Logitech International S.A. (LOGN) Earnings Call Transcript

Good afternoon and good evening. Welcome to Logitech's video call to discuss our financial results for this quarter. Joining us today are Hanneke 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. Unless noted otherwise, references to net sales growth are in constant currency and comparisons between periods or 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 Hanneke.

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 3 founders, our employees, and key stakeholders from around the world. We'd 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. And our flagship Logitech G-PLAY events held in Shanghai, L.A. 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 debuted 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 for 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. The trends are contributing to the strong VC growth. The post-COVID refresh wave office footprint expansion as companies require more days in office, an 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. Matt, over to you.

Right. Thank you, Hanneke, 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 U.S. 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. 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 keyboard 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 installed base 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% and 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. India 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 impacts. 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% and to fund key initiatives like the Logi 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 $106 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 million 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 million to $255 million, with a gross margin rate between 41% and 42%. 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.

Our first call comes from Ananda, Loop Capital.

Really appreciate the question. Just 2, if I could. The first one is, I guess, on the component situation, really component situation and then how they promote. So really that kind of dynamic. Is there anything that you see -- you had mentioned Matteo year-over-year, is that higher promos than typical on a year-over-year basis? And then kind of collectively, are you thinking that you can get -- make up some of the revenue lost from the thin,components as you move into the new year? And are those 2 things in the trial? And then I have a quick follow-up.

So let me maybe give you some qualitative perspective on the components and on holiday, and then Matteo can walk you through the numbers. So on components in general, obviously, really short, and the cost pressures and availability pressures there have expanded from just memory to basically all electrical components. And that's not unique to us. That's the whole industry. So that is affecting the gross margin outlook. And of course, we do have some levers to mitigate those things like value and engineering and like pricing that we will activate over the quarters ahead. Matt can walk you through the impacts in Q2, Q3 and Q4. As for holiday, our markets globally were pretty solid in Q3, and we expect that to continue into the holiday season. So we do expect positive holiday demand overall. But it is that proverbial K-shape. We expect high-end consumers absolutely to spend, and you see that in the growth of our premium -- of the premium part of our portfolio. But we also expect that mainstream consumers will be cash strapped and will be looking for promotion in order to afford their holiday shopping. So hence, you see a modest increase in promo spending versus last year, and we're really comfortable with that. That is strategic and that allows us to be competitive.

And then on the -- in terms of quantification to Hanneke's point, the promotional spend in the third quarter will be slightly higher, but we are talking about roughly 50 basis points of negative impact year-over-year in the gross margin rate in the third quarter versus last year. So we are not talking about a huge amount. And we always keep ourselves a little bit of wiggle room during the holiday season, as you know. So that's really what we factored in our financials.

That's super helpful, guys. And just I guess the quick follow-up is, what's a good way for folks to think about the way GTA layers kind of layers in across your console and PC gaming portfolio.

Yes. Yes. Great question. And of course, Q3 is going to be a very exciting quarter in gaming with GTA 6 launching on November 19. A couple of things I want to say there. First of all, of course, we're going to leverage that because the whole gaming world is very excited. So that's good. Now that said, GTA 6 is launching for console and won't launch for PC until much later into next calendar year. So we are mostly a PC gaming business. So we're not expecting like a giant upside from this initial launch. Second thing I would say is the markets in gaming, especially in the U.S., have been looking pretty good because it's not just GTA 6. There are some other big games that have come out. So I'll call out Call of Duty: Modern Warfare 4, which came out just last week, 10 days ago. we're the official partner of Call of Duty: Modern Warfare 4 and things like that really give a little extra pizzas to the business, and we're doing custom-tuned settings unique in-game items, events with Call of Duty. So all of those things make the gaming space really happening at the moment, which is great.

Our next question comes from Erik with Morgan Stanley.

And congrats on -- again, the nice results in pointing devices, keyboards and combos against that down 20% PC shipment environment. So I'd like to just know what the offsets were that -- that drove that outperformance. For example, any color that you could share on pricing tailwinds or just the success that you're having attaching peripherals to the installed base? Like is there a year-over-year growth metric you could share related to some of those internal initiatives. Just any other color that you can help us understand the nice outperformance you guys saw. I had a quick follow-up, please.

Sure. Thanks, Eric. It's good to see you. I'd say the big numbers really are the market share numbers in both mice and keyboards. So in the quarter, pointing devices or mice were up 320 basis points globally, and that is well ahead, I would say, kind of what we do on average. We always grow share, but on average, we grew about 50 basis points a year over the last decade. So to grow 320 basis points in the quarter on mice is huge. And we grew similarly in keyboards about 280 basis points globally in the quarter. So that is massive share growth in a market that's held up much better than the PC market. market was flattish, I would say, in what we call personal workspace. What's driving that share growth is innovation and superior products. So the MX Master 4 in mice continues to be really, really strong. We've also done fun things, limited additions. You may have seen the much and late limited edition this quarter in the United States. And in China, some really great keyboards that are now have been expanded globally. So the Alto keys performing very, very well in the U.S. and in the rest of APAC. So it's really down to innovation, which then continues that flywheel of having more people use a mouse and a keyboard because that's still relatively low, growing share and growing ASP because all of those innovations are premium priced.

Okay. That's awesome color. And then maybe quickly as my follow-up. We've seen -- we see 2 consecutive quarters of OpEx growth outpacing sales growth. And I think the implication rough math is something similar in the December quarter. I understand the source of this spend, of course. And maybe my question is just like -- can you walk us through how you expect these kind of sales and marketing and R&D investments to begin materializing in, let's call it, accelerating revenue growth. Just how to think about the timing of kind of the return on those investments and when you expect those to start playing out?

Yes, absolutely. So thank you. Again, hopefully, nothing new in that OpEx. As we've said before, we are investing in R&D and in sales and marketing because this is such a special time. The age of AI gives us so many new opportunities for innovation and then to obviously market that sales and innovation and to grow in B2B, and we feel this is the right time to step up those investments a little bit. with a lot of discipline. G&A, of course, a lot of discipline and flat as a percentage quarter-over-quarter. Now I think you asked a million-dollar question when I'm not going to give you a date on when that will materialize. But this quarter and also Q3 are a little wonky because of the supplier accident. And as Matteo said, demand has been there. Unfortunately, we just haven't been able to have the supply to deliver on that demand. So it's a little hard to say, but sooner rather than later, I think it's probably the best way to put it.

Our next question comes from Asiya with Citi.

Video Collaboration has been another strong quarter here, do low teens, double-digit growth here. How should we think about just the demand continuing? There just seems to be continued pressure on enterprise spending with all the infrastructure purchases. Just how you're thinking about demand continuing here given whether it's AI enabling, more video collaboration or otherwise? And just given supply constraints, I know maybe it doesn't necessarily affect video collaboration, the one supplier you talked about, but I think Hanneke talked about just broader supply issues. So how should we think about Logitech being able to meet this meet demand? And how should we think about continued demand here in the spec segment?

Yes. Yes. Thanks, Asiya. It's good to see you. We're very optimistic about continued really great demand in video collaboration. This is not a 1 quarter happening. The reasons that I'll give a little bit of which are true for the whole market, and then I'll come back to us and our position in that market. First of all, the COVID era refresh. And that is not a discretionary spend. That's a mandatory infrastructure upkeep because customers are facing hard deadlines there from the major platform providers, not so much from us, but for Microsoft, from Google, from Zoom, the devices they're running are end of lifing. So that means they have to upgrade these after 5 to 7 years. So that refresh is kind of in its early innings and will continue over the next couple of years. So that's 1 big thing. And again, that's not discretionary. Second is return to office mandates, especially here in the U.S., more and more companies, and you feel it really here in the Valley or saying come back to the office really 5 days a week. That means they need more office space. And again, that's not discretionary. You need more office space, you also need more video-enabled rooms. And finally, AI integration. So a lot of CIOs investing a lot in co-pilot licenses and their competition. It makes no sense to pay for thousands of licenses -- when you don't have the right hardware in your meeting rooms to make sense of those, then that's a real waste of money. And again, we also expect that trend to continue and really not being discretionary. So I'd say all 3 of those trends in the market are longer term and not discretionary. Now how do we play there? We didn't mention it because it didn't happen in the quarter, but at the very beginning of the third quarter, we launched the Generation 2 of our entire video collaboration lineup which is an absolute beauty, and we'll talk about it next quarter, but you can also see it online. We have refreshed and we've started to ship a whole new generation of all of our product AI-enabled beautiful. So we are very well positioned with a really superior lineup of video collaboration products. For the first time, we're also set up to do large rooms like auditoriums, which we weren't able to do before. For the first time, we're also launching into audio for large rooms, which we weren't able to do before. So our product portfolio is outstanding. And then to your last question, can we meet the demand? It's a battle every day, but we feel pretty good that at least for the quarters ahead, we have enough memory chips to meet the demand that's out there. So with all of that optimism, the only other thing I would say is demand. Again, we're very positive on Net sales quarter-by-quarter can be a little choppy in video conferencing because you can have a huge deal 1 quarter and not in the next or have that in the comparator. So -- but very upbeat on the demand in video, and that will last for a while.

As just to connect the dots on the financial to Hanneke's point, we've been pretty proactive in trying to secure as much memory as we could. And that's why you see the inventory a little bit elevated compared to last year. The terms are not as good as last year. That's intentional -- just to make sure that we can continue to fulfill the strong demand that we are seeing on VC. And as a reminder, we also raised prices back in May to mitigate the impact of the cost increase. And in spite of that, you saw the net sales performance has been pretty remarkable.

Okay. And then just if I can, a quick follow-up on the gross margin upside. I think just help us understand, again, very strong here relative to guide. I understand it's guided down 200 bps here. in third quarter because of components and logistics, et cetera. Just what were the drivers for the upside here relative to, I think you guys guided maybe 44-ish percent or so for the quarter. So the 120 bps upside, just if you could talk a little bit about what drove the upside here relative to pricing or promotional, et cetera?

Sure. So the -- fundamentally, 2 things. One is the biggest one is a mix. I think if you look at the product mix, and premiumization that came in a little better than what we were thinking 3 months ago. As you know, with video collaboration growing 12% year-over-year. So that's accretive to the mix of both on the top line and the margin. But also, overall, our premium -- the premium side of the portfolio. So MX, ERGO, Pro, all performed extremely well and overall better than the average sales of the company. So mix was the key driver. Promotions were a little -- maybe lower than what we originally anticipated. But overall, we're very pleased with the results. And yes, as you said, we are assuming for the third quarter, more pressure on the inflationary side, on the margin year-over-year. But so far, year-to-date, just to put things into perspective, our gross margin has been almost 45% and excluding the tariff reimbursement that we had in the first quarter. So very pleased how the team keeps working on it.

Our next question comes from Jorn with UBS.

It's good to see you -- would be 2 questions, please. The first one is Europe. I mean, you're not the only one who are saying the consumer environment is really tough. What is your best guess for how long Europe can remain negative territory? And what is your strategy now trying to turn this around. And the second question would be please in video conferencing. Can you please split the recent growth into volumes and price mix because I think you increased prices quite materially to pass on the rising memory cost also.

Yes. Let me take the European one and then you can take the video conferencing one. Yes, Europe was clearly a little soft, 6% down in constant currency. And part of that is the conflict in the Middle East. Clearly, about 50 basis points at a company level and a little over 100 basis points set at an EMEA level. What we're seeing in the Middle East is a really depressed environment, very cautious local businesses. but also no experts leaving, no tourism, all those big events being canceled. And as a company now, I'll just speak for Logitech. We've canceled all travel in and out of the Middle East and inside the Middle East as well. So it's a really difficult environment in the Middle East. I would say that's one thing that's definitely unfortunately impacting those EMEA numbers for us. But second, also, in Europe, definitely not a lot of consumer confidence or business confidence at the moment. And the markets there were down mid-single digits. So -- what are we doing about it? That's probably a better question. I'm not going to ask you a question how long this will last. I would need a crystal though. I really don't know, and it's not something that's in our control. But what is in our control is what we're doing about it and that is continuing to innovate. So we're seeing our innovations doing well in Europe. Europe had a fantastic logic play event in the middle of September in Warsaw, super well executed, tens of thousands of people. We had a counterstrike tournament that we ran attached to Logi PLAY, launched 50 new products, really great reception for those. So we'll continue to innovate, and we'll continue to market to make sure that we create the awareness and the pop culture presence for those innovations. That's what it will take to win. We'll focus on growing share and then, hopefully, the market will turn around, but that's unfortunately not directly in our control.

On your video collaboration question, the way I would split the growth is basically 60-40. 60% was priced and 40% was units. So we saw both increase in pricing units in the quarter.

Allow me one quick follow-up. The semiconductor issue. The incident in Q2, this was around 100 basis points then on top line growth, right?

So the way -- for the second quarter, Jorn?

Yes, for the second quarter.

Basically, the way I looked at the number is we grew net sales 2% in constant currency year-over-year. If you exclude the supplier issue plus the war impact would have been about 4%. So demand in total remains pretty resilient, and that's pretty much the same view that we have also for the third quarter. We are still expecting demand to remain positive across the regions.

Yes. But I would say, our of those -- that 200 basis point difference, about 3/4 was from the supply incident. So it's a little more than 100 basis points. And of course, Q3 carries the brunt of that supplier incident impact.

Our next question comes from Didier from Bank of America.

Yes. Got a question maybe just for Matteo. If you don't mind repeating what you said on gross margin for Q4 because I'm not sure I got it. I think you said 41% to 42% for the -- sorry, for the December quarter.