Logitech International S.A.

Welcome to Logitech's video call to discuss our financial results for the third 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 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, 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 results and information about our use of non-GAAP measures and factors that could affect our financial results in our press release and our filing with the SEC, including our most recent annual report and subsequent filings. These materials, as well as our prepared remarks and slides and webcasts of this call, are all available at the Investor Relations page on our website. We encourage you to review these materials carefully unless noted otherwise. between periods in year-over-year and in constant currency, and sales or 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.

Thank you, Ben, and thanks for joining us. Q3 was our biggest quarter in company history, and this will clearly be the biggest year in Logitech's history. Last quarter, we predicted that as the world opened up, few companies would opt for a full work from home or a full work from the office approach. In short, most companies, we said, are likely to adopt a hybrid model, with many of us working a few days a week in the office and a few days a week at home. With another quarter behind us, I have greater conviction that most companies will move to a hybrid at work at home model. I had a meeting with almost 60 other CEOs this week, and while we didn't take a poll, I would guess the vast majority of them will adopt hybrid work as the new norm. Logitech is well positioned to serve customers moving to hybrid work. We can upgrade and improve workspaces at home and in the office. And the explosive growth of video calling drives the need for high quality video at home, in office workspaces, and in meeting rooms. For Logitech, that simply means growth. The global trend propelling gaming toward becoming the largest collection of spectator and participant sports in the world continues. Over a billion people watched some part of the League of Legends final last quarter, a billion people. Over 100 million people watched the final live, the same number as the Super Bowl last year. Streaming and creating is poised for long-term growth as well. There are now 1.8 million podcasts to listen to and untold TikTokers, Instagrammers, and streamers to watch. These are examples of the democratization of digital content that we've talked about for some time. And this trend grew into the pandemic, during the pandemic, and will surely grow after the pandemic. Given the increasing pervasiveness of this type of content, streaming and creating could one day become one of our biggest product categories. In other words, we're really well positioned for the long term. Let's look back at our third quarter that just ended. We delivered another strong quarter with sales up 80% and non-GAAP operating profits more than tripling. But to put this in context, this quarter's year-over-year sales volume growth is greater than the total growth from the three prior years combined. On top of that, Q3 profit was more than we delivered in all of last fiscal year. Our creativity and productivity categories delivered a mid-30% growth in porting devices and keyboards and combos. The transition to a work-from-anywhere culture and a mixed learning environment creates increased peripheral attach opportunities for us against a large and growing PC install base. And customers who upgrade their devices can benefit from improved aesthetics, performance, ergonomics, or all of the above. We simply have upgrade opportunities across every workspace in the world. PC webcam sales more than quadrupled in Q3, and year-to-date sales have more than tripled. While these growth rates may seem tremendous, and they are, the incremental units we sold this year are just a drop in the bucket compared to an installed base of nearly 600 million monitors and almost 1.5 billion PCs. 600 million monitors, 1.5 billion PCs. To support the growing prevalence of video communications, we're working to expand our capacity to support the higher demand for Logitech webcams. As video conference use has exploded, As video conferencing has exploded, the opportunities to innovate our camera technology have come into sharper focus. We're the market leader in webcams, and we're increasing our product investments to provide customers with even better experiences than they have today. Tablet and other accessory sales for the quarter increased more than fourfold to $138 million, the first time we've achieved sales over $100 million in a single quarter. The real highlight this quarter was the tremendous growth we delivered in our education tablet keyboards. Governments, schools, educators, parents, and students around the world are all adapting to a digital learning environment. While we had significant demand from various countries, Japan was one of the biggest contributors to our education tablet keyboard sales in Q3. We mentioned last quarter that Japan's education ministry has allotted over $3.5 billion to improve schools for online teaching. And this program is expected to last through the remainder of our fiscal year. Video collaboration sales more than tripled to another record high of $293 million. Sales of our conference news products also delivered an impressive quarter, doubling year over year. As I said last quarter, and to lead off these remarks, companies are starting to reconfigure their office layouts and work cultures to enable workers to collaborate remotely and flexibly. I say starting because most people are not back in offices yet. Not only are companies video enabling their on-site offices, but they're equally, if not more quickly, equipping their employees with enterprise-grade webcams and headsets, both for the home and for the office workspaces. Just last week, we announced a complete refresh of our video conferencing conference room product portfolio. The products are RallyBar Mini for smaller rooms, RallyBar for medium-sized rooms, and RoomMate with our current Rally system for larger rooms. In addition to exceptional audio and video, one of the key features of these products is to run these products in appliance mode so that you can have a Zoom room or Microsoft Team rooms, for example, without a separate monitor. This greatly simplifies the rollout of these products and allows IT managers to scale out deployments to every room. We're ready for when people go back to work. Based on the feedback from dozens of large enterprise customer beta trials, we believe this new portfolio raises the bar for Logitech and the entire VC industry. Gaming sales grew 73% in this quarter. Growth is strong across all three regions and across all of our gaming categories. on the back of several new product introductions, which helped us achieve a record high market share in PC gaming. We believe that the deep integration of gaming into consumers' digital and social networks will greatly enhance the stickiness of gaming for years to come. Streamlabs had another strong quarter, with continued growth in subscribers and paid conversions. We couldn't be more excited with the Streamlabs team, George, I hope you heard that, who are teaching us capabilities as they experiment with various initiatives to increase user engagement and customer acquisition. Blue microphones and retail headsets also had another great quarter with sales growth of both up triple digits versus the same quarter last year. Mobile speakers and smart home categories remain soft this quarter, as we expected. You know that we actively manage our portfolio, and as such, we continue to focus our investment priorities on other fast-growing market opportunities, and we'll manage these two product categories to maximize profitability rather than growth. Now let me turn the call over to you, Nate, to walk through the rest of our key financial metrics in Q3.

Thanks, Bracken. We delivered another excellent quarter of financial results on the strength of our diverse product portfolio, the global reach of our sales and marketing capabilities, and the execution of our operations team. Our results were strong across nearly all dimensions. We grew revenue significantly and gained share across our categories, expanded gross margins, invested significantly in our strategic priorities and brand, and delivered more than $500 million of free cash flow. Gross margin increased 760 basis points to 45.2% in the quarter. The gross margin improvement was the result of very strong sales volume, reduced levels of sales promotion, favorable product mix, and some tailwinds from currency exchange rates. While our recent gross margin has been above our target range, I do expect margins will come down from these highs in the quarters ahead. As supply normalizes and retail stores continue to reopen, we plan to actively pursue opportunities to invest in joint marketing and appropriate levels of promotion to drive continued growth. We have always said that we are focused on delivering sustainable and long-term growth while keeping margins at levels that we believe strike the right balance of profitability and investment. And so it is with this philosophy in mind that we will continue to manage the business going forward. Non-GAAP operating expenses increased nearly 50% to $278 million, and yet OPEX reached a record low 16.7% of sales. As we discussed last quarter, we ramped up the pace of investments in sales and marketing and R&D, and will do so strongly again in Q4. Our sales and marketing spending increased over 50% year over year as we deployed investments against various marketing priorities, including a global brand awareness campaign and local country and category-specific marketing activations. We utilized new marketing platforms and bolstered our influencer marketing campaigns. GoToMarket investments also included the continued expansion of our sales coverage for video collaboration, education, and the overall B2B channel. All these activities will continue in the March quarter as we leverage the strength and investment capacity from our current demand to improve our potential growth over the longer term. R&D spending increased 23%, a growth similar to the prior quarter, as we continue to reallocate engineering resources from mature and declining categories to faster growing opportunities. I'm pleased with our pace of innovation, and we announced several significant new products, including the conference camera solutions Bracken mentioned, exciting gaming peripherals, and refreshed mice and keyboards over the recent months, and we have a strong roadmap of new products teed up for FY22 and FY23. G&A expenses rose 73% as we invested in our IT and customer care infrastructure. to support a vastly higher sales volume, and we also launched a few short-term investments and projects that should wind down by the end of the fiscal year. The teams did an incredible job in scaling our business so quickly, and we have invested more in the areas to help serve our growing customer base. While we are accelerating our investments into our business, we will maintain the financial discipline you have come to expect from Logitech. A significant portion of our second half investment is variable, allowing us to align our spending with future gross profit. And while we're managing risk by variabilizing our costs where possible, we also believe that fixed cost investments in the business are essential to help drive long-term growth. And we plan to continue to enhance our marketing capabilities, brand awareness, and selling capacity. Now let me move to our cash flow and balance sheet. We delivered another strong quarter of operating cash flow, which reached $530 million, up from $181 million in Q3 last year. These results bring our year-to-date operating cash flow to over $900 million. Record fast inventory turns and healthy cash collections led to a cash conversion cycle of 15 days. Our cash conversion cycle is typically lowest in this quarter, in Q3, due to the faster inventory turns during the holiday, so you should not be concerned to see an increase in this metric next quarter. Our cash balance is nearly $1.4 billion exiting Q3. And in addition to funding acquisitions, share repurchases, and dividends, we view our strong balance sheet as a strategic tool to support our growth via investments in both supply and expanded manufacturing capacity. And once again, as with prior quarters, our operations team executed this strategy well, all while adhering to strict COVID safety measures and travel restrictions. Rounding out uses of cash in the quarter, we repurchased $50 million of our own shares, bringing our year-to-date share repurchase total to $72 million. And now I will return the call to Bracken for guidance and his closing remarks.

Thank you, Nate. Nice job. This morning, we announced an increase in our fiscal year 21 outlook, which implies that for the final quarter of the year, our Q4 sales will grow 40% to 50%, and our non-GAAP operating income will increase about 30%. This means that our revised fiscal year 21 outlook will be for sales growth of 57% to 60%, and our non-GAAP operating income to be approximately $1.05 billion. This is up from our prior annual outlook of 35 to 40% sales growth for the year and a range of $700 to $725 million in non-GAAP operating income. You've all come to appreciate Logitech for our commitment to delivering sustainable long-term growth. That commitment remains firm. We see so many new and expanded market opportunities as we emerge from the pandemic that we will invest aggressively to capture the growth potential. The next several years will be so exciting. And I can't wait to innovate, expand, and drive change. And with that, Nate and I are ready to take your questions. Ben, can you queue them up?

Thank you, Bracken.

Thank you.

Jorn, from UBS, your line is now open.

Hi, Jorn.

How are you? Hey, Jorn.

Hi. Hi. Thanks for taking my questions. And hello to you, Bracken and Nate. Three questions, please. The first one is, Taking an early view in fiscal year 22, do you see the risk that we have some pulled forward demand in the gaming end market and also in video collaboration where corporates are doing the homework preparing when employees are coming back to the office? Second question would be based on the cross-profit margin. Just from a technical point of view, why was it not higher quarter on quarter given the higher scale benefits and the higher ethics benefits? And also on point number three, can you elaborate a little bit more on your incremental marketing spend of 50 million quarter on quarter? Was this headcount related? And what exactly is this global brand campaign you are rolling out at the moment? Thanks a lot.

I hope everybody else is not experiencing the slight negative feedback I'm getting on Zoom. but I bet you are. So if one of us is talking and it gets kind of choppy, please don't hesitate to re-ask the question. I'll jump in and then Nate, you and I can kind of go back and forth. Are we experiencing pull forward demand in gaming in BC? You know, the demand for gaming has been so long-term and so strong for many, many, many years. And I think, well, it's certainly the case that, you know, people are playing a lot of games during the pandemic. A lot of what drives the growth of gaming is really the games themselves. You'll remember the Fortnite effect a few years ago. And then before that, I would say League of Legends is probably the big phenomenon. And there will be more. So I'm really optimistic that gaming is just going to keep chugging along and growing long-term. We're not going to guide anything today for next year. That will come in the next few weeks. But I'm really optimistic about gaming long-term. I would say I'm just as optimistic, if not more optimistic, about VCs. You know, VC is, if you look at just the personal video enablement, you know, the typical person has a webcam that's not very good. And yet we sell, and if you look at the number of webcams we sell relative to the number of monitors and the number of PCs out there, 600 million monitors, 1.4 billion PCs. know it's just a drop in the bucket it's up to us to figure out how to unlock the demand that ought to be out there for webcams long term because you get such a better experience many of you right now are looking off in the distance instead of looking right at the right in the camera for example or the quality of your picture is not very good and you're looking at yourself now four or five times a day four or five times a minute four or five times a day so i think we have opportunities and then in the office The video enablement of Office is just, it's barely even started. I mean, if you think about what's going to happen when people go back into these hybrid work environments, I can't believe you're not going to see a very strong growth of video conferencing long term. So I'm really optimistic about it. I'll let you take the gross margin point in just a second. Although I'll give you the shortcut to the answer, which is, well, I won't. I'll let you do it. Incremental marketing spending. It's a combination. And Nate mentioned it in his script. You know us. We try to be very aggressive and risk managed. So a lot of the spending we're putting in is variable. So we're always ready to, if it's working, we'll double down on it. If it looks like it's not as effective as we'd like, we'll pull it back. But we also are making long-term fixed investments. We have so many opportunities right now. around the world. So we're going to keep making those. You want to add anything to any of those?

Sure. Yeah. Let me just on the gross margin question, Jorn, and again, apologize for the feedback if you're getting it as well. The primary difference sequentially, I think, Jorn, would be mix of products in that in Q3, we mentioned we had a very strong EDU quarter, which tends to be a little bit lower gross margin than other parts of the portfolio. Still very good business for us. So that's the primary reason why I suppose you could say gross margins were not higher, although they were quite strong. And then as Bracken said on the marketing side, I mean, frankly, we couldn't add that much headcount in one quarter to drive that kind of cost increase. So most of that was variable on the marketing side. And as Bracken said, I think it could become a long-term investment for us. We'll judge the effectiveness of it. But as we've been saying, so many of these trends we really firmly believe are long-term, multi-year growth drivers for us. And when we have confidence in that, we'll make fixed-cost investments to support those. It simply wouldn't make any sense. Even if there were a quarter where demand pulled back, if we believed in the long-term strength of that trend, you'd want to continue to invest through that potential slowdown to make sure that you're competitive over the longer term. Absolutely.

Thanks, Jordan. Thanks, Jordan. Paul, from JP Morgan, your line is now open.

Hey, guys. Great quarter. Thanks for taking my questions.

Thanks, Paul.

So first up, can you talk about the pricing dynamics across segments? You know, given your elevated demand, did you raise or are you raising prices in any segments? Or is the gross margin benefit mostly, you know, product mix? and scale with some FX in there and have a follow-up.

Okay. Yeah, the answer is no, we have not raised prices. We are doing a lot less promotion. You know, you see our promotion numbers now, they're gross now. We really pulled way back on the promotion levels and we've stayed back. I hope we can keep at least some of that benefit coming out, although I'm sure some promotion will go back. That certainly has, I'm sure it's had an effect on our average pricing, but most of our pricing benefit is really, as you said, it's mixed. Mixed within category, mixed across category.

Yeah, and I think, Paul, maybe to where you're going is the sustainability of these gross margin levels. As I mentioned in my comments earlier, do expect gross margins will come back down towards probably the high end of our prior range. There's some things in there that are probably more sustainable, like some of the mixed benefits, growth and VC. It's a nice category from that standpoint. But I think we're going to need to move back to more reasonable levels of promotion as supply and demand normalize. And so that, again, is included in our outlook and something I would expect to see in the near term and in quarters ahead.

Thanks for that. And then on VC, more and more enterprises are looking to switch to Zoom-enabled rooms. Is your market share kind of accelerating in the larger conference rooms now? What's been the kind of initial feedback on the roommate product? Thanks.

Yeah. So. Yeah, more and more companies are going to Zoom, to Microsoft, to Google. So there's all the kind of plug-and-play solutions that are cloud-based are all growing really well. You asked about our market share in large conference rooms. It's a little hard to judge that exactly, I would say. First of all, large rooms are a really small percentage of the total. But we've now got phenomenal products for large rooms. And I think we're definitely growing in large rooms. We'll see. But overall, as you see, our growth has been extremely strong and we're super optimistic about all of our product portfolio, including the newest reset that I mentioned early in the call. Not reset, new introductions. I mean, I think we've really raised the bar on the industry. You asked about feedback we're getting from beta customers and it's been very, very strong, very strong.

Yeah, I mean, I think our performance in those larger rooms has been very good. As you can see, you know, the conference cameras continue to grow quite well. I think there's a lot more room for us there, Paul. You know, we've been adding capacity, selling capacity, more coverage into large accounts, and we've had some really nice large wins. But I think there's a lot of room for us to continue to grow in those spaces.

Okay, great. Thank you.

Thanks, Paul. Alex from Goldman Sachs, your line is now open. Hi, Alex.

Hi, everyone. Hi, and congrats on the robust results. Two very quick questions. Firstly, just on the guidance for the next quarter, you seem to be implying seasonality, which is meaningfully below what we'd see normally. And just given that obviously we continue in many countries to be in a lockdown scenario in the current fiscal quarter, I just wondered if um what what plays into that in terms of that sort of sub-seasonal forecast and then secondly um it's very interesting you talked about governmental spend particularly in japan we've seen a few news articles also in terms of other regions talking about home education and peripherals required for that um i wondered if you could talk about what you're seeing on a global basis and if uh that could go beyond um the current quarter um which you obviously reference

You want to start with that one? I'll take the guidance. Sure.

Yeah, you bet. You know, I'd say on the education front. Yeah, we we there are a lot of governments around the world that are investing now in education and technology for education. And I don't think that's going to let up. And we see it as a lot more than a one quarter trend. We think it's a long term trend. We're excited about the education space.

Yeah, Alex, on the guidance and the seasonality sequentially, you know, honestly, I do like to look at our business in terms of typical seasonality. This year has sort of not been typical. And you saw that, in fact, in Q3, where we grew sequentially about 33 percent, which was pretty well above our typical seasonality. Q2 is above typical seasonality. So you're correct. Our outlook for Q4 does imply a sharper slowdown than what we have seen in recent times, Q3 to Q4. But I think it's appropriate, just again, given the strength that we had this quarter and some of this increased promotional spend, which we expect to reactivate, that will also put a little bit of pressure on revenue sequentially. So nonetheless, it still implies 40 to 50% growth year over year into a quarter where, as you know, Q4 of last year, we started to see some pretty strong pickup in demand. So I think the guidance looks pretty reasonable. Great. Many thanks. Thanks, Alex.

Hi, Eric from Morgan Stanley. Your line is now open.

Hi, Eric. Awesome. Thanks, Ben. Hey, Bracken and Nate. So two questions on my end. First, congrats on the quarter. So for the second consecutive quarter, we kind of saw sell-in meaningfully outpace sell-through. So just wanted to understand kind of the dynamic there, why that has been the case, and whether you think that has to reverse in coming quarters. And I have a follow-up.

Sure. Do you want me to take that one, Bracken?

Yeah, you can go ahead.

Yeah, it's a good point. There's really two drivers of this primarily. The first is that sell-through is reported on a gross basis, meaning those numbers do not reflect promotions. It's before promotions. And so as we've talked about, we got some benefit from the reduced promotions. And so you see that in net sales. You don't see that in the gross sales or in the sell-through number. So that's the first reason why you'd have, Some difference. The other would be channel inventory. So sell in to replenish channel inventory still at very reasonable levels. And in fact, still short in some categories like last quarter. So that's really the two drivers. There would be the difference in the calculation because one is before promotion and one is after. And then the other would be channel fill. But again, channel inventories at very appropriate levels and feel good about how we look going into the March quarter.

Okay, super helpful. Thank you. And then maybe if I just turn to the balance sheet, it's kind of a two-part question. So one on the cash balance, obviously you have more than a billion dollars of cash. So just looking, just wondering if you, if you're looking to be more aggressive in deploying that cash and how you would do that. And then the second part is just, again, your inventory levels are nearly double what they were at the end of last year. So is that a sign, you know, you you're holding onto more inventory, for perhaps direct-to-consumer purposes? Is that going to be worked down over the coming quarters? Just any color on both of those line items. Thanks, Guy.

Let me pick the first one. We have the same approach with our cash that we had before. We're obviously paying a dividend. We'll surely increase the dividend. I can't speak for the board, but we normally do in September. You know that, but kind of a normal level. The second thing is we'll keep doing stock buybacks and I'm sure we'll want to keep doing that. But again, I can't speak for the board, but the rest of the board, but I'd expect that. In terms of M&A, that's the key. You know, we continue to look hard for great strategic opportunities and they are out there. Now, will they be large enough to take that kind of cash? We're always looking at small, medium, and large. The stars have to really align to find something large. So we're going to stay after it. It is a lot of cash. We're generating a lot of cash. But we'd love to put it to use strategically. But we have so much organic opportunity, too. We're certainly going to keep plowing into that. And you might want to add to that, too, Nate.

Yeah, I mean, I think the other thing that's been important. And we've mentioned this a couple of times. It's just the use of that cash to invest in working capital, which really gets to your second question. Yeah, really gets to your second question on inventory. Yes, obviously, the inventory balances has increased, but we're supporting a much higher volume. So if you look at days of inventory that's continued to come down, we had our actually best inventory turns in history this quarter. And again, I'd want to point out, but I think our operations team has done such a nice job. Not only have they scale, help scale the business to capture the incremental volume that we've had, but they've also continued to drive operational improvements at the same time. So this hasn't just been an environment where we're chasing supply. We're actually trying to make our, you know, stay on path with our structural improvements, whether that's manufacturing diversification into other countries, whether that's efficiencies in our supply chain, cost reductions. things that benefit us over the longer term. And in fact, some of that is what's driving the improved inventory performance that we see right now. So I think we're getting some benefit on inventory from the higher sales velocity, but we're also making efforts to improve things structurally so that we can continue to be more efficient on working capital going forward. But no concerns for me on the inventory. Again, it's a It's all appropriate given the increases in volumes. It's all fresh. It's on fast-moving products. So I feel very good about where we're at. Absolutely.

Awesome. Thank you, guys.

Thanks, Eric.

Thanks. Our next question comes from Asya Merchant from Citigroup. Great.

Hey, good morning, everyone. Thanks for the opportunity. A couple of quick questions on promo spending. You guys talked a little bit about resumption and promo spending. You know, at some point, are we looking at that in the March quarter? Or do you think just given, you know, still all the COVID lockdowns, etc., this is likely going to be a fiscal 22 event? If you can, you know, parse out the impact of lower promo spending in any way on margins year to date or even in third quarter, that would be great. And then I just have a follow up for Bracken as well on Streamlabs. He mentioned that, you know, obviously that's going well for you. Any anecdotes you can share there on how that's driving higher user engagement slash higher, you know, use of your peripherals? And when do you see that, you know, services or subscription, you know, really showing up as maybe a meaningful driver of revenues across your portfolio? Thank you.

You want to take the first one, Nate? Sure.

You know, on promo, I'll be a little bit careful on this one, obviously, because this can be something that's important for competitive reasons. But I'll just reiterate, I don't think the current levels of promotion are sustainable. I think it's healthy for us to have some promotion to continue to drive growth and growth. you know, invest in our categories. So actually, I would expect to start seeing that promotion turn on again in the March quarter. But we'll see how things look. You know, it's something that we can do quickly and we can manage dynamically in terms of the impact on the margins themselves. It was the largest drive from lower promotions were the largest driver of the year over year improvement in gross margins. it's a bit of an unusual year so i'll i'll step maybe away normally we wouldn't talk too much about besides that impact but it's been kind of an unusual year in that respect so i think it's good to share it was probably about a five to six point impact in our gross margins favorably year over year from lower promotions similar to what we saw last quarter um so it's important to keep that in mind as we look forward again we've we've benefited from it i think we're managing it wisely um but you know that's something that we're going to have to continue to evaluate in the future

Yeah, and on your question about services in general and Streamlabs in particular, Streamlabs, a little bit of color on that. We're offering a subscription service now, and that subscription service is doing really well. I mean, the team has done an extremely good job of mining that subscription service opportunity. And so it's growing really well. I'd say the more important part of that is not per se the exact service we're selling today or even the size of that business. It's the learning. So we're really learning hard on this because we're also offering services quietly in our video conferencing business. We've got things in the works in gaming. We've got some things in the works in CMP. I wouldn't expect any of that individually or collectively to become a really big number next year or even the year after that. But I think I'll predict that what's going to happen with our services businesses over time, we're going to be working, working, working. You're going to hear a little bit about it. And then one day it's going to really pick up because we're in the learning mode. And we want to have a stickier relationship with our customers across every business. So stay tuned. You know, it's a long term play. I'm super excited about it. I'm reminded of when I first joined Logitech, I went down to meet with a bunch of a lot of venture capitalists and get kind of advice on what Logitech should do. And at the time, so many of them were investing deeply into hardware, hardware enabled service businesses. I kind of got from some of them, you know, kind of a pat on the head and said, you guys probably should, you ought to try to find another job because one day we're coming for you. And, and I walked out thinking, gosh, we got a turnaround to do. And that's easier said than done. I think I'll just focus on what we're doing and do it well and hardware. Eight years later, we're worth a lot more than 10 times what we were then. And a lot of those investors have gotten out of hardware. But they're right that services are going. It's just a question of timing. Services are going to be a really critical part of so many experiences you buy. And we know that. And so we've been investing. We're going to keep investing. We're going to build that. So I'm excited about the future that involves services. But it's going to take time as yet to develop.

All right, thanks for your questions.

Okay, great. Thanks. Thank you. Our next question is from Serge from Credit Suisse. Hey, Serge.

Serge?

We cannot hear you. How are you, Serge?

So can you hear me now? Yes, we can. Oh, sorry. It's always me who has the problems with the hardware. So you should teach me once. Okay. Congrats, guys, to your results. I have several questions, at least two I would like to ask now. You already mentioned that this order from Japan has been a one-off, at least in the press release. Before you mentioned, no, you could expect more to come of that. So I'm wondering... Can you give me a size of this contract? Well, not in detail, but that we get a feeling what this means. And do you see other such one-time orders in mice, keyboards or VC? And are they coming also from corporates and not only from government? To give some color here.

Yeah, I don't think we've disclosed, nor do I think we should probably disclose the size of that order in Japan. But what I would say is we do see very sizable orders coming from corporates. I still think it's kind of early days for that. We've had some bulk buying in mice and keyboards that are really exciting. And I think but I don't think those are kind of temporary things. I think you're going to see some of that will come as people are outfitting people or homes. But it's also going to start to happen in the office. We never we never had a direct relationship with a lot of the largest companies in the world because we just didn't have the scale or hadn't made the decision to have a scale of a sales force selling into the enterprise, for example, and moving past education for a minute. And the same thing was true of education. And because of VC, this is one of the synergies we're creating now for the future. Because of VC, we now have a direct conversation with the largest companies in the world. And that enables us to talk about things like our workspace, our desktop business, mice and keyboards and webcams in a way we never did before. So our market shares were underdeveloped in the enterprise business and B2B in general. And we are completely committed to changing that going forward. So I think that's one of the growth opportunities we have ahead. In education, I think there's most people who are involved in education around the world will tell you this, while students at home all the time is probably not going to change. remote work and more technology-enabled work is the future. And so I think the investments that are going in now in education in Japan are kind of exemplify what's going to happen and what's starting to happen around the world in places like Germany and other countries that will invest and keep investing in education technology. And we're going to be part of that. So we're putting ourselves in position for that.

Okay, very, very, very good. A follow-up question is, you mentioned that you still have some supply constraints, mainly in webcams. Is this for enterprise webcams or only the consumer webcams? And do you have any other product categories where you're short? And when do you believe that you're coming out of this situation?

Yeah, it's really in both. We also have some shortages in microphones, a few other places. In terms of when we think we can come out of it, I'm almost embarrassed to predict that now. I think I've predicted every quarter we're going to be out of it in a quarter or two, and I've been wrong. The demand's been stronger than we thought in each case, and it continues to be very, very strong. We are expanding our capacity both in assembly or making as well as in the components we need. Yeah, I would guess sometime next year, we'll see really get to full capacity on webcams. You want to add anything to that, Nate?

No, I think that's right.

Next year, fiscal or calendar? Fiscal. Fiscal. And sorry, again, the last question, where is the main bottleneck? Is it in components or is it in production or it...

Right now, it's moved a little bit. I'd say we're now in a pretty good place on assembly. We think you don't really know until you have everything. So it's components now.

Thanks, Serge.

Thank you, Serge. Our next question is from Tom from DA Davidson.

Great. Nate and Ben, congrats on an outstanding quarter. So two questions for me. The first one is, how should we think about the influence of the new gaming platforms for Sony and Xbox on the gaming industry's ability to grow on top of the pandemic in general and Logitech in particular?

I apologize. I missed the first part of that comment because one of my personal assistants started to talk to me.

Sure, Bracken. So how should we think about the new gaming platforms, Sony and Xbox, and that enabling the gaming industry in general and Logitech in particular to generate growth this year on top of the pandemic-led sales and gaming?

Yeah, I think the new gaming platforms from those two plus other companies are all drivers of long-term growth in gaming. And we're excited about cloud-based gaming in general. And those two platforms, if you look at our Astro business, it's done really well this year. And we expect it to continue to do really, really well. This has been a banner, an amazing period for the new consoles. And I think the new consoles are starting to spill over into PC gaming and there's an interaction between them. And we're excited about it. I think the gaming business has never been more exciting. And I don't see how that will let up.

Excellent. And then my second question is, can you give us your current thoughts on the long-term opportunity for Logitech in virtual reality, especially in gaming?

Yeah. So we've been working in virtual reality now for about four or five years. Four years, I think. We've had a dedicated team on it, located in a couple of different places in the world. Our goal there is really to try to be in the... In the early stage of when as as augmented reality becomes more accessible for productivity, creativity and gaming and but but also in virtual reality, you know, there is obviously gonna be virtual reality playing gaming. We've got a couple of things we can't talk about right now, but I think as that continues to grow, we're going to stay in the mix. We've got a product out now that is not a gaming product. It's called Ink Edition. It's a stylus that you can draw and create in three dimensions. We've got a couple of large companies using that to design things. It's not a big product for us, but it's another opportunity for us to learn. I love the team we have on this. I hope they're listening. We've got super sophisticated people working on this, both hardware and software. And it's an exciting future. Maybe another call, we'll talk about where the future will be one day in offices and homes and how virtual reality and even more augmented reality will probably be played there. And we think we can really play a big role, a bigger role there. So it's exciting.

Great. Thanks.

Thank you.

Our next question is coming from Andreas from ZKB.

Yes. Hello. Hi, Andreas. Hi. First question, can you give a bit more color into the investments into IT and customer care infrastructure, which brought up also the G&A line? What is that exactly?

Nate, you want to take that one?

Yeah, sure. You know, obviously just as the business has grown, I mean, our needs to support our customers have grown as well. And so we've just added scale and capacity into call centers and, you know, more enterprise-oriented support to support some of the VC growth that we've had. So those types of areas. And on the IT side, some of its projects that we had planned maybe over a longer term, Andreas, that, you know, we simply have had to pull forward, you know, As some of the scale of the company that we had planned for has pulled forward, we've had to increase the scale of some of the IT investments that we have to support that growth. There's also some investments in G&A, as I mentioned in my prepared remarks, that I expect will wind down by the end of this year. So I'm not expecting this level of GNA to be our new run rate. But it is one area where we've put some investment into it, and I think very appropriately, you know, and that will remain. So a portion of what you saw in GNA is variable, more probably for this year, and certainly a portion of it is more fixed, still variable over the longer term, you know, if volumes do not sustain at these levels. But, you know, we think it's certainly appropriate given where we're at right now. And by the way, you still see G&A below 2% of sales. So, you know, I don't think it's something that you should have real concern over.

Okay, cool. When do you think you will see a normalization in the supply chain to be able to bring it down these logistics costs? I mean, it's currently probably still high, but what needs to be in place to bring that down, these logistics costs?

Yeah, it's true that our logistics and supply chains are basically our air freight and express boat have been super high. I think it'll start to come down a little bit this quarter. I don't know how you feel, Nate, but I think maybe a little bit. And as we go into next year, we expect it to be more normalized.

Yeah, I think that's true. I think I'll also say, though, that, you know, uh, expedited, uh, freight is something that is a good option to have. And, um, especially as you start to address more business users, um, and, and large deployments, uh, that may continue to be, uh, something that we want to utilize. So, um, I agree with Bracken. I think it will come down as supply catches up again in some of these categories where we've been chasing all year. Um, but I also would say that it's, it's an option that is available to us if we want to, um, just kind of manage potential mismatches in the future between demand, supply, mix, volumes, some of these large deals, things like that.

Thank you. Good luck.

Thank you. Our next question is from Michael from Vonto Bell.

Yeah, thank you. Hi, everybody. Two questions actually from my side. First of all, in the use of cash, you already talked about your cash allocation strategy and you talked about organic opportunities. My question was here, should we expect you to see R&D step up more materially going forward? And where would the priorities be? in R&D. And along the same lines, your CapEx plans last quarter, I think you announced an increase in your CapEx projections. Question would be here if that guidance is still unchanged and where are you expecting to invest CapEx going forward? And then I have a follow-up.

I'll jump in there, Nick. Yeah, we are increasing our investments in R&D and we'll keep increasing our investments. In terms of priorities, I wouldn't share too much for competitive reasons, but we're focused strongly on four broad areas and you can bet that they all are potentially hungry for investment that we should make and we will make. So we're going to really keep investing. Engineering has been the lifeblood of this company long term. Design has unlocked the power of engineering. It's really always been about we have great engineering and we're going to keep investing there. On the CapEx side, it's been an unusual year for CapEx because we've invested a lot more capacity than normal. It's still relatively low. I mean, i think we're we're at the very low end of what most companies our size would be doing from a capex standpoint i don't know whether we'll need to spend that much capex in the future you want anything nate um no i think i think that's right maybe just to

Be very precise. I mean, we're guiding for 75 to 80 million of CapEx spend this year, Michael, which, again, as Greg said, is not a significant amount when you look at the cash we're generating. And I think the return on it is very strong in terms of R&D. You know, just to put a little more color on that year to date, R&D expenses up 21 percent. So I think we've been investing in it. consistently this year again because that's more long-term oriented that does that is some more fixed cost but again it's fixed costs addressing long-term growth opportunities so Very consistent with that. The other thing within R&D, and we mentioned this in the script, if you heard, was shifting resources between product categories. And so while it's 21 percent for the year growth or 23 percent in the quarter growth, you know, within that we're reallocating resources. So some of the priorities that Bracken mentioned are seeing growth well in excess of the 20 percent growth that you see at the company level because of that reallocation internally.

Okay, great. And then my second question would be in terms of your sustainability initiatives, two questions. What are your priorities going forward in fiscal 21 in terms of sustainability? And where do you think you're making the best progress currently?

We're really excited about what we're doing in sustainability. We've gone from... We just got named the Dow Jones Industrial Europe Sustainability Index. We signed up for the Paris Accord and we're on track to deliver our first year of commitment against that. It's the one and a half degree rise, trying to keep the globe to the one and a half degree rise in temperature. We announced this last quarter that we're gonna be 50% of our mice and keyboards, which is a lot of volume, will contain consumer recyclable, recycled plastic and by the time we get to we haven't announced that publicly but you know over the next year or two after that we'll get to you know 60 and then 70 and higher we've we announced that we're going to be carbon labeling and we've got the seven first seven kind of product platforms done carbon labeling every single product in our portfolio and trying to encourage all of our competitors and everyone in tech and beyond to do the same thing so that we can try to get uh be part of the world that moves to making labeling carbon a little bit like labeling calories. So once it's on the package, some consumers will look at it and it'll put pressure on all of us to try to bring that down. We've moved to renewable energy everywhere we can so far and we're aggressively going after that. We're investing in carbon offsets to offset whatever we can't do so far. And we're making big progress there. So we have a big program going against sustainability. It's absolutely a value to the company and we're not going to let up.

Perfect. Thanks a lot. Keep up the pace. Thank you. Thanks, Michael.

Thank you, Michael. Our last question is from Reto from Research Partners.

Hi, Reto.

Yes, hello. Thank you for taking my question. I actually have two of them. First one, you already touched on it before, but I was wondering how much of your revenues were sold through your B2B channel in the quarter versus a B2C? And how much is your addressable market going to change or increase as a result of your investments into the B2B channel? Is it simply going to double or is that wrong thinking? And then my Second or almost third question would be, how did the education order from Japan impact your growth margin in the quarter? Because I believe to remember that margins in education are below the group's average growth margin, but maybe I'm wrong there.

Yeah, that's true. By the way, in Japan, it is true that education is below our group margin. On the other hand, it's the lower OPEX so far by a long shot. So it's pretty efficient and profitable. I would say in terms of B2B as a share of the quarter, we don't really break that out. And your other question around addressable market size increases, I think this is a good moment where I can invite you to our Analyst Investor Day, which will be coming up quite soon. We would love to have you join. And I think some of those questions we'll be able to answer it a little more clearly and rather than try to hustle through it at the end of an earnings call, I think it deserves more discussion than that. Yeah, I do think you're right that our overall addressable market, our TAM this year has dramatically increased and we're excited about that. And the real question is how do we unlock the power of that? And I think that's the, I'm advertising for our AID, which will be sometime in the next several, you know, not too far away.

All right. Thank you.

Thank you.

Thank you, everyone. And that concludes our Q&A session. I will turn it over to Bracken for his closing remarks.

You know, it was obviously a super strong quarter. It's been a very strong year. But don't confuse that as temporary. I mean, this is a long-term thing for us. We're a completely committed world. You know, most of the people in the company now are working on next year and the year after that, not this year. So it's been extremely exciting. You guys have been really great, challenging and collaborative investors and analyst partners for us all year long. We appreciate it. Keep challenging us. I hope you will all come. We haven't announced a date here for our analyst investor day, but we will shortly. And I hope all of you will join. We're excited about this year and we're really excited about next year. Thanks a lot. See you next quarter.