Logitech International S.A. (NASDAQ:LOGI) Q3 2023 Earnings Call Transcript

Logitech International S.A. (NASDAQ:LOGI) Q3 2023 Earnings Call Transcript January 24, 2023

Nate Melihercik: Okay. Good morning, and good afternoon, everyone. Welcome to Logitech’s video call to discuss our Financial Results for the Third Quarter of Fiscal 2023. Joining us today are Bracken Darrell, our President and CEO; and Nate Olmstead, our CFO. As a reminder, during this call, we will make forward-looking statements, including with respect to future operating results under the Safe Harbor of the Private Securities Litigation Reform Act of 1995. We’re making these statements based on our views only as of today. Our actual results could differ materially. We undertake no obligation to update or revise any of these statements. We will also discuss non-GAAP financial results and you can find a reconciliation between non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC, including our most recent Annual Report and subsequent filings.

These materials as well as our prepared remarks and slides and a webcast of this call will all be available at the Investor Relations page of our website. We encourage you to review these materials carefully. And unless otherwise noted, comparisons between periods are year-over-year and in constant currency and sales are net sales. And finally, this call is being recorded and will be available for replay on our website. And with that, I will now turn the call over to Bracken. Good morning, Bracken.

Bracken Darrell: Good morning, Nate, and thanks, Nate, and thanks to all of you for joining us. As you saw in our preannouncement, our third quarter results were disappointing. Enterprise demand deteriorated versus last quarter, and consumer purchases were soft and more concentrated during promotional weeks than is typical. Those factors compressed our net sales and gross margins and resulted in a revised fiscal year 2023 outlook. I’ve discussed for the past few quarters the ongoing macroeconomic and geopolitical challenges impacting Logitech and the world. A strong dollar, global inflation and low consumer confidence continue. In the midst of these, we focused on what we can control: product innovation, a strong go-to-market strategy and disciplined P&L management.

So what changed during Q3 that pressured our results? First, our enterprise demand declined. Our VC business had delivered consecutive quarters of 7% growth and fell 16% this quarter. You all have read the headlines. Google, Amazon, Microsoft, banks and other businesses have announced layoffs and cost containment actions. Initially resilient in the face of pressured macro conditions, businesses are increasingly cautious in their spending, given the economic volatility and uncertainty. And of course, that is impacting our enterprise business, too. The second change in this quarter was a shift in our consumer’s purchasing patterns. Consumer sales remained weak. And importantly, of those consumers that did buy, these purchases were concentrated in time with higher promotional intensity, resulting in lower sales and pressured margins.

While current macroeconomic conditions and even the variables that changed in the third quarter aren’t going away this quarter, they don’t impact our view of the long-term potential of this business. We remain committed to the long-term growth trends, strong market strategy, the markets and the business models we have in place over time. I fully expect us to return to more predictable, less volatile economic conditions. And I believe this will support business investment, rising consumer confidence, sustained growth at Logitech. Because if we look beyond the whipsaw of the daily headlines, I’m actually struck by what hasn’t changed. While the pace of return to offices remains uneven, hybrid work is inevitable. Company’s approach to return to the office has been different across industries and geographies.

I hear a familiar story from CEOs and customers across industries. They’re still working to determine what hybrid model works best for their teams. Logitech is no different. We’re relocating and redesigning buildings in the Bay Area and across the globe focused on a hybrid work environment. As companies settle out on their definitions of hybrid work, we should see investment in personal workspaces and collaboration rooms. This investment will happen. It’s just a question of timing. Product innovation matters more than ever. The winners will have great products. That’s why we keep investing. We’re also diversifying the ASPs in our portfolio through innovation across our categories. Our oldest business, Pointing Devices, had ASPs 25% higher this quarter than four years ago as we’ve systematically expanded the category into new segments, with differentiated features.

This is obviously by design. Making sure we have category defining products across a broad range of base fees is our goal. Innovation requires investment, and our R&D investment this quarter was up 50% more than we invested in Q3 2020. Few companies have the financial resources and the management discipline to sustain investment in product development during challenging times, while driving efficiency at the same time. We continue to press that advantage and are enhancing our product portfolio. The big durable trends we’ve been highlighting, video everywhere, hybrid work, the explosion of gaming and content creation, continue to move ahead. People today want to work, play and free from anywhere. And we believe that our products will be a great enabler of this trend.

Let me provide a little more perspective on this quarter’s performance. I mentioned consumer spending was weak in the quarter, and it was with sell-through, excluding currency, and our prior business in Russia and Ukraine, only declined mid-single digits. We grew market share in Gaming, Video Collaboration, Pointing Devices and Tablet Keyboards. In Video Collaboration, while the number of conference cam units declined year-over-year, we continued to drive ASPs per room higher. The mix of our conference room sales is skewing to higher-end cameras. And the attach rate of accessories and services to our conference room cam sales is growing, which drives our sales revenue per room higher, evidence that our strategy of developing integrated room systems is working.

In keyboards and mice, we continue to gain share in the fast-growing high end of the market. So what can you expect from us in the near-term? You should expect us to operate in a conservative, disciplined manner, consistent with the last few quarters. Namely, we’ll focus on decreasing our expenses. We plan to reduce operating expenses by $150 million, or 11% by the end of fiscal year 2023. We’re on track to well exceed that goal. For Q3, OpEx was down 23%. You’ve watched us be aggressive on our OpEx as we saw the market weaken, and you can expect us to continue to manage our costs based on market conditions. We’ll continue to invest in product development, though. Customer needs are evolving quickly. We have the engineering and design expertise, customer insights and financial flexibility to bring new products to market to meet this demand and to accelerate refresh cycles.

And we will lean into our global operations and go-to-market capabilities. One final note before I hand it over to Nate. First, regarding our CFO search, our search is progressing well, though we don’t have an update to share with you today. Second, I’m really pleased to announce that our current Head of Global Operations and Sustainability, Prakash Arunkundrum, has been appointed Chief Operating Officer here at Logitech. Prakash has been here for close to seven years and is a frequent presenter at our annual Analyst and Investor Day. So many of you already know him. In this newly created role, Prakash will be one of my key partners in making sure we are structured strategically and operationally for the short and long-term road ahead. With that, I will hand it to Nate to provide some additional color on our results.

Thanks, Nate.

Nate Olmstead: Thanks, Bracken. Hello, everyone. Let me walk you through the quarter in more detail. Our Q3 results were impacted by a challenging macro environment. Net sales were down 17% to $1.27 billion. This reflects consumer purchasing concentrated in promotional weeks throughout the quarter and lower enterprise and consumer spending. Gross margins decreased versus last year to 37.9%. Versus the prior year, currency was unfavorable three points. Promotions were also unfavorable three points, and cost inflation was unfavorable two points. These eight points of headwinds were partially offset through our pricing actions and by driving down our use of expedited shipping. Operating profit was $204 million, reflecting lower demand and gross margin pressure, partially offset by reductions in operating expense.

Cash flow from operations was $280 million in Q3, and cash flow is up $118 million year-to-date versus last year. Turning to results across our product categories. Gaming was down 10%. Growth in our simulation products was essentially flat and more than offset by declines in PC and console gaming. Asia Pacific was down only modestly, while Americas and Europe remain pressured. Despite these declines, we gained market share in nearly all Gaming categories. The largest negative swing in our portfolio versus last quarter was in Video Collaboration, which was down 16% after posting consecutive quarters of 7% growth. Video conference room cameras and peripherals declined single digits, but we gained share. And business-oriented webcams were down more than 40%.

Pointing Devices were down 8% driven by pressure in the low end of our portfolio, but we grew market share in total Pointing Devices. Keyboards & Combos net sales declined 17% with gains in the high end of the market, offset by losses in the low end of the market, and consumer webcams were down nearly 50% year-over-year. Turning to expenses. Consistent with last quarter, we reduced our OpEx, which was down 23% versus last year. As Bracken mentioned earlier, we remain committed to investing in product design and development to strengthen our category leadership. And while R&D was down modestly versus last year, the $63 million we invested in R&D in Q3 is more than 50% higher than our R&D investment level just three years ago. In Q1 of this fiscal year, we communicated our plan to reduce our annual operating expenses by $150 million versus last year, and we achieved that goal this quarter, one quarter ahead of schedule.

I now expect that for the full year, we will reduce operating expenses by approximately $215 million or 15% versus last year. We will continue to focus on finding efficiencies throughout the organization as we manage our costs based on market conditions. We ended the quarter with a cash balance of more than $1 billion and continued a strong share buyback program, returning $90 million to shareholders in the quarter. We revised our financial outlook for FY 2023 based on three items: softer than expected third quarter results; enterprise and consumer demand, which may remain weaker than we previously expected; and uncertainty in supply availability related to the recent COVID outbreaks in China. Our outlook calls for full year revenue in FY 2023 to be down 13% to 15% in constant currency.

The US dollar weakened versus last quarter, but currency still projects to be a roughly 5-point headwind to US dollar growth for the full year. Therefore, our outlook for full year revenue in US dollars would be down 18% to 20%. Our full year non-GAAP operating income outlook is now between $550 million and $600 million. Nate, we can now open the line for questions.

A – Nate Melihercik: Great. Thanks, Bracken. Thanks, Nate. Our first question is from George Brown at Deutsche Bank. Good morning, good afternoon, George.

Bracken Darrell: Hi, George.

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Q&A Session

George Brown: Hi, guys. Good afternoon. Thanks for taking my questions. I have two, if I may. Firstly, in terms of product launches, you released quite a few products in Q2 out of the holiday season. Can you provide some detail on how they performed and in particular, I’m interested in how Logitech G CLOUD has performed and whether that’s met your expectations or not. And I’ll leave it at that.

Bracken Darrell: Okay. Yes. I would say overall, we announced 20 new products that we’re launching in Q3 or sometime in the next six to — three to four months after that. And I would say, overall, our launches are pretty well on track. The G CLOUD, in particular, is a very narrow launch. So we launched it only in the US. We’re so far, so good. We’re now expanding it into Europe and Japan. So, I would say, so far, it’s on track. It’s a new category for us. We’re always very conservative on new categories, George, because we don’t want to get kind of over the tips of our skis as we’d say here, but so far, so good. And generally speaking, I feel really good about our innovation in total. I mean, we continue to have just a really, really good insight-driven innovation with — and I would say, our performance in all of our new products is pretty well on track.

George Brown: Perfect. And then just a second question. Just in terms of the level of discounting going forward, after there was clearly some pull forward of demand during the Black Friday and Cyber Monday period. What could we expect going forward into Q4 and beyond from a promotional perspective, given inventory stands at quite a high level?

Bracken Darrell: Yes. I don’t think — we’re not in a position where I would say we’re going to have it at a discount, because of the inventory levels. Our channel looks fine, and our internal inventories came down quarter-over-quarter, again, as you probably saw. But we’re going to make sure we’re responsive to the environment. So I wouldn’t commit to you exactly where the overall promotion levels will be. I think they were particularly high as a percentage of our business this quarter, though, and I wouldn’t expect that again.

Nate Olmstead: Yes, George, just TWO quick comments on your questions. First, I think from an NPI standpoint, I agree with Bracken, off to a good start. I wouldn’t say there was anything in there that was financially really that significant in the quarter. So still ramping up there. And then on the discounting, as Bracken said, we definitely saw consumer preference towards more promoted products this quarter. I think there’s some of that assumed going forward here in Q4. Too early to say what that looks like out into next year, I would say. But that seems to be the environment that we saw during the holiday with certainly the weeks with the higher promotions had the higher percentage of sales.

George Brown: Perfect. Thanks, guys.

Nate Melihercik: Thanks, George. Next up, good morning, Asiya Merchant from Citi. Good to see you, Asiya.

Bracken Darrell: Hey, Asiya.

Nate Olmstead: Hey, Asiya.

Asiya Merchant: Hey. Good to see you guys, too. Couple of questions. First on the VC side of things, where — if you can give us any anecdotes about how your discussions with customers are going now? Clearly, the environment is still pretty gloomy out there as far as layoffs, but has there been any change since their reported quarter in terms of these conversations with these customers around demand for VC? And then secondly, I know in the press release, and Nate mentioned that as well, there were some supply concerns for your March quarter that you discussed in the press release with the pre-announcement. Can you tell us how much of that’s really affecting the March quarter? And when do you expect those to kind of play out, or are you still expecting supply issues post the March quarter? Thank you.

Bracken Darrell: Okay. I’ll take the first, and Nate, I’ll let you take the second one. Yeah, I would say, overall, we just came back from CES. And I would say, generally speaking, the tone was about the same. Everybody seems very committed to the long-term, making sure they’ve got the right setups, and that I wouldn’t say, there’s any real change in the secular term from what I see. But I do feel €“ I do sense the conservatism. I think you could hear it in some of our salespeople, who were saying March, March, March. And I’m not sure that was the right date, but they were saying a lot of the companies are really pushing out spending into future quarters. So I think that’s probably still out there. And we’re certainly assuming that as we go into Q4, and it’s reflected in our guidance. Nate, do you want to take the China question or I’m happy to?