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.