Logitech International S.A. (NASDAQ:LOGI) Q4 2023 Earnings Call Transcript

Logitech International S.A. (NASDAQ:LOGI) Q4 2023 Earnings Call Transcript May 2, 2023

Nate Melihercik: Good morning and good afternoon. Welcome to Logitech’s Video Call to discuss our Financial Results for the Fourth Quarter and Full Year of Fiscal 2023. Joining us today are Bracken Darrell, our President and CEO; and Chuck Boynton, 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 are 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. 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.

These materials, as well as our prepared remarks and slides 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 will now turn the call over to Bracken. Bracken?

Bracken Darrell: Thank you, Nate. Thanks all of you for joining us. Today, I am joining you from New York. This really is a hybrid call. I think Chuck is in — I know Chuck is in California, and Nate, I believe you are in Dallas. So we are really all over. About 60 days ago, we provided an overview of our business and our outlook for the coming fiscal year, and Chuck will cover the details. But big picture, we ended this year with our latest outlook and the outlook for the first half of — first fiscal year 2024 remains unchanged. Most of the macroeconomic and geopolitical issues that impacted our fiscal year 2023 results continue. Central banks are raising rates to combat inflation, consumer confidence remains lower and overall demand from enterprises remains tapped.

As I look at factors that are more directly impacting our business it’s a mixed bag. There are positive signs. The dollars weakening, thankfully, shipping rates, lead times and our reliance on expedited shipping are nearing pre-pandemic levels, promotional levels are normalizing and supply chains appear to be a problem in the past. However, industry layoffs continue, the way companies handle return to the office continues to be uncertain and we are not yet seeing refresh cycles kick in for products that were in high demand during the pandemic. As we said last quarter, these conflicting economic signals has created an environment with low visibility and a bias towards managing our business conservatively. Adjusting our business to meet the market opportunity is something that is not new to us.

We adopted throughout the pandemic when we face supply chain, logistics and manufacturing challenges and we are adapting now to reshape our organization for more nimble decision-making, faster product design cycles, meeting evolving customer needs quickly and fluidly, and improving our speed to market. So while acknowledging the macro headwinds, we ended Q4 in a solid position. Our sales teams closed a number of meaningful customer deals. We closed one with Snowflake, for example, and representing multiple industries, as well as education and government contracts. We released 52 new products in fiscal year 2023 and while it takes time to scale these launches that demonstrates a commitment to product innovation, we won a record number of design awards.

The latest number is over 160 for the full year, 82 in the fourth quarter alone. Innovation is the key engine of this business and it’s firing on all cylinders. Our commitment to sustainability is absolutely unwavering. In fact, we now have nearly 45% of our products with carbon labels. I believe there’s no other company of our size or bigger near this level. We quickly reduced operating expenses to match the revenue reality. Revenue decline and OpEx reductions were down equally on a percentage basis for the year. As I indicated last quarter and at our Analyst and Investor Day, our fiscal year 2023 results were disappointing. As I always say to myself, it’s tied to draw a line behind our heels, learn from the past, but move forward and that’s exactly what we are doing.

We remain committed to the long-term growth trends, markets, strategy and business model we have in place. So, looking ahead, you should expect us to operate the business in a disciplined manner consistent with what we have demonstrated over the last few quarters. We will continue to adjust our expenses in line with the market. We will continue to invest in product development. We have plans to introduce a whole line of new product — a whole series of new products across Gaming, Video Collaboration and Keyboards and Mice in the quarters to come, and we will continue to improve and refine our global go-to-market capabilities. I am confident that the big durable trends we have been highlighting, video everywhere, hybrid work and the explosion of Gaming and content creation will drive growth.

Challenging times always sharpen your focus, and in fiscal year 2023 — and the fiscal year 2023 definitely sharpened hours. We quickly resized in a prudent methodical fashion while remaining committed to the keystone of our business, product innovation or as I think of it, design-led engineering. We are confident that we have taken the appropriate steps to spring load our categories for growth as we exit this economic cycle and move ahead. One final point before I turn it over to Chuck. I have said a little this before, but it worth repeating. I said earlier that 45% of our products now include carbon labeling. This is a huge deal for Logitech, but it could be an even bigger deal for the world. I’d like to point out that we are not trying to create competitive advantage here.

We would love the chance to help others, including competitors to advance carbon labeling. So please, for those of you listening, consumers, investors, analysts and our competitors, you can have an impact, a big one. I’d ask that next time you are interacting with any company, including your own, ask them about their approach to carbon labeling. We can move this ahead so much faster for the betterment of our customers and for the world. Carbon labels on all our products can be the new calorie and that will drive competition and bring down carbon levels. With that, I will hand it over to Chuck to provide some additional color on Q4 and fiscal year 2023 results. Chuck? And Chuck, I want you to notice that I wore my jacket. I felt so much pressure from you.

You said until we have growth, you have to wear a jacket to the earnings calls and I don’t like wearing jacket, so I hope it’s not long.

Chuck Boynton: Well, you look great, Bracken. Well, thank you…

Bracken Darrell: Thanks.

Chuck Boynton: … and I appreciate you all joining our call today. Our Silicon Valley site is being relocated. So I am calling in from my house today using a 4K Brio Webcam, the LogiDock and our MX Series mouse and keyboard. Next quarter, we should be office in San Jose. Now let me delve into the fourth quarter and full year in greater detail. Our Q4 and full year results were in line with the revised outlook we shared during our Analyst Day in March. For the quarter, net sales in constant currency declined by 20% to $960 million. For the full year, net sales were down 13% to $4.5 billion. Examining our category performance, results were in line with expectations, with continued pressure in Video Collaboration down 25% and Gaming down 22% due to a slowdown in simulation, while our Creativity and Productivity categories either held steady or improved sequentially.

In Q4, gross margins were in line with our expectations, decreasing year-over-year to 36.3%. For the year, gross margins were 38.3%, down 340 basis points compared to fiscal year 2022. Margins were pressured throughout the year due to unfavorable currency movements, inflation-driven cost increases and product mix. As we transition to fiscal year 2024, we anticipate the weakening U.S. dollar/euro exchange rate and lower manufacturing costs to contribute to improved gross margins. We judiciously reduced operating expenses over the year, while continuing to invest in our product innovation, initiatives and enterprise selling capabilities. Operating income was $82 million in Q4 and $589 million for the full year. Operating income in both the quarter and the year reflected lower demand and gross margin pressure, partially offset by reductions in operating expenses.

Cash flow from operations was $217 million in Q4 and $534 million for the full year. Our ending cash balance was over $1.1 billion. Notably, we returned a total of $577 million to shareholders in fiscal year 2023 through our share repurchase program and dividend payment. In March, we outlined our intentions to quickly address two opportunities; one, improve our cash conversion cycle by reducing on-hand inventory and optimizing channel inventory; and two, reduced operating expenses to a run rate of $1 billion. Although, less than two months have passed since we presented these plans, I am encouraged by the strong momentum on both fronts. I am pleased to report that our on-hand inventory was down for the fourth consecutive quarter with Q4 seeing the biggest reduction of the year.

Our goal over the next year or so is to continuously improve inventory turns to 5 or better. Furthermore, we plan to keep reducing channel inventory in the first half of the year before the normal build to the December quarter. As we mentioned during Analyst Day, we believe lower channel and on-hand inventory provide better economics for us and our partners in the value chain. We are maintaining the outlook we provided in March, expecting H1 fiscal year 2024 revenue of $1.8 billion to $1.9 billion, down approximately 22% to 18% compared to the prior year in U.S. dollars. Our corresponding operating income is expected to be between $160 million and $190 million, down approximately 47% to 37%. Nate, we can now open the line for questions.

Q&A Session

Bracken Darrell: Hello, Paul.

Paul Chung: Good morning. So good to see you guys.

Bracken Darrell: Good to see you in your fair city.

Paul Chung: Yeah. So first up on gross margins, for 4Q would have thought there would be better improvement and kind of easing supply chain headwinds. What drove the pressures there? I know VC and Gaming mix has come down a bit, which may have driven some impact there. What do you see as temporary? And as we move into the next year, how should we think about those variables easing and kind of impact on gross margins at least in the first half?

Bracken Darrell: Okay. Chuck, do you want to take that one?

Chuck Boynton: Yeah. Certainly. Thank you, Paul. Our overall margins for the quarter were roughly in line with our expectations. We — the operations team did a phenomenal job reducing costs. But with inventory turns, we won’t see the benefit of that cost reduction until next quarter as it flows through. Q4 kind of compared to Q3, we did have some minor inventory charges. The mix issue as I identified in the prepared remarks. And looking forward, we see tailwinds with FX, lower costs, and obviously, not the same inventory charges, and longer term, we expect to be in that long-term operating model of 39 to low 40s over time.

Paul Chung: Okay. Great. And then, second, on VC, in your prepared remarks, you kind of mentioned kind of typical ASP per room has been increasing, which is great. Can you help us size both the opportunity to expand conference rooms? Where do you think that ASP can go when volume comes back and which peripherals you are seeing the most success in the conference rooms? Thanks.

Bracken Darrell: Yeah. So I think the cool thing about our business model is there’s just a lot of room to continue to increase the ASP per room. If you think about it, we announced something called site, which all of you have seen and most of you have seen, which is just about — it’s soon going to be out. And it’s another peripheral basically for the room, you get a rally bar mini, you add that into the middle of the table and suddenly you have got an equitable meeting. So that’s an example. You have also got whiteboards, which at $1,000 a unit. You can drop into a conference room and suddenly a camera, your whiteboard — whatever kind of whiteboard you are using becomes a participant. So we have lots of ways to increase the value per room.

So I am very optimistic long-term that the ASPs can go up. The number of rooms that will be enabled continues to be a very high number. We just got to get through this current period where people are kind of scratching their heads saying, I am not really sure exact, I am not know all of people, but a lot of all companies, but a lot of companies are saying, I am not quite sure what we are doing yet. We are a good example. We are closing one office. We are opening another office. And then the new office, we know exactly what we are doing from a Video enablement standpoint, but a lot of other people are lagging us they are either — they really haven’t completely decided what to do with the current office, they are doing the minimum or they are saving money, because they are going through this economic cycle, too or they are going to do it, but it’s going to come later.

So I am not hearing anybody say, gosh, Video enablement of rooms is a bad idea. It’s just timing.

Chuck Boynton: And I would just add, Bracken, the market sizing that we talked about at Analyst Day is roughly 50 million conference rooms with approximately 10% penetration.

Bracken Darrell: Yeah.

Chuck Boynton: Certainly, what you are seeing, I think, is we have won some great deals this quarter, a large food company, Bracken mentioned one of the tech giants.

Bracken Darrell: Yeah.

Chuck Boynton: So we are winning lots of deals. They tend to be smaller upfront with additional purchases as they re-outfit their rooms over time. So we are bullish on Video long-term and it’s a great category. These new products, I think, will provide additional fuel for growth long-term.

Bracken Darrell: One other thing we didn’t mention, Paul, was Service. It’s a really small business for us today, but it’s going to keep growing. It’s growing rapidly. And every time you buy a room, you really ought to be getting the service that goes with it and our service package called Select and it’s growing, like, I said, it’s growing very rapidly and I think one day, they will be a pretty decent chunk of our revenue.

Paul Chung: Okay. Great. Thank you.

Bracken Darrell: Thank you.

Nate Melihercik: Next question is from Alex Duval from Goldman Sachs.

Bracken Darrell: Hey, Alex. How are you doing?

Alex Duval: Hi, everyone. Thanks very much and for the questions. Just want to ask, firstly, on OpEx, you have done a very strong job controlling that. I just wondered how much more OpEx control you think can be done. Should we expect further cost reductions this fiscal year versus fiscal 2023 or is fiscal fourth quarter indicative of a new run rate going forward? And secondly, some investors have been asking about PC suppliers, which have indicated there could be a possibility of stabilizing PC demand in the second half of the year? I am curious to what extent your PC-linked revenues could benefit from such a recovery? Any color there very much appreciated.

Bracken Darrell: I will just touch on each one and then, Chuck, you can clean up whatever you feel like I didn’t cover. I think we have been super clear that we want to get to $1 billion run rate on our OpEx as we get past this first half and into the latter half of the year and that’s where we are headed. So no, our current run rate is not quite where we want to be yet, but we will get there. The second — on your second question, we have been pretty clear that we think the PC category is kind of not linked as a driver of our peripheral business. However, it is probably indicative of what’s happening in one way, which is that if — especially in the B2B business, if people are cutting spending on PCs, they are probably also kind of spending on peripherals.

So, yeah, I think, there’s some relationship. We will see what happens. We are not guiding back half of the year yet. We continue to feel like the visibility is really hard to call. What do you want to add there, Chuck, on either one of those?

Chuck Boynton: Yeah. I would just add on the OpEx side. We finished the quarter with $266 million in OpEx and our plan is to get to $250 million in a quarter by the back end of this year. And so there is — there are some headwinds on OpEx with FX, which is an overall benefit to the company, but a little bit of a headwind. But so — the reductions are already mostly completed and we are — we will see the numbers come down, I think, each and every quarter up until the middle part of the back half of the year.

Alex Duval: That’s very helpful. Many thanks.

Bracken Darrell: Thank you.

Nate Melihercik: Next question is from Asiya Merchant at Citi. Good morning, Asiya.

Bracken Darrell: Hi, Asiya.

Asiya Merchant: Hey. Good morning, everyone. Hopefully, you can hear me.

Bracken Darrell: We can.

Asiya Merchant: So a quick question on gross margins. I think in the past you guys have provided some breakdown of how FX versus promotions versus inflation have kind of affected margins on a year-on-year or even on a sequential basis. So if you could go through that exercise for the March quarter. And then as you look ahead, I heard Chuck mentioned that, margin should improve here as dollar weakens and the inventories rightsized and flow-through of the lower manufacturing costs. So what should we kind of expect for, let’s say, even the first half of the year, how should we expect those unwinds to happen that for a headwind in the first throughout most of fiscal 2023? That’s my first question. And then secondly, Bracken, like…

Bracken Darrell: Let me stop you there. Let me — let’s answer it one at a time so we can really focus on it. And Chuck, you will correct me if I am wrong, but I think we have been saying that about 300 basis points were inflation, a couple of hundred basis points for currency and then there was a few other drips and drabs, 100 basis points on transportation, et cetera. I think all that is coming through, it’s just coming through slowly, and as it would, it has to work its way through our inventory, which takes time and we have got a pretty long inventory cycle and we were sitting on more inventory than we would have liked before. Do you want to add anything to that, Chuck?

Chuck Boynton: Yeah. I think that’s good. And yeah, sequentially, that’s sort of a year-over-year view. Sequentially, inventory charges were a couple of hundred basis points and mix was a couple of hundred. So those are ones — mix it’s hard to predict, but inventory FX, costs, I think, are all transitory and I think we should see sequential improvement slowly throughout the year.

Bracken Darrell: Yeah. Sorry to interrupt.

Asiya Merchant: With the promotions — no. That’s fine — were there — was there any effect, just people are trying to understand what the effect of promotions have been? Is there a competitive — that kind of goes into my second question, the competitive dynamics? You talked about Gaming being soft.

Bracken Darrell: Yeah.

Asiya Merchant: We heard from GN, I guess, Jabra in Europe that they had done well in Gaming.

Bracken Darrell: Yeah.

Asiya Merchant: So maybe you can talk a little bit about the competitive dynamics, both on the Gaming side and just broadly how it’s affecting margins, whether there’s been an increased competitive intensity here and if you see that easing as the year progresses?

Bracken Darrell: Yeah. First, let me — I don’t know their earnings quite well enough to know, but I have a hunch that, the difference between us and them is simply category difference. So we have a big simulation business and we had a huge simulation number that you are going to — you go their info. So we certainly don’t think we are losing share in Gaming. So I think it’s probably comparable. You want to — Chuck, do you want to take from that.

Chuck Boynton: Yeah.

Bracken Darrell: Yeah.

Chuck Boynton: I do. So promotional activity sort of went back to normal in Q4. That was a bit of a headwind in Q3 sort of back to normal in Q4. Competitive positioning, I think, we feel great in Gaming. Our business — our Gaming businesses were very, very much larger than theirs is. So it’s — when you compare the categories, we have different categories, like, simulation that they are not in, that’s a great category with terrific margins. That was down quarter-over-quarter given the kind of promotional bump from the December quarter.

Bracken Darrell: And year ago.

Asiya Merchant: Okay. All right. And so just competitive intensity going forward, whether it’s VC, with HP, probably, whether it’s Gaming. Are we trying to — are we seeing, like, as the inventory digestion has happened, competition is kind of going back to normal promo and so there isn’t this excessive hunt to reduce inventory in the channel?

Chuck Boynton: I don’t…

Bracken Darrell: Yeah. Go ahead, Chuck.

Chuck Boynton: The B2B side is not as price sensitive as the consumer side. So I don’t think the Video category is very price sensitive. The margins are terrific and the industry participants have been behaving rationally. And so that’s really more, I think, just this kind of general issue around the economy and uncertainty that’s happening with corporate buyers. But the overall large conference or a medium conference room business is kind of stable. It’s not really taking off and growing, but it’s not really going down either. So I think that’s really more just the early indicators look good, but I think what the overall uncertainty that will come back. Other areas like web cams, I think, you see more price sensitivity.

Bracken Darrell: Yeah. And we have always got and we do now areas where we feel like we really need to adjust pricing a little bit, bring pricing down a little heavier, but they tend to be surgical. And so we are — and without giving you specifics here, I think, that’s going to continue to happen. But overall, I feel like the promotion intensity is not — it doesn’t scare me right now. I don’t feel like there’s a big wave of price competition coming through that’s going to change the dynamics of our business.

Asiya Merchant: Okay. Great. Thank you.

Bracken Darrell: Thank you.

Nate Melihercik: Next on the line is Erik Woodring from Morgan Stanley.

Bracken Darrell: Hello, Erik.

Erik Woodring: Hey. Good morning, guys. Thanks for taking my questions.

Bracken Darrell: Thank you.

Erik Woodring: Bracken, maybe if I could ask you a bigger picture question and that is…

Bracken Darrell: Okay.

Erik Woodring: … I appreciate the fact that you are very clear and that visibility is more limited today. Can you maybe just share some comments about why visibility is less limited today? Is it the channel? Is it spending patterns? Is it the impact and the uncertainty of the macro conditions, all of the above? If you could just double click on that to help us understand why perhaps today versus historical periods, you just have less visibility into the business?

Bracken Darrell: That’s a great question. I like the way you phrased it. It’s really — it’s only the — just the economic environment we are in. It’s just a little hard to see. You don’t know — you are going to go up until you actually balance. And I think we have been down now for three quarter or four quarters and I think it’s really hard for us to judge when that direction will change. We think it will change. It’s just a question of when. So it’s really just that. I was with — I was in an event this week where there were a bunch of kind of midsized and smaller CEOs, some HR people, et cetera. And like — I really got this — it just reinforced my strong feeling and the data that we are seeing, which is that especially on the B2B side, it’s not like companies are in trouble.

I mean they are okay. They are just spending more conservatively. And I think that conservatism is pretty — is — when you spend conservatively, you tend to have the easiest control over your cost and that’s why a lot of the PC companies are feeling it. We are feeling it. So it’s really just that, Erik, and it’s really hard for me to say when it will turn, but it will. You could probably go back and look at economic cycles and try to do something, but we decided to just be more conservative and just guide for six months and then wait and see quarter-by-quarter.

Erik Woodring: Okay. That’s helpful. And then, I guess, the second question, because you guys kind of elaborated to it, but you called out some deals this quarter, which I feel like you don’t necessarily do historically. You mentioned Snowflake, Chuck, you mentioned another one. Can you just give us an understanding? I know, Chuck, you mentioned they start small, but are these needle movers, are these mostly in the VC business, are they currently embedded into your guidance or is this incremental, because you just announced them, so I wasn’t sure how much line of sight you had 30 days or 60 days ago. So, again, if you could just elaborate on the impact of those deals, any color you could share on the products and then whether they are incremental or not, that would be helpful? Thank you.

Bracken Darrell: I will jump in, Chuck, you can add. I think we really just felt like, what we should once in a while, call out some of the customers. So you get a feel for the logos. There are a lot of big logos that we don’t get permission to talk about publicly for whatever reason. It’s not usually that they don’t want us to. We just don’t go ask them. We did mention Snowflake this time. We talked about the food company. There are many others. I would say they are pretty much part of what our overall game plan. But they are needle movers, but they are not needle movers relative to the expectations you have already said. Do you want to add anything in their Chuck?

Chuck Boynton: Yeah. I do. Erik, the key thing is, you want to win the company. Now many companies use multiple vendors. So it’s not like they are other exclusive, but the market, if you win the account, it tends to be a smaller deal upfront and then they keep buying more and more and more over a period of years. So no one transaction is a needle mover for us, but they are really good signs that we have won the account that we can land and expand, and ultimately, that’s what we are looking for. I just want to call out our sales organization, because they are just — they have done a really, really good job of building out this B2B capability. It’s a key strategic investment for us and I think it will bear fruit for years to come.

Bracken Darrell: And if I could just add, I was just in a large manufacturing companies’ offices here in New York this week and it’s really interesting. They started very small with us to your point, Chuck. So very small with us about two years ago. And now every single room they have has our stuff and it’s an incredible office, by the way. And so that’s kind of our game plan, where you just really want to land and expand.

Erik Woodring: If I could tell — just follow-up with one last question, Chuck, this one’s for you. Just on gross margins. If we look back over the last four years, we have seen sequential compression in gross margins from March into June. The comments I hear from you kind of seem to indicate they might go the other direction and expand from March to June. Can you just maybe help us — give us a few more pieces to help us understand the direction — directionality of gross margins from March into June, and some of the more influential moving pieces there? And that’s it for me. Thanks.

Chuck Boynton: Yeah. Yeah. Thank you, Erik. We are not providing detailed guidance for June. So I would say, let’s look over the longer term. We are in this sort of transit — transitory state right now. We brought channel inventory down significantly. So we brought channel inventory down. We are going to continue to take that down in Q1 and Q2 before it builds into Q3. The overall seasonality of the company is such that, Q1 and Q2, we actually — we outlined this at our Analyst Day, if you go back and look, I think, if it’s like 24% Q1, 24% Q2, 30% Q3, I think 22%, if my math works for Q4, that overall profile if you think about that, you are absorbing more overhead you have bigger quarters and with taking channel inventory down and revenue being sort of suppressed with reducing channel inventory that hurts gross margins and then when it expands, it’s a benefit.

So I look at that and say, I am not going to say, hey, Q1 of the June quarter, it’s back to normal, but I do think by end of Q2, Q3, back half of the year, I expect us to be back to normal, and certainly, no one can predict the currency rates, but that’s been a real headwind over the last year or so. It looks like it’s getting better and turning, but we just — we can’t be sure. The inventory charges, some of those items, I do think those are a tailwind now.

Erik Woodring: Super. Thank you for all the color guys.

Chuck Boynton: Yeah.

Bracken Darrell: Thank you.

Nate Melihercik: Our next question is from Ananda at Loop. Good morning, Ananda.

Bracken Darrell: Hi, Ananda.

Ananda Baruah: Hey, guys. Hey. Good morning. Yeah. Good to see you guys. Thanks for taking the questions.

Bracken Darrell: Thank you.

Ananda Baruah: A couple if I could, I mean, I guess, we could just stick right there, Chuck, with your comments around sort of seasonality, do you think that the inventory that remains to be worked down could impact seasonality in September, December quarter meaningfully or are — is it — is the inventory really in businesses where right now where the impact would be needed? And then I have a quick follow-up. Thanks.

Chuck Boynton: Yeah. I mean, overall, I feel comfortable with where our inventory levels are. I just — our view is sort of a philosophy is that a lean supply chain is better for everyone. If you think about return invested capital, as I think is the ultimate metric. If you have less on inventory, less channel inventory, it’s better economics for everyone. So while our weeks on hand are within the normal operating model, we would like to get that a little bit leaner, because I think that will be better returns for us and the channel, but of course, you have to rebuild the channel inventory because of that seasonality for the December quarter, Black Friday into the Christmas period. So that I believe will happen regardless. But overall, I — we are comfortable with where the levels are today and even where they were in Q4, we just want to take them down, because I think it’s better unit economics.

Ananda Baruah: That’s really helpful. I appreciate that. And then, Bracken, I guess for you, you mentioned sort of like kind of off the cuff in the beginning prepared remarks, return to offices on certain refresh cycles haven’t kicked in yet. Anything that you guys are seeing that has you think kind of the structural nature that underpins some of the key trends is altering at all. And actually, it could just — as a part of that, just where are you seeing the refresh cycle, it’s not yet kicking in when you think they eventually will kick in? And that’s it for me. Thanks.

Bracken Darrell: Yeah. Thank you. On the refresh cycle, I think, we are not yet sitting in a personal workspace. We are not really seeing it kick in yet, which is the Mice and Keyboards, and that kind of thing and even for Gaming. So I think that’s probably ahead of us. Those cycles are three years to five years. So we will probably see it some of the categories are faster, some are a little longer. On the structural nature of our opportunity, I don’t really see anything that’s changed. I mean, I think, it’s pretty much the same. We have just got such a — I am sitting in an office now and the one I am sitting in now does have Video. But if I walk down the hallway, it’s amazing to me how many of these offices do not have Video.

So I think that’s just a reality and hybrid work has done nothing but make that more obvious to people and more required. I think what has — so I don’t think that’s changed. I don’t think the need for a home office has changed or to upgrade it. I don’t think the reality of Gaming or Streaming and Creating has really changed at all. So I don’t see anything really fundamentally structurally that’s changed in our view of the category opportunities.

Ananda Baruah: I like. Okay. Great. That’s helpful. Thank you.

Bracken Darrell: Thank you.

Ananda Baruah: Appreciate it.

Nate Melihercik: Next on the line is Adam Angelov from Bank of America. Hey, Adam.

Bracken Darrell: Hi, Adam.

Adam Angelov: Hi. Thanks for allowing. Yeah. So firstly, just a very quick one for Chuck to follow up on what you just answered to a previous question. Gross margins back to normal, did you mean back to the long-term guidance range, just quickly on that.

Chuck Boynton: Yeah. I — it’s possible we get there still this year. Q3 generally tends to be really strong gross margins, because it is a peak quarter. So I think it’s very possible that Q3 is there just because it’s such a big, big quarter due to seasonality. But if you think about run rate structurally, annually at that kind of 39% to 44%, my guess, it’s probably into next year, but that’s — I can’t really predict that. But, certainly, I think, if you look historically, Q4 — Q3 being our best quarter, we have been typically quite high margins in that Q3 just given the volume.

Adam Angelov: Got it. That’s helpful. Thanks. So, next, I think, just curious on what you saw in China in the quarter? Was there any sequential improvement there, and perhaps, as you look into the rest of the year, how you would expect that to develop?

Bracken Darrell: I am going to try that one, Chuck, you feel free to jump in. I think China is a little harder for me to judge right now to be honest. It’s usually been just kind of consistently up until the right. I think it’s been choppy over the last kind of year. It is highly competitive there. It’s opened up but not as much as you would like. So it’s not quite where back where it used to be. But I feel very confident in sort of longer term. I think the dynamics in China are great. You have got such a young population, everybody is moving into the workforce and moving up in the workforce and there’s more and more knowledge workers, and it’s become an environment where you can imagine a bigger, healthier, more dynamic kind of IT world in China.

It’s obvious to me and probably obvious to you. So I am really excited about long-term. We have a great brand there. I mean a really great brand there, incredibly strong market shares and that’s across both our two consumer businesses. On the Video Collaboration side, it’s never been as strong there. It’s just, for some reason, the dynamics there have developed quite differently and that does tend to happen in China in some categories. We will see if it eventually gets to, it’s really got more gusto, but overall, I don’t see anything but strength long-term in China. But I don’t — it’s really hard for me to call, just like it is for our visibility in the back half of the year for the company in general for China, particularly, I don’t know.

Chuck Boynton: Yeah. I think as it relates to China, Q3 was a tough quarter. It was down — we were down 25% year-over-year in Q3. Q4, though, we were down 3% year-over-year. So it looks like a recovery in China. As Bracken mentioned, our top SKUs, the best-selling products in China are on the Gaming side. So there’s just a huge opportunity on Video, but it’s a tough nut to crack. But that one — the market is just enormous and so I think we are in a good position with things stabilizing there as it relates to volumes year-over-year.

Bracken Darrell: And we do partner differently in Video in China than we do elsewhere, because they have the same service players are not, I think, big Video conference players are not as big in China, they are much smaller.

Adam Angelov: Okay. That’s great. And if I can just squeeze one more in.

Bracken Darrell: Sure.

Adam Angelov: The behavior you are seeing from the enterprise customers. I think you touched on it briefly, but just curious to know, it sounds like it hasn’t gotten worse, but equally hasn’t improved. But maybe if you could just go into that in a little bit more detail?

Bracken Darrell: Yeah. Yeah.

Adam Angelov: Thanks.

Bracken Darrell: I think you captured it. It’s pretty much kind of stable. I would say, it’s about where it was, which doesn’t really shock me. The layoff news continues on the layoffs, especially in tech, but it’s also spread to some extent, as you know, on banking and I think in some other sectors. I think that news kind of — it’s kind of — it seems like it may be as almost all the way out, the big company news at least is almost all the way out, but the impact really dribbles over three months to six months to nine months. So I think that those Domino’s will continue to fall now for another few quarters, but it will turn.

Adam Angelov: Very good. Thank you.

Bracken Darrell: Thank you.

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

Bracken Darrell: Hey, George.

George Wang: Hey, guys. Chuck, maybe you can give more color on the capital return kind of going forward, especially given better cash flow backdrop, with some tailwinds coming back on the inventory kind of better cost of profile? Just curious if you have any color just on buyback or kind of dividend going forward?

Chuck Boynton: Yeah. We are just really proud of what we have been able to accomplish on returning capital to shareholders over the last few years. We had a great cash quarter. We had a great cash year. If you look at it year-over-year, our cash balance now is $1.14 billion, $1.15 billion. It’s down year-over-year. I think we ended last year at about $1.2 million or $1.3 million and we returned $577 million roughly to shareholders. So that has been great. Our primary objective, though, as we have stated before is growth, and so we if — to the extent we don’t use cash to buy companies or expand and then we plan to turn that back to our shareholders via a great dividend that we pay, as well as buybacks.

George Wang: Okay. Thanks. I have a quick follow-up. Bracken, maybe you can comment on the kind of share gains. In your prepared remarks, you called out some share gains within the Gaming category. Are there any other kind of category you want on the cloud in terms of notable share gains in the last few months?

Bracken Darrell: Across the year, you can see our share gains across most of our key categories and those share gains were very wide spread and consistent, and it’s really a function of our innovation engine. Within any single quarter or a few months, we will have sometimes bobbles up and down, so I won’t go through the individual categories. But we have — over the 10 years, 11 years that I have been here, we have consistently gained share in almost every category and we are — that’s why we are so focused on design and design-led engineering and that’s why we are investing.

George Wang: Okay. Great. Thank you.

Bracken Darrell: Thank you.

George Wang: That’s it for me.

Bracken Darrell: All right. Thank you.

Nate Melihercik: Our next question is from Serge Rotzer at Credit Suisse.

Bracken Darrell: Hi, Serge.

Serge Rotzer: Hi. Hi. So now I am ready. Good morning, everybody. Well, two simple questions. The first question is you were down 22% in sales and also in Gaming, 25%, 27% in your conference. And can you give me a feeling how much is price impact and how much is volume impact, price impact due to promotions, but also due to more competition in the enterprise business, can you give me a flavor on that?

Chuck Boynton: Certainly. It’s — the year-over-year changes are primarily volume. We were promoting a little more than we would expected in Q3 that has returned to normal. So it’s primarily volumes year-over-year.

Serge Rotzer: Any product categories where you have been able to increase prices or to increase volume?

Chuck Boynton: We increased prices in a number of categories. There have been some bright spots. Some of the tablets and accessories have been a bright spot. Certainly, there’s lots of different, we have many, many SKUs, many products, many of them — there are — many that are growing, but the secular trends that you are seeing our year-over-year comps. As we start to lap our Q4 and throughout this year, I think, you will — we will see easier and better comps as it relates to the year-over-year results.

Serge Rotzer: Okay. Fair enough. And probably switch direct to the second question, at the Capital Markets Day, you mentioned us, hey, guys, look at the seasonality of our quarters in sales and it’s 4% to 8% in sales you do the first six months, and obviously, 52% in the second six months — for second half. Now I am wondering, we also have a seasonality in EBIT. In the past, you did 40% of the EBIT in the first six months, so basically, you had to do 60% in the second half. And when I take your guidance and what sum this up for the full year and we are at the level at the midpoint of $435 million. This is clearly below consensus and expectation. Now I am wondering, are you to cautions more for the first six months or are you much more ambitious for the second six months?

Chuck Boynton: Well, what you are seeing is the profile is we are in a transitional stage. So operating expenses are coming down, we are taking costs out and we are seeing some benefits that we think will manifest into gross margins, and so that profile that you are seeing in this transitional stage is putting more pressure in the near-term. We are not providing outlook to the back half of the year, because, quite frankly, we just don’t know. We hope to do that. We plan to return to annual guidance over time. Certainly, we are optimistic that the December quarter, our biggest quarter will be a strong quarter. But at this point sitting here in early May, it’s just too early right now to provide color on Q3 and Q4.

Serge Rotzer: But to be honest, to improve your margin, your EBIT contribution in the second half, you need success in VC. Is this correct because it is still the highest gross profit margin product?

Chuck Boynton: Well, certainly, if Video conference improves, that’s an additional tailwind, the mix that we talked about. It’s really hard to predict what will happen with the mix. I will tell you, generally, the B2B categories are less seasonal. So I think you will see the other parts of the business will mix up more in the quarter due to seasonality. But Video does not have to return to get to our targets, but if it does, I think that’s great and we expect it to. We just — we are not providing guidance for the back half of the year.

Serge Rotzer: Probably still the last one. You mentioned VC stable, but VC quarter-over-quarter was minus down 20%. So what do you mean were stable when something is down by 20%?

Chuck Boynton: Yeah. That’s a good question. So we are going to realign the categories that we show you next quarter. So you will see — we are going to break out in a bit more detail the quarterly businesses. So in the Video category, we have professional webcams and some other solutions in there. And webcams across the board, business-to-business, consumer, those have seen some significant declines and whereas the room solutions have been fairly stable and that’s what we are referring to.

Serge Rotzer: Okay. Got it. This is very helpful. So boyar, Chuck. Thank you so much. Bye-bye.

Bracken Darrell: Thank you.

Chuck Boynton: Thank you.

Bracken Darrell: I am glad you said that, Chuck, because I think that, I can’t wait until we do that realignment, because it will…

Chuck Boynton: Yeah.

Bracken Darrell: I think it will fare out things for people.

Nate Melihercik: Great. Our next question is from Andreas Müller at ZKB.

Bracken Darrell: Hi, Andreas.

Andreas Müller: Hi, everybody. Thanks for taking my question. And I have one on Windows 11, if that’s going to help you in — at some point. You mentioned this correlation with PC sales, of course, is not that much strong. But from a product perspective that this operating system will help you in some ways with your product that some new innovations coming in?

Bracken Darrell: My experience with Windows upgrades is just kind of ignore them from a standpoint for the near-term and then the long-term, they are good, because they keep the PC industry vibrant. So that’s kind of the way we are thinking about it now. But I am sure it will be a good thing overall, good for users and our products are always well integrated with the latest Windows updates — upgrade. So it’s going to — we are going to be in good shape there, but I wouldn’t expect anything significantly changed because of that.

Andreas Müller: Okay. And then your…

Bracken Darrell: I would add one other thing. I think the bigger change we have made is our products work really well with Apple, with the MAC and that’s happened over the last year and we have seen really significant business improvement and potential out there because of that.

Andreas Müller: That’s tied to the Productivity categories or also product.

Bracken Darrell: Yeah. Yeah.

Andreas Müller: Then next question. You are cash-rich company right now. And I was wondering, can you discuss if that is helpful or once has helped over times when financing by banks sort of far more conservative and towards clients and competitors, mean does that change your position in some ways, because I saw the DPOs went up?

Bracken Darrell: Let me just try to briefly answer that and I will let Chuck jump in. I am not sure it really changed anything for us, because we don’t need much support from the banks. We do have great banking relationships in the event we ever needed it. But we don’t really need much so probably didn’t change much. I will say, it’s kind of comforting not to be too dependent on leverage in tough times. But I think, at the end of the day, we are really — as you said, we are a cash-rich company, but we are also a very good cash generator. So that means we have to make sure that we deploy that cash responsibly and I think, like Chuck, I am really proud of the way we put the cash back in shareholders’ hands last year in one way or another and I think we expect to continue to be a great cash generator.

And we are aggressively looking for strategic ways to really grow our business, because growth is what it’s all about and so we are going to keep doing that. Chuck, do you want to add anything to that?

Chuck Boynton: Yeah. I agree. We have a very high bar for M&A. We have got a great history and a great track record, and to the extent we find great opportunities, then we will deploy it. Otherwise, we will return the capital to shareholders as we have done. But I am very comfortable with the cash balance that we have. It’s similar to where it’s been the last couple of years and so I think we are — it’s sort of steady as she goes on the capital allocation model.

Andreas Müller: Okay. And then last question on — with — for you, Chuck, this $18 million restructuring charge, was that it now in this program or should we look for more going forward?

Chuck Boynton: There will be more charges. The accounting rules have kind of changed over the years where you used to just take all the charges upfront and then you would spend against those reserves. The rules have changed a little bit. So there will be additional charges that we incur over the next few quarters, but largely, the actions are all done internally, it’s just more the timing.

Andreas Müller: Okay. Thank you very much.

Bracken Darrell: Thank you very much. Thanks for investing.

Andreas Müller: All the best.

Bracken Darrell: Michael.

Nate Melihercik: Bracken, Chuck, our final question for the morning is from Michael Foeth at Vontobel.

Bracken Darrell: Hi, Michael. It’s great…

Michael Foeth: Hi.

Bracken Darrell: It’s biking season so you are probably back out.

Michael Foeth: Okay. I have one on sustainability. You mentioned that your carbon labeling is now, I think, 45% of products. What holds you back from being faster and labeling the rest and is the process so complex, is that maybe a reason why it’s also holding back your peers from doing the same?

Bracken Darrell: Yeah. There are two…

Michael Foeth: And then I have a follow-up

Bracken Darrell: Okay. I will answer that. There are two things going on there. One is that it is a — we don’t want to just estimate — give a really high level estimate of carbon impact, because we are taking Scopes 1, 2 and 3, which means from the components that go into our products, transportation, in use and end of life. So we are really taking the full period. We also need to have enough data to actually be able to draw conclusions that are accurate. So some of our products that are newer, we really have to give them a year before we have a good accurate assessment. So that’s one of the drivers. The second one is it just takes a while to then implement those into individual products product-by-product. So I am really excited about how fast we have moved actually.

And I think one of the reasons why you don’t see it from other people is, because it isn’t easy, we are trying to make it easier, so we have been working with an external provider to try to make that easier and more cost efficient, because it’s not terribly expensive. But it costs some money, because we really strongly believe that everybody should be carbon labeling in every industry that this is really the one tool that we can all use, governments can use to drive this all to be — to have — to compete with each other on carbon.

Michael Foeth: Okay. Thank you. And then on your guidance for the first half of your fiscal year, what — which categories are you most confident in that, that will support that guidance and where do you have more uncertainty looking in the first six months.

Bracken Darrell: Okay. I won’t try to be anything except just straightforward on this. It’s a little hard to say. I really think personal workspace seems pretty solid, Mice and Keyboards. It’s just kind of — it’s been great for us since, I mean, since 1981, so 1982 and it continues to be. And I think that the Gaming category will be solid. I think Video Collaboration, it’s — I kind of think that one. They say inter-cycle earlier on consumer and you exited earlier and you inter-cycle later on B2B and you exit it later. So I would say, if you had to ask me, you really pressed me, I would say that, my guess is that the Mouse and Keyboard business will be steadier and more reliable than the others. But it’s been a little hard to tell through this cycle. One of the reasons we only guided six months is because it’s really harder to tell right now, especially on the B2B side.

Michael Foeth: All right. And then I have a last one for Chuck. You mentioned return on invested capital as your ultimate metrics. Is — how long do you have to wait until that becomes sort of part of your long-term model?

Chuck Boynton: I don’t think at this point we plan to use that for an outlook externally. It’s an internal metric that we track and it’s — so I would not expect us to publish a long-term outlook there.

Bracken Darrell: I do love that we are using it internally and I think it’s a super important metric.

Michael Foeth: Definitely. Thanks.

Bracken Darrell: Sure.

Michael Foeth: Thanks a lot.

Bracken Darrell: Thank you. Well, thanks to all of you. I will jump in here, Nate just. I really appreciate all the discussion. One quarter down, in a minute we have more visibility, you can bet that our strong visibility, we are going to go to the full year, as Chuck said. And so, thanks, we will see you in a quarter.