Logitech International S.A.

Good morning, everyone, and thank you, everyone, for joining Logitech's Q2 fiscal 2022 earnings call. This call includes forelooking statements, including with respect to future operating results and business outlook under the safe harbor of the private securities litigation reform act of 1995. We're making these statements based on our views only as of today. Our actual results could differ materially due to a number of risks and uncertainties, including those mentioned in our earnings materials and SEC filings, including our most recent annual and quarterly reports. We undertake no obligation to update or revise any of these statements. We will also discuss non-GAAP financial results. You will find a reconciliation between non-GAAP and GAAP results and information about the use of non-GAAP measures in our press release and in our sec filings these materials are well as well as our prepared remarks slides and a webcast of this call are available on the ir page of our website we encourage you to review these materials carefully unless noted otherwise comparisons between periods are year over year and a constant currency in sales or net sales This call is being recorded and will be available for replay on our website. And with that, I'll turn the call over to Bracken.

Thank you, Nicole, and thank you for that gripping and surprising summary of safe harbor provisions. This month, we celebrated our 40th anniversary here at Logitech. We've grown from a Swiss software startup that found a niche in computer mice to a design company with leading market share across many categories. And we're growing share in the majority of our key product categories, including the original category of the mouse. I mentioned our 40th anniversary, not really to look back, but as a prelude to looking into the future. Just as the PC growth trend supported our 30 years around the PC growth period, a collection of long-term trends will support our strong growth for many years ahead. Gaming will grow to become the biggest collection of sports in the world one day for both a participant and a spectator standpoint. Video collaboration will almost totally replace audio only collaboration. Almost everyone will create content as well as watch each other's content. And the mouse and the keyboard, those original categories, will keep growing as more people work, create, and learn at a desk or a table, where they can move away from that tiny screen on the phone and be comfortable for hours at a time. I love Logitech's position in this landscape of long-term market trends. Gaming, video collaboration, streamers and creators, and our workspace product categories. We are ideally positioned to grow in all of them. That's the long-term outlook, but let's look more near term. Most organizations are settling into new ways of working, hybrid, and the evidence is overwhelming that employees prefer working from home two to three days a week. Many employers have embraced this reality and a large share of the rest have at least accepted it. Companies across all industries are adjusting their offices, planning redesigns, or relocating to accommodate the shift. Many companies, including Logitech, are reshaping offices to support hybrid work practices and enable more places for meeting, for collaborating, and for creating together, while still continuing to have dedicated workspaces for those who prefer and need it. The days of the simple, I work in the office and then I go home, are over for so many of us. It used to be your workplace was the office. We've entered the next era where your workplace is your workspace, wherever that is. Traditional office desk, hot desk, home office, kitchen table, conference room, your child's room, or a coffee shop. The variety of workspaces is growing. And in that world, with people distributed across so many places, the video-enabled spaces in the office must grow too. conference rooms, huddle rooms, collaboration spaces, all will need video and must continue to grow. What an amazing opportunity this is for Logitech. We offer solutions for all of those, wherever your workspace is, and most of us will need more than one. When we're not working, we want to create, connect, and just play. Humanity has always had the need to create new things and connect to each other. Now most people create in the digital world. Digital creation has been growing strongly for many years, and not surprisingly, it surged during the pandemic. But that surge continues. The total number of hours watched across all streaming platforms, including Twitch, YouTube, and Facebook, increased 20% year-on-year this past quarter, from 7.5 billion hours to almost 9 billion hours in Q2 of 2021. That's 20% on top of the incredible growth we already saw last year. Those trends in mind, let's examine our performance in Q2 of this year. Last year, we reported tremendous Q2 growth of 73%, accelerated by the pandemic. On top of that substantially larger base, we not only sustained that growth, we actually grew again this quarter. We delivered record sales of double-digit sell-through across all regions, and grew market share across almost all of our revenue. I believe we're innovating better than any time in the 40-year history of the company, too. Design, engineering, and sustainability. Our PC peripherals categories remain very strong, with double-digit sales growth in pointing devices and PC keyboards and combos. Here's one example, or two examples, of how our design-centered approach is so powerful. the one hand this quarter we launched mx keys mini and mini for the mac these keyboards these keyboards uh were designed as all of the input requests the creative community the new keyboard offers the best features of popular standard size mx keys which is a larger keyboard that's sitting in front of me but in a minimal wireless keyboard i'm using it right now and it's absolutely awesome it's right here it will likely skew 30 or 35 and older On the other hand, just go look at our website and type in later, ideally, so you keep listening to me for now. Type in pop keys in the search bar. You'll see a line of mechanical keyboards with replaceable emoji keys with very colorful. That's just launching in China. It's so fun and so cool. It's perfect for Gen Z. It will skew strongly under 30 and female. Our gaming category had another strong quarter with market share growth in PC console and simulation gaming, all of them. Underlying sell-through grew double digits in this category as well. Our tablet category is more than double the size it was two years ago. Our portfolio is stronger than ever. education and online learning are a strong and growing opportunity not just for k-12 but as universities democratize learning with online courses and the adoption of numerous learning platforms grows in popularity remote teaching has has become easier and there's much more we can do to help educators to lead their classes are both in person and when students are at home As organizations worldwide continue to reestablish ways of working remote, on-premise, and hybrid, people are indeed using more and more video. According to the market research firm Frost and Sullivan, out of the nearly 90 million meeting rooms worldwide, only about 8% are video-enabled. That's 1 11th of the total rooms out there. We're working to change that and help our customers evolve with the new ways of working because it's simply a must to have videos in the rooms of the future. The lack of video access creates a terrible experience for remote attendees who've experienced the benefits of face-to-face video interaction over the last year. Every IT decision maker is thinking about this. Thoughtful reformatting of the way companies work as they go hybrid is a watershed moment for many of these departments. Because for the first time, the structure of offices and the technology in the rooms, the primary role of these departments will be a driver of the cultural evolution of every company. So it isn't surprising company IT departments are making careful, broadly aligned, and systematic steps here. We're investing in building out solutions for these IT leaders and investing deeply in this area. Next, I want to touch on the impact of the well-discussed supply chain industry challenges that have been headline news globally. While we've managed these global supply chain challenges well throughout the pandemic, Logitech is not immune to their effects. We continue to proactively manage our supply chain, but expect ongoing headwinds from higher logistics costs and prolonged delays. and challenges with component availability. We do believe our long-term supplier relationships as well as our wholly owned production facility should help us remain competitive in the current unprecedented supply chain environment. And before I close and hand it over to Nate, let me give a quick sustainability update. We recently raised our climate goals. We announced that we will be carbon neutral this year and have plans to be climate positive in 10 years. And at that point, we'll be taking more carbon out of the environment than we generate. These are industry leading commitments. We're addressing our carbon footprint across the entire value chain, designing our products for sustainability, using renewable energy at 92% right now in our facilities, and supporting third-party certified carbon removal projects. We're excited about the long-term trends that are driving growth in our business. These trends drove our business pre-pandemic, accelerated during the pandemic, and will be a driving force for years to come. Our long-term strategy remains unchanged. The current market trends play to our strengths, and we are doubling down to become even stronger. Now let me turn the call over to Nate for further comments on our business performance this quarter. Nate? All right.

Thanks, Bracken. We delivered a solid quarter and continue to execute well on a number of fronts. In Q2 and for the first half of the year, We grew the top line, maintained strong gross margins, gained share in most categories and returned record levels of cash to shareholders. We are confirming our full year outlook despite unprecedented supply chain industry challenges. Turning to the Q2 results, our total company top line grew 2% in constant currency with strong momentum in our pointing devices and keyboard categories, both growing double digits. Webcam sales decreased this quarter by 9% after more than tripling last year. We gained share in all three categories, and each has good long-term growth potential driven by hybrid work and greater category awareness. Q2 video collaboration sales declined 4%, but sell-through grew double digits in all regions. Net sales for Americas and Asia Pacific grew year over year, and while EMEA net sales declined versus the prior year, they grew sequentially, and EMEA sales more than doubled versus two years ago. Gaming grew 9% against 84% growth last year and delivered impressive share gains across PC gaming, simulation, and console headsets. It's been an excellent first half for gaming, enabled by a very strong lineup of innovative products, solid marketing execution, and our position as the leader in the fastest growing categories like wireless mice and keyboards. Sales in our tablet accessories category declined 3% in Q2, but excluding Japan, where we had a large education order in Q2 through Q4 last year, sales grew more than 30%. Importantly, our tablet category is still more than double the size it was two years ago, and our portfolio is stronger than ever, as demonstrated by six points of share gain in the quarter. Our music categories declined as expected in Q2, down 14% overall, including mobile speakers down 11%. Q2 non-gap gross margin remains strong at 42%, although down 370 basis points versus last year's elevated levels. We anticipated that gross margins would be down from last year. And as we look out to the rest of this fiscal year, I expect gross margins to be lower than current levels for three primary reasons. First, we expect our promotional spending will continue to increase, although still remain below historical levels. Second, we will continue to invest in retail point of sales marketing, which was significantly curtailed last year due to store closures and broad-based supply shortages. And lastly, while we continue to manage our supply chain, we expect to be impacted by industry-wide component and freight cost increases. Turning to expenses, we executed our plan to strategically invest to grow our business over the long term. Our non-GAAP operating expenses increased 52% in Q2 to $337 million. The increase was largely driven by investment in marketing, sales coverage, and product development. As a percentage of sales, OpEx was higher than Q2 of last year, but still down versus Q2 of two years ago, highlighting our significantly increased scale as a company. Rounding out the P&L, our Q2 operating profit decreased 40% to $211 million, and operating margins were 16.2% of sales, down about 12 percentage points versus the prior year, and up about four points versus two years ago. Cash flow from operations was negative 63 million in Q2. We returned significant cash to shareholders with $120 million of share repurchases, paid an annual dividend of $159 million, and ended the quarter with a cash balance of approximately $1.1 billion. At the end of September, our inventory was 828 million, up 433 million from last year, while our inventory turns were 3.7 times versus an unusually high seven times in Q2 a year ago. Historically, our Q2 cash flows tend to be positive, but they were negative this quarter as inventory turns were slower due to longer transit times and our continued strategic use of the balance sheet to secure long lead time components for key product categories. I expect to see positive cash flow generation in the second half, but given that logistics bottlenecks and supply dynamics will remain challenging for at least the rest of this year, our cash from operations will be lower than our initial outlook. This dynamic should be temporary, and as lead times and transit times improve, cash flow will rebound due to reduced working capital. Our Q2 cash conversion cycle was 69 days, up from an exceptionally low 19 days last year, and up from 43 days two years ago. The primary driver of the change in our cash conversion cycle is higher inventory days, which are up about 25 days versus pre-COVID Q2 levels. Looking ahead, we are tracking to our plan of sustaining the increased revenue scale from last year and investing to build a larger, faster-growing, and more profitable company for the long term. We are confirming our fiscal year 22 outlook of flat sales growth in constant currency, plus or minus 5%, and maintaining our fiscal year 22 non-GAAP operating income outlook of $800 million to $850 million. We are well positioned in the market, and this outlook reflects our focus on driving long-term growth.