Earnings Call: Q1 2019

Jul 31, 2018

Good day, and welcome to the Logitech First Quarter Fiscal 2019 Financial Results Conference Call. At this time, all participants are in listen only mode. We will be conducting a question and answer session and instructions will follow at that time. This call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech. I would like to now introduce your host for today's call, Mr. Ben Lu, Vice President of Investor Relations. Thank you, Kim, and welcome to the Logitech conference call to discuss the company's financial results for the Q1 of fiscal year 2019. The press release, our prepared remarks and slides as well as a live webcast of this call are available online at the Investor Relations page of our website, logitech.com. During the course of this call, we may make forward looking statements, including forward looking statements with respect to future operating results that are being made under the Safe Harbor of the Securities Litigation Reform Act of 1995. The forward looking statements involve risks and uncertainties, and actual results could differ materially as noted in our quarterly and other filings with the SEC. The company undertakes no obligation to update or revise any forward looking statements as a result of new developments or otherwise. Please note that today's call will include results reported on a non GAAP basis, except as otherwise noted. Non GAAP reporting is provided to help you better understand our business. However, non GAAP financial results are not meant to be considered in isolation from or as a substitute for or superior to GAAP results. Non GAAP measures have inherent limitations and should be used only in conjunction with Logitech's consolidated financial statements prepared in accordance with GAAP. Our press release and slides provide a reconciliation between GAAP and non GAAP numbers and are posted on our Investor Relations Web site. We encourage listeners to review these items. 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 the Investor Relations page of the Logitech website. Joining us today from California are Bracken Darryl, President and Chief Executive Officer Vincent Pilette, Chief Financial Officers. I'll now turn the call over to Bracken. Thanks, Ben, and thanks to all of you for joining us, especially those in Switzerland who decided to join us in spite of the fact that you've got a big holiday tomorrow. When I started in 2012, there were a lot of people who told me you need to go private to do what you need to do. But I didn't think we need to do that in order to change ourselves. I'm mentioning that because I love being a public company. Public companies are sometimes criticized for being only short term or quarterly focused. For us, the rhythm of closing and reporting every 3 months creates something different. It drives a heartbeat inside Logitech that keeps us sharp and nimble, but never impacts our focus on long term value creation. That's the key to everything we're doing. As a public company, the Q1 is a key quarter. A good year usually starts with a good Q1 and this was a very good Q1. Our sales increased 12% while our operating profits grew 41%. I want to focus you on our and I'll use the terms I did it or we did at the Analyst and Investor Day. Our newest, our coolest and our oldest businesses for just a minute. As you know, we're doubling down on 2 key businesses, video collaboration, our newest major business and gaming, our coolest major business. And this doubling down is paying off. Both businesses grew over 60% this quarter. Video Collaboration continued to benefit from both our increased resources in sales and our increased resources in engineering. Gaming was our biggest business this quarter, bigger than mainstream pointing devices and bigger than keyboards and combos. What about our oldest business? Well, we will not stop innovating in our oldest businesses. Pointing devices and keyboards continue to grow because of that innovation engine and webcams and tablet accessories grew double digits this past quarter. The bottom line is that while we build a multi category, multi brand company, it's diversified. While many public companies start with a single category, they have to be really lucky, particularly in hardware. There are just too many variables to predict how their growth prospects will fare over the next few years, much less the next decade. That's why we love to be a multi category company. We can ramp up or ramp down investments against various businesses as we see opportunities, reset them when they slim down. That's what we did this last quarter like many other periods before it. We're evolving to exploit the opportunities ahead of us and there are many. Now let me go through our strong quarter results. Our strong results for the Q2. Gaming is off to a great start for the year with sales up 68%. That was the fastest growth rate we've seen in over 3 years and we were much, much smaller then. Gaming growth was broad based across all three regions and all our major product lines, gaming mice, headsets, keyboards and steering wheels. ASTRO was also a stronger contributor to our results and actually tripled in size versus the prior year. I was just in New York this past weekend and saw the inaugural Overwatch finals. 1 of our sponsor teams, the London Spitfire won the championship. Congrats to Jack and his players. The level of energy from the 22,000 fans in the sold out Barclays Center was simply incredible. It was like being at the NBA finals I went to a few years ago when the Cavaliers beat the Warriors And I'm sorry to use that example for you Warrior fans. The outlook for the gaming market has never been brighter with esports becoming one of the most viewed forms of entertainment and very likely a future part of the Olympics. In fact, we participated in a meeting on this at the home of the International Olympic Committee 2 weeks ago. And you can't talk to anyone under 25 without hearing about a new blockbuster game, Fortnite. This new game phenomenon is driving even bigger engagement with both new and existing gamers. We believe this with both new and existing gamers. We believe this trend of new engaging games will happen again and again over the next year over the years ahead, while the major eSports games of today will continue to grow. But this engagement is not about a single game like Overwatch or a fad. Gaming is a rare long term secular and generational change. With an amazing World Cup having just ended, imagine for a minute if the game of soccer had just been invented 20 years ago. Can you imagine the growth curve ahead of it? Or if you're an American, this period of esports is like the 1960s in American football in the NFL or the 1960s or 70s in basketball like the NBA. As these 2 pro sports franchises started to climb and interest continued to grow. Most engaged in those early days were the kids who played the games like me, the youth. That's what you're seeing today in eSports. Gaming started with the young and has been growing for years. ESports is emerging out of that. Instead of the Premier League, the NFL or the NBA, these leagues are League of Legends, Overwatch and others. One day, Esports collectively will most likely be bigger than all of them. As we've told you before, our goal is to be the Nike or Adidas of eSports. As I mentioned earlier, video collaboration sales grew also grew 60% in Q1. Our newest rally camera just began to be available. It's a modular system that not only delivers premium audio and 4 ks video, but also features our latest software, intelligent software, which we call Logitech RightSense. RightSense leverages our computer vision know how to automatically cross the camera around the person or people in the room. It also automatically optimizes the lighting, the sound and the audio based on the environment you're in, adapting to dark or noisy environments for example. With these automation and computer vision features, you can see we're investing to expand our software capabilities and all this for a mere fraction of what it historically cost to video enable a room. The world is quickly moving to video and we've aimed to be at the forefront of this adoption. PC peripherals grew 5% driven by growth in pointing devices, keyboards and webcams. You know we love this business and we'll continue to introduce new products and experiences regularly. Tablets and other accessories grew 37% and this comes on the heels of 38% growth last year and on top of a very tough compare in Q1 of the prior year at 71%. The iPad tablet market itself is up 7% in the last 12 months and we're growing thanks to new product innovation, share gains and channel expansion. Moving to mobile speakers, sales fell 46% in Q1. As we mentioned in our last earnings call, the market for 3rd party voice enabled speakers as well as the overall Bluetooth mobile speaker market have slowed over the past several months. And we're rightsizing our channel inventory and resetting our pricing. While we continue to introduce new products and improved experiences, we're adjusting our investments to match this lower market growth outlook. Should the market growth accelerate, we'll be ready, believe me, to capture the upside. Audio and wearables sales were up 2% versus the same quarter last year. Headsets grew in the quarter, offsetting a slight decline in desktop speakers. We continue to position Jaybird for niche applications in the wireless earbud market. Our smart home sales in Q1 declined 46% against the strong Q1 last year where sales grew roughly 50% and we have saw a change in the overall growth profile of this dynamic category. With that, let me turn the call over to Vincent to walk you through our financial metrics. Thanks, Bracken. As you mentioned, we had a very strong start to the year. Sales grew 12% in constant currency, 15% in U. S. Dollar. ASTRO contributed 5 points to our company's growth and showed strong growth year over year. Building value into acquired assets is a capability that we are steadily and quietly developing. Non GAAP operating income increased 41% to a better than expected $61,000,000 and non GAAP EPS reached $0.34 compared to $0.24 a year ago. In Q1, our gross margin reached 37.4%, which included a one time benefit of approximately 60 basis points from a legal settlement with our prior supplier for our distribution center in the Americas. We remain comfortable with managing our business within our gross margin target range of 35% to 37% as we balance various factors like logistics and supply chain cost pressure, currency exchange volatility or even tariff uncertainties with our overall efforts on maintaining ASP trends, taking cost out and freeing up gross profit dollars to reinvest throughout our organization. I know many of you are wondering about the impact of the new China to U. S. Tariffs on our business. Let me share with you what we know so far. The first run of tariffs has had a relatively immaterial impact on our products sold in the U. S. It's too early to assess the effect from the 2nd proposed run of tariffs. In the event these new proposed tariffs are implemented, we are currently investigating various mitigating actions such as pricing, trade classification of products or making adjustment to our overall supply chain including manufacturing. Now let me come back to our Q1 P and L. Our non GAAP operating expenses increased 9% or 6% excluding our acquisition compared with U. S. Dollar sales growth of 15%. R and D spending increased 12%. Sales and marketing expense rose 11%, both to support the strong top line growth in the year. And at the same time, we continue to manage tightly our G and A spending, which was down 3%. You can expect us to continue to optimize our spending, while we build out our capabilities and introduce new products and experiences. Last quarter, we had mentioned that we are continuously transforming and reallocating resources to shape the portfolio for the future. This quarter, we booked a one time $10,000,000 restructuring charge for evolving our capabilities for growth opportunity. To give you a few examples, we are standardizing sales processes across regions. We are placing more resources to enhance our software capabilities and we are accelerating changes in our cost structure in slower growth categories, so we can double down faster into higher growth markets. We are still in the process of reviewing some smaller residual areas to optimize in FY 2019. In the quarter, we also adopted the new 606 revenue accounting standard. This had a non material impact on our P and L, but it led to some reclassification on our balance sheet between accounts receivable and other liabilities. It does not have any operational or cash impact, but it does affect the calculation of our DSO and our net receivable balance as reported. You can refer to our 10 Q when it is filed for more details on that topic. Cash from operations for the quarter amounted to $12,000,000 versus roughly breakeven a year ago, leading to a total cash balance of $604,000,000 at the end of June. Working capital metrics and related balance sheet items, inventory, AR, AP were all in line to historical trends for June quarter, excluding the non cash impact of ASC 606. In summary, we delivered a great start to the year with our Q1 results, but there is still so much more that we can do. We're not only excited about the opportunities for the rest of the fiscal year, but for the next few years as well. And with that, I'll pass it back to you, Russ. Thanks, Vincent. It is a great start to the year, but as Vincent said, there's so much more to come. We shared our vision many times about a multi brand, multi category company, a vision we are methodically marching towards. We'll focus on secular growing markets, innovating with design and engineering into our existing categories at the same time. And at the same time, we're also always on the lookout for and innovating to meet exciting consumer and technology trends, whether that's internally, organically or through tuck in acquisitions. In fact, we just announced today that we've agreed and I'm excited to announce it here to acquire Blue Microphone, the top player in the microphone space. Microphones are used by gamers as they stream and podcasters as they podcast and performers on stage. It's a category we've been interested in for a while, we're very familiar with because of our webcam business and we couldn't be more excited about the terrific team brand and business that we've brought into the Logitech franchise. Given our strong Q1, we're raising our outlook for fiscal year 2019 for both net sales and operating income. We're increasing our net sales growth to 9% to 11% from high single digits and non GAAP operating income to $325,000,000 to $335,000,000 from $310,000,000 to $320,000,000 Now with that, Vincent and I are very ready to take your questions. Operator, please queue them up. Your first question comes from Asia Merchant from Citigroup. Your line is open. Hello there. Hi, Ratin. Hi, Ratin. Congratulations on a great quarter. Thank you. I guess I just wanted to ask about the acquisition, if you can provide some more guidance. I mean, it's one of your larger acquisitions that you've done. You guys are building the capability to integrate these acquisitions rather well, given your prior experience with Jaybird and ASTRO. But just in terms of this category, while ASTRO was pretty well known, the impact to gaming, etcetera, Maybe you can help us understand like how you think about this category from a growth perspective? Also maybe about the margins, how does that compare to your other product portfolio? And how we should think about the growth going forward into fiscal 2020 as you guys integrate through? Yes. Vince and I can tag team a little bit. First of all, we've been looking I mentioned it in the opening. We've been looking at this business for a while. In fact, we've been quietly working on products in the space. I told I've mentioned several times, I can't imagine us doing an acquisition where we weren't already working internally on the category and small teams trying to develop products that were competitive in the space. And occasion but we're always looking on the outside in these so called seeds to see if there's something we could bring in that could either accelerate or differentiate what we're up to. And this is a poster child for that, just a spectacular example of where we could bring in really if I mean it's really difficult to say who the exact leader in the space is because it can be defined different ways. But really I would say the leader in the space, the conceptual leader and the product leader in that space into our franchise. They look a lot like the UE business when we first bought it many years ago, Ultimate Ears. They're both in the professional space, but then they expanded into consumer. They have done a great job with both design and engineering and product development. The team itself has been stable and they're strong and we really like them. And we think culturally they fit extremely well. They're even located in the same city as the original UE Custom business. So it's super exciting and the and I'm not disclosing any surprising market insight here. If you've got kids or if you're an entrepreneur and you've got a little hustle on the side yourself, you may well be podcasting or somebody in your house is. And if you're not podcasting, you might be somebody's probably streaming, somebody you know is streaming themselves, playing games on either YouTube or Twitch. And that's right at the heart of what this business is about. And we're very familiar with it because our webcams are used the exact same way. And we've been developing that business for a while. You saw it grew 13% this quarter on what many people would say, why in the world are webcams growing? Well, that's why. Now the other thing you need is great mic. And so we're super excited about it. I think the long term prospects are good and the margins are also very good. I'll let Vincent respond to that further. Yes. I can do 2 things. One is talk a little bit about the team, very rounded team of all the business we've acquired. I think that's the most mature business team we've had. And from an integration perspective, we'll do what we've learned how to do, which is integrating the back end, helping them from manufacturing to channel expansion and really helping them to really focus on what matters, which is developing the brand and developing the product portfolio. So that's our approach. The deal expect to close at the end of the summer. Bracken mentioned it's a growing business. It's a profitable business and the margin is in line to the margins we have across our portfolio on Avocci Norway Day stand. Great. Thank you. And if I can just have a follow-up on the organic growth. A lot of investors tend to focus on organic ex ASTRO. Maybe you can clarify, I mean, you guys have done a lot with the ASTRO once you purchased you guys have expanded it to more of the mid market mid pricing tier. So how should we what is the read with organic growth kind of perhaps slightly decelerating from where it was in the Q4 of last fiscal of the March basically the March quarter. How should we read into that? And then as you lap the Astra acquisition in this quarter, how should we think about gaming growth going forward? Yes. So maybe I'll take that one. So in terms of organic growth, the way you would report it, if you take all of ASTRO out, the reported number is 7%. I do want to point out that we have more than tripled the size of ASTRO since we have acquired and that's called an organic growth, right? So if you just take the ASTRO last year as the baseline and then grow everything else, with double digit organic growth. From a quarter over quarter perspective, that organic growth is actually improving. And I think the real dynamic in our non ASTRO portfolio is to isolate mobile speaker. And what we're doing with mobile speaker, rightsizing it for the market opportunities and also ahead of maybe other things that will happen there. The organic growth excluding mobile speaker is actually extremely strong and we've seen it in gaming, in video collaboration and even in our PC peripherals where we've had a very, very solid growth. Yes. And I'll add, the organic growth in our existing gaming business, excluding Astro is very strong. Extremely strong. So from that perspective, we feel pretty good. In terms of guidance overall, so we've raised the guidance as you know. We're not going to re break it by category when we guide. But if you compare to the numbers we've said by markets at AID, I would say at this point in time, the PC peripheral, what we call creativity and productivity, the gaming and the video collaboration will do better. And then the music categories and the home category will do under the overall guidance. But it's a portfolio play and we still have 3 quarters to go before we can talk about the annual number. Great. Thank you very much. Thank you. Your next question comes from Joran Sertz from UBS. Your line is open. Joran? How are you? Hi, thanks for taking my questions. Thanks for having me. The first one would be please on the wireless speaker segment. Can you please clarify what was sell through? And then I recognize that the wording has maybe changed a little bit. I remember there was some inventory clearance ahead of new product slowing down because the end market is deteriorating. So can you help us what are your plans for new product launches into the second half? And also what is the expected growth rate for the speakers? Next question would be please on EMEA. Adjusting for currencies, if I am not totally wrong, like for like sales growth was around 3%. Do you expect an uptick here already in the next couple of quarters? And if yes, so why? And then the last would be on new growth areas. I know it's a quite broad question, but is there something where you are confident that in 1 or 2 years you have a 3rd or 4th growth pillar in your portfolio in addition to gaming and video collaboration? Thanks very much. Well, you covered a lot and very quickly, we'll see if we can remember the question. So first of all, let me go to your wireless speaker question, which was what's going on there? Okay. As we mentioned before, there are a couple of things going on there. One is the as we said, we're resetting the channel for a change in really the growth expectations for that category. And so we took a lot of channel inventory last quarter, some more of this quarter. And then you mentioned that we mentioned, I think Vincent did in the last call that we always have new product development in the pipeline and we do. We haven't disclosed anything. We're not announcing anything today. We don't have a timing that we're going to give you, but we always do and you can be sure that we do. The second one, let me jump down to your Europe question. Yes, Europe, we don't like flat sales in Europe any more than you do over a dollar basis actually up 7%. But we feel really good about we're doing over there. We've structurally changed a few things inside the company, which is part of a longer term plan. And we are excited about super excited about the team that's doing that and the process we're undergoing to do that. And I think we're going to be in really good place on the other side of what we're up to. So I'm excited about that. And on that one, if I can add, I would say it's a first half versus second half story, Yaron, and it will improve as we progress through the year. You had 2 more questions. I apologize. I can't read my own writing here. I think you addressed the first two, right? On mobile speaker, it's both its channel and its cost structure as we align to a lower gross market. On EMEA, we've talked about it. And then the next one is really about the new growth drivers and area. Yes. And you now know us, okay. So you know that whatever we're talking about today is by no means everything we're working That's not the model that we have here. So we're always working on new category development, new ideas, new areas that we can drive for further growth. And we intend the mission of this company is to serially expand in new categories over time. Now, rarely are we going to do do multiple categories a year and I wouldn't even guarantee it will do 1 a year. But I can promise you that we're always looking at new spaces that we can grow in. While we aggressively use design and engineering to innovate and build the businesses we're in to try to get to leadership or either a top 1 or a top 2. So it's a diversified portfolio of play. It will be more and more diversified over time. And that will that's our strategy and we're over time. And that will that's our strategy and we're super excited about where we've gotten to, but much you're only as good as what we're going to do next. And that's why you're asking the question. So we're focused on that too. All right. Thanks. If I may come back to a wider speaker, can you share with us the sales growth rates for Q1 and also what you expect for the full year for sales? Yes. So overall, like in Q1, Johan, sales through continued to be somewhat flattish, I would say. So much better than the selling number you see. And so it's part of the discussion we've had. A part of it is channel management, another one is overall investment and cost structure. In term of the overall growth for the year, I would say you should expect a continued decline in Q2 and then improving in the second half. Thanks very much. All right. Your next question comes from Scott McNeil, McConnell, D. A. Davidson. Your line is open. Hello there. Hi, good morning. Welcome to the team. You're welcome. Yes. Thank you. Thanks for taking my question. So you touched on this a bit, but regarding the Battle Royale gaming format and the emergence of esports, what gives you confidence that those are sustainable trends and not fads? And second, how have you seen Fortnite in particular as increasing the total addressable market for gaming accessories, including headsets by expanding the demographic for game players, including to maybe younger kids and girls? Yes. Well, it's hard to predict any single game, whether it's a fad, it's going to go up and then eventually go down. But I think the most important thing here is the secular trend that's been happening now for, I would say, really it's been happening for 10 plus years. It's really taken off the last 5 years. And we thought actually when I started here, when Vincent and I started here a few years ago, we thought there would be more games like this that would come in explode and then probably flatten or decline and then something else would replace it. We really didn't see any of that for the and to be honest, as excited as it was about gaming in general, I was a little disappointed because I thought that would spike interest in the gaming business and the gaming category and bring more people into the franchise at an accelerating rate. That's exactly what Fortnite has done. So it finally happened. I would say it would be shocking if it didn't happen again. So I'm sure it will happen. Fortnite is a really compelling game as you know, I had dinner in New York last weekend when I went to the Overwatch finals with a friend of mine, his 10 year old son who had been who really got into gaming because of Fortnite. And we talked for a while about all his friends coming into gaming. And he was having a debate with his dad about why he couldn't have a PC yet. So he was using our headsets, but not our PC. So I think that the Battle Royale format is very compelling, especially since it's not you're really working with other people at the same time that you're playing a Hunger Games kind of event. And I think there will be there are others and there will be more. But beyond that the secular growth of gaming should just continue for a very long time, as I said in the opening. Great. Thanks. Thank you. Next question. Your next question comes from Bank. Hi, Juergen. Hi, Juergen. Yes. Hi, good afternoon. Thank you for taking my question. Actually, I have 2. On your gross margin, you mentioned the 60 basis points one off positive. And you also mentioned the benefit of FX and cost cutting. How much was the latter 2? And your perceived peripherals was quite stronger than you expected, you said that. Were there any special events or promotions that drove that growth? Let me jump in and answer that one first. I'll let Vincent take the analysis of the gross margin. No, not really. I mean, that was pretty much a normal quarter, a normal Q1 for us in PC peripherals. Now in Q1, one of the fun things is Q1 has several big events in China that some of you may not be aware of, Brand Day and in Q2, Q3 you see Singles Day come, but that's not in Q1. So you got a couple of big events that the Chinese market has, which is good, but they're not big enough to really fundamentally change the number very much. Bottom line is that we did have a Q1. We're excited about how we started the year in PC peripherals. Stay tuned. Yes. I can talk about the gross margin. We normally don't break exactly every FX impact. But this quarter, the main currency impacting was the euro versus U. S. Dollar exchange rate was 1.17 this quarter versus $1.10 a year ago, so a 7% favorable delta. In the past, we've shared that when we had a one point in time 2, 3 years ago, a 20% decline, we saw about a 3 points impact. So around 7% would be around 1 point. There are other FX, of course, around other currencies. So it's not a perfect answer, but gives you some idea to model. As we go into the next quarter, last year, the euro was 1 $17,000,000 actually, and we currently have a spot rate at $116,000,000 So that FX impact going into Q2 should be much more moderate. Okay. And the cost initiative? Well Cost contained, million. Yes. So we continue to, as you know, working on our overall cost structure. It's an ongoing process, right, as we design new products to introduce them at better margin or at the margin of the prior product and designing with a cost element. So we continue to work on that and enables us to deliver the margin that you've seen. Across the margin, there's a lot of levers, right? So working on all of those levers is important and having good handle on cost savings to manage cost pressure from logistics or supply chain costs, for example, is a must. Okay. Thank you. Thank you. Your next question comes from Michael Sillis from Vontval. Your line is open. Hi, Michael. Hey, Michael. Congratulations. Good quarter. Thank you. My first question would be the what explained exactly the relative weakness in Europe in the Q1, which category in particular? And the second question would be with respect to your operating income guidance, which increased €15,000,000 I guess. That can't all be from Blue Micro. So how much does Blue Micro contribute to the margin to the guidance increase and how much is from the rest of the business? I'll let Vincent jump in a second because he's pointing at me telling me he wants that question. That's the secret behind here. We pointed each other. Yes, so Europe, I mean, at the end of the day, it's not really obviously Bluetooth speakers were weak in Europe like they were in for the GoPro business. But I would say generally we're doing a couple of things in Europe. 1, we're moderating our promotion activity in Europe. And so far so good. I would say we'll probably try to keep that up. And that's a kind of a sine wave, wave you go through. And so we're doing that. And I think that's probably having a dampening effect across the region. But overall, I think we're doing several things change the structure, which I don't really want to totally share, but they're not anything that's secret for any particular reason except there are people involved. And we're excited about the changes we're making there. And I think we'll see a really good impact over the next year or 2 and probably as we go through the year. Definitely. I think we'll see improved productivity in Europe as we drive those changes. And the growth rate by category in Europe is kind of at a lower level, but similar than what you've seen on a global basis here, very strong VC gaming and weaker mobile speaker. In terms of Blue Microphone, as I said, a growing business, very strong gross margin at or slightly better than our current corporate average. So we're very excited about that. To date, it has been run with positive EBITDA. We are acquiring it really frankly to develop that business. We think there's a good growth potential here and we're going to invest to make sure we can capture that growth opportunities. So into the overall guidance, we'll close the business by the end of the summer and we'll contribute about one point to the top line at or slightly accretive to the gross margin. And then we plan to invest to grow very minimal contribution to the bottom line in net FY 2019. Okay. So the majority of the guidance increase is actually from is actually organic. It's organic and operational performance coming out of Q1. But that's correct. It's organic. Yes. All organic. Yes. Correct. Okay. Excellent. Thank you. Okay. Thanks, Michael. Your next question comes from Paul Coster from JPMorgan. Your line is open. Hi, Paul. Hi, Paul. Hey, Bracken. Hey, Vincent. So this is Paul Chung on for Coster. Thanks for taking my questions. So first up, another impressive quarter for video collaboration. Are you seeing some increasing competition given the growth numbers you're putting up and at nice margins. I assume you've been on a very nice run here. It looks like you're on track to get 40% growth again for the 4th consecutive year, which is pretty impressive. So how should we think about kind of the growth in the out years? Yes. Thanks, Paul. I'll tell Paul we said hi. And yes, video collaboration is a monster opportunity. So it's not an opportunity just for us. It's an opportunity for video conferencing companies that make cloud based services. It's an opportunity for other people who do hardware like we do. It's an opportunity for everything in between. For the cost of a chair or 2 in a room, you can video enable it and a small fraction of all the rooms out there are video enabled. Sorry to do that advertisement, but I know some of you are not on a video call on a regular basis and I encourage you to at least give us a call and see if we can help you. Yes, the long term secular trend is great, but the competition keeps pouring in all the time and we are used to that. That's the business we're in and every category we play in and it's a business we're going to be in here. And so we see new competitors come in a lot and there it just makes us better. Competition also drives market growth. And so I think as you see more people come into this space, probably the growth will get even stronger. And we'll have to be better. And that's why we're investing both on the sales side and on the engineering side. So I think the long term potential here is really great. Okay, great. And then my second question is, can you just quantify the impact your the value your channel provides? I mean, you have a couple of recent use cases, including Jaybird and Astro. So how much of that growth would you say you drove out of the respective businesses by kind of expanding to your large channel? I know there's some channel overlap when you do these acquisitions. I understand the question. Yes. I understand the question, I can't answer it. It's a very difficult it's a really hard one for us to answer. I would say, generally speaking, we're more global than anybody we're going to buy. So over time, which doesn't usually happen overnight and hasn't in the case of either of the last few acquisitions, we will get growth expansion, which is one form of channel expansion, which is great and it drives a sustainable growth curve that's long term. Within an existing market, our ability to sell better than the thing than the people that we buy depends. I'd say in some cases, we maybe we have been able to, in other cases maybe we won't. I think it remains to be seen with the Blue Microphone whether we'll be better at it than they are. I think we'll certainly long term, I think we'll have potentially go into new channels of development that they're not in, in new countries and things. And we've got a portfolio we can connect more directly to those products. So I think that we bring a lot on the synergy side of bringing things to market for a small company like Blue Microphone, Astro, JVirt, any of them. It's one of the synergies that we really bring to the table. We also bring a lot potentially to the other end of the equation, which is the cost side and the innovation side. On the cost side, obviously, we make 140,000,000 product. We sell 140,000,000 products a year. We make 140,000,000 products a year in our factory. And we buy another 50% of our stuff from other people. So we really have a lot of scale relative to any small company. And our innovation engine is quite good. And as you know, we've been emphasizing design. So we feel like we can help a small business in several different ways to grow And that's why we are really excited about bringing things like Blue Microphone in. Okay, great. Thank you. Thank you. Your next question is from Gunther Hultfelder from Ratterjee Hellvis. Your line is open. Hey Gunther. Hey Gunther. Hi. Thank you. Just one on the gross margin follow-up. I mean, is it possible to also to quantify the impact from product mix given the strength in gaming and weakness in mobile speakers? Yes. That's easy actually. It's relatively material. We have different dynamics. Again, it's the portfolio player, right? So you have maybe lower than average gross margin mobile speaker being down, but you have tablet also lower being up. You have gaming being up, VC being up and the rest match within it. So product mix overall when you do the normal rate and mix analysis, it's relatively flat. Okay. And in terms of currency tailwinds you mentioned, it's basically management of the gross margin by promotions to drive growth. Basically if I compare to the Q1 last year? Yes. You bring the point, right? If you take currency actually for a full year, right, it's favorable in the first half. And then depending on where it is, but versus today's spot rate, it would be unfavorable in the second half. For the full year, we've assumed I just take the euro to U. S. The exchange rate similar to last year, a $1.15 exchange rate, which right now we're operating under. So it's a good assumption. And then it really comes down to that, which is improved cost structure to a portion of it would be reinvested into promo and other activities to drive the growth. And a follow-up on Blue Microphones. Can you disclose the 1PP of what you're expecting for this fiscal year? What sort of sales growth this would mean for Blue Microphones? The business has been growing before we bought them, and we expect them to continue to grow. So the one point includes that growth. And I don't think we'll disclose more at this point in time. Okay. And last question. Can you provide a little bit more color regarding Europe in also in terms of the improvement you're expecting in the second half? Is this broad based or are you targeting special product categories with your actions? I would say it's broad based and we could probably start to dig in if we wanted to talk to that level at the country levels and things like that. But it's relatively broad based and I'm really excited about what we're up to and it's part of the it's actually part of playing offense. We started some of you may remember back in January, I said, we really took a hard look at Vince and I've been together for 5 years. And we asked ourselves, what do we need to do different for the next 5 years and this is part of that. We really reorganized the way we're thinking about regions long term And we've put in place new leadership. We're bringing some synergies and really significantly improved processes from one country from one region to another. And so that's a very broad based thing. We've got leadership changes as well. And if I just step beyond that, we also talked about that we went through a the word restructuring has to be used, but we think of it as a realignment, which is another effort to say really get ahead of the next round of changes we need to drive long term growth and that's affecting Europe as well. So a lot of things in there. And look, I'm optimistic that we're going to have a good business in Europe long term and across the company. Okay. Last one restructuring charges, anything more to expect here basically booked in the Q1? No. As I said, there are still a few areas we are reviewing and optimizing. I don't know the output out of it, but if we feel we need to do a little more, we will. As we filed our 8 ks, you can see that we put an estimated range for the year of $10,000,000 to $15,000,000 Okay, great. Thank you. Thank you very much. Your next question comes from Ananda Bara from Loop Capital. Your line is open. Hi, Ananda. Hey, guys. How are you? Good. Awesome. Congratulations on strong results and very crisp execution. Hey, just a couple for me, both with regards to gaming and video collaboration. Bracken, much like you talked to some of what the specific kind of catalyst and dynamics in video collaboration have been. And actually, I think you spoke to this group for speakers also are those have been driving sort of increased adoption. Could you do the same? This is sort of what you're seeing below the covers for gaming that you've seen maybe over the last certainly the last quarter, but even the last couple of quarters, kind of the squiggles that you guys are picking up on that are really, really continuing to drive broader adoption. Those would be really helpful. And then anything additional in video collaboration at same regard to what you mentioned on the call with regards to kind of like podcast, etcetera, podcasting, etcetera? And then I have one quick follow-up. Okay. Yes, on gaming, I mean, I think it's if you think about it, when you play a PC game, you need a mouse, you need a keyboard, you need a headset. If you're going to stream it just to stretch over to the other category, you need some kind of microphone, could be in your headset. If you're not going to use a headset, you need a microphone or some kind of it's good enough to pick up the sound well. So these long term trends are there. It's a very global phenomenon. We're seeing the you can kind of track just like in music, you can track streaming, you can kind of track the growth of esports around the world and see how strong this is happening and how broad it's happening, it's happening. I was just looking at something in Japan today and it's amazing how strongly eSports is driving the gaming industry in Japan and it's also happening in Latin America. It's happening in Taiwan. It's happening of course very broadly in China and Germany and the Nordics. It's everywhere. It is really everywhere. It's happening in Russia. This is one of the very few global phenomena that is kind of takeoff mode all over the world at the same time and looks like it's not going to slow down. It's probably going down in age as well. If you've got kids around the age of 14, when we when I started here, I would have said, gosh, this really starts to pick up steam at 13 or 14. Now it's moving down, I would say, probably down to 10, 11, I don't know exactly, but I wouldn't be surprised. So it's very broad, very deep and I think it's going to have a really long growth curve. And how Yes, go ahead. Sorry about that. I don't have much to add on video collaboration. I think, I said as much as I'll probably say for today except I'll just say, video collaboration and broadcasting, I think are 2 completely different things. One is about communicating point to point with somebody real time and the other one is about creating. And I think the world of creators is on the rise and it's going to be that will be a very long term secular growth of people who want to create things for other people. We all see it every day. But it's that's also at the very early days. So broadcasting is part of that and a microphone is a piece of that as is a webcam. And with my second question is with regards to the microphone acquisition and really your entrance into that category sort of in a holistic way. Would you like us to think of this as sort of like potential for being kind of a mini mega category? I'd say mini mega because it probably can't be as big as gaming. Well, maybe it could be as big as gaming. So what's the context in which you'd like us to think about sort of that one inside of the portfolio with regards to breadth and depth potential? I think I don't know, you can think about it as I think you can assess it for yourselves. I'll tell you how I think about it. I think we're a company of an increasing number of categories with growth potential. Some will grow long term and be very big and powerful. Others will be will grow for a little while and then they'll probably stabilize. Others might even shrink. And in some ways, a shrinking business can be a beautiful business, by the way, if it's part of a portfolio where you can manage it for invest for maximizing profitability, investing in other places. So I think the microphone business is really interesting. I don't want to miss I don't want to reach out in the future and try to predict how big it will be relative to other categories except to say, I love great products, I love great teams, I love great brands and this has all of that. And the dynamics of a world where more and more people are getting in front of a camera of some kind and trying to put something out for other people either live or recorded is a good secular trend for a microphone. Are you able to yet discern, I mean, I guess you're just announcing it today, so it's not yet closed. But from what you'll have from an IP perspective allows you to what you'll have from an IP perspective allows you to accomplish sort of what you like over the next for whatever timeframe would be sensible to be able to get a sense? Or is this a big enough category where you might say, hey, like in the past, like you've done in gaming, we may there's room potentially for doing additional acquisitions to build out the IP portfolio? The cool thing about this business is that it was started like our UE business in this one in particular in 1995. You can imagine how much know how and product development and expertise they developed over that very long timeframe. And as a result, when we posted today, I don't think I've ever gotten so many comments from people either directly in my email or on the various places showing up today on how excited they are that we're part of it and how impressed they are with Blue already, not us, but Blue microphone. So they're bringing a lot to the table. And I hope that we can add something too. We have a lot of capability in that space as well, but I think they bring a lot with them. That's awesome. Really helpful. Really appreciate it. Thanks a lot. Thanks, Vedanta. Thanks a lot. There are no further questions at this time. I turn the call back over to Mr. Lu. Okay. I'll just finish up real quickly. I'll go back to something I said kind of midstream with these questions, this Q and A. We're playing offense. We're just going to play offense. And a lot of people probably wonder why in the world did you announce any kind of restructuring today. It's because we're playing offense. We're not here to try to make things a little bit better all the time. We're building a long term sustainable growth company in more and more categories. And part of that is we're going to realign when we think it makes sense and it does right now. And we're going to continue to systematically enter new categories and we're super excited about what we're doing. So thanks a lot for all the questions and engagement and we'll talk to you next quarter. This concludes today's conference call. You may now disconnect.