Logitech International S A : Q4 2021 Transcript (opens in new window)

FINAL

Company Name: Logitech International SA

Company Ticker: LOGN SW Equity

Date: 2021-04-29

Y 2021 Earnings Call

Company Participants

Ben Lu, VP of IR

Bracken P. Darrell, President

Nathan Olmstead, CFO

Other Participants

Ananda Prosad Baruah, Analyst

Asiya Merchant, Analyst

Erik William Richard Woodring, Analyst

Paul Chung, Analyst

Serge Rotzer, Analyst

Unidentified Participant, Analyst

Bloomberg Transcript

Presentation

Ben Lu {BIO 19785128 }

Good morning. Welcome to Logitech's video call to discuss our Financial Results for the Fourth Quarter and Full Fiscal Year of 2021. Joining us today are Bracken Darrell, our President and CEO; and Nathan Olmstead, our CFO. During this call, we may 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. 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. 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 and quarterly reports 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 a replay on our website. I'll now turn the call over to Bracken.

Bracken P. Darrell {BIO 3403495 }

Thank you, Ben. Thanks to all of you for joining us. I want to start by saying I'm as worried about India as I could possibly be in a year or whatever it's been now, where this pandemic is raged on. I think we've had fears that have affected every person on this call and more. But in some ways, I was always so worried about India for all the reasons you

Page 1 of 15

FINAL

Bloomberg Transcript

Company Name: Logitech International SA

Company Ticker: LOGN SW Equity

Date: 2021-04-29

can imagine. I'm afraid it's happening. But I hope and pray that they really get it back under control quickly -- and that the rest of the world continues to improve step-by-step and escape this pandemic.

Well the pandemic continues to disrupt our daily lives. And as I said, in some countries it's even getting tragically worse. It's -- we're starting to emerge from the strict shelter in place requirement here where I'm sitting today in California and actually broadly in the U.S. We've been thinking -- that's got us thinking even more -- maybe more accurately about what a return to the office might look like as the pandemic subsides.

Some of the behaviors that were formed during the pandemic are clearly going to endure. Video callings meteoric rise will not reverse. Most calls are moving permanently to video. A place in your house, having one for each person to work or to study or to be both, they're here to stay. We're all going to have places in our home. While gaming was popular long before they pandemic, people are using it more and more for social interaction. Many of us noticed this first during the Fortnite phenomenon a few years ago.

This year, gaming took on and even -- took an even bigger step toward prominence in our culture. The number of podcasts, funny videos, thank God, streamers and creators continue to grow throughout the pandemic, emboldening more and more people to think maybe they could get in that streaming act and create video for other people or audio. None of that is new for our strategy. While our long-term strategy is unchanged, our opportunities have changed. They're bigger and they're broader. On top of that, we now have a bigger, more profitable base to grow from. Let me briefly give you a few external examples that illustrate the acceleration of the secular trends that affect us. These illustrations might help you see what we see, long-term growth. Let's start with the trend of video everywhere and working from home and office. Citi group announced that most of its employees will be designated as hybrid workers who will spend at least three days of work in the office and up to two days in home.

That's just 1 of many companies that have announced similar plans. More and more will follow over the coming weeks and months. In fact, even surveys from early in the pandemics showed that companies are beginning to think then about hybrid. CBRE, 1 of the largest commercial real estate operators in the world, noted in a survey last September that 61% -- remember, this is last September, 61% of companies were already back then planning to offer a hybrid work arrangement. I suspect that number is even higher now. And 1 of the key reasons the companies are going to hybrid work is, well, it's obvious to all of you on the call now because we like it. We, who are working at home, want it. JLL, another commercial real estate operator, said in a survey that 72% of workers view work like ballots as their number1 priority post-COVID, ahead of a comfortable salary even.

I've spoken with many executives over the past year. Since the onset of COVID, most, until recently, have really had no plan for how to return to work. Now plans are starting to form. Short term, a story that's come to everyone is a few days in the office and a few days at home. They need video in their offices to keep their remote, but connected teams working well. Things go beyond hybrid work.

Page 2 of 15

FINAL

Bloomberg Transcript

Company Name: Logitech International SA

Company Ticker: LOGN SW Equity

Date: 2021-04-29

Last week, Apple was just the latest major company to identify podcasts as a growth platform with podcast subscriptions, which will allow creators to sell subscriptions to their podcast listeners.

On top of that, streaming is soaring. Social audio, like Clubhouse, has suddenly taken off, and there are more and more creators, making it seem like a feasible and attractive thing for even more and more would be creators to do. The network effect is so powerful. We make the tools that enable existing creators to do it better and be more effective, and for new creators to try it. In Gaming, it's bigger than it's ever been. And as I said, it's become the place to meet for more and more people socially. What does all this mean for Logitech?

More video enabled rooms, more video enabled workspaces that need to be equipped and upgraded with our growing portfolio of offerings, more streamers and more creators looking for more equipment, more gamers looking for better gear. Before I go further, let me say that you might never have another analyst call from Logitech without an update on either our quest to be environmentally sustainable are our actions in diversity, equity and inclusion. But in some cases, you're going to hear about both.

These are so central to Logitech's purpose. This quarter, we announced the availability of the previously announced carbon label products we talked about. First, we know of in the tech world. We're 1 of very few companies in the world to commit to this on every single product in an effort to reduce global carbon output by setting a new industry standard, just as calorie labels have impacted the food industry. In the process, we developed a life cycle analysis methodology to measure a product's carbon impact from its raw materials to its manufacturing and transportation to use by the customer consumer and then, finally, to the end of life. We're sharing our learnings and third-party certified methodology to any company, any competitor anywhere in the world for no price at all for free.

I encourage you to ask companies, as you're talking to them, if they're considering carbon labeling. Don't do it because we ask you to now, do it because it's part of a program that will enable the earth to keep the earth healthy for your Kids, and your grandkids.

Now let's turn to our financial results. Logitech delivered the best year in our history, with fiscal year 2021 sales up 74% and operating income more than tripling to $1.3 billion. What drove those impressive results was not just 1 category or a onetime pull forward. These results were broad-based across virtually all our categories and regions, including countries that never fully locked down and those that are furthest along with their post- COVID recovery programs. Said another way the secular trends we keep talking about are really secular and they're still secular. They will keep growing.

Our PC Peripherals categories were already growing consistently every year, but they increased over 50% in fiscal year 2021 to $1.9 billion. To be candid, we always felt there was potential to grow more in these categories than we were, but we were held back by (inaudible) awareness of some of our premium mice and keyboards, for example, MX masseter and anywhere, I'm using the MX Master right now, which participate in the

Page 3 of 15

FINAL

Bloomberg Transcript

Company Name: Logitech International SA

Company Ticker: LOGN SW Equity

Date: 2021-04-29

premium into the category. Analysts, coders and creators should be using these products, but the awareness has always been limited.

I bet many of you on this call, don't even realize how outstanding these products are. Nate and I were talking about this again last night. It was only when hybrid work and remote learning expanded, and we began to be able to invest in awareness that demand for premium price -- of premium mice and premium keyboards began to accelerate.

We also have an even faster-growing alternative, ergonomic products for those who need comfort. WEBCAMS, needless to say have shown their highest growth -- showing the highest growth, more than tripling versus a year ago. While we've been supply- constrained through most of fiscal year 2021 and have admittedly lost some share because of it, we expect to close the gap between in market demand and our ability to fulfill it in fiscal 2022. But let me put this opportunity in perspective on WEBCAMS, CNBC WEBCAMS.

We shipped less than 20 million units in the entire year of fiscal year 2021, the 1 we're talking about today against an installed base of 500 million monitors and 1.4 billion PCs. You can see that we still have vast opportunities ahead of us to drive greater attach rates. But what excites us even more is the increase in the number of workspaces as more companies shift to hybrid work.

As we noted at our recent Analyst and Investor Day our internal survey suggests a 2x to 3x increase in the number of people who will work more than two days at home and the other day is in the office. This means more mice, keyboards, WEBCAMS, speakers, headsets, mics. You can expect us to continue to innovate across our product portfolio, like the MX line of mice and keyboards for enhanced productivity, or our mainstream license keyboards focused on lifestyle and design, or those ergonomic products I talked about. Combined with that, combine that with our increased investments in marketing, which you now know we're putting in to create greater user awareness and consideration for how something as simple as a $50 mouse or keyboard can drastically improve your PC experience, your workspace experience at home or in the office, or both.

You could start to see why we're so excited about this category for the next several years. Now let me talk about another big growth category for us, video collaboration. Sales almost tripled in fiscal year 2021 to over $1 billion for the first time. Our Q4 VC sales were more than what we did in all of last fiscal year. Our growth actually accelerated through the quarters of fiscal '21 as supply improved and more companies started to map out their return to the work -- return to the office.

That represents a clear trend toward turning on video to connect with friends, coworkers, clients and others. Triple-digit growth in this category was across both our conference room video products as well as our personal collaboration products, such as the enterprise 4K Brio Webcam or the Zoom wireless headset. We're also very excited about the opportunities for our most recently announced all-in-one devices, the Rally Bar and the Rally Bar Mini. They are just starting to roll out to great customer feedback.

Page 4 of 15

FINAL

Bloomberg Transcript

Company Name: Logitech International SA

Company Ticker: LOGN SW Equity

Date: 2021-04-29

Our Gaming category also had a very strong year, with fiscal 2021 sales up 77% and sales more than doubling in Q4. The growth was broad-based across all our Gaming categories, including PC gaming, simulation, console gaming and all of our regions. Not only has the gaming market expanded significantly over the past year, we've also reached our highest level ever in overall gaming market share. I'm extremely proud of all the innovation and products that we, our teams have been able to introduce despite the shelter in place mandates around the world.

Our colorful and playful G733 gaming headset, developed by Tiffany Beers and her team, has quickly become 1 of our best-selling gaming headsets. While our newest ProX Superlight gaming mice, mouse, had 1 of our fastest post-launch sales ramps since it was introduced just six months ago. These are just 2 of the many new products that supported our growth and share gains in fiscal year 2021.

Tablet and other accessories also had a tremendous year, with sales up almost 3x, while our tablet keyboards for education we're up over 7x. Schools around the world have needed new technology tools to deliver education to students remotely. And as we noted last quarter, a large onetime order from a Japanese school district drove a significant part of our tablet sales for the year. Even excluding this, our overall tablet sales growth was up triple digits, and our traditional retail tablet sales were up over 50% for the fiscal year.

Our audio and wearables sales grew 69% in fiscal 2021, led by retail headsets and blue microphones. And mobile speakers were down 22% for the full year, but that's in line with our expectations as we reallocated and prioritized our investments in other fast-growing markets. Now let me turn the call over to you, Nate, to walk through our key financial metrics.

Nathan Olmstead

Okay. Thanks, Bracken. We finished an excellent year on a high note with our Fourth Quarter sales more than doubling and with broad-based growth across all our categories and geographies. As Bracken said, fiscal 2021 sales reached $5.3 billion, up 74%, which exceeded our recently revised guidance of 63% growth. This represents over $300 million of sales upside compared to that recent guidance. And as Bracken will cover later, we are maintaining our growth rate outlook for FY '22, and therefore, effectively flowing through this FY '21 revenue upside. Our non-GAAP operating income more than tripled to over $1.27 billion, higher than our previous outlook of $1.1 billion.

Our fiscal '21 non-GAAP gross margin reached 44.8%, up over 6percentage points from last year, almost 5 points of that was due to lower promotional spending and lower retail point-of-sale activations. We do expect, however that these promotions and marketing activities will increase and return to more historical levels in fiscal '22, putting some downward pressure on gross margin in the months ahead. Product mix was favorable this year, and we expect it will remain favorable to margin again next year, somewhat offsetting the pressure I just mentioned. What all this means is that our FY '22 gross margin should land within our recently revised and increased target range of 39% to 44%. Our non-GAAP operating expenses increased 44% in fiscal '21 to $1.1 billion. As our business growth solidified and accelerated, we invested across many areas, including

Page 5 of 15