Earnings Call: Q4 2020

May 12, 2020

Good morning. Welcome to Logitech's first video call to discuss our financial results for the Q4 and full year 2020. Joining us today and sheltering in place, as everyone else, are Bracken Darrow, our President and CEO and Nate Olmstead, our CFO. During this call, we may make forward looking statements, including with respect to future operating results under the safe harbor of the Securities Litigation Reform Act of 1995. We're making these statements based on our views as of today, May 12, 2020. Our actual results could differ materially, and we undertake no obligation to update or revise any of these statements. During today's call, we will discuss non GAAP financial results. You can find a reconciliation between non GAAP and GAAP measures as well as more information about our use of non GAAP measures and factors that could impact our financial results in our press release and our filing with the SEC, including our most recent annual report and subsequent filings. These materials, as well as our prepared remarks and slides and webcast of this call will be available at the Investor Relations page of our website, ir. Logitech.com. We encourage you to review these materials carefully. Unless noted otherwise, comparisons between periods are year over year and in constant currency. This call is being recorded and will be available for replay on our website. I will now turn the call over to Bracken. Bracken, your line is now open. Ben is muted. Okay, there we go. Yes, thank you, Ben, and thanks all of you for joining us in the first video call we've had. After 8 years at Logitech, this is my 33rd analyst call. But given the exceptional moment, I'm going to start this from a little different from the other 32. On behalf of all of us at Logitech, I want to recognize several groups who deserve our attention in any discussion during this COVID-nineteen period. The medical professionals in the middle of this pandemic go to work every day knowing they have a much higher probability of contracting the deadly disease than we do. Banksy, the mysterious and famous graffiti artist in the U. K, some of you might know, recently painted a young boy who put down Batman and Superman toys and was holding a nurse up in the air as his new superhero. A friend of mine is a nurse who's been on the frontline for months managing a nursing staff and performing as a nurse herself. She's experienced constant stress that one of her team might contract the disease and the fear of contracting it herself. Now 3 of her staff are sick. She's sick too, all diagnosed with COVID-nineteen. And their primary goal is to get through their days of being sick to get back into the and are and are indeed heroes. Teachers around the world changed their approach literally over a weekend. I came from a family of educators, including my mother who taught 1st grade, which is 7 year old 6 and 7 year olds for 35 years. So I have some understanding of what it's like to be a teacher at least to be around one a lot. And I can't even imagine how one can connect with and teach 37 year olds or 8 year olds or teenagers over a computer screen. Teachers didn't choose a profession that's remote. Teachers aren't adequately trained for remote teaching. The tools haven't been developed with them in mind. Distance teaching came as an uninvited guest and it's completely changed educators' jobs. Yet teachers around the world are evolving their approaches, experimenting and starting to make it work. My mom would be very proud of her peers. So many parents suddenly find themselves working at a kitchen table that's half schoolroom and half home office. I had a video call with a fellow CEO who has 2 very young children. She was exhausted as she and her husband's shoulder not only new work from home realities, but also teach at home realities simultaneously. Parents aren't trained for this. There are no rules for this, but she and a 1,000,000,000 people around the world are learning to make it work. I could go on and on about the heroic efforts of medical professionals, teachers, distribution center and manufacturing workers, grocery store clerks, delivery drivers and so many other essential workers who are risking their lives to keep ours more normal. And there's a lot more to say about the challenges so many people including many of you have. Many of you like my CEO friend are also juggling the remote work reality with children at home. Others are overseeing aging parents at your home or worse far away where you can't visit them in person. Many are sheltering at home completely alone and perhaps not on this call too many are now living with the anxiety of unemployment. Even if you feel frustrated, challenged and even if you feel like you're failing at times, you're making it work. In these times that's heroic too. So what can Logitech do to help with these new realities even if it's just in our own little way? A lot. In this unprecedented, unpredictable and uncertain moment Logitech, our little company, your little company has never been more relevant. Before I get into what we do though, let me start with who's doing it, our people, the most important thing in our business. Our people are healthy. The health and safety of our people has always been our top priority and continues to be and everyone is healthy right now. Our supply chain is also getting healthy. In January February, as many of you know, our manufacturing sites as well as those of our suppliers came to a complete standstill like so many others. Thanks to outstanding leadership and the dedication of our local teams, we've recovered very quickly from the shutdown of 3 straight weeks. It took us to the end of the quarter to get almost back to our old production levels and now we're back at full throttle. We're in catch up on some categories that sold out during the late March timeframe, but our supply chain is working well now. Our people are working pretty well from home too. Of course, like everyone else, most of our office workers suddenly began working full time from home the 2nd week in March. Our own culture is one based on intensive video calling and we began 3 or 4 years ago to sponsor work from anywhere week, first a day and then a week to encourage companies like us to let their people work start to work from home or at least try it. This has made the transition much easy for our people on the work front than for many other companies. Of course, it still isn't perfect. But there are aspects that are actually better. The environmental impact for example, and there are things we all miss. But our people are making it work. Our products have never been so relevant. Logitech's contribution just one second. In these difficult times is that many of our products play a small but essential role in helping everyone stay engaged and connected. Whether that's co workers collaborating from home or teachers providing remote instruction students or kids playing and watching games in lieu of physical contact. The long term secular trends that will drive sustainable growth in our 3 large businesses continue. While other companies are suffering drops in interest in their categories, this global crisis may have accelerated the trends underlying our big businesses. Companies are moving faster to adopt video centered cultures. Esports and gaming are becoming an even bigger part of our lives. And working from home including creating and streaming content for many of us is settling in to stay. Companies are setting up business continuity plans that involve a more distributed workforce and they need a desktop set up including a mouse and keyboard and more. Independent of the companies, employees are increasingly setting up their own personal home office whether that's in a dedicated workspace or at their kitchen counter. A growing number of companies and employees are realizing that working from home can work, so to speak, and they will duplicate their office and then upgrade it as time goes on. We will see less business travel, more video and more virtual collaboration. Esports, whether it's Fortnite or e racing tournaments, have record viewership as realized sports have been replaced by virtual sports for now, such as NASCAR turning to virtual eRacing. Twitch set record highs in viewership, while Microsoft saw all time record engagements for Xbox Live. Traditional sports will return, but the rise of esports will continue to happen perhaps even faster than I originally envisioned. Streaming, broadcast and content creation are increasingly becoming not only a form of entertainment, but also a source of income for more and more people. You must see this happening real time on your Instagram, LinkedIn, YouTube and Facebook feeds. And of course, this global crisis has led an even greater focus on remote work and learning. Home offices are doubling as schools. And things won't pop back to the old way when this is over. Much of this is the new normal, more home offices to create and upgrade, more video everywhere, more gaming and more broadcasting. Those are exactly the secular trends we've built our future around. Logitech delivered another great year with fiscal year 2020 sales up 9% and operating income up 10%. We almost grew double digits again in spite of all the China tariff headwinds, in spite of the negative currency and in spite of the most recently the COVID-nineteen supply constraints. Of course, as the shelters at home policies went into place, we saw a rare event acceleration immediately. One of the biggest beneficiaries that we have seen in the recent acceleration in work from home is our PC peripherals category, which grew 6% in fiscal year 2020 to an all time high. In Q4, PC peripherals achieved double digit growth. On top of that, our sell through in the quarter was even stronger. Our highest gross profit in PC peripherals this past quarter was our webcams, which were up 34% with double digit growth in all three regions. Shouldn't be a surprise that video is an essential part of many home office and remote learning setups. And with our lion's share of the webcam industry, we experienced a sudden spike in demand starting in March that led to supply constraints that we're working hard to alleviate this quarter. We haven't caught up yet. We see growth in the future for PC peripherals at the double digit will we see growth in the future for PC peripherals at the double digit sellout rates we saw for Q4, most likely not at double digits. But at the same time, the momentum toward remote work and distance learning will continue as we emerge from this crisis. More and more people will work permanently from home and an even larger percentage have found that they're comfortable working at home at least part of the time. There's a lot that's a lot of home offices to establish and as I said a lot of them to upgrade later. Companies are already getting on this bandwagon of more work from home when it's over. Our video collaboration category also benefited from the same work from home trend with fiscal 2020 sales up 43% and with an acceleration both sales and sell through in Q4 to 60%. As the world is transitioning to remote learning and work, we've seen a clear trend toward turning on video to connect with friends, coworkers, teachers, students, doctors and patients as we all practice social distancing. Video for work became essential. Video for social became a surprisingly good experience for a lot of people. While our gaming sales grew 8% in fiscal 2020, sell through grew in the 15% to 20% range. The gap was driven by supply constraints. Our gaming sell through growth was further accelerated in the month of April as gaming provided many families a sense of escape and a way to connect with friends. Even the World Health Organization teamed up with the gaming industry to recommend people PlayApart Together. Tablet and other accessories grew for a 3rd straight year, up 7%. As Apple launched their latest iPad OS that brought trackpad support to the iPad, we saw strong initial sales of our Combo Touch, a keyboard case with an integrated touchpad as well as our newest Slim Folio Pro for the 11 inches 13 inches iPad Pro. In addition, we delivered a 2nd consecutive year of robust iPad keyboard sales into the education channel. I'm really excited about the potential for education, particularly as each child needs a computing device now. Mobile speakers were down 2% for the full year, in line with our expectations and slightly outperforming the broader market. The mobile speaker market has experienced a significant impact from COVID-nineteen as retailers brick and mortar stores around the world closed. The market itself fell strong double digits in the month of March and we expect further deterioration in the Bluetooth speaker market near term. We've always thought it's important to adjust the flexibility and speed to new market opportunities and away from markets no longer look promising. So we've reallocated some resources from Bluetooth speakers to several growth initiatives to accelerate their performance. 2 other products that saw a major uptick in sell through in March were headsets and Blue microphones. Headset sell through increased over 50% while Blue more than doubled with Blue's growth further accelerating in the month of April. As concerts, tours, music performances canceled, many musicians started to live stream their performances online and oftentimes with a Blue Yeti mic. And Blue is also the voice of video bloggers, which are also on the rise. The bottom line is that the long term trends that favor 85% or more of our business accelerated in March. Now let me turn the call over to Nate to walk you through our key financial metrics in the past year. Thanks, Bracken. We finished a very good year with a very strong Q4 and we head into our next fiscal year excited about the growth potential, but at the same time, realistic about the macro challenges we face. Our focus on operational execution and financial discipline remains constant and critical during these unusual times. This consistency was on display throughout fiscal 'twenty and we executed well, although I believe we can do even better. The short period between our Analyst and Investor Day on March 3rd and the end of our quarter was particularly volatile with significant new global challenges as we closed out the quarter. Retail partners closed stores, logistics connections were disrupted and run rate processes needed to be quickly adapted to manage large swings in demand. And despite all of these challenges, we closed out another year of strong financial performance. As Bracken said, fiscal year 2020 sales were just shy of $3,000,000,000 up 9% in constant currency, at the very high end of our guidance. That's our 5th year in a row of nearly double digit growth. We also delivered non GAAP operating profit growth of 10% to $387,000,000 higher than the revised guidance that we provided at our March Analyst Day, and in fact, we also exceeded our original guidance of $375,000,000 to $385,000,000 Our fiscal 2020 gross margin reached a record 38.4%, up 60 basis points in spite of roughly 200 basis points of China tariff and currency headwinds. We're driving cost savings and efficiency improvements across all parts of our business, from our own manufacturing plant to our global supply chain and logistics network and in our go to market strategies. You've heard us talk about our transition to a more demand pull and marketing led business model. And this was particularly evident during Q4, where we reduced our price promotions and invested more into our marketing OpEx spend. You can expect us to continue this transition from push to pull demand generation over the next several years. On top of this, our gross margins also benefited from better product mix led by PC peripherals, video collaboration and gaming, as well as profit improvement initiatives across several other categories. Our non GAAP operating expenses increased 8% in fiscal 'twenty to $755,000,000 or up 7% excluding Streamlabs. This demonstrates our continued discipline in driving operating leverage by balancing our spend with both top line growth and gross margin expansion, while continuing to invest to capture our most attractive growth opportunities. Our sales and marketing and R and D spend were up 8% and 9%, respectively, to support strong top line growth this year and in the future, while we keep our G and A spending flat for the year at a record low 2.7 percent of sales. In Q4 specifically, we reinvested the strong sales and gross profit dollar growth into various marketing initiatives, into our video collaboration sales force and into multiple R and D projects to support future product introductions and innovations. The net result of these business dynamics and operating decisions was strong profit growth and operating margin expansion for both Q4 and fiscal 2020. Now let me briefly talk about our cash flow. We delivered an all time record cash flow from operations of $425,000,000 for the full year, up significantly from $305,000,000 in fiscal 2019. In addition to strong earnings growth, our cash flow was helped by a 13 day decrease in our Q4 cash conversion cycle versus the prior year. The main drivers of this improvement were faster inventory turns and better collections performance. Working capital management is an emphasis across our company, and I'm pleased that we were able to achieve these strong results even while transforming our operations and supply chain to offset cost pressures from China tariffs. Looking forward, I would like to remind everyone that the first half is typically our lowest cash flow period of the year as we build inventory for the holiday season, and this upcoming first half will be further impacted by our need to replenish distribution center stock following the demand surge and supply constraints in Q4. Therefore, while I still expect our full year cash flow to approximately our full year non GAAP operating income, our first half cash flow may be weaker than our normal seasonality. Before I make my final comments, I want to highlight 3 material, but non cash and one time items that impacted our GAAP results in Q4 and created a wider than normal spread between our GAAP and non GAAP earnings. I won't go into each one in detail now, but we have more information about each item in our press release. First, we booked a $23,000,000 GAAP expense as an estimate of the Streamlabs earn out and reflecting good growth in this business. This expense unfavorably impacted GAAP operating profit. 2nd, we recognized a $40,000,000 gain in other income and expense due to the sale of our minority stake in Lifesize, a company we divested in 2016, but in which we retained a small investment. This gain increased GAAP net income. Finally, we recognized a $152,000,000 income tax benefit related to the Q4 enactment of the Swiss tax reform. This also increased our GAAP net income. Now I realize some of you may find these three items confusing, but let me just reiterate that they are all one time and non cash events. In summary, we closed out a very good fiscal year in spite of the various cost headwinds and macro challenges that we had not anticipated when we started the year. Looking forward, our upcoming fiscal year has many unknowns as well, particularly around the depth of COVID related macroeconomic declines and the pace of any recovery, as well as logistics disruptions and cost increases or potential changes in customer purchasing behaviors. As one example, the cost of the incremental airfreight we will use in our Q1 of fiscal year 2021 to fulfill sell out demand will and replenish stock will negatively impact our Q1 gross and operating margins by 2 to 3 points versus the prior year. In fact, we have already spent nearly as much on airfreight in Q1 as we normally do in a full year, and we have factored this incremental cost into our profit guidance. But even though our margins may be temporarily pressured by logistics cost increases and we cannot be certain if the recent pace of sales growth will continue, we feel confident that our products and offerings, as Bracken said, are becoming even more relevant. And we believe this positions us well to deliver against both our FY 'twenty one targets and longer term objectives. With that, let me pass it back to Bracken. Thank you, Nate. We just gave our outlook for year 2021 in March. And today we're confirming sales growth of mid single digits in constant currency and maintaining our non GAAP operating income of $380,000,000 to $400,000,000 No doubt this is more stretching to guide you today than it was a month ago. But we feel that as Nate said that the strength of the trends in our favor should enable us to still deliver our original guidance. And with that, Nate and I are ready to take your questions. Great. Thank you, guys. Let me queue up the questions. Alex, you are now open. Hi, Alex. Hi there, and congrats on the strong quarter. A couple of quick ones for me. First of all, just given the various countries and regions are coming out of lockdowns at varying rates, I wondered if you could share any color about what you've seen in the last 2 or 3 weeks. Any key learnings would be appreciated as we can start to compare places like China versus other Asian economies and, for example, Europe and the U. S? And then secondly, obviously, video conferencing is going very strongly and you talked about the momentum that you see there. But investors, in some cases, are asking about the extent to which you could see new competition maybe from start ups or from larger tech companies. So I wonder to what extent you are seeing new entrants coming in there, To what extent you can protect your position? And how and how you're factoring that into your guidance for this year and future years? Let me start with your second question, Alex. I think I said this I think every time I get a question about competition, I've always said the same reaction. I have that to your question right now. I think we're in competitive markets all the time. And with growth comes more competition. The stronger the growth the more interest in the category. And I think growth makes you better. I think we would not have been the company we are without strong competition over time in all of our categories. So if we have and surely we will have more competition in some of our video categories, it will require us to step it up in both innovation and go to market and cost. And we're certainly playing as if we're going to have that. But the most important thing for us is focus on the customer. And the better we do a job of understanding inside and out what makes the customer more effective, more efficient, more engaged, the better off we're going to be. And that's where we're putting 95% of our effort. So look, I'm optimistic in any scenario that we're going to have a great video collaboration business. In terms of the question you asked about how the world is opening up in different places, it's a little too early to say what there is to learn from that. I think we're all sort of experiencing this one small step at a time. And China certainly opened up fastest within that part of the world. Taiwan never closed. And I think we've learned a lot from our Sinchu office where we never closed the office. We never sheltered in place. Within a few days of realizing what was happening, we pulled chairs out between people. We started taking temperatures as our people walked in the door, temperature checking temperatures when people walk in the door. And we realized that this is a kind of a petri dish for us to reapply into the rest of the world. I think as China started to open up, we're seeing things return somewhat back to a more normalized level and I expect that's going to happen now in Switzerland and parts of Europe and later in the U. S. And the rest of Asia. So I'd say too early to say exactly what we can learn, but I'm an optimist, but I'm practical. I think it's going to take time. And as these things slowly open up, we'll reapply learnings from the different parts of the world to make sure that every successive step is more effective for us. Yes. I'd maybe add to that, Alex. It's really about adapting. Things that we're doing in our own lives, we're also doing in the company. I mentioned run rate processes having to adapt within our company. We've had to meet more frequently in some cases. It's about sharing those learnings and those insights. And many times, the countries are different for reasons. They may have different go to market models, more online versus offline, different logistics situations. So as Bracken said, it's a little bit early to make generalizations, but I think the key point is that we have to adapt and continue to learn communicate internally about what we're seeing. Okay. Tom, your line is now open. Great. So hope everyone is staying well, and thanks for taking my question. I want to take the opportunity to ask the question I get most often from investors. And that question is, when we think about your efforts in video collaboration and gaming, what gives you confidence that we're not seeing a pull forward in demand for a one time surge versus sustainability in both of those categories? Yes, I guess it's a couple of things. One is that the long term secular trends that are really happening have been happening in both gaming and video collaboration are consistent and measured and you could look at them 2 years ago and 3 years ago and last year and last and 2 months ago. This sudden hit that came in the month of March feels very dramatic. But the truth is underneath that the same set of decisions and interest that people have are what's driving that. Now if you step into each one of those categories, it's really interesting. So if you look at the video and you say, gosh, we had a big surge in demand and so many people bought our webcams or tried to buy our webcams, they couldn't. But if you do the math on how many people are now working from home how many of those will continue to work from home on some level either full time or part of the time, it's really a small fraction of the number of people that have actually adopted a web from us or a mouse or keyboard within the last month. So could there be some pull forward? Absolutely. Will there be a long term trend to continue to bring those in and then to upgrade the ones they have? I really believe that. It remains to be seen how much of each of those is the case. On the gaming front, I think gaming is just a freight train that won't stop. And I think the I don't think we will see a really significant change in the gaming business until it's as big as conventional sports. And I think we'll have varying growth rates. Sometimes it'll be stronger than it, sometimes weaker. But gaming is here to stay and the growth is too. Thank you, Brecken. Stay well. Thanks, Tom. Paul, your line is now open. All right, Paul. Hey, thanks for taking my question. So, in VC, you mentioned telemedicine, teachers, workers kind of setting up home offices in your prepared remarks as kind of nice drivers. But can you help us better understand the decision to buy a VC solution kind of relative to a PC webcam for the home? Is that decision kind of being made at the enterprise level and distributed to employees? Are consumers kind of buying the products themselves? And then how do you see the VC kind of versus webcam purchase evolve over the course of the year as it kind of looks like work from home is here to stay for a while? Yes, thanks Paul. First, I think the decision to buy a webcam for your home, whether it's done by the individual or done by the companies is all over the place. I think we have companies that are ordering in bulk. We have individuals that are buying through all the different ways you can get virtual get equipment today including calling reaching out to me personally where they couldn't find one. So I think you've got a whole range of things happening and I guess you're going to have more and more people, companies buying webcams to distribute to their workforce as many of the banks that are on this call have done that actually are working on that right now. In terms of you mentioned it as a webcam versus VC, I don't think that's really what's happening. I think it's really webcams and VC equipment. The offices around the world are going to continue to video enable. In fact, I suspect that while we may have a low on the action of installing equipment into offices just because people can't get in there or because they're preoccupied with all their team that's working from home. The other truth is once you get into this video world, you don't go back. So all those enclosed spaces that aren't video enabled are going to need to be just like they were before. So I don't think it will be a choice of either or, I think it will be and. Okay. And then my follow-up is, we're starting to see some firms kind of change channel strategy, reducing kind of retail footprint and then pushing more products to online channels, particularly on company websites. So I assume your online mix from both the website and e commerce is probably up considerably. There any kind of change in future strategy to kind of possibly capture more gross margin upside on more shift to online sales over time? Thank you. Thanks, Paul. Yes, our online sales are relatively are actually quite a small percentage of our total sales and we did see a significant increase as the last 6 weeks, 8 weeks have transpired. And I suspect that's going to stay higher. We really want to make sure that consumers can buy their products anywhere they want to, including directly from us. We don't like the idea of competing with our own channels, but we certainly want to make sure that our products are available and we can offer sometimes a wider variety of products than some of our partners or even retail and retail partners are. So we're going to keep investing in our own website just to make sure that people can do the right research and that if they want to buy it directly from us they can. And like our margin targets are achievable and we're going to stay after them no matter where they're sold. I do think you're going to see an increase, permanent increase in e tail now. That's probably not a surprise to anybody. How big that is, what percent of it is, I don't know yet, but it certainly increased a lot over the last 6 weeks. Thanks. Michael, your line is now open. Michael. Yes. Hi, everyone. Good to see you live. I have actually 3 short questions. The first one is you talked about penetration of video equipment in meeting rooms and also at desks in general. My question is, how have your expectations as to how this penetration is going to develop in the next 2 to 3 years, how have those expectations changed over the last 2 months? I mean, by how much is it accelerating, if you have any way of sharing your thoughts on this? The second question will be Let me start to answer that question. Let me answer it one at a time. Nate and I'll answer it one at a time. How have our expectations changed? Let me start with what hasn't changed. What hasn't changed is our belief that video rooms, the video enablement will happen across almost all, if not all, enclosed spaces around the world over time. Over the next 2 to 3 years, I think that that's still going to happen at a very fast rate. So that the video equipment in the office side hasn't changed. You could have a low on the action here as people are not in offices as much. But I imagine those video enablement of enclosed spaces inside of companies is going to continue to much the same rate as it was. What has changed is I think more people are going to have video equipment at home. And so that's an added plus. I think that was happening anyway, but I think it's because of the what I mentioned in my opening, the kind of explosion of requirement of doing video to stay connected to your teammates and in your social life has kind of pushed everyone forward in terms of getting on video. I mean, we this call, for example, is video today and it wasn't last quarter. I think that's accelerating the need to have video equipment at home. I think that is a change. Okay. And then the other question was for Nate, maybe regarding the mix effect on the gross margin. Can you quantify how much uplift you got from mix in the quarter to the gross margin? It was the most powerful benefit we got in the quarter, Michael. As you saw, the growth was particularly strong in some of our higher margin categories like video collaboration, like PC peripherals. That and just the incremental volume we were driving, which course gave us a little bit of operating leverage on some fixed costs that are up in manufacturing and places and logistics and things like that. So but mix was very powerful and positive for in the quarter. It's actually been a nice story for us all year. You've seen how we've been able to manage through some of those the currency and tariff headwinds. And one of the big factors there has been mix as well for the whole year. So it's probably more than 300, 400 basis points? No, it wasn't that big. It wasn't that big. There's several factors in there, but mix in Q4 in particular was the most positive one. Okay. Thanks a lot. I'll leave it at those 2. Thank you. Okay. Thanks, Michael. Yes. Hi. Here is Serge speaking from Credit Suisse. I will have 2 or 3 questions. The first one is on Let's take them one at a time, Serge, so we can sort of take it. Yes, yes. Yes, I think this is better. On the guidance, you are from mid single digit guidance and Nate mentioned that you will have or will see much less promotion. This has been deductible so far from the top line. So I'm wondering how much of this less promotion is in this mid single digit guidance so that the organic growth, if you would like, you stand only 1% to 2%? Or how should I understand this? That's a good question, Serge, but I don't think that's the level of detail we probably need to get into when we think about the guidance. I mean, I would just say overall, that's what we're driving our top line to grow at and we have a number of levers on that shipment volume, promotion, many, many things that go into it. I think in general, we have been working towards being less aggressive on promotion and investing more in OpEx for some time and we're going to continue to do that in the future. FY 2021 is no exception to that. We're continuing to build the long term strength of our brand through marketing investments. And again, one of the levers of that is for funding that is reduced promotions in our gross sales. Okay, got it. And the next one probably. You mentioned that some of the products has been sold out first. And secondly, we have seen high sell through. So I'm wondering whether you will see a pent up demand in Q1 still or even in Q2. How do you see that for this? Yes. First of all, yes, we do have some products, webcams in particular that sold out and then and we're playing catch up, kind of what we're shipping and it's selling right out. Is there a pent up demand? Well, we did a reduction in channel inventories in several places. And the question is and I'm not sure that we're going to let the channel inventories go back to where they were entirely. We're going to keep an eye on that. As we move more online, we may be able to reduce our channel inventories a little bit or we may need to. Maybe it's a prudent thing to do. We're going to keep an eye on that and see. I'm sure there is some pent up demand that you're going to see in the early part and we've seen in the early part of Q1. But how long that keeps playing out? We'll have to keep an eye on it. Okay. Then probably the next one on net working capital. Why are the DSO still at such a high level when I compare it to the past? It was on a half the size or half the days it's still today. And the same is true then for the DPOs. They're on a very low level. Why are these DPOs not higher that you collect cash from your payments? Yes. Let me take each of those. So on the DSO, you really should just compare it to last year because in the prior years, we had different accounting treatment for how we accounted for accounts receivable and some of the rebates that go into accounts receivable. So really, it's only a clean compare year over year. This was related to the 606 accounting change that we implemented in FY 2019. So actually DSO came down 5 days Q4 to Q4 here in FY 2020. We did a nice job on collections in Q4, which was one of the drivers of our strong operating cash flow for the year. On DPO, this is really just the math. I mean, you know how DPO is calculated. You've got a numerator and denominator. We had strong sales. So the denominator increased, cost of goods increased. And because of the supply constraints, as well as just efforts to reduce our inventory levels, we were not able to replenish and make those purchases, which would have offset. So some of the reduction, there's no change in our payment terms and things like that. This was all just the math and the linearity of the quarter. But you read that you still have a potential or a huge potential to improve? I think it's important to look at all three of those metrics together and really focus on cash conversion cycle because depending on how your quarter shakes out in terms if you have strong sales out at the or strong sales at the end of the quarter versus the beginning of the quarter, you can see movements in each one of those metrics. But if you focus on cash conversion cycle, a lot of those timing differences will offset each other. Okay. And probably last one. Given the circumstances, how is your shortlist look like for M and A? Can you give us some flavor here? We never really share too much of our M and A targets, but there are always targets out there. We're looking at things all the time and we're looking at things now. And it's an interesting time to begin. As I said in the opening, we have a lot of cash or I didn't say it, actually I will now. We have a lot of cash, we have no debt, we are a great cash generator and our top priority for cash is to look for smart accelerants or replacements for things we're doing internally in terms of M and A. So we're looking. But let me ask you if I could I'm not indulging your question. No, but I can imagine that some of the companies are running out of cash, and so they're happy that they got a new mother or the new cash. No problem. Okay. Thank you so much. Ananda, your line is now open. Ananda, I just sent you a private message that wasn't intended for you, Ananda, but don't luckily, it wasn't anything personal. Nanda, you're still on mute. Ananda, you're still on mute here. You want to go somewhere else and come back to Nanda, Ben? Yes. Why don't we come back to him? Okay. Andreas, your line is now open. Hi, Andreas. We're learning, aren't we? Hello. Again, my question. Hi, everybody. On the collection performance, which was good going forward. Do you envisage problems with some of your clients basically being cash constrained? And how do you protect then basically your accounts receivable? Are there special measures in place for that? Yes. We watch that very closely in all environments and I think even more so today. This is around having good relationships with those customers as well and being in frequent communication with them. As I mentioned again earlier, some of our processes we need to adapt a little bit. I mean this is one where we have strong processes in place, but I think now the frequency with which we review things and that we reach out to customers just accelerates a little bit just to make sure they're really on top of it. But thus far, we have not experienced any issues. And like I said, I expect us to manage that well. Okay, cool. Then on the air freight and all these additional costs you've got to get the products out of China. I mean, when do you think will that be normalized, these type of problems? Are you seeing already that shipments by ships and so forth are going normal? Or would you expect for a couple of months these higher costs going on? We're looking at all forms of logistics. I think what you're really seeing here is, of course, we had the 3 week kind of closure of our factory and of our partners' factories. And so we knew that we were going to be having to chase supply and replenishment with some air freight in Q1. But even since then, the rates have increased as well, as you probably know, across the industry for air cargo. So we're looking at all forms of transportation. I certainly see this lasting through Q1. We'll probably see some of this cost pressure into Q2 as well. And that's one of the things that we factored into our profit outlook for the year. Yes. Remember the other side of airfreight is that they basically when it comes to airfreight, the product goes underneath and the passengers are on the plane most of the time. And if there are no passengers on the plane and the fleet is not flying, you have lower capacity. So and so to get that air freight, you have to pay more. And I think you can imagine that air freight is going to stay pretty high, I mean, for a while. I think it will come down over time, but it probably will come down for a while. I mean, I think kind of like the challenges that we've had in the past around tariffs and things, we're looking at a number of actions we take to try to offset this, whether it's increasing capacity for certain products in the factories so that we can build up supply, many, many measures that we'll take a look at. Okay. And then maybe my last question then. On the inventory level, which is low and you said there are some constraints for certain products. But are you confident that these inventories are really filled then for the strong quarters going forward? Yes. So the answer is yes. I'm confident that we're going to be okay from an inventory standpoint. I think we're going to have to watch demand. And our job is to match demand and supply. Right now, supply has been tricky to call and demand has been tricky to deliver. And the good news is now the demand isn't as tricky to deliver because we're back in full production in all of our factories and all of our supply chains are working well. So that side of it is fixed. Now it's the demand side. And we're fulfilling the demand for some of these products that really was super, super strong. As we get more predictability around that, I think we'll be able to both be sure we have the right inventory and also drop the amount of express or airfreight and fast boat that we're using now and bring that cost back down. So I think this will moderate over the next quarter and 2 or 3, probably over the next quarter, but let's see. Okay. Thank you very much. Okay. Thanks, Andres. Thanks, Andres. Thanks. Ananda Anybody notice my blue microphone? Are you impressed? It's actually I'll let you all. Everybody wants to, we'll take orders after the call. All right. All right, Ananda, let's see if it's All right, Ananda. Everyone's open. Oh, no. Ananda, we still unfortunately can't hear you. You can also write your message in on chat maybe, Amanda. And we'll go to someone else. All right. Assia Merchant, your line is now open. Hello. Hey, Assia. Hey, good morning, everyone. Thank you for taking my questions. A couple of ones, maybe Brack and Nate's. Demand visibility into the next couple of quarters, like which segments do you have strong conviction in? I know there's the secular trends you talked about, BRAC and that's impacting everything. But just even in the near term, meaning a couple of quarters out, what products do you have a lot of conviction in, in terms of getting to your mid single digit growth rates for fiscal 'twenty one? And then on if you can take my next question to gaming, it kind of decelerated on a year on year growth rate into this quarter versus the prior quarter. I know in the past there were the tough compares with Fortnite, etcetera, but then as we head into now fiscal 'twenty what are some of the drivers that we should be looking at, especially with the new consoles coming on? And I think they're backward compatible. And then I have a question for Nate just on the use of cash. Thank you. Okay. Let's jump on the visibility first. I don't want to be too boring here. I'm going to repeat myself. I think in terms of what in quotation marks visibility, I would say really these secular trends that are happening don't look like they're going away, whether it's gaming video or streaming or just having your own desktop. So we feel like we have a pretty good view that all those secular trends are going to continue. Exactly how they're going to continue beyond the next month or 2 depends. I mean there's going to be a range around it. But when you look out over a full year, we feel like those trends are strong. They're going to continue even in a recessionary a deeply recessionary environment. We're going to have a lot of drive into those all those categories. So that's why we feel confident confirming your guidance. In terms of the gaming space, I think the as you looked underneath this, the real sellout and gaming continue to be strong double digits, 15%, 20%. So we still things still look very good. If you you talked about the console refresh cycle that's coming in forward compatibility. So if I buy a product today, it's going to be it's going to work on the new consoles. It looks like they will, but that may not be totally reflected in the console market right now. And probably it will take time for awareness to build and confidence to build among consumers. So I think that's one of the drivers why headsets still haven't quite sold as much as we would have thought or would have liked. But after the Fortnite attack was over, I think there is still a pause going on. The next reason, which is that we'll wait for new consoles to come, we're really going to work there. I think that will get cured over time. There's never been forward compatibility before as far as I know. So there may be a little bit of a credibility question until you get a little closer into it and there's press around it. So we'll see. But I think overall the gaming business continues to be a good strong driver for us and we'll be in the quarters and year ahead. Okay. So let me just jump in. I don't think I've heard Bracken call himself boring. He's called me boring all the time. Only when you're ready, Mr. Rogers, Mr. Rogers, better what you do. I think just to really reiterate what Bracken is saying, Ashu, when I look at investments, I'm looking for long term trends. I'm looking for things that I have confidence are going to provide a long term return and haven't changed my philosophy around any of those investment areas over the last couple And like Fracken said, if anything, they've only strengthened. So obviously, we're always I'm always focused on efficiency, always focused on cost and reinvesting our efficiency for growth. And I think in this environment, those bets have almost become clearer for me into where we need to drive our investments and drive the company. So really no change. That sounds a little more exciting than boring. If I can I throw in one more exciting question and that's 5 gs, AR, VR, obviously these are some underlying trends that are 5 gs maybe more near term as it comes to mobile devices, AR, VR maybe a couple of years out or maybe a year out, especially given the new iPad launch by Apple that had some more interesting camera functionality? How are you guys thinking about that in terms of drivers for your own product portfolio? Thank you. Yes. 5 gs is really a difficult one to answer. I think 5 gs will probably be an accelerant for gaming as it becomes an alternative to WiFi. It will just give you shorter lag times and require you to have less equipment and things. So I think that's really interesting and you'll still need the equipment we make. In terms of VR and AR, we've been investing in VR and AR on the right kind of level for the last 4 years. And we want to be there in the early days of exploring how AR especially is going to develop with interfaces and the tools you use to manipulate the things you're using or you're building or you're creating or playing with in AR. We've had I have to say we've learned so much over the last few years with all the different approaches that are happening. And I'm quite optimistic about it, but I don't think it's going to happen overnight. So I wouldn't wouldn't put it into your I wouldn't put it as a line in your spreadsheet for part of our growth for the next year or 2. But it's going to come eventually. And I think when it does, it will be we'll be there. We'll absolutely be there. Okay. Thank you. Thank you. Thank you. Hi, Jorgen. Your line is now open. Well, you're there. Yes. Thank you. Actually, you mentioned that certain products were sold out. And what impact did that have on pricing last quarter? Or is that to come now this quarter, next or this year? And then you mentioned the earnout for Streamlabs. How significant is that business? Or was it in Q4? And what should we look at for this year? Thank you. Those are 2 interesting questions. I'll take them and then Nate you can add. Yes, sure. I'd say in terms of impact on pricing, we probably did a little less promotion than we normally would have, which is good. We don't really like to promote that much as Nate indicated in his opening. We're shifting ourselves to a much we're working on the shift to a more poll oriented marketing approach which is healthier long term, but those things don't happen overnight and that's going to happen over the long term. We did have less promotion especially in Q4. And I hope we can sustain that as we go forward. That's really the goal. But we'll reinvest that back into marketing and really build the brand and build demand. You want to take the second question, Nate? Yes. On Streamlabs, so I think Bracken alluded to this. We've seen some nice increase in the demand for streaming products, whether it's the blue microphone or things like Streamlabs, again, musicians and others have been looking for ways to connect with their fans and with their communities. Streamlabs really, of course, was not material for us at all for the year. For the quarter, it added about 1 point of growth at the total company level. And again, the earn out charge that we took in the quarter is just an indication that growth has improved from our outlook in the past quarter. But I will say I love Streamlabs for a couple of reasons. One, it's a really cool business. First of all, it's just a really cool business. It's fun to be in the business of really enabling streamers to do what they're excited about, whether they're new ones who are just streaming to 10 people or they're big time ones really making a living doing it. We sort The second thing I love about it, it's a pure service business. It's our really our first pure service business. So we're going to school on that and we're trying to figure out how to reapply service back into the rest of our businesses. And we have projects in the works right now as I said at Analyst Investor Day to try to do that over time. So that's really fun. And the third thing is I just love the team. There's such high energy there. They're located in 2 different places and now they're located everywhere like we are. But it's a great team of heavy software engineering and very creative and they're always come up with new ideas. So super fun business. I hope you'll hear more about Streamlabs over time because it is it's been a really good one for us. I think it's really critical that we learn to play well in a service environment and that we build great software products as well as hardware. And how big could it be, let's say, in 3, 4, 5 years out? We're still hesitant to give answers like that. No means do and then say rather than say and then do. So I think it's but I think it's really exciting. And I don't know yet, but we'll be sure to tell you when we do. Okay. All right. Torsten, your line is now open. Torsten? Yes. Hi, good morning, everybody. And congratulations to dealing with the crisis so well, yes? To be honest, I have 2 questions set of a question here. First, maybe on distribution. I saw that in your distribution, you seem to offset the decline in brick and mortar channels pretty well with a move to online. And now a few questions derived from this. I mean, has this switch created any new cluster risk exposures towards certain bigger platforms? And also over the What do you mean cluster risk to bigger platform? Amazon, for example, being a big player already, a big channel for you. I'm basically thinking about your midterm positioning as a player on those platforms, your capability to position your products well, set prices well Because these platforms are big, and they the channel seems to be more consolidated to me than the brick and mortar channel and more sophisticated as well. Yes. Well, let me answer that one quickly before you go to the next one. That will keep us like steadily on the logic flow. Yes, so we've obviously got a lot more on the line this quarter, but this isn't new for us. We started this in China about 5 years ago when I don't know how many of you know this, but in China, the IT malls as they were called collapsed one day, not exactly one day to close and all that business moved online and all that online business generated even more attention online and suddenly the China marketing from about 13% online to 70% online. And so we became really good at marketing and executing online businesses and staff differently and Alibaba, JD, the Calm, the whole thing. So that's a thing that we learned and we've actually been organizing ourselves internally unbeknownst to you because we don't really talk about this much to take that same model into the rest of the world. So we're better and better, I would say, at managing online for customers like Amazon or the marketplace. So I feel really good about where we are. Their consolidation is good, bad and different. I would say there's still a lot I mean, there's still a relatively small part of the overall universe, but they're an open playing field and we like that. We think we can win in a fair fight. So we like the growth of online sales and I think we're going to do well. Yes. It. I think we're still well diversified in terms of our go to market channels. And there's strengths and weaknesses to each of them. But I think, as Bracken said, continuing to be a good partner with those customers. And there's some great things that you can do online that are harder to do or much more expensive to do in stores. So it's important for us to stay nimble and shift investments to capture those opportunities as they arise. And maybe another one that really helps understanding, at least for me, the to contextualize the situation around video collaboration. How do you see built in video cameras that many laptops, for example, are already equipped with when they are sold, right? I mean, look at me. I'm just calling in from my 2016 laptop, no additional equipment. I don't know how the quality is, of course, in video and stuff. But like, can, do you really need all this stuff? I mean, how big is this unmet demand really? Yes, there's a couple of things. So first, you do get a higher quality video experience. I'm using one of our video cameras and I hope I look okay. But you really can't do a side by side comparison for most built in laptops, you'll see a significant difference. So you do get a higher quality picture, you look better. And why is that? It's because a lot of the I won't even go into why. But the bottom line is it's usually the case. The second thing is, if you once you get a once your setup is kind of established usually if you have a laptop, your laptop is kind of built in here and then you've got a screen up there. Well, you end up looking either up like this, which is kind of weird, or you're constantly going back and forth. So once you're in there, you're screening a lot of screens don't have built in video cameras. So there's a need for webcams. I think there's going to be a need for webcams for the long term for all the dynamic all the reasons of dynamics that this business has always generated a need for webcams. But there will be all kinds of people, all kinds of different solutions. And today, we've got a really nice position in all of them and we have a lot of scale and we keep we'll be investing. And Torsten, I would say too, I think there's room for both solutions. I don't have to use my external webcam exclusively, just like I don't need to use my laptop webcam exclusively. And as Bracken said, I think as you set up a home office, maybe you've got a monitor because you're working at your desk for more than just 20 minutes doing e mail, it's definitely a better experience to have that external webcam. Okay, got it. Thanks. We're obviously pro webcams. Thank you, Bracken. I think that ends all the Q and A for this call. Okay. Well, I'm going to, in this rare moment, actually going to say a few things here to close. So I hope everybody doesn't hang up anyway. We have never been a lot of things have never been so integral to what matters, whether it's doctors and patients, students and teachers or gamers to each other or creators to their audiences. It's exciting to be playing this role right now where so many people need us and need help. These are exceptional times and we have exceptional opportunities. The late Andy Grove of Intel thing, he was the very famous CEO of Intel for many years, as a quote says, in a crisis the weak fail, the good survive and the grade improves. And I can assure you we are going to improve. We said 5 years of nearly double digit growth are better. We're worth 8 times more today than we were 8 years ago. We're the leader or among the leading few in virtually every category we're in and we're going to enter more as we further exploit the growth in these categories. I have never been as energized as I am now. Even if it's a dark macro period, the light has turned brightly on in Logitech. We can help so many people now in so many different ways. So stay tuned, it's going to be an exciting year. It's a dark period, but I think we can really do a lot of good here. Thanks a lot for doing our first video call. Sorry for the glitches. We'll get better at our promise like we are in everything we do. See you guys.