Logitech International S.A.

okay good morning and good afternoon thank you everyone for joining us welcome to logitech's video call to discuss our financial results for the second quarter of fiscal 2023 joining us today are brack and daryl 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 reform act 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, and we will also discuss non-GAAP financial results. You can find a reconciliation of 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 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 encourage you to review these materials carefully. Unless noted otherwise, comparisons between periods are year over year and in constant currency and sales are net sales. This call is being recorded and will be available for replay on our website. With that, I will now turn the call over to Bracken.

Bracken. Thank you, Nate. And thanks to all of you, as usual, for joining us. Last quarter, we discussed the ongoing macroeconomic and geopolitical challenges impacting Logitech and the world. And the short story is that the industry is volatile. Inflation continues to be an issue. The dollar remains strong. The war continues. And consumer confidence appears to be tepid. Despite this volatility, we're committed to a straightforward approach as we manage the business. We'll continue to invest in product innovation while we manage the near-term conservatively. First, let's talk about innovation. We love the categories we're in. We're optimistic about their growth trends, the markets, the strategy, and our business model. We just had one of the most impressive sets of product launches in the history of Logitech. All told, we announced more than 20 new products in the quarter. In my time at Logitech, I don't think we've ever launched this many. More important than the sheer number, though, is that I believe this year they have never been more innovative. We've increased our product development investments over the past three years. And you're seeing the results of those investments as we further separate ourselves from others in the market. And with everything going on in the world, our teams are doubling down. It's so exciting. Many of these new products, by the way, are additive to our existing portfolio. We're increasing our addressable markets. And equally as important, they're designed to take advantage of the big, durable trends we've been highlighting. Video everywhere, hybrid work, and the explosion of gaming into content creation. We continue to develop products to help businesses and employees thrive in this new and evolving work from anywhere world. And as the environment changes, we're continuing to learn something new every day, every week about what the future holds. It's that evolution that creates the demand for innovation. And that's the kind of markets we like to be in. Markets where our expertise in design and user insights is rewarded by customers. For example, for B2B customers, we announced Logitech Sight, addressing the question we hear most from enterprises about video conferencing. What do I really need in a conference room to make hybrid work work? We're passionate about creating an equitable experience for remote participants and in-room participants. Sight is the next step bridging this gap. It's a tabletop camera that will be sold as part of our conference room solutions. And it uses AI to more intelligently track conversations and provide a more natural video perspective to enhance meeting effectiveness. I'm especially excited about this product because it highlights two important areas where we've continued to make strides. It's powered by AI software, an excellent example of our increasingly software driven solutions. And it's a perfect example of a product that's completely additive to our existing portfolio of conference room products, seamlessly working with Rallybar and Scribe, just to name a couple of them. Nobody else has a solution like this. It's such an important product. I think of it as the missing piece of the conference room setup. For the personal workspace, we launched a new set of keyboards and mice designed especially for Mac users, which will expand our addressable market in the work-from-anywhere trend. And now let's look at gaming, where the team had a really strong quarter of product launches. Similar to the trend in video and hybrid work, we're seeing more gamers demanding products that let them game from anywhere. We announced G-Cloud, a gaming device designed for cloud gamers that accesses PC and console games from nearly anywhere. And as a site for B2B customers, this product is completely additive to our gaming lineup. Gamers want on-demand access to their favorite games and high-quality gaming experiences, wherever they happen to be. And that's exactly what G Cloud provides. Later in the quarter, we released our lineup of pro racing wheels and pedals, which I believe are far and away the best in the industry. These are the high-end, high-performing products, and the response has been incredibly positive. The list goes on and on. Gaming launched its Aurora suite of products. A new set of keyboards, mice, microphones, and headsets targeting a larger customer set with expanded color and design choices and new features like headsets more easily worn with earrings and a broader range of hairstyles. For creators, we have a new studio quality microphone and lighting. We're pushing ahead on the metaverse and in partnership with Meta, released an immersive audio solution, Logitech Chorus. You get the point. So what's the common thread that runs through these product launches? They offer a high quality, seamless experience for people to work, play, and create wherever and whenever they want. They're tightly integrated with our existing product portfolio, and in some cases, expand the addressable market. By investing in our product roadmap while also focusing on operational efficiency, we'll ultimately come out of this downturn better positioned and poised for strong growth. Many companies talk about investing through times of economic uncertainty. We're doing it. But make no mistake, we're not operating in normal times, and we're acutely aware of the macro challenges. We're focused on what we can control. Last quarter, we discussed a plan under this theme. What you saw this quarter were the first steps in executing that plan. We decreased our expenses, focused on operational efficiency. We committed to reducing operating expenses by $150 million, or 11% by the end of the fiscal year. We're on track to meet that goal. For Q2, OpEx was down 15%. And part of the operational efficiency is realigning our org structure. Earlier this year, we merged our commercial organizations into one team. The goal was to serve B2B customers in a coordinated way, leveraging one Logitech to sell a portfolio of Logitech's relevant products. This quarter, we evolved our business group and engineering structures to directly align with our new commercial structure and customer audiences. B2B customers, end users, and gamers plus streamers. Along with operational efficiencies, this will allow us to better compete within the enterprise market and better serve end users at the same time. We executed targeted pricing increases, and our operations team continues to look for more cost-effective ways of getting our products to market. Our gross margin for the quarter was a strong 38.6% given inflation and currency headwinds, and we've not yet started to see the lower shipping rates flow through our P&L. Looking ahead, you should expect us to continue to operate this way. We'll be prudent in the near term while investing in our priorities to grow in the long term. And that's why I'm so optimistic about our future. People will invest in their workspaces. People will participate in video calls. People will game. People will create content. And Logitech will be right in the middle of all of it. Before I turn the call over to Nate for a breakdown of our financial performance, I'd like to say a few things about what you saw in our press release about Nate's next steps. Nate's been my CFO for nearly four years. We've worked through the pandemic and have grown this company nearly twice the size it was when I hired him. He's done an amazing job as CFO in a period that's unlike anything Logitech's ever gone through. Nate and I talk regularly about his personal aspirations and those for the company. And over the course of these conversations, we came to an understanding that now would be a reasonable time for him to move on to the next opportunity. He's built a best-in-class finance team over the last few years that will support the transition for a new CFO. And as important, Nate plans to stay on board until his replacement's in place. I am very grateful to you, Nate, for everything you've done for Logitech, and I can speak for the board and say they are too. So, Nate, with that, can you take us through the quarter's financial performance?

Thanks, Bracken, and thanks for your kind words. Let me walk you through the quarter in more detail. In Q2, net sales were down 7% to $1.15 billion. While sales were down, this was the third consecutive quarter of improved year-over-year growth performance. We grew in video collaboration and pointing devices, while gaming showed nice sequential improvement in year-over-year growth, down 4% after being down 13% in Q1. Gross margins decreased versus last quarter as expected to 38.6%. versus the prior year, product costs and freight rate increases were unfavorable three points and currency was unfavorable two points. We partially offset these headwinds with our pricing actions and by driving down our use of air freight. Operating profit was $156 million, reflecting lower demand, inflationary cost pressures and unfavorable currency and our continued investment in our product development capabilities. Cash flow from operations was $73 million in Q2, and cash flow is up $215 million year-to-date versus last year. Turning to results across our product categories, gaming showed some resilience in the quarter, led by growth in racing wheels. For Q2, gaming was down 4%, which is a marked improvement from last quarter. Americas and Europe gaming sales remain pressured, while Asia continues to grow up 25%. As with last quarter, we outperformed the market and gained a PC gaming share. We think our product portfolio is in great shape with strong new product introductions as we head into the holiday season. Video collaboration posted a second consecutive quarter of 7% growth. Video conference room cameras and peripherals grew nearly 30%. This growth was offset by a decline in business-oriented webcams, which were down more than 30%, although their sales remained more than three times higher than pre-pandemic levels. We talked about this dynamic for several quarters. Pressure in webcams following the incredible pandemic-driven growth, somewhat offsetting solid and strong growth in conference room cameras and peripherals. Pointing devices were up 3%, driven by our new Lyft ergonomic mouse and our high-end MX Master 3S. Keyboards and combos net sales declined 10% due to low end market softness in China and Europe, partially offset by a strong start from our new high end MX mechanical keyboard. Keyboard sell through was essentially flat in the quarter. And as with our business webcams, consumer webcams were pressured and down 33% from pandemic highs. In any given quarter, results across our categories may not move up or down in concert. It's the benefit of having a diversified portfolio that we like so much. This quarter was no different. So what we focus on is the performance of the categories that are addressing secular trends in gaming, video collaboration, and hybrid work. Sales of our pointing devices, keyboards and combos, gaming, and VC products were 80% of our total net sales this quarter. And we're up 1% year over year in constant currency and excluding Russia. Their sales grew 1% year over year in constant currency and excluding Russia. It's also important to note that the combined gross margins for this set of categories are above the company average. So our biggest categories addressing attractive secular trends grew and produced above average margins. Turning to expenses, consistent with the first quarter, we reduced our expenses, most notably in sales and marketing, which was down 21%. As Bracken mentioned earlier, we remain committed to investing in product design and development to strengthen our category leadership, and we increased R&D spend by 3%. Last quarter, we committed to reduce our annual operating expenses by $150 million versus last year, and we are on track to meet that commitment by year end. We will continue to focus on finding efficiencies throughout the organization as we align our spend with our sales. We ended the quarter with a cash balance of $869 million. In September, our shareholders approved our proposed dividend distribution, which, when combined with our continued buyback program, returned $276 million to shareholders in the quarter. We are now halfway through the fiscal year, and despite the headwinds, we remain confident in our ability to meet the outlook we announced last quarter. As a reminder, that outlook calls for full year revenue in FY23 to be down 4% to 8% in constant currency. The U.S. dollar continued to strengthen versus last quarter, and currency now projects to be a roughly five-point headwind to U.S. dollar growth. Therefore, our outlook for full-year revenue in U.S. dollars would be down 9 to 13 percent. Our full-year non-GAAP operating income outlook remains between $650 million and $750 million, despite the incremental currency pressures. This pressure is expected to be offset by incremental efficiency gains throughout the organization and favorability in logistics rates. Much like last quarter, our intent is to provide you with a range of reasonable outcomes given the highly volatile nature of the global economy. We've made assumptions about a number of factors, including potentially protracted economic volatility and sustained revenue and profit pressure from the stronger US dollar. At the high end of our outlook, We assume a relatively normal holiday cycle, while at the low end, we've assumed a holiday lift generally aligned with the worst in the last decade. And while it continues to be challenging to forecast with a level of precision and certainty in line with pre-pandemic business cycles, we believe maintaining our forecast is prudent and reasonable. The other Nate, it's time to open the call for your questions. Thanks.