Logitech International S.A.

Good afternoon and good evening. Welcome to Logitech's video call to discuss our financial results for this quarter. Joining us today are Hanukkah Faber, our CEO, and Matteo Anversa, 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 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. Less noted otherwise, references to net sales growth are in constant currency, and comparisons between periods are year over year. This call is being recorded and will be available for a replay on our website. I will now turn the call over to Hanukkah.

Thank you so much, Nate, and welcome everyone. Q2 was a memorable quarter for us as we celebrated, as you just saw in the video, Logitech's 45th anniversary. And we celebrated it with the very people who built this iconic brand. Our three founders, our employees, and key stakeholders from around the world. We like to say the mouse built this house. But over 45 years, there have been many, many other firsts and breakthrough products from Logitech. We're proud of the innovative, strong and resilient business and organization we have today. And we're super excited for the growth that lies ahead in the next 45 years. Q2, in fact, was another quarter of growth, our 11th in a row, despite a challenging general environment of tight component sourcing, elevated costs, and the ongoing conflict in the Middle East. In addition to, as we told you back in July, the negative impact of the closure of one of our semiconductor suppliers for essentially the entire quarter after an accident. Despite that difficult backdrop, we increased sales by 2% year over year, delivered excellent gross margins, and grew non-GAAP operating income to $231 million, well ahead of our outlook. Growth was particularly strong in the Americas in video collaboration and in gaming. And even as global PC shipments declined by 20% in the quarter, our pointing devices and keyboards grew mid-single digits, demonstrating that our growth opportunity continues to come from the large installed PC base. We also made good progress against our strategic priorities this quarter. First, superior products and innovation. Our innovation engine is humming, fueled by the incremental investments in R&D that we initiated at the start of fiscal 27. At our flagship Logitech G Play events held in Shanghai, LA, and Warsaw this September, we unveiled 15 new gaming products ahead of the holiday season. The headliner of the new lineup is the Pro X3 Super Strike, the next generation of the massively popular Super Strike gaming mouse that we launched earlier this year. It's powered by the unique haptic inductive trigger system, or HITS. The NDX3 debuts a top-tier new chipset. It's even lighter than the original, and it boasts an extended battery life. Also in the new gaming range is exciting new sim racing gear and a sleek new Yeti 2 microphone for streamers. And that wasn't all. In the quarter. We also introduced DMX Keypad, an AI control center designed specifically for developers seeking to streamline agentic workflows. And the Zone 5 Pro headphones. The Zone 5 Pro features adaptive noise canceling and AI-powered voice isolation. So users can move effortlessly from morning meetings to evening playlists with the same ultra-comfortable headset. Second, doubling down on B2B. Video collaboration net sales grew 12% in constant currency. Three trends are contributing to the strong VC growth. The post-COVID refresh wave, office footprint expansion as companies require more days in office, and AI-driven VC room expansion. Finally, we had another quarter of terrific operational excellence. Non-GAAP gross margin was very strong at 45.2%, and Matteo will detail that shortly. And we maintained very strict spending discipline in G&A while continuing to invest strategically in R&D and in sales and marketing to drive long-term growth. All in all, our Q2 results demonstrate the resilience of our business model, and I'm really proud of our team's ability to execute through significant external headwinds. Now let me hand over to Matteo to walk you through the details of our financial performance and of the outlook.

Matteo, over to you. All right. Thank you, Anneke, and thank you all for joining us on the call today. Our operational discipline delivered solid second quarter profitability, allowing us to protect our margins despite the macroeconomic headwinds and significant ongoing supply constraints. Now let me walk you through our financial results in more detail. So net sales for the second quarter were 1.2 billion, up 3% in US dollars and 2% in constant currency. This marks our 11th consecutive quarter of year-over-year top line growth, driven by sustained momentum in video collaboration and gaming. Our core business is tracking where we expected it, excluding the impact from the third-party supplier incident and the ongoing geopolitical conflicts. Estimated underlying net sales would have been up approximately 4% in constant currency. Now taking a closer look across our categories. So video collaboration net sales grew 12% year over year in constant currency supported by sustained enterprise investment as organizations refresh COVID era equipment and upgrade meeting rooms. Gaming net sales increased 7% driven by new product launches and the continued strong demand for our top sellers like the Pro X2 Super Strike mouse. Pointing devices and keyboards and combos both grew 4%. And importantly, this occurred while the PC market shipments contracted by roughly 20% year over year in the September quarter, demonstrating the strength of our install-based strategy and premium mix. Conversely, tablet accessories fell 30% against a tough prior year comparison featuring a large multi-quarter educational deal in Asia Pacific. Webcams declined 10% as the global market declined, though we continue to gain market share. Looking at the regional level, Americas led the way, accelerating to 13% net sales growth, reflecting solid business and consumer demand ahead of the holiday season, in addition to strong local sales and marketing execution. Asia Pacific declined 2%, primarily due to a tough year-on-year comparison from the large educational deal that I just mentioned, as well as a disproportionate impact from the supply limitations. EMEA declined 6%, driven by market weakness and the ongoing Middle East conflict. Now turning to profitability, non-GAAP gross margin rate was an outstanding 45.2% up 140 basis points year over year. This represents our fifth consecutive quarter posting gross margin rates above 43%. This year over year expansion was due to lower tariff costs supported by our manufacturing diversification, favorable product mix towards video collaboration and premium product lines and positive currency impact. These tailwinds were partially offset by higher freight and logistic costs. Turning to operating expenses, Non-GAAP operating expenses were $320 million flat sequentially and representing 26.3% of net sales up 190 basis points year over year. This increase reflects our planned growth investments for the year and specifically sales and marketing grew 12% to fund key initiatives like the Lodge Play, while R&D increased 9%. G&A held flat sequentially corresponding to 2.8% of sales consistent with the prior year. So as a result, non-GAAP operating income was 231 million up slightly year over year and non-GAAP operating income margin came at a very strong 18.9%. Now turning to cash, we generated $164 million in cash flow from operations during the quarter. We ended second quarter with $1.5 billion in cash after returning $406 million to shareholders through $235 million in annual dividends and $171 million in share repurchases. Now turning to the third quarter, We expect constant currency in the third quarter net sales to be down 5% to flat year over year. While the underlying demand across the business remains positive, this outlook reflects the significant impact of the supply incident. and after significant mitigation work, we now estimate the negative impact to net sales to be between 70 to 80 million in the third quarter. By the fourth quarter, we expect the impact of the supplier incident to be largely resolved. On profitability, we estimate the third quarter non-GAAP operating income to be in the range of 220 to 255 million with a gross margin rate between 41 and 42 percent. We anticipate the third quarter gross margin rate to decline by approximately 200 basis points year over year mainly due to rising logistics and material costs, as well as modestly higher promotional spend. Despite this inflationary pressure, which we expect to continue throughout the remainder of our fiscal year, We now expect fiscal year 2027 non-GAAP operating income margin to be at the high end of our long-term 15% to 18% range, even excluding the 61 million tariff refunds from last quarter. So with that, we're going to open the call for Q&A.