Logitech International S.A. (NASDAQ:LOGI) Q4 2024 Earnings Call Transcript

Logitech International S.A. (NASDAQ:LOGI) Q4 2024 Earnings Call Transcript April 30, 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).

Operator: Good morning and good afternoon. Welcome to Logitech’s Video Call to discuss our Financial Results for the Fourth Quarter and Full 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’re making these statements based on our views only as of today. Our actual results could differ materially and 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 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 in 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 Hanneke.

Hanneke Faber: Thank you, Nate, and welcome everyone. In today’s call, we’re going to cover three items, all of which are detailed in the shareholder letter that we released with our earnings materials. First, Chuck will provide the highlights of our fourth quarter and our full year results. I’ll then briefly touch on my view of our current assets, the secular trends driving the business and strategic decisions that we’re implementing and I’m going to close with our financial outlook. Let me start though, by saying how pleased I am about the execution of our teams in the fourth quarter. We return to top line growth. We executed at a very high level, with both gross and operating margins up year-over-year and before Chuck dives into the numbers, I want to thank him for an impactful tenure here at Logitech.

He’s built a highly capable finance team, and he has helped drive the consistent progress we’ve seen in the business over the last year. He’s going to be missed, and we wish him all the best. And now, Chuck, over to you.

Chuck Boynton: Well, thank you, Hanneke and thank you all for joining us on the call today. I am so proud of the way our employees finished the year. In addition to further enhancing the value chain, we continued our cost reductions and promotional disciplines. These factors all drove better than expected. Fourth quarter results. The detailed financial results can be found in the press release and in the shareholder letter, but I’d like to call your attention to three metrics. First, we are pleased to see Q4 revenue return to growth at plus 5%. However, please note the channel inventory reduction in Q4 was lower than last year’s reduction. When normalized for the change in channel inventory, net sales growth was closer to plus 3%.

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Q&A Session

Second, our Q4 non-GAAP gross margin of 43.6% was better than expected due to lower product costs, lower inventory reserves and reduced promotional activities. For the year, we achieved non-GAAP gross margin of 41.8%, a tremendous accomplishment by the team and comfortably within the range of our operating model and finally, the business continues to generate impressive cash flow. In Q4, we delivered $239 million of operating cash flow, totalling over $1.1 billion for the year. We returned almost $700 million to our shareholders and ended the year with a fortress balance sheet. Thank you Hanneke and thank you Logitech for the opportunity to serve. It’s been a real pleasure and I will miss everyone. With that. I’ll turn it back over to Hanneke.

Hanneke.

Hanneke Faber: Thanks Chuck. So in my first 100 days, I’ve met with hundreds of employees, customers, partners and shareholders and their passion and excitement about Logitech’s future, as well as their healthy dissatisfaction with the levels of top line growth of the last two years were palpable, and these interactions have been super helpful as I shaped the plans for Logitech’s future. Everything starts with our mission. Logitech extends human potential in work and play. Extending human potential is exciting. It means helping people be more productive, perform better, win that game and connect more easily, all in ways that are more sustainable and more equitable. We will pursue this mission with a terrific set of existing assets that we build from.

We have world-class design and engineering expertise. We have a strong brand with high levels of brand awareness and leading market share positions in key product categories. We have truly global go-to-market capabilities in more than 100 countries, and we’re an operations powerhouse with a relentless focus on cost, inventory, quality and customer service. Now, as we look forward, we see five external trends that we believe will affect our business. First, new ways of working or splitting time between working at the office, at home and on the go. It’s here to stay, highlighting the need for multiple workspaces and the need for more video collaboration. Second, gaming has gone mainstream. Nearly every age, gender and demographic is gaming today, providing an opportunity for us to provide more tools to a wider community of gamers.

Third, we’re in the early innings of a major AI transformation and Logitech will be, and already is, an important part of the emerging AI ecosystem. Fourth, climate change is impacting every country, every business and every society. Logitech intends to continue to be a leader for sustainability in tech and the final trend is the increasing importance of trust in a world where trust in government, the media, science and in business is at an all-time low, Logitech delivers trusted experiences with assets like our well established Swiss brand and high privacy and security standards, we are very well positioned. I’ve come to really like this combination of strong assets and long-term secular tailwinds. To take advantage of them, we’re in the process of implementing a number of new strategic decisions to accelerate profitable growth, where to play, and how to win choices, if you will.

Let me share those briefly with you. First, work and play. We will continue to innovate and grow in the core categories that we compete in today, personal workspace, video collaboration and gaming, but there is more room to grow. Today in work, we’re focused on office workers. Most people in the world don’t sit in offices every day. They work in retail, in education, in healthcare, in manufacturing, in construction and other places and in play, we are mainly focused on PC gaming today. There are other play opportunities, console and mobile, and even beyond, in what I’d call active play. Expanding our definitions of work and play, significantly broadens our total addressable markets. Second, we will create competitive advantage through a focus on design-led, software-enabled hardware.

Those words are carefully chosen. We differentiate our hardware with world-class design and with advanced software insight. Third, we will double down on the B2B, the business to business channel. Our B2B business is twice as big as it was in 2019, but I would still call us relatively young in this channel. Further strengthening our B2B capabilities and domain expertise offers significant opportunities for future growth. Fourth, we will build out our already strong global presence. We will reapply best practices to drive a more consistent share of wallet across our developed markets and further extend their presence in emerging markets. Combined, these geographic opportunities represent more than $1 billion of incremental growth. And fifth, we will focus on building a Logitech brands and take it from good to truly iconic.

That single Logitech brand. That’s where to play. Now how will we win? We will relentlessly drive product superiority through innovation. We will build on our reputation for operational excellence and discipline, and we will continue our industry-leading work to reduce carbon emissions across our value chain. Now let me turn to the outlook and what this set of choices means for the near term and longer term profile of our business. Our first priority is to return to business to annualized growth in fiscal ’25. We’re targeting low single digit growth with strong operating margins. Our goal in the midterm is to return organic growth to mid-single digits. Potential acquisitions would be incremental to that. We believe this growth, supported by non-GAAP gross margins in the 39% to 44% range and non-GAAP operating margins of 14% to 17%, represents an attractive investment profile.

In summary, the path ahead builds on Logitech’s impressive set of strengths, takes advantage of secular trends and makes a number of clear strategic choices going forward. With that combination, I’m confident that Logitech’s future is bright and its best days are still ahead. Thank you. Before we now move to Q&A, one final administrative comment. We spoke last quarter about our plans to host an Analyst and Investor Day in May. With Chuck moving on to a new opportunity, we thought it prudent to modify our plans. We will host a more traditional AIV later in the year with the exact timing to follow. And with that, Nate, let’s move to Q&A.

A – Nate Melihercik: Our first question today will be from Alex Duval at Goldman Sachs.

Alex Duval: Yes, many thanks for the question and many thanks, Chuck, for everything. Greatly appreciated. My first question is just on gross margin. Obviously you had a very strong gross margin in the quarter. I wondered if you could talk about how sustainable that is and also to what degree was lower promotional spend because of a stronger demand environment? In recent holiday windows, consumers prefer to shop during the promotional days. So just curious how the trend was there. And secondly, on video collaboration, we saw slight year-on-year growth. I wondered if that really signals the start of a recovery here and troughing in the cycle, which is obviously something we’ve been waiting for, for a number of quarters. Curious on your view there and how sustainable the growth can be and whether you’ll be investing behind that in terms of boosting the channel. Many thanks. A – Hanneke Faber Why don’t I take the B2B and you start off with gross margin. Chuck?