Logitech International S.A.

All right, good morning, good afternoon, everyone, and welcome to Logitech's video call to discuss our financial results for the fourth quarter and full fiscal year of 2022. Joining us today on the call are Bracken Darrell, our President and CEO, and Nate Olmsted, our CFO. During this call, we will make forward-looking statements, including with respect to future operating results under the safe harbor of the Private Securities Litigation Reactive 1995, We're making these statements based on our views only as of today. 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, and you can find a reconciliation between these non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results in our press release and in our filings with the SEC. including our most recent annual and quarterly reports and subsequent filings. These materials, as well as our prepared remarks and slides and a webcast of this call, are all available at the investor relations page of our website. We do encourage you to review these materials carefully, and unless otherwise noted, comparisons between periods are year over year and in constant currency. Sales are net sales. And finally, this call is being recorded and will be available for a replay on our website. With that, I will now turn the call over to Bracken. Good morning, Bracken. Good morning, Nate.

And good morning, Nate and Nate. And thanks to all of you for joining us. I am so excited about the year that Logitech has had and our team's strong performance despite a backdrop, perhaps best defined as unpredictable and certainly challenging. In spite of its headwinds, our teams delivered an outstanding fourth quarter and overall a tremendous fiscal year 2022. Coming off of 74% net sales growth in the previous year, we challenged ourselves to continue the momentum and we did it. We posted our ninth consecutive year of growth delivers strong growth in key categories like C&P and gaming, saw market share gains across our portfolio and geographies, and continue to invest in the future, using our strong gross profits to invest in key strategic areas like marketing and product development. Nate and I will go deeper into the financial details for the fourth quarter for the fiscal year in just a minute. But I wanted to start by offering a bit of perspective on the macroeconomic environment, world events, and overall state of the global business as we head into our new fiscal year. As I've talked to other CEOs, we generally agree that there's uncertainty about the US and global economies will perform. But we'll leave the predictions about that out of this call. But what is the backdrop of our thinking? I see a certain set of conditions that most of you will be familiar with. Inflation, war in the Ukraine, COVID lockdowns, changes to monetary policy, supply chain disruptions. These challenges are not just possibilities, of course. They are happening. No business leadership team operating globally can dismiss them. We at Logitech talk about possible impacts regularly. And the truth is that all businesses, including ours, operate in this environment with the understanding that we can't influence the outcome at each of these challenges, but we all can adapt, change, and ultimately adjust. That's exactly what we've done at Logitech through the last decade. The dynamic nature of Logitech, and we've gotten more dynamic as we've grown, makes me proud we've continually found ways to solve old and new challenges while ultimately serving and delighting customers we've adjusted adapted so many times over the past decade so what does next year look like well this may not be the most satisfying answer the hard truth is that we just don't know exactly how and when this particular set of challenges is going to play out but i do know we have years of experience operating in challenging environments We've changed the way we source components. We've diversified our shipping strategy. We've automated our factories. We've built a very diverse portfolio. We've changed the way we price our products. We've strengthened our balance sheet, intentionally pursuing a strategy, avoiding high levels of debt. The list goes on. All to ensure we can operate with excellence, discipline, and a focus on the future during unpredictable times. So I prefer to look beyond the near term and make sure we're operating in growing categories, staking out long-term leadership positions in those categories and investing in product design and engineering, the absolute lifeblood of our business. And as we discussed in our analyst day in March, we are doing exactly that. But what's been true over the last few years is still true today. Hybrid work or the idea that we used to call work from anywhere continues to thrive. There are sales and upgrade opportunities that exist right now across more than a billion workspaces, all driven by hybrid working and learning. What an incredible opportunity. Everything is moving to video, including this call. Hybrid work is here to stay, and most meetings will be a mix of on-site and virtual, and video helps bring more meeting equity to all participants. Gaming will continue to expand. The long-term momentum is unstoppable. Like most long-term high-growth markets, there will be strong growth quarters and lower ones, but that shouldn't confuse anyone. Gaming is a juggernaut, and it's evolving and adding new engines of growth. Take the metaverse, for example. The tools needed to experience and create the metaverse are expanding and evolving, but big picture, ask yourselves, what about the fundamental premise of gaming as a cultural phenomenon has changed? The answer? Nothing. And the streaming and content creation trend hasn't changed, but continues to grow rapidly. In other words, while we're very clear-eyed and measured in our approach to the near-term challenges and events, we're equally invested in and excited about the durable, longer-term trends driving our largest categories. Our company's solid performance reflects the broad strength of our capabilities, including the product development engine that continues to introduce new products on a global scale. And also reflects our diverse portfolio and its leading position in growing markets. Our focus on operational execution and the ability to adapt quickly continues to help us navigate industry-wide supply chain challenges and disruptions. And that's why I'm so incredibly excited about the future at Logitech. With that, let me briefly step into our categories. Creativity and productivity. In creativity and productivity, we had a really strong year and finished the fiscal year 2022 with good momentum. Mice and keyboards continue to drive this category with another year of creative product development driving growth. There is no debate over the sustainability of hybrid work. Hybrid is here for now and in the future. And C&P is set up to enhance workspaces around the globe. You've heard me say this before, but it remains true. Very few people have the optimal workspace set up, either at home or at work. Eve and I continue to experiment all the time to try to find a better way. I'm excited about what you'll see in the coming quarters from this group. Gaming grew double digits in fiscal year 2022, on top of an exceptional revenue growth last year. Gaming continues to be adopted by an increasing number of people, as both a competitive esport and as a more casual way to hang out with friends. And we're in the very early ending of what the metaverse can do to enhance the enjoyment and experience of gamers. Gaming is a market that demands innovation, and we're doing just that with more wireless peripherals and higher performing keyboards and mice. I'm so confident about the long-term potential of this category. In video collaboration, we continue to see pockets of increased activity with more certainty in office reopenings and hybrid work planning. But planning and purchase timing differ by region. So as I said earlier, there will be near-term unpredictability and an overall choppy environment, but long-term growth. Webcams declined versus our lofty mid-pandemic peak, but the need for webcams is strong and the demand is steady. And more than three times what it was two years ago. And our long-term strategy of enabling meeting spaces with high-quality video systems and solutions, supported by an enhanced sales and support team around the globe, remains well on track. Consistent with our mission to develop video collaboration tools that can make remote participants feel they can participate equally or even better than those gathered in person in a room, we launched RightSight2, an AI-based software solution. that helps bridge the gap between in-meeting participants and those joining remotely. It's such a smart solution, and we have much more in the works. And supporting all our products is our Defy Logic marketing campaign. We're increasingly raising awareness of the brand and bringing Logitech's amazing products to the top of every consumer's consideration list. More to come in this area, but we really like the results we're seeing. Finally, it's such a fundamental part of our purpose that we focus on environmental sustainability at the core of our business. We were just recognized by the Financial Times as the European climate leader based on our carbon intensity improvement score. It's nice to be recognized like this, but the truth is that this score only covers things that happen in our offices and factories. Hardware companies like us release much more carbon beyond our four walls than in them. As we buy components and products, transport them, and consumers like us use them. The rest of our story so far is that we are carbon neutral in scopes one, two, and three, which includes all of those carbon impacts. And we're committed to being carbon negative or climate positive, as it's called, beyond 2030. On top of that, earlier this quarter, we announced that we had exceeded our initial commitment to incorporate post-consumer recycled plastic into our products, reducing our carbon impact and increasing the circularity of consumer product materials and ingredients. During the last calendar year, one of every three Logitech product shift used recycled materials, and that's going up and to the right. We believe this is the right thing to do for the planet. But we also believe that a growing share of businesses and consumers will favor our products as a result of this industry-leading approach. Now let me turn the call over to Nate for further comments on our financial performance this quarter. Nate?

Thanks, Bracken. We delivered solid financial results in Q4 and for fiscal year 22 in an environment that was often quite challenging. I'll spend a few minutes on the quarter and then provide some context and texture to our full year results. Q4 was our toughest compare for the year as we grew 108% one year ago. In Q4 this year, net sales were down 17% to about $1.2 billion, although impressively, we saw continued growth in pointing devices, keyboards and combos, and gaming. Gross margins were essentially flat sequentially despite ongoing cost pressures and incremental currency headwinds. We remained disciplined with promotions while still gaining share in many categories, and we worked to reduce our reliance on air freight Looking ahead to the first half of fiscal year 23, margins could come down further due to ongoing cost increases, unfavorable currency rates, and higher levels of air freight as we expedite to recover from supply disruptions due to the China COVID lockdowns. Profit was down for the quarter, as was cash flow from operations, both as expected. For fiscal year 22, we turned in our ninth consecutive year of growth with net sales in constant currency up 4%. As mentioned earlier, C&P and gaming performed particularly well over the course of the year. Overall gross margin was 41.7% within our long-term guidance of 39 to 44%. In fiscal year 21, we experienced an unusually low level of promotional and in-store marketing investment, and as expected and planned for, an increase And we expected and planned for an increase in such spend this year. Higher promotional and retail marketing investment and increased logistics and component costs proved out as margin headwinds. For example, the cost of ocean freight is up about five times versus fiscal year 20. Operating profit was $904 million, well above our annual guidance provided at the beginning of the fiscal year. We delivered this incremental profit while continuing to invest to improve our capabilities with an emphasis on marketing, product design and engineering. And we returned over one half a billion dollars to shareholders through our share repurchase and dividends. Moving into our categories in creativity and productivity, keyboards and combos grew 8% in Q4 and 22% for the fiscal year. Pointing devices were up 14% for the year as a strong portfolio, excellent marketing execution, and continued demand from hybrid work trends drove strong performance in these categories. Gaming delivered 1% growth in Q4 and 17% for fiscal year 22. Delivering double digit growth off of a record year last year was impressive. While we experienced pressure in our console gaming and PC gaming headset categories, we have an excellent lineup of innovative products. A leadership position in expanding categories like wireless mice and steering wheels, and are beginning to gain traction with the social gaming segment. Q4 video collaboration sales declined 35% after growing more than 200% in Q4 last year. For the year, video collaboration was down 4% after growing more than 180% last year. Conference room cameras and systems grew double digits for the year and continue to lead the category performance behind a refreshed and expanded product portfolio. Sales in our tablet and other accessories category declined 39% in Q4 and 17% for the year. As a reminder, last year we saw a surge in sales for our education iPad keyboards, driven by Japan's government-sponsored Giga program, which expired at the end of March 2021. Excluding sales through the Giga program last year, fiscal year 22 sales in this category grew double digits, and we gained more than three points of share in retail keyboards driven by strong product launches and in-store marketing execution. Our mobile speaker sales declined 12% in Q4 and 15% for the full year. As noted previously, we continue to reallocate our resources to faster growing market opportunities. Our audio and wearable sales decreased 35% in Q4 and 15% for the year as expected. Despite these declines, sales were up more than 40% versus two years ago, due primarily to expanded market opportunities for retail headsets and blue microphones. Looking regionally, for fiscal year 22, our sales were sustained or grew in all three regions. Much like the diversification of our category portfolios, our geographic diversification helps us manage risk. For example, hedging against regional softness in demand, geopolitical issues, or economic disruptions. Turning to expenses, in the quarter, we executed our plan to strategically invest to grow our business over the long term. While our Q4 non-GAAP operating expenses decreased by 13% to $342 million, Our fiscal year 22 non-GAAP operating expenses were up 27% to $1.4 billion. As we stated before, this is reflective of continued investment in marketing, sales coverage, product development, and operational improvements. For example, we increased the level of automation in our factory by more than 50% over the last year, which helps us reduce our costs, improve quality, and reduces our exposure to labor disruptions. And finally, Q4 cash flow from operations was positive $100 million, and we ended the year with a cash balance of approximately $1.3 billion. Our cash balance ended this fiscal year about $400 million lower than the end of last year, as we returned $571 million to shareholders through dividends and share repurchases this fiscal year. For the year, our conversion cycle, our cash conversion cycle, increased to 77 days. This increase was primarily driven by higher inventory days due to industry-wide supply chain disruptions and 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 help ensure supply availability and maintain competitive advantage. Finally, I'll spend a minute on fiscal year 23 guidance. At our analyst day in March, we guided fiscal year 23 revenue to be up mid single digits and non-GAAP operating income of $900 to $950 million, and noted that full year revenue from Russia and Ukraine was about 2% of our net sales and was included in our outlook. At that time, the Russian invasion of Ukraine was in its first days. As of now, this war is ongoing with no sign of resolution in the near term, and we do not expect sales in Russia and Ukraine for the full fiscal year. We continue to monitor the Russia-Ukraine situation and broader, potentially challenging market conditions. Given this, we now expect full-year revenue to grow between 2% and 4%, and full-year non-GAAP operating income is expected to be between $875 and $925 million. With that, I will hand over to Bracken for some closing remarks. Bracken.