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

Good afternoon and good evening. Welcome to Logitech's video call to discuss our financial results for this quarter. Joining us today are Hanneke Faber, our CEO; and Matteo Anversa, our CFO. During this call, we will make forward-looking statements, including with respect to future operating results under the safe harbor of the Private Securities Litigation Reform Act of 1995. We're making these statements based on our views only as of today. Our actual results could differ materially. We undertake no obligation to update or revise any of these statements. We will also discuss non-GAAP financial results. You can find a reconciliation between GAAP and non-GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC. These materials as well as the shareholder letter and a webcast of this call are all available at the Investor Relations page of our website. We encourage you to review these materials carefully. Unless noted otherwise, references to net sales growth are in constant currency and comparisons between periods are year-over-year. This call is being recorded and will be available for a replay on our website. I'll now turn the call over to Hanneke.

Thank you, Nate, and welcome, everyone. Q1 was a strong start to the fiscal year with net sales growing 5% in constant currency, marking our 10th consecutive quarter of growth. The business performed well despite tight component sourcing, elevated component and shipping costs and the ongoing conflict in the Middle East. We were particularly pleased to see an acceleration of growth in gaming and in North America and continued strong growth in video collaboration and pointing devices. Our strong operational performance was driven by our strategic priorities. First, superior products and innovation. The MX Master 4 mouse and the Pro X2 Superstrike gaming mouse have scaled at an exceptional clip. The super-premium products with unique technologies are both big hits. Just a few quarters from launch, they now both rank amongst the company's absolute top-selling products, helping professionals work more productively and enabling gamers to win. This quarter, we also added four new releases to our product portfolio. The Mobi Fold ultra-portable mouse, the G512x gaming keyboard, the Spotlight 2 Advanced Presenter and have really fund limited edition soccer Alto keys bundle. Our elevated marketing efforts are supporting the success of our products. In gaming, our partnerships with iconic brands like NASCAR, McLaren, Call of Duty and a range of top Pro gaming teams helped accelerate growth this quarter. And on the work side, we are investing more in creators and social commerce, anchored by a fast-growing roster of influencers. We will continue to deliver superior innovation at pace. And the incremental growth investments we outlined entering fiscal '27 are now underway, laying the groundwork to fuel a unique product innovation pipeline for the years ahead. A second driver of growth in the quarter, doubling down on B2B. Video Collaboration net sales grew 9% in constant currency this quarter, extending momentum built over the past year. Logitech's video conferencing solutions are now used by more than 70% of Fortune 500 companies, putting us on a very short list of preferred suppliers as organizations refresh and expand their meeting spaces. Third, excellence across geographies. This quarter, our geographic diversity really paid off, allowing us to balance tough spots like the Middle East with terrific demand-led growth in the Americas as well as continued strength in China. And in Europe, where the broader market was soft, our teams gained significant market share. Finally, operational excellence once again drove results. This quarter once again demonstrated the power and the consistency of our operational teams, even in a volatile and uncertain macroeconomic environment. While tariff refunds positively impacted our reported numbers, we delivered excellent operating income growth, excluding the refunds too, thanks to the discipline and the precision of our teams. All in all, our Q1 results reinforce our commitment to operational rigor and our belief in our ability to execute on our strategic pillars and positioning us well for long-term success. Now as we look ahead, we expect the demand momentum we are creating to continue. But as you may have just seen a new serious incident at one of our suppliers, which we're working hard to mitigate, is likely to temporarily impact our ability to fully meet demand. Let me hand over to Matteo to provide more details on both our performance and the outlook. Matteo, over to you.

Okay. Thank you, Hanneke, and thank you all for joining us today. So as Hanneke mentioned, our teams navigated a difficult operational backdrop throughout the quarter and delivered very strong results. In addition to delivering a strong quarter, we received $61 million in tariff refunds. And as a result, non-GAAP operating income was $290 million, up 44% year-over-year. If we exclude the tariff refund, non-GAAP operating income was $229 million, up 14% year-over-year, reflecting strong execution from the team. Now let me walk you through the quarter in a little bit more detail. So starting with net sales. Net sales were up $1.2 billion, up 7% in U.S. dollars and 5% in constant currency. Pointing devices, video collaboration and gaming were the key growth drivers in the quarter. More specifically, Pointing Devices net sales grew 14% year-over-year fueled by the continued success of the MX Master 4. Marking our fifth consecutive quarter of growth, Video collaboration net sales increased 9% year-over-year as a result of sustained corporate investment in our workplace solutions. And gaming net sales grew 9% year-over-year, driven by double-digit growth in AMR. Conversely, both webcams and headsets were down, driven by soft end markets in EMEA. At the regional level, AMR led the way, up 11%, with gaming, Pointing Devices in keyboard and combos all growing double digits. Asia Pacific grew 5% and with China ahead of the broader region and EMEA net sales declined 4% due to the Middle East conflict, which impacted the region's net sales by approximately 400 basis points. Now it is important to note that in Europe, we gained share in a subdued market. Turning now to Profitability. Our reported non-GAAP gross margin rate including the $61 million tariff refunds was 49.8%. Excluding the impact of the tariff reimbursement, our gross margin rate was 44.8% and expanding approximately 270 basis points year-over-year. We have now posted gross margins greater than 43% in the last four consecutive quarters. And this year-over-year gross margin rate expansion was driven by favorable currency exchange rates, product mix and product cost reduction. Now product mix played a prominent role in the quarter as we drove double-digit growth on the premium product lines and categories, including the sustained momentum in video collaboration. Now this gross margin tailwinds were partially offset by higher promotional spend, particularly in EMEA. Now looking at operating expenses. Non-GAAP operating expenses were $320 million or 26.1% of net sales, up about 150 basis points year-over-year. This increase was driven primarily by higher investments in sales and marketing and R&D. G&A was flat as a percentage of sales at 2.8% as we continue to remain diligent in our G&A spending. As a result, excluding the tariff reimbursement, non-GAAP operating income was $229 million, up 14% year-over-year. And non-GAAP operating income rate was 18.7%, up 110 basis points year-over-year. Our profitability continues to translate into exceptional cash generation. Cash flow from operations increased more than 30% year-over-year, and we ended the quarter with a cash balance of $1.75 billion, while we returned approximately $150 million of cash back to shareholders in the form of share repurchases. Now as we look forward, we expect the demand momentum from the first quarter to carry into the second quarter despite the geopolitical and macroeconomic challenges. However, in late June, one of our suppliers of semiconductor components experienced a serious incident in their manufacturing facility, which led to its closure. The facility remains closed today, impacting our ability to effectively meet demand. And the supplier has not yet provided a definitive date for the facility to reopen. Now our team is working through several mitigation plans. And in the near term, our robust balance sheet allows us to maintain a sufficient level of inventory precisely to mitigate this type of supply chain disruptions. And as a result, we are able to significantly reduce the impact of this incident in the second quarter. And more specifically, we expect second quarter revenue to grow 0 to 3% in constant currency with a gross margin rate of approximately 44%. This outlook contemplates a net sales impact of approximately $20 million due to the supplier incident. We expect non-GAAP operating income to be between $185 million and $210 million, down year-over-year, driven by the continued investments in R&D and sales marketing as well as our prior year austerity measures. Now looking ahead for the full year of fiscal year 2027, absent the disruption caused by our supplier we expect top line momentum to continue at roughly the first quarter rates throughout the remainder of the year. However, based on our limited information to date, we are estimating the negative impact of our supplier incident to be up to $200 million in revenue in the third quarter. And for the fourth quarter, we estimate the supplier incident to be largely resolved, which would mean little to no impact to our fourth quarter results. On profitability, we expect full year non-GAAP operating margin to continue to track near the high end of our 15% to 18% long-term target range, helped by the strong underlying operating performance of the business and this quarter's tariff refunds. With that, I will turn it over to Q&A.

Thank you, Matteo. [Operator Instructions] Our first question comes from Jorn Iffert from UBS.

I will start with two questions, okay, and then I go back in the queue. The first one is, can you tell us more about the risk of pull forward demand what you have potentially seen in Q1? You had a very strong sales through double digits. And if you exclude the $20 million sales impact from the semi supplier issue, you would give an outlook of 1.5% to 4.5% sales growth for Q2, there was quite a material slowdown? Or is this pulled forward demand you've seen in Q1? Or what -- how do you explain the slowdown? And the second question would be, please, when we look on the full year outlook and you're still saying you're coming up at the 18% or close to including this $61 million tariff fund, which would be then if you export around 17%, it's a 200 basis point drop versus last year almost. I mean, how do you explain this is really only SG&A as gross profit margin seems to bode up quite well? Or do you also pencil in some additional cost for the CV component sourcing here?

Yes. Jorn, let me take the first question, and then I'll let Matteo answer the second question. So -- we think there was very little to no pull forward in the first quarter. Why do I say that? Pull forward would particularly happen in video conferencing where the memory shortages are well known, and we took pricing. But we took pricing in May. So if there was any pull forward on the absolute price increase, it would have happened in April, i.e., in the quarter, -- and in fact, what happens when you take price increases in B2B, you actually continue to honor the old price for a little bit because you've got deals that are in progress. So in the quarter, the actual impact of the price increase was not very high. We'll see the positive impact of the price increase starting from the next quarter. So there was no reason for our customers to pull forward in the quarter. So -- and certainly, on the consumer side of the business, we tend to really ship to demand. So there's not a lot of pull forward there. So we continue to be optimistic ex the supplier. I think your math is right on what we would have guided for the second quarter. We're always looking at kind of the high end and the low end. On the high end, we meet North America to continue to perform as well as it has in the high single or double digits. On the more conservative side, that might come down a little bit. So that's where the original guide came from what your numbers are about correct.

Yes, Jorn, So if you adjust for the $20 million of the supplier incident for -- as it pertains to the second quarter, we would have -- the outlook would have been something between 2% to 5%. We closed the first quarter between 4.5% and 5%. So I think we are in the zone -- and obviously, there is, as Hanneke said, a bit of uncertainty in the macroeconomic world today. So overall, the number is closely to what we have achieved in the first quarter. As far as the second question, so the -- if you recall, last quarter, we mentioned that on the backdrop of a very strong fiscal year 2026, where we almost reached 19% of operating income rate, we wanted to take some of these outsized gains in profitability, particularly out of a very strong gross margin and reinvest this towards the growth -- or the future growth of the company. This is really what we are planning to do and notwithstanding the supplier incident that we just described, where we can talk more about it later. So that's the driver. So I would not expect G&A to increase is really the focus on investment for the future growth of the company, which would be sales and marketing and R&D. And we have -- to your point on the gross margin, I think, is valid. We are very happy on where the gross margin rate has been now for several quarters, and we expect the gross margin to continue to be strong.

If you allow me to zoom into one thing, when we adjust now for the $61 million tariff refund, your underlying non-GAAP EBIT would be more around $800 million, $850 million. Is this a new starting point you should look at how you can grow them in '28, '29? -- or is this then -- okay, look, I mean, you're using the $61 million, you're already investing in next year, you will play down the investments again. Just have a little bit of feeling on where we can start to model the company for the midterm.

I think it's a little premature to talk about fiscal year '28 and '29. But right now, we are committed to the to the range that we provided at Investor Day, and that's the commitment of the company, which you can expect the company to deliver.

Our next question comes from Asiya Merchant with Citi.

Just if you can highlight how you guys are thinking about channel inventory here? How is that performing relative to -- the sell-through was obviously pretty strong here. How should we think about perhaps some buildup of inventory if there was any? And then if I may, just the supplier incident that you talked about, it seems like you have pretty good line of sight to it getting resolved in 4Q and then sort of your revenue growth rate probably accelerating back to what you saw in 1Q. So just if you could peel that up a little bit, why do you feel so confident that, that supplier relationship or that supplier issue could be mitigated if there's alternatives there that you're looking at?

Yes. Maybe let me start from that one, and we'll go back to inventory with Matteo. So I was expecting quite a few questions. So thanks, Asiya, on this incident. And I got to say, we will share transparently what we know because we still have, I would say, limited info, and we also need to protect competitively sensitive information. So I'll do my best to give you a bit more color on that. But at the very end of June, one of our many semiconductor suppliers had a serious incident in its manufacturing site, that resulted in a temporary shutdown, and that facility is still shut down. And we are now in the early stages of receiving information about the impact of the event. We are confident that the fab will reopen and will be open again certainly in the fourth quarter. But the supplier has not yet confirmed definitively when it's going to reopen. So in the meantime, we are working very hard, obviously, on a set of mitigation plans. We do have secondary suppliers for most components, including semiconductors including this one. But as you will know better than most people, the general supply situation for semiconductors is unusually tight across the industry at the moment, which means that getting significantly more supply at a time where we need a lot ahead of the holidays is particularly challenging. So hence, what we told you in Q2, we -- the midpoint of the outlook still shows growth, 0% to 3% despite the fact that we'll think we'll be short about $20 million because of this incident. And that's because in the quarter, we can leverage some of our regular inventory that we have, and Matteo can give you a bit more detail on that. In Q3, it gets a little trickier. And again, based on the limited info we have today, the negative impact could be up to $200 million in net sales because of the incident. And it's going to depend when does the fab reopen, how much supply can we get from our secondary suppliers and other plans that we have in progress. By Q4, we are confident that this will be resolved. And again, this is a temporary supply issue. We're confident that the demand is going to remain strong, and that will resolve this by Q4.

So, Asiya, let me address the first question. So yes, the sell-through now going back to the first quarter, was strong. You remember though, that the sell-through is a gross number, so it does not include obviously, it's not in constant currency, so it includes any FX movement. And it does not include the promotions. So the -- if we spend more dollar year-over-year on promotional activity. So -- if you take the 11% of growth in sell-through and you try to walk it back to the 5% on net sales, really, you have two components. One is the FX, which is about 2 points. And the second one was primarily higher promotional spend. So the channel inventory was actually in good shape. Nothing happened abnormal in the channel. But we promoted a little bit more than last year, particularly in Europe. We saw the market at the beginning of the quarter being pretty subdued, as we said in our prepared remarks. And quite frankly, we took an opportunity to gain share, and we are pretty happy with the outcome because as we -- as Hanneke alluded in her prepared remarks, we gained a few points of share on the majority of the product lines in Europe. So we are happy with the outcome. But that's how you bridge from the sell-through to the net sales in constant currency. As far as the -- maybe last one comment on the channel back to the impact of the second quarter on -- of the supplier incident. We -- the beauty is that we have a strong balance sheet. And this is what allows us to maintain a healthy level of inventory of this type of components exactly to withstand this kind of situation that sometimes happen like we are experiencing today with the supplier. So thanks to the inventory that we have on hand and the finished products that we have in the channel we will be able to serve our customers for the vast majority of the second quarter. And that's why, to Hanneke's point, you see that the impact on the second quarter financials is limited. It will continue to grow. It's about $20 million. Obviously, the situation for the third quarter to Hanneke's point, is a little bit more challenging. But we are happy where the channel sits and is healthy and in the range in terms of week on hand that we want it to be.

Our next question comes from Alicia Reese with Wedbush.

I wanted to start with just an overall question on the impact of the supply chain incident. I assume that, that impacts predominantly the video conferencing, but wanted to just double check that there is nothing within gaming and the other segments that is particularly impacted.

No. So thank you for asking that, and hello. But the impact is actually on a portion of both our gaming and our PWS portfolios. So these are not memory chips.

Okay. All right. And you did call out share gains in the Americas and EMEA. I believe that's from the super strike predominantly if there were any other categories or products that drove some of those share gains, if you could call that out. And you did also call out that Asia Pacific growth was led by giving, but there were no share gain call-outs there. Can you talk about the overall strategy there or if there's any particular products that are leading that growth in China, that would be helpful.

Yes, sure. So in terms of shares, actually, the biggest share growth, fantastic share growth was in personal workspace. So we gained about 220 basis points of share in the quarter across personal workspace, which is giant. And that included gains in the Americas, in Europe and in Asia Pacific. So -- and including in China there. So PWS really have outstanding performance. Gaming also strong share gains in both the U.S. and in Europe. In Asia Pacific, shares were flattish. But on the premium end of our lineup in gaming, again, thanks to what you already alluded to the Super Strike mouse, we also saw share gains. So and then video conferencing also strong share gains in the quarter. So really strong performance across the board that we're really, really pleased with.

Our next question comes from Alex Valero with Loop Capital.

My first question is on gross margins. So your gross margin, excluding the refunds was 44.8%, which is above your 43% to 44% structural range. Which piece of that is durable, the mix, FX or cost reduction?

Sure. So Alek, the overall, we are obviously extremely pleased with the gross margin results now for quite several quarters, as I alluded in my prepared remarks, we have been printing pretty good gross margin well above 43%. If you look at the year-on-year walk, so if you go from last year in the first quarter, we were about 42%. So we expanded about 270 basis points, excluding the tariff reimbursement. There were a couple of drivers. Obviously, one is foreign exchange, like year when you look at the year-over-year because last year, the euro was pretty weak. The -- so that's accounted for about 240, 250 basis points of the margin lift. When you look at it operationally, I would highlight a couple of components. One, is the overall premiumization of the portfolio, so the positive mix. If you look at the high-end product lines, right, look at ALDI, MX Ergo, Pro Simulation. They all grew double digit and really solid double digit, okay? And then also videoconferencing in total, as you know, we are doubling down on B2B. So as with the conference in outpaces the growth rate of the company that is good for mix. So it's good for margin. That was another big component. So when you combine a little bit of price and this premiumization of the positive mix, it's about 100 basis point lift year-over-year. And then the continuous tremendous work of cost reductions. Then Sri and the team continue to do notwithstanding the environment where we are of higher commodity costs, higher freight costs in the first quarter. Product cost reduction helped us about 100 basis points. In all these positives, as I alluded in my prepared remarks, were offset partially by higher promotional spend. So of these categories that I just mentioned, if you look at least the short term, call it, the next quarter. Probably the number that will be more challenged is going to be the product cost reduction. We see freight rates increasing and this is going to be a little bit of a less of a help. When you look at the second quarter compared to the first. But overall, you heard in the prepared remarks, we're still going to be around 44% of gross margin rate, so still a good number.

Got it. Just a quick follow-up, just changing it up a bit. What are your B2B customers telling you about their AI budgets right now?

Obviously, everyone is investing in tokens. So their people are spending on tokens. But at the same time, we're seeing a really healthy market for video collaboration. Why is that? I'm sure you guys are all using either Microsoft or Google in your video or Zoom in your video conferencing meetings with their AI notetakers, AI assistance, et cetera. So to use AI properly, you need to enable your people with video conferencing in all of your meeting rooms. And I've said this many times before, but globally, Less than 25% of meeting rooms are video conferencing enabled. So there's so much white space in that market. And you see that in the market growth. AI is a tailwind for video conferencing. And beyond the white space, video conferencing equipment tends to last between 5 and 7 years. We're now about 6 years post the beginnings of COVID when many companies put in video conferencing for the first time. So that's another tailwind. So all in all, a really healthy market for video conferencing equipment that we're taking advantage of.

Our next question comes from Torsten Sauter with Kepler Cheuvreaux.

I guess, I didn't have a question actually. I mean -- sorry, I think there was a misunderstanding here because my question just.

I just see you anyway.