Logitech International S.A.

Good morning and good afternoon. Welcome to Logitech's video call to discuss our financial results for the first quarter of fiscal 2023. Joining us today are Bracken Darrell, our president and CEO, and Nate Olmsted, our CFO. As a reminder, 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 React of 1995. We're making these statements based on our views only as of today, and our actual results could differ materially. 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 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 report 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. Unless otherwise noted, comparisons between periods are year over year and in constant currency, and sales are net sales. And finally, this call is being recorded and will be available for a replay on our website. And with that, I will now turn the call over to Bracken. Good morning, Bracken.

Thank you, Nate, and thanks to all of you for joining us. Logitech, like many other companies, is experiencing the impact of a wide range of overlapping macroeconomic and geopolitical issues. The war in Ukraine directly reduced our net sales about 2% versus last year, as we talked about earlier. Foreign currency headwinds have increased, with the dollar shrinking to nearly 1 to 1 in the euro now. Inflation rose further, and consumer confidence has weakened. None of these fundamentally affect our optimism for our target markets, our strategy, or our business model. But as we looked at the quarter and ahead into the rest of the year, we believe it's proven to take a more conservative view than we had previously. Impacted by these challenges, our net sales were down 9% in constant currency this quarter. There were clear highlights for sure, solid growth and video collaboration, keyboards and combos and pointing devices as hybrid and return to work trends continued to take shape. We grew market share and we delivered solid gross margins of 40% despite worsening inflation and currency impacts. As I just said, our overall net sales in Q1 combined with the worsening economic picture made us take a hard look at our assumptions for the rest of the fiscal year. We can't affect currency exchange rates or inflation, of course, but we can adjust our business to the current conditions. And although we can't predict the depth and duration of these macroeconomic conditions, we can conservatively manage our business until we have evidence that the markets will return to stronger growth. In short, we can't change the macros, but we can adjust to them. And that's what we're doing. Based on current conditions and performance, we're implementing plans to reduce operating expenses by approximately 10% or about $150 million versus last year, predominantly through variable cost reductions. As our sales nearly doubled since fiscal year 20, we added disproportionately variable costs, which makes us ready to meet the moment. We'll continue to raise prices to offset currency and inflation and target to keep a strong margin profile. We'll continue to invest in exciting new innovative products. This investment has been a key driver of our sustained share gains, and we believe it will be into the future. All that's leading us to provide you with an updated outlook for fiscal year 23, reducing expectations for both revenue and operating profit. We believe this update appropriately takes into account the macroeconomic and geopolitical environment we're in, as well as our own plans to lower our costs and take control of all the variables within our grasp. Before I let Nick take you through our financials and outlook in more detail, let me just say that the macro picture we're dealing with now is challenging, but we believe it's temporary. I'm as optimistic as ever about the medium and long term. I can't think of anywhere I'd rather be for the long term than writing the secular trends Logitech gets. Hybrid work, or the idea of work from anywhere, is simply the future. As I said a few months ago, the debate is over. Hybrid won. And that will favor Logitech, as offices are renewed for new footprints and more video. And homes continue to upgrade for better offices. While the gaming market was softer over the past two quarters, we believe the interest in gaming will increase over the long term. As gaming content expands, cloud gaming grows, and more and more people become gamers, socially or even competitively. And the streaming and content creation trend will grow and grow. From individual creators producing content from home to businesses leveraging podcasts and creators to new markets, the use of streaming content continues to expand, driving growth of this trend. So we're going to continue to focus on great long-term growth, but run the business conservatively short-term. What does that mean? Our product teams across our largest businesses, video collaboration, C&P, and gaming will continue to launch a series of new products throughout the remainder of the year. As in the past, you can expect these products to be packed with innovative features full of lifestyle design enhancements and critical to the work and play of both consumers and enterprises. Our operations team will continue to optimize our supply chain for the short and long term as we source components from a diversified set of vendors, now much more diversified, adjust shipping routes, and mitigate transportation costs and risks, and finally diversify manufacturing outside of China. They'll be working hard to flip the inflationary trend to cost reduction as the macroeconomic tide turns, and it always turns. Our sales teams, especially our enterprise teams, will continue to refine and improve their go-to-market capabilities across the globe. And we'll go all out to help companies reconfigure offices, expand video enablement, and create workspaces appropriate to this hybrid world. We'll bring down expenses significantly to align with the market realities that we project for this fiscal year. And as we do this, we'll focus on organizing for maximum effectiveness over the next few years. Our capital allocation priorities remain unchanged. Investment in our product design and development capabilities, accretive M&A, and returns of capital to shareholders in the form of share repurchases and dividends. And finally, you can expect our commitment to sustainability to remain firmly in place. We were just named by Echovetis as one of the top 1% of sustainability companies in the world. And our plans to turn sustainability into a driver for good and for growth will continue. Now let me turn the call over to Nate for a breakdown of our financial performance this quarter and our new outlook. Nate?

Thanks, Bracken. Bracken described our perspective on the quarter and environment. It signals that we need to be prudent about the rest of the year or until economic trends become more consistent and favorable. I'll spend a few minutes on the quarter and then walk you through our updated outlook. In Q1, net sales were down 9% to $1.16 billion after growing 58% in Q1 of last year. We grew in video collaboration, keyboards and combos, and pointing devices while facing tough compares and the macro environment. Gross margins remained essentially flat sequentially despite the litany of external factors that pressured profitability. I mentioned last quarter that cost increases, unfavorable currency rates, and higher shipping rates may pressure half one fiscal 23 margins. And while we did see these impacts, we managed pricing and reduced our reliance on air freight to help offset these pressures. However, we anticipate Q2 margins will be lower than Q1 as these headwinds remain. Operating profit was down as expected after doubling last year. Cash from operations was negative $36 million, also as expected, and an improvement of $79 million versus Q1 last year. Let's review some of the results across our product categories. similar to last quarter the gaming market continued to decline in americas and europe while growing in asia and our results reflected these trends with sales down 13 globally we outperformed the market however and gained pc gaming share we saw momentum from our products geared toward both social and professional gamers offset by ongoing headset demand weakness in core pc and console gaming Video collaboration sales increased 7% as conference room cameras and systems grew double digits to more than offset double digit declines in business oriented webcams, which are part of our video collaboration category. In creativity and productivity, keyboards and combos grew 7% and pointing devices were up 3%. We saw solid and consistent demand during the quarter for PC peripherals and introduced a series of new products. Our master series line added two mechanical keyboards and an upgraded mouse, and we also released a line of keyboard combos to support our enterprise customers. Taken together, these results highlight the performance of our categories addressing the secular trends in gaming, video collaboration, and hybrid work. Sales of our creativity and productivity gaming and VC products exceeded 80% of our total net sales this quarter and were flat year over year in constant currency. If you exclude Russia, these categories actually grew 2%. We have growth opportunities in other categories as well, but I wanted to highlight the performance of these key areas that directly address the strategic secular trends that Bracken referenced. Looking regionally, Asia Pacific grew nicely in the quarter, driven by gaming, while Americas and EMEA sales declined. Through the excellent work of our operations and sales teams, we were largely able to recover from the COVID lockdowns in China. For those that track the sell-in and sell-through data in our earnings slides, you can see that globally these metrics are in balance. The timing of the Shanghai reopening, however, resulted in the bulk of our China sales occurring later in the quarter, which is why Asia's sell-in was stronger than sell-through. Turning to expenses, I mentioned last quarter that we wouldn't hesitate to reduce our variable expenses, including marketing, if conditions warranted. Given the weaker top line results, that is what we did in Q1. We reduced marketing and sales spend by 10% and reduced G&A by 9%. We've also said that investment in product design and development would remain a priority for Logitech, even during trying economic times, and you'll note that we increased R&D investment by 9%. We are not done reducing or eliminating unproductive expenses from our business, and we are driving efficiency in all our spend, including fixed cost, product and freight cost, and our go-to-market investments in the channel. We can't offset every headwind that we predict for this year, but we are taking aggressive actions to align our spend with our sales while sustaining investment we believe supports our longer-term growth ambitions. We ended the quarter with a cash balance of approximately $1.1 billion after returning nearly 121 million in capital to shareholders through our share repurchase program. As a sign of our confidence in cash generation and our commitment to returning cash to shareholders, our board approved an increase in our repurchase authorization by another $500 million, and we proposed a 10% increase to our dividend per share for approval at our September annual meeting. Finally, I'll spend a minute on our updated fiscal year 23 outlook. In May, we provided an annual outlook of 2% to 4% growth in constant currency and an operating profit outlook of $875 to $925 million. Since that time, We've seen continued and in some cases intensified deterioration of economic conditions across the globe. Bracken discussed the external environment earlier. So when we developed this new outlook, we made assumptions about a number of factors, including potentially protracted economic volatility and sustained revenue and profit pressure from the stronger US dollar. Given these considerations and the actions we are taking to reduce costs versus last year, we now expect full year revenue to be down 4% to 8% in constant currency and full year non-GAAP operating income to be between $650 and $750 million. At the midpoint, our outlook for profit is down $200 million versus our prior estimates. At a high level, that comes from two headwinds and two partial offsets. The headwinds total about $400 million, including approximately $250 million of reduced profit from lower volumes and cost increases, and $150 million of lower profit from currency changes. Offsetting these unfavorable impacts are OPEX reductions and pricing. So in summary, we see about $400 million of incremental profit headwinds for the full year, of which we have plans to offset 50% through actions we are taking. Nate, we can open the line for questions. Thank you.

Great. Thank you, Nate. And as a reminder for everyone, please raise your hand or you can message me if you would like to ask a question. We'll start with Paul Chung from JP Morgan. Good morning, Paul. Hi, morning. Good to see you guys.

You too. Thanks for taking my question. So VC and keyboards were kind of a nice bright spot in a tough quarter. And in VC, you're kind of seeing some relative strength in conference cams. So where are you seeing demand across verticals, regions? Is this for new conference rooms, kind of replacement of legacy competitors? Any update you have there and seeing in terms of competition as well?

Yeah, I mean, the conference cam number was strong. I mean, I don't think we put it in the script, but the conference cam number grew very strong, double digits this quarter.

Double digits, yeah.

And it was about what you would have expected. I mean, it was pretty much a global story. The Americas in particular were very strong. And I think that kind of reflects the return to work that's happening here in the West. Do you want to add anything to that, Nate?

Yeah, I think it was pretty consistent, Paul. And the sell-through has remained pretty consistent, actually, going back several quarters. It's been a little bit tough to predict sometimes. on the sell-in because of the start and stop nature of some of the reopenings. But if you just look at the sell-through, another quarter of double-digit sell-through, as well as net sales.

Gotcha. And then on cap allocation, so the pace of buybacks has been, you know, quite elevated over the last four quarters. You know, the increase in authorization suggests kind of more of the same over the next 12 months, maybe at a similar pace or higher pace. Is that the right way to think about it? And then separately, you know, private market valuations looking more attractive today from your seat. We're seeing opportunities there. Thanks.

Go ahead, Ned. Let me take the buyback. Yeah, I think, Paul, really, you know, you think about this is the board gave us the option to increase repurchases. But I would just think about it as we're staying consistent to our strategy around capital allocation, right? We still prioritize investing in the business. And then from there, we have a balanced approach really on dividends and share repurchases. In fact, if you look back over the last several years, going back to FY20, we've returned about $1.3 billion to shareholders through repurchases and dividends, and that's been roughly 50-50. A little bit more weighted towards share repurchases, to your point, recently. I think about 60% over that time share repurchases. But, yeah, you know, we have confidence we'll continue to generate cash, and we think it's great to have that option.

Yeah, I'll just add, first of all, I'm really thankful to the board for giving us the increase in the authorization. I feel really good about the buyback program we've got going. In terms of M&A, we never stopped on M&A. We weren't aggressively going after whatever we saw available. Nothing really stopped us from an evaluation standpoint before. But you're right. I mean, there's no doubt that evaluations have come down across the board. So we're we've got we've always got a lot of activity going and we have a lot of activity going now. So it's it's not going to let up.

Thank you, Paul.

Thanks, Paul.

Thanks, Phil. Next up, we'll be Asiya Merchant from Citi. Good morning, Asiya.

Hey, good morning, everyone. Quick question. For the guidance that you guys are providing, I guess the question is, if you can help us understand through each of the categories what's kind of baked in, is this the worst that it gets? And if you can kind of walk us through how the minus eight to minus four makes sense in the current environment. It suggests that, you know, it will improve from here on. Is that just a function of easier comps through the rest of the year? And if you can walk us through some of the categories, that would be great.

Thank you. Nate, why don't you take the first part of that, and then I'll come in to the back and talk more about categories.

Okay. I was going to start with categories, but no, I'm just... So, Asi, I think if you're thinking about the year... You know, you can always look at it year over year. You can get a quarter of a quarter. Let me try to explain to you a little bit about how I thought about a quarter on quarter. What the outlook reflects is that we don't think that we've seen the every bit of bad news yet. And Q2 will be softer than what it has been historically. Normally, we see an increase sequentially from Q1 to Q2 in kind of the mid teens on growth. The outlook sort of reflects that it's probably mid single digits. So Q2 is not going to see the same spike that it has before. And that's sort of a continuation of some of the trends that we saw in Q1. And then from there, if you think about the range that we have for the full year, the 48%, really the difference there is how we think about the holiday and the back half of the year. So at the low end of the range, I think the holiday is a little bit weaker than typical seasonality. At the high end of the range, we're starting to get back to typical seasonality in the back half. So that's what it really reflects. TAB, Mark McIntyre:" Our outlook reflects a weaker than normal seasonality in the back half of the year, depending on which end of the range you talk about kind of at the midpoint still weaker than the normal seasonality and Q3 and then some rate and some return to normal seeing Q4. TAB, Mark McIntyre:" And then, to your point on the year over year compares that just comes down to some easier compares but that's how I think about it sequentially.

Yeah, I'll just add in categories, and you can jump back in, Nate. I think from a category standpoint, our view is about the same as what you see this quarter. We think we're going to continue to have a pretty good workspace business, mice and keyboards. We're actually constrained a little bit. We're still constrained a little bit on mice, which shows up both in the mouse and the keyboard business. So I think that's going to continue to be a solid business for us. And of course, the VC business conference rooms, we think conference rooms are going to continue to be enabled. That's a good thing. We think the gaming business pullback is probably going to stay pulled back Um, I don't think it'll get, we don't expect a big, big change that we think that we pull back. Now, all that said, you know, we just, we just finished prime day, you know, this year prime day was in Q2. So, and last year's in Q1, our prime day was up, you know, 24% versus a year ago, I think, Nate. So that's a constant occurrence. That's in dollars, by the way. So it's not all all pullback here. I mean, there's still plenty of interest in our categories. I think that's kind of a good reflection of the future. But, you know, I do think it's prudent for us to really look at the world, the macroeconomic world we're looking at and just moderate across most of our categories in light of what's happening.

Yeah. And just to kind of highlight something I mentioned in my prepared remarks, I said, you know, that Those four categories that I talked about, gaming, video collaboration, keyboards, and commas and pointing devices, those are the ones that are predominantly addressing these secular trends that we talk about so often. Over 80% of our net sales this quarter combine those categories with flat. They grew if you exclude the impact of Russia. And that's with the gaming decline of 13% in there. So it does indicate some durability, if you will, or continued interest in those categories, which I think is very healthy.

Okay, and then capital still remains kind of high at 110 million. I know you guys talked about the variable cost structure and being able to manage that. Anything on capex and why you guys are keeping that at a high level, relative to where you guys have been in fiscal, you know, the last fiscal year, for example.

Yeah, I mentioned this before, what you see here is a catch up this year, some investments in facilities. Over the past couple of years, as offices have been closed, we haven't been making investments or expanding footprints and As we've invested in our headcount and in our people, we have the need to invest in CapEx this year. So the increase that you see this year is predominantly into facilities, not necessarily a new run rate, but we have some catch up to do because it's been low the last couple of years.

Okay. All right. Thank you.

Thanks. Our next question will be from Torsten Sauter from Kepler Chevro. Torsten, good morning. Good afternoon.

Hey, Torsten.

Hey, hello, everyone. Thanks for taking my questions. Actually, I have two. First, is it fair to assume that you can cut the OPEX by, say, 150, 200 million US dollars if needed? And if so, where could you cut without hurting the franchise? And then if I may, secondly, I wonder to what extent has the deliberate direct B2B sales channel for video collaboration also supported and catalyzed sales in other categories? In other words, How much non-VC products are you selling in this Deliberate Enterprise channel?

Let me take the second one. Nate, I'm going to let you take the first one. I would say not much yet. You know, the direct enterprise sales force has been, we really organized to focus completely on the conference camp business. And in fact, I used to say for years, I would say, I really don't want to hear the word mouse come out of anybody's mouth in the enterprise sales force because we're really good at mice and we need to get good at conference camps. boy that's changed you know we're now to the point where I feel like we're you know we've got to build a big structure at Enterprise Salesforce where that I feel good about and I think now we're ready to add to it so we're in the very early days of taking advantage of that for the rest of our business but we are seeing uh large sales through there already but it's still very early days and then on your question on on opex you know that is our plan is to reduce spend year over year in opex 150 million dollars

We've talked about it before, you know, as we've invested over the past few years, we've invested both in fixed and variable costs, but the majority of it actually in variable cost, Torsten. So I think we've been prepared for such a time like this where we have to reduce those expenses. And so we'll go execute those plans. Also, it's important probably to keep in mind, OpEx is not the biggest portion of our spend in the company. We spend about $3 billion in cost of sales. And so we're looking at all areas of spend. So there's $4.5 billion of spend that I really go after and look at and make sure we're spending wisely and efficiently, looking for opportunities. Now, all that spend's different and you got to think about it uniquely. And in this environment where we've seen cost pressure and cost of sales, it's difficult to reduce it, but we still need to make sure that we optimize it. So we're not focused just on one piece of it. We're looking at all of it.

Very clear. Thanks.

Yep. Thanks, Bruce.

Our next question will be from your effort from UBS.

Hello, you're. Hi, I cannot switch on my videos the host is not allowing it, so I have to just ask questions acoustically and maybe the first question is please. And on the guidance again for the full year the minus eight to minus 4% can you help us understand what is the ethics and impact what is roughly the volume impact, what is the price impact. that we can better read underlying trends? Maybe I take the question one-on-one and start with this one, if I may.

Sure. Well, you know, the straight volume impact, if you will, if you went from the midpoint to midpoint, Jorn, we were at plus 3% constant currency and midpoint now minus six. So there's a nine-point swing there, excluding the impacts of currency, as you can think about as volume. And then the currency impact itself increased by about three points. So we had about a one-point currency impact That's now gone to four points for the year. So the spread between US dollar and constant currency growth is expected to be about four points versus just one point previously.

And on pricing versus volumes?

Yeah, so if you flow that through to, and I kind of mentioned this in my prepared remarks, if you flow through that volume impact down to profit, it's about, you know, the problem, one of the big problems with currency is it flows through at a very high rate, right? Because our cost of goods are primarily in US dollars. So when we have an unfavorable currency impact, flows through at a very high rate to operating profit. You know, frankly, if things reverse, the opposite is true. It flows through at a very high rate favorably to profit. So that currency flow through, which about three points you can think of, it's about $175 million of currency pressure on the top line. That flows through at a very high rate down to profit. That is one of the reasons why we've taken some pricing actions, because normally our strategy when currency moves unfavorably would be to do that. So we've taken some pricing actions to help offset some of that. But then you've also got the volume impact as well from weaker demand and many of those macroeconomic factors, which flows through. And that demand side, nine points, like I mentioned, about $475, $500 million of volume flowing through. We can offset more of that, and that flows through at more traditional rates. But it's a combination of the OPEX and the pricing actions we've taken that are offsetting those volume and currency impacts that I mentioned.

OK. Second question, please, on the $200 million recycling savings out of the $400 million incremental negative impact on non-GAAP EBIT. Can you help us to provide really more clarity where exactly these two main recycling is coming from or cost savings is coming from with concrete examples?

Yeah. So the $200 million, about three-fourths of that will be the OPEX reductions I mentioned, $150 million year over year and the other 50 from pricing. The OPEX, very easy to measure. We know where all those dollars are. The pricing, you've got to make some assumptions about what the impact is on volume and so forth, but that looks like what our capture rate is. We put those increases in a little earlier in the year, so I think have pretty good visibility to what that is. But the OPEX will primarily come out of variable expense, and a lot of that will come out of variable marketing, as we've talked about. But there's other areas that we're looking at too and have plans to reduce. Again, mostly on the variable side. Very similar to what we've been talking about for the last few quarters, actually.

And the last question, if I may, in terms of the end markets, speaking about gaming, for example, do you see that consumer sales trends have stabilized recently after them weakening over the last couple of months or is it still in declining mode and you do not know exactly when the trough is materializing in gaming?

I would say we're in the middle of the summer. I don't know if you can remember what you were doing last summer at this time, but I know I can't because I didn't do anything interesting. This summer, everybody's traveling. Whether you're in Europe or maybe except for China, everybody's on the move. I'd say the trends are really tough to read right now in gaming. It's a very soft gaming market. Now, when people come back in the fall, just think about it. You have a 12-week summer and you're traveling for two or three weeks of it. That's a very different picture. So it's really hard for us to extrapolate from what we're seeing this summer to, you know, in the middle of summer right now to what's going to happen the rest of the year. But I would say I think the reality is that we're going to have a gaming market that will be down for the year and, you know, probably significantly down like we're seeing right now. And really the key question is, when does that start to recover? It will recover. And I think it's going to be as we get further into the back half of the year.

All right. Thanks a lot.

Thank you.

Thanks, Jorn. Our next question will be from Alex Duvall at Goldman Sachs.

Hey, Alex. Hey, Alex. Thanks very much for the question. If we look at the lowered top line guidance that you put out today, as well as the altered EBIT guidance, it looks like you're assuming around 60 cents of EBIT lost for every lost dollar revenue. But of course, we know that your group gross margin would be closer to 40%. So I wondered if you could just talk a little bit to the drop through that you're assuming. How come it's so high, given that obviously you're taking some cost out? And I wondered, you know, is that because you're baking in an expectation of, you know, further pricing pressure? So to clear our inventories, how should we be thinking about that? And then I have a quick follow up.

The primary reason, Alex, why you'd see a higher flow through is because currency is a big portion of that. I said there's about $175 million of incremental currency pressure on the top line, and that flows through at almost 100%. We can offset some of that. And again, that's gross, excluding the impact of pricing. So you can think about which headwind you want to use the pricing as an offset to when you think about the math. But the real reason why it's a high flow through is going to be currency.

Very, very clear. I appreciate that. And then some investors have also been asking, even with the new guidance, obviously your revenues and EBIT would still be at a level significantly higher than pre-pandemic. So to what extent at the moment are you at all concerned about a mean reversion to where you were beforehand? You know, is the risk more about sort of consumer demand at the moment or are you sort of seeing signs in any of these categories of a pull forward and sort of any anything that would prompt you to kind of reassess your thesis that, you know, these are more structural trends that will endure for the long term?

Right now, I wouldn't say we see anything that would suggest that the structural or secular trends that we've been seeing are going to slow down. This period of adjustment, this temporary period, feels like a temporary period if we just go through each one of them you know the hybrid work trend and we're still only one-tenth of all the conference rooms enabled you know our conference cam number is growing strongly and i think we're still and and if you talk to companies around the world so many of them including us are really looking at their footprints and trying to decide what are we going to do you know and and we're we've landed our plane now we kind of know what we're doing around the world but a lot of companies really haven't yet If you go into workspaces, just the number of workspaces has increased so significantly that the replacement rate, the sheer replacement rate on upgrading workspaces looks like what it did pre-pandemic, just a lot more of them. And there's a lot more upgrading to do because you have a different dynamic. It's part of your home decor. You're kind of living with it all day long. And you're going to be working in the home and some of the office too. And then there's gaming. And gaming, we have absolutely as much confidence as ever on the gaming business. There are companies like Microsoft or More and more of the large meta who are coming into the gaming space, they're investing in the gaming space because gaming is going to be a very, very long-term strong growth engine. And that's what drives our business, the investment in content, the creation of new compelling things, this generation that's below. So I definitely don't think anybody should be overreacting to what's happening in gaming right now. I do think you've got a very, very strong two years of gaming.

now you've got a lot of people who are back out again and doing other things and you know in spending their money on trips and totally get it and uh and getting back out but i think the secular trends will continue another comment on gaming i think specifically alex you know if we went back and looked at our analyst day a couple years ago um so this would um it's i i thought the gaming market or our gaming business might be kind of flat year over year after a really strong fy21 at plus or minus 5%. We ended up growing 17% last year. But the thinking back then was, hey, listen, as things reopen, there'll be some substitution effects, other forms of entertainment. We'll probably see gaming take a pause, slow down a bit. And I think what I'm seeing right now is I think that that's taken another year from what I thought originally, right? That things didn't really reopen last year like we thought they would. But we're seeing that now. A lot of the weakness that we see and that I see in the market is in headsets. Be clear, all the other categories are declining as well, but headsets in particular have been down a lot. And certainly on the console side, we know that some of that is due to shortages and timing of title releases and things like that, shortages on consoles themselves. But I think also some of the headset demand probably during the past couple of years was from non-gaming use as well. People buying headsets, using them for Zoom calls and hybrid work. So not unexpected to see some particular pressure, I think, in that category. But for the reasons Bracken mentioned, I think the fundamental drivers of the gaming industry remain strong. Thanks a lot. Sure. Thank you.

All right. Next up will be Eric Woodring from Morgan Stanley. Good morning, Eric.

Hey, good morning, guys. So maybe Bracken, I'll pose one to you and then one to Nate. You know, as we move kind of further into this kind of post-COVID hybrid work environment, obviously you own a number of the markets you're establishing, mice, keyboards, webcams, headsets. You know, how should we think about your desire to enter newer adjacent markets or maybe accelerate investments into markets like music where you can regain a firmer hold on the share that you once had, kind of obviously all in a request situation? all in a goal to get back to kind of that 8% to 10% growth range. Just curious how you think about that question.

You know, we're always looking at new categories, Eric. You know, since I've been here, I think we've gone from about a little over a dozen categories to over, you know, 25 or 30 now. So we've got things in development all the time to try to go into new categories. We really try to start the seed programs first, and then we'll acquire something if it makes sense to either augment that, accelerate it, or replace it. So we're going to keep doing that. And I would say we've done actually quite a bit of category expansion in the enterprise space. And I think that is a good opportunity for us. We've gone into cabling, into whiteboard cameras, and into meeting room screens. And we'll continue to look across the whole business at that, to your point. The music business in particular, we talked about really pulling back on the Bluetooth speaker business because we just didn't love the fundamentals of that business. And I still feel the same way about that. I don't think you'll see us like doubling down on that. We're still in it. It's still a great contributor in many ways, but I don't think that's a space we'll look at, but we see spaces across the board to keep expanding. But the good news is, I really think the fundamentals of our current categories can deliver that long-term guidance we talked about already. I mean, the fundamental growth opportunity in conference rooms, the workspace opportunity you know i i when i came here i never would have dreamed that we'd have the kind of growth opportunity we have in mice and keyboards that we have now ahead of us uh and of course gaming we just spent time talking about and the only other thing we haven't talked about is is the streaming and creating phenomenon you know it's uh it's super exciting i mean i you know if you just think most of you are not in the flow of discussions on what's the future of marketing And what many of us would say the future of marketing is it'll be disproportionately large for creators themselves, where they'll actually be selling, transacting, or at a minimum, directly, strongly influencing the sale. And that's aspirational for all of our kids and everybody under the age of 30. So many people want to be a streamer creator. So we're in all those spaces. And there's a lot of growth ahead in all of them.

Okay, that's helpful. Thank you, Bracken. Maybe one to you, Nate. So sales and marketing down, call it 10% in the June quarter, you've alluded to containing variable costs, of which sales and marketing, I assume, is a sizable chunk of that. How does a pullback in those efforts impact your need to discount products? And any way you can kind of help us think about the impact of discounting in fiscal 23 on kind of your net sales growth outlook that you provided last night?

Sure.

When I start with this one, Bracken, you may want to come in a little bit too on the marketing strategies. You know, We've seen some pockets, Eric, not unexpected, where promotional activity has increased, but that's really, we're sticking with our strategy, which is really to drive marketing, even at lower levels of marketing investment, drive marketing to increase the value of the brand and to drive preference for Logitech without having to be so promotional. And that's really our, it's been our long-term strategy and we're continuing to do that even during this year. Now, I think, again, as gross margins have come down for some of the, I think more temporal reasons that we've talked about before, cost increases, logistics rates increases, now currency, that's put some pressure on the cost structure. And so the place that we're going to go address that right now is with variable spend. And I don't think it makes a lot of sense to invest as much in marketing when the demand environment is this volatile and in some cases weaker. So I think you should think about it as we'll probably put that marketing back in when it makes sense. Um, but in this environment, I think it makes more sense to pull back on that, continue to drive the investment in innovation, um, and the long-term roadmaps.

Yep. You said everything I would've said, uh, Nate, I, I don't think it makes sense to over invest in marketing when the markets themselves are retracting some in places.

I wouldn't. Yeah. And I guess I, I wouldn't think about that as a signal that we're gonna get more promotional as a result of that. I mean, I, you've heard me talk about having to manage pricing. to try to offset some of those pressures. And so I think that remains the focus. In fact, this year, if I look at margins year over year, increased promotion was not one of the big drivers of margin pressure. Really the things that drove margins down year over year were currency, cost inflation, and logistics rates. Those were the biggest drivers. And so I think we're starting to see some of those things settle down a little bit. The cost increases have definitely slowed logistics rates still at very high levels relative to where they've been historically, but are no longer increasing month over month or quarter over quarter like they have been. Month over month, I would say they've stopped increasing. So hopefully we'll see some of those things bottom out. And then, you know, as the economy continues to go through this cycle, we can see some favorability and some return to the costs that we had previously in those areas, which would give us a nice lift on gross margin.

I'll just add one more thing. I think in my experience, you know, when markets retract like gaming is retracting right now, your marketing is just less effective. So I don't think you want to spend as much. And that's where we're going. Now, it will come back. This is temporal. So it will come back. If it does, we'll probably increase the marketing again. But we still have a lot of marketing spending. Don't get me wrong. Even with these numbers, we're still going to be spending a lot of marketing.

I think too, Eric, sometimes we've talked about a business model and what's the shape of the P&L. And I think these adjustments we're making to the spend are really to help sustain the shape of the P&L. We've run OPEX at about 25% of sales. And on this lower revenue outlook and with these OPEX reductions, should be seeing us still manage roughly to that same area. You'll see a lower mix of sales and marketing while we continue to sustain investments in R&D.

If I could just sneak one last one in, Bracken, just for you. You mentioned earlier in the prepared remarks diversification of supply chain outside of China. Can you maybe just elaborate on that a bit, what you mean by that? Obviously, you have a big manufacturing base there, but any incremental details would be helpful. And that's it for me. Thanks, guys.

Yeah, absolutely. When the tariffs happened a few years ago, I think we had less than 1% of our total manufacturing outside of China. So we had We had flexibility because we're really good at moving things in and out of our factory, but we really didn't have a supply chain that was set up there. So even though we had the ability to move things in and out, we didn't have the ability to move things in and out very quickly. So we've really been working on that. The first big wave of work happened during the post-terra, kind of right in the middle of the terra of activity. We got to about, I'd say, 15%, 17%. Our goal is to get up closer to 30%. And that will give us flexibility, not only in case of other tariffs, but also just better cost positions and things. So we feel very good about the progress we're making. We're still very high on China as a manufacturing site, but we want to be flexible. We want to be able to move even beyond that 30% when we need to, or if we need to, either for costs or for geopolitical reasons. Super. Thanks, guys. Thank you.

Thanks, Eric. Next up, Adam Angeloff from Bank of America.

Hello, Adam.

Hey, Adam.

Hello. Thanks for letting me on. I think we've gone through most of my questions. So just one from me, please. If the revenue outlook is worse than your guidance, do you think you have further flexibility to cut OPEX if needed?

There is always opportunity. Like I said, well, I would just say, again, I would think about OpEx, but I would also think about cost overall. It's $4.5 billion if you think about OpEx and cost of goods sold. So again, all that cost is different, but it's a big number. If you're 1% inefficient on $4.5 billion, it's $45 million. So we're not going to wait and find out if the revenue is worse. We're working on all those things today. But it certainly will become tougher. I mean, the more costs you have to take out, it gets a little bit tougher around the edges. But I think that our outlook captures the majority of the outcomes. But if things get worse, you know, we'll make some decisions at that time. We're always going to try to manage our business for the environment, but for the long term. So we want to do things that make sense for the long term health of the company.

Yeah, I'd add to Nate's point. I think, you know, the way I think about any business is you have to adjust to the size of the business. You just have to. It's a must. So it's not a question of can we, we will. The question is how fast are we going to do it if that happens. But we don't think that's going to happen. But if it did, we'll face into it and deal with it.

Got it. Great. Thank you. Thanks, Adam. Thank you. Thanks, Adam. Our next question will be from Ananda, Luke Capital. Good morning, Ananda. Hello, Ananda.

Good morning, guys. Thanks. Yeah, Nate won't let me go visual here yet either. So Nate, give me a heads up when I can turn it on. But let me just jump into it here, guys. Thank you. I hope you're good. Thanks for taking the question. Hold on a second. Let's start video. There you go. Cool. Thanks, man. All right. yeah so just two if i could um the first is bracken you may mention the prepared remarks or actually i think it was one of the questions about uh asya's about the segments um that you you expect keyboards and mice you know to continue to to hold up well would love to get your thought process behind that and then i have the add-on follow-up you know i'm just uh i just i guess i have a several things contributing to that comment and that that belief that we have

One of them is that we're also dependent on it today. And I think in a hybrid world, you're going to still be dependent. It's not like the category is going to go away when you go into the office a few days a week. And many of you probably are experiencing that. And I think the awareness is up. And so there's a lot of interest. We're seeing it when we launch new products. We have you know, much stronger demand than we had before. As we launch a new product, we launched mechanical keyboard to do extremely well, you know? So I think this is that there that's, uh, one key down here. The second one is, you know, if you go back to the really heart and soul of this business, it started as a mouse business and then went to mouse and keyboard. We have an incredibly good innovation engine and a very, very good strategy for segmentation. And, uh, I just feel very good about the vision, the strategy, the execution, the whole thing. So I think we're, we're, we're in more control of our own destiny there than I'd say almost anywhere else we operate. And yeah, so I'm excited about those categories. Like I said, when I came to the company, I actually joined Logitech because I thought these categories were going to be in a long-term secular decline. They've been a long-term secular growth trend the whole time and it's getting better and better.

Is there a... We actually, we're tight on supply in some areas of the keyboard and mice market too. So I think our results there actually could have been a little better if we had the supply. I mean, that's always the case every quarter. We've got something we're short on and, you know, in the recent quarters, it's been there.

And do you guys, do you guys have any sense? Like, I know this is mostly a channel sell or a web-based sell, so like not your enterprise sales force, as Bracken, you mentioned a little earlier, but do you have any sense of, any sense, like even if it's super broad, how much goes, how much of mice and keyboard sales are used for folks in their business environment, you know, or for business context? And then secondarily, how much is sort of middle class, upper middle class? So, you know, sort of less income sensitive. Well, it's really less inflation sensitive because employment's pretty good. So we don't have an employment issue, we have an inflation issue. So still have discretionary income.

Okay. So to answer your first question, yeah, we have a sense. It's really, as you would guess, it's kind of a hard number to measure, but it's probably about a quarter. And we're underdeveloped in that quarter. We've never done a particularly great job of really attacking the go-to-market through the enterprise of the workspace. You can bet that we're focused there now. So we're going to work to resolve that one. In terms of... You know kind of high end versus low end or people with with a lot of economic availability versus less yeah i'll just remind you that the average mouse we sell sells for I think. $29 or $24 in the marketplace. This is not an economic hardship for most people. I mean, it's a, and especially if it's your job, you know, or if you're creating on the side, I was talking to a customer the other day, who's, who's actually got two jobs going at once, you know, and this is the lifeblood of your business, you know, doing it well. And, and also just, you know, the health and, you know, making sure that your hands don't hurt and all that stuff. So I think we're, we're not too, um, too sensitive to now we're not especially mouse and keyboard i don't think it's super sensitive to the economic environment that's one of the reasons why when we lowered the our discussion of where the revenue is going to be you don't hear us too negative on mice and keyboards i think even in a recessionary environment they're going to do okay

That's, that's helpful. And then I, I'm going to ask one, one more quick one here. How was the webcam? I think it's the, the, the griots, the high end webcams that's in the video, video collab segment had those hold up during the quarter. Sorry. What's the, and, and how they held, hold up. And then also like, what's that, what's the outlook for them?

Yeah. You know, webcam in general just pulled way back, you know, and I think that's not too shocking. I mean, I think, You know, people were really scrambling to get on camera. And now most people have found a way to get on camera. So the market's pulled back. Now it's still way out versus what it was two years ago. So it's a much bigger business today. And we've got, you know, we're excited about what kind of innovation we can do there. But I don't want to mislead you. I don't think we're going to turn webcams into a strong growth category in the future. I think it's a good, solid category that's attractive for us. But it's not going to be a heavy focus for us. We're going to innovate there. And I think we'll do well there. And we've got great market share and we're gaining market share there. But I'm not, I wouldn't point to that one and say, gosh, that's one to really look at as a bellwether for how our business is going to do. We know what we think is going to happen there.

I think about webcams, excuse me, is really think about the entire workspace, right? It's a point sale, sure. But it's really part of the essential workspace. And so as you're doing more video calls, you know, I think the webcam are definitely important. is more essential than what it was before. So I think that's exciting. The installed base is bigger than it was before because of the sales over the last couple of years. Certainly it's pulled back off of those highs, but our strategy is more about the entire workspace. So it's the webcam, it's the mouse, it's the keyboard, it's the headsets. How do we gain more control, more business of that entire personal workspace? And webcam's a part of that. Absolutely.

And are the webcams that are classified in video collaboration, the high-end webcams, did they also, were they also softer like the reported segment?

Yeah, similar to the reported segment. Not quite, not down quite as much, but similar.

Yeah. Cool. Thanks, guys.

Thank you, Adam. Great. Our next question is from Michael Faith from Vontable. Hey, Michael. Hey, Michael.

Yes. Hi, thank you for taking my question. Actually, two or three. The first one is on capital allocation and your buyback. The question is actually what are you going to do with all those shares? Are you considering canceling some of them or is it all for employee shares? Or do you have other intentions for those shares in order to make them revalued shareholders? That will be the first question. And the second one is really similar or adding up to what you just said on on webcams, when you think about the sort of the creator economy and all the devices that these people need, I guess it's mice, keyboard, and webcams, headsets, how come there is such a disconnect between mice and keyboards and the other sort of creator economy type of products? And then I have an add-on just on details.

Mark Warren, That you would take the capital allocation discussion and i'll jump on the next.

Nate Persily, yeah Michael you know there's there's several uses of them, some is for employee grants. Nate Persily, We could cancel some you know we could take some proposals to shareholders at the general meeting we don't have anything on the on the proxy for this year, but we still own a relatively small percentage of that total. Nate Persily, So it's not really a decision we face today. Nate Persily, But yeah you know general. General use is like we've had in the past, I would say is the message right now. Do you want to take the second one or do you want me to take it?

Yeah, I think what you're saying, what you just described, what the opportunity we see is, you know, there is a big difference between, you know, what people are buying and what they probably need for the creator economy. And as you said, you know, some keyboards are going super well. Why are cameras down? We've got one camera that's positioned for that audience. And then we've got a new set of cameras that we've launched called Mevo, which is very, very small. And I think, you know, really getting our story, our marketing stories correct and make sure we're placed in the right places. All those things are really critical to having a long-term, really great growth business. It's small today and the opportunity is really big. You know, I think Michael Daly- You know the making sure that a creator feels like they know what they need we just launched lights, for example. Michael Daly- And you know very, very small way well we've watched one light product so far and it's super interesting to see. Michael Daly- How many people are looking for that you know and we're in very limited distribution so far, so I think there's a big opportunity there Michael I think we just got to keep working to make sure we get the right portfolio, the right positioning for those in the right distribution.

Okay, thank you. And the add-on would be in the audio and PC wearable space there. Could you give a bit more detail on what happened in there? What dragged sales down? What went well? And how did the microphones business perform?

Yeah, Nate, you want to cover the overall segment. I'll talk about microphones in particular.

Of course. Well, you know, are you including mobile speakers in your question, Michael, or overall?

No, no, no. Just the just the RMPC wearables.

Yeah. So I think on one hand we had headsets in there and I mentioned earlier that I think headsets overall was kind of a tough market. So that was probably one of the biggest drivers of decline. Microphones was also an area that was weaker. And Bracken, I'll let you follow up with a comment on that one. But microphones was weaker year over year, again, coming off of, I think, a pandemic period where, you know, there was probably some additional demand for microphones above and beyond the normal creator demand. And then the other pieces of that category are sort of declining as expected. PC speakers, the category we have very high share, but, you know, a market that has been in some decline. And then the last piece I'd probably say would be Jaybird, where, you know, we made a decision to not launch new products there. So we're seeing the expected decline in Jaybird as well. Bracken, did you want to comment on Mike's?

Yeah, the mics, you know, as Nate said, you know, the mic business grew dramatically during the pandemic. It's still up, I think, more than 50% versus pre-pandemic. And we think a lot of that growth was driven by people who just felt like their mic wasn't good enough on their desktop. And so they were not really in that segment you just described as really interesting. They were in another segment, which is, wait a minute, the microphone isn't working and And most people have found their way around dealing with that. But the underlying business of streamers and creators and podcasters, I believe it's still very healthy. Now, in the pandemic, a lot of people got into podcasting that weren't in it before. Probably a big spike, and then that's come down. But I think after we get through this period of kind of reduction to the point where you say, okay, this is the real core market, we'll see very strong growth again. I think the need for streaming and creating products in the world ahead is going to be bigger and bigger. And so we're pretty optimistic about it. And we haven't innovated much in that business either, and that's coming just to be fair.

Yeah, still very strategic for us. I think also keep in mind it has some exposure to the gaming market, which we've talked about has been slower the last couple quarters.

Okay, thanks. Very helpful. Thank you. Thanks, Michael. Okay, our final question today will come from Serge Rotzer, Credit Suisse.

Hi, Serge. Yes. Hi. Good morning, everybody. I have two quick ones in that case. The first one is you had a very favorable sales mix in Q1 with video collaboration, keyboards, combos, ponting devices. So the high gross profit margin products growing, the low gross profit margin product declining. So now we have to expect even not improving margins. But still, we can expect higher volumes sequentially, isn't it? Not high single-digit growth, as Nate mentioned, but higher volumes in Q2 than in Q1. Does this imply that the high gross profit margin product will decline than in Q2? So we see lower sales in video collaboration and mice and keyboards, or where I'm wrong.

I think the reality is that the other impacts are just larger than the impact of category mix. We did see favorable category mix year over year, Serge. And I saw that in my gross margin bridge. It just wasn't as big as the other ones that I called out. So I think that story still remains. VC, I think, is gone. It's now over 20% of our mix. It was down about 10% pre-pandemic. So it's doubled in size relative to the overall company. But the other factors are just just too big, you know the cost increases the logistics rates, the currency those kind of overwhelmed most of the other impacts.

Okay fair point and the second one is in your inventory, can you remind me how much is finished or finished products and how much is semi finished products. Because these days, probably you will not ship finished products around the world, giving the high cost. You mentioned once, you do this only if it gives sense, you know. So I'm wondering in this ratio. And then secondly, obviously, are there any impairment risks then on some of the inventory because it's at the wrong place or you have the wrong products in your inventory, your stock?

Can you, I just want to make sure I understand your mixed question between sort of- The first one is how much is finished products and then how much is components, huh?

Let's say that way, you know? And then secondly, I fear that on finished products, you could have an impairment risk because you will not ship finished products from Asia to Europe and wherever, you know, because it's not worth to do that. So over time, you could have impairment risk on your inventory. What is, yeah, can you help me there?

Well, I think on the impairment thing, obviously, it's something we look at every quarter. And we have taken reserves in the P&L really over the last year, I would say, including some this quarter. We didn't have very many of those during the height of the pandemic growth period because everything was selling. But we've sort of been reverting to more normal levels of reserves, I think, over the last 12 months. So that continues and something that obviously gets a very close inspection every quarter to make sure that Rich D' Things that are aging or slow moving or things that come back from customers those all carry reserves and that's all reflected in the p&l. Rich D' The other thing to keep in mind to search is our business mix has shifted so we started off your questions talking about vc. Rich D' it's a very different category than say music speakers right, which was just which is category emphasize it's now just a couple points of our sales. So that was a category, and Bracken mentioned why sort of the unattractiveness of that business model. It was a much more discretionary purchase, had much higher holiday sales. VC is a much steadier demand product, longer life cycles and so forth. So I think the overall amount of risk in the types of inventory that we're holding is different than what it was a few years ago as our business has shifted to more mice and keyboards, which have long product life cycles, more VC, which have long product life cycles, things like that.

Yeah, I would just add to that. I think we're also just, I mean, you know this because you've been following us for a while, but I'll say for everybody else, you know, we're not in a business that has big obsolescence risk where, you know, some new technology is going to come in and really obsolete our category. I mean, if we have a risk, it's, you know, we have a little too much inventory in one place or another one, and we need to just be patient and get it out and not hyper-discount it to get it out. And that's generally the approach we've taken. We, you know, I'm not saying we don't have any inventory risk, we always do, but it's not, it doesn't look like many of the categories that you probably look at outside of us.

Right. Okay. Got it. Many thanks and bye-bye. Thanks Serge.

Thanks everyone for your questions. Bracken and Nate, thank you. That's a wrap on our call. Bracken, any final comments?

No, you know, I really appreciate it. It was a great high engaged discussion today. Thank you very much. We'll look forward to talking to you again next quarter and Stay tuned. It's an exciting time in the world. Every first quarter of the year seems to be very different from the last one over the last three or four years. And we're in another one now. But I'm very optimistic about the future. I think we're in a great spot.

Wonderful. Thanks, everyone.

Thanks, Dan.