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.