Logitech International S.A.

Welcome to Logitech's video call to discuss our financial results for the second quarter of fiscal year 2021. Joining us today are Bracken Darrell, our president and CEO, and Nate Olmsted, our CFO. During this call, we may make forward-looking statements, including with respect to future operating results that are based on the 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 non-GAAP and GAAP measures and information about our use of non-GAAP measures and factors that could impact our financial results in our press release and our filings with 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 are all available at the investor relations page of our website. Unless noted otherwise, comparisons between periods are year over year and in constant currency and sales are net sales. This call is being recorded and will be available for replay on our website. I'll now turn the call over to Bracken. Bracken, you're on mute.

I couldn't see because I had my script open. I should be unmuted now, correct?

Yes.

All righty. Okay. uh before i start every company's performance starts and ends with its people our people are working longer hours their work from home is overlapping with their personal life at home and that's stretching work earlier in the morning and later at night so our team is not only working more hours in a day but those those hours are being stretched out longer in the day some are working with a child nearby needing attention while others are there where there's no one at all and it's lonely But we're all overcoming many challenges, including those. And Sam Harnett, for example, our general counsel, started in June and has become one of my most trusted partners and advisors, as she has for many on our team. She's on this call today. Jason Baden, who probably isn't on, is running our new and exciting influencer offense, as we call it. And I am deeply aligned with his values, and I've discovered that even more deeply after he started work. Yet I've never seen Sam or Jason outside of this video screen. Somehow this is working and it'll work even better as we learn how to work within the constraints we're in over time. In fact, our team is just doing an amazing job in spite of it all. New products are flowing. New ideas are sparking. Our capacity is growing. Our supply chain is humming. We're building capabilities and we're building new growth engines for the future. And our morale is strong. I couldn't be more proud of everyone at Logitech. I joined a call on Friday with one of our teams of about 90 people. As I entered the call, I found myself completely underdressed, or should I say inappropriately dressed. I discovered Rosie the Riveter, the Dude, the Captain of a Ship, and various Star Wars figures. There were 85 other Halloween costumes. Our team is finding ways to have fun because Logitech is really a fun place to work, even when times aren't normal. This way of working won't ever be perfect, but I just want to say publicly to analyst investors what we say privately to our teams. We know this is a hard period emotionally and even physically, but thank you, all of you at Logitech for your remarkable and collective persistence, energy, and ingenuity. You're really making a difference. It's hard to have a call like this without reflecting a little bit on what a weird year it's been for everybody. 2020 has been so challenging. The health impacts of COVID-19 have been horrible. The unemployment rates, unprecedented. And for those not directly affected by the virus or by furloughs, this strange lifestyle stays feeling strange. Despite over six months that many of us have lived like this, staying at home, it still doesn't feel routine. As we head into winter in the Northern Hemisphere, it seems likely we won't see a huge change in our lifestyles between now and the end of winter. but this really won't last forever. So I've been imagining what we'll be like next summer and fall. How does this play out, as they say? One thing's for sure, some changes are permanent. In my opinion, the biggest permanent changes were gonna happen anyway. The pandemic accelerated them. In fact, we are really fortunate at Logitech. Years ago, we identified one by one four major changes in global lifestyle and work life that we felt we built our business on. They are video calls will grow and replace audio calls over time. Work will increasingly spread outside of our offices, even though we'll continue to work in offices too. Esports will become the biggest collection of sports in the world for spectators and participants. And most content we engage in will be created by hundreds of millions of people, even billions, instead of the dozens of media companies it was in the past. Those four trends didn't seem as obvious when we first called them out for ourselves as they do now. COVID-19 didn't initiate any of those trends. It accelerated all of them. And they will continue to grow. Video is going to grow at the expense of audio calls. Esports will continue to grow, too, and one day become bigger than conventional sports in viewership and participation. And more and more of us will share more and more creations with each other. That's great for Logitech. What will likely moderate is the extent to which we're working at home. Our belief is that while offices will reopen and people will go to work in them again, not all companies will be the same. Some companies will go exactly back to the way it was before. Almost everyone in the office every day. I think this is gonna be a small minority. Others will go completely the other way and they're gonna eliminate offices altogether. I think this too is gonna be a really small minority. And that leaves the big middle, a hybrid of work in the office and work at home. Most companies will allow people to work from home a few days a week and in the office a few days a week. This will make workspaces in both home and office important. It will increase the number of desk spaces that we could call the installed base of workspaces and gives us expanded upgrade opportunities across all these new and important spaces. Many of us see this in our own lives already. If you didn't have a computer at home before COVID, you probably limped along before COVID with your phone or your tablet, or you worked with a laptop on your couch or in the bed. Now most people are getting a PC, a Mac, or a Chromebook, often really hastily, either bringing it from the office or buying it wherever you can find it. And you might even feel you have the need to equip a few more workspaces at home, one for you, one for your partner, one for each of your children, maybe even two for you, depending on what kind of spaces you have. In other words, the market for many of our categories is correlated with the number of locations people work from. And we believe this market will grow more rapidly as people rethink the number and locations of spaces they need. After that hasty expansion to the home, there will be an opportunity to help people improve the experience. Better functionality instead of the first mouse I could find. Better ergonomics because I'm not up and moving like I was. And better aesthetics because these workspaces look like they'll be a permanent addition to the home decor. That suggests a potential for a large increase in the installed base and longer term upgrade opportunities at the same time over years to come. And on top of that, as the big middle, as I called it earlier, heads back into the office part of the time in this hybrid work culture, we will most likely see an expansion of what some people are calling satellite offices to serve those who work from home a lot, but don't always want to drive so far when they do go to work. That creates a potential for even more workspaces to equip, more workspaces to later upgrade. Virtually all meeting rooms will be video enabled over the coming years as more companies adopt video more broadly. The network effect of Zoom, Teams, and Meets is creating a growth wave that's unlikely to end anytime soon. And then these video rooms will need to be improved and upgraded. And education will also be hybrid, Computing devices and the peripherals we built for them will have become mandatory, as have good cameras and computers for teachers. That reality will surely remain in place now in some way for good. Outside of work and outside of school, esports has grown, though traditional sports slowed or even temporarily stopped. And the number of people creating content to entertain, educate, and connect with others appears to be spreading more and more rapidly. Every day there's a new podcast, stream, and person showing content for the first time in your video feeds. Content creation is growing and will not stop in our lifetime. We'll even accelerate as the network effect works at scaling magic. What's all this mean for Logitech? growth, long term growth. And we'll be innovating for that growth. Now let me go over some of the highlights of this quarter. Our Q2 sales were up 73% and non-GAAP operating profits nearly quadrupled. Our quarterly sales surpassed a billion dollars for the first time in history and by a wide margin. Our creativity and productivity category posted double and triple digit growth across almost all products. Our mice and keyboard sales grew 35% and 44% respectively, as workers and students around the world set up those additional personal workspaces in order to stay productive and engaged. In the future, we will work to upgrade that much bigger install base to even better performing products. PC webcam sales increased over 250%, doubling the growth rate we achieved last quarter. Despite improving our capacity throughout the quarter, we still couldn't make enough to meet all the demand for Logitech webcams. We're expanding our capacity even further as we qualify other component suppliers to meet this unprecedented demand for video devices. While we don't expect to maintain this level of triple-digit growth forever, we believe that the continued transformation of work where video is an integral part of collaboration and staying connected will provide a multi-year tailwind to this category. Tablet and other accessory sales grew over 140%, with our education channel sales rising more than fourfold versus last year. We have seen significant demand from schools around the world for tools to better prepare students for a more digital and hybrid learning environment. and governments are getting in on it too. They're allocating huge budgets to this for the future. For instance, Japan's education ministry launched a program with over $3.5 billion in funding last year that's being used to improve school preparation for online classes, including distribution of iPad tablets and keyboards to many students. And Japan is just one of many countries transforming how educators are thinking about teaching our children Video collaboration sales increased over 160% to another quarterly record high of $237 million. Sales of our conference room products, like Meetup and Rally, nearly doubled and benefited from continued deployment of video in the office as some countries started to bring employees back to work or get ready to. And augmenting this growth inside conference rooms was the 4 to 5x growth in our enterprise-grade webcams like Brio. In fact, we're not only seeing companies accelerate the deployment of video in offices, but we're also starting to see purchasing of large bulk orders of VC webcams to equip workers with video capabilities from their home workspaces. Gaming's not been left out. Gaming sales grew 84% in the quarter. Growth was across all three regions and across all our gaming product categories, including PC gaming, simulation, console gaming, and Streamlabs. We introduced several new products in the quarter, but this time I'll skip them in favor of talking about our brand. Logitech G is just hot. In the League of Legends final, just this past weekend in Shanghai, with an expected 110 million people watching it live, that's about the same as the Super Bowl. And an estimated 1.5 billion will watch some portion of the League of Legends championships. Get this, every team in the final four and seven of the eight final teams representing China, Korea, and Europe all use Logitech G products. It's not all about the best equipment, but it helps. In addition to these three large categories of C&P Video Collaboration and Gaming, we had two other products that delivered impressive results. Blue microphones and retail headset sales more than doubled this quarter, with supply for blue mics remaining tight even as we exited Q2. The benefits of clean, crisp audio that you get from using a Blue Yeti mic have become much more pronounced with streamers, musicians, and video bloggers who want their stories and songs broadcast to their fans in the best possible audio quality. Mobile speakers remain weak this quarter as expected. We continue to reduce our investment in the category and relocate our resources to the many other faster-growing market opportunities, as well as leverage Ultimate Ear's decades of audio engineering capabilities across other product groups. Now I'm going to turn the call over to Nate to walk you through the rest of our key financial metrics in Q2. Nate?

Thanks, Bracken. I want to start by repeating Bracken's thank you to our people for delivering these strong results in such challenging times. We are on pace to grow our revenues by more than $1 billion this year. And the operating profits we achieved in this single quarter were more than what we did in all of fiscal 2019. To accomplish these feats in a year which began with factories shut down and employees abruptly working from home is a testament to our team's resilience and their talent. One of the most impressive highlights of this quarter was the expansion of gross margin by over seven percentage points to 45.7%. The strength in gross margin was largely due to three factors, significantly higher sales volume, considerably lower levels of sales promotions and favorable product mix. In the second half, we expect gross margins to return to the high end of our target range of 36 to 40%. As supply demand conditions normalize, We increase investment in retail store marketing, and we move into the more promotion-heavy months of the year. And as we noted last quarter, we anticipate that education iPad tablet keyboard sales will remain strong, given the demand for remote and hybrid learning solutions, which Bracken mentioned. These products carry lower than corporate average gross margins, and therefore, a higher mix of these tablet keyboards will also put some downward pressure on gross margins. Non-GAAP operating expenses increased 18% to $221 million and were 17.6% of sales, down from 26% in Q2 last year. While we ramped up the pace of investments in sales and marketing and R&D versus Q1, it was not nearly at the same level as the sales upside we delivered in the quarter. So with strong first half profits and confidence in the strengthening of our core markets, We plan to invest more aggressively in Q3 and Q4 to build out our video collaboration sales coverage, step up our brand marketing campaigns, and increase spend to drive hardware and software innovation. I want to emphasize that these are the same priorities we've discussed for many quarters, but we are moving faster on all fronts. It's also important to note that some of the increased spend this year will be structural and long-lasting, like in product development. while a significant portion of it will be more elastic or variable in nature, like marketing. So I want to emphasize again that we are managing the business consistent with our historical approach by moving aggressively to capture the opportunities before us, while being prudent and thoughtful to prepare for potential fluctuations in demand and market conditions. Now, let me move to our cash flow and balance sheet. We delivered another strong quarter of cash flow, reaching $280 million, up from $107 million in Q2 last year. We achieved a record low cash conversion cycle of 19 days, largely due to quick inventory turns driven by our high sales velocity. We will continue to leverage our strong balance sheet to not only strategically invest in supply, but to also increase our manufacturing capacity, as Bracken mentioned, to support the heightened demand. As such, and consistent with the growth in our business, we are raising our CapEx outlook for the year from $40 to $50 million to $70 to $80 million. And now I will turn the call back to Bracken for guidance and his closing remarks.

Thank you, Nate. It's not like I'm going to give personal guidance. I'm not. I'm going to give company guidance. This morning, we announced an increase in our fiscal year 20-month sales growth outlook to 35% to 40% and our non-GAAP operating income outlook to $700 to $725 million, an increase of more than 80% versus the prior year. This, of course, is up from our prior outlook of 10% to 13% in sales growth and the range of $410 to $425 million in non-GAAP operating income. I'm certain many of you are wondering, what will we do next year, next fiscal year? It's still way too early for us to commit to a target for next fiscal year. We will provide that guidance, as usual, next March in our annual investor day. What I would say is the underlying trends driving our business are not going away. Video calling will continue to expand. We'll continue to work from home, and for most of us, also in the office. Gaming will continue to expand its reach in our lives and in our culture. And more and more and more people will create content for us, for all of us. We have such an exciting future ahead of us. Today, we're worth more than 13 times more than we were when I started eight years ago. And yet today we have so many new opportunities and so much more momentum. We have so many opportunities to unlock enormous growth in existing and in new areas. It's going to be an exciting, really exciting next few years. Thanks so much. And with that, Nate and I are ready to take your questions.

Thanks Bracken. I'll take the first question from Jorn from UBS. Jorn.

Yes, thank you. Hi, Brett and hi, Nate, my band, for taking my questions. The first one would be, please, is it fair to assume that pricing and mix is supporting the sales growth by roughly around a quarter in fiscal year 21? And also, what is the pricing strategy going forward? Second question would be, please, on your R&D allocation. I mean, now when cash flows are much stronger versus you anticipated maybe three to six months ago, are you willing to experiment a bit more on R&D, trying to develop new categories, also looking to health care, for example? And the last question is, I mean, I understand that you are saying you will step up your SG&A investments in the second half. You are guiding for non-GAAP even in the second half, only up 5% year-over-year, despite your sales in the second half should grow around 30% according to your guidance. I mean, what kind of SG&A investments are giving you the return as capital you need to really justify this investment as COVID-19 is quite a nice marketing tool for you? Many thanks.

Nate, I'll let you answer the first one, pricing and mix, and then I'll jump in and do the, maybe I'll try the next two.

Okay, thanks. Jorn, let me just make sure I captured your first question. You asked how much impact has pricing had on our revenue growth for the year? Was there a second factor you mentioned?

Correct. What you roughly expect is the benefit from price mix. It's fair to assume that it's around maybe 10% or so, 10 percentage points for fiscal year 21, if this is a fair assumption.

Yeah, I think it's in that ballpark. I think in the second quarter, we had some restocking in the channel, bringing some products. We were pretty short on really across the portfolio at the end of the first quarter. So there were some products we were able to restock. But if you look over the first half, growth being 50%, that sort of washes out. So yeah, we had some benefit in this quarter from both the restocking the channel in some areas. We're still light in some areas like web cameras, And then we also got some benefit from the reduced promotions as well. I was going to say, Bragg, if you want to get started maybe on the SG&A or R&D.

Sure. I mean, they're really kind of related questions. On the R&D side, you aren't asked if we would be given where we are, would we be willing to experiment with new categories? You mentioned one in particular. The answer is we've always experimented with new categories and we're going to keep doing it. We keep about between five and 10 new categories of development at a time. We call seeds and we're certainly going to keep doing that aggressively. And, you know, many of them don't make it to market, but they're super interesting and exciting and we're getting better and better at this, I think. So, yeah, you can count on that. We're working on new categories of development, both from an engineering standpoint and from a business model standpoint. On the SG&A side, Not only are we going to keep investing in those kinds of things and probably increasing it, certainly in the areas of video collaboration and others, but we're also looking into the back half and planning to spend more on marketing. We're trying to move our business over time from what's traditionally been kind of a push model in the vernacular marketing to more of a pull model. And we're going to spend a significant amount of money in the back half, really trying to drive that further. And we're also going to increase our spending in infrastructure because, you know, with this increase in demand, obviously it's stretching some of the infrastructure areas that we normally have, customer experience teams, some of the other stuff. Yeah, we will be spending more on SG&A, and I think it's going to be a good investment. You want to add anything to that, Nick?

Well, I think just a little bit more on the R&D side. I think you've seen us pretty strategically increase investments in R&D. The first half of the year, R&D is up $17 million on a non-GAAP basis. Year over year already, it was up $10 million this quarter, 25%. I think as Bracken has said, you know, I think about investments maybe the same way a lot of you or the investors would is we're investing in a portfolio. And, you know, as we see things that have great market potential like VC and gaming and creativity and streamers, we're investing aggressively in those areas. And we have other areas where we've pruned back the investments a little bit and reallocated resources. So, well, even while you see that 17 million increase in R&D, uh for the first half some areas are getting more than than 100 of that and other areas are getting less so we're pretty actively managing that investment portfolio all right many thanks thank you thank you thanks nanda your line is now open please ask your question hey guys appreciate it hey so you know for both of you bracken and nate you know as we think about

sort of what the model looks like longer term. And Bracken, you made a couple of comments and one was for all things video, you used the term multi-year cycle. You talked about some of the structural changes. I'm not asking for a forecast here, but clearly it sounds like all COVID catalyst aside, there's been a pull forward and a leveling up of some of these trends into sort of being more structural. you know, what, what would be the reasons you could see that the long, your long-term, you know, kind of growth funnel, which has kind of been that five to, you know, I don't know, like it's actually been more like recently, like a 7% to a 12% wouldn't structurally level up to something higher. What would be the reasons that that wouldn't take place or shouldn't take place? And then I have just a quick follow-up as well.

Well, you know, first I, you know, I, I, I do not use the word cycle when I talk about any of our businesses because I don't really see us in a cycle. I see us in long-term secular trends. And as you said, you know, I think there's two ways to look at those long-term secular trends in the context of COVID-19. One is to say, oh, gosh, you've had all this short-term business that's going to take away from the rest of the longer term. The other way to look at it is to say, actually, we've increased the overall installed base of workspaces, for example. It's actually going to accelerate our long-term. You know, we're not really looking at our long-term guidance right now. We're not really talking about guidance for next year at all. But I'm super optimistic about what's happened here. I mean, it's basically leveled up the entire world in terms of the devices that we support. And that is an incredibly exciting thing.

Yeah, the install base is the other thing, you know. So, okay, totally got it. And then just a quick follow-up is, With regards to the investments that you're making in video collaboration on the sales side, can you just talk to us structurally what you see is needed to be done, not even from a spend perspective, but from an initiative perspective, so we can sort of help fill out our map about how much there is still to sow there and how you guys are thinking about that?

Yeah, I don't want to be too specific there just for all the reasons you would imagine. But what I would say is we've increased the absolute number of salespeople and customer support people dramatically. We've added service around that. And we're going to keep doing that systematically over time. Not the same proportion that we've done before. We're going to keep adding because this is a lot of what we've done with the sales force. We've separated it from our conventional sales force. It's really a high-touch business. especially for the larger customers. And so we're going to make sure that we have the right people on the ground face-to-face with the buyers and the decision makers, and then supporting them once they bring in these big deals that we're increasingly seeing. So without being too much more specific than that, that's going to require continued investment, and we're going to make it, but the margins certainly support that.

And if I had just a little on the VC side, I think it's important to emphasize what Bracken mentioned on the customer support side and the customer experience, things around how you do pricing and the supply chain. And it's a little bit different motion and customer expectation than what you have on consumer. There's some areas, you know, I think as we continue to grow, we're going to want to invest in that and really be able to do something that's differentiated and really pleases the customers.

And you guys, just to wrap that real quick, you guys have been investing in that Get to Market for a while now. So should we think of this as being just part and parcel, sort of ongoing with what you've been doing, that set of initiatives? Or should we think of this as something that's been, you know, meaningfully incremental to what you've been doing? From an initiative perspective.

Yeah, no, this is absolutely a continuation of what we're already doing. And we're really hitting our stride here. So this is just continuing to double down on the growth we already have to drive further growth using the same mechanism, which is an expanded sales force and customer support, as Nate said. Yeah. Got it.

Great. Thank you, guys.

Thank you. Thanks, Ananda.

Thanks, Ananda. Paul, your line is now open.

Hi, Paul. Hey, guys. How's it going? Thanks for taking my question. So congratulations on the quarter. So just first up on APAC, you know, you saw really robust growth in that market, you know, suggesting the hybrid work from home, kind of go to offices, have some staying power, at least in the near term. Can you help us break down, you know, where you saw the best relative performance in Asia and Can this region kind of serve as a leading indicator for other regions in your view? And then I have a follow-up.

Yeah, I mean, we, excuse me, we just had strong growth around the world. I mean, it's really hard to find a country where we didn't have strong growth, including China, you know, great in China, which kind of went into the COVID phenomenon the earliest and came out the earliest, or started to come out the earliest. It's a little difficult to give any specifics on that. We don't normally give you details by country of growth, but China continues to grow very well. I mean, that's reflected in our guidance. We feel really good about the long-term growth potential of this business. And, you know, as long as we keep investing and then keep upping our game, And that's when we talk about marketing and moving from push to pull. As long as we keep investing and upping our game, I'm really optimistic about the long term growth of this business in every place, including after COVID-19.

Okay, thanks for that. And then just to follow up on ETL and direct to consumer, can you kind of give us a sense for how much of that business in the quarter went through those channels? you know, how you expect that mix to evolve kind of near term. And then can you quantify any lift you get from DTC? And, you know, if this shift is accelerating, do you think you are in a position to, you know, kind of structurally raise your long-term gross margin target soon? Thank you.

Well, I'll punt on that last question because the answer to the first question, make it clear. it's still a relatively small part of our business. You know, we're not, we're not one of these companies with 30% of our business going through DTC. Now we look much, much smaller than that. So, you know, we're in the single digits, you know, mid single digits, even low single digits, but we're, we're growing very rapidly and it is better margin for us. It wasn't better margin for us, but it's becoming better margin because we're getting better at it. And we're going to keep investing. We don't want to compete with the rest of our distribution. So we're making sure that we offer is, Paul Hoffman, The opportunity for a customer to buy where they want, including directly from us, and then, where we can we're offering something extra special and so we're going to keep doing that I suspect that DTC will grow faster than the rest of our business. Paul Hoffman, But it's still relatively small, so I wouldn't expect it to have a really big margin makes an impact on the company.

James Forrest, Norcal PTAC, I would agree with that Paul and I think. Just as we're diversified in other areas, I think that route to market, e-tail, traditional retail, D2C, I really like having a diversified approach across all those. One of the things that's happened in the first half of the year is A lot of business has shifted to retail. Some of that may stick. Some of it will move back in traditional retail. We're increasing our investments in traditional retail marketing and point of sale displays in the second half of the year. And that is one of the reasons I called out for why I believe gross margins will come down sequentially. Because we're going to reinvest into that channel, which has been a little bit slower in the first half as stores have been shut down. But we'll always want to keep a really nice balanced approach there.

Yep. And I'd add the other great thing about that channel is that it just gives you a chance to learn better for how to deal with everybody. All the other channels we work through because then we're skin to skin with the customer and that makes us better everywhere. Thanks, guys. Thanks, Paul. Thanks, Paul.

Thanks, Paul. Asim, you are next.

Hi, Asim. Again.

Great. Hopefully everybody can hear me here. Can you guys talk a little bit about seasonality and how we should think about seasonality in the second half? I know you guys were initially talking about March being negative year on year. Now with this, you know, growth year that we've seen in fiscal two Q, how we should think about the March quarter or, and what are some of the, you know, maybe the indicators that you're seeing that would suggest that March could be, you know, very, very negative from a year on year growth perspective. If you guys can kind of talk a little bit about that. And then on the gross margin side, I know you guys talked about heavy retail investments, which benefited you guys. You're in fiscal 2Q and you have some makeshift towards tablet accessories. I get that. But you also have the budget flush coming typically in the December quarter. And I don't know if enterprises and SMBs and even consumers because we have nowhere else to go, actually use the wallet to go out and buy some more peripherals whether it's video conferencing, blue, all these categories that are offsets to just very heavy tablet accessories. And so again, if you could talk a little bit about gross margins from that perspective, that would be great. And then lastly, Bracken, I know you talked about high single digit, your long-term CAGR going up because the installed base has gone up. One of the other questions is also what about replacement cycles? I mean, are you seeing, because of more content creation, et cetera, are replacement cycles for some of the peripherals, you know, shortening, or are they kind of hovering around the same?

Let me answer that one first. I didn't actually, I certainly haven't committed to increasing our long-term growth rates. I do think there's an exciting increase in our installed base that's coming right now, which certainly bodes well for our long-term growth. And so But it's too early for us to revisit the long-term growth rate. We'll talk about our entire business in this fall at the Analyst and Investor Day. In terms of going through the back half of the year, if we gave you the impression we're super pessimistic about March, we probably, maybe we were in the beginning. I'm not pessimistic about March. I think March is If you look at the relative growth rate of March this year versus the rest of March of fiscal year 2020 relative to the rest of the year, it wasn't that different. So I don't think you've got something to really worry about there. I think when we look out the rest of the year, we don't guide by quarter. We certainly don't guide by month. But I think the biggest uncertainty that I have personally as we look out the rest of the year is what's going to happen during holiday? Is it going to be a normal holiday? We just have a lot of people around the world who have never been in a shelter-in-place environment like this and never gone through a holiday. Will they really give the same kind of gifts? Will the same kind of thing happen? We just don't know. We do have a pretty big seasonal skew in a normal holiday period. We're reticent to count on that this year. And so we'll see. We'll see. We also have a Bluetooth speaker business that is super seasonal. They've really pulled out of the mix because we're intentionally dampening that business and bringing it down. So that's certainly not going to have any holiday spikes. So that's reflected in the way we look at the back end of the year.

You want to add anything to that, Nate? Yeah, I mean, I think if you just look at what we guided last quarter for the full year and what we've got at this quarter, obviously we've delivered a lot of upside in Q2, but the back half of the year, we took up significantly as well, right? We were guiding sort of We were really cautious, I think, about what the second half might look like three months ago. We were guiding sort of flat, maybe up 5% revenue in the back half. We've taken that up to 20% to 30% growth in the back half. And as Bracken said, that's pretty well balanced, we think, across the quarters. We don't know if this holiday, we're going to see the normal spike that we see in Q3, whether you're going to see the type of volumes that Black Friday or some of the other big promotion days have. um so it's it's it's hard to say that this is a normal year when it comes to seasonality for some of these things but certainly if you look pass to pass on the guidance we took the revenue up significantly and we took up our investment significantly in the second half which is an indication of confidence confidence this year and confidence in the long term margins on the margins with tablets versus gaming and vcs because there's going to be some kind of budget flush i hope

I expect for enterprises and SMBs.

Nate, I'll let you take that one.

Yeah, I mean, normally in the enterprise, calendar Q4 is a strong quarter, as you said, for sort of budget flush reasons. I think with video right now, though, I think people are investing. I don't think it's we're going to wait till the end of the year. I think they're investing now to make their teams productive, to get their offices ready for today and for the future. So I'm not sure that we'll see a spike, as you mentioned, which is often common in enterprise type businesses. I think people are investing right now. And then as far as tablets goes, yeah, I mean, as Bracken said, we had very strong demand for tablet keyboards this quarter. And they are lower than average gross margin. So I think while we have a lot of mixed things that are favorable to us, that's one that is certainly a headwind, but it's a good business for us. It's a headwind to us from a gross margin standpoint, but it it uh it's still a very nice business for us and um you know we've got some new products that have come out both in retail uh on the tablet side and retail as well that have done that have done well right and then in gaming and vc did you guys gain share you think relative to your peers we you know it's really hard to say in in areas where we were short of product we certainly didn't you know so we lost some share in some of the categories in gaming and

And we were here really fighting hand or fighting to get back in the game. I think we're back in the game now, so we're ready to play competitively. In BC, I don't know the answer to that. I mean, there's so much growth there. There's certainly a lot of opportunity for everybody. We have a great market position. We still have a great market position. I don't think that's changed. You want anything to that name?

No, I think that's accurate. I think as supplies improved on the gaming side, we believe we've regained some share that we probably did lose early in the quarter at the end of last quarter.

Great. Thank you.

Thanks.

Hey, Alex, your call is you are next.

Yes, Alex.

Hi there, everyone. Just a couple of quick questions, if I may. Just firstly, following on from your early answers, you talked about obviously confidence this year and clearly your guidance raise implies 27% growth in the second half, even on tough comps, if I'm not mistaken. So that would seem to suggest you see sustainability of growth in the next couple of quarters. I wondered if you could just give a bit more colour to explain You know, for the various business segments, which are the ones that you're having more or less confidence on sustainable demand trends? Obviously, given concerns around pull forward and so forth. And then just my second question is on video conferencing. You've obviously talked about how you see a very long term story there. But I wondered if you could just put numbers around that. where we were on penetration of connectable rooms with your VC solutions in the lower end before COVID and where we are now, just so we can think about where that could go to in the next two to three years.

Okay, let me do that one first. Maybe even the first one. You know, I don't think there's a huge difference in the share of penetration of connected rooms yet. You know, we're still at the very, very early days of this, you know, and I think, you know, we're, you know, I don't know what the exact number was, but maybe it was 10% of the rooms available. And I don't think we've made a huge difference in that yet as an industry. So there's a lot of room left. And in fact, I wouldn't be surprised if there are even more connected rooms coming now because I mentioned in the opening that I sort of view this as like a scaling impact. Now that everybody's gotten super comfortable with video like we are now, it's really hard to imagine going back into an office and not doing a video call. So I think you're going to have just more and more rooms. So it's super, it's very elastic that to me, I think that's a very elastic market. It continues to grow the number of rooms available. So I don't think we've made a dent, a big dent in the, in the rooms and the penetration in terms of giving a little bit of color as we go through the rest of the year on what categories are likely to grow. I think, you know, we expect, All of them to continue to do well, to have been doing well. I think, you know, VC will continue to be strong for all the reasons we talked about. I think desktops, you know, the desktop businesses will continue to be strong. Streaming will be strong. So I think you're just, we're in for more of the same. You want to add anything to that, Nate?

I think on the VC room penetration side, I would say nothing's really changed there. I think it's still in the single digits. I mean, we've had a couple quarters here where the growth has accelerated a little bit, but it As Bracken said, it doesn't really make a dent in the total number. More people go back into the office broadly around the world. As mentioned in Bracken's remarks earlier, we've seen really strong growth in business quality or centric webcams, I would say. Especially companies are purchasing in bulk for their employees to make them productive at home. It's not just We need something at home. You've got to be fully productive. You know, you're working. You're working from home. You're not just dropping in and doing a little bit of email. You're working from home. And so some of that growth that we've seen in Q2 has come from some of these nice wins that we've had with business customers buying a lot of equipment for their employees to be productive at home.

Many thanks. That's super helpful. And maybe just to squeeze another very quick one in, just in terms of your sell-through, I noticed you had very strong sell-through from a regional perspective in China. It was actually the strongest area and actually improved. And that's just interesting given, you know, they've probably come out of lockdown sooner than other regions. So I wondered if you could explain what's going on there and does that mean that potentially sell through could actually improve in some of these other regions when lockdowns ease?

You know, I don't know about that. I don't know if I would say it's likely to improve as we come out of lockdowns, but I think we expect to have, you know, we're super optimistic, especially for the long term on the growth potential of all the categories that we've talked about. China is both an example of the future and an anomaly at the same time. So I wouldn't over conclude that, you know, from China, but also would say, yeah, we look at it as a a bit of a bellwether for the rest of the world. But it's a little different. They're faster, they're farther ahead in some areas. And so we'll see. It's hard to use that as a direct predictor, but it certainly is good that they continue to have a good business there as they've gone through the worst of the COVID-19 period.

Alex, maybe just to clarify, the data that we have in the slides, which I think you're referring to, is actually for Asia Pacific overall and not China. And I think as Bracken mentioned too, there really weren't significant differences in sort of the the strength of the demand across countries. It was pretty strong everywhere. And I do think there are some important differences about how each country is really attacking these problems related to COVID, whether how much the government's involved in things like education or in different ways that they're trying to support their economies and culturally the way that people are adapting to these changes. In general, all the big trends obviously are consistently accelerating across all countries, but there can be small differences and nuances. And so obviously we have operations in each of those locations, and we try to learn from all of them. But China, as Bracken said, is certainly one that's, you know, went into this early and has come out of it early, but they've attacked the problem differently than other countries have. So we can't use them as the basis for all of our decisions. Very helpful. Thanks again. Thank you.

Tom, your line is now open.

Great, thanks. So first off, Breck and Nate and Ben, congratulations on an amazing quarter. I had one question and one follow-up. So can you talk about the changes you're making that improve your ability to manage demand surges? I think you're doing a really good job, but I'm curious to see the adjustments you're making that are positioning you to manage future demand surges.

Yeah, that's a great question. So what we did, we put in place as we went into COVID-19, I'll give you one example. It'll just be reflective of what we've done. We've learned that we need to have a super fast cycle on matching demand and supply. And then we also need to make sure that we're reaching into our normal systems and turning off the autopilot. And so we learned that in the early days of COVID-19 when we made us bet that was well ahead of what our markets could see. And Nate and I and several others of us made that bet knowing that we were going to take some inventory risk. And we did it. And it paid off big time. Now, we're well beyond where that was now. But I think learning to having a leadership team that has the experience and the wisdom to be able to reach in, sometimes turn off the autopilot as part of it and not be afraid to. And we weren't. And we aren't. And I think that's one The second one is there's nothing like learning by doing. And we've increased our capacity. Our operations leader has really stepped in for all of us and supply chain leaders. Both have stepped in for all of us and systematically increased our capacity very aggressively working with proponent suppliers across the board. We have a great set of relationships upstream into our supply chain. Many of them are very long standing relationships. And that's really helped us too. And so we're, I probably, I think we come on the, I came out of this feeling, uh, really appreciative of that. And, and probably a little sensitive personally that we haven't, um, we haven't recognized how valuable that is in the case where you do have demand searches. So we're going to take special care of those relationships in the future to make sure we're positioned well in the future. And then on the other side of it is we're sometimes sole sourced, you know, sole source where we're hurt, you know? And we're going to try to avoid that in the future so that we have the flexibility to go up on certain components where we just, you know, the supplier just couldn't meet the demand.

Great. And then for my second question, one of many things I thought was interesting on the new iPhone launch in 5G was the mobile gaming opportunity. So can you talk about what the mobile gaming opportunity means for Logitech?

Yeah, you know, not too much. But what I will say is, you know, mobile gaming is bigger than desktop gaming. And we don't do much of it. So it's an opportunity out there for us to figure out how to get a handle on it and get some business out of it and help create a better experience there. We haven't figured that out yet. We tried several things over time, but we've never really knocked it. We've never really gotten it right. But most of you have been following us for a long time. We don't give up easily. So we're usually working on things and we're not going to give up on that one. We'll sooner or later figure this out.

Great. Thanks for my question.

Tom, you know what? I'd like to come back real quick to your demand search thing, just to really emphasize or highlight one of the points Bracken made around how we've made this bet on inventory. And we've really leveraged our balance sheet, which I think is a very strong balance sheet, and our strong cash collection. We're really passionate about making sure that we have strong cash conversion cycle. And whether it's changes that we make to our collections processes, the way we manage payment terms, The way we think about inventory management, all these things help us squeeze a little bit more cash out. And I think our strong balance sheet, I think, is an important differentiator against some of our competitors who may not have the flexibility to make the types of bets that we made in the first half of this year. So I think that I think that has been a strength for us and I think it will continue to be a strength for us. and uh you know i think it's it's important in these times so that you're not held back by those types of financial constraints so you know we're going to manage that really tightly and we're going to make sure that you know we're managing risk but when when we feel that we need to be aggressive and we need to go support potential business growth we have the ability to do that i would add one last comment that that's a great point nate and you're so right and i'd say we had a couple of categories we probably should have been carrying that system to our room and we

Michael Leccese, Not except we should be carrying more inventory for the as you call the demand services and we weren't we've learned you know we make mistakes, every day we try to learn from all that's mistaken so we've learned.

Michael Leccese, Excellent Thank you.

Thank you.

HAB-Michael Leccese, Michael you are now open. HAB-Michael Leccese, Michael.

Hi, Brecken. Hi, Nate. Thank you. Two questions from my side, starting with your guidance. You mentioned that you increased your guidance because you're more confident or you gained more confidence. My question is really, what is your visibility into the second half? I mean, how did you come up with the actual growth range that you were giving? Why is it not just below that or above that? How good is your visibility actually with all the uncertainties that are still out there in terms of economic development and the usual holiday season uncertainty? And the second question would be regarding your pointing devices and keyboards. In both, you mentioned very good demand across the product range. So high-end and entry-level products. My question is, did you have the same availability of all products across the range as well? Or was the sort of demand driven by the fact that there were shortages at one end or the other?

Yeah, I would say, I'll answer that one first, and then I'll jump on the visibility of it. I'll hand it off to Dave. You know, I would say, in the case of keyboards and important devices like mice, pretty evenly spread across our product portfolio. So I think that's pretty reflective of the market. We had a very broad, now I will say, I think we didn't market. We really turned off our marketing because the demand was so strong. We were really trying to keep up with it. So now when we market, we tend to try to market a more premium mix. And I think that's an upgrade opportunity for us as we go forward. We haven't really touched yet. So we've got another round of upgrades. All those people who hastily went out and bought whatever they could, um now there's an opportunity for us to upgrade a lot of those people a lot of you and then the the second part of the visibility you know what they come in there but i would say you know uh how much visibility we have i would say we had a normal level of visibility in some ways and less in other ways normal in that you know usually we can You know when we we can see, based on the current trends what's going to happen over the next couple of quarters, because of tradition, because of the long history, we have here, we really have a lot of data on that. On the other hand, is your as you pointed out, you know there's this unusual really unusual dynamic. code so that's that led us to think harder, for example, about the holiday period and we. We normally wouldn't say, you know, gosh, you know, holiday is going to be like every other holiday. We're going to see a certain increase over Q2. You can take the math, take the percentage, add it to it. You've got the number. We didn't this time, you know. And so I'd say that, so our visibility is probably a little lower and it's reflected in the fact that we've tried to intervene in a couple of places. Normally, we would have had better visibility than we did. And we tried to adjust based on good judgment. You want to add anything to that, Nick?

I think you covered most of it. I mean, the only place where we might see a little more visibility sometimes is if we have a direct relationship with a large enterprise customer or with an education buyer or something like that, where they have a little bit more of a roadmap that they're that they're building to. But that's still pretty small for us.

Although it's improving, I would say that is getting better. Yeah. Yeah. Yeah.

And it's an area, I think I forget who asked the question earlier when we talked about the sort of structural types of investments we have to make around processes and tools to build up those capabilities. So that's one of those things that we've been investing in this year, but we'll invest much more in the second half.

Our head of the video collaboration commercial organization is a sellout for getting better visibility. So she is amazingly focused on this. So I'm sure we will get better and better.

Great. Thank you. And congratulations. Thank you.

Hey, Serge. Your line is now open. Hi, Serge. You're on mute.

Hey, Serge. You're on mute. But it's a nice headset. Oh, no. It's still on mute. Or frozen. Should we go to somebody else and come back to serve? You want to try to type it real quickly into the chat while we go somewhere else?

You want to try to type it in? Once you type it in, sir, once you type it into the chat, just how multimodal we are.

Andreas, maybe if your line is open.

Hi, Andreas. Okay. Just show you there are product opportunities here. We've got to get up to this.

Yeah. Hello. Hello, everybody. Thanks for taking my time. Two questions, if I may. One is actually what is currently your view about sales through in the second half? I mean, is that going to be close to the guidance implied selling of roughly 27% or do you see there some divergence in the sell through?

Okay, was there a second question?

Yes, the second one is the promotion activity. I mean, how far do you need to go in the third quarter with promotion activity given demand has been so strong also your certain degree supply constraint at least on two products probably also in q3 which is the largest quarter how how is it different than than the usual uh promotions as in in in in the last couple of years or or uh the same okay

I think on the first question you have, I would say we expect kind of a pretty balanced view of sell-in and sell-through in the second half. As you mentioned, there's a few products where we're still catching up and Bracken mentioned that we're increasing capacity and we'll try to catch up in the second half there. But in general, I would think about a more balanced second half between sell-through and sell-in. And then on the promo activity, I think while we're uncertain as to the magnitude of the holiday demand, it may not be as sharp of an increase. just because people have been buying so steadily throughout the year. I think we do expect the promotion to be similar to prior years. I mean, you have the typical promotion days around the world, and we're expecting to participate in those. And as supply and demand get in more balance, we think that those promotion levels will move in here in the second half to more typical levels. That's what we've assumed.

Okay. Thank you.

Thank you, Andreas. Do you want to try one more time or catch up later?

OK. He said he would use the one on one.

No, we can't hear you. Sorry for the technical problem.

Why don't you type it into the chat? Sir, that might be the best thing to do. We're done. Okay, do you have somebody else we can go to there, Ben?

No, I think that is the end of it.

We're going to give Serge one more minute to see if he can type into the chat. He wants to wait. Okay, no problem.

Okay.

Well, I will close this off by saying it was obviously a super strong quarter. We have tremendous momentum. It's an exciting place to be. And the most exciting thing about Logitech right now is our long-term growth potential. We are really in the right places and we're going to keep learning more. And it's been so exciting so far. And I feel like a newcomer. We have a long way to go. All right. Thanks so much. We'll see you guys next quarter.