Logitech International S A : Q1 2023 Transcript (opens in new window)

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Company Name: Logitech International SA

Company Ticker: LOGN SW Equity

Date: 2022-07-26

Q1 2023 Earnings Call

Company Participants

Bracken Darrell, President and Chief Executive Ofcer Nate Melihercik, Head of Global Investor Relations Nate Olmstead, Chief Financial Ofcer

Other Participants

Adam Angelov, Analyst

Alex Duval, Analyst

Ananda Baruah, Analyst

Asiya Merchant, Analyst

Erik Woodring, Analyst

Joern Ifert, Analyst

Michael Foeth, Analyst

Paul Chung, Analyst

Serge Rotzer, Analyst

Torsten Sauter, Analyst

Bloomberg Transcript

Presentation

Nate Melihercik {BIO 20814398 }

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 Olmstead, 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 Re Act of 1995. We're making these statements based on our views only as of today, and our actual results could difer materially. We undertake no obligation to update or revise any of these statements. We will also discuss non-GAAP fnancial results, and you can fnd a reconciliation between non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could impact our fnancial results in our press release and in our flings with the SEC, including our most recent annual report and subsequent flings. 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

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Bloomberg Transcript

Company Name: Logitech International SA

Company Ticker: LOGN SW Equity

Date: 2022-07-26

net sales. And fnally, 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.

Bracken Darrell {BIO 3403495 }

Thank you, Nate, and thanks 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 strengthening to nearly 1:1 in the year amount [ph]. Infation rose further and consumer confdence has weakened. None of these fundamentally afect our optimism for our target markets, our strategy or our business model.

But as we look at the quarter and ahead into the rest of the year, we believe it's prudent 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 in Video Collaboration, Keyboards & Combos and Pointing Devices as hybrid and return-to-work trends continue to take shape. We grew market share and we delivered solid gross margins of 40% despite worsening infation and currency impacts.

As I just said, our overall net sales in Q1 combined with the worsening macroeconomic picture made us take a hard look at our assumptions for the rest of the fscal year. We can't afect currency exchange rates or infation, 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 fscal year '20, we had a disproportionately variable cost, which makes us ready to meet the moment. We'll continue to raise prices to ofset the currency and infation and target to keep a strong margin profle.

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 fscal year '23, by reducing expectations for both revenue and operating proft. We believe this update appropriately takes into account the macroeconomic and geopolitical environment we are in, as well as our own plans to lower costs and take control all the variables within our graphs.

Before I let Nate take you through our fnancials and outlook in more detail. Let me just say at the macro picture we're dealing with now is challenging, but we believe it's

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Bloomberg Transcript

Company Name: Logitech International SA

Company Ticker: LOGN SW Equity

Date: 2022-07-26

temporary. I'm as optimistic as ever about the long and -- the medium and long term. I can't think of anywhere I'd rather be for the long term and writing the secular trends Logitech gives. Hybrid work or the idea of work from anywhere is simply a future. As I've said a few months ago, the debate is over, hybrid won, and that will favor Logitech as ofces [ph] are renewed for new footprints and more video, and homes continue to upgrade for better ofces.

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 for 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, we'll 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 the 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 diversifed set of vendors now much more diversifed, adjust shipping [ph] routes, and mitigate transportation costs and risks and fnally, diversify manufacturing outside of China. We all been working hard to fip the infationary trend to cost reduction as the macroeconomic type turns and it always turns.

Our sales teams, especially our enterprise teams will continue to refne and improve their go-to-market capabilities across the globe. And will go all out to help companies reconfgure ofces, expand the video enablement and create workspaces appropriate to this hybrid world. We will bring down expenses signifcantly to align with the market realities that we project for the fscal year. And as we do this, we'll focus on organizing for maximum efectiveness over the next few years.

Our capital allocation priorities remain unchanged. Investment in our product design and development capabilities, accretive M&A and returns on capital to shareholders in the form of share repurchases and dividends. And fnally, you can expect our commitment to sustainability to remain frmly in place. We were just named by EcoVadis as one of the top 1% of sustainability companies in the world. And our plan is to turn sustainability into a driver for good and for growth will continue.

Now let me turn the call over to Nate for breakdown of our fnancial performance this quarter and our new outlook. Nate?

Nate Olmstead {BIO 21036514 }

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

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Bloomberg Transcript

Company Name: Logitech International SA

Company Ticker: LOGN SW Equity

Date: 2022-07-26

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 & Combos and Pointing Devices while facing tough compares in the macro environment.

Gross margins remained essentially fat sequentially despite the litany of external factors the pressured proftability. I mentioned last quarter that cost increases, unfavorable currency rates, and higher shipping rates may pressure half one fscal '23 margins. And while we did see these impacts, we managed pricing and reduced our reliance on air freight to help ofset these pressures. However, we anticipate Q2 margins will be lower than Q1 as these headwinds remain. Operating proft 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 refected these trends with sales down 13% globally. We outperformed the market, however, and gained PC gaming share. We saw a momentum from our products geared toward both social and professional gamers ofset 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 ofset double-digit declines in business oriented webcams, which are part of our video collaboration category. In creativity and productivity, Keyboards

• 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 fat 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-Pacifc 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 earning 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 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

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Bloomberg Transcript

Company Name: Logitech International SA

Company Ticker: LOGN SW Equity

Date: 2022-07-26

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 on reducing or eliminating unproductive expenses from our business and we are driving efciency in all our spend, including fxed cost, product and freight costs and our go-to-market investments in the channel. We can't ofset every headwind that we predict for this year, but we are taking aggressive actions to align our spend with our sales while sustaining an 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 confdence 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 fscal year '23 outlook. In May, we provided an annual outlook of 2% to 4% growth in constant currency and an operating proft outlook of $875 million to $925 million. Since that time, we've seen continued and in some cases intensifed 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 proft pressure from the stronger US dollar.

Given these considerations and the actions we are taking to reduce cost 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 million and $750 million. At the midpoint, our outlook for proft is down $200 million versus our prior estimates. At a high level that comes through two headwinds and two partial ofsets.

The headwinds totaled about $400 million, including approximately $250 million of reduced proft from lower volumes and cost increases and $150 million of lower proft from currency changes, ofsetting these unfavorable impacts are OpEx reductions and pricing. So in summary, we see about $400 million of incremental proft headwinds for the full year of which we have plans to ofset 50% through actions we are taking.

Nate, we can open the line for questions. Thank you.

Questions And Answers

A - Nate Olmstead {BIO 21036514 }

Great. Thank you, Nate. (Operator Instructions) We'll start with Paul Chung from J.P. Morgan. Good morning, Paul.

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