Logitech International S.A.

Good afternoon and good evening. Welcome to Logitech's video call to discuss our financial results for the third quarter of fiscal year 2025. Joining us today are Hanukkah Faber, our CEO, and Matteo Inversa, 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. 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 GAAP and non-GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC. These materials, as well as the shareholder letter 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 net sales. This call is being recorded and will be available for a replay on our website. I will now turn the call over to Hanukkah. Hanukkah?

Thank you, Nate, and welcome everyone to our third quarter earnings call. As you all know, the holiday quarter is a very important quarter for us at Logitech, seasonally our biggest. And I'm thrilled to share that we performed very well this holiday, delivering strong, profitable growth for the fourth consecutive quarter. Net sales grew 6% versus last year. Demand or sellout growth accelerated to 8%, and the growth was broad-based across categories and regions. As a result, we're raising our outlook for the year. Importantly, our growth was driven by the strategic priorities that I shared with you last spring. First, superior design-led innovation. It's in our DNA, and we went into the holiday quarter with a fantastic lineup of new products, which customers and consumers loved, and which translated into strong demand around the world. In gaming, with 16 new products launched in advance of the holidays, sales reached near-pandemic highs, growing double digits at plus 13% versus last year. Our Pro line, developed in collaboration with professional esports athletes, was a standout and achieved record sales. And looking ahead, we just announced an AI streaming assistant, developed in collaboration with Nvidia at CES. This agentic AI innovation is designed for gaming streamers, giving them an instant producer, a co-host, and a sidekick to better content create and reach their fans. Superior innovation like this has fueled success across our portfolio, particularly in the high end. For example, our premium MX line of mice, keyboards, and webcams, including the new MX Creative Console that was developed for digital designers, reached near record sales levels this quarter. Our innovation increasingly leverages AI to make our products smarter, driving new features that were not possible even six months ago. In addition to the AI streaming agent for gamers I just mentioned, our newest headsets offer a truly unique two-way noise-canceling experience powered by AI on the edge. And the Logitech Sight, our advanced tabletop meeting room camera, which uses AI-driven smart switching for video framing and sound processing, was recognized as one of time's best inventions of 2024 last quarter. There's more to come. Just last week, we announced a RallyBoard65, a mobile touchscreen display with video conferencing capabilities that you can easily roll into any room. This portable solution creates a digital cocoon for meetings and a more immersive meeting experience in any space. In a short amount of time, we have successfully integrated AI into the work and play flows of nearly all our key categories, and there is much more to come. The developments in AI of just this last week position us even better as they provide more opportunities for edge AI applications into our product development. The second strategic driver of our strong results was Logitech for Business. Doubling down on growth in the B2B channel is an important strategic focus for us. This quarter, engagement with customers at LogiWork events created strong momentum, resulting in growth in video collaboration and headsets, as well as in the personal workspace products that we sell to B2B customers. Services bookings, an important driver of customer satisfaction, more than doubled. And our continued expansion into the new vertical of education yielded growth of more than 20%. The Logitech for Business team continues to meet the evolving needs of modern workplaces. Just this month, they launched a range of innovative smart office tools, including the RallyBoard 65 I just mentioned, the Rally Camera Streamline Kit for higher education, and the Logitech Spot Sensor. These new solutions, combined with commercial go-to-market initiatives from our new dedicated global sales forces, are resonating very well with B2B customers. Next, when you look at our growth this quarter, it was broad-based across geographies. This underscores our strategic approach, tailoring our execution to meet local demands and opportunities, and rapidly reapplying best practices across countries. For Q3, I want to congratulate our teams around the world for delivering very effective marketing campaigns and truly excellent in-store and online holiday retail execution. Notably, we're making progress in China. Our end markets there saw robust growth, helping to drive a double-digit increase in Logitech's net sales year over year. Our teams are doing admirable work, quickly introducing new products in China that reposition us in the market at both the premium and the lower end, and refreshing our use of social media and online sales channels in exciting new ways. It's still early innings in our China execution, but I love the momentum that we're regaining in China. Last and certainly not least, our continued delivery of profitable growth is underpinned by the exceptional execution of our operations team. Once again, cost reductions drove our gross margin above 43%. And with tariffs on everyone's mind, we continue to prepare for a range of possible outcomes and for an ever more resilient global supply chain. I'm pleased to report that we remain on track to further diversify our manufacturing footprint, with well over half of units shipped to North America coming from locations outside of China by the end of our fiscal year. In summary, a quarter with very strong results, driven by real progress against our strategic priorities. And finally, as a reminder, we have our Analyst and Investor Day scheduled for March 5th, when we will discuss our mission to extend human potential in work and play and our longer-term strategy, as well as showcase our industry-leading innovation. We'd be thrilled to host you at our Silicon Valley office or online.

Matteo, over to you. All right. Thank you, Annika. Thank you all for joining the call today. The team delivered another exceptional quarter with strong profitable growth. The detailed financial results can be found in the press release and shareholder letter. But let me briefly share with you the key financial highlights for the quarter. Net sales were up 6% year over year, driven by demand in both our business and consumer channels, which came in ahead of our outlook. Demand was broad-based with all regions and key product categories growing year over year. I would like to call out two particular high points for the quarter. Gaming grew double digits, approaching net sales levels last seen during the pandemic. And the high end of our business did very well. And as Annika mentioned, our pro line hit record net sales and our MX line also hit near record net sales. Regionally, Asia grew high single digits in year over year net sales and Europe and the Americas grew mid single digits. We entered the third quarter with a healthy and balanced channel inventory, which supported a successful holiday season. And as we exit the quarter, both owned and channel inventory levels ended well within our operating targets. As we indicated in the prior earnings call, in the third quarter sell-through outpaced sell-in, and we expect this trend to continue also in the fourth quarter. Most importantly, our growth continued to be highly profitable. The non-GAAP gross margin rate was 43.2% in the third quarter, up 90 basis points year-over-year, driven by reductions in product costs. And this marks the fifth consecutive quarter of year-over-year gross margin rate expansion, a real testament to the durability of our cost reduction initiatives and commitment to operational excellence. As a result, we expect the gross margin rate for this fiscal year to be on the higher end of our previously provided range of 42% to 43%. Moving to operating expenses, Q3 OPEX was impacted by a $14 million charge for bad debt reserve due to the inability of one of our e-commerce payment providers to pay us. We have since transitioned to a new provider. And excluding the impact of this charge, operating expenses would have been 22.3% of net sales, slightly lower than the previous year. Sales and marketing would have been up 6% year over year. And additionally, we continue to invest in R&D while maintaining G&A flat year over year. Non-GAAP operating income increased by 7% compared to the prior year. And excluding the charge that I mentioned earlier, it would have been 20.9% of net sales up 110 basis points compared to the third quarter of last year. Our cash generation remains robust. In the quarter, we generated $370 million of cash from operations, contributing to a healthy cash position of $1.5 billion. In addition, we announced a five-year, $750 million credit facility, which we believe will enhance our financial flexibility and further strengthen our financial position. In the third quarter, we returned $200 million to shareholders through share repurchases as part of our ongoing $1 billion buyback program. And since the beginning of fiscal year 25, we have returned over 650 million to shareholders through dividends and share repurchases. Now, looking ahead, we have increased our fiscal year 2025 outlook. Our underlying business is performing extremely well, and we are confident that we will close out this year in a strong position. There are two items that I would like to call out since our update last quarter. Now, first, as I mentioned earlier, in this quarter, we faced an isolated $14 million headwind related to a bad debt expense. And second, we believe that it is likely that our results in the fourth quarter will be negatively impacted by the recent strengthening of the U.S. dollar. Taken together, bad debt and foreign exchange represent an approximate $40 million headwind, and these items are not related to our core business and ultimately are transitory. Despite this pressure, the tremendous performance of our underlining business gives us the confidence to raise our fiscal year 2025 outlook for both net sales and operating income. Absorbing an unforeseen 40 million headwind near the end of our fiscal year and raising our full year outlook is a testament to the resiliency and flexibility of our teams. You know, we speak often about the dynamic environment in which we operate, inflation, possible tariffs and currency fluctuations. But in the end, our business is executing at a high level and adjusting to these external uncertainties. We delivered another strong quarter in our position to end the year. We continued strong momentum. So now we are ready for the Q&A.