Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Logitech first quarter 2018 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Ben Lu, you may begin your conference.
Thank you, Chris. Welcome to the Logitech conference call to discuss the company's financial results for the first quarter of FY 2018. The press release, our prepared remarks and slides, as well as the live webcast of this call, are available online at the investor relations page of our website, logitech.com. As noted in our press release, we publish our prepared remarks on our website in advance of this call. 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 Private 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 both a GAAP and a non-GAAP basis. 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 website. We encourage listeners to review these items. Unless noted otherwise, comparisons between periods are year-over-year and in constancy, all reported results and updated outlook are focused on continuing operations.
This call is being recorded and will be available for replay on the investor relations page of the Logitech website. Joining us today from Lausanne are Bracken Darrell, President and Chief Executive Officer, and Vincent Pilette, Chief Financial Officer. I'll now turn the call over to Bracken.
Thanks, Ben, and thanks to all of you for joining us. We started the year strong. Net sales grew 13% and profit grew 14%. All three regions grew double digits for the second consecutive quarter and the second time since I've been at Logitech in five years. We expanded gross margins by 1.4 points and invested that back into growing the capabilities that will enable long-term growth. By now, I think all of you know our underlying vision is to create a multi-category, multi-brand company. Investing and excelling in those five capabilities, operations, design, engineering, go-to-market, and marketing, are absolutely key to realizing this vision. From a product launch perspective, it was a really exciting quarter. Let's start with gaming. Here's an insight about competitive gamers. Even though productivity users of mice prefer wireless mice, gamers prefer wired mice for two reasons.
First, the battery in a wired mouse could die in the middle of a game, or wireless mouse could die in the middle of a game, while a wired mouse obviously is always plugged in. Second, a wireless mouse has greater latency than a wired mouse. Latency, in this case, is that delay you see when you move the mouse and there's a slight lag between your hand movement and the movement on the screen, especially at high speeds. These two problems are enormous for competitive gamers. The possibility of a dead battery is a potential catastrophic issue mid-game. The latency problems, in some ways, are even worse because they're an ongoing drag on competitiveness. It's not just an insight applicable to esports athletes who make their money gaming.
Just as Nike's best basketball shoes are worn by casual players, competitive equipment is not just demanded by the pros, but also by serious gamers and even casual gamers. We've been working for a few years to solve both problems. We've made progress, but that is an understatement. We've solved both problems and actually made wireless gaming mice superior to wired gaming mice. At E3 in Los Angeles last month, we announced a breakthrough, continuous charging wirelessly. That's never been done before by anyone. Now, you have a mouse pad, which most gamers use anyway, that wirelessly charges your gaming mouse as you play. You have the untethered freedom of a wireless mouse, but with infinite battery life. As for the latency, well, we also fixed that with superb engineering creativity.
We unlocked that with our LIGHTSPEED technology, now our LIGHTSPEED wireless gaming mice are faster in latency than many of our competitors' most popular wired gaming mice. There is no reason not to go wireless in gaming. For the next innovation, we told you we're working on enhancing our software capability, we're doing it broadly. As an example, we're even bringing that to the mouse. Logitech Flow is a new free download that allows you to not only seamlessly control up to three computers with a single mouse, but you can even cut and paste text, images, and documents among those three computers. You no longer have to mail them to yourself or go reopen them in a cloud program. Yes, you can drop and drag across computers.
Imagine simply copying a file from a PC and then pasting it into a Mac on the fly instantly, only with the cursor moving from screen to screen seamlessly. This is another first of its kind. In video collaboration, we launched a special new conference cam, Logitech MeetUp. MeetUp is designed specifically for small conference rooms and huddle rooms. Huddle rooms are the fastest-growing segment of the video collaboration market. Traditional conference cameras are terrible for huddle rooms. The screen and the camera are so close that if you have two or three people in the room with normal cameras, with their limited viewing range, you actually lose one or two people, or they're leaning in to appear on the screen. MeetUp has a really wide field of view, which captures everybody in the room.
Its all-in-one design also puts super high-quality video and super high-quality audio in one unit, eliminating annoying cables from the table. At a small fraction of the cost of a normal video conference camera in a system, it's an amazing way to expand video anywhere. I'm not going to stop talking about products without mentioning the latest version of our security camera, Circle 2. We took our original Circle camera and made it tremendously better and even more versatile. Not only does Circle 2 now offer the widest field of view, a stunning 180 degrees, but we're also offering mounts and accessories that make it multipurpose. They can take the same camera, the exact same camera, and now you can go indoors or outdoors, in the rain, wired, battery-powered, all plugged directly into a socket, attached to a window, and even more.
It's simply awesome, we just started selling this this past weekend. These are just a few of the products we announced in the past few weeks, Trust me, we have a lot more to come. I'm super excited about our pipeline. Let's take a look at the progress in each category. Let me start with gaming again. Sales in our gaming category grew a very strong 40%. All three regions posted healthy double-digit momentum in the quarter. Of course, the latest news is the recent announcement that we've agreed to acquire Astro Gaming. We demonstrated our ability to execute a leadership position in the PC gaming peripherals industry, we still have so much more opportunity there.
With the acquisition of Astro, expected to close in early August, we're excited to be able to expand our leadership into an adjacent category, console gaming, the console gaming headsets in particular. Astro leads the high-end of the console headset market, It's a powerful brand built by a powerful team. I'm excited to have them join Logitech. We see significant opportunities to leverage our global go-to-market and operations capabilities, with Astro's award-winning headsets to further deepen our presence in the PC and console gaming markets. Video collaboration sales increased 51%. The opportunities in this nascent but growing market are simply tremendous as we partner with leading cloud-based video collaboration solutions providers with our low-cost hardware products to video enable thousands of huddle rooms and conference rooms. Our mobile speaker sales grew 10%, with particular strength from Asia Pacific.
The newest addition to our Ultimate Ears family, the $99 WONDERBOOM, was a powerful contributor to the growth. Audio's PC and wearable sales fell 10% in the quarter. We're in the early days of the wireless earphone market, we are crafting the right distribution and product portfolio for the years ahead. You'll see some very interesting things soon as we make changes to play in one of our hottest markets today. Stay tuned. We continue to have renewed growth from our smart home business, with sales up 49%. The interest in the Harmony Hub has been strong as it's really the premier way to use voice to control the full range of devices in an entertainment room. Our decade-long track record of connecting new and old devices by a crowd-sourced database of almost 300,000 devices, makes using a personal voice assistant in a TV room easy.
Our PC peripheral category continued to grow, with sales up 3% this quarter. A stable PC installed base, along with our strong innovation, has enabled this category to remain healthy. Pointing devices grew 6%, while keyboards and combos were flat, our new baby, Spotlight Presentation Remote, had a strong performance in the quarter. Our mice products were also up. PC webcams grew 3% in Q1, the sixth consecutive quarter of growth. You'll recall that webcams have been driven by the growth of personal broadcasting, from gaming to social media to video blogging. Sales in our tablet and other accessories category rose a powerful 71%. Even with a weak compare, the business fell 26% last year. This was a strong performance. It's too early to call that a growth, a trend, I do think you can see that our approach to innovation in tablets is working.
Our newest Slim Combo for the iPad Pro is off to a great start, we're also seeing strong sales to educational institutions for the first time with our new Rugged Combo case and keyboard for the 9.7-inch iPad. Looking ahead, we continue to expect sales in this category to track the overall performance of the broader tablet market. Now I'll pass the call over to Vincent for some financial performance info.
Thanks, Bracken. With sales up 13%, all regions growing double digits, a few categories being well ahead of our expectations, operating profits up by 14%, we delivered another strong quarter. As I tell our teams, a strong start is very important, it is only the first quarter of the year. We will stay very focused on execution ahead of a heavy investment quarter so that we can deliver a great holiday season and another great year. Our Q1 non-GAAP gross margin increased 140 basis points to 37%. We continue to be very diligent in managing our cost structure and the contribution margin of every product line so that we can reinvest our gross profit dollars into targeted investments, both for the short term and for the long term. As you can see, we are investing in sales and marketing and R&D, which increased 22% and 8% respectively.
As examples of our investment, we are adding sales capacity in video collaboration around the world, we are extending our online marketing capabilities, and we are increasing funds for more seed projects.
G&A spending has remained flat in dollars, absorbing our growth through productivity gains. Overall, our non-GAAP operating expense rose 15% to $153 million in the quarter. Our cash flow from operations was roughly breakeven in the quarter as working capital increases ahead of the holidays. This is similar to the seasonal patterns we saw in fiscal year 2016, when working capital was consumed in the first half to support our growth and the product roadmap, with cash flows from operations skewed towards the second half. Similar to prior year, we still continue to expect our full-year cash flow from operations to be approximately one time our non-GAAP operating income. With that, I'll turn it back to Bracken.
Thank you, Vincent. Our momentum from fiscal year 2017 continues into fiscal year 2018. We launched a strong tranche of new products in the first quarter, we have even more exciting products to come throughout the year across our product categories. Our strong first quarter and the pending acquisition of Astro put us in a position to raise our fiscal year 2018 guidance to sales growth of 10%-12% in constant currency and a non-GAAP operating income of $260 million-$270 million. Vincent and I are now ready to take your questions. Operator, please queue up the questions.
At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Ananda Baruah with Loop Capital. Please go ahead.
Hi, Ananda.
Ananda.
Hey, Bracken. Hey, guys, Vincent, Ben.
Hey.
Hey, congrats and thanks for taking the question.
Absolutely.
Just a quick one for me. In the raised guidance for 2018, can you confirm that Astro is still expected to be about 200 basis points of contribution to that? If that's accurate, it sort of suggests, I think your prior guidance was high single digits, so it sort of suggests there's, I don't know, order of magnitude 100 to 200 basis points of incremental raise in that guidance raise. You spoke broadly to the momentum, Bracken, but is there anything, I guess, on a more specific level you could speak to that's having you raise the sort of the non-Astro portion of the portfolio? It's pretty early in the year for you guys to be raising guidance relative to how you typically like to provide us visibility.
Is it a stretch to think that the momentum that you're seeing that's giving you sort of satisfaction to do that feels greater at this point than it has in prior fiscal years? Thanks a lot. That's it for me.
Let me take the second two, and I'll let Vincent take the first question on Astro. Yeah, in terms of the momentum, what specifically, I would say, it's been a while since we've seen such strong growth from some of our most profitable categories and really across the board, gaming, video collaboration, Harmony, we just across the board had very strong growth rates. I don't necessarily expect all of those to continue quarter after quarter, but between that and the strong gross margins, it gave us a lot of confidence to go ahead and raise at this point. In terms of the timing of the raise, you asked how would I compare this with past years.
I would say, yeah, it's a little hard to remember back to how we felt a year ago and the year before that, the year before that, but I would say, I feel really, really good about where we are at this point after the first quarter. We came into the year saying, "If we have a good, strong start, it usually dictates a strong finish." I think we had a good, strong start, it's up to us to finish.
Ananda, this is Vincent. Yes, Astro is included. It's about 2 points on the top line, slightly dilutive on the bottom line as we invest to build up that business internationally. Normally after Q1, we wouldn't raise, but as you know, our guidance dated from AID in March, then we fully digested Q4, look at the momentum in Q1, got better confidence in our roadmap moving forward. Since we integrated Astro, we took again a full look at the bottom up and felt that we were in a position to raise where we are. I wouldn't expect every Q1 every year to be a raise, of course, but that's where we stand today. Much more confident to the year than we were four or five months ago.
That's great. Just one quick follow-up for me in that regard. You remind me, Vincent, Astro is dilutive next 12 months. You raised the op profit guidance as well, despite dilution. Bracken, to your point about gross margins.
Yeah
What's specific about it, about the portfolio as having sort of the gross margin, number one, beat for the June Q, but the number two, have enough momentum such that you feel like you can raise the op profit guide even though you're absorbing dilution from Astro?
Well, I don't think there's really a specific. We've made really strong cost savings that we started last year that is carrying over into this year, and we're executing our cost savings programs this year, and we expect to do that throughout the year. On top of that, we're having really strong growth in a lot of categories, and we do have a mixture of gross margins across those, and that shouldn't hurt from a mix standpoint, let's just say that. Overall, we looked at Q1 and felt like we're in a really strong position to go ahead and raise.
That's great. Thanks a lot, guys. Congrats.
Thanks, Ananda.
Your next question comes from Asiya Merchant of Citigroup. Your line is open.
Hi, everyone.
Hi, Asiya.
Again, congratulations on the quarter strong results.
Thank you.
Just wanted to talk a little bit about your audio PC wearables, that you talked about realigning your portfolio.
Sure.
Jaybird underwhelmed a little bit. Maybe you can provide some more insight into that and how we should be looking at this category. Overall, just along with your music speakers, any competitive dynamics you can talk about in that category and what your expectations are, if that's still aligned with what you had at your Analyst Day for the music category growing this year.
Let me take both those. Let me start with the category for Bluetooth earphones. The category for Bluetooth earphones is really strong. I mean, it's really taken off, and we expect that to be the beginning of a very long-term trend. We got into this category because we were excited about being able to carve out a niche within that and have a really strong performance in it. Now, we would love to be able to just bring it in and turn that on and immediately have the same kind of growth rates or better growth rates in the category. Realistically, as we've gotten into this, like every category, we've got to learn it. We're learning that we need to really adjust our portfolio to be in the right position within the category for long-term sustainable growth.
We've got to do the same thing in our go-to-market. I've been doing this now for over five years, Vincent and I have, Alastair and the whole team, every time we enter a new category, we have to learn it, we have to iterate in it, then we have to execute. I'd say we've been iterating our way through the first year of the business. I think you're going to see some really cool things come out from us over the next quarter, two, and three, I'm really optimistic about where we are. In terms of Bluetooth speakers, I think the category itself is very much in line with what we expected. It's a great category. It's a big category, super global, we're playing in it all over the world, we still have opportunities everywhere.
It's always going to be competitive. It's one of the most competitive categories we're in, we've really competed well there from a pure innovation standpoint, we've leveraged a global go-to-market, that's the way we're playing going forward. I'm optimistic we can continue to do well within that very competitive market.
Okay, what about your sales and marketing investments that have gone up? Is there something that you can point to? Is there a different distribution format, storefronts that you're going into? Is there anything there that we can look for and see how that materializes in improving your operating income as the year progresses?
I'll give you a couple of examples of it. Vincent, you can jump in, too. There's a series of things within that. As we expand into more categories, we have different kind of plays we need to make. One example that I think Vincent mentioned in the opening we just had was in video collaboration, for example, just like in Jaybird, where we're iterating to make sure we have the formula correct for sustainable growth, one of the pieces of the formula that we've discovered we needed, and we discovered this a couple of years ago, was direct enterprise sales in some cases. We are adding direct enterprise salespeople to support the rest of the distribution chain, and that is highly effective. That's one of the places we're obviously adding. It's not the only place.
We're adding in other places, too, but that's one of the key ones. In terms of looking at how it sustains our profitability, all these marketing sales investments are really, one of our principles is, and I've said this probably on every call since I've been here, I'm not here for the short term, I'm not interested in stuff that's only going to drive a quarter or two or a year. Everything we're doing is really to set ourselves up for a long-term, sustainable growth path, and that's exactly what we're doing in each piece of what we're investing here.
Okay. Thank you.
Thank you.
Your next question comes from Joern Iffert of UBS. Your line is open.
Hey, Joern.
Hey, Joern.
Thanks for taking my question. The first one would be for Bracken, please. Bracken, you stated a couple of times in the last conference calls, Logitech is just at the beginning. Can you please give us some more clarity here, and what is really happening maybe in the next 12 months, how many new designers you are hiring, how many direct sales guys you're hiring in video collaboration, and what other new areas you are working on the product portfolio? What is the new product introduce rate in 2018 versus 2017? Some more clarity would be appreciated. Second question please, to Vincent, also the third one. On the FX hedging, can you please provide us with some clarity on what rates you roughly hedge right now and when the Euro benefit should come through to the P&L?
The third question on gross profit margin, if you split the improvement on the 140 basis points into design to cost, mix, and scale, this would be appreciated. The last question is just to double-check, the momentum running into Q2, is it similar to Q1, or are you observing any mild changes in the end markets? Thanks very much.
Okay, let me take the first and I'll let Vincent take the second two. My reference to just the beginning, actually, my reference to just the beginning is a very long-term reference. I really think of us as being in a position to be a company, one of the companies that creates a multi-category, multi-brand format that leveraging today's technology. I think there will probably be more than us, but we're very fixated on doing that. There are lots and lots of opportunities to do that. You mentioned a couple of categories that we're in, or the tools that go into a couple of the categories we're in, the people in one case, so video collaboration, but it's a much, much longer point than that. We're constantly looking at, we have a whole portfolio of what are the new categories we should be entering?
At what time frame should we? To your point on designers, we're building small teams to do sprints and then seeds to figure out how to enter them and where to enter them. Sometimes we're shutting those down and keeping others going. It's a very dynamic process. In terms of specificity on exactly how many people we're adding over the next year, we don't disclose that. What I would say is, you asked about number of products we might be selling this year versus next. The whole principle here, Joern, is really we're building a long-term growth platform of multi-brand, multi-category. It's not about any quarter or 12-month period. You'll see us building this capability and systematically entering new categories. I hope, generally being successful in that, in each category we enter. That's really our game plan.
As we do that, we'll unfold what those categories are and how we're supporting them, just as we are in video collaboration.
I will take the currency hedging question. Just let me focus for illustration on the euro-USD exchange rate, which is the major driver in our P&L. In the last quarter, that rate moved from 106 in April to an average 108 in May and 112 in June. The average for the quarter is 110, and FY 2017 average rate is also 110. As you know from a hedging perspective, we hedge three months on the four-month rolling forecast kind of view. Even though today there's a little bit of an uptick, we would be hedged at around 110 average for the next quarter. Our guidance also assume average rate of FY 2017 within a few points. Those are the assumptions used and how we drive the business from a currency perspective. Gross margin improvement, your third question, 140 basis points, 37%.
The 37% is somewhat in line to how we moved into the high end of the gross margin target, as you know, through last year. As we explained last year, most of that improvement is coming from cost savings, very little impact of mix, and then partially offset by increased of promotion. As we say, we reinvest a portion of the gross profit generated into short-term demand. From a cost-saving perspective, it comes from both design to cost and scale, both of them playing into the overall bucket of cost savings. Momentum, we don't guide by quarter, but I would say if you modeling by quarter, Q3 is definitely our big quarter and what we are shooting for. As I mentioned in my script, Q2 is an investment quarter where we really prepare for a greater holiday season.
Okay. Thanks very much. Maybe the last question, if I may, to follow up on the financials-
Sure
with marketing and selling expense going up 22%, was this all already resulting in cash outflow? Or is there something built via provisions and cash outflow and marketing campaigns will only happen then in Q2, Q3?
Yeah, no, most of it is somewhat on the cash outflow. It's what happened in June, maybe outflow in July. It's part of the cash flow of the quarter, generally speaking.
Yeah, there's nothing extraordinary.
No, there is no extraordinary accrual, if that's your question, Joern.
Cool. Thanks very much.
Thanks, Joern.
Your next question comes from Chris Gretler of Credit Suisse. Your line is open.
Hello, Chris.
Hey, Chris.
Yes. Hi. Thank you. Hi, Bracken. Hi, Vincent. I have two question. The first relates to the bonus effect on your cash flow. Could you-
Sure
speak about how substantial that impact was? The second relates to your gross margin. You're now tracking already the top end of your longer-term guidance in Q1, which is seasonally typically a smaller quarter. What actually would trigger you to review this longer-term guidance and kind of now giving maybe some structural change in your product portfolio?
Let me answer the first question quickly. On the bonus side, what we put in our prepared remarks is that the Q1 cash flow from operations was impacted by a change in our bonus structure. Up to FY 2017, we were paying our bonus semi-annually. The first half of the year bonus was paid within the year. Last year, we changed that and make it an annual bonus. In FY 2017, there was no mid-year payment, and all of the payment on a full-year basis happened here in Q1 2018. That effect got compounded by the fact that FY 2017, as all of you remember, was an extraordinary year in term of beating our own expectation and our plan. We paid above the 100% level of a bonus.
If you go into the accrued liabilities of the balance sheet, you would see that that decreased by over $20 million. The impact on the cash flow is over $20 million on a year-over-year basis for people compare. On the gross margin side, Bracken will also answer, we're definitely trying to drive a gross margin as high as possible structurally, both by creating great value and so price premium, but great value for the consumer. Also by cutting up our operations, and that goes from efficiency of our promotion all the way to product cost savings, as you know. The reason we're doing that is because we definitely want to invest in all of our capabilities and create the capacity to invest in our five key capabilities.
Yeah, you asked what would trigger us to relook at that top end or the range on the gross margin. I would say, if we didn't think we had the kind of growth opportunities ahead that we do today, we would rethink it. I think our job is to make sure that we have so many opportunities ahead of us that investors would think we were crazy to try to eke out more profit at the expense of stronger growth. Our whole mission here is to have strong, profitable growth options ahead of us that are substantial, and we just keep going, even if we did have our gross margin rise above 37%.
Okay, thanks. Keep it up. Great result.
Thanks, Chris.
Thank you.
Your next question comes from Andrew Humphrey of Morgan Stanley. Your line is open.
Hi, Andrew.
Hi there. Thanks for taking my question. Firstly, maybe on Jaybird-
Sure
it'd be useful to understand how much do you think there is down to you learning the business, as you say, and getting to know the channels and maybe specific channel partners? How much is a conscious decision to move around the product portfolio? How long do you expect that transition to take? Vincent, I think you mentioned in the comments that the coming quarter is going to be an investment quarter ahead of stronger performance in Q3, as you would normally expect from a seasonal point of view. Would you expect profitability this year to be more heavily weighted to Q3 than usual? Is that what we should read into that remark, or am I reading too much into it?
Okay. I'll jump in and take the first one. It's hard for me to parse out which is which, but I would say every time we've entered a new category, we've had things to learn, and we've adjusted both the go-to-market, the distribution emphasis, and the product portfolio for that. It's really hard for me to say how much of this is us learning and how much of it is us adjusting because we're doing it at the same time. In terms of how long does it take till I feel like we're really where we need to be, I think it's probably a few quarters. I feel very good about where we are, and I'm super excited about the portfolio that we're developing. I just say stay tuned. I think you'll see some good things.
With regard to the seasonality, as you know, as we drive growth, we always have investment in inventory, in OpEx to prepare in the field and marketing plans. Then, of course, in margin, as we transition product from old to new, I would say that this year, like other years, but not like FY 2017, we are a lot more front-loaded from an investment perspective. Of course, it will become more apparent as you know and see the years unfold and we continue to launch new products. Yes, investment will be more front-loaded in Q2 than FY 2017.
Yeah. Okay. Very helpful. Thank you.
Thanks, Andrew.
Your next question comes from Paul Coster of JP Morgan. Your line is open.
Hello, Paul.
Hi. Hey, Bracken. Hi, this is Paul Chung on for Coster. Thanks for taking my question.
Great. If you're consistent, we can always say Paul, and we know it'll be one of the others.
Yeah, it'll be one of us, right?
Yes.
On gaming, it may now become your most important category and may even become your biggest segment by FY 2019 with Astro. Do you see other opportunistic acquisitions or new product introductions, possibly a VR headset? On Astro, can you give us some insight into the thinking behind the buy versus make decision? Finally, Vincent, how does the margin profile in gaming stand relative to keyboards and desktops, and does that change over time? Thank you.
Great. In terms of opportunistic acquisitions, actually, I'm probably mincing words a little bit, but I would say that we would never do an opportunistic acquisition. It would always be a strategic one, and this was very strategic for us because we felt like we really had an opportunity to play in the bigger part of the headset business for gaming, and we really didn't have any real play in it at all. That leads right into your question of make versus buy on Astro, and obviously, we could have taken our existing brand and brought it over. What we saw was a wonderful opportunity to buy the top premium brand in the category, who had 80% of the top of the category, and that just doesn't come around very often.
They'd already established a very strong brand in the console esports space, which was important to us because we're really dedicated to being a key player in the esports peripheral space. Just really super opportunity. This acquisition we worked on for quite a while because we were really dedicated to getting it done. In terms of other spaces within gaming that we think there might be in VR and AR and other things, we absolutely think they're out there. It's been no secret that we've been working on it. We have a seed that we call VR and AR. It's not just gaming. I don't know exactly when that will come. We'll have to wait and see, and in the meantime, we have so much opportunity in the places we're in now in gaming that we're super excited about where we are.
Your last question on gross margin. As you know, as we share that AID, gaming is sitting at around the corporate average gross margin, and Astro is fairly in line to that overall P&L business structure.
Okay, thank you.
By the way, I'll come back Paul, I would reply to you or respond to one thing you said. I'm not taking issue with it. I think gaming is a really important business to us. It has been almost from the beginning, and it's been a great growth driver, and will be a great growth driver for us. We have so many that I wouldn't say that it's going to be the most or even one or two. I think we've got a very distributed portfolio of growth opportunities now, one at a level this company's really never had before, and I suspect that'll get richer and richer over time. We're super excited about gaming, but we have lots of other opportunities out there too, and we're excited about them as well.
Thank you very much.
Thank you, Paul. Say hi to Paul.
Your next question comes from Tavis McCourt of Raymond James. Your line is open.
Hey, Tavis.
Hey, Tavis.
Hey, thanks for squeezing me in.
Absolutely.
A couple of details here, and nice start to the year. I had in my notes previously that the minimal Circle revenues previously had been in video, but I'm imagining from your commentary, those are going to be in the home segment. Is that right?
Yeah, that's correct. It was very minimum in material as we had shared, and as we relaunch now or launch the Circle 2 that will ship in July, we will put in the smart home category.
No, it's just. Yeah, exactly. It just started shipping in July, yeah.
Yes.
Yep.
Got you. As I looked through your slideshow, on your slides on gross margin, it has a footnote that in Q4 there was a $14 million benefit or so from a change to a breakage model in EMEA. I don't recall that from last quarter. Can you remind us what that was, and is that non-recurring?
Yes. I would invite you to go and read our 10-K that was filed at the end of May, there we developed the implementation from an accounting perspective of a breakage model on our promotion in Europe, which first time implementation of that breakage create a $14 million adjustment.
Got it. Vincent, you've mentioned Q2 being an investment quarter a couple of times. If I look at the full year guidance at this point from an operating margin basis, it looks like it's reasonably flattish. Would you expect year-over-year operating margins in Q2 to be slightly down and then some operating leverage for the back half of the year? Is that how we should think about how you expect the year to play out at this point?
Yeah, correct. As we said, every year is unique, and last year was a lot more smoother through the year. FY 2016 was the reverse, first half investment, second half return operating leverage. We would be closer to 2016, although every year is unique, of course.
I will say, I think our ideal year would be to be a little more front-loaded in our new product launches and our investment activities because that sets us up for Q3.
Yep.
This is probably a better model than we've had in the past, but we now got to deliver it.
Correct.
Got it. One product question for you, Bracken, on the video conferencing segment, the MeetUp launch. I think that's a higher price point than the ConferenceCam was. There may be some kind of bundled offering of ConferenceCams. I guess, what's your sense on what's the right price point for that category? When do you get too much into the higher-end Cisco, Polycom competitive dynamic versus really designing specifically for the huddle rooms?
Well, it's interesting because we already have a pretty wide range of price points. This one actually, our price points run well over $1,000 up into the $1,500 range, where you can buy a whole array of things for almost a boardroom-sized room now, actually, a boardroom-sized room. This one is actually targeted at about $899 in the U.S. or $799 in the U.S., it really is for a huddle room. I think that's a completely reasonable price. We always say it's the cost of two or three chairs in your office, and you can video enable a room, and you can save that in one flight or one of your teams flights somewhere that they didn't have to go to. It's absolutely a good value, and I think from a competitive standpoint, it's in a really, really good spot. I don't know.
Yeah, I think we've got a lot of room on the portfolio for ConferenceCams. I don't think we've really filled it out completely yet. This one's a terrific product. It's an all-in-one product, it really is. You can attach it to the wall or attach it to a TV, you don't need to have the cords running on the table. I'm using it in the huddle room right behind me now, and the acoustics are amazing.
Yeah, it looks very well-conceived. A follow-up on that, on the distribution model there.
Yeah.
Can you remind us, historically, have you sold through traditional enterprise channels and distributors and resellers, or is this the growing of an enterprise sales force, the beginnings of that? How far along that journey are you?
No, we have always sold through that since we started this business up three and a half years ago. We still are. We're just augmenting it with direct selling to some of the larger enterprise, just so that we can get the story right directly to them. A lot of these distributors we're working with are carrying big bags. They've got a lot of other things to sell. This is a way for us to supplement. I don't want to preempt anything. I would say this is a very smart complement to the way we're going to market in this category, it seems to really work.
Great. Thanks, and great start to the year.
Thank you.
Thank you.
Thanks a lot. Thanks, David.
Your next question comes from Michael Foeth of Bank Vontobel. Your line is open.
Hi, Michael.
Michael, hey.
Hi, Bracken and Vincent. I would like to come back to the FX situation. At the time when FX went in the other direction, obviously it was a big topic, and it put a drag on your margins. Now my question is, can you update us on the sensitivity of your operating margin to the FX rate? If you're guiding or if you're basically planning with 110, and we're now, I think at 116 or so, that alone should be enough to get your operating profit up by $10 million. Is that part of the confidence you mentioned when increasing your guidance so early in the year? That's basically already achieved just with the FX. That would be my first question, if you can elaborate on that. The second question would be regarding China.
If you can explain the dynamics you're seeing in China and what specifically is driving the strong growth there. I think it was a record quarter again, if you can go into more detail there. Thank you.
Yes. Michael, I will quickly do FX and Bracken will take China. On FX, if you remember FY 2015, right, when the EUR-USD depreciated 15%-20%, we lost about three points of margin. We said it would take about 18 months to recover through price actions and pricing, et cetera. We did recover, as you know. When we planned the year, we initially assumed average currency rate to be on average equal to FY 2017, right? We don't try to forecast currency. We plan at that level and within a few points, we know how to manage the different levers in our P&L. It goes through a thing. It started the year at 106. Three months later, we are at 112 when we finish June, 116 today. It does give us confidence that FY 2017 average is still at play, I would say.
We're not counting per se on currency just to raise the guidance. I think it's a true operational strength. Of course, it plays in our mind that currency has not collapsed and therefore our confidence. If we see upside from currency, frankly, we have plenty of investment plan as well, and we'll always balance profit growth with investment for the long term.
To answer your China question, we've had a string of quarters now where China's had very strong growth. It's actually very broad-based, broad in almost every conceivable way in China, including the fact that a lot of this growth, we're seeing very strong growth in gaming, very strong growth in video collaboration, a good start even in Jaybird and some of it. Really, it's a very broad-based story. We've got a good team executing very well in China, and I'm super optimistic. In fact, we're now building a group to do products in China for China. We started this about a year and a half ago. We continue down that path. We're big optimists about China. We're definitely not one of the companies that said, "Well, we think we'll pull out. It's not worth it." We're pouring in and we're going after a lot more.
We think there's more opportunity there than probably anywhere else in the world.
Excellent. Thank you.
Thank you.
Thanks, Michael.
Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from Andreas Müller of ZKB. Your line is open.
Hi, Andreas.
Hey, Andreas.
Hello.
Hello, everybody. Thanks for taking my question.
Yeah.
I've got a question also on Astro Gaming and the cross-selling of cheap products into the console market and, of course, vice versa, Astro Gaming products into the PC market. Is that a real difference in terms of go-to-market channels and so forth? What do you need to do to do that, to cross-sell here effectively between the two kind of categories or end markets in a way?
Okay. Yeah, the go-to-market's quite similar. Astro had a stronger direct selling operation than we did, mostly online or all online. Besides that, I would say the go-to-markets are very similar. This is really about the brand and the portfolio, and they had a very strong brand in console gaming. They started years ago with really in the esports that were console gaming related, and they were the first ones in and gained quite a reputation there. Then they built a portfolio at the very, very top end of that category. They established price points that didn't exist before. They positioned themselves as the premium player in the console market. It's really not as much about cross-selling into one channel or another. This isn't that kind of synergy. This is about really taking advantage of the fact that we're a global player.
We can take those products very efficiently into markets all over the world, and we can continue to build that brand in the places that make sense. We also have a lot of technology in earphones and headphones to complement theirs. It's really a great marriage of just two companies with strengths that are quite complementary.
Okay. Got that. Then on the sustainability of tablets and accessories and also the Rugged Combo for these educational purposes, can you elaborate there a bit? Is that the one-timer, for example, for the educational market for after the holidays? Would you see there really kind of another kind of market popping up? Also on the tablet side, what's currently, of course, you mentioned that the year before it was pretty low, so it was easy to have this growth. Going forward, what do you kind of think?
Well, you probably know me well enough now to know that I'm a little bit conservative on the way I think about things. My general view is, there's a great American expression, one robin, which is a bird that comes out in the spring, one robin doesn't make a spring. I'd say this strong quarter in tablet keyboards doesn't make me think that we might be having suddenly a resurgence in our tablet keyboard business. I do think it's a very strategic category for us. As you point out, our path into the education market has not been available to us before. This is new. It's early days. We love the potential there. We're selling there now and it looks really good so far, but I'm too conservative to tell you that I think you can expect that for the long term.
I'm hopeful that you'll see a good story there, but I certainly wouldn't want to set the expectation that you could expect anything like we saw this quarter in the next quarter or the quarter after that. What I can guarantee you is that we'll keep innovating very effectively there, and we'll get everything there is to get there. If there is a big market there, we'll get it.
Okay. Thank you very much.
All right. Thank you, Andreas.
Your next question is from Joern Iffert of UBS. Your line is open.
Hi, Joern.
Yeah. Hi again, and sorry for a follow-up question.
That's okay.
I apologize for my ignorance, it's on Jaybird. I'm not getting this 100%. Is Jaybird at the moment declining in revenues year-over-year? Is this something which can take or which can happen also in the next couple of quarters? This would be the first one. The second one also on Jaybird, what is the update on the expansion into Europe and Asia? Where do we stand here? When do you expect that you have penetrated your classical distribution channels in these regions? Thanks very much.
Yeah. To be clear, Jaybird's a small business, it declined this quarter year-over-year. Could that go on next quarter too? Maybe. It's a little hard for us to say because we're now, as you point out, we're also in the early phases of expanding this into distribution all over the world. I think you'll see, as I said, I don't want to say anything about next quarter or the quarter after that. We're not going to guide to quarters. What I can say is I feel really good about the plan we have, both from a go-to-market standpoint and from a portfolio standpoint, and I think you'll see some really cool things coming.
I don't want to go too much further than that except to say it's a cool category, and I think we've created a strategy that goes after a part of it where we can really sustain good, strong growth.
What is the incremental challenge? I remember when you acquired Jaybird, I think you were quite positive on growth which can materialize immediately. What is really the incremental challenge here? What is something where you said, "Okay, look, this was really something we have not foreseen in Jaybird.
Yeah, no, I think the key here is that as we've gotten into this, we've decided we don't want to be playing a broad game where we're just selling an earphone to anybody for anything. We bought a great brand that's positioned in sports. Without being too specific, because I don't want to kind of unleash our entire strategy that we haven't let out the bag yet, we're trying to narrow this much more so we can create a really sustainable play here and become the leader of one segment as opposed to number 3 or 4 of a very large segment. You know me by now. You know that I'm not a believer in being 2% of a really big category is not nearly as good as being 50% of a smaller one. That's the game we're really after.
I think by the time we bought the business, we really integrated it, we continued to see the category unfold and develop, and now we can see this opportunity much better for what it is. I think it's a great opportunity. We've just got to make sure we have the right portfolio, the right focus on the channels, then execute. That's our game plan.
Okay, thanks.
Thank you. Please feel free to jump back on if you have another question there, Joern. Okay.
There are no further questions at this time. I return the call to our presenters.
Okay, well, thank you very much. It was a strong start to the year. We're super optimistic, or we wouldn't have raised, and we can't wait to see you guys in about three months.
Thank you.
Thank you now.
This concludes today's call.