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.