Right? Are we? Yep. Thank you for joining this fireside with Matteo Anversa, CFO of Logitech. Matteo joined Logitech in September of this year, bringing decades of experience across a variety of C-suite roles across automotive and tech industries. Most recently, he was the CFO of Gentherm, and we're lucky to have him today. Before we begin, I need to mention that important disclosures can be found on the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, Matteo, thank you for joining us.
Nigel, this is great to meet you in person and be here. Thank you so much for hosting us.
Great. Kicking right off with an earnings recap. If you can start us off, and zoom in on the September quarter earnings.
Yeah.
which reflected stronger than expected demand and, as expected, channel fill. Can you talk through the drivers of the outperformance and key trends by business segment?
Yeah, sure. So a couple of things I would highlight. First of all, we were very pleased by the performance in the quarter. The growth was broad-based, both in terms of the product lines. Pretty much every product line grew, except webcams. And then was broad-based also in terms of region. We had good performance all across the regions. To me, it really goes down to a couple of key factors that really, I think, made the difference in the quarter. One is execution. Second one is B2B. And then the third one is overall the end consumer demand, which has been solid. So maybe let me dissect it for you. In terms of execution, really, I think the highlight of the quarter was Europe for us.
We grew almost 13% year over year in Europe, which is almost a little counterintuitive based on what you read in the financials, you know, papers about the economy in Europe. And it's really driven by execution. Our team knocked it out of the park. They really had a fantastic relationship with the retailers. They organized demo days, play days where customers can go in, feel the product, test it before they buy it. And I think that really, really made a difference. So great job by Yalcin and his team in Europe. The other thing we were pleased is North America. So overall, AMR grew nicely, particularly in the latter part of the quarter, which also gave us the confidence then to raise the guidance for the remainder of the year.
Then B2B, as you know, has been a pillar of the strategy that Hanneke laid out six to nine months ago, with the fact that we are doubling down in the B2B. We think there are great opportunities that I can talk through later. Actually the consumer channel, sorry, the enterprise channel grew stronger than the consumer channel in the quarter. B2B, really, the growth was very resilient, very broad-based, and we're very pleased with what we've seen. Overall, the consumer demand was good. We grew. It was about 3%-4% up for the first half of the year. We are expecting the same thing to continue for the second half. Overall, it was broad-based. We are happy with what we've seen in the quarter.
Great. Thanks. And you've also raised your full-year guidance, but it still implies a second-half revenue decline by around 10% year- on- year, which kind of implies quarterly revenue to come in below normal seasonality. So could you elaborate on why that is, what's driving the expectations for a below-seasonal December quarter? Maybe talking through factors such as your channel inventory, promotional intensity, seasonal end market.
Sure.
Et cetera.
Sure. So you're right. We raised the guidance for the year to up to 2%-4% year-over-year growth. If you take the midpoint of guidance, that would imply that the second half of the year is, you know, flat to slightly down year over year. The key driver of that is what happened with the channel inventory. I have to take you back basically to the end of 2024, fiscal year 2024 for us. We ended last year with the channel inventory being a little too lean. We spent the first half of fiscal year 2025, so the first two quarters, to replenish the channel. That's why you saw, particularly in the first quarter, a pretty sizable difference between the sell-in and the sell-through.
That dynamic is reversing itself in the second half, after primarily in the fourth quarter, after the holiday season is over. So really, the dynamic has nothing to do with what we are seeing on the consumer side. Actually, I would say, things are trending well as expected, but it's really more around this replenishing, the need to replenish the channel inventory in the first half of the year that is driving this dynamic. Our goal is to continue and end the fiscal year with a healthy channel inventory so that next year we don't have the same volatility, and you know, we don't deal with the same issue that we had this year, which I know is particularly for investors can be, you know, confusing. So.
Mm-hmm. Understood. So actually as a follow-up, how much visibility do you have into the December quarter versus the past years? And are there any specific trends by segment or product that you wanna call out?
So, this is the key quarter for us, right? It's the holiday season. So, right now, so far, we continue to see good growth and the consumer is being resilient and is very broad-based, very similar to what we experienced in the Q2. And actually, you know, growth I would say is pacing nicely so far. On a regional standpoint, if I break it down for you, we continue to see strong growth in Europe. AMR is performing similar to what we had in the Q2, so similar to what we were thinking. And then on the product side, B2B continues to be strong, same reasons that I just discussed that happened in the Q2. So, I think so far, things are going well. Obviously, we are not naive, right?
We know that the big days are ahead of us. We had a good 11.11 day in China a few weeks ago where we saw good growth, year over year, both on the personal workspace area as well as gaming, but the key sale day, you know, Black Friday, Cyber Monday are ahead of us, so we'll have to, you know, see what happens, but we are confident that we're gonna have a good holiday season, and we look forward to keeping you, everybody, apprise at the earnings call in January.
It is one, you know, trend you can always already talk to, which is at least what we're hearing is quite persistent across the ecosystem that when products are discounted, consumer demand outperforms and vice versa. So are you seeing this behavior as you refer to 11.11, for example, so far in the quarter? And how does that specifically influence your approach to discounting Logitech products in December?
Look, I consider myself still relatively new with the company. It's been a little bit, you know, more than two months. I am really pleased by the diligence that, all across the board, our sales team, led by Quinn, has on promotions. We have a very, you know, good formula. We partner with the retailers. We are very quick, prompt, enacting. And when we do it, we do it in a way that doesn't unnecessarily erode margins. So, in terms of what we're seeing in this holiday season, nothing different from last year. There is nothing that concerns me nor that I would call out in terms of change compared to what we have seen in the last 12 months.
Now, obviously, when you segment this by product, you know, our philosophy has been to, you know, protect our, you know, mid to high end of the product lines with higher ASPs and then protect the shares on the lower end, and therefore, you know, price, you know, a little bit more aggressively, call it this way, on the low end of the product spectrum. But overall, really nothing different from what we have seen in the past in terms of the promotional environment in this year.
Got it. Switching to a key topic, which is the impact of potential tariffs on U.S.-bound Chinese export that sort of the incoming administration had hint, has hinted at, sort of increasing. So how has the company diversified its manufacturing base in the last four years to limit the impact of potential tariffs? And how much of your U.S.-bound production currently comes from China?
Yeah. So Hanneke talked in the past about the fact that Logitech is an operational powerhouse. I, you know, having just joined, I can 100% confirm that. And I, the numbers talk by themselves. So if you go back to 2018, 2019, we basically had almost 100% of the products that we sold worldwide were manufactured in China. You know, today, we are about 40% of the products that we sell worldwide are manufactured not in China. Our plan is to have to basically reach this percentage up to 50%, slightly higher, by the end of this fiscal year. And actually this number, so this exposure is even more limited, if you look at the products that actually are sold in the United States, which will be most likely the bigger target, if the administration goes where it seems they will go.
So, the team has been working on this now for several years. They've done this in a very methodical, solid way by, you know, changing some of the suppliers, moving out of China without impacting quality. And in most of the cases, they've actually done it cost neutral. I mean, I'm sure we'll talk about gross margin later, but product cost reduction has been a catalyst of the profitability growth of the company. And as you can see, none of these moves impacted the gross margin of the company in the last few years. So they've done a phenomenal job. We are much more resilient, much more diversified than what we used to be.
Now we will have to see what happens and the extent of the tariffs and which kind of shape or form there will be, you know, applied. But if things, you know, turn out in the way that there is some speculation on the press, I think we have several levers that we can use to mitigate the impact of the new tariff environment. We can definitely accelerate the move out of China. We can increase this percentage, as mentioned, of production out of China much faster than what is originally planned. We can renegotiate and change suppliers, working on shipping routes. Product classification is another area where the company has done a marvelous job in the first time this happened in 2018, 2019, and changed the product classification so we were not impacted by tariffs, and then ultimately, you know, price is always the an option.
So we have a very solid, detailed, step-by-step plan that we are ready to enact once we know exactly the dynamic and the landscape of the tariff environment. And I think we are very ready. I think we know exactly where our competition is in each of the key products, and that's where we're gonna attack immediately. But first we need to know exactly where what the landscape of the tariff is gonna be, but we'll be ready.
Perfect. Maybe switching from top line to gross margins, which have been very impressive in recent quarters, outperforming even your own guidance, by multiple points. I guess the first question here would be, where are you basically why or where have you outperformed.
Yeah.
your own expectations?
We're very pleased with the performance of the company. And a big thanks really goes to Sri, Prakash, and our operating team in continuing to drive product cost reduction. So if you look at year over year, Q2, you know, gross margin rates were up about 200 basis points. The majority of the improvement was really around actions that the team has taken to reduce the product cost, primarily around value engineering. So taking cost out of the bill of material through partial design change, full design change, material substitution. So all these kind of activities that we do every year, then on top of it, in the Q2, we leveraged very successfully the strong demand that I just talked about, and we were able to sell some of the previously reserved inventory, which gave us about 100 basis points margin lift.
And that one, you know, we know that, is not going to repeat, to the same extent, moving forward. So that's why we said in the earnings call that, the gross margin rate will go from about 43.5% in the first half of 2025 to about 40%-42% in the second half. And the driver of the sequential, you know, decrease is driven by this 100 basis points that I just talked about, plus a combination of mix, freight cost, and a little bit more promotional activities. And the, you know, mix and promotion is pretty normal. That always happens in the second half of the year because that's where you have the consumer, the holiday season.
That's when, you know, you always have an uptick a little bit of the promotional activity in the second half compared to the first half. That's something we can control. We'll see how, you know, the holiday season plays out. Freight is, I think, a matter of what we are seeing. Freight costs are elevated, and in some of the lanes that we use. I'm not expecting a lot of room out of that. That's kind of the dynamic that we are expecting for the second half. This will take the total year to gross margin rate of 42%-43%, which is on the higher end of the 39%-44% range that, you know, you just talked about.
Year over year, it's about 100 basis points improvement, which really comes again from the great work that the operating team has done on the value engineering and product cost reduction that I just mentioned.
Got it. So as a follow-up, I guess, as you're already, you know, approaching the higher end of the, of the guidance range, despite actually your highest margin segment being video collaboration underperforming, is the 39%-44% range then too low? Or should we, you know, assume that recent trends that, you know, provided this margin expansion will, will slow? And why would that be?
Great question. The look, I think we will update everybody at the January earnings call, sorry, the April earnings call, actually, with an update on fiscal year 2026. So it's a little early to say. I think right now the 39%-44% is a good range. You know, things may vary by quarter. You know, if you look at some of the products, to your point, the gaming, for example, which performed also very well in the Q2, tends to be a little bit more dilutive if you look at the product lines on the gross margin rate for the company. But on the other side, video conferencing B2B is actually accretive, right? And so you can have some puts and takes happening in each quarter. Tariffs are an unknown.
So I think it's a little bit premature for me to change the 39%-44% range. I would stick with that for now, and then we will update everyone in the year-end earnings call once we know how the holiday season went, how we closed the year, and we're gonna have a little bit more visibility into 2026.
Makes sense. Thanks. Then maybe going on to OpEX, I think one of the concerns that has emerged from September quarter earnings was OpEX, which grew 15% year on year while revenue was up 6%. On the earnings call, your CEO, Hanneke Faber, said you were able to take advantage of some gross profit outperformance to reinvest in the business. But the question is, is this the new norm for Logitech? Meaning, should we expect higher levels of OpEX intensity such that less profitability flows through, if enabled by the gross margin?
No. That's the answer to the question. So, let me, you know, let me expand a little bit.
Certainly.
So for sure, we cannot take the Q2 operating expenses rate over sales as a proxy for the future. There were a couple of dynamics happening in the Q2. We had a few events like Logi Work, Logi Play that where we had you know see some cost that it was really timing that pushed the OpEx rate a little higher. That won't repeat in the second half. Actually, you will see the second half operating expenses rate to come down you know you know notably here in the next couple of quarters. And our plan is at the end of the year OpEx will be within the range of 24%-26%, as we previously stated, maybe on the higher end of the range, but within the 24%-26%. Philosophically, though, I wanna address the second portion of your question.
Our philosophy has always been we want to spend the OpEx that allows the company to grow. So we're focusing on NPI, product development, go-to-market. And we are gonna be relentless in driving efficiency in G&A. And that's what you should expect from us and investors should expect from us.
Okay. So maybe wrapping this portion up, if we think of all the moving parts in your model, this year, what are the biggest factors that would put you at the high or low end of your full year 2024, sorry, full year 2025 guidance range, respectively, both from revenue and operating income perspective?
Sure. So, you know, let's go through the income statement, right? We are finance people. So, if you look at revenue, I think, you know, the holiday season will be critical. So we'll see how things go. Things can go a little better than what we thought in the Q2, a little worse, but that's really available. And we will know the answer pretty quickly here, in the earnings call that we'll have in January. On the margin standpoint, I would go back to the comment that I made when I explained the second half margin, right? So these three key variables, the negative mix, the promotional and the freight. I think freight is gonna stay as we're expecting.
I'm not expecting a lot of, you know, changes that will stay elevated based on what we are seeing. But the, you know, promotional and mix, it's a function a little bit of, how the holiday season goes and how the mix of product that we're gonna sell goes. If B2B continues to outperform and perform strong, there can be a potential lift that we may see here in the gross margin. On the promotional side, right now, no, no change. I am not seeing any shift in the environment, but we'll see when we report the numbers. But that's really are the couple of variables that can swing in a way or another. I think holiday season is critical. The next, you know, few weeks is where really we're gonna have an answer, to some of your questions.
We'll wait, January.
Yeah, understood, and actually then let's move into the more sort of medium term.
Yeah.
Long-term outlook. Earlier this year, Hanneke revised the long-term growth expectations from eight to 10 to mid-single-digit organic growth. Can you help us better understand how Logitech is thinking about the long-term or medium-term growth rates?
Yeah.
Obviously, major segments to get to that.
Look, so first of all, the 8-10% included M&A, but as you know, you can't control M&A. So, I think we did the right approach by, you know, eliminating M&A out, taking M&A out for a minute and talk about the mid-single digit organic growth that, I think, investors should expect the company to deliver and what we're expecting to deliver organically, moving forward. In terms of spaces, you know, I would go back to a couple of key points. Doubling down on B2B has been, you know, a cornerstone of the strategy that we laid out last year, and you see some of the results are really encouraging, and I think even more importantly than that is the approach that we are having to NPI is very, very focused, really continue to be great at what we do great.
and that has been, in a way, the mantra that we used for approving, you know, costs on the NPI. And we are launching some fantastic products. I'm gonna stick to B2B for a second. Sight, for example, which is the one that was named by Time Magazine one of the best inventions of 2024. With the help of AI, we built a smart switch software where, if you are outside of the room, if you're at home and all your colleagues are in the room, you feel like you have a producer in the room. This software can distinguish between me talking versus me opening a bag of chips or, you know, make a noise with a cup. And you are really much more in the room compared to the traditional product.
Gaming, we launched 18 NPIs in the last quarter. I really encourage you to try some of them, some of these, the PRO series, with the new PRO Mice, PRO Keyboard that were actually designed with professional gamers in mind, and have been doing fantastically well. The new wheel series with the shift are much more real. Much more. I'm a big Formula One fan. I come from Ferrari. So the simulator is what I really like. It's unbelievable. You should try it if you haven't. So these are really where we are focusing our efforts. And back to the B2B side, I would add, we people think about B2B office, which is great. It's a great space for us because particularly in the, you know, I would say in the U.S., hybrid work is here to stay.
Companies are changing their offices to make it smaller and to make it more video conferencing ready. That's a sweet spot for us, right? There are also other big verticals that we are going after: healthcare, education. These are all fantastic opportunities for organic growth that require really minimal product changes. We already have the product. It's a very asset-light type of, you know, model. We can really tap into the spaces and really grow organically the company. That's why we feel comfortable about talking about the mid-single-digit organic growth. These are the key areas that I think you will see us focusing on.
Very clear, but there's also the element of competition.
Yeah.
Maybe if you start at, you know, the personal workspace where you are a clear market leader, competition hasn't given up.
Yeah.
You see OEMs and even Microsoft are introducing products. So what does Logitech need to do to defend its market-leading position? And do you think more serious entrants could lead to greater price competition?
We are paranoid about competition, okay? So that's for sure. And we keep that in mind. What I think is, what differentiates us on the personal workspace, I think is two things. And I think this will continue to be the differentiator for the company. One is the design, and the second one is the performance. The design is our ability to tailor the product to the different critical-to-quality characteristics that the different consumers have, right? So we have keyboards that are made for the new generation, like the POP Keys, where you have the emoji that come out, you can replace the emoji, and then if you wanna type a text, you click the emoji, and all of a sudden this thing goes into the text. This for the young generation, okay? You have the products that are for the ergonomics.
So the ergonomic keys, the ergonomic mice. You have the products on different colors for also for the young generation. The Alto keys that we launched in China, which became after a month the top keyboard being sold in China, also for the, you know, tailored to that, to that specific, you know, customer, and then you have the performance, and what differentiates us is what our product can deliver that is a step ahead of competition. So for example, if you take the MX mouse, mice, you have several buttons in the mouse. You can go into our, you know, website that loads the Options+ app, and you can tailor how you want each button, what you want each button to do. So you can create shortcuts.
If you're an Excel person like me, you press a button, you go straight to Excel, so you don't waste time in getting out of the workflow. Your productivity really gets significantly improved. That's how the company is really leveraging software, being part of our hardware and AI. As long as we continue to stay ahead of the comp, of the competition on these features, I think we will be fine. We are paranoid about the competition, obviously.
Understood. Thanks. As an Excel person using a mouse, though.
I use mouse.
Okay. Maybe now switching to the gaming market.
Yes.
How has the recovery trended versus your expectations? And do you believe gaming is still a category with the greatest long-term growth potential? And how do you think about the various factors driving growth, like organic versus inorganic growth, in core gaming expansion and into new markets?
Look, great results of gaming in the Q2, up mid- to high-single-digit year over year. We continue to do extremely well on the share, particularly on the mid- to high-end. And this is thanks to all the products that we launched. We launched 18 NPIs, as I said, in the quarter. And I just mentioned a few earlier, so I'm not going to, you know, repeat myself. I think where we have been, you know, public on that, where we had some challenges in gaming is in the low end in China, where we saw some share loss. And so what we did, we reallocated. This is not new resources, it's just a reallocation of resources of NPI resources into China to build in China for China products, at the China speed.
And the initial you know results are positive. So, I talked about the MX Keys in China, which number one keyboard in you know in less than a month. 11.11 data is positive. We saw good growth. But time will tell if this strategy will allow us to you know to protect the share on the low end. There is another aspect not to forget. China is a big gaming market. So the idea is to do this NPI in China for China, but then potentially transfer them to the rest of the world. So that's our way and our thinking of how to protect the share, but at the same time continue to grow gaming worldwide. We're very very bullish on gaming. Gaming is going mainstream. Even within my family, I game, my wife games, my kids game.
So you don't need to be a professional gamer, and that's why we have some fantastic, range of products that go from the professional ones to the more, you know, mainstream gamers like, you know, you and I.
Great. I think you're gonna like this question in terms of, you know, worldwide AI gained significant traction both in consumer and enterprise markets. Could this become a significant growth driver over time? And what areas of AI are you investing in today?
We are using AI quite intensively also internally, like as a tool to within Gentherm to make our teams more productive. On the product side, as you know, our products are software-enabled hardware, right? And that's where really, in a way, the competitive advantage comes in. And some of the products that I mentioned, the Options+ with the shortcut, the Sight that used this, smart switching is all AI-driven. So I think AI is very important for us. And you will see it more and more in our products. But smart switching is a key one for someone that works from home. You should try it if you have not done so. And that's all AI-driven. It's a great example of how we are using AI in Logitech.
Great. A couple more questions. I think enterprise has been a key area of investment for the company in the last few years. Where do these efforts stand today?
Yeah.
As you look out for the next sort of two to five years, do you believe that enterprise exposure will increase or decrease as a percentage of the mix?
Yeah. We are, I think, cornerstone of our strategy, as I said, very pleased with the growth that we have seen in recent quarters, particularly in the Q2. B2B enterprise will increase for the reason that I mentioned earlier. It's not only about our products in the new office hybrid work environment, and by the way, today I think worldwide only 20% of the video conference rooms are really enabled. So there is a big opportunity for us to tap in with the products that we already have, but then I go back to the new verticals, for example, healthcare. You know, Hanneke was at Stanford Hospital on the West Coast a couple of weeks ago.
They are buying their Rally Bar, you know, our products in the conference rooms so that the doctors can interact with the patients virtually. It's becoming more and more predominant in the healthcare space, particularly in the U.S., where the costs are so elevated. So that's a great opportunity for us. Education, today we are primarily focused on K-12, but there is all the higher education, which is also untapped opportunities. And what I like the most is really, as I said before, that these verticals require really just a minor change to the product lines that we already have in order to be fitted for these verticals. So to me, this is a great opportunity for growth. So we are very pleased to where B2B is going.
Very clear. Maybe circling back on M&A, you extracted from the guide, but you have a rock-solid balance sheet, over a billion of gross cash, no debt. So what's your message on M&A? Will Logitech do more here? And if so, what kind of deals are you interested in pursuing?
Yeah. So the team has done a beautiful job on the balance sheet, and I cannot take the credit. This happened way before me. So don't take the size of the cash that we have as a proxy that we will start, you know, buying and going to an M&A spree. We're gonna be very diligent. You know, both Hanneke and I believe that it's much easier to buy a company than integrate a company. And so we will be very, very careful and diligent in any M&A activity you're gonna see us doing. I would add two things. One, in order for us to buy something, this something has to really accelerate the growth of the company, right? And then, even more importantly, though, I wanna go back to a comment that I made earlier. We have so many fantastic products.
The product lineup is impressive. And I did not realize it, quite frankly, well enough from the outside. You, you realize it when you are inside the company. And these product lineups and these verticals that are untapped, like the ones that I just mentioned earlier, really represent a great, great opportunity for the company to grow organically. And you're gonna see us focusing on that.
Very clear. So, beyond M&A then, how should we think about capital allocation priorities? Will they remain relatively static? You pay a growing dividend.
Yeah.
We invest for growth and a buyback of $500 million per year. Should we expect any of those priorities to change?
We will continue to deliver strong free cash flow as we always do. I think that remains a key priority for the company. We will maintain a great balance sheet. But in terms of you know capital allocation priority you just mentioned, whatever cash we generate, we fund organic growth, and then we pay a good dividends, and we buy back shares. I'm not seeing this capital allocation strategy changing anytime soon.
Very clear. We're running, you know, to the end of our time here. So I just wanted to give you the final minute or so to share your message for the audience about why this is the time to invest in Logitech.
Thank you, first of all. You've got great questions, overall. Look, maybe let me answer it, giving you, you know, my perspective as still the new person and what attracted me to the company. Number one, fantastic leadership team with a clear vision. I hope I was able to clarify for you with some of your questions on how to grow the company into the future. The company has been consistently driving profitable growth, and that is what you should expect us and the investors should expect us to do moving forward. We have a fantastic balance sheet that I think is really an enabler to allow us to continue to grow the company. Then, you know, ultimately, I would say, I'll give you another data point of what really excites me about Logitech.
We did an analysis and we looked at the top 100 countries where the company, you know, operates. And if you take these, all these countries, just up to the medium share of wallet, the opportunity for us is more than $1 billion. So that's why I am, in a way, so focused on the organic growth of the company. So that's really what excites me about the company and about the opportunity ahead. And I am so pleased to be part of it.
Perfect. Matteo, thank you so much for joining.
Thank you.
Everybody have a good day.