Great. I think we're gonna go ahead and get started. Stephen Ju with the UBS Internet Equity Research Team. I'm joined on stage by Chuck Boynton, the CFO of Logitech. So welcome, and thanks for joining us.
Thank you. It's great to be here.
All right. Awesome. So, let's get started with your most recent quarter first. Can you talk about the drivers of the results by category, as well as what's baked into your near-term outlook for your various segments, you know, gaming, video conferencing, and personal workspace?
Absolutely, yeah. We posted results that were better than we expected in our September quarter, driven largely by overperformance in what we call Personal Workspace Solutions. Think of that as the heritage of who we are as a company, you know, keyboards, mice, webcams, etc . It was overall a really good quarter. That business, we saw year-over-year growth in pointing devices, think of that as mice and in tablets. And this is a—if you recall, our business had been declining year-over-year. We had—Our revenues grew 70%+ during COVID, and then they've come off their highs, but are still 40-ish% above where they were pre-COVID. And while we're still posting declines year-over-year, the rate of change is slowing.
And so if you think about, in, you know, Q4 last year, we were down 22% year-over-year. Q1, we were down 16%, and in Q2, we were down 8% year-over-year, which was better than we expected. So while we're not happy that it was a decline year-over-year, the rate of change is slowing, and we maybe are starting to see on the horizon, a bottom. We haven't called, we haven't called it yet, but we're starting to maybe see, based on the rate of change, that we may be hitting that kind of asymptote to the bottom. We also had a pretty strong quarter in gaming, in certain key categories with some new products coming out.
Our video business, the third leg of our stool, was kind of sideways. It wasn't better or worse than expectations. It's still a great business, doing about $150-some million a quarter in revenue. It's still a good business, but it's been. I would say we're not yet seeing the inflection point. If you look at the geographic mix, Europe was quite strong. We actually saw year-over-year growth in Europe, and which I think was surprising to a lot of people because other companies had not posted such great results in Europe. In constant currency, it was down mildly. U.S. was kind of in line with expectations, and then Asia is still struggling a bit, down kind of high teens year-over-year.
As we look forward into, you know, Q3 and Q4, our December and March quarters, we see margins compressing a little bit from where we posted 42% gross margins in Q2. We see margins going down a little bit in Q3 and Q4 at the lower end of our long-term financial model, which is 39%-44%. We see on a category basis, December is our biggest quarter. So certainly, the consumer categories like gamers and creators should do quite well, and followed by Personal Workspace Solutions. And then finally, I think, you know, enterprise video and headsets will be sort of somewhat in line with the prior quarter, given we don't quite see the same peak in the December quarter.
Yeah. The European strength is a little bit counterintuitive. Like, do you have any color to share there in terms of what might be driving that?
I think a lot of it is easier comps.
Yeah.
I think a year ago, Russia is no longer in the baseline from prior years-
Yeah
So there was a little easier comp without the, without the Russia business a year ago. And then I think it was still maybe a bit more of a tenuous market. I'll also call out really strong execution by our local sales organization. They really have done a great job. And so I do think there's, it's a little bit of easy comps and hard work and good results.
Gotcha. I'm gonna put you on the spot a little bit here because I think there were some questions on the gross margin guidance for the third quarter. So, I mean, 39%-44% for the third quarter seems pretty conservative, given what seemed like a pretty, you know, nice jump in the second quarter. So, and there's also the easing of what the promotional environment it sounds like. So, you know, can you add some color there in terms of what's, you know, being factored into the guidance?
Certainly. We're really proud of our margins, both, you know, gross margin and operating margins. This is a great business. It really is. The 39%-44% is our long-term financial model. The guidance or the outlook we provided for Q3 and Q4 was approximately 38%-39%, just to be clear. And if you think about why would that go down from Q2 at 42%? Well, 42% in Q2 was really a little bit of one-time benefits in there. We brought down channel inventory, brought down on-hand inventory, that created some reserve releases, which were kind of one-time in nature. If you look into Q3, the December quarter, it's our peak quarter. So on one hand, we should do better with a tailwind of more overhead absorption into a larger base. That should help us out.
Yep.
On the part that's the headwind is the big quarter is gaming primarily, and gaming has the lowest margins of our stack. And so overall, with the higher mix of gaming and in a more promotional environment, that overall we think will bring margins down a little bit from where we were in Q2. And then Q4 has a little bit of the opposite, where it's our trough quarter.
It's our lowest revenue quarter of the year in the March quarter, and so you have less overhead being absorbed, but then again, you have higher enterprise mix, so it should be a benefit there. And so net-net, we see, you know, approximately 38%-39% is a good base, and I think that might be, you know, sort of the low water mark. If you think about where we're going, the long-term model is 39-44. I think we'll be in the low end of that range, you know, throughout next year.
Gotcha. Now, you touched on inventory levels, so I was wondering if you can add some more color on the current state of your owned as well as the channel inventory?
Certainly. Our operations team has done a really nice job bringing down inventory levels. Now, during the pandemic, we took a bet, and it paid off. We built inventory and bought ahead ICs, and that, the supply execution by our team really paid huge dividends. We saw revenue growth of 70%+ during the pandemic. Other companies had revenues declining because they couldn't source parts. Now, on the back side of this, the supply chain issues have eased up, so we don't see the constraints. However, our on-hand inventory levels are still a little bit too high.
So if you look at, you know, a year ago, we were about 3.2 inventory turns. This last quarter, we were at 4.6. I think the long-term model should be between five and six turns, maybe above six occasionally, maybe below five occasionally, but I think we ought to be in a point where we're able to consistently deliver on an annualized basis between five and six turns, and that will generate a little more free cash.
Yep.
On the channel side, our, our sales organization has done a really nice job, and we have this sort of religion around both on-hand and channel inventory, thinking about it from a lens of return on invested capital. If you think about: How do you improve your ROIC? Well, you can improve your, your profits. For sure, we want to do that, but you can also reduce invested capital. That's good for us, it's good for the channel if we reduce channel inventory. And so our view, our thesis is, if we keep channel inventories low, then we can do a better job in pricing with the channel to have them. They don't need to earn as much money if they have less inventory. And so that part, we've brought channel inventory down materially in Q1.
We had planned in Q2 of channel inventory being flat, but it actually came down because sell- out was stronger than we'd expected. And now we don't know where December's going to land. The reports that I've read about last week with Amazon and a lot of the retailers were—it appears that last week was a very strong week, both in Europe and the U.S., on the heels of, you know, Black Friday and all the promotion events. And I'm not talking about our results specifically, but it looks, and what I've read and seen on TV and read in, in the newspaper and in articles, that there's a general consensus that the consumer is showing up.
And so that could mean that our inventory levels, our channel inventory levels, are already lower at the end of the year than we expect, and that would bode well for Q1 or for, sorry, for the March quarter. It won't really impact our December quarter too much, but it would have a positive benefit if that is true and that happens, it could benefit our March quarter. So, oh, yeah, we can talk more about the demand environment, but I wanted to sort of give you the color on the current market.
Gotcha. So as far as you can tell, Christmas is still coming, right?
Christmas is still coming.
All right.
Exactly.
Okay.
Of course, you know, the last week is one week-
Yep
And the next three weeks are super important. So, you know, I think we're cautiously optimistic, and if what we're reading in the newspapers is accurate, then we're off to a good start.
Got it. Is your SG&A savings program fully executed at this point? Or, you know, are you starting to think about increasing marketing budgets over some timeframe?
Yeah, we don't have plans to increase marketing budgets. We had outlined a model. If you go back, at our Analyst Day, we'd outlined a model of OpEx as 25% of revenue, and at the time, revenues were forecasted to be below $4 billion. And so we said, "Well, we won't go below $1 billion in OpEx because there's a base, and we wanna protect our investments in sales and marketing, protect our investments in R&D, because that's really the future growth of the company.
That drives future revenue growth and future margin expansion." So we wanted to protect those, and so we said, "We'll stay at $1 billion as a floor." But as we saw the business performing better, it'll be a little bit above $1 billion this year, and our target is roughly 25%. So as revenues grow, we'll increase OpEx a little bit, but effectively, we'll be quite disciplined and we'll. Yeah, so yeah, cost programs are largely all executed. Now, will we shift money between different departments? For sure, we'll always be looking at optimizing our investments. But I think overall, I'm really pleased with the cost cutting that we've done, and that business model has translated into really good operating margins. Last quarter, we delivered 17% operating margins, which is near the high end of our published range of 14%-17%.
Yep.
And so I would, I would think long term as a, you know, kind of 25% or a tad less, and as revenues grow, maybe we can see a little bit of expansion there, but for the most part, I would say, you know, at or below 25%.
Understood. Now, let's zoom out to the big picture. I mean, what you were saying earlier about how much bigger you are versus pre-pandemic, that was striking to me. So I mean, but obviously, the pandemic created a surge in gaming, you know, video conferencing and content creator, you know, type activities. But, you know, despite the tougher comparisons and the challenges recently, it seems like the biggest takeaway here is that, you know, consumers and enterprises who may not have been customers of Logitech before, they're now here, right? So, so what steps are you taking to not only retain all of these users, but in fact, grow your share of the pie? Yeah.
Yeah, that's a really good question. You know, we participate in roughly 15 categories. We have number one market share in roughly 11 of those 15 categories. So we are really proud of being the category captain in some really important categories. You know, we have plans to grow. In some of the categories, like in video, enterprise video, the market is been a little challenging, and so the way we look at it, we have top share in video, but the market's really not moving. We have launched two new NPIs that should help gain additional revenue growth, hopefully, and potentially some share. One is a Rally Bar for the small conference room that's been released. It's a great product. It's a smaller footprint for a smaller room.
The second one is a really cool new product called Sight, that is for the large conference room, that provides meeting equality for those that are in the back of the conference room. I'm sure we can all relate to being on a Zoom call where you're remote and you're dialed in to a Zoom meeting, which has, you know, 15 or 20 people in the room, and the camera picks up the folks in the front of the room quite well, but those in the back are really second-class citizens. Our new product is a tower, like the size of a tennis ball can. It sits in the back of the room, has cameras, and that will render those in the back of the room with equal prominence to those in the front of the room and creates a much better meeting experience.
Yeah.
A lot of our enterprise customers are really excited about this product. I don't believe it's yet fully certified on Zoom and Teams, but it should be imminently, and the initial feedback from our customer base is incredibly strong. So I think we'll find share expansion there. In the other categories, we, we've released lots of new NPIs, you know, 50-70 a year, and that's really helping to maintain and grow share. So you think about what brings the customer back year after year, new products. In gaming, in time for the holidays, we've got a whole bunch of new products on the gaming side to help extend our lead and to help grow share. In the traditional webcam, mice, keyboards, tablets, we're always revamping that line, and that's helped keep the product line fresh and keep customers coming back to upgrade.
Got it. Now, I think on the last conference call, you talked about potentially the second half of 2024, returning to year-over-year growth, right? So setting aside the considerations of using comparisons, et cetera, like, can you elaborate on what's kind of being baked into that thought process, either from a product perspective or category perspective or otherwise?
Yeah, we haven't really called the bottom and called growth. I think there are, you know, some investors are quite excited about what next year's gonna look like. We're a bit more cautious on what next year will look like. The first thing of the data I mentioned of, if you look at the last three quarters, 22% decline, down to 16%, down to 8%. So that slope, if you draw that line, it feels like the bottom is out on the horizon. We haven't called the bottom yet, but it looks like we're headed there.
Now, our March quarter is generally gonna be an easier compare versus a year ago, but we do plan to reduce channel inventory in the March quarter, so it's possible that there's growth on sales out, but sell- in might be, you know, flat or down. We haven't provided that level of granularity in our annual outlook. But as you look out to next year, for us to get back to growth, I think we need the consumer to show up and to be strong.
Yeah
The economy to be, you know, fairly resilient globally, and video to come back. Now, we haven't provided an outlook for next year. We'll do that. We're likely gonna have an Analyst Day in mid-May, this year, so we'll see. We haven't finalized the plans for that, but likely in mid-May next year, we'll do some, Investor Day and kind of talk more about the, our longer term views. But for now, I think we're being a little more cautious on our views into next year, given the uncertainty.
Okay. Got it. You talked about operating margins earlier, but narrowing down the discussion a little bit to the gross margins, as you think about, you know, medium to longer term, how various categories are gonna grow at different levels, I mean, how do you think your gross margins will trend in sort of a similar timeframe?
Yeah, it's a really good question. I think overall, on the video side, enterprise video and headsets, those are above company average margin, and I think those will stay roughly consistent. The competitors, it's a big category, and there's lots of competitors, for sure. You know, big markets that are profitable attract competition, and there's good competition. I think overall, in that video space, I think margins are fairly stable. The industry participants have acted responsible. Enterprises are not that price sensitive. If you think about video gear, what they're spending on furniture likely costs more than what they spend on the video technology in that given conference room. So it's not really a pricing issue, it's really more: Is it the right technology?
And I think we have the best technology, and so I think that's what's helping us to be number one in that market. In the other categories, you know, I think in PWS, the team has done a really good job on margin expansion. They've done a great job on lowering costs. Certainly supply chain costs have come down with freight and logistics for everyone. We've also done a good job in kind of design for manufacturing and bringing costs out that are negotiated supply chain. And our brand value, the brand equity is quite high. And I. So I think in the margin side, for PWS broadly, I think that's fairly stable. And in gaming is the one that is a bit more volatile, and gaming is really below the gamers and creators space. There's, like, four or five subcategories.
The flagship for us is PC gaming, which the margins are quite good. They're below company average, but they're quite good. And then the other end of the spectrum is console headsets, where margins are challenged. Now, there are some new products coming out, and I think that, you know, can help to create differentiation and potentially help improve margins, but the, you know. But generally, in the gaming space, it's a lot more price sensitive.
Yep.
People buy when they're promoted, and they don't buy as much when they're not promoted, and so I think their brand is really important. We have taken a lot of the old brands, like Astro and Blue Microphones, and we've bundled those underneath the Logi G brand that our customers love and revere. I think that can help on the brand equity side to grow or protect margins.
Gotcha. Now, let's switch gears, a little bit to prospects for AR and VR, over the medium term. So how do you currently split your R&D budget, to make sure that you remain in a strong position in this category?
We have a handful, a number of different R&D organizations. We have more software engineers than we have hardware engineers. We've got a really phenomenal hardware engineering team. A large group in Lausanne, Switzerland, where our corporate headquarters are, a very large group in Taiwan, and then a group in the U.S. as well, and so they're always innovating. Our interim CEO, Guy Gecht, did just such a phenomenal job. He was a great partner. I really liked working with him. He's brought a lot of new ideas of how do we accelerate time to market, and our view is that if we can accelerate time to market for new products, we'll have more time to do more fundamental research.
So we take a view, and I don't wanna get into kind of our secret sauce and how we do our engineering and design work, because I think we're world-class at this. We are. The design that we do is phenomenal, but we have a separate design organization that does the design work, and they are world-class. We have a hardware engineering organization that does invest significant money in new technologies like AI, AR, VR, all these new technologies, and then they have a group that does sustaining. And the whole battle for all tech companies, not just us, is the tyranny of the now tends to move budgets towards sustaining engineering. You have to be very disciplined to move engineers off of legacy product projects onto new projects. That's not a Logitech issue, that's a company-wide issue.
And it's why many times large companies stop innovating because they get consumed with dealing with the current products and market. And I'm really happy with the work that our head of software, hardware design, have been very disciplined about making sure we're protecting those investments in new technology, 'cause that's the lifeblood of any company. And I look at, generally, tech companies, and we're, we're no different. If you don't spend money in R&D, you get commoditized and margins start to fall. Revenues fall, margins fall. If you're investing appropriately in R&D, you should have stability in margins or growth in margins, and so we're very conscious on how do we allocate and allocate resources.
Gotcha. Now, Sony, I believe, recently introduced some new gaming line products. I mean, this is probably not a new dynamic, right? But, you know, how do you assess the prospects of, you know, for the first party manufacturers to increasingly, you know, access your end markets?
Yeah, we're very close to Sony. They're a great company. They've got, you know, really great products, and, you know, these are big markets. These are big, multi-billion-dollar markets, and big markets attract lots of different, competitors. And you've seen, you know, Microsoft and Sony and many companies, they'll, they'll get into categories, they'll come out of categories. I'd say, you know, I welcome the competition because I like our odds of competing and doing better, and it's validation.
When others enter markets, it validates the markets that we're in. But I would say Sony is a, is a really good partner, and we like them a lot, and I. If they wanna introduce products that are in our backyard, that's great. I think we're happy to compete with them, and if they wanna partner with us deeper, we're happy to do that too, but they're a great company and a good partner of ours.
Got it. And, you know, yet another one among things to, you know, worry about, you know, think about, for video conferencing. I mean, should we be worrying about prospects for greater camera integration into screens?
I don't think so.
Yeah.
I mean, if you think about the market that Dell has, as an example, selling glass into the conference room, that's a huge business for them. If they start to integrate cameras, then they gotta have the software teams, 'cause I would say the hard part in video, and the part that we excel at, is the software part that makes that stuff work really well. You know, I think with Dell, my guess is they're a lot better off selling great monitors in the conference room, because when you put the camera in there, great, what about the microphones? What about the speakers?
Yeah.
The speaker placement, the microphone placement, it's probably a lot more complex than it might seem. Now, in a small conference room, would an integrated solution make sense? Sure, you could have a monitor that has a camera in it, like your laptop. But the great cameras need to be large to capture a lot of light, to render the individual you know it with the right color and the right you know kind of clarity. And so I think when you embed the camera into the screen, you lose more flexibility. Do you want the camera above or below? If the camera's up high and it's up high, you're looking down on people.
If it's low and the monitor is low, so I don't think the market wants them integrated, and I just, I'm not—I don't think that's a big threat. But if they come out with it, there's a... It's a huge market, so people will buy whatever you create because the market is so big, there's room for lots of people. But what will be industry-leading and what will have the highest share? I don't think the integrated camera is necessarily the best form factor for conference room video.
Understood. Switching gears a little bit, you have $1 billion in cash, and you have been returning cash to shareholders. Should we expect your current capital allocation strategy to continue?
Yeah. Our stated capital allocation priority is, one, we're gonna protect the dividend. We pay a, we pay an annual dividend, we're very proud of that. We've been increasing that every year for, you know, 10, I'm not sure how many years, but many, many years. So we will continue to do that. Then after we pay the dividend and grow the dividend, we then want to buy companies, invest in CapEx and grow.
We have not been very active in the M&A side as of late, but that's partially because we have an interim CEO, and we're not gonna be doing M&A deals with interim CEO. Our new CEO starts on Monday, and so I would expect this to be, you know, we're not gonna suddenly start doing deals overnight. It will probably take a year, it could be two, before we're more active. But there's a lot of opportunity out there for us to grow, and then the excess capital, we return to shareholders via buybacks.
Yeah.
Now, the M&A side, I wanna just highlight a couple things there. We're really good at M&A. We have done some. If you look at our categories, like gaming with Astro or our video conferencing businesses, those are all businesses that grew out of M&A, and we would not be a $4 billion revenue company today without doing significant M&A. So one, we're quite good at it. And of course, every time. You know, there's a lot of risk in M&A, not everything has worked out perfectly, but I think we're quite good at this. And we have something unique. We've got a brand that everyone knows and reveres, a great brand. We have a great supply chain organization, and how we manufacture and create the upstream part of our business, we're really good at that.
We have a global distribution network that is at scale, and other companies don't necessarily have the same scale we have. So there's an opportunity for us to buy companies, plug them into our supply base, get lower costs, plug them into our distribution network, and be able to work with the likes of the retailers and e-tailers, and the multi-tiered channels around the world. So I think we have something unique and special here that makes M&A a little lower risk and more beneficial than maybe some companies out there.
Gotcha. And you had, you know, you touched on this earlier, you have a new CEO in a matter of days now, I think, right? So, you know, with new leaders come new ideas, new directions. So, you know, anything you can share in terms of what we can expect,
Yeah. Hanneke Faber starts on Monday.
Yeah.
I'm just super excited to work with her. We've been talking a lot, and she's just a very dynamic leader. She'll be, she's gonna fit right in. She's already been working incredibly hard with us. I'll be leaving for Switzerland on Saturday. The whole team will be with her all of next week. She's gonna bring so much to the table for us. You know, a couple things we were talking about in the conferences earlier today is, you know, she ran a fifteen or twelve to fifteen billion dollar business at Unilever just recently.
We have aspirations to grow. We're at $4 billion in revenue today, and this idea of bringing global scale, I think, you know, we as a company, have a lot of room to mature in how we think about things and how we scale. I think she'll bring, you know, many things, but that ability to scale as an organization, and she's really in tune with who is the customer, and being very in touch with identifying with who the customer is, and helping us along that journey of being better in touch with our customers and what they want and what they need in the future.
Got it. We have only about a minute or so left, so, let's fast forward in time about a year. We're once again sitting here at the UBS Tech Conference, and it's November, December of 2024. You know, what do you think we'll be talking about in terms of what you've accomplished in the trailing twelve months?
Well, first of all, I'm so excited you're having this conference, 'cause the first time I ever attended the old Credit Suisse Tech Conference was in 1999, back when, you know, it was the kinda. if you were invited, you were a company in the Silicon Valley. Everyone wanted to be here, and I was afraid you were gonna cancel it now that UBS had acquired Credit Suisse. So first of all, I'm thrilled you're having the conference again next year.
It's a great conference. And I hope that we're talking about revenue growth, strong margins, great end markets, video growing and video performing quite well. I'm a little more, you know, cautiously optimistic, but I hope what we're talking about is all the pandemic kind of decline is behind us, and we're back to growth, and we're talking about, you know, future markets and ideas of how we can continue to grow at that long-term financial model rate.
Gotcha. So with that, we'll wrap it up. Chuck, thank you so much for your time.
Stephen, thank you so much.
Of course.
It was a great conversation. I really appreciate it.
Thank you.