Logitech International S.A. ($LOGN)

Hey, everyone. Thank you for joining us today. For our last session, we have the CEO of Logitech, Hanneke Faber. Thank you, Hanneke, for joining us today. I appreciate your time.

With pleasure.

So maybe I wanted to start with a more open-ended question. You're entering your third year as the CEO. Maybe can I ask you to reflect back on your prior 2 years. Specifically, what has taken you the most surprised -- are taking you by the most surprised at the helm? And how is that kind of shaping your strategic vision going forward, particularly just given kind of the geopolitical environment, AI, et cetera?

Yes. That's a lot of questions in one. I would say, overall, my top line would be -- I feel proud of what the team has accomplished in the last 2 years. But I'm also feel a great sense of urgency about what we now need to do. So proud because when I came in 2.5 years ago, the business was declining. China was a really poor shape for us. Now when I look at the results we just delivered for our fiscal, we've had 8 quarters of growth. We have had fantastic earnings expansion operating income margins at 18.8%, well above our long-term model last year, great balance sheet. China is our star. So our execution has been very, very strong. So I'm proud of that, but at the same time, I feel a huge sense of urgency because AI is changing the way people work in play, and that provides fantastic opportunities for us going forward. So we will lean in on top line growth going forward while continuing to execute really well, having the cost discipline you know us for. But there's more room for growth at Logitech.

So maybe that's a good transition point because the next question I was going to ask you is about you exited or you -- on the last earnings call, you talked about upping the tempo on offense in fiscal '27. So maybe just talk to investors, why is this the right time? And just relative to the areas you outlined, should investors view this as a trade-off between top line growth and margins? Or is that an oversimplification?

Yes, I think it's a little bit of an oversimplification. But why is this the right time? We can invest and we should invest at this time. So we can because our financial foundation in excellent shape. So we have the firepower. Our margins are -- both gross margins and op income margins are at record levels. Our balance sheet is super clean, $1.7 billion in cash, no debt. So we can invest. We start from a position of strength. And we should invest because of all of the opportunities that AI provides for us, both in existing categories that we can make them smarter and more superior and in new categories and spaces. So hence, we've said we'll lean in on investing in 3 areas. One is R&D innovation, two is B2B sales. We're doubling down on B2B and the investments in additional sales capabilities there are providing good ROI. And finally, in marketing, which has traditionally been low at Logitech, but where we're also seeing great ROIs. So those are the 3 areas. Now we'll invest, but we'll also apply our cost discipline that you know us for. You've seen OpEx leverage last year, 170 basis points from just being disciplined, especially in G&A, helped by AI application internally. We'll continue to do that. And with all of that combined, I think I'm comfortable that our margins will remain at the high end of our long-term model of 15% to 18%.

No, got it. And maybe one of those proof points recently in terms of product investments was the success with the MX Master 4. So maybe from your vantage, what drove this product to become one of the fastest adopting across Logitech's history. And then like how replicable is that formula going forward?

Yes, I don't see enough of them. I'm just looking at people.

[indiscernible].

Okay. Thank you. But if you're in financing, you're not using MX Master 4, you're not as productive as you could be. Anyway, yes, a really great product. It launched last October. We've already had revenues of more than $100 million of just that single mouse. That's actually our fastest adoption of any new product that we've ever done at Logitech. It's also helped us grow 140 basis points of market share worldwide in those 9 months. And it's really delighting finance people and tech pros like yourselves. So that's great. So your question though, is there a formula. I think the formula is one really designed for a specific audience. This is designed for what we call advanced users, but these are finance people, software engineers, designers, architects, people are in Excel or in complicated programs all day. That's one. The second is superior benefits and features that people can see and feel and touch. So you really are 30% faster, more accurate, more productive when you use the MX Master 4. And you can feel it with unique haptic feedback with the actioning where you can put shortcuts. So users love that. And then finally, the third area is marketing, again, high ROI marketing in a very targeted way to those users has really helped that launch. And I think those elements specific target group, superior benefits and features and targeting marketing apply across more of our range. So we see that on the pro gaming line. We see that on our SIM racing line. We see it on our ergonomic line. So yes, definitely a reapplicable model. I don't promise everything will be $100 million after 9 months, but the model itself definitely is replicable.

So maybe I can take one of the comments you made there in terms of going after a more targeted audience across the portfolio and combine that with, I think, even recently with the PRO X SUPERSTRIKE series, you talked about a faster innovation cadence there, bringing it to market much faster. How should we combine those 2 in terms of your ability to maybe accelerate the annual product introduction cadence each year? I think you mentioned the last call, like 35, 40 products per year? Like should we expect that increases? And then how do you juggle that if you're targeting more individual market segments?

Yes. I think 35 to 40 products a year is about right. In addition to that, by the way, there's 5 to 10 that are China-for-China. So that already adds a bit more. I think that's about right. I don't think it's that we would want more quantity. I think what we try to do is make each of those individual innovations bigger. And again, in the age of AI, that's possible. We can also bring them to market faster. And that's what we saw in the SUPERSTRIKE, which is another -- that's our latest gaming mouse, huge success. That came -- went from prototype to launch in 10 months, which in hardware is unheard of, but was really enabled by AI.

No, got it. And you mentioned the China -- for China innovation strategy which you've obviously seen success and it's showing in the quarterly results. But you've also mentioned that some of these products are now transferring over to the global market. Maybe can you help investors view if this is more of a structural R&D advantage? Or is there a bit of a headache in the sense that how are you maintaining kind of this organizational complexity of maintaining both a global product as well as China-for-China that's also now seeping into the global product?

Yes. I absolutely believe it's a structural advantage to do China-for-China for 2 reasons. One, obviously, China is the biggest gaming market world, winning in China is really important for us. And if it stopped there, it would already pay out, and it has. But second, China is also the most sophisticated gaming market in the world. So what we learned there can be reapplied and the things that work there. My other countries are like, "Oh, I want it to." So we had a fabulous China-for-China mechanical customizable key called the Alto Keys. We launched in the U.S. last fall, too, and it's working very well. So that's kind of a bonus to China-for-China approach, that the things we launch and we learn there can then be reapplied in the West because that market is so sophisticated, so competitive and so large things that work there often can work in other places, too.

Got it. And then maybe just over the past couple of months, you've been teasing innovation into new spaces and categories as well as products designed to help customers be more productive, particularly leveraging AI. Can you elaborate any further on this? And if not, perhaps maybe help us understand how you're thinking about the quality of innovation logic can bring to markets and TAM implications of that?

Yes, yes. Yes. So maybe a step back on this innovation in the age of AI. What does it mean for us? What are we going to bring to market? Logitech is 45 years old this year, which kind of old for a tech company. But the one thing that's been consistent since the start is we connect humans and technology. So we started with the technology was the very first PCs, these clunky things. And we connected this human to that with the very first mice, which also were quite clunky. And then over the years, Newtek came laptops came, tablets came, mobile phones. And we've continued to connect with all kinds of new products, new mice, but keyboards, headsets speakers, gaming, peripherals, cameras, webcasts, video government. So you name it, we always connect the human and the technology. Now today, that technology is AI. And there are so many exciting ways that we can connect to that. We're looking at that strategically in 2 ways. One is make our existing product categories smarter. So one example would be the new Rally AI video conferencing cameras. Those are so much smarter than anything you've ever seen in terms of a video conferencing camera. They work in small rooms, large rooms and they really produce your meeting like Steven Spielberg is in the back producing our meeting, smart switching, smart framing, digital cocoons summarizing your meeting, you name it. So that's one way that we create superior products in categories that we're already in, and we believe that will accelerate growth. Second is new ways to connect the human and the tech. And I'll give you -- again, we're working on lots of new things with lots of big partners, but maybe 2 things that are already out there that are completely new. One is the spot AI sensor. It's a sensor. You just stick it on the wall of a meeting room or on the table. And it sees occupancy. So it helps CIOs and workplace services managers optimize their meeting room space, but it also takes in temperature and CO2 in the room and optimizes the environment of rooms. So it's a smart sensor to optimize all your meeting spaces. A second new form factor is the stylist that we've launched because gesture is another new modality that's going to be big in the age of AI. Stylist for the Google, for the Meta Quest headset and for the Apple Vision Pro, and you can imagine there's going to be other form factors where Stylist is will be important. So these are just 2 examples, more is coming. Voice is obviously a really important modality that we're working on and that's exciting and that will come. So between our existing categories and new form factors, just a lot of growth to be had in years ahead.

No. Great. And wanted to hit on one of the products you just mentioned. So the Rally AI video conferencing [indiscernible]. I believe it's supposed to ship this summer. Maybe you can talk to us about how you're thinking about the opportunity as it relates to replacement versus refresh of -- or sorry, replacement or refresh of the existing installed base versus greenfield expansion, just given kind of all the capabilities you just talked about, which do you expect to be kind of the bigger growth driver for the product?

Yes. Both are big growth macro -- both are big macro growth drivers. Maybe one is more immediate, one is a bit more, will take more time. So the immediate one is the video conferencing refresh. So every company on the planet during COVID put in video conferencing, those things last 6 to 7 years. So we're in the early innings of a VC refresh. As a market leader, we have a lot of rooms to refresh ourselves, but we also know who has competitive rooms, and we're obviously looking at those as well. That's hundreds of thousands of meeting rooms that are needing to be refreshed in the 1 to 3 years ahead. Second, only less than 25% of meeting rooms globally is video conference-enabled at all, which is hard to believe in this day and age. And again, especially with AI meets video inputs and audio inputs. It's not just text. So there's a huge opportunity over the next decade to enable many more meeting rooms in offices in education rooms in hospital rooms with video conferencing. So those 2 things combined, the refresh of what's already there and equipping new rooms gives us a lot of confidence that video conferencing will be a great space for us going forward.

And so maybe as a natural follow-up to that, can you discuss the services attach opportunity as you think out all this opportunity ahead of yourselves. Like, where are you seeing and building that opportunity? And how much of this can be actually recurring and how material could this be over the next 3 to 5 years?

Yes. Yes. So it's relatively small because we -- again, we weren't really a B2B company. So we weren't charging for services until a couple of years ago, which, of course, everyone else is. So we are now -- it's a fast-growing business for us. And it's really a win-win. It's great margins for us. It's growing fast. Both the attach and the revenue are growing double digit but it also drives much better NPS for our customers. Our customers really have much higher satisfaction when they use our services. So it's a nice part of the business. We don't break it out. I wouldn't say it's material yet, but it's growing fast. So at some nice revenue and gross margin.

And maybe for those who are not familiar, what services are you actually providing?

So you guys will know, if you go into a meeting room and the thing doesn't work. So instead of calling your local IT guy, you call us basically, and we help you fix it. And it allows IT managers of big companies to manage thousands of meeting rooms basically by one guy.

Got it. And then maybe just as another follow-up there about taking a step back, can you remind us where B2B mix stands today? And given the current pace of the B2B outperformance, what's a realistic time line for you to reach your target of 50%? And what do you see as the big as bottlenecks there?

Yes. I don't really manage this as a target because -- well, first of all, our business historically has been more B2C. That's where we come from. B2B is a big opportunity. It's about 40% of our business now, but we're doubling down on it and it has been outgrowing B2C. But I don't really say 50% is the target because I could get there by just tanking B2C, which obviously we don't want to do. So we like it when B2B outgrows B2C, which it did last fiscal high single-digit demand growth on B2B, a little bit lower on B2C and now got us 6% dollar growth. So I don't know, I don't set a time for when it has to be 50%. But if we continue in this direction, we'll get closer to 50% of our business being in B2B. And the way to do that is continuing to invest, obviously, in great products in video collaboration, but also in all the other things, businesses need mice, keyboard headsets microphones, you name it. And then in go-to-market skills and things as simple as salespeople, which we didn't have a lot of, but we're adding quarter-on-quarter, we're measuring very tightly on whether those are paying out and adding more when they do or taking a way when they do.

So maybe let me try to ask the question in a different way. When we think about, for example, the investments that you're making in B2B with that sales force, we talked about the product introduction like is there any way to kind of extrapolate what's B2B today in terms of those investment in sales count versus our even product introductions on an annual basis relative to what they were historically? And [indiscernible] is that mix shift to actually much greater than where the revenue mix is today? Or is it still more biased towards B2C?

No. I would -- I'd say the investments -- so on the R&D and the product side, with the exception of video conferencing, which really is only a B2B business, but it's less than 20% of our total business. The 80% of the R&D investment goes across, which is great. It really has scale. We sell similar products in B2B and B2C, and that scale is an advantage. When it goes to go-to-market, 2 areas that we're leaning in on investment in. One is B2B sales capabilities, which is people models as systems. And the other one is brand-building and marketing, which benefits the entire business. So yes, a little bit more on the B2B side, if you add it all up, but the vast majority of the investments benefits us all.

Got it. Makes sense. Maybe kind of switching gears a little bit, but LogiQ platform. You announced that recently, Logitech was essentially customer 0. Maybe one, can you just provide a brief description of what that is for the audience in case they don't know what it is. And then maybe just help us understand what's the competitive mode of this platform and how you're thinking about initial productivity gains internally and how that can extrapolate going to customers.

Yes. So this isn't really -- LogiQ is not meant to go outside. So that's really our internal platform to leverage AI with. So it's a platform that connects all our 45 years of knowledge, data, documents, insights, all our proprietary stuff with all the LLM so that people can use the LLS in a secure space and accelerate. So 80% of our employees use it regularly, and with regularly, we mean daily. So it has very high uses. What do they use it for? Obviously, just access to data and new insights on that data but also very much to build AI agents and assistance. So we've built more than 3,000 now agents and assistance in the last 18 months. And those -- I would say, some of those are huge home runs, massive productivity increases. Most of those are in engineering, both software and hardware. Some of them are complete duds, and we're no longer using them, probably 1,000 of the 3,000, you know fine. We tried, we learned, no use. And then there's about 2,000 of them that are -- that give incremental benefit -- but when you have 2,000 agents that give incremental productivity benefits, it starts adding up and you see that in our OpEx as a percent of sales. So for last fiscal, we had 170 basis points improvement in productivity. And LogiQ in the AI ways of working are definitely contributing to that.

So maybe like as a follow-up there and taking it a step back from LogiQ. But as we think about -- and just curious to hear your thoughts, but I'm sure I can ask this about any CEO or CFO. But as we think about AI and driving productivity increases, how are you thinking about reinvesting those productivity increases versus them being as net savings from -- on the OpEx line or even on et cetera. So just curious how you're thinking about that? And is there a rule of thumb that you're thinking about as you start to see those savings and reinvesting some of them?

Yes. So my rule of thumb has been I think we are about the right size in terms of people. So the 7,000 people we employ is about right, but we have an opportunity to grow faster with those people. So that's -- and it doesn't mean those 7,000 exact people will stay in the company because you obviously have people going in and out and skills you need versus skills you may no longer need. But it's probably about right but we have an opportunity to accelerate sales growth. And that's what we said at AID, mid- to high single digits is what we've got to deliver every quarter in the midterm. So -- and I think we can do that without adding people, thanks to AI.

Got it. Interesting. So maybe just shifting gears to gaming. GTA 6. Maybe we should hold our breath -- maybe -- but maybe just taking a step back there, can you remind us of the typical behavior you'd expect around the title release of this magnitude? And specifically, how do you think about the duration and breadth of potential gaming peripheral upgrade cycles associated with it?

Yes. It's been a long time since there was such a blockbuster, I think Fortnite in 2017 might have been the last time. So it's a little hard to say what's typical but there's definitely excitement about that. Now for Logitech, our business does not depend on one game or another. I mean a SUPERSTRIKE promo. So we launched in February is a massive success unrelated to any new game. So we don't have that in our forecast, but what I will say is there will be excitement in the gaming market. So GTA 6 is supposed to launch now in November for console with PC following sometime in the calendar year after. When I talk to gamers, which I do a lot, people are saying, "I'm going to take a month off to play GTA 6," you even heard [indiscernible] say he's planning his paternal leave around GTA 6, which, I don't know, slightly questionable. But there will be excitement in the market around this launch and many other game publishers have been holding back releases because I don't want to overlap. So I think into next calendar year, there will be more exciting game releases and all of that should be good for the gaming market.

Got it. Let me just pause there and see if there's any questions in the room. I see one up front. Just wait for the mic, please.

In B2B area, you -- I've heard you say a few things today. One is that -- I mean when you were talking about even just a mouse that has an ability to drive what I think you said a 10 year 30% productivity gain. And then you talked about services, and I know the video conferencing is a big play for you. Are you trying to become more than a product provider just inside of the B2B space and be more of a productivity play. And I'm trying to figure out what the laneway there is because the consumer business, importantly, is more of a product play, hey, we sell on retail spaces. Here, it seems like it's a different play and a different type of left brain, right brain, how you have to think about running the organization.

Yes. No, absolutely. Thanks for the question. So our mission, our stated mission as a company is to extend human potential in work and play. And what does that mean? That means making humans a bit more productive making humans perform better, and that's mainly in gaming and connect better. So that's what we try to do across our business. And in B2B, certainly, productivity is top of mind for any buyer in a company. So we have some pretty precise claims around not just video conferencing and how you connect better, but also on our personal workspace products on how they truly drive productivity. Another thing that's on the mind of B2B buyers is people being out of work for different reasons, but sickness and discomfort or another thing that does happen to people at work. So our ergonomic line is also very popular with businesses because it's proven that you have fewer sick days. if people are comfortable at work, especially these kind of RSI type issues. So that's how -- when we go to market with B2B, I'll give you one example. I was with a Canadian pension fund, a big customer, a couple of months ago. And we talked in depth with the CIO about her 2 like target employees in her company that she's buying for. The one is people like yourselves, your advanced users, your investors, your rainmakers, or the pension fund. And she's like "They can have everything they want." So we had a big MX sale there. And then she had her customer service reps who sit on the phone talking to retired teachers in Winnipeg for 3 hours at a time, and who need comfort, so a big sale of ergonomic headsets and ergonomic mice and keyboard. So we really, again, a bit like your question earlier, we really try to go deep on the audiences and then the benefits for both the user and what we call the chooser.

And last year, you and I actually talked about this on the side about ambient computing. And it sounds like -- is that a play that's going to take off, do you think, with artificial intelligence and your use of software and your knowledge of connectivity?

Probably. Yes. And we'll stay really close to it. We want to attach to whatever takes off.

The question is, is can you monetize that? Or is it something that's going to become a table stakes play you see a lot of people just talking to ChatGPT or talking to Claude now and I'm just trying to -- can you actually monetize that?

Yes. So voice definitely is a modality that's on the rise. So -- and I -- we love additional modalities at Logitech. Software engineers and coaters are on the cutting edge of that, and we see it in our own business. Some of my coders are just talking to their Mini Mac all day rather than using their keyboard. Now when you're talking all day, you still need hardware. So what are they using headsets, microphones even gaming pedals for fast input to their multiple agents. Now who's the leader in headsets in microphones and gaming pedals, it also happens to be us. So we're really well positioned for future with voice, and I think it will be additive to the other inputs for the rest of us. So again, this comes back to -- this is an exciting time where there's just more opportunities than ever before for us to grow.

Actually, let me just check. Any other questions in the room? No, I don't see anything. So maybe just piggybacking off of that question. Last summer, you hired a new head of M&A this year, you're coming into the year with a very healthy balance sheet. I guess first part of that question is help us think through how you're evaluating potential targets? And then maybe second part of that, has there been any shift in strategy there, just given the new head that was brought in.

Yes. So indeed, $1.7 billion in cash, we have the firepower, and no debt. We have the firepower to do M&A. We brought in a new head of M&A. We have slightly broadened the space in line with our strategy. So doubling down on B2B and within that, the verticals of health care, education and government, that's given us a little bit of a broader pool to look for M&A targets. The long list now is longer than it's ever been. I also -- I said this earlier, but I've kissed a lot of frogs in the last year, but no prince yet. Again, when the right thing comes along, we won't hesitate to act on it, but it has to make the boat go faster. And we have so many organic growth opportunities that acquiring something that is so just doesn't interest me very much.

And is there like a part focus between hardware and software there just because you were just talking about voice being a new modality. Is there an investment that you need to make on the hardware side to essentially enable these new modalities that are popping up in the world of AI? Or is it really more of a focus on the software side? Because obviously, I can bring up examples around that as well.

Yes, yes. Ideally, we acquire in the space that we're good at, which we describe as design-led software-enabled hardware that's what we're really good at. Pure software is not something that we have a great track record of unless it goes into some of our hardware. So Ideally, targets would be software-enabled hardware rather than just software.

Okay. And maybe just wanted to switch gears here. One of the key pillars that you brought up on the earnings call was an iconic brand, which is a little bit abstract for us as investors, right? So maybe can you just talk to what are key areas of investments that are needed to make -- to be made to achieve that? And then I have a follow-up.

Yes. No, absolutely. And I -- yes, a great brand is a moat. And honestly, we've seen that in China, where our business soft, soft in the years before I got it and kept getting softer, but it didn't disappear, thank God because we were the #1 brand, and that protected us even though for a while, we did not have the innovation, not have to go to market that we should have had. And we've turned that around, but it's kind of an example of how the brand provided a mode and some protection. If you go -- so our brand is really good. We have good awareness. We've got good attributes. People like our quality, they trust us, and that's true around the world, which is good. Did they really love us, I would say, an iconic brand is really loved not quite yet. Gamers, there's gamers who really love us. I've never been this popular with 15-year-old boys as I have since I took this job. But across the business, we have more work to do. How do we do that? That starts from superior innovation, which we talked about. That's the foundation of any great brand. And then second, a really well-rounded marketing plan, which for us, there's 4 things we do in marketing, and we know they all have great ROI. First one is look like a leader in store and online. If you go into Best Buy, you see that we're the leader. It's really a great presence and the same should be [indiscernible] Amazon. Second search, you got to be visible online, and that's both traditional search and what's now called AEO, which is visibility in the large language models. Third, social. And again, China leads the way in social media. We work with thousands of influencers there. We've got hundreds of thousands of pieces of content there out. And then finally, in real life events, and those are unique events like Logi Play and Logi Work bring people together in real life gamers where we launch innovation, where we create fantastic live streams to millions and millions of users. So those are the 4 things. Look like a leader in store search, social and in real life events, and we then really measure the effectiveness of that and we do that obviously through market share, but also through brand heat, which is measured through share of search. And finally, through Marketing [indiscernible]. And I'm happy to say all 3 of those are on the up and up behind these marketing plans.

So maybe in the last couple or last 40 seconds here, as investors, how do we know that you've achieved it? Like what does an iconic brand look like to you 2 or 3 years down the line and should be a milestone that investors are looking for?

Yes. I don't think there's going to be 1 day where we say now we are iconic. Sorry. It's a matter of just getting better every day. But you know an iconic brand when you see it, you know that Apple or Nike or Chanel is iconic. And again, maybe with gamers, we're really getting there. If any of you has 15-year-old boys, asked them about Logitech, tell them you saw the CEO today. They're going to be excited, which is funny. But in the rest of the business, we've got a little bit of a ways to go. But the way we measure that is really getting better every day on those key metrics.

Got it. I think we're out of time. Thank you, Hanneke. Thank you.

Thank you. Appreciate it.