Good morning and good afternoon, everyone. Welcome to Logitech's video call to discuss our financial results for the 3rd quarter of fiscal 2023. Joining us today are Bracken Darrell, our President and CEO, and Nate Olmstead, our CFO. As a reminder, during this call, we will make forward-looking statements, including with respect to future operating results under the safe harbor of the Private Securities Litigation Reform Act of 1995. We're making these statements based on our views only as of today. Our actual results could differ materially. We undertake no obligation to update or revise any of these statements.
We will also discuss non-GAAP financial results. You can find a reconciliation between non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC, including our most recent annual report and subsequent filings. These materials, as well as our prepared remarks and slides and a webcast of this call, will all be available at the investor relations page of our website. We encourage you to review these materials carefully. Unless otherwise noted, comparisons between periods are year-over-year and in constant currency, and sales are net sales. Finally, this call is being recorded and will be available for replay on our website. With that, I will now turn the call over to Bracken. Good morning, Bracken.
Good morning, Nate. Thanks, Nate, and thanks all of you for joining us. As you saw in our pre-announcement, our 3rd quarter results were disappointing. Enterprise demand deteriorated versus last quarter, consumer purchases were soft and more concentrated during promotional weeks than is typical. Those factors could pressure our net sales and gross margins and resulted in a revised FY '23 outlook. I've discussed for the past few quarters the ongoing macroeconomic and geopolitical challenges impacting Logitech and the world. A strong dollar, global inflation, and low consumer confidence continue. In the midst of these, we focused on what we can control: product innovation, a strong go-to-market strategy, and disciplined P&L management. What changed during Q3 that pressured our results? First, our enterprise demand declined. Our VC business had delivered consecutive quarters of 7% growth but fell 16% this quarter.
You all have read the headlines. Google, Amazon, Microsoft, banks, and other businesses have announced layoffs and cost-containment actions. Initially resilient in the face of pressured macro conditions, businesses are increasingly cautious in their spending, given the economic volatility and uncertainty. Of course, that is impacting our enterprise business, too. The second change in this quarter was a shift in our consumers' purchasing patterns. Consumer sales remained weak, and importantly, of those consumers that did buy, these purchases were concentrated in times with higher promotional intensity, resulting in lower sales and pressured margins. While current macroeconomic conditions and even the variables that changed in the third quarter aren't going away this quarter, they don't impact our view of the long-term potential of this business. We remain committed to the long-term growth trends, strong market strategy, the markets, and the business models we have in place over time.
I fully expect us to return to more predictable, less volatile economic conditions. I believe this will support business investment, rising consumer confidence, sustained growth at Logitech. If we look beyond the whipsaw of the daily headlines, I'm actually struck by what hasn't changed. While the pace of return to offices remains uneven, hybrid work is inevitable. Companies' approach to return to the office has been different across industries and geographies. I hear a familiar story from CEOs and customers across industries. They're still working to determine what hybrid model works best for their teams. Logitech is no different. We're relocating and redesigning buildings in the Bay Area and across the globe, focused on a hybrid work environment. As companies settle out on their definitions of hybrid work, we should see investment in personal workspaces and collaboration rooms. This investment will happen.
It's just a question of timing. Product innovation matters more than ever. The winners will have great products. That's why we keep investing. We're also diversifying the ASPs in our portfolio through innovation across our categories. Our oldest business, pointing devices, had ASPs 25% higher this quarter than four years ago, as we've systematically expanded the category into new segments with differentiated features. This is obviously by design. Making sure we have category-defining products across a broad range of ASPs is our goal. Innovation requires investment, and our R&D investment this quarter was up 50% more than we invested in Q3 2020. Few companies have the financial resources and the management discipline to sustain investment in product development during challenging times while driving efficiency at the same time. We continue to press that advantage and are enhancing our product portfolio.
The big, durable trends we've been highlighting, video everywhere, hybrid work, the explosion of gaming and content creation, continue to move ahead. People today wanna work, play, and create from anywhere, and we believe that our products will be a great enabler of this trend. Let me provide a little more perspective on this quarter's performance. I mentioned consumer spending was weak in the quarter, and it was, with sell-through excluding currency and our prior business in Russia and Ukraine only declined mid-single digits. We grew market share in gaming, video collaboration, pointing devices, and cable keyboards. In video collaboration, while the number of conference cam units declined year-over-year, we continued to drive ASPs per room higher.
The mix of our conference room sales is skewing to higher-end cameras, and the attach rate of accessories and services to our conference room cam sales is growing, which drives our sales revenue per room higher, evidence that our strategy of developing integrated room systems is working. In keyboards and mice, we continue to gain share in the fast-growing high-end of the market. What can you expect from us in the near term? You should expect us to operate in a conservative, disciplined manner consistent with the last few quarters. Namely, we'll focus on decreasing our expenses. We plan to reduce operating expenses by $150 million, or 11% by the end of fiscal year '23. We're on track to well exceed that goal. For Q3, OPEX was down 23%.
You've watched us be aggressive on our OPEX as we saw the market weaken. You can expect us to continue to manage our costs based on market conditions. We'll continue to invest in product development, though. Customer needs are evolving quickly. We have the engineering and design expertise, customer insights, and financial flexibility to bring new products to market to meet this demand and to accelerate refresh cycles. We will lean into our global operations and go-to-market capabilities. One final note before I hand it over to Nate. First, regarding our CFO search, our search is progressing well, though we don't have an update on it to share with you today. Second, I'm really pleased to announce that our current Head of Global Operations and Sustainability, Prakash Arunkundrum, has been appointed Chief Operating Officer here at Logitech.
Prakash has been here for close to seven years and is a frequent presenter at our annual Analyst and Investor Day. Many of you already know him. In this newly created role, Prakash will be one of my key partners in making sure we are structured strategically and operationally for the short and long-term road ahead. With that, I will hand it to Nate to provide some additional color on our results. Thanks, Nate.
Thanks, Bracken. Hello, everyone. Let me walk you through the quarter in more detail. Our Q3 results were impacted by a challenging macro environment. Net sales were down 17% to $1.27 billion. This reflects consumer purchasing concentrated in promotional weeks throughout the quarter and lower enterprise and consumer spending. Gross margins decreased versus last year to 37.9%. Versus the prior year, currency was unfavorable 3 points, promotions were also unfavorable 3 points, and cost inflation was unfavorable 2 points. These 8 points of headwinds were partially offset through our pricing actions and by driving down our use of expedited shipping. Operating profit was $204 million, reflecting lower demand and gross margin pressure, partially offset by reductions in operating expense.
Cash flow from operations was $280 million in Q3. Cash flow is up $118 million year-to-date versus last year. Turning to results across our product categories, gaming was down 10%. Growth in our simulation products was essentially flat and more than offset by declines in PC and console gaming. Asia-Pacific was down only modestly, while Americas and Europe remained pressured. Despite these declines, we gained market share in nearly all gaming categories. The largest negative swing in our portfolio versus last quarter was in video collaboration, which was down 16% after posting consecutive quarters of 7% growth. Video conference room cameras and peripherals declined single digits. We gained share. Business-oriented webcams were down more than 40%.
Pointing devices were down 8%, driven by pressure in the low end of our portfolio, but we grew market share in total pointing devices. Keyboards and combos net sales declined 17%, with gains in the high end of the market offset by losses in the low end of the market. Consumer webcams were down nearly 50% year-over-year. Turning to expenses. Consistent with last quarter, we reduced our OpEx, which was down 23% versus last year. As Bracken mentioned earlier, we remain committed to investing in product design and development to strengthen our category leadership. While R&D was down modestly versus last year, the $63 million we invested in R&D in Q3 is more than 50% higher than our R&D investment level just three years ago.
In Q1 of this fiscal year, we communicated our plan to reduce our annual operating expenses by $150 million versus last year. We achieved that goal this quarter, one quarter ahead of schedule. I now expect that for the full year, we will reduce operating expenses by approximately $215 million or 15% versus last year. We will continue to focus on finding efficiencies throughout the organization as we manage our costs based on market conditions. We ended the quarter with a cash balance of more than $1 billion and continued a strong share buyback program, returning $90 million to shareholders in the quarter.
We revised our financial outlook for FY '23 based on three items: softer than expected third quarter results, enterprise and consumer demand, which may remain weaker than we previously expected, and uncertainty in supply availability related to the recent COVID outbreaks in China. Our outlook calls for full-year revenue in FY '23 to be down 13%-15% in constant currency. The US dollar weakened versus last quarter, currency still projects to be a roughly 5-point headwind to US dollar growth for the full year. Our outlook for full-year revenue in US dollars would be down 18%-20%. Our full-year non-GAAP operating income outlook is now between $550 million and $600 million. Nate, we can now open the line for questions.
Great. Thanks, Bracken. Thanks, Nate. As a reminder for those on the call, please raise your virtual hand and we'll get you in queue for Q&A with Nate and Bracken. Our first question is from George Brown at Deutsche Bank. Good morning. Good afternoon, George.
Hi, George.
Hi, guys. Good afternoon. Thanks to take my questions. I have two, if I may.
Okay.
Firstly, in terms of product launches, you released quite a few products in Q2 ahead of the holiday season. Can you provide some detail on how they performed? In particular, I'm interested in how Logitech G CLOUD has performed and whether that's met your expectations or not. I'll leave it at that.
Okay. Yeah, I would say overall, we announced 20 new products that we're launching in Q3 or sometime, you know, in the next 3-4 months after that. I would say overall our launches are pretty well on track. The G CLOUD in particular is a very narrow launch, so we launched it only in the US. We're so far so good. We're now expanding it into Europe and Japan. I would say so far it's on track. It's a new category for us. We're always very conservative on new categories, George, because we don't want to get, you know, kind of over the tips of our skis, as we'd say here. So far so good. Generally speaking, I feel really good about our innovation in total.
I mean, we continue to have just really good insight-driven innovation with. I would say our performance in all of our new products is pretty well on track.
Perfect. Just a second question. Just in terms of the level of discounting going forward, after there was clearly some pull forward of demand during the Black Friday and Cyber Monday period, what could we expect going forward into Q4 and beyond from a promotional perspective, given inventory stands at quite a high level?
I don't think we're not in a position where I would say we're gonna heavily discount because of inventory levels. Our channel looks fine, and our internal inventories came down quarter-over-quarter again, as you probably saw. We're gonna make sure we're responsive to the environment. I wouldn't commit to you exactly where the overall promotion levels will be. I think they were particularly high as a percentage of our business this quarter, though, and I wouldn't expect that again.
George, quick comments on your questions. I think from an NPI standpoint, agree with Bracken. Off to a good start. I wouldn't say there was anything in there that was financially really that significant in the quarter. You know, still ramping up there. On the discounting, as Bracken said, we definitely saw consumer preference towards more promoted products this quarter. I think there's some of that assumed going forward here in Q4. Too early to say what that looks like out into next year, I would say. You know, that seems to be the environment that we saw during the holiday, was certainly the weeks with the higher promotions, had the higher percentage of sales.
Perfect. Thanks, guys.
Mm-hmm.
Thanks, George.
Thanks, George. Next up, good morning, Asya Merchant from Citi. Good to see Asya.
Hey, Asya.
Hey, Asya.
Hey. Hey, good to see you guys too. Couple of questions. You know, first on the VC side of things, where, you know, if you can give us any anecdotes about how your discussions with customers are going now. Clearly, the environment is still pretty gloomy out there as far as layoffs, has there been any change since their reported quarter in terms of these conversations with these customers around demand for VC? Secondly, I know in the press release, and Nate mentioned that as well, there was some supply concerns for your March quarter that you discussed in the press release with the pre-announcement. Can you tell us, you know, how much of that's really affecting the March quarter, when do you expect those to kind of play out?
Are you still expecting supply issues post the March quarter? Thank you.
Okay. I'll take the first. Nate, I'll let you take the second one. I would say overall-
Sure
... you know, I just came back from CES, and yeah, I would say generally speaking, the tone was about the same. Everybody seems very committed to the long term, making sure they've got the right setups and that, you know... I wouldn't say there was any real change in the secular trend from what I see. I do feel, I do sense the conservatism. You know, I think you could hear it in some of our salespeople. They were saying March. I'm not sure that was the right date, but they were saying a lot of the companies are really pushing out spending into future quarters. I think that's probably still out there. We're certainly assuming that as we go into Q4, and it's reflected in our guidance.
Nate, you wanna take the China question, or I'm happy to?
Yeah, no, I think, listen, I think the thing that we've probably all learned over the last few years with COVID is it's a little hard to predict. I've made some assumptions, you know, that there could be some disruptions on supply in the quarter. We're working hard on those things. We may have opportunities through expedited freight and so forth to recover some of that, still a fluid situation, Asya. There's not really a specific number I would say we called out. We just tried to factor in a range of possibilities in the outlook, that was one of the things that caused us to adjust the full year outlook.
Yeah, I would just add to that. I think, you know, We're probably in the middle of the most uncertain period right now because, you know, it's Chat-
Mm-hmm
... or New Year just started. All of our factory people went back to their homes, and there, it's anybody's guess on what that's gonna do to COVID rates and whether we'll have a problem getting people back or some of our suppliers will. We're in this kind of uncertain period now, but I think it'll settle out over the next few months. It's not an unlimited risk, we bracketed it pretty well, I think, in our outlook.
I think the other thing that we've done, certainly over the last couple years through investment, has been increase the amount of automation in the factory. We can't fully offset the risk of labor disruptions and things like that, but we have improved the company's ability to do that versus a couple years ago by driving up that automation in the factory, which has somewhat reduced the reliance on labor. Still something that we've gotta really manage tightly.
Great. Just in terms of growth outlooks, you know, beyond the March quarter, you guys obviously have a target model out there. Any indication on when we should expect that growth? Are we at a point where post the March quarter, we can return to kind of the growth rates that you guys have outlined, just given the macro trends that you're so confident on will continue?
Certainly, you know, we're planning Analyst Investor Day, we'll have the date out there shortly. I think it's too early for us to tell you what next year's gonna look like, and, you know, but hopefully we'll have a clear picture of that when we come into March. you know, I can't imagine that we're gonna see a snap back in the macroeconomic picture in a quarter, so I wouldn't expect it to, you know, our fiscal year to end and then things suddenly get better. I think I'm pretty optimistic about somewhere out there in the next, over the next year or so that you'll see the market come back. I think that everybody on this call probably has an opinion on how long this is gonna last.
Okay. Thank you.
Thank you.
Thanks, Asya.
Great. Next up will be Paul Chung from JP Morgan. Good morning, Paul.
Hello, Paul.
Hey, Paul.
Thanks for taking my question. Just on gross margins, you know, as we kind of think about a couple quarters, you know, down the line, you know, how do we think about, you know, pricing increases you've done, you know, kind of lapping some FX headwinds, lapping some component inflation and lower shipping costs. You know, can we rebound comfortably into your kind of target of 39%-44% in a couple quarters?
I'll go ahead and take that one, Bracken. I mean, Paul, you know, this quarter we had 8 points of headwinds year-over-year. Very similar factors in the sense that we had currency was the largest. We also did have some headwind this quarter from the increased promotional mix. Then we also had the inflation. As I mentioned last quarter, I mean, I think we feel good about some of the trends on the inflation side. Start to see some of the costs come down. Ocean freight, we continue to make some progress on the rates there. And currency, you know, looks a little bit more favorable than it did last quarter. Good trends, but we didn't really see any of that really flow through yet this quarter.
I think next quarter, I really don't expect to see a lot of that favorability yet. It takes a little bit of time with the inventory being a little bit higher. We've got to work that down to start seeing some of those benefits come through as well. Yeah, I think into next year, I think some of these tailwinds could probably. Excuse me, some of these headwinds could probably become tailwinds. I think I misspoke earlier. Those are obviously headwinds. Some of those headwinds could become tailwinds and, you know, I think in terms of the pricing, I think it's good that we took action early this year to increase prices across a number of categories. That's helped offset some of these pressures.
You know, we'll see what the promo environment, you know, what kind of promo environment unfolds over the next few quarters of whether we can hold those or not. Lots of moving pieces, Paul, but I do think that we've been absorbing a lot of those headwinds this year, and I do expect some of those to begin to reverse into next year.
Maybe, Paul, I'll add one more piece of perspective. I think the thing that makes me feel the best about this year is the, you know, incredible amount of headwind we're facing from a gross margin standpoint. Exactly when that reverses is a little unclear. I mean, clearly currency is on its way now. We're not seeing it yet, you know, it's caught in hedges and natural hedges and technical hedges, et cetera. I'm super, I'm super excited that we have 800 basis points of a headwind, because that's gonna come back out again. We're not gonna see 800 basis points of improvement, getting into that range again, I would sure hope we do it next year.
By next year, you mean next fiscal year, I assume?
Yeah.
Maybe, yeah, Q2 of fiscal-
Yeah, that's right.
I'm going. Okay. Just to follow up on OPEX, you know, pretty material cuts. Where do you kind of see it normalizing? I assume, you know, more aggressive cuts maybe in the near term. You know, do we get back to that 25% of sales? Or where are you seeing, you know, further opportunities to kind of right-size costs while top line's challenged? Thank you.
I'll.
Yeah, Paul, on a, real quick on that one-
Oh, go ahead. Go ahead.
... I think on a full year basis, you probably see the OpEx be around 25%, which is where it has been. Come back to your earlier comment on gross margin, you know, those things go hand in hand. If we get good confidence and line of sight to gross margin expansion, that creates more room for investment if we see good returns available to us to drive growth. That strategy remains unchanged, you know, moving away from a promotion driven strategy to one that's more pull driven through increased marketing investment. Certainly, we're committed to the investment in product innovation, and we think that that's key. Bracken, something you'd like to add to that?
Nope. You got everything. Perfect.
Cool. Thank you.
Thanks, Paul.
Thanks.
Thanks, Paul. Next up from Morgan Stanley, Erik Woodring. Good morning, Erik.
Hello, Erik.
Hey, guys. Good morning. Thank you for taking my questions. I guess maybe first, if we take a step back and think about kind of your four major end markets. you know, where do you think some of those are furthest along in terms of kind of facing the brunt of the challenges the world faces today? Meaning, you know, we saw PCs correct earlier perhaps than consumer electronics, which perhaps has corrected earlier than enterprise. Just curious where you think you could perhaps see maybe a rebound first relative to other of your end markets. Then I have a follow-up.
Wow, that is a really good question. I, you know, I'm gonna hesitate to give you a definitive answer, but I'll give you kind of a feel. I think it could be that we see it first in gaming. It kinda depends because, you know, the gaming market has also seemed pretty sensitive to promotion this quarter, so that made me a little less. It makes me a little more tentative to say that. I think the enterprise spending, you know, it kinda comes in later and starts out you know, starts out later, or it hangs in longer and then comes out a little later when you go into a softening of the economy. That's generally the view. Our personal workspace business gets just somewhere in between.
I reserve the right to completely reverse those. 'Cause to be honest, the visibility's not what we'd like, you know. It's really hard for us to see. I think, the good news on all three is I really feel good about the long term. I do think those secular trends are super solid.
Okay. No, that's helpful. Then, you know, just 'cause you mentioned it, Brad, I'd love to just maybe get some color from you guys on maybe why visibility is different than historically. Is it different purchasing patterns? I know you mentioned the purchasing during promotional-heavy periods in the December quarter. Maybe just taking a step back. Are enterprises purchasing at a different cadence than they used to? Are consumer preferences for purchasing changing? Would love some more color on just maybe how that visibility has changed and/or when it could improve, and why it might improve. That's it for me. Thank you so much.
Oh, sure, absolutely. Thanks, Erik. You know, I'll just split them into those two pieces. On the consumer side, I think, you know, you said it all. The consumer demand's been weaker, this quarter we saw it really concentrated in promotion. I hope that, you know, Nate was saying, you know, we're assuming it could be more promotional as we go through the rest of the year. I hope that it starts to fade at some point soon, because, you know, normally promotion is heaviest during a holiday quarter. We may see that in Q4, but we'll see. We're prepared for that, but I hope that it'll start to get better from a promotional standpoint.
That would not be normal to have heavy promotion go on, you know, all the way through outside of the holiday quarters, all the way through the year. We'll see. On the B2B side, really it just comes down to, I think there's such turmoil is maybe too strong a term, but there's a lot of settling that's happening. You know, I can't remember, since I've been in this job anyway, when we've had the kind of layoff announcements that we've had over just the last 90 days. You know, I think there's just a lot of constriction of spending happening, and I think that automatically drops your visibility. What you think you have in visibility suddenly seems like it's being pushed out a quarter or two or something. I think that's reduced it.
I think it's, you know, I like the fact that it's actually a sharp reduction right now from a business standpoint, 'cause I think that means it might be a faster exit back out again. Maybe that's my optimism poking its head out, but, I would rather see that than see people kinda gradually easing into something. I'm sort of feeling good that there's all this discussion around constriction. I don't feel good about our business, don't get me wrong, but I feel good about the restriction. I think that suggests that, you know, people are making the right steps, and then the clarity will come as we go into next year.
If I could.
Can I just add a little bit to that, Erik.
Yeah, please.
... if I may, though, 'cause I think-
Yeah, please, of course.
You asked what causes it to be different. I think we're transitioning out of obviously a unique period globally, from shutdowns. The diversification that we have, again, I'll come back to this in the portfolio by product, by category, by geography, are all things that I love having in a time like this, because that transition is obviously different in those categories and in those geographies. We still see places, you know, that are doing better, that are growing a little bit. They maybe went into the lockdown at a different time. They've come out of it differently. That diversification continues to be, I think, a really, really important thing. Obviously, this quarter we're disappointed with the volumes, but the shape of the P&L held up pretty well, and I think we continue to manage well in this environment.
We continue to do well from a market share standpoint. We continue to invest in our long-term priorities, and, you know, continue to manage OpEx, I think, very well and do a good job with cash generation. Lots of things haven't changed. Again, I think the diversification in our business, is really key to us being able to deliver a good, strong quarter in what's a challenging macro environment.
Okay. That's super helpful. I was just the last very quick follow-up was, when you mentioned enterprise demand weakness, did it spill over into any other segments besides VC, or was it mostly concentrated in VC? Just wanted to share that clarification. That's it for me.
Yep. We see it also in C&P, mice and keyboards.
Yep.
Mice and keyboards. Traditional mice and keyboards and video collaboration are our two biggest areas in B2B. VC is a good proxy for it because it's pretty much all B2B, but we also see it in mice and keyboards.
Okay. Thank you.
By the way, I should say, it's not like people weren't buying any conference cams. They were, so, you know, we didn't suddenly go, you know, terribly negative. It was down mid-single digits, so but that was after being up double digits before.
Right.
Thank you, guys.
Thank you, Erik
Thanks, Erik. Next up will be Adam Angelov from Bank of America.
Hey, Adam.
Adam.
Hi there. Just wanted to check on the channel inventory situation. Maybe if we could go by division. I think gaming was positive sell-through in the quarter. Is that, you know, a sign that the inventory levels there are kind of at reasonable levels and perhaps the sell-in can match the sell-through going forward? Maybe if there is any other specifics by different division, if you could add that would be great. Second one, on 2023, the calendar year, are you thinking about further price increases? Maybe if you could just, you know, share your thought process on price increases versus potentially prolonged promotion periods as you mentioned already. Thanks.
Nate, I'll let you take the first one. I'll take the second.
You know, I think channel is in good shape. It's down year-over-year, which would be, you know, consistent with the overall trends in the business. I mean, I think, we continue to see our customers, I think, being pretty cautious and conservative around restocking. You know, the same sorts of visibility challenges that we were talking about a moment ago I think probably apply to them as well, so being a little cautious on reordering. The channel's in good shape. As Bracken mentioned, gaming was one of those areas that seemed to be more promotional this holiday period, we did make some progress in reducing some of the inventory levels there. I'll just quickly say on the pricing side, I'll let you jump in there too, Bracken.
You know, it's really a function of a lot of things, Adam. What happens with currency, what happens with inflation. Lots of elements there for us to consider. Bracken, something you'd want to add on that?
No, I'll be even more definitive. I mean, if something doesn't change, I can't imagine us raising price further. I think those 900 basis points or 800 basis points of headwinds are, you know, that are gonna eventually, you know, drop, would suggest that we won't need to. If something radically changed again, who knows? You know, I don't think as long as currency keeps heading in the direction it is and, you know, inflation keeps heading in the direction we all think it's gonna go, I don't think we would need to raise price again.
Yeah. On the inventory side too, you asked about channel. Again, Bracken had mentioned it, I think, in his remarks. Third consecutive quarter where we've reduced our distribution center, if you will, inventory sequentially. We made good progress, I think, there this quarter. We'll be able to reduce that more into the fourth quarter and continue to normalize those levels. Not in a big hurry to do so. It's all good, fresh inventory that I expect we'll sell. It continues to be a focus for us.
Great. Thank you.
Thanks, Adam.
You're welcome.
Next on the line will be Joern from UBS. Good afternoon, Joern.
Joern.
Hey, Joern.
Yes. Hi, good morning. Thanks for taking my questions. The first I would be pleased on your implied Q4 outlook, which is targeting or guiding for sales being down around 25%. Can you really give us a rough indication? Is one-third of this destocking, one-third consumer demand weakness, and one-third China? Is this how we should think about it? Because it seems when you're saying look sales through for your key categories, ex Russia was only down mid-single digit in Q3. It seems a quite sharp deceleration. So if you can provide somewhat color here, would be definitely appreciated. The second question would be, please, just focusing on the freight costs, which they came down to pre-COVID levels for a couple of areas.
Do you feel that this will be a very strong contributor, say, those variables to your earnings growth in 2024? Maybe to start with these two questions. Thanks.
Nate, go ahead.
I'll take the first one. Yeah, and then I can hit the second one too.
Sure.
I mean, the outlook for Q4 really implies typical seasonality, Joern, from Q3 to Q4. Q3 was weaker than expected, you know, and off of that, you would get sort of a normal mid 20% decline sequentially into Q4. That's what the guidance really implies. We've got one quarter left. The full year guidance basically implies that for the fourth quarter. On the freight cost, you know, the benefit we got this quarter was that we didn't use air freight to the same level by long ways versus last year. We were chasing a lot of supply last year. It's not the case this year. We were able to reduce our air freight, so we got some year-over-year benefit there. We're still, and ocean rates are getting...
are coming down, but they're still higher than what they were pre-pandemic. They've come down month-on-month, starting to look more positive there, but still have a ways to go before we get back to pre-pandemic levels.
Maybe the last question, if I may, on your OpEx. When we look in 2024, I mean, after you take out $250 million OpEx in fiscal 2023, is this now enough? Is this done? Are you lean enough, for example, to cope with a flattish 2024? Is this how you feel about it? Is there more to come now in the next couple of quarters regarding your plans?
Yeah.
I wanna clarify real quick, Bracken. I'm not sure if you said 250, but I said 215. .
15. Yeah. Yeah.
Yeah. Okay.
Yes. Thanks.
Wanted to make sure that you heard that clearly. Bracken, sorry, did you have a comment you wanted to add?
Yeah. No, I'll just... Yeah, 215. We're gonna keep after the OpEx, Joern. We're not letting up. You know, when we look at the top line, we feel like we need to take, we're gonna continue to take more out. You can count on that we'll keep aggressively taking it out. We're gonna respond to the market conditions, and you see what they are, so you can imagine how we feel about our cost.
Okay. Thank you.
Thanks, Joern.
Okay. Our next question is from Andreas Müller at ZKB. Hey, Andreas.
Hi, Andreas.
Andreas.
Yes. Hi, everybody. Hope you're well. I have two questions. One is really can you say something about the Chinese sales in the quarter and the expected impact from the lifted restrictions going forward? Is that a benefit or not? Probably also the status. I mean, you mentioned something in your own production facility. Are you completely 100% operational right now? What is what's there, the status basically?
I'll answer the first one. You wanna take the first one, Nate? Chinese sales.
No, in China sales, I mean, you know, China unfortunately was natively impacted this quarter from a sales standpoint due to the infections, the rise in infections. I think we probably had about a one-point headwind this quarter, Andreas, from sales in December that didn't occur. I think longer term, I mean, I think it's a positive. It's potentially a positive but, you know, like I mentioned earlier, I mean, I think COVID is just unpredictable. Hopefully, you know, this was a sort of a one-time event, but I think that's not for me to know with certainty. But I think it's a positive to see a more open position by the government. I do, but.
Yeah
Yeah, it was a bit of a headwind this quarter.
I'll add to that. You know, I do think, I think opening, China opening is positive, you know, and I think, and you asked about our production facility related to that. Right now, you know, our production facility is closed 'cause of Lunar New Year, so that's one of the things that has given, gave us a little pause was what happens during Lunar New Year when everybody comes home, how many come back? You know, I'd say, you know, we'll see. I mean, I think we'll manage whatever it is, but that is what it is. I'm actually, you know, I hear so many negative headlines about China. I feel like the optimist in the room on that for sure. I feel good about China. I think as China opens, it's gonna be good for us.
It's our second-biggest market. It's always been a good market. As long as I've been here, it's been good. We've had very few times we had a long period of slow growth there. I'm excited about China. We've got great market shares. We've got a great brand there, and we're really learning a lot about the Chinese consumer there, so, you know, I'm optimistic.
Thanks, Andreas.
Okay. I have another question, about, you know, your priorities. When you go through your portfolio, do you see a need for changing some priorities, for some categories with the downturn, maybe to earmark also a category as non-strategic, one more besides, say, mobile speaker and the earbuds, for example?
We've kind of done that, and we always redo it, and we do it on a very regular basis. We, as you mentioned, you know, we picked out a couple of categories that we said were non-strategic, which means we're reducing our investment, and we've stayed true to that. I don't see any immediate changes in our current, last time we updated you, but we'll, you know, we'll update you again at the analyst investor day. I think our portfolio, I'm really excited about that kind of 80% of our portfolio that we've angled toward and put our investment into. You know, we're gaining market share across those. We're investing aggressively from an engineering standpoint into them.
Yet we're managing costs really well across the company in the middle of this current economic kind of storm. I think that bodes well for the future. We'll update you again regularly. We'll keep you updated on where we've, we're de-emphasizing categories.
Mm-hmm. Okay. Thank you very much.
Thanks, Andreas.
Thanks.
Our next question is from George Wang at Barclays. Hey, George.
Hi, George.
Hey, hey, Bracken. First question is, maybe you can gain more color just in terms of the latest B2B consolidation in terms of the go-to market kind of sales force and how are you guys apply learnings from the consumer vertical kind of innovation there to apply to the B2B vertical?
Okay. Well, first I would say we're trying to unlearn our consumer vertical into the B2B. Because I think our strength in consumer is something that really doesn't lend itself too much to the B2B side right now. We've taken, we leveraged as much of that as we possibly could have during the first, you know, five or six years in the business, and now we're building new muscle, which is how to be a B2B company, and I'm excited about our potential there. We have a long way to go to really be, I think, first class in that space, but I think that's the upside here, you know, is how do we become a great execution engine in B2B? I think it's still early days, you know, in that path.
We've got the right resources in place. We've got the right capacity, and we're putting step by step, process by process, you know, compensation plans, everything into place to really become stronger in B2B. I keep asking us about that. I think it's one of the hot spots of our business and one of the areas where, as we improve, I think we can, we can improve our performance.
Yeah. Maybe you can unpack a little bit in terms of the install base refresh/the kind of upgrade cycle, you know, kind of against this iffy macro. If the economy were to slow further, you know, how do you think this install base refresh gonna play out? Do you think it's gonna be delayed, or do you think it's just a more temporal kind of headwind there?
You're talking about on the, on the per, on the desktop side, the mice, keyboard?
Yeah. Just across the portfolio, kind of mostly on the PC install base, and also on the gaming as well.
You know, I think if there's a dramatic slowdown that goes on for a long time, it certainly, it is gonna delay the install base refresh across almost every category you can think of in the world, including probably ours. I think, you know, if you look at our products, whether it's personal workspace or video, they kind of are required for the new world we're in, so I'm not sure that you can on the in the office, for example, video collaboration, while there may be a delay, and it feels like there is, you know, short term, it's really hard to imagine that lasting a really long time. In a hybrid world where you're doing so much video like we are all right now, it's really hard to imagine not video enabling a room.
I think I'm pretty positive on that. Yeah, it could be, there could be some kind of a delay in that. Looks like there was this quarter. I don't know how long that can go on. We'll see. On the workspace side, you know, this is so central to what we do now. Everybody in this call is sitting in front of a desktop with some stuff in front of them. I would guess 90% of you don't have really exactly what you need, even if you don't realize it quite yet. you know, I think that upgrade cycle is coming and it's already started, and it will continue for a very long time.
Maybe, if you're really an optimist, then I'll stay away from going too far on this, but I think you can imagine it's become more central to our lives as part of our homes and things, so the upgrade cycle could even accelerate. I think, regardless, I think there's a good, strong upgrade cycle ahead of us, and, you know, could it be slowed down a little bit? Yes. Will it be stopped? No.
Yeah, I'd like to squeeze in my last question, if I may.
Sure.
Can you kind of gain more color, and impact a little bit in terms of the recent market share gains across, you know, key categories? That's super encouraging. It seems Anker is outgrowing the industry. You know, are there any sort of levers and the kind of differentiation you guys have to sort of for this sustain the kind of market share gains?
You know, we announced last quarter that we had launched 20, or announced 20 new products. It's kind of a reflection. Numbers don't tell the whole story, of course. You know, we're actually trying to do fewer, bigger. I think it's kind of a reflection of our investment. We started nine or 10 years ago, really focusing on design, which means putting the user in the middle of the action. We've really matured that approach. Meanwhile, we've kept investing in engineering. You know, we're up 50% in four years in our total spending on engineering. You know, certainly the, that's happening across all of our categories. I feel very, very good about the innovation engine here. It's the primary driver of growth, but it's not the only one.
You know, the go-to-market on the B2B side is a big opportunity, too. We're gonna keep investing there.
Bracken, I think
Great. Thank you.
... maybe just wanna, you started to mention the go-to-market. I mean, I think some of the things the teams have been doing around analytics and under, and in e-tail or on Amazon, I think, have also continued.
World class.
... to be really impressive.
World class.
CR, in-house share numbers look really good at Amazon in, across the categories. I think it does start with the products, and you look at the ratings on the products, and you can see those are quite good, George. I also think that you have to tip your hat to the go-to-market team with their work they're doing around analytics.
Really agree with that.
Great. Thank you.
Thanks, George.
Thanks, George. Our final question this morning is from Michael Foeth at Vontobel. Good morning, Michael.
Hi, Michael.
Yes. Good morning. Hi. Thank you.
Hi, Michael.
Two questions from my side. If you could give some more color on the appointment of Prakash to CEO, COO position, sorry, and what sort of gaps you think you need to fill there? What improvements you're seeing on the operation side? The second question would be regarding your thoughts on the creator economy as we go into, you know, recession. Do you see particular dynamics developing there, and how you position yourselves to harness those opportunities?
That's a really interesting question. On Prakash, you know, Prakash has always been, I mean, he's been here for seven years. We recruited him right out of a consulting firm, and he's just grown and grown. You know, a lot of what you see from a sustainability standpoint we're doing in this company, you can, you can point right at Prakash's leadership. He's got a tremendous team, and my entire staff right alongside him have been part of this drive to be better for the world from an environmental standpoint. Make no mistake, Prakash has led that from the heart, and the hands, and the head.
But I think the next step for him and for us is to give him a larger role, not only in the overall operating execution of the company, but also in the, in the structure and the cost of the company. This is another, you know, we've evolved very quickly structurally, very quietly behind the scenes. We've changed our structure, and we're gonna keep evolving it going forward. It'll just keep evolving, and he's gonna be a real partner for me, and for the CFO, and for the whole team in helping think through that. Think of him as overseeing the overall operating cost of the company. He also has responsibility for the overall M&A strategy corp dev, so he's got a big chunk of responsibility now.
Now, there are others who have huge chunks of responsibility, too. I don't wanna only focus on Prakash, but we did announce his move today, so it's a big one. On the creator economy recession and what are our prospects going forward, you know, the creator economy is touching so many things. You know, I think it's one of the quiet drivers of interest in the personal workspaces we're now calling the mice, keyboards, webcams, et cetera, headsets. It's one of the quiet drivers of that business, and I think it's here to stay. You know, the growth of all the things we read about, including the new world of ChatGPT and, you know, what that can unlock. I think all these are fuel for that creator economy.
I do think, you know, if you go into a deeper recession, I think the creator economy will, a lot of those people will end up in full-time jobs if they weren't already in them or trying to get full-time jobs. They're gonna keep going alongside that in this creator economy. I think the other thing about the creator economy that's exciting to me is that I think more and more people are gonna be selling to their friends directly, and we're experimenting with that. Lots of companies are. I think there will be more and more of that kind of selling. It's probably not gonna be significant in the short term, but I think in the future there will be more and more of a network of activity to drive sales through the creator economy, and that'll be part of it.
Thank you.
Thanks, Michael.
Very much, Michael.
Let me-
If I-
Thanks, Michael, and thanks everyone for joining. I think that's a wrap, Nate and Bracken.
Great. Thank you. Thanks, everyone.
Great. Thank you. Take care.
See you at the analyst investor day, which we'll announce shortly.