Logitech International S.A. (NASDAQ:LOGI) Q3 2024 Earnings Call Transcript

Logitech International S.A. (NASDAQ:LOGI) Q3 2024 Earnings Call Transcript January 23, 2024

Logitech International S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Nate Melihercik: Good morning and good afternoon. Welcome to Logitech’s Video Call to discuss our Financial Results for the Third Quarter of Fiscal Year 2024. Joining us today are Hanneke Faber, our CEO; and Chuck Boynton, our CFO. 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 are making these statements based on our views only as of today, and our actual results could differ materially. We undertake no obligation to update or revise any of these statements. We will also discuss our non-GAAP financial results, and you can find a reconciliation between GAAP and non-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.

These materials, as well as the shareholder letter and a webcast of this call, are all available at the Investor Relations page of our website. We encourage you to review these materials carefully. Unless noted otherwise, comparisons between periods are year-over-year and in constant currency and net sales. This call is being recorded and will be available for a replay on our website. I’ll now turn the call over to Hanneke. Hanneke?

Hanneke Faber: Thank you, Nate, and welcome everyone. I’m very excited to be here today for my first earnings call at Logitech. Now, you’ve probably noticed that this quarter we introduced a new document as part of our earnings material, a shareholder letter. This letter is intended to be a comprehensive review of our quarterly results and includes commentary that previously would’ve been covered at the beginning of the call. So today, after brief opening remarks, we will move directly into Q&A. Now, let’s move on to this quarter. Our team delivered really solid results in the third quarter, and I am proud of the products innovation, the share gains, the operational discipline, and a prudent financial management throughout the quarter, resulting in really healthy gross margins and exceptional cash flow generation.

Our disciplined execution, tightly managing costs and promotional spend drove a 22% increase in our operating margin. That is tremendous work by all of our teams, but we will not be satisfied, of course, until we return to top line growth, which will be a gradual process. As we look forward, I am delighted with Logitech’s positioning. Our portfolio is designed to take advantage of indisputable trends in hybrid work, video conferencing, gaming, and content creation and disruptive technologies like AI will provide additional opportunities for us. As we work our way back to growth, we have demonstrated consistent disciplined operational excellence that builds a highly cash generative P&L, and a very strong balance sheet. This discipline, coupled with an innovation engine that introduces new products at a global scale, drives our market leadership across multiple categories.

I’ve spent the last two months visiting with our employees, partners, customers, and shareholders. It’s been a really exciting time for me, and I am as optimistic about Logitech’s future as when I joined on day one. We will be hosting an Analyst and Investor Day later this spring, and I’ll provide you with a more detailed perspective on our strategy and our approach to capital allocation then. Additionally, we will then provide our outlook for fiscal year 2025. I really look forward to seeing you all at that event. Thank you, again, and let me turn it to Chuck to discuss the numbers. Chuck?

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Q&A Session

Chuck Boynton: Thank you, Hanneke. Thank you all for joining us on the call today. You’ve seen our detailed financial results in the press release and shareholder letter, but I’d like to highlight three metrics this quarter that really stand out. First, our gross margins of 42.3% were better-than-expected year-over-year due to lower product and logistics costs, reduced promotional activities specifically in North America. Second, we’ve spoken for several quarters about our focus on driving lean operations. For the seventh consecutive quarter, we reduced on-hand inventory, and this quarter it was down 44% year-over-year with our inventory turns hitting 6.5. And finally, in Q3, we delivered $443 million of operating cash flow, one of our best ever.

This was driven by an improvement in the cash conversion cycle and strong operating margins. We are updating our outlook for the full year. We are now expecting revenues of $4.2 billion to $4.25 billion, up from $4 billion to $4.15 billion. Our operating income is expected to be between $610 million and $660 million, up from $525 million to $575 million. One final note regarding fiscal year 2025. If you look at our last four quarters, as well as the midpoint of our fiscal ‘24 outlook, you will see the declines in our net sales have moderated. Looking ahead to fiscal ‘25, we do not anticipate an inflection point in the slope of this curve, while the rate of our net sales declines has improved, there are a number of headwinds and uncertainties that may impact our net sales throughout fiscal ‘25.

Thank you to all of our employees for the hard work and impressive execution. With that, Nate, let’s move on to Q&A.

A – Nate Melihercik : [Operator Instructions] And with that, we’ll start with Samik Chatterjee at J.P Morgan.

Samik Chatterjee : Congrats on the robust results here. Maybe just to — Chuck, just to start with your ending comment there about the headwinds you’re thinking of for fiscal ‘25, maybe just fresh that out a bit more for us in terms of, I mean, obviously, there’s been improvement in the pace of declines or moderate those declines, but why shouldn’t the slope sort of carry you back into growth? What are the headwinds you’re thinking of? And I have a quick follow-up. Thank you.

Chuck Boynton : Yes, that’s a really good question. We thought very hard about what next year’s going to look like. And if you look at the fundamentals of our business, they’re very strong right now. We feel really good about the execution. If you look at this last quarter in Q3, a lot of it was driven by really strong discipline on pricing and promotional activity. The baseline business in Q3 outside of the promotional windows was a little softer than what we would’ve thought. The promotional windows were incredibly strong with great pricing discipline, but the overall pace of the run rate business was a little soft. And if you look forward into Q4, the midpoint of our outlook for the year would indicate a 1% decline in Q4.

Now, the high-end of our outlook would imply a little bit of growth in Q4. If you look into next year, there’s just so much uncertainty around will there be rate cuts in the U.S., the macro situation globally, whether it’s in China or Middle East or Europe. And so, we’re taking a cautious approach to next year. And as we look out, we’re confident this is a great business, profitable, strong margins. As Hanneke said in her comment, it makes sense. It’s if not when. But if you just look at the overall market, we just think that we don’t want to be have people get too optimistic about what next year’s going to look like given these overall headwinds in the geopolitical situation.

Samik Chatterjee: Hanneke, if I can, I know it’s early days in your role, but as you sort of looked at across the customer base, particularly if you look at them as enterprise versus consumer, and you think about the sort of next couple of years, where do you see the bigger opportunities? Where are we more likely to return to growth in which customer segment faster than the other? Just share your thoughts on that, please.

Hanneke Faber : I see opportunities everywhere when it comes to our customer base. So, we’re really, really strong in retail, and you saw that over the holiday period. Just great execution in store after store whether it was here in the U.S. or in Europe or in Asia. We also have grown online a lot with our e-retail customers. And then of course, there’s B2B and we’re newer to the B2B business. But the opportunity there is gargantuan. So many meeting rooms that are not yet enabled with video. And as that corporate spending comes back, I think we’re really well positioned with products that are fantastic, easy to use, great value for that B2B segment. Opportunity everywhere. B2B is a little newer to us, but I’m quite bullish on that.

Nate Melihercik: Our next question is from George Wang at Barclays.

George Wang : Just two quick ones. Firstly, can you talk about kind of gross margin, the December quarter was super strong and any thoughts on kind of outlook going forward 4Q and FY ’25? And that kind as it relates to sort of the long-term model of 39% to 44%, just curious kind of any thoughts on kind of modeling for the margin going forward?

Chuck Boynton : No change to our long-term model. We believe the 39% to 44% is the right range. This past quarter was stronger than we’d expected. 42.3% gross margins. We’d expected somewhere in the 38% to 39%. So, we were really pleasantly surprised at the results for the quarter. The real drivers, if you look overall kind of year-over-year, it was roughly in line. If you look at it — or sorry, quarter-over-quarter is roughly in line. Year-over-year, we saw pretty good margin expansion. That’s really driven by a couple of factors. One, we did a great job on the operations side, getting product costs down. Logistics costs certainly benefited all the industry participants with lower shipping and freight costs. And that was the big primary driver.