubled, right? So we are seeing a very nice tailwind. And it's all organic and the market didn't grow that fast either. So we continue to see more and more demand for our products. So that's a big positive. The market, if I look at the office space, is still severely untapped in a way because there are about 28 million conference rooms in the world and less than -- around 25% of these conference rooms are video-enabled. So that gives you already an indication on how much is the untapped opportunity for us. And this trend, particularly here in the United States, where several companies are calling employees back into the office. But it's still 3 days in the office, 2 days at home. That means that all your conference rooms need to be video-enabled in order to allow the people that are at home to participate in a productive way, as the example that I mentioned earlier at the beginning. So that, for us, is a huge opportunity. And the way we are going after it is really being simpler, smarter and more sustainable. So simpler, meaning the product needs to be simple to install, simple to use. And every time you get into a conference room, you don't need to have an IT person with you to get this thing activated. And it needs to be a product like ours that interfaces well with any of the key video conferencing system like Teams, Zoom or Google Meet. So that's one. Using the AI actually really allows our conferencing to be more specific around the people that talk, like the Sight example that I mentioned earlier. And then sustainability is something that our customers demand. And 3 of our products are actually using recycled material. And that's a big deal, particularly on the enterprise side. So that's where we are currently playing. Then yesterday, we indicated that about 1% to 2% of our growth will come from entering in new adjacencies for us, in the Logitech for Business area, which is health care, education and the public sector. These are 3 key areas for us, fundamentally, almost, I would say, largely untapped. We have a little bit of presence in health care and education already where our products have a proven relevance. But right now, we're very small. And that for us is a big opportunity because these are all large, growing, profitable markets. If I look at health care and education, for example, they are growing in the mid-teens CAGRs. And our products really fit very, very well. And so here, we have to do a little bit of investment in the next few years, fundamentally in expanding our sales force, which is more boots on the ground, modernizing some of the tools that we are using as we sell into these 3 channels. And then a bit of product development to adjust and adapt our products to these 3 verticals. But fundamentally, our products are already basically there, and we think we have a fantastic opportunity in these 3 spaces. So that's why we are so bullish around Logitech for Business. It's the combination of what we can do in the markets that we serve already today and the proven presence that we can even further accelerate in these 3 verticals.

Okay. Something that stood out to me, and we'll get into the quantitative side of this stuff as the CFO, but something that stood out to me on the long-term guide was video collab and gaming both growing 4% to 6% annually, excluding any of the market expansion. What was interesting is that VC has been in a bit of like a demand digestion period post-COVID. Gaming has been very strong for you guys. And it's maybe a two-part question. But one, what gets VC to accelerate from where it is today? And maybe how long do we think about that taking? Are we past demand digestion and expansion in that market?

So VC is basically what I mentioned earlier, primarily on the B2B side. How long will it take? Erik, the framework that we provided yesterday, and this not only applies to VC, it applies to the entire company, is 7% to 10%, right, which is higher than what the old framework was. We purposely stayed away from putting, I'm going to call it, an artificial time line on when we're going to see the 7% to 10%. But fundamentally, what I can tell you is, number one, our outlook factors all the steps that we have to take to get to the 7% to 10%, both organic and inorganic. And then all the investments, and there's not much, as I indicated earlier, but that are required to get us there, are all well underway. So while we stayed away to put in an artificial time line, everybody is marching towards that direction, and that's our goal. So that applies not only to VC but also to the rest of the business.

Okay. If we shift to PWS kind of two questions in one as well. There's clearly confidence, and we heard it this week from the OEMs about a PC refresh building, although their commentary is that's commercial-driven, not consumer-driven. I know you have exposure to each side. It's a little more over-indexed to the consumer. So my first question is kind of what does the PC refresh mean for your core keyboard, mice and combos business? And are attach rates changing again as we get past like the COVID refresh period or into the COVID refresh period?

I wish I had a formula in financial terms to give you. Unfortunately, I don't. So the only thing I can -- and this is going to sound a little wishy-washy, but the thing I can tell you is, generally, a wave of PC refresh is positive for us because you buy a new PC and then people tend to buy a new peripheral. But I don't have a specific correlation to give you. So being the prudent finance person, we did not bake any massive tailwind coming from that in our outlook. If the PC refresh, which we have been expecting now for quite some time, by the way, will happen, then it's going to be for sure a positive. But I don't have a discrete formula to give you.

Okay. No, fair. How about when we take that 7% to 10% long-term guide, kind of normalized long-term guide, if we were to kind of scenario-analyze, what gets you to the low end of that? What gets you to the high end of that? How do we think about the various situations or factors that could -- 10% is different than 7%. What gets me there versus 7%?

So let me break down the pieces. So the first block is 5% to 6% of the range, which is driven by two things: the market growth and market share gains. So our 3 business groups, so the gaming; the B2B, so VC and headsets; and the personal workspace, all play in markets that are poised to grow into the mid- to high single digits. So that is a normal tailwind that we will have and it's a positive tailwind. Then on top of that, we are expecting to gain 1 point of share in each of the business group every year. And we do this through a couple of things, relentless focus on innovation across all our product lines. As I said earlier, we are maniacal on OpEx. If there is one area that we always fund, it's innovation. Two is building an iconic brand, and Hanneke has been talking about it for quite some time, which is really all our teams are very end user-centric. We get the input from the end user. Think about gaming, right? We develop some of the products in partnership with some of the top gamers or Formula 1 drivers, right?

Like me last night.

Like you last night. I saw you. You couldn't get off the simulator. So that's in the DNA of the company. And then high-ROI marketing, as we have done in recent past, and then increasing the share of wallet in the geographies that we play in. Then we have 1% to 2% coming from the verticals that we just talked. And the rest is M&A. And we can talk more about M&A. So that's how we built the framework, and that's how I see -- how I look at the range. So things can vary one side to the other one on the different components, but that's how we are thinking about it.

Okay. And then touching on the long-term operating and gross margin, so 40%-plus gross margins, 15% to 18% operating margins, both kind of incrementally higher than the last guide. Has anything changed that gets you a little bit higher? Or is it just like, hey, you've been performing extremely well. You talked about cost downs and OpEx efficiency. That's how you get there.

I think it's the latter. So if I look at the -- let's start with 2025, right? The outlook that we reconfirmed yesterday would indicate the gross margin rate is going to close probably at the higher end of the 42% to 43% that we put out earlier in the year, as we said in the last earnings call. So we are starting with a natural good tailwind. And that's why we feel comfortable, thanks to all the actions that we talked about and the work that Sree and the team have been doing on value engineering, supply chain diversification, to say 40%-plus on gross margin and then on the OI rate, the continued focus on controlling OpEx. And that will not change.

Okay. You mentioned M&A. Let's go to M&A. Your comment, it's not necessarily materially different. It's tuck-ins. It's bolt-ons. It's about 1 to 2 points kind of growth. Where do you see these M&A opportunities? Is that adjacencies? Is that expanding kind of your core? And just high level, again, CFO, how would you characterize kind of the deal environment today?

Look, we are very active. As I think I answered your question yesterday, it's much easier to acquire a company than integrate it. So we are very, very diligent. The areas that we're looking at is fundamentally areas on work and play, which really fits our strategy. And we have a few overarching principles. So right now, we are not looking for a big transformational M&A action because we are very, very comfortable about the organic growth that we outlined yesterday. There will be tuck-in and bolt-ons in the spaces of work and play that really can strengthen and further strengthen our product and allow us to enter into adjacent ones. And then being the finance person, it is important that the acquired targets are highly synergistic, so they can quickly benefit from our operational strength, our global go-to-market, our brand. So these are the parameters that we are looking at, but we are very, very active. And stay tuned.

Good. Cool. Something we didn't necessarily talk a ton about yesterday that I think is fascinating, and you see it in the product demos that we did yesterday, was a lot of software and services kind of embedded in the hardware. You talked about agentic AI. We saw kind of the gaming example yesterday. I know you get paid for that, kind of by charging a premium on your products relative to some of your peers that compete on cost. Is there an opportunity at all to kind of directly monetize software and services at all? I know you do some services on the business side, but just talk about that opportunity as you see it.

So to me, the big opportunity in service is on the B2B side. We have seen service growing nicely in the last -- at least since I've been in the company, in the last couple of quarters, a big focus for us. Now we are starting from a very small base, but that's a big, big opportunity that is part of the strategy that we are outlining and the growth that we are expecting on the B2B side that we talked yesterday.

Okay. Let's move to capital allocation. So a company that has a lot of cash, no debt, good cash conversion, good cash generation. Yesterday, you talked about kind of the 4 pillars of your capital allocation strategy. How do we think about the priorities that you guys have? And then maybe we'll get into some of the specifics there. But let's talk about priorities and how you think it's changing really at all.

So number one, invest in the organic growth of the business. Our return on investment capital is greater than 25%. That's really money very well spent, as we have seen in the past. Number two is continue to increase the dividend. This is something that is important for us and it is important for our shareowners. Number three is the M&A fit within the parameters that I mentioned earlier, and then the share repurchase. And yesterday, we outlined a further acceleration on our share repurchase program. So we pointed out to the audience that we are on track to complete the $1 billion share repurchase program that we announced in the summer of 2023, a year ahead of time. This goes back to -- thanks fundamentally to the strong cash flow generation of the company. And we announced yesterday that we are targeting a further acceleration of the share buyback to $2 billion in 3 years, which is really the result of our confidence in the outlook, both the growth, accelerated growth, and accelerated profitability that we outlined yesterday during Investor Day. So that's the capital allocation strategy, as simple as that.

Great. So we have just about a minute. What I'd love to do is give you the final word. And we talked about a lot, fiscal '25 ending strong; 2026, controlling what you can control amidst market volatility; kind of a stronger long-term outlook, cash flow generative, can return that capital to shareholders. I'm probably just giving you the answer that you're going to give me, but I'd love to just -- what makes you so excited about the future? Obviously, you haven't been there at Logitech for more than a year, but you can hear it. It's palpable in your voice. What's excited? And then maybe what's underappreciated from that perspective?

Sure. I see that -- the message is yesterday, I'm happy about it.

I was listening.

Great. So two things. First of all, I'm super thrilled of being part of the next chapter of Logitech. It has been great. I love the culture. You hopefully came across yesterday, we are very energetic and we like the challenges, but we are also very humble, a hungry and humble culture, and I love that. I would say what excites me is the story, which is very simple. We are playing in key markets that are growing fast. We are in the sweet spot. We have a $24 billion service addressable market, and we are $4.5 billion today, a huge opportunity. We are very diligent on how we deploy the cash, extremely diligent on the balance sheet. And we are an operational powerhouse, and that's what allows us to thrive even in such a different and difficult environment. I think these are the top 3, 4 messages that really excite me about the company.

Awesome. We're out of time. Thank you so much, Matteo.

Thank you, Erik. It's great.

Thank you so much.