Logitech International S.A.

Great. I'm going to start. Thank you, everyone, for joining Logitech's Q3 fiscal 22 earnings call. This call includes four looking 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. We undertake no obligation to update or revise any of of these statements. We will also discuss non-GAAP financial results. You will find a reconciliation between non-GAAP to GAAP results and information about our use of non-GAAP measures in our press release and in our SEC filings. These materials, as well as our prepared remarks and slides accompanying these, are all available on the IRO page of our website. Nicole LiBaire, We encourage you to review these materials carefully unless otherwise noted comparisons between periods or year over year and in constant currency and sales or net sales. Nicole LiBaire, This call has been recorded and will be available for replay on our website and with that i'll turn the call over to bracken.

Bracken Mosby, Thank you so much, Nicole, I am excited about this quarter strong performance and our ability to raise our full year outlook on top of last year. Bracken Mosby, Last year's exceptional revenue growth. We have a strong foundation heading into next fiscal year. We also continue to gain share in the majority of our categories this quarter, reinforcing that we've got an innovation engine that is really working well. The company's performance reflects the broad strength of our capabilities, especially that innovation engine, but also reflects our diverse portfolio and leading positions in growing markets. Our focus on operational execution continues to help us navigate the industry-wide supply chain challenges, And our investments in design and go-to-market are setting us up for the next chapters of growth in the coming years. I've always said that picking good markets is a key to success, so I want to speak just a moment about the market trends. We've always focused on identifying fast-growing categories where we can develop a leadership position leveraging our set of powerful capabilities. Today and over the last few years, Logitech has focused our design-centered innovation engine on some of the world's most exciting secular trends. Video everywhere, gaming as a social phenomenon, hybrid work, and the explosion of creators on all digital platforms. We are well-positioned with each of these macro trends to keep growing strongly as they grow and evolve over the next decade. And I said up front, We have an innovation engine that's mature and continues to strengthen. Our design-led innovation capability is powerful, delivering diverse product offerings and a robust pipeline for the future. We've been methodical. We've segmented our markets. We've understood customer needs. And we've reorganized our teams to create new products. And more recently, we've increased our marketing efforts to drive preference for our brand. With this consistent approach, we've established leadership positions in most of our key categories. and as we have for years, continued to grow market share. Now let me briefly step into those categories. In creativity and productivity, we had our biggest quarter ever, driven by another strong performance in mice and keyboards. Hybrid work is driving and even accelerating demand for these products. We're the market leaders in these categories, and we're innovating as a leader should. Developing upgrade opportunities that offer more value and have higher price points Unlocking new dimensions of advantage that cater to today's consumers, like sustainability and lifestyle, and always staying ahead of what's happening in the category. I'm so excited about the reception of our newest offerings. From the latest MX portfolio to the sexy Pop Keys lineup, there's really something for everyone. Yet only a small percentage of people have the optimal workplace setup. Let me repeat that. Few people have the optimal products set at their desks. In fact, even our market penetration, our oldest category, mice, is still an opportunity. Imagine how many don't have ergonomic mice or keyboards but actually need them. How many people don't have a cool keyboard and don't yet even know that PopKeys exists? And how many of even those of you on this call Don't yet have the amazing MX Master and MX Keys on your home desk and office and probably would love it. And we continue to expand our product offerings to address underserved customer segments. And like the recently announced M650 wireless mouse that has a left-handed mouse option. We continue our strong momentum in gaming, even after having exceptional revenue growth last year. We've been telling you that gaming is no longer a fringe hobby for a small group of customers for a long time. According to Newzoo, there are now 3 billion gamers worldwide. And whether you game for fun or competitively, our peripherals improve your experience. As the number of gamers grows, we see more and more opportunities for customer segmentation and product innovation to meet a broader set of market needs. Our gaming motto is that life is more fun when you play. And we believe this applies across the gaming community, from pro to social gamers. As one example of our continued innovation, our recently launched G435 gaming headset was certainly designed with competitive gamers in mind. But it's also good for any gamer who just wants to connect with other players. It's extremely lightweight with an ultra-fast connection, and it's made of recycled plastic. In video collaboration, we're starting to see some increased activity in our office reopenings and hybrid work planning. Video collaboration sales improved this quarter, nearly equaling last year's high levels when sales more than tripled. We delivered 24% quarter-over-quarter growth, and conference cams grew double digits year-over-year. Video has become the de facto tool for replacing in-person meetings and audio-only conference calls. Smaller conference rooms are more vital than ever, but in fact, all meeting spaces will need video. Our mission is to develop video collaboration tools that can make remote participants feel like they can participate equally or even better than those in the room. This year has been another year when operations has been tested for many companies globally. Our operation team continued their strong execution in the face of ongoing industry-wide supply chain challenges. As we mentioned last quarter, we continue to be impacted by higher logistics costs and prolonged delays and challenges with component availability. However, our active supply chain management, long-term supplier relationships, and our wholly owned production facility continue to help us remain competitive. With an eye on the future, it's really important for us that we continue our focus on sustainability at the heart of our business. We're very pleased that we were recognized for the second consecutive year for leadership on the Dow Jones Sustainability Europe Index, or DJSI. We were ranked number 12 worldwide in the computer peripherals and office electronics industry for ESG. We're taking strong action, including going carbon neutral, which we achieved in 2021, and setting us on a direct path to be climate positive beyond 2030 by capturing more carbon than we create. We are carbon labeling our products with the amount of carbon created by their production, distribution, use, and end of life. The so-called scopes one, two, and three. So we're including everything. In addition, we're moving to recycled plastics throughout our products, which are now in 65% of our mice and keyboard product lines. Now let me turn the call over to Nate for further comments on our performance this quarter. Nate, good morning.

Hey, good morning, Bracken. Thank you. We delivered solid financial results in Q3 with record sales and key categories as we navigated a challenging supply chain environment. As Bracken mentioned, we gained share in the majority of our categories while investing for long-term growth. Our total company top line declined 2% in constant currency with impressive double-digit growth in keyboards and combos, strong single-digit growth in pointing devices and gaming, and double-digit sequential growth in video collaboration. While I'm pleased with our top line results and we had supply to fulfill most of the demand in the quarter, we had insufficient stock for some products, including keyboards and gaming wheels. Industry-wide supply availability, logistics disruptions, and cost increases negatively impacted our Q3 top line growth by about three to four points and gross margins by approximately two percentage points. Despite these headwinds, we are increasing our sales and profit outlook and now project to grow net sales for the full fiscal year. I'll cover our outlook in more detail later in the call. In our creativity and productivity categories, pointing devices grew 8% and keyboards and combos grew 29%, driven by continued demand from hybrid work trends. We also saw strong growth in our B2B channel and high-end MX product lines. Although webcam sales decreased by 12%, they are still triple where they were two years ago, and we grew market share by more than 10 points over the last three months. Q3 video collaboration sales declined 1% after growing more than 200% in Q3 last year, and quarter-over-quarter sales increased 24%. Similar to the first half of the year, conference room cameras and systems led the category performance, growing double digits year-over-year. Gaming grew 8% off of our 73% growth last year, and with better supply in gaming wheels, the category would have grown double digits this quarter. It's been another excellent quarter for gaming with strong growth and share gains primarily enabled by an innovative product lineup and solid marketing execution. The tablet accessories category declined 37% in Q3. However, excluding Japan where we had a large education order in the same period last year, tablet accessory sales grew 21%. Our tablet category is still more than double the size it was two years ago and our strong product portfolio helped drive five points of share gain in the quarter. Our music categories declined as expected in Q3, down 29%, including mobile speakers down 22%. We regularly review our portfolio and redirect resources to new opportunities. And along those lines, we've made a decision to cease future product launches under the Jaybird brand. We remain committed, however, to developing wireless audio products such as Logitech's own wireless and UE fits. Q3 non-GAAP gross margin was 40.6%, down as anticipated from last year's elevated levels and remained within our target range. Higher freight costs reduced gross margin about two points year over year and quarter over quarter. We expect those headwinds to remain factors in Q4, and they are included in our profit outlook. Turning to expenses in the quarter, we executed our plan to strategically invest to grow our business over the long term. Our Q3 non-GAAP operating expenses increased 30% to $361 million. The increase was largely driven by investment in marketing, sales coverage, and product development. Rounding out the P&L, our Q3 operating profit decreased 37% to $302 million, and operating margins were 18.5% down about 10 points. Compared to two years ago, however, profits nearly doubled and margins are up 1.7 points. Q3 cash flow from operations was positive 377 million. We spent $116 million on share repurchases and ended the quarter with a cash balance of approximately $1.4 billion. Our cash balance is flat with Q3 last year, even as we have returned $450 million to shareholders through dividends and share repurchases year to date, more than double the amount of the first three quarters last year. Our Q3 cash conversion cycle was 56 days, up from an exceptionally low 15 days last year. The primary driver of the change in our cash conversion cycle is higher inventory days, impacted by industry-wide supply chain disruptions, such as port delays, as well as demand forecast fluctuations for some of our products. We also continue to leverage our balance sheet to strategically purchase hard to find and long lead time components to assure supply availability and maintain competitive advantage. Looking ahead, we are increasing our fiscal 22 constant currency sales outlook to growth of 2% to 5%, up from our prior outlook of flat sales growth in constant currency, plus or minus 5%. We are also increasing our non-GAAP operating profit outlook to $850 to $900 million, up from our prior outlook of $800 to $850 million. And with that, we can open the line for your questions.

The first question can come from Asya from Citi. Asya Merchant.

Hey, good morning, gentlemen. And Nicole, congratulations on a well-executed quarter. Some of the questions that we've heard from investors, you know, as you guys report these segments and look across your portfolio, what gives you like some confidence about, you know, future years outlook and the fact that this wasn't just, you know, some ASP benefit that's benefiting, like, for example, your creativity and productivity portfolio. And then I have a question on gross margins as well.

At the end of the day, across all of our categories, these are not new trends for us, as we've talked about many times. We mentioned in the script again, it's been very long-term growth. The secular trends underneath this are very, very strong. I don't see any reason why any of these trends won't continue. In mice and keyboards, I said this in the opening of the call, it just continues to blow my mind. That if I can guarantee you that if we if we took pictures, everybody, everybody's workspace on this call and we we didn't have to analyze them very carefully. We took a quick glance. I'll bet there's maybe maybe 20 percent of people here have an optimal setup and you follow us. So so you know what we do. So there's just opportunity across the board as you.

Okay. And then on gross margins, Nate, you talked about the impact of higher freight costs that were impacting the second half margins. Are we to assume that 2% impact continues in the fourth quarter? And when do you see, do you see any light at the end of the tunnel for these higher freight costs?

Yeah, I mean, yes, I think in Q4, I expect similar supply cost challenges, supply chain cost challenges. And in terms of the timing of when those will release, it's a great question. I think there's really two elements to this, Asya. There's predictability and there's also cost. And the predictability in the supply chain, really industry-wide, has not been to normal levels. So you're getting more delays as things come in, both on ocean and on air. But that lower predictability is causing us to use more air freight, more expedited supply measure channels to try to improve the predictability and to make sure that things are in stock. You can see the demand has remained pretty resilient in a lot of these categories. And so we've increased the use of air freight to try to overcome some of those predictability challenges that we see on the ocean. So that's one reason why the costs are higher and why I think they'll remain higher in Q4. And the other reason, of course, is industry, right? Just the rates being higher. They're up three to four times year over year, both on ocean and air. You know, I think that we could see some relief on both predictability and cost in our next fiscal year, but probably not till the back half. But we'll keep a close eye on that and update you as we go. But I don't see any short term relief. release on those pressures. And we're operating under that assumption that these are going to be with us for a few quarters still.

Okay. And will that be offset? I mean, I think there were the supply chains and then you guys were backing on to your media spend that benefited you in fiscal 21. So is the delta there just incremental media spend on a year-on-year basis?

You're talking about year-over-year gross margins?

Yes.

Yeah, the two biggest factors year over year would be the return to some level of promotion. We're still not back to the levels that we were two years ago, but some increase in promotion as we've been talking about doing, and then also the higher logistics costs. Those would be the two biggest drivers year over year.

Okay, thank you.

Thank you. The next question comes from Alex Duvall.

Yes, hi everyone. Thank you so much for the question. Firstly, I just wanted to clarify some investors have been asking, obviously you beat consensus today by around 70 million on EBIT, but then implicitly you've only upgraded your full year guide by around 50 million. So people just wanting to understand, is that just prudence given some of these moving parts you've just been talking about, or is there any sort of change in fundamentals? And then secondly, a more philosophical question. Obviously, we're in this period of very hard year on year comps. But as we start to move forward a few quarters, those comps will ease very materially and we'll start to see comps in the single digits. You've obviously articulated a model of eight to 10 percent constant FX growth in the longer term. So should we be expecting you to hit those kind of growth rates at that point in time? How should we be thinking about that transition as you get out of this period of very challenging comps? Many thanks.

Let me jump in on the second one, and then I'm going to hand the first one back to you, Nate. On the second question, which is a good one, I invite you very cordially, all of you, to our Analyst Investor Day that's coming up on March 3rd. We'll be talking about exactly that topic, and we'll be thrilled to have you there. And, Nate, you want to talk a little bit about why we set the guidance where we did and kind of our general feeling about it?

Yeah, it's a good catch there, Alex. I mean, I think sequentially, if I look at the guidance, really the top line sort of indicates at the high end something a little bit better than typical seasonality, and at the low end something a little bit worse than typical seasonality. And then from a profit standpoint, as I just mentioned to Asya's question, I think similar headwinds on gross margin pressure. I think currency could be a little bit more of a headwind sequentially than what we had here with interest rate volatility and, of course, the volatility in the market overall right now. So I think there's some potential for incremental cost pressure impacting margins. And of course, as you get down to the lower end on the revenue guide, you've got some additional unfavorable operating leverage in the model as well. And so I took that into account. I just think we're in a period right now, our business, like most, operates its best in a really predictable environment. We can get our supply chain in a predictable state. We can have great matching of supply and demand. I just don't think we're quite there yet across the industry and across all the markets, but it's really encouraging to see some of the categories continuing to grow despite the tough comps. So I feel great about that. And I think the underlying demand trends over the long term look really solid.

Many thanks. It's very helpful. Thank you, Alex.

The next question comes from Luke Capital, Ananda.

Hey, Ananda. Hey, yeah, thanks, Nicole. Yeah, good morning, guys, and happy new year. And Bracken, to your point, you guys look great. You look super crisp, and... I'm doing this on an iPad and I get to compare and contrast because I'm staring at me and I'm staring at you. And I think I need to go out and get a new webcam.

Oh, actually you might need the new, uh, light or glow light that we just launched.

So that was that what you do. So like right behind you, you guys have this pro lighting situation going on. No, no, no.

It's a very beautiful, looks like a webcam, but it's a light. We just launched it. So it's available.

I'm going to say, I'm actually going to take a look at this. Thanks. Thanks for the, the idea. Thanks for the, uh, for the heads up on that. Edwin Lindo, I guess you just so a couple things if I could so with with the strong revenue performance this quarter, you know anything any any structural context that might be useful for us or interesting for us to be aware of I guess i'll just start there and have a couple quick follow ups.

I'll jump in on that and you can add anything you'd like. I think the most important structural comment I'd make is, this is playing out about the way we thought it would. We're really excited that at the end of the day, the growth in number of workspaces, the need for conference rooms with video, the incredible long-term growth of gaming and the equally or maybe more incredible long-term growth of streaming and those structural secular trend moves are happening. And as we go through the pandemic, they've continued to happen. And wherever you think we are in the pandemic, now they continue to happen. So it's exciting. I think it just validates our long-term thesis that these are great long-term trends to ride. And by the way, we're not going to stop there. We're going to keep launching new categories and getting behind other new trends over time.

Well, that was actually one of my follow-ups. So maybe we'll just go there. Are there new categories that you guys are getting excited about are maybe already excited about

Yeah, there are. I mean, I think, you know, just as an example, we're always working on new categories. You know, this concept of seeds, which we haven't talked about in the last few quarters because there's been so much demand on our existing products. You know, we're always working on them. You know, a lot of them don't make it out the door and some make it out the door in a very quiet way. We quietly pack them back away. So when one gets some publicity, it means we're really excited about them. And I mentioned the Lighter Go Lights as an example. I mean, I think being in the lighting business makes a lot of sense for us. It is super, this one, for example, is a super easy product to use. So, yeah, I'm excited about some new categories that will be coming over time for sure.

Okay, awesome. And I guess just last one for me, I'll see you before. Are you seeing any legitimate impact yet from new competitors? You know, we have...

Yeah, we've had new competitors serially or continuously, you know, as long as I've been here. You know, I think we had in the webcam category, we had a lot of new competitors and a lot of them have kind of receded back out again, or at least they've reduced their efforts there. Others will stay. But, you know, Nate always says the same thing that I've always felt, which is, you know, Great competition comes with great markets and you know we're in great markets, so I would say it really suggests we pick the right places and we love our innovation engine. And we built a commercial engine now we can we can deliver to both enterprises and consumers so we're super optimistic, but for the future and and we feel are very competitive.

You know, and I'm probably going to miss one, but off the top of my head, I think specifically of, you know, Microsoft and HP, and those are deep pocket folks. And they're new for them, so they're probably not quite as committed as you guys are. You know, it's a new category for those guys in a strategic sense. But they do have, you know, they do have deep pockets. And so I think of those guys. But, I mean, I bracket that to say, like, you guys don't seem like you're really seeing material impact yet. And not necessarily to the business, but not really seeing them in the marketplace kind of structurally in the way that you guys operate.

I think the competitors you mentioned and other competitors have been in the market and they're going to be in the market. We know they're going to keep investing and we expect it. And so we're going to keep investing and keep driving and keep growing. All I can say is we're growing market share across all our key categories, vast majority. So I feel good about the innovation engine and we've got good stuff coming.

Awesome. Thank you, guys.

Thank you, Hernando. Thanks a lot.

Thank you. Next question is from JP Morgan, Paul Chung. Paul?

Hey, Paul. Hey, Paul. Hey, good morning, guys. Morning. You know, nice quarter. So first up, on VC, you know, you called out strong video, camera, and systems. Man, anything you want to call out by region or, you know, particular vertical? And, you know, how have initial trends been in the kind of first month of the year? as you start to see more people return to the office?

You know, I would say in terms of within the video conference segment, you know, webcams have declined, but boy, they declined off an incredibly high base. They're really, they're really high. Conference camps are growing double digit. That's a great story. You know, and I think that's, even though I would say probably most people in this call would agree, we're only in the beginning of the big thaw of the office, you know, as it starts to,

uh warm up again in there and people actually do start to go back i think the the implementation plans for video conferencing are going to going to grow a lot more so i think i feel really good about that you want to add anything nate um yeah i mean i think regionally america's was you know kind of the strongest of the three regions although amia actually had a much better quarter uh this quarter than it did last quarter paul i think we i think we mentioned last quarter the media was a And then from a product standpoint, as Bracken said, you know, I think it's impressive when you look even at something like web cameras. We're pretty much selling the same number of units as we did a year ago. Some of the mix is a little bit lower. This is more on the PC side than in the business, but we're selling kind of the equivalent number of units as we were a year ago, which is great because that means the install base is growing. and you know creates this future opportunity there so there's still a lot of interest in webcam but last year it was such a hot category and i think uh you know it's it's been a little bit more reasonable this year but i also think that has good potential in the future as offices reopen i think we'll see more video at the desk and i don't think we've quite seen that yet

And I would say, Nate, that we're good at driving mix within categories. And we actually drove really good mix last year, but it wasn't us. It was the fact that we just couldn't make enough. We didn't have supply at the low end. So I think now that we've got, we're going to have a period where we're going to, the mix story will go the other way a little bit on webcams, but then we're set up to see what we can do with the category after that.

Gotcha. And then on competition, you know, given your cash and ability to find Inventory, are you seeing some market share in that respect in VC and I guess across other segments as well? We gained share.

Oh, go ahead, Brian.

Yeah, I was going to say, we continue to gain share in VC. And I think having a great balance sheet is an advantage. So we'll continue to try to make sure that we're well positioned with components going forward. We're not immune to what's happening out there, so we still have some component shortages. But I think generally speaking, we've got a much improved state now. I hope it stays that way.

Yeah, it's hard to know, Paul. I mean, we'll listen, as you will, to what our competitors say about their supply. I mean, the market share indicates that we did pretty well. You know, as I mentioned, there were some categories where we just didn't have enough supply. Gaming wheels has been a challenge for us to get to get back to the levels that we want to be from a stock standpoint. And so I actually think we'll probably lose a little bit of share there just based on availability, kind of like what happened a year ago with web cameras. And then I think we can recover that share with better supply. But we'll listen to what others have to say. I think also, you know, several of the market trends are really playing to our favor. Some strength and kind of the high. If I look at gaming, there's been some strength in the higher price bands, which is interesting. you know, a sweet spot for us. And it's a little bit, been a little bit weaker in the, in the entry price bands where we also play a lot, but you know, the market trend is towards wireless and places where we're strong. And so I think that's been beneficial from a market share standpoint.

Thanks. And last question is, you know, the pace of OpEx is, is on track to be, you know, up pretty strong this year, you know, against a big step up last year. So as we think about the out year, should we assume kind of the pace of OpEx slows or is it

more kind of think about it in terms of you know percentage of sales in that 25 to 26 range thanks yeah i mean i think we won't be increasing opex the same growth rates this year unless revenue grows at those rates i think you know we'll probably see more alignment between revenue and opex in the future paul this was really a year we had to catch up on some investments last year with 74 revenue growth just far ahead of what our ability was to really invest wisely into the business and so taking the opportunity this year to to do that to set ourselves up which we think for some good long-term growth opportunities but i would say out into the future you're going to see opex much more you know at a rate much closer to what you would expect relative to revenue great thanks guys thank you thanks paul thanks paul next question is from ubs your are you on the call

Hi, Jörg.

Yes, hi. Good morning, Breck. Good morning, Nate. Thanks for taking my questions. The first one would be, Breck, on the statement you made at the beginning of the call.

that um logic reorganized teams to drive innovation market prospects what exactly was reorganized um recently well we were constantly returning you know the uh for example in our cnp business we reorganized a few years ago actually around a different segmentation approach and i think that's been super effective uh it's unlocked some openings for us for example in ergonomics and general lifestyle categories i think I think we would partly attribute pop keys and pop mouse, you know, these new kind of lifestyle mice that include, they're mechanical, but they're beautiful and fun, really focused on Gen Z. We partly, you know, that's partly because of the way we've organized now. But we're not going to stop. So, you know, continuing to stay really close to the customer and organize around that has been one of our, I think, strengths. And we've probably got two of our businesses right now that are going to reorganize again as we go into the next year. So we see opportunities. This is a very fluid market. Lots of consumer insight and customer insight on the business side.

All right, I understand, thanks. And the next question would be please on your capacity planning. I mean, this year production site in China and also with your third party suppliers. I mean, what are your plans in terms of capacity expansion for the next one or two years? What are you reserving here to your suppliers? What are you doing in your own production site?

Yeah, let me jump into that, Nate. It's a little bit of a hard question to answer. We have lots of different production sites, and then we have lots of different component suppliers, of course, like everybody. The main focus we've had in our supply chain has really been location. So we've tried to distribute our manufacturing into new places. And so we've moved. We have more production than ever in China, but we have a lot more production than ever out of China. So we have production in Southeast Asia and multiple countries now. And we really set that up for a couple of reasons. One was during the tariff period, but then we've decided to really continue to ramp that up because we want to make sure we're well positioned for whatever could happen down the road. In terms of production planning, the expansion of our ability to produce ourselves or in other people's factories has always been a strength for us. We've been able to ramp up and ramp down pretty quickly and move things in and out of our own factories. So we're going to keep that capability.

thanks and the last question please on r d spend um can you give us some more clarity how much of the r d is going proportionally in the existing um segments logic has and how much of the r d is going um into new categories that we have a rough idea

Well, I would say the vast majority goes to our existing businesses. You know, we've got big, strong, vibrant opportunities in all four of those large secular trend areas. So the vast, you know, the super vast majority goes into that. But we have a seed program where we're always investing in small teams to really create pilot programs against new categories. And that's ongoing all the time. Super exciting. Always fun. I've got a couple of products on my desk from that. You know, Electra Glow came out of that. And sometimes that results in M&A, you know, where we figure out, we learn enough about a category that we feel confident that we want to be in it. And we go out and look. Sometimes it's organic. Like, you know, like our UE fits. If you haven't seen that product, it's really amazing. You know, automatically fits. It customizes to your ear in 59 seconds. I don't know if we've ever talked about that on this call, but yeah. It's a pretty amazing product and it's in market now in a small way, selling direct to consumer as we continue to learn how to bring that thing to market. But yeah, we've always got products out there, but we really measure our investment against the timeframe when it might come out. And so we try to fail early, fail fast, and in a small way so we can keep pivoting and understanding the customer need better until we get them right and then launch them like light or glow.

All right, thank you very much.

Thank you.

Thank you. The next question comes from Eric Woodring from Morgan Stanley, please.

Hi, Eric.

Hey, Eric.

You guys, good morning. Congrats on your quarter here. Sorry about that. Let me get my Logitech... I took my Logitech camera up and running. So maybe this is just a high-level question, but, you know, we've seen a handful of companies that I think the market perhaps would have considered to be COVID beneficiaries, you know, see some challenges in the near term. Obviously, you're bucking that trend. And so, you know, would just love your high-level thoughts on why you think that is, why Logitech has been able to do that relative to other, you know, preeminent companies, let's call it. And then I will follow up.

And without knowing exactly which companies you're referring to, I think our belief, and I think it's turned out to be true, our belief was that what COVID really did wasn't to drive a one-time surprise in our categories, but was to accelerate what was already happening. The cool thing about that is, let's just take our PC peripherals categories. If you have more workspaces, especially workspaces that have more dimensions of mattering to you, what does that mean? When you have a product in the office and you have a mouse and a keyboard, it looks like everybody else's mouse and keyboard, so you might not care as much as at home, where suddenly you have a mouse and a keyboard. It's actually part of your home decor and I don't know about you, but I didn't even, believe it or not, I didn't even have a home office that had a permanent PC on it or Mac on it before. And so now I do. And a lot of people, now the interesting thing is that that's just an increase in the installed base because I've still got something in the office. And on top of that, what I got for the home, and even me, was I scrambled. I got what was available nearby as I was walking out the door on March 6th or 7th or whenever it was. And I think there are a lot of us out there like that. And then to take it to people who don't work in this business, most people don't even know what's out there. And so the opportunity to continue to upgrade them is significant. So I just think the biggest difference between us and most businesses is it's a gift that keeps on giving. Once you have it, you can upgrade it, and the experience really is better. And we're focused on upgrading people over time. So there's more spaces, and there's a constant opportunity for upgrading, especially as we keep innovating. Awesome.

I think the way to maybe think about that, too, is just existing trends that got stronger versus some new trend that got created that maybe I wouldn't call it a fad, but, you know, might have just been more short lived. And I think in cases where something new has been created. it's it's sticky right we've been doing this now for two years people's uh way of working has changed their ways of learning have changed their ways of communicating have changed um and so we've kind of gotten up the adoption curve on a number of trends that were already and thinking a lot about like video you know that was a trend before but it's gotten a lot stronger and we've gotten up the adoption curve where a lot more people have gotten comfortable with it and they actually prefer it and so i think you know that's that's what's perhaps different in many of our categories or really in all of our categories, I think, is that they were existing trends before that had good growth characteristics. And all of those, I think, have gotten stronger.

That's a really helpful color. Maybe as a follow up, and this is more of a near term comment, just curious on your, you know, your general ability to procure supply in the December quarter and whether that, you know, surprise to the upside relative to your expectations, really just trying to get it. Obviously, it was an amazing quarter. Kind of what do you think led to that outperformance relative to perhaps prior expectations? And was that supply driven or or was that something else?

It was a strong quarter, but I think, actually, we continue to be a little frustrated. We couldn't get better supply. As Nate said, we had some areas where we really just couldn't get as much as we needed from a component standpoint. And logistics continue to be a challenge. So actually, it could have been even a little stronger. Were you going to add anything to that, Nate?

No, I mean, I think it was actually kind of as expected in a lot of ways. I mean, you know, we went into the quarter knowing that we would be tight in some areas. And, you know, it was really I think we recovered. Well, we recovered kind of late in some places to the linearity in Europe, for example, was pretty back in loaded. But I think we got there on time to be on shelf for most of it. But that was the place where we probably had some some more revenue if we could have supplied it.

Okay, super. And then just last one, just channel inventory levels. I know you guys have commented on that in the past, just maybe relative to the end of the September quarter, where you think there might be opportunities for channel fill in the future. And that's it for me. Thanks, guys.

I mean, I think the channel is in good shape. Again, I think we're light in some areas, but in general, I think our availability metrics have improved a lot. But there's always places where we can do better. But I think the channel is in a good, healthy place. We go into Q4, again, it really matters down at the skew level, Eric, and where the demand is and where our supply is, not only in terms of products, but also by country and by region. So we're going to do our best in Q4 to try to fulfill that, but I was happy with the strength of the demand and the categories.

Awesome. Thanks, guys. Thank you, Eric.

The next question from Stiefel, Juergen Wagner.

Hi, Juergen. Yeah, hi. Thanks for letting me on. Yeah, when I look at what your gaming competitors in the US reported recently, you must have gained a lot of share or are still gaining. How should we model revenue growth based on that higher market share in gaming? And then you talked a lot about supply demand for you on your supply side, but also in your end markets. How would you see, I mean, you said March still difficult, but further down calendar 22. How would you see supply-demand trending? Thank you.

Let me answer the first one, and then I'll let you answer the second one. I think that in the gaming business, we did gain share. We've been gaining share. And we love our innovation engine, love our team in that business. you know I without getting into your modeling I would just say you know we're excited about what we're doing I mean I think we we feel like we've got a group of people and a team that's really working well and we continue to see opportunities that are actually broadening the definition of gaming today you know I had an interview with John Ford who's a CNBC reporter and anchor and he He opened the call and really with a lot of insight, I think he said, you know, my kids are now, when I was growing up, I would sit and listen to music with my friends and talk. He said, now my kids are getting on playing games, putting the headphones on and talking to their friends. And I think that's a really big difference from where even we started in gaming. We saw it as kind of social, but only among a narrow gamer set. Now it's broader. And that broadening is a reflection of the market itself growing and expanding horizontally. And that opens more and more categories, more and more different kinds of products for those people. Like that G435 headset I talked about that's light and colorful, beautiful, and you can wear it, you know, it doesn't, you know, it's a, it looks like part of what you'd want to wear if you're a 17 year old girl, instead of the stereotype of a boy in a basement playing games.

Hey, Juergen, I'd also add on share. I don't want to overstate our focus on share. We want to get that share the right way, as Bracken said, with innovation, with marketing investment to drive awareness and preference for our brand. And I usually look at share over three-month trends rather than one month. As an example, I think we lost some share in gaming, frankly, during the holiday period. season in probably December or a bit in November because we weren't as price competitive as some others. But I think that was the right decision. We want to manage these businesses for the longer term. So over the three-month trend, again, we were gaining some share. But I can see in November and probably December that we lost some share maybe in the US where we weren't as aggressive. But we're being very thoughtful about that as well. So I think it's important to keep that in mind. Just as an example, you're asking about gaming. I'll give you an example in traditional mice and keyboards because Bracken mentioned the MX series. Those products, both the MX Keys and the MX Master 3 have 4.7 stars on Amazon, over 10,000 reviews each, 86% five-star reviews on both of those products, which is exceptionally high. But those are just an example. We really have examples like that in tablet accessories. We have examples like that in gaming. um so it starts with having great innovation great products obviously we're investing more in the marketing capability to drive the awareness for those products because you know as i mentioned or as bracken mentioned on this call we still have a lot of opportunity with just increasing the awareness of how nice these products are and what a great experience it is so it starts with having the great products and i think we're you know we've done a very good job of doing that but we have a lot more to do to drive the awareness and i i think you know that's that's a big focus

And the supply chain. Sorry. The supply chain. How do you see it in. Sorry, can you take the question on that.

We didn't quite get that.

yeah I mean, how do you see supply demand for your product shaping us, you said we were still in short supply for some of our mice and keyboards but um.

mostly on keyboards um and also on gaming wheels were probably the biggest source parts source spots i think a bit on mice maybe as well you know i think we did see good good strength in the b2b channel even though i think by and large offices have not sort of reopened to capacity i mean i'm looking at your office there it's probably been fuller at other times um so i think we've seen some some pickup in in demand on b2b and that's put some pressure on certain products but um I think we're still really thinking about most of these headwinds as being with us for a while. We're taking steps to try to secure supply for some of those things that have been tough to find, using the balance sheet there and battling through it. I don't know, Bracken, you add anything on the supply situation?

No, I think, you know, look, we've still got tight spots, you know, on component availability, you know, semiconductors in particular. And we're probably going to stay with us for a while. So we've we've decided we've got to live with that and we're going to do the best we can to work around it as we've done in the past. And as we go into next year, I think that we can expect that for a while.

Yeah, I think I'll come back to Jorn's question on that too about R&D. One of the things that we have been investing in R&D on is second sourcing.

Absolutely.

So I think as Bracken laid out strategically how we think about where we want to invest in R&D, this year we have invested more of our R&D spend into existing products and ensuring supply by second sourcing. I think positively, as availability improves in the industry on some of the semiconductors, we'll probably see an increase in R&D productivity just because we will be able to shift more resources towards new innovation rather than second sourcing.

OK. Good. Thank you. Thank you, Juergen. Hope that office fills up soon.

Yeah, we'll see. Not soon, I guess.

As a friendly reminder, send me a chat or raise your hand if you would like to ask a question. The next question comes from Serge. Credit Suisse, please.

Hi, Serge. Yes. Good morning, everybody. Good morning, Nicole. Good morning, gentlemen. Well, I would have first a VC question. You mentioned that you have seen less webcams, less headset sales in VC, but more room solution. Is it the start of the transition to the enterprise channel, or is it only that you have very limited in supply for more consumer-oriented products in VC? Probably you can update here also on direct sales, on supply chain companies, where you are moving currently. And especially when I'm on the webcam, I see still some products are lagging, available 2022 or available soon, like the documentation or other products. If you could give us more flavor here.

Let me start, Nate, you can finish. You know, I think I wouldn't interpret the mix of sales, you know, the stronger sales and conference cams and the lower sales of webcams as anything more than they're both really strong. You know, the conference rooms, you know, I think we're seeing, as I mentioned earlier, I think we're seeing the early days, the thaw of the office, you know, where people are starting to rethink their footprints and how many offices need more. How many meeting rooms do you need? How much video do you need? Which we think is going to be everywhere over time. And then, you know, even people restructuring offices, there'll be people closing offices and opening other ones. It's going to be, there's going to be a lot of turmoil. So I think we're seeing the early days of that thaw and that has a lot of video coming out. conference room enablement in it ahead of us and and we're super excited about that so that you're starting to see that you know double digit growth on the other hand on the webcam side remember while it's down versus a year ago it's way way way up versus 2020 so those are pretty heady numbers as nate said they're actually flat in units so it's actually not down at all so i would say they both look pretty strong for the years that you know years ahead in terms of the number of people really using video i mean this is just the future we're in and that you want to take the rest that question

Well, now I can't remember the rest of the questions. On the enterprise channel, yeah.

How are we doing with the enablement of our sales force?

Yeah.

And procuring companies in addition. Yeah.

Yeah. I mean, listen, we're continuing to build out the enterprise sales capability, direct sales, inside sales. Also, I think the cross-selling across the portfolio is another big area of focus for us. I think we're still kind of early days on some of these things, but we're starting to see better coverage. better pipeline metrics forming, you know, those types of things. Uh, I just think on Bracken's point, it's interesting on the webcams, you know, a year ago we had 400, we had quarters with 400%, 500% growth on web cameras with NBC. It was huge. Um, so, um, I think, again, I'll just make the point. I think video at the desk in the office is something that didn't really exist a lot pre-pandemic and I think will exist in the future. I'm not going to say post-pandemic, but just in the future as people come back into the office, I think you'll have more video there. I don't think we've really seen all of that take off yet. Don't know when that'll happen, Serge. I think that it's a good opportunity for us in FY23 and 24. But video everywhere in the office and at home Good trend. And so, yeah, I don't really know that I have much more to add for you on the coverage. We're still making investments in it. And that's really a global investment. But I don't know, Bracken, anything you'd add to that?

We've come a long way. We're a different company than we were three years ago. We've really expanded our coverage directly into the largest enterprises. We still have ways to go to where we feel like we're operating at 100%. But I feel very, very good about the trend line. We're on our way.

Yeah. Okay. Probably in addition, I have noticed that you have launched Logitech Select. This is a service contract, one year and three years. Can you give us, what's the success so far? Did you already sign the contract with the customers or what is happening there? What is incremental going forward? Give us some bullets.

we gave you growth rates quarter over quarter you'd just be so excited but but they're on a very very small base of course but what does this mean for logic no i think i think it's very exciting you know it's part of a long-term game plan we have which is first of all we want to make sure that our users have everything they need in that case it's the customers in the office and you know, we think we can bring, you know, services to them that they aren't getting now when they buy our products and then extend those services out over time. So the famous recurring revenue for us and a better experience for them. And so we're excited about it. It's early days. You know, I don't want to overstate it where it is now, but I'm optimistic for the future. And I think it's going to be exciting. We'll talk more about that at Analyst Investor Day. I have a feeling in March. So I invite you, Serge, to come and hear more.

Happy to join, Bracken. And probably last one, I had the impression that the promotional activities were quite low in the Christmas quarter, also because of availability, that the peers didn't have enough products in the channel, so they were not even in a position to make any promos. So what do you expect now going into January to March quarter? Because this is a typical promotional quarter, especially with all the vouchers and cash the kids get from Christmas, and then it's really the fight. So Do you see more promotional activities now in the current quarter? Or yeah, what does this mean, quarter over quarter? You want to take that one?

Yeah, I think Q3 promotional levels were kind of similar to Q2. You really have to go in and look by category. I think in gaming, we definitely did see some increased promotion from competitors during the holiday, but that's not atypical. I'm not sure what we've seen yet in January, Serge, but yeah. you know for us at the company level it was not really a change q2 to q3 there wasn't really a margin impact from promotions changing at all there again i think our strategy for the last few years and continues to be let's try to rely less on promotion to drive the top line to drive the business and let's invest in marketing and drive the awareness and i think that's a healthier way to grow over the long term so both in the short term the long term that's that's our strategy okay last one and then stop uh

Microsoft wants to acquire Activision Blizzard. What does this mean for Logitech? As you have, for example, a Call of Duty line in mice and keyboards, I believe. But still, is it an opportunity for you or more a threat? What is the reach with the first impression you have from this acquisition?

Well, I certainly wouldn't say it's a threat. That's the gaming content business, and that gaming content business drives our business. The better and stronger the innovation is in gaming, the more content created that people are attracted to, the bigger our business will be over the long term. So I think Microsoft and Activision Blizzard have already been two big leaders in that, and it's super exciting to see them potentially coming together. Whether they do or they don't, gaming is going to keep growing with great content. It's inevitable.

Okay. Bon voyage. Go for it. Thank you so much.

Thank you. Thanks so much. Thanks, Serge. You're welcome.

The next question is from ZKB from Andreas Muller, please.

Hi, Andreas.

Hi, Andreas. We were missing you. We were wondering when you were going to come on.

Yes, hello. Just let me the video on. I've got a couple of questions. Hi. One is if you have any figures or any experience about this climate pledge friendly selection people can can choose in eShops such as Amazon. I mean, is that really driving demand here? Can you share here a bit? What do you see?

Let's pick them one at a time. So I'll answer that one. The answer is no, we don't have any data right now that would say that we're getting big sales out of our climate policies and practices, which I think really are leading edge and leading in the industry. So we're doing it because we think it's the right thing to do. But we believe that that's going to be a brand builder and a business builder over time. You know, there is a growing, certainly among younger people, you know, kind of Gen Z and also the Gen Y. You know, there's just a general interest in and understanding that we need to do something about the climate now. And so we believe that it's not only the right thing to do, but it'll be the right thing to do for the business. And I think that's going to prove out over the next several years.

Okay. And then further on, you have been able to pass on prices, I believe, in the last, say, two quarters at least. And if I remember right, I mean, that's also with the strategy. How... what do you expect going forward this is this are the same kind of factors in place that you can still pass on price increases or or would that be gone if say demand supply is more in line

I'll start with that, Nate, and then I'll hand it off to you. I think the best way to increase prices is to lower promotion. And Nate mentioned the promotion practices we've had the last several quarters, and we hope to continue those right onward and spend more of our time and investment in trying to drive demand the other way, which is to build our brand, which builds long-term expansion capability for the business. more efficiently, I think. In terms of direct price increases or even decreases, you know, related to, you know, cost, you know, I think when there's a broad cost impact that hits the whole industry, you do eventually see price increases. That broad cost increase has only just begun. we've and nate mentioned and we've talked about in the last call we've done some selective price increases now and we'll keep an eye on that you know if inflation looks like it's here to stay you know we're pretty good at raising prices when we need to be we have a history of doing that during uh inflationary periods or especially during currency changes in different parts of the world so i think we're prepared for that um and we're starting down that path we'll see where it goes okay

Then maybe my last question is on Jaybird. How much revenue was that, say, in the last quarter, for example? And also, did you have some charges with ending this business, basically? Or would you see some charges going forward?

Yeah, I can take that one. Really, the revenue was... It's about $5 million a quarter, so it really was not material at all. And in terms of the charges, yeah, we had some things that hit in cost of goods and also some things that hit in gap OPEX. In terms of cost of goods, we had about $8 million of component and other inventory write-offs related to products that we decided not to launch, or products we decided not to launch. So that hit us this quarter, about $8 million in cost of goods. There's also about $8 million that hit down in OPEX, which is gap only for us this quarter, a little bit of restructuring, a little bit of contract cancellation, things like that.

Okay. Thank you very much.

The next question comes from DA Davidson, Franco Granada.

Hi, Franco. Hi. Good morning, everyone. Thanks for letting me ask a couple questions here. So I have one product and one big picture question. So Bracken, as you mentioned earlier, you recently introduced your pop keys as part of your efforts to really capture a broader market. So I was wondering what kind of traction are you getting there? And then secondly, you know, with most headlines nowadays in gaming, you're really revolving around this whole concept of the metaverse. And so some shape or form, is this a trend you'll be trying to capitalize on perhaps on, you know, marketing materials or even some type of product introductions?

Yeah, so pop keys. Yeah, the traction has been good. I mean, I think people are super excited about that. We launched it first in China. It's done really well. And I think as we expand, as we're expanding that around the world, the recession has been very strong. Not only the number is good, but also the anecdotes are good. You know, I always know when I have people reach out to me, especially people I don't even know on a product that we've just announced and asking if they can get it. It's usually a very good sign. And that's a product we've had that I'd also add light or glow. I brought it up a couple of times in this call. It's the highest pre-orders we've ever had, you know, and after that one, I've had tons of people writing me about, so we'll see where we go with that. The metaverse is here is, is here, you know, and I think it's going to keep growing and, We've been working in the VR and AR space quietly for years, for five years plus. It doesn't have to be VR and AR completely to be part of what most people are describing as the metaverse, but the metaverse is going to keep growing what we do online, what we do virtually. So we're certainly going to be in the middle of that action. We're very excited about it. I think it's a potential creator for us.

everybody products marketing everything absolutely thanks thanks franco the last question comes from torsten kepler torsten hello yes hello everybody and also congratulations from my side quite a nice surprise this morning now uh just quickly i i see you want to close you said that you want to going forward rely less on promotion invest more in brand building brand equity Now, your DeFi Logic campaign has started, if I'm not mistaken, about a year ago. Has your marketing surge already led to any measurable improvements, say on guided, unguided brand awareness, price perception, also relative positioning of your brands?

Yeah, we have KPIs we're measuring now. And so it's a little early for us to give too much insight into that. Probably if you ask us six months from now, we would give you a better answer. What we do have is a little more anecdotal, but somewhat data-driven and looks pretty promising. I mean, I'd say our brand, the Defy Logic campaign does seem to have a direct effect on brand awareness, especially among the younger consumer set, which we're really targeting there, trying to bring them into the fold. We historically were underdeveloped in kind of the sub-30 group, and that looks like it really affects them dramatically, which is great in terms of awareness and positive view of the brand, which was our goal. But it's not just the Defy Logic campaign. We're spending a lot of marketing money on gaming. In the gaming business, our brand definitely has elevated significantly over the past few years. It looks like the ROI on that spending is very high. And, and we're going to keep investing there. And also the direct product category spending that we do, you know, we've, whether it's digital online internet spending real kind of ongoing almost like a sales engine activity that people call marketing and it is marketing it's classified as marketing. That is also very measurable with the return on ad spend ratios you may be familiar with, and we're seeing great pockets of investment there. So across the board, we see opportunity, and we're going to keep monitoring, measuring it, and making sure we're spending the right amount for what we're getting back.

Very clear. Thanks.

Thank you. Thanks, Carson.

Thanks. That's the end of our questions. Thank you, everyone. Bracken, any final comments?

No, it's wonderful to be in 2022. And it feels like we really are probably at the beginning on the downslope of this pandemic. And we just see so many opportunities ahead for Logitech and for the world. It's like a really... I think it's going to be an exciting time ahead as things start to thaw out. And we're going to be ready to innovate left, right, and center and grow right into all these long-term secular trends we've been part of. And I think they're not going to let up. Thanks so much. Thanks for all of you. Talk to you in a quarter.

Thank you.