Hi. Amazing. Good afternoon, everyone. I think we're gonna get started. My name is Sabrina Hao, and I'm a member of the U.S. IT Hardware Equity Research Team here at Morgan Stanley. Today, I am pleased to be joined by Chuck Boynton, CFO of Logitech. Before we begin, just some housekeeping. I need to mention that important disclosures can be found at Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your sales representative. So with that, Chuck, thank you for joining us.
Thank you, Sabrina. Great to be here.
Great. Maybe start a little bit more near term. You just reported September quarter earnings, outperformed your expectations or what was implied by your guidance. Channel inventory actually came down versus expectations for it to be flat. So can you talk about some of the drivers of the outperformance and any trends you saw by segment?
Certainly, yeah. Yeah, both Q1 and Q2 were really good quarters relative to expectations, still down year-over-year. But I would say, you know, we're, we're not quite at the bottom yet. We're, we're not quite calling the bottom, but the rate of decline has been better. So but the decline is slowing and we're kinda trending towards that break even or towards that year-over-year flat, and then we hope to grow from there. Last quarter overperformed on a number of key categories. Our pointing device business, our mice business, kinda what we're known for, the hallmark, we saw year-over-year growth, which was really, really exciting. And our tablet business, we make a lot of tablets for Apple devices and whatnot. That was another kind of really good growth business.
And then regionally, Europe, actually, in U.S. dollars, had year-over-year growth, whereas the Americas and Asia still had year-over-year declines. I would say in terms of the areas where we overperformed relative to expectations, our PWS business, the Personal Workspace Solutions, traditional mice, keyboards, webcams, kind of the big category that we're well known for, those all performed quite well, and we can get into other categories later.
Yeah, absolutely. That's great. You know, maybe to dig into the region. I mean, you mentioned Europe was stronger, and a little bit surprising given lots of our consumer enterprise hardware companies are seeing weakness in Europe. So I guess, what were you seeing there and what maybe makes Logitech a little bit different?
Yeah, you know, you know, we're a Swiss company by nature, and so it's kind of our home field. I think Europe for us, it was probably an easier comp year-over-year. I'm not so sure that the penetration is better right now in Europe, but the year-over-year comps were favorable, and they were favorable partially because the our Russian business was no longer in the year ago period for comparison, so that comp was easier. And I think also our business in Europe was a little more muted with the conflict in Ukraine and Russia a year ago, whereas Americas and Asia, I think versus a year ago, the business is a little bit stronger then. So it's more of a comp, not so much penetration.
I will also highlight our sales team in Europe is performing quite well. We started recently selling our direct B2B sales force that sells to the large enterprises. Traditionally only sold video and headsets, and now we've added mice, keyboards, webcams to the toolkit, and that's allowed them to really kind of have more quivers in their arrow or more arrows in the quiver to go sell to the enterprise, and that really, I think, helped that business, helped Europe and helped our PWS business.
Yeah, makes a lot of sense. So you had a great September quarter. You raised fiscal 2024 guidance, and for the back half of the fiscal year, you got into a seasonal December quarter as a % of annual revenue, but a subseasonal March as you worked down some channel inventory. If you look at, I guess, sequential growth, that would imply that both December and March are eight to nine points below what you would normally do historically. So, you know, is the seasonality of your business structurally changing, and how should we think about that in a post-COVID world?
Yeah, seasonality is not... I don't think it's really changed from a true sell-out standpoint. At our Analyst Day last year, we articulated that historical seasonality was kind of 24% in Q1, 24% in Q2, 30% in Q3, 22% in Q4. And so that, that tends to be how the business is operated. Now, with the sell-in and with some reductions in channel inventory and whatnot, you know, some of those, those numbers are a little bit different. And given that we're in a declining environment, that kind of 30% Q3, 22% Q4, I think that 52, given that we're in still a declining environment, maybe that, that 52 is more like 50. Maybe it's not quite—doesn't have the back half, growth in the first half, or maybe it's closer.
It's also really hard to tell right now because, you know, this holiday season is our biggest holiday season. Like, this is our biggest quarter, and the buying part is just now happening for the consumer. I'd say so far, that, you know, China has a really big holiday called Singles' Day. It's on November eleventh, 11.11 . We just got the results in, and they're. I'd say they're okay. They're not, like, great, but they're okay. It's kind of a rounding error for the company, but overall, that, that promo period was pretty good, but not great. And I think the state of the U.S. consumer, the U.S. is our biggest market, followed by China. The state of the U.S. market, the consumer is kinda still, we're still cautious on the consumer.
I think, you know, they've kinda held us through this period following post-COVID, but I would say, you know, it's a wait-and-see game right now with how the kinda Black Friday through the Christmas buying period how that performs, and we just don't know. We're optimistic, but we don't know.
Yeah, it makes sense. So how much visibility do you feel like you have into the December quarter at this point?
... We have really good visibility on revenue,
Right.
- on sell-in.
Yeah.
You know, everyone here cares about sell-in. I don't. I care about sell-out. That's, to me, all that matters because that's just timing. So we have really good visibility. We know what we're gonna ship, we know what orders are scheduled, we know what sell-in. There's some last-minute orders or cancellations that always happen. But for the most part, we know exactly what we're gonna sell-in, what's on order. We've tried to move things from the air to the boat, and so those get scheduled way in advance. The promotions are planned with Amazon and Best Buy, the retailers around the world. Those are the plans in place. But as far as the sell-out, we don't know how the consumer shows up this year, so we're optimistic but cautious.
Yeah. And our retailers, are you, are you finding that they're being more careful with channel inventory still, or what are you seeing in there?
They are. Some, like Amazon, have really pulled back over the last few years on channel inventory on in stock. Amazon has kind of taken a little bit of a notch up, maybe, maybe leaning in a little bit. But generally, sort of our philosophy as a company, I've been with the company now for, I guess, about three quarters. We've really tried to bring down, lean out channel inventory, lean out on-hand inventory as kind of more of an ethos of how do we improve return on invested capital as kind of our true north of a financial metric.
Yeah, makes sense. And then in terms of discounting, obviously, the holiday quarter, there's a little more discounting on the consumer side. So how should we think about that relative to past December quarters?
Well, a year ago, I wasn't here, but a year ago, it was a quarter that we discounted. I would say the percent of items that were purchased over-indexed to things that were on sale or discounted. So while the promotional planning was set, the items that sold through were the ones that were promoted, and the ones that were at kind of full retail price or had less promotions didn't sell as much.
Mm-hmm.
That's not a good mix because that mix shifts toward lower-margin items. It's not surprising, though, with this environment and this economy, that people are looking more for value. So we have tried to, this year, dial back the promotions, maybe not discount so much or have, you know, kind of discount fewer quantity of items, with to try to drive a little higher margins.
Mm-hmm.
We'll see. Again, we don't know until the dust settles where it all ends.
Exactly. Okay, makes a lot of sense. So when you think about fiscal 2024 guidance, what are some of the factors that will put you above or below the guide? I mean, you spoke about channel inventory, how the consumer is gonna show up. Like, how would you stack rank those factors?
Yeah, I think overall, you know, Q3 is gonna be whatever Q3 is gonna be, based on what we sell out. The real test is gonna be what is left in the channel post-holiday. And you always have too much of some, not enough of the other. But the way we think about channel inventory is forward weeks on hand. This is kind of like. I think of this as like the way a good operations team runs a company. You don't look in the rearview mirror, you look in the forward. They look forward and say: What is the demand signal like next quarter? And I want to have a certain number of weeks on hand based on the future demand. And it's a science. It's very complicated because each region is different.
But generally, we're gonna try to pull down channel inventory in Q4 based on the fact that Q4 is our trough quarter. It's 22% of the year from a sell-out standpoint. So we want to end the December quarter, and hopefully, channel inventories are low enough that we, there's just a little bit of fine-tuning, but our plan would be to have a further reduction in the March quarter based on weeks on hand, and then it will grow a little bit, because generally Q1 goes up from Q4, so you'll bring up channel inventory a little bit and it's . . . and so on and so forth. So it's really active channel inventory management and being very intentional on what the targets are by distributor, by region, by product line.
Got it. That's super helpful. You know, and maybe so sticking on the September quarter. So gross margins of 42% came in very strong, materially ahead of expectations, and then you guided margins in the second half of 30%-39%. So, you know, can you fill in some of the tailwinds this past quarter, and then how we should think about the trajectory through the rest of the year?
Yeah, I mean, this is a, this is a great business. Even though we're seeing revenue declines, you know, we still are having really good, really strong gross margins, really strong operating margins. The 42% exceeded expectations in Q2. There's a couple one-timers. As we mentioned, we brought down channel inventory, brought down on-hand inventory, and when you bring those inventory levels down, it tends to release reserves. Good things tend to happen, and when you have too much inventory, bad things tend to happen. This is kind of a... It's hard to draw an exact correlation, but so there were some one-time benefits by bringing down channel inventory, bringing down on-hand inventory. We can get into more detail if you want to later.
And so that going into Q3, into our December quarter, that's a little bit of a headwind on a comparable basis. However, Q3 is really good because it's our biggest quarter, and so you absorb more of the fixed cost. So you have basically margin expansion just based on more revenue. Now, that's offset a little bit because the mix shift. So where enterprise is about 1/3 of our business, consumer is about 2/3, but in the Christmas season and the December quarter, that tends to amplify the consumer piece, and you're discounting running promotions for Black Friday and whatnot. And so we tend to see a little bit of a margin decline into Q3, and then Q4 has a little similar profile. You have less overhead being absorbed, it's our trough quarter, and there's less promotion, so the B2B helps more.
It's more. It'll be a bigger share, so that'll help. But it—so generally, though, we see that 38, 39 approximately in kind of both quarters, and but I think that's still a good base to build from and grow from there.
... Great. Super, super helpful, caller. Maybe to zoom out a little bit, when we think about your longer term growth trajectory. During the March analyst day, you reiterated expectations for 8%-10% longer term revenue growth. So as we think about your different end markets, C&P, gaming, VC, you know, what segments are you most excited about, and do you think are going to be the primary drivers of high single-digit growth?
Yeah, I think long term, from a TAM standpoint, video, the B2B side, the enterprise side, has the biggest, untapped TAM, and that's basically based on, the video conference business and the headset to a certain degree. But the video business is like 10%-15% penetrated. Zoom and Teams have sold the licenses in; the enterprise owns the licenses that they need, but you're seeing the enterprise really is not really buying in full force. It's still a good business. We're still doing, you know, $100+ million a quarter in video sales, but it's not at the level that it can be, at the growth rates that it should be based on that huge TAM that we're selling into.
Now, the question is kind of, you know, what are the catalysts to drive that TAM, the sell-in growth? It's really kind of clarity on return to office. There's so many people and so many companies are, are unsure if is the hybrid here to stay? Are they going to be working in the office two, three, four days a week, full-time? There's a lot of discussion around their corporate footprint and do I shut offices down? Do I consolidate? Do I restructure certain floors? I think once there's clarity on the office footprint, then I believe every conference room eventually is going to have video. I mean, it's just, it's, it's just like in the days before there were conference phones, you had a conference room that people went to meet in, and there was no phone.
And then pretty soon, Cisco and Polycom, every room had those iconic star phones in every single conference room. That same trend is going to happen here, where every room will have video eventually, and but right now, you're not seeing that deployment. You're seeing the licenses are being purchased by the companies with, with, you know, Microsoft and Zoom primarily, but they're not yet really deploying the hardware. And so I think that will come. You know, today, I think, you know, partially it's probably interest rates and economies and, and, you know, CFOs are nervous right now, and they're spending on security, but not on kind of more discretionary IT. And I think we're kind of in some of that discretionary IT spend.
When do you think VC can get back to growth—I mean, I know it's hard to predict, but is this a few quarters? Is this next quarter? I mean, how, I guess, how do you think about it?
Yeah. You know, I think there are some encouraging signs in the U.S. on inflation, this week or last week, I remember when the report came out. So that was an encouraging sign, you know, but it's really hard to predict kind of when that inflection point will be. We've kind of been roughly at kind of a stable sort of a level basis the last three quarters from a revenue standpoint. We have a couple new products that came out that could provide some tailwinds and some growth. Where, you know, one is being certified, one is already certified, but it's, you know, one is a brand-new category. It's called Sight.
It sits in the middle of the table, so if you have a large conference room, it will render with cameras the people all around the room on the screen with equal prominence in a Zoom or a Teams screen, which is really a game changer. We'll have to demo that at some point for the team, but it's a really, really cool new technology, and it's an add-on to the room, so it increases the ASP per room. So that should help. But return to growth—it's hard to say. It's probably still, you know, at least a few quarters out.
Yeah. Maybe then the last one on VC before we move on. You spoke about 10%-15% penetration, but I think there is a debate in the market of what that penetration number is.
Yeah.
You know, where do you think you may differ versus some of those other market expectations?
Yeah, I mean, it's hard to say. This is when the data out there is all over the map. The last one, I think it was Synergy, was, or maybe it was Frost & Sullivan, was like 40 million conference rooms around the world and some order of magnitude more, if you think about offices and classrooms and those things. But just the core TAM in this report was around 40 million, I believe. That number, maybe it comes down because they, you know, offices are shut down, but it's-- no matter how you cut it, the penetration rate of video is still very, very low. Whether it's 20 million, 40 million, 80 million, you can-- whatever number you want to use, it's still we're in the early, early days of the video deployment in the enterprise.
Makes sense. Really interesting opportunity to watch moving forward. You know, and maybe to move on to the C&P biz or the peripherals business. You know, there was clearly a pull forward of some of that demand during COVID, just due to hybrid work and work from home. You know, now we're coming up on three to four years after that cycle, and so, you know, which areas do you think are most ripe for replacement demand, and where could you start seeing that come through?
Yeah, I think, you know, what's really great about this, we call the PWS business or the Personal Workplace Solutions, is, you know, pre-COVID, people had kind of one kit. They had their laptop, and they had their office set up with a screen, a webcam, a keyboard, a mouse, and they would go to the office, they'd work, and they'd come home, and they'd sit on the couch and open up their laptop and do email in the evening. The pandemic hit, and pretty soon they were not going in the office. Maybe they went to the office and brought their monitor and their keyboard and mouse home with them, or maybe not, and maybe they bought, like, whatever they could find just to work from the kitchen table or create a home office.
Now, that's kind of becoming part of the fabric of how we work. I mean, people are now, myself included, I have a dedicated place at home that I work. I have an office, and now I've got, you know, multiple mice and keyboards. I actually, I mean, I work for the company, so I've got one in my briefcase I travel with too. But now you're seeing, I think people have two setups, and so what's happened in that category is the TAM has radically expanded because of COVID. Now, certainly, it went, we had this just incredible growth during COVID, and it's come off significantly off the highs, but where the exit point off of COVID is still way higher than where it was pre-COVID. So I think this is kind of permanent TAM expansion, and that, that's great for us.
Now, to your question on replacement cycle, you know, we're always coming out with brand-new products. Now, our strategy is kind of defend the low end and fight to the death on the low end so that we can keep competition out of the category that we generally are the category captain in, and then innovate mid to high end. And this has been kind of a long-term Logitech strategy, and it works really well because we make most of our money in the mid to high end, and the brand just has such great brand value. People revere, they love our products, and they are incredible, the engineering, the design.
So you can go into the store or online and buy a mouse for, you know, $10, $20, or you can spend $200 on the MX Master, and it is an incredible piece of technology. And so the whole idea is try to upsell them. The replacement cycle, a lot of times, is not tied to it doesn't work anymore. These things last for a long time. A lot of it's tied to, I want the next best thing. I want a more comfortable one. I want an ergonomic keyboard. I want an ergonomic mouse. And so, a lot of it's just tied to, you know, feature updates.
And as, as professionals, I've got kids that are just out of college, one still in college, and they'll start off with the lower end, and throughout their, their career journey, they'll be upgrading to those, higher-end items as they can afford them. And so I think they're-- I'm, I'm... We've got a great portfolio, and the upsell cycle, I think, is a natural part of our customer base, wanting to kind of go to premiumization over time.
Makes sense. You know, moving to gaming, another area where you have, you know, great brand value, high ASP products, how do you think about that growth algorithm moving forward, whether it's through inorganic impact, secular growth in the market, expansion to higher ASP areas? And, you know, can that business structurally grow over 8%-10% longer term?
Yeah. I mean, eight to 10 is over time probably a pretty tall order for that category to grow in, like, over five or 10 years. You've seen in that category periods of hypergrowth when Fortnite came out. It just, you know, it was just everyone was buying, you know, gaming headsets. And then when COVID hit, it was like everyone was gaming nonstop. That category's had significant growth based on more women entering the market in gaming. Traditionally, when I was a kid and was 13, was a gamer, my sisters never wanted to game. Now, my daughter, maybe not anymore, but when she was younger, she was. So you're seeing it being more gender diverse. You're also seeing people game later in life. Like, my oldest son is 21, he still games with his friends.
You know, so I think what you're seeing is the people are gaming later into life, and it's more gender diverse. That's increasing the TAM on gaming. Now, could it grow at 8-10 for, you know, periods of time? Yes, and it has. Long term, I think that's gonna be that seems like a tall order without kind of additional categories. Now, we look at gaming, and we break it down into kind of three or four different categories. We will say gamers and creators more broadly. Under that category, the kind of primary thing you all know us for is PC gaming. We're, you know, top market share in gaming mice. You know, we have the we just launched the next kind of killer mouse, that, you know, sells for about $200.
That, that's a big premium, and it's the all the professional gamers use it. It's the best product. It's super cool. You know, gaming keyboards, webcams for streamers, we have software that allows the streamers to stream their gaming to other people that want to watch them game, which is a really cool new category. Another part is console gaming, and this is a very crowded market. You've got a lot of competitors that make console headsets for, you know, PlayStation, Xbox. That category tends to grow a lot when new titles come out. New releases come out, people then buy. We have a new product coming out in that category, probably early next year or calendar year, probably January, February timeframe, that I think will help us in that category, differentiate ourselves from all the other players.
Simulation is a really cool category. We're the market leader in steering wheels, so people that are fans of Formula One. I know we're in Europe, a lot of Formula One fans here, I'm sure. We have, I think it's the best Formula One steering wheel that will work with Xbox or PlayStation, and it's just a $1,000 ASP, really good margin, and it's probably the best product on the market, including things like flight simulators and other ones. So there's a diverse set of categories and products. I think you'll see periods where you've got really strong growth, like we've seen, and periods where it's more flattish.
Right now, with where the consumer is, this business has kind of been down a little bit, year-over-year, so we're not yet seeing that inflection point where it's growing again. But this is again, our big quarter, so we'll see.
Yeah. Great. I mean, so we talked about your three main segments. I'd be remiss if I didn't ask you about AI. Obviously, it's a hot topic of conversation. You actually said this, you know, Logitech is the interface between human and machine. And so, you know, how do you think Logitech's business changes as AI starts to penetrate the consumer and enterprise markets, and what areas are you investing in today?
So we've been using AI for a couple of years now as it relates to video processing and audio processing. We have a brand-new headset coming out, the Zone 2, and it's a killer headset. It does not only have models that get updated every day with, you know, keyboard typing and background noise of sirens or dogs barking or kids yelling in the house while you're working. It'll filter that out and render on the far side, just your audio, so it's not distracting, it's really smooth. I think we're the only ones in the market now that offer this.
We run that same audio processing on the far end so that the voice that we're talking to is rendered more clearly. And that is a killer new app that those are all AI models, that it learns, like, this is not a human voice, let's cancel that signal out when you, when you process it, both listening and, and, pushing it out. We do the same thing with our video, all of our video gear. So if you're looking at and you're running our Rally Bar, a Rally Bar with Sight in a conference room, we're constantly updating the models to say, "That is a human face. Zoom in on that person. That person is talking.
Show them on the screen." How do you divide them and kind of go between shots, like almost like a movie production, where you're basically taking different faces based on who's talking in a conversation? And so the cool thing is, like Tesla, that technology, when you buy that, it gets better every day that you use it, as opposed to, like, you know, the technology gets old and tired. These AI models keep getting updated, and it makes the tech better and better every day and every year. On the emerging side of AI, of course, we're using it internally for coding.
We have more software developers than we do hardware engineers, and they use things like Copilot, which is great, and, you know, our teams are using things like ChatGPT, like everyone else's, for various functions. As you think about, like, how could our technology partner or work with AI, I'm not gonna kinda disclose, you know, the areas that we're working on because they're super confidential, but you could just imagine that we are using keyboards, and mice, and contextual keyboards with a recent acquisition to interface with the computer. There's other ways to do that too, that some are obvious, some are not, that we intend to come out with new products.
So we've got, you know, all of our teams are looking at how do we take advantage of this emerging technology that will, I think, radically transform the communications landscape and the interface to the machine, as we say.
Yeah. I mean, it's an exciting time, and you're really well positioned to benefit from all that. It's also exciting because you just hired a new CEO,
Yeah.
Hanneke Faber. So what were some of the factors that drove Logitech to select her? What do you think her strengths are? Maybe what are some areas she'll ramp on over time?
Yeah, Hanneke Faber, she's awesome. She's really just a force of nature. She's a real global business leader, and so if you think about who Logitech is, we're, we're a revered brand. People love our brand. We've got number one market share in roughly 11 of our 15 key categories, so top market share. We're a company that really understands retail and the consumer to a great degree. We're enterprise. We, we sell to the enterprise. We're truly global, and Hanneke's career is truly that.
She spent, you know, a decade plus at P&G, understands brands, understands portfolio management, understands how to communicate with the consumer, spent time building out an e-commerce platform, knows how to sell online, has sold B2B, understands that relationship, and at Unilever, ran a $12 billion or $13 billion business and knows how to scale, and we have ambitions to grow and become bigger, and bigger, and better. And so I think, you know, she'll hit the ground running. She's incredibly smart and a great communicator. I can't wait to have her up here because I think she's a more eloquent communicator than I am, and I think she'll, she'll be a great face of the company.
Yeah, absolutely. We can't-- We're very excited to meet her. You know, maybe to pivot, you spoke about B2B earlier and some of the investments that you've made there and, and how that's kind of bearing fruit. So how far along are you in that transition? What are some of the changes that you've made, and are there any examples of, of customer wins on the back of that?
Yeah, I mean, we're... You know, I'd say in the Fortune 500, probably all 500 have our products. I mean, almost every company does because we're so ubiquitous in the categories that we compete in. I would say that, you know, we have a lot of room to improve on B2B. I think we're, I think we're good, we're not great. We've invested a lot of money. We've built a big team globally, and we've done some restructuring of that team over time. But, you know, we've hired a couple of new leaders recently, and we're, I think we're starting to really see that flywheel start to move. And I think it's, this is like traditional old-school selling. It's Salesforce.com. It's what's the TAM? Who's the pipeline? Where are the leads? How do you do lead conversion, funnel management?
I think right now, it's, there's more of a market issue in B2B than it is sales execution. I think our sales execution is getting better, and I think that as we, I think success will drive more success. But I think that, that team, we've added PWS to their arsenal, as I mentioned, and so that, that has been bearing fruit, and we've seen the results there. The video numbers are not yet showing, I think, the effort of the team. Europe has probably done a little bit better, worldwide as of late. Asia's pretty far behind. Some countries, Australia's pretty good, Japan's okay. China's really, really early in the kind of the corporate video market. But I think the B2B team is really good. There's but still a lot of room to improve.
Yeah, definitely an exciting area. You know, maybe to talk about OpEx a little bit. So you've pulled back on sales and marketing, and more broadly, think about non-GAAP OpEx at or below 25% of revenue. You know, moving obviously, we're in a more challenging part of the market. We are entering a recovery, but you know, in fiscal 2025, if things rebound more strongly, how do you think about holding the line on OpEx or you know, maybe moving above that 25% of revenue?
Yeah, I don't think we want to go above 25%. I think, you know, we're in, I mean, every person or company wants more OpEx. They all want more headcount. That's just the nature of work. But I think that we've got more than enough OpEx to go around. Now, we're focusing on kind of two strategic areas, and that's this B2B selling and engineering, both hardware and software engineering. Those, to me, are where the most value is in the spend. So we want to protect those two, and we wanna and we've done things like moved from high-cost locations to low-cost locations. We've built a great shared service center in Ireland. We've been hiring a lot there, and as people attrit from high-cost locations, moving those to Ireland.
We've got a great business and center in Taiwan, and we've got a brand-new office in Silicon Valley that is not that full and probably won't be that full because we don't really want to hire a lot of people there. As far as our ratio goes, our business model, it's really a great model. I mean, if we talk about, you know, 39%-44% gross margins, call it 40% gross margins plus, keeping OpEx below 25 would generate a 15% or higher operating margin. And I think I don't see a reason why we would need to take up OpEx above 25. You could argue you could go below, and there's room to, but we're investing for the future. We're more focused on that top-line growth. How do we drive revenue growth?
I think it's by investing in technology and investing in sales and marketing, and, and I think we'll try to keep that number at or below 25. Now, could it go above it a little bit? Sure. But, you know, generally, the model is to constrain it to 25% of the, of the annual revenue, right? In Q3, for example, it'll be below because it's a peak revenue quarter, and in Q4, it'll be above that 25 because it's a trough revenue quarter. But overall, staying in that at or below 25 is, is the right, is the right, business model.
Yeah, makes sense. You have a really strong financial model. You also have a really strong balance sheet, you know, over $1 billion of net and gross cash. In terms of capital allocation, you've talked about your priorities being reinvestment in the business, M&A, and then kind of a balanced approach between buybacks and dividends. So how do you think about that moving forward? Would you agree? And then, how, what's your propensity to do a more transformational deal, and what are some of the things you'd be looking for?
Yeah, I mean, so first of all, we'll protect the dividend. We'll pay a dividend, we increase it every year, and that's kind of like, that's just table stakes, and we're not gonna come off of that. And then the priority is M&A, and then what's left, we buy back shares. We just, the board just approved and shareholders approved an additional $1 billion or a new $1 billion line to repurchase shares, and we're active in the market every day buying back stock. And so on M&A, historically, we've done more kind of tuck-in acquisitions. We recently did one called Loupedeck, a company in Finland. Really great technology. This is a product already on our roadmap that we were working on. We bought them, and it just accelerates our roadmap by a year.
And it's a really cool new category, contextual keyboard, right, just completely square in our strategy. Now, something transformative, I think not in the short term. You know, first of all, Hanneke needs to get up to speed on the business and the strategy, and generally, a big M&A deal is kind of a bet your job type thing for a CEO. So I would expect that would be, you know, a ways off. You know, probably not in the near term. Is it possible? It's possible, but I would say right now we're more focused on kind of tuck-in acquisitions that fit our portfolio and fit kind of either time to market, new categories, new products, new verticals, but, you know, nothing transformative on the horizon.
Okay. Makes sense. So, nothing in the near term, but maybe potentially longer term, if something interesting comes your way.
Absolutely.
Okay.
Yeah.
And then, you know, with so much net and gross cash, would you, would you think about increasing dividend growth over time?
I think we've been pretty consistent with our dividend growth. I would just—I think our goal is just to use excess cash to buy back stock. You know, we've been increasing our dividend kind of on a really good track. It's probably doubled over the last, you know, three or four or five years. So we have a good track record in growing the dividend. I don't think we'll come off that. I think we'll, you know, primarily focus on buybacks.
Makes sense. You know, to maybe you can wrap, we have a few minutes left. You spoke about AI as an emerging opportunity. You know, what other adjacent markets do you think are compelling or ripe for disruption for Logitech? Are there any opportunities, whether that's software, services, recurring revenue as well over the next three to five years?
Well, I think services for sure. I think that's a business that we are under-indexed in. Our customers are telling us: "We want service. We're willing to pay for it." And the reason why is because the video gear can be complicated. Now, it's way simpler than it ever was. I mean, for the most part, you or I could set one of these things up. They're not that difficult, but the IT departments don't want the volume of calls for the help desk. So I think that's one that we're. It's a very, very small business today, and I think that we can build that into a bigger business with really good margins and good growth. So we are focused on that piece. The other one is mobile.
I think mobile is just such a merging category for us. We've done a really good job building out the tablet business, but there's a lot more I think we can do on the mobile side. Again, an emerging trend. People are now, you know, moving more towards, you know, mobile work, not just office work, and so that's another kind of longer-term trend that I think that we'll we can capitalize on.
Yeah, makes sense. And then, you know, maybe to get a step... So global supply chain disruptions have, you know, faced in every company in our coverage. And so how has that impacted how you think about your manufacturing strategy moving forward in terms of, you know, outsourced versus in-house, geography, just any color would be really helpful.
Yeah, we've been trying, you know, we're. I would say if you went back a few years ago, it was primarily China as the locus of our manufacturing. We've. I think that the target is to get to kind of roughly 70% end of this year, maybe next year, of made in China versus outside of China. We've been moving product manufacturing to Southeast Asia, to Mexico, really to diversify. Now, we love China. It's our second biggest market. We've got a phenomenal team there, and it's a market that's really important to us. But we do want to have kind of global diversification on the supply chain. It's just been a. It's sort of a constant theme that you've heard.
Mm-hmm. Got it. That makes sense. This may be, you know, pivoting a little bit, but your three largest customers have increased fairly materially as a percent of revenue, you know, roughly a little under 50% of total sales. So how do you think about balancing that customer concentration risk moving forward? Is that something that's concerning to you or?
Well, it's not really concerning because, I mean, you think about our customer might be Amazon, but the real customer is the consumer. And how the consumer wants to buy, we wanna show up where the consumer wants to buy, whether that's brick-and-mortar or retail, e-tail. You know, the key thing for us is to be out there and available for the customer when they want to buy. And I think you're seeing, you know, globally, online has, has been really growing, but now you're seeing a bounce back in retail. So it's been good to see both in Europe and the U.S., you've seen retail kind of come back a little bit, and that's, I think, is, is healthy for the market overall.
Mm-hmm.
You're also seeing really an emergence of, you know, social. Like this November eleventh holiday in China, we saw TikTok sales were up like 130%. I mean, it was huge growth, and a channel that we were, like, barely even participating in years ago is now emerging as a. Now, it's still tiny. It's still a very, very small number, but the growth rates are astounding.
Yeah, makes sense. I mean, you spoke about online. You know, DTC, I know, has been, also-
Mm-hmm
... an investment area in the business. And so I guess, how big is that today? How do you think about the strategy?
We don't disclose the number, but yeah, we call it DTX. Yeah, us selling to the end customer off our website is we're way under indexed. This is a big opportunity for us to engage with our customers on our website or via apps, have that recurring relationship with the customer and sell to them directly. The margins are better. I think we have a better relationship and get to know our customers yet even better. It's a small number today, but I think it could be a much more material number longer term. I think Hanneke, it's an area that she can really help as well with her experience, but that's one that we are investing in, and we do see opportunity for significant growth there.
Makes sense. In the last 30 seconds, you know, we always like to ask this question at the end, but what do you think is most underappreciated about the Logitech story?
I think overall, it's the US investors don't appreciate us as much 'cause we're a Swiss company by nature. I think that's where I think there's more awareness to be done. I know we were doing some marketing with you in the East Coast, and I think getting a little bit more awareness from the US investors would be good for us.
Yeah, makes sense. Well, you guys have a great story to tell, great business. Thank you so much for-
Thank you, Sabrina.
for coming today.
Awesome. Thank you.
It's a pleasure.
Great.