Logitech International Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

There are 13 speakers on the call.

Operator

Good morning and good afternoon. Welcome to Logitech's video call to discuss our financial results for the Q4 and full year of fiscal 2023. Joining us today are Brack and Daryl, our President and CEO and Chuck Boynton, 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 Reform Act of 1995. We're making these statements based on our views only as of today.

Operator

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 and forward looking statements in our press release and in our filings with the SEC. These materials, as well as our prepared remarks and slides and the webcast of this call are all available at the Investor Relations page of our website.

Operator

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 Bracken. Bracken?

Speaker 1

Thank you, Nate. Thanks to all of you for joining us. Today, I am joining you from New York. This really is a hybrid call. I think Chuck is in I know Chuck is in California, and Nate, I believe you're in Dallas, so we're really all over.

Speaker 1

About 60 days ago, we provided an overview of our business and our outlook for the coming fiscal year. And Chuck will cover the details. But big picture, we ended this year Within our latest outlook. And the outlook for the first half of first fiscal year 'twenty four remains unchanged. Most of the macroeconomic and geopolitical issues that impacted our fiscal year 'twenty three results continue.

Speaker 1

Central banks are raising rates to combat inflation, Consumer confidence remains lower, and overall demand from enterprises remains tepid. As I look at factors that are more directly impacting our business, it's a mixed bag. There are positive signs. The dollar is weakening, thankfully. Shipping rates, lead times and our reliance on expedited shipping are nearing pre pandemic levels.

Speaker 1

Promotional levels are normalizing and supply chains appear to be a problem in the past. However, industry layoffs continue, The way companies handle return to the office continues to be uncertain, and we're not yet seeing refresh cycles kick in for products that were in high demand during the pandemic. As we said last quarter, these conflicting economic signals create an environment with low visibility and a bias towards managing our business conservatively. Adjusting our business to meet the market opportunity is something that is not new to us. We adapted throughout the pandemic when we face supply chain, logistics and manufacturing challenges.

Speaker 1

And we're adapting now to reshape our organization for more nimble decision making, Faster product design cycles, meeting evolving customer needs quickly and fluidly and improving our speed to market. So while acknowledging the macrohedrons, we ended Q4 in a solid position. Our sales teams closed a number of meaningful customer deals. We closed on with Snowflake, for example, and representing multiple industries as well as education and government contracts. We released 52 new products in fiscal year 'twenty three.

Speaker 1

And while it takes time to scale these launches, it demonstrates a commitment to product innovation. We won a record number of design awards. The latest number is over 160 for the full year, 82 in the Q4 alone. Innovation is the key engine of this business and it's firing on all cylinders. Our commitment to sustainability is absolutely unwavering.

Speaker 1

In fact, we now have nearly 45% of our products with carbon labels. I believe there's no other company of our size or bigger near this level. We quickly reduced operating expenses to match the revenue reality. Revenue decline and OpEx reductions were down equally on a percentage basis for the year. As I indicated last quarter at our Analyst and Investor Day, our fiscal year 'twenty three results were disappointing.

Speaker 1

As I always say to myself, it's time to draw a line behind our heels, learn from the past but move forward, and that's exactly what we're doing. We remain committed to the long term growth trends, markets, strategy and business model we have in place. So looking ahead, you should expect us to operate the business a disciplined manner consistent with what we've demonstrated over the last few quarters. We will continue to adjust our expenses in line with the market. We'll continue to invest in product development.

Speaker 1

We have plans to introduce a whole line of new a whole series of new products across gaming, video collaboration and keyboards and mice In the quarters to come. And we will continue to improve and refine our global go to market capabilities. I'm confident that the big durable trends we've been highlighting, video everywhere, hybrid work and the explosion of gaming and content creation will drive growth. Challenging times always sharpen your focus. And in fiscal year 'twenty three definitely sharpened ours.

Speaker 1

We quickly resized in a prudent methodical fashion while remaining committed to the keystone of our business, product innovation, or as I think of it, Design led engineering. We are confident that we've taken the appropriate steps to spring load our categories for growth as we exit this economic cycle and move ahead. One final point before I turn it over to Chuck. I said a little of this before, but it merits repeating. I said earlier that 45% of our products now include carbon labeling.

Speaker 1

This is a huge deal for Logitech, but it can be an even bigger deal for the world. I'd like to point out that we're not trying to create competitive advantage here. We'd love the chance to help others, including competitors, to advance carbon labeling. So please, for those of you listening, consumers, investors, analysts and our competitors, you can have an impact, a big one. I'd ask that next time you're interacting with any company, including your own, ask them about their approach to carbon labeling.

Speaker 1

We can move this ahead so much faster For the betterment of our customers and for the world, carbon labels on all our products can be the new calorie, And that will drive competition and bring down carbon levels. With that, I'll hand it over to Chuck to provide some additional color on Q4 and fiscal year 'twenty three results. Chuck? And Chuck, I want you to notice that I wore my jacket. I felt so much pressure from you.

Speaker 1

You said until we have growth, you have to wear a jacket to the earnings calls. I don't like wearing a jacket, so I hope it's not long.

Speaker 2

Well, you look great, Brecken. Well, thank you, and I appreciate you all joining our call today. Our Silicon Valley site is being relocated, so I'm calling in from my house today using a 4 ks BRIO webcam, The Logi dock and our MX Series mouse and keyboard. Next quarter, we should be in our new office in San Jose. Now let me delve into the Q4 and full year in greater detail.

Speaker 2

Our Q4 and full year results are in line with the revised outlook we shared during our Analyst Day in March. For the quarter, net sales in constant currency declined by 20% to 960,000,000 For the full year, net sales were down 13% to $4,500,000,000 Examining our category performance, Results were in line with expectations, with continued pressure in video collaboration down 25% And gaming down 22% due to a slowdown in simulation, while our creativity and productivity categories either held steady or improved sequentially. In Q4, gross margins were in line with our expectations, decreasing year over year to 36.3%. For the year, gross margins were 38.3%, down 3.40 basis points compared to fiscal year 2022. Margins were pressured throughout the year due to unfavorable currency movements, Inflation driven cost increases and product mix.

Speaker 2

As we transition to fiscal year 2024, We anticipate the weakening U. S. Dollar euro exchange rate and lower manufacturing costs to contribute to improved gross margins. We judiciously reduced operating expenses over the year while continuing to invest in our product innovation initiatives and enterprise selling capabilities. Operating income was $82,000,000 in Q4 and $589,000,000 for the full year.

Speaker 2

Operating income in both the quarter and the year reflected lower demand and gross margin pressure, partially offset by reductions in operating expenses. Cash flow from operations was $217,000,000 in Q4 and $534,000,000 for the full year. Our ending cash balance was over $1,100,000,000 Notably, we returned a total of $577,000,000 to shareholders in fiscal year 'twenty three through our share repurchase program and dividend payment. In March, we outlined our intentions to quickly address 2 opportunities: 1, improve our cash conversion cycle by reducing on hand inventory and optimizing channel inventory and 2, reduce operating expenses to a run rate of $1,000,000,000 Although less than 2 months have passed since we presented these plans, I'm encouraged But a strong momentum on both fronts. I'm pleased to report that our on hand inventory was down for the 4th consecutive quarter With Q4 seeing the biggest reduction of the year, our goal over the next year or so is to continuously improve inventory turns 5 or better.

Speaker 2

Furthermore, we plan to keep reducing channel inventory in the first half of the year Before the normal build for the December quarter, as we mentioned during Analyst Day, we believe Lower channel and on hand inventory provide better economics for us and our partners in the value chain. We are maintaining the outlook we provided in March, Expecting H1 fiscal year 'twenty four revenue of $1,800,000,000 to $1,900,000,000 down approximately 22% to 18% compared to the prior year in U. S. Dollars. Our corresponding operating income is expected to be between $160,000,000 $190,000,000 down approximately 47% to 37%.

Speaker 2

Nate, we can now open the line for questions.

Operator

Great. Thanks, Chuck. Thanks, Bracken, and everyone for joining. As a reminder, please raise your hand if you're interested in participating in Q and A and come off of video when selected. Thank you.

Operator

First question comes from Paul Chung at JPMorgan. Good morning, Paul.

Speaker 1

Hello, Paul.

Speaker 3

Good morning. So good to see you guys.

Speaker 2

Good to see you

Speaker 1

and your fair city.

Speaker 3

Yes. So first up on gross margins, for 4Q, we would have thought there would be Better improvement in kind of easing supply chain headwinds. What drove the pressures there? I know VC and gaming mix has come down a bit, which May have driven some impact there. What do you see as temporary?

Speaker 3

And as we move into the next year, how should we think about those variables easing And kind of impact on gross margins, at least in

Speaker 1

the first half? Okay. Chuck, do you want to take that one?

Speaker 2

Yes, certainly. Thank you, Paul. Our overall margins for the quarter were roughly in line with our expectations. The operations team did a phenomenal job reducing costs. But with inventory turns, we won't see the benefit of that cost reduction until next quarter as it flows through.

Speaker 2

Q4, kind of compared to Q3, we did have some minor inventory charges. The mix issue is identified in the prepared remarks. And looking forward, we see tailwinds with FX, lower costs and obviously not the same inventory charges. And longer term, We expect to be in that long term operating model of 39 to low 40s over time.

Speaker 3

Okay, great. And then second on VC, in your prepared remarks, you kind of mentioned Kind of typical ASP per room has been increasing, which is great. Can you help us size Both the opportunity to expand conference rooms, where you think that ASP can go when volume comes back and Which peripherals you're seeing the most success in the conference rooms? Thanks.

Speaker 1

Yes. So I think The cool thing about our business model is there's just a lot of room to continue to increase the ASP per room. If you think about it, we announced something called site, Which most of you have seen or most of you have seen, which is just about it's soon going to be out. And it's another peripheral, basically, for the room. You get a Rally Bar, Rally Bar Mini, you add that in the middle of the table, and suddenly you've got an equitable meeting.

Speaker 1

So, you know, that's an example. You've also got whiteboards, which $1,000 a unit, you can drop into a conference room and suddenly a camera, your whiteboard, whatever kind of whiteboard you're using becomes a participant. So we have lots of ways to increase the value per room. So I'm very optimistic long term that the ASPs can go up. And the number of rooms That will be enabled continues to be a very high number.

Speaker 1

We just got to get through this current period where people are kind of scratching their heads saying, I'm not really sure exactly. Not all People, but a lot of companies, but a lot of companies are saying, I'm not quite sure what we're doing yet. We're a good example. We're closing one office. We're opening another office.

Speaker 1

And then the new office, we know exactly what we're doing from video enablement standpoint, but a lot of other people are lagging us. They're either They really haven't completely decided what to do with the current office. They're doing the minimum, or they're saving money because they're going through this economic cycle too. Or they're going to do it, but it's going to come later. So I'm not hearing anybody say, gosh, video enablement of rooms is a bad idea.

Speaker 1

It's just timing.

Speaker 2

And I would just add, Bracken, the market sizing that we talked about at Analyst Day is roughly 50,000,000 conference rooms with approximately 10% penetration. Yes. Certainly, what you're seeing, I think, is we've won some great deals this quarter, a large food company. Bracken mentioned one of the tech giants. So we're winning lots of deals.

Speaker 2

They tend to be smaller upfront with additional purchases as they re outfit their rooms over time. So We're bullish on video long term, and it's a great category. And these new products, I think, will provide additional fuel for growth long term.

Speaker 1

One other thing we didn't mention, Paul, was service. It's a really small business for us today, but it's going to keep growing, It's growing rapidly. And every time you buy a room, you really ought to be getting the service that goes with it. And our service package is called Select, and it's growing Like I said, it's growing very rapidly, and I think one day that'll be a pretty decent chunk of our revenue.

Operator

Okay, great. Thank you.

Speaker 1

Thank you.

Operator

Next up is Alex Duvall from Goldman Sachs.

Speaker 1

Hey, Alex. How are you doing?

Speaker 4

Hi, everyone. Thanks very much For the questions, just wanted to ask firstly on OpEx. You've done a very strong job controlling that. I just wondered how much more OpEx control you can be done. Should we expect further cost reductions this fiscal year versus fiscal 'twenty three?

Speaker 4

Or is fiscal Q4 indicative of a new run rate going forward? And secondly, some investors have been asking about PC suppliers, which have indicated there could be a possibility Of stabilizing PC demand in the second half of the year, curious to what extent your PC linked revenues Could benefit from such a recovery? Any color there, very much appreciated.

Speaker 1

I'll just touch on each one, and then Chuck, you can up whatever you feel like I didn't cover. I think we've been super clear that we want to get to a $1,000,000,000 run rate on our OpEx as we Get past this first half and into the latter half of the year, and that's where we're headed. So no, our current run rate's not quite where we want to be yet, but we'll get there. The second on your second question, we've been pretty clear that we think the PC category is kind of not linked As a driver of our peripherals business. However, it is probably indicative of what's happening in one way, which is that If especially in the B2B business, if people are cutting spending on PCs, they're probably also cutting spending on peripherals.

Speaker 1

So, yeah, I think there's some relationship. We'll see what happens. We're not guiding the back half of the year yet. We're we continue to feel like the visibility is really Hard to call. What do you want to add there, Chuck, on either one of those?

Speaker 2

Yes. I would just add on the OpEx side. We finished the quarter with $266,000,000 in OpEx, And our plan is to get to $250,000,000 in a quarter by the back end of this year. And so there is there are some headwinds on OpEx with FX, which is an overall benefit to the company, but a little bit of a headwind. But, so the reductions are already mostly completed and we're we'll see the numbers come down, I think, each and every quarter up until the middle part of the back half of the year.

Speaker 4

That's very helpful. Many thanks.

Speaker 1

Thank you.

Operator

Next question is from Assia Merchant at Citi. Good morning, Assia.

Speaker 1

Hi, Assia.

Speaker 5

Good morning, everyone. Hopefully, you can hear me. So quick question on gross margins. I think in the past you guys have provided some breakdown of how FX versus Promotions versus inflation have kind of affected margins on a year on year or even on a sequential basis. So If you could go through that exercise for the March quarter.

Speaker 5

And then as you look ahead, I heard Chuck mentioned that margin should improve here as dollar beacons and The inventory is right sized and flow through of the lower manufacturing costs. So what should we kind of expect for, Let's say even the first half of the year, should we expect those unwinds to happen that are a headwind in the first throughout most of Fiscal 'twenty three. That's my first question. And then secondly, Brian, like

Speaker 1

Let me stop you there. Let me let's answer it one at a time so we can really, Really focus on it. And Chuck, you'll correct me if I'm wrong, but I think we've been saying that about 300 basis points were inflation, a couple 100 basis points We're currency. And then there was a few other drips and drabs, 100 basis points on transportation, etcetera. I think all that is coming through.

Speaker 1

It's just coming through slowly, and as it would. It has to work its way through our inventory, which takes time. And we've got a pretty long inventory cycle. And we were sitting on more inventory than we would have liked before. You want to add anything to that, Chuck?

Speaker 2

Yes, I think that's good. And sequentially, that's sort of a year over year view. Sequentially, inventory charges were a couple hundred basis points and mix was a couple hundred. So those are ones mix, hard to predict, but inventory, FX costs, I think, are all transitory, and I think we should see sequential improvement slowly throughout the year.

Speaker 1

Sorry to interrupt.

Speaker 5

With promotions, no, that's fine. Was there any effect just people are trying to understand what the effect of Emotions have been is there a competitive that kind of goes into my second question, the competitive dynamics. You talked about gaming being soft. We heard from GN, I guess, Jabra in Europe that they had done well in gaming. So maybe you can talk a little bit about the competitive dynamics both on the gaming side and just broadly how it's affecting margins, whether there's been an increased competitive intensity here And you can see that easing as the year progresses.

Speaker 1

First, let me I don't know their earnings quite well enough to know, but I have a hunch Well, the difference between us and them is simply category difference. So we have a big simulation business, and we have a huge simulation number in the year ago info. So certainly don't think we're losing a share in gaming. So I think it's probably comparable. Chuck, you want to take any of that yet?

Speaker 2

I do. So, promotional activity, sort of went back to normal in Q4. That was a bit of a headwind in Q3. 3, sort of back to normal in Q4. Competitive positioning, I think we feel great in gaming.

Speaker 2

Our business, our gaming business is very, very much larger Then theirs is. So it's when you compare the categories, we have different categories, like simulation that they're not in. That's a great category with Terrific margins, that was down quarter over quarter given the kind of promotional bump from the December quarter.

Speaker 1

And a year ago.

Speaker 5

Okay. All right. And so just competitive intensity going forward, Whether it's VC, with HP Poly, whether it's gaming, are we trying to are we seeing like as the inventory digestion has happened, Competition is kind of going back to normal promo, and so there isn't this excessive hunt to reduce inventory in the channel?

Speaker 1

I don't Yeah. Go ahead, Chuck.

Speaker 2

The B2B side is not as price sensitive as the consumer side. So I don't think The video category is very price sensitive. The margins are terrific, And so that's really more, I think, just this kind of general issue around the economy and uncertainty that's happening with corporate But the overall large conference room, medium conference room business is kind of stable. It's not really taking off and growing, but it's not Really going down either. So I think that's really more just the early indicators look good, but I think with the overall uncertainty that will come back.

Speaker 2

Other areas like webcams, I think you see more price sensitivity.

Speaker 1

Yeah. And we've always got, and we do now, Areas where we feel like we really need to adjust pricing a little bit or bring pricing down a little heavier, but they tend to be surgical. And so we're and without giving you any specifics here, I think that's gonna continue to happen. But overall, I feel like the promotion intensity is not, It doesn't scare me right now. I don't feel like there's a big wave of price competition coming through that's going to change the dynamics of our business.

Speaker 5

Okay, great. Thank you.

Speaker 1

Thank you.

Operator

Next on the line is Eric Woodring from Morgan Stanley.

Speaker 1

Hello, Eric.

Speaker 6

Hey, good morning, guys. Thanks for taking my question. Brett, maybe if I could ask you a bigger picture question and that is, I appreciate the fact that you're very clear and that visibility is more limited today. Can you maybe just share some comments about why visibility is less Limited today, is it the channel, is it spending patterns, is it the impact and the uncertainty of the macro conditions, all of the above? If you could just double click on that to help us understand why perhaps today versus historical periods you just have less visibility into the business?

Speaker 1

That's a great question. I like the way you phrase it. It's really not it's only the just the economic environment we're in. It's just a little hard to see. You don't know You're going to go up until you actually bounce.

Speaker 1

And I think we've been down now for 3 or 4 quarters. And I think it's really hard for us judge when that direction will change, we think it will change. It's just a question of when. So it's really just that. I was with I was at an event this week where there were a bunch of kind of Midsized and smaller CEOs and some HR people, etcetera.

Speaker 1

And I got I really got this It just reinforced my strong feeling in the data that we're seeing, which is that, especially on the B2B side, it's not like companies are in trouble. I mean, they're okay. They're just spending more conservatively. And I think that conservatism is pretty is when you spend conservatively, you tend to go Of the easiest control over your costs. And that's why a lot of the PC companies are feeling it and we're feeling it.

Speaker 1

So it's really just that, Eric, and it's really hard for me to say when it will turn, but it will. You could probably go back and look at economic cycles and try to do something. But We decided to just be more conservative and just guide for 6 months and then wait and see quarter by quarter.

Speaker 6

Okay. That's helpful. And then, I guess maybe the second question because you guys kind of elaborated to it, but you called out some deals this quarter, which I feel like you don't necessarily do Historically, you mentioned Snowflake. Chuck, you mentioned another one. Can you just give us an understanding?

Speaker 6

I know, Chuck, you mentioned they start small, but Are these needle movers? Are these mostly in the VC business? Are they currently embedded into your guidance or is this incremental? Because you just announced them, so I wasn't sure how much line of sight you had 30 or 60 days ago. So again, if you could just elaborate on the impact of those deals, Any color you could share on the products?

Speaker 6

And then whether they're incremental or not, that would be helpful. Thank you.

Speaker 1

I'll jump in and Chuck, you can add. I think We really just felt like, you know what, we should once in a while call out some of the customers. So you get a feel for the logos. There are a lot of big logos that we don't permission to talk about publicly for whatever reason. It's not usually that they don't want us to.

Speaker 1

We just don't go ask them. We did mention Snowflake this we talked about the food company. There are many others. I would say they're pretty much part of what we are our overall game plan. They're needle movers, but they're not needle movers relative to the expectations you've already set.

Speaker 1

You want to add anything in there, Chuck?

Speaker 2

Yeah, I do. Eric, the Key thing is you want to win the company. Now many companies use multiple vendors, so it's not like they're other exclusive. But If you win the account, it tends to be a smaller deal upfront, and then they keep buying more and more and more over a period of years. So No one transaction is a needle mover for us, but they're really good signs that we've won the account, that we can land and expand.

Speaker 2

And ultimately, that's what we're looking for. And I just want to call out our sales organization because they are just they've done a really, really good job of building out This B2B capability, it's a key strategic investment for us, and I think it'll bear fruit for years to come.

Speaker 1

And if I could just add, I was just in A large manufacturing company's offices here in New York this week. And it's really interesting. They started very small with us, to your point, Chuck, you know, started very small with us about 2 years ago. And now every single room they have has our stuff. And It's an incredible office by the way.

Speaker 1

And so that's kind of our game plan where you just really want to land and expand.

Speaker 6

If I could, sorry, just follow-up with one last question, Chuck. This one's for you. Just on gross margins, if we look back over the last 4 years, we have seen sequential Compression in gross margins from March into June. The comments I hear from you kind of seem to indicate they might go the other direction and Span from March to June. Can you just maybe help us give us a few more pieces to help us understand the directionality of gross margins From March into June and some of the more influential moving pieces there.

Speaker 6

And that's it for me. Thanks.

Speaker 2

Yeah. Yeah. Thank you, Eric. We're not providing detailed guidance for June. So I would say, let's look over the longer term.

Speaker 2

We're in this sort of transitory state right now. We brought channel inventory down significantly. So we brought Channel inventory down, we're going to continue to take that down in Q1 and Q2 before it builds into Q3. The overall seasonality of the company Is such that Q1 and Q2 we actually we outlined this at our Analyst Day if you go back and look. I think it was like 24 Percent Q1, 24% Q2, 30% Q3, and I think 22% of my math works for Q4.

Speaker 2

That overall profile, if you think about that, you're absorbing more overhead as you have bigger quarters. And with taking channel inventory down and revenue being sort of suppressed With reducing channel inventory, that hurts gross margins. And then when it expands, it's a benefit. So I look at that and say, I'm not going to say, hey, Q1 or the June quarter, it's back to normal. But I do think by end of Q2, Q3, Back half of the year, I expect us to be back to normal.

Speaker 2

And certainly, no one can predict the currency rates, but that's been a real headwind over the last Year or so. It looks like it's getting better and turning, but we just we can't be sure. The inventory charges, Some of those items, I do think those are a tailwind now.

Speaker 6

Super. Thank you for all the color, guys.

Speaker 1

Thank you.

Operator

Our next question is from Ananda at Loop. Good morning, Ananda.

Speaker 1

Hey, Ananda.

Speaker 7

Hey, guys. Hey, good morning. Yes, good to see you guys. Thanks for taking the questions. A couple if I could.

Speaker 7

I mean, I guess we could just stick right there, Chuck, With your comments around sort of seasonality, do you think that the inventory that remains to be worked down Could impact seasonality in September, December quarter meaningfully or is the inventory really Since where right now where the impact would be needed? And then I have a quick follow-up. Thanks.

Speaker 2

Yes. I mean, overall, I feel comfortable with where inventory levels Sorry. Our view is sort of a philosophy is that a lean supply chain is better for everyone. If you think about return invested capital, as I think the ultimate metric. If you have less on end inventory, less channel inventory, it's better economics for everyone.

Speaker 2

So while our weeks on And within the normal operating model, we'd like to get that a little bit leaner because I think that will be better returns for us and the channel. But of course, you have to rebuild the channel inventory because of that seasonality for the December quarter, Black Friday into the Christmas period. So that I believe will happen regardless. But overall, we're comfortable with where the levels are today and even where they were in Q4. We just want to take them down because I think It's better unit economics.

Speaker 7

That's really helpful. Appreciate that. And then Bracken, I guess for you, you mentioned Sort of like kind of off the cuff in the beginning, prepared remarks, return to office is uncertain, refresh cycles haven't kicked in yet. Anything that you guys are seeing that has you think kind of the structural nature That underpins some of the key trends, is altering at all. And actually, if you could As a part of that, just where are you seeing the refresh cycles not yet kicking in?

Speaker 7

When do you think they eventually will kick in? And that's it for me. Thanks.

Speaker 1

Yes, thank you. On the refresh cycles, I think we're not yet seeing it in personal workspace. We're not really seeing it kick in yet, which is the mice and keyboards and that And even for gaming. So I think that's probably ahead of us. Those cycles are 3 to 5 years, so we'll probably see it.

Speaker 1

Some of the categories are faster, some are a little longer. On the structural nature of our opportunity, I don't really see anything that's changed. I mean, I think it's Pretty much the same. We've just got such a, I'm sitting in an office now and the one I'm sitting in now does have video. If I walk down the hallway, it's amazing to me how many of these offices do not have video.

Speaker 1

So I think that's just a reality. And hybrid work has done nothing but make that more obvious to people and more required. I think what has so I don't think that's changed. I don't think The need for a home office has changed or to upgrade it. I don't think the reality of gaming or streaming and creating has really changed at all.

Speaker 1

So I don't see anything really fundamentally structurally that's changed in our view of the category opportunities.

Speaker 7

I like it. Okay, great. That's helpful. Thank you.

Speaker 1

Appreciate it. Thank you.

Operator

Next on the line is Adam Angelo on Bank of America. Hey, Adam.

Speaker 8

Hey, thanks for letting on. So firstly, just a very quick one for Chuck to follow-up on what you just answered to previous question. Gross margins back to normal, did you I mean, back to the long term guidance range? Just quickly on that.

Speaker 2

Yeah. I It's possible we get there still this year. Q3 generally tends to be really strong gross margins because it is a peak quarter. So I think it's very possible that Q3 is there just because it's such a big, big quarter due to seasonality. But if you think about run rates Structurally, annually at that kind of 39% to 44%.

Speaker 2

My guess, it's Probably into next year, but that's I can't really predict that. But certainly, I think if you look historically, Q4 Q3 being our best quarter, We've been typically quite high margins in that Q3 just given the volume.

Speaker 8

Got it. That's helpful. Thanks. So next, I think just curious on what you saw in China in the quarter. Was there any sequential improvement there?

Speaker 8

And perhaps As you look into the rest of the year, how you would expect that to develop?

Speaker 1

I'm going to try that one, Chuck, and you feel free to jump in. I think China is a little harder for me to judge right now, to be honest. It's usually been just kind of consistently up into the right. I think been choppy over the last kind of year. It is highly competitive there.

Speaker 1

It's Opened up, but not as much as you would like. So it's not quite where back where it used to be. But I feel very confident in sort of the longer term. I think the dynamics China are great. You've got such a young population.

Speaker 1

Everybody's moving into the workforce and moving up in the workforce. And there's more and more knowledge workers. And It's become an environment where you can imagine a bigger, healthier, more dynamic Kind of IT world in China. It's obvious to me and probably obvious to you. So I'm really excited about long term.

Speaker 1

We have a great brand there, I mean, a really great brand there, Incredibly strong market shares. And that's across both our 2 consumer businesses. On the video collaboration side, it's never been as strong there. It's just that for some reason, the dynamics there have developed quite differently. And that does tend to happen in China in some categories.

Speaker 1

We'll see if it eventually gets Super. It's really got more gusto. But overall, I don't see anything but strength long term in China. But I don't it's really hard for me to call it just like it is for our Visibility in the back half of the year for the company in general for China particularly, I don't know.

Speaker 2

Yeah. I think as it relates to China, Q3 was a tough quarter. It was down I mean, we were down 25% year over year in Q3. Q4, though, we were down 3% year over year. So it looks like a Recovery in China.

Speaker 2

As Bracken mentioned, our top SKUs, the best selling products in China are in the gaming side. So there's just a huge opportunity on video, but that's a tough nut to crack. But that one, the market is just enormous. And so I think we're in a good position with things stabilizing there as it relates to volumes year over year.

Speaker 1

And we do partner differently in video in China than we do elsewhere because the you don't have the same service players. I think big Video conference players are not as big in China. They're much smaller.

Speaker 8

Okay. That's great. And if I can just squeeze 1 more in.

Speaker 1

Sure.

Speaker 8

The behavior you're seeing from the enterprise customers, I think you touched on it briefly, but just curious to know, it sounds like it hasn't gotten Worse, but equally hasn't improved. But maybe if you could just go into that in a little bit more detail would be great. Thanks.

Speaker 1

I think you captured it. It's pretty much kind of stable, I would say. It's about where it was, which doesn't really shock me. The layoff news continues, and The layoffs, especially in tech, but it's also spread to some extent, as you know, in banking. And I think in some other sectors, I think that news It's kind of it seems like it may be as almost all the way out.

Speaker 1

The big company news at least is almost all the way out, but the Impact really dribbles over 3 to 6 to 9 months. So I think that those dominoes will continue to fall now for another few quarters, but it will turn.

Speaker 8

Very good. Thank you.

Speaker 1

Thank you.

Operator

Our next question is from George Wang at Barclays. Hey, George.

Speaker 9

Hey, George. Hey, guys. Chuck, maybe you can give more color on the capital return kind of going forward, Especially given better cash flow backdrop with some tailwinds coming back on the inventory Better cost of profiles. Just curious if you had any color just on buyback or dividend going forward.

Speaker 2

Yes. We're just really proud of what we've been able to accomplish On returning capital to shareholders over the last few years, we had a great cash quarter. We had a great cash year. If you look at it year over year, Our cash balance now is $1,140,000,000 $1,150,000,000 It's down year over year. I think we ended last year at about $1,200,000,000 or 1.3 And we returned $577,000,000 roughly to shareholders.

Speaker 2

So that has been great. Our primary objective, though, as we've stated 4 is growth. And so, to the extent we don't use cash to buy companies or And then we plan to return that back to our shareholders via a great dividend that we pay as well as buybacks.

Speaker 9

Okay, thanks. I have a quick follow-up. Bryton, maybe you can comment on the kind of share gains. In the prepared remarks, you called out some Share gains within the gaming category. Are there any other kind of category you want to call out in terms of notable share gains in the last few months?

Speaker 1

Across the year, you can see our share gains across most of our key categories. And those share gains We're very widespread and consistent. And it's really a function of our innovation engine. Within any single quarter or a few months, we'll have sometimes wobbles up and down. So I won't go through the individual categories.

Speaker 1

But we've over the 10, 11 years that I've been here, we've consistently gained share in almost every category. And we're that's why we're so focused on design and design led engineering. That's why we're investing.

Speaker 9

Okay, great. Thank you.

Speaker 1

Thank you.

Speaker 9

That's it for me.

Speaker 1

All right. Thank you.

Operator

George, our next question is from Serge Ratzer at Credit Suisse.

Speaker 1

Hi, Serge.

Speaker 10

Hi. So now I'm ready. Good morning, everybody. Well, two simple questions. The first question is you were down 22% in sales and also in gaming, 25%, 27% in video conferencing.

Speaker 10

Can you give me a feeling How much is price impact and how much is volume impact? Price impact due to promotions, but also due to more competition in the enterprise business. You give me a flavor on that?

Speaker 2

Certainly. It's the year over year changes are Primarily volume. We were promoting a little more than we'd expected in Q3. That has returned to normal. So it's primarily volumes Year over year.

Speaker 10

Any product categories where you have been able to increase prices or to increase volume?

Speaker 2

We increased prices in a number of categories. There have been some bright spots. Some of the tablets and accessories have been a bright spot. Certainly, there's lots of different we have many, many SKUs, many products. Many of them, there are many that are growing, but the secular trends that Seeing are our year over year comps.

Speaker 2

As we start to lap our Q4 and throughout this year, I think you'll we'll see easier And better comps as it relates to the year over year results.

Speaker 10

Okay. Fair enough. Then probably Switch direct to the second question. At the Capital Market Day, you mentioned to us, hey, guys, look at the seasonality of over quarters in sales. And it's 48% in sales you do the 1st 6 months and obviously 52% in the 2nd 6 months for second half.

Speaker 10

Now I'm wondering, we also have a seasonality in EBIT. In the past, you did 40% of the EBIT in the 1st 6 months. So basically, you have to do 60% in the second half. And when I take your guidance and would sum this up for the full year, And we are at the level at the midpoint of SEK 435,000,000. This is clearly below consensus and expectation.

Speaker 10

Now I'm wondering, are you too cautious more for the first Or are you much more ambitious for the 2nd 6

Speaker 2

months? Well, what you're seeing is the profile is we're in a transitional stage. So operating expenses are coming down. We're taking costs out and we're seeing some benefits that we think will Manifest into gross margins. And so that profile that you're seeing in this transitional stage It's putting more pressure on the near term.

Speaker 2

We're not providing outlook to the back half of the year because quite frankly, we just don't know. We hope to do that. We plan to return to annual guidance over time. Certainly, we're optimistic that the December quarter, our biggest Quarter will be a strong quarter, but at this point, sitting here in early May, it's just too early right now to provide color on Q3 and Q4.

Speaker 10

But to be honest, to improve your margin, your EBIT contribution in the second half, You need success in VC, is this correct, because this is still the highest gross profit margin product?

Speaker 2

Well, certainly, if video conference Improves. That's an additional tailwind, the mix that we talked about. It's really hard to predict what will happen with the mix. I will tell you generally The B2B categories are less seasonal. So I think you'll see the other parts of the business will mix up more in the Q3 quarter due to seasonality.

Speaker 2

But video does not have to return to get to our targets. But if it does, I think That's great. And we expect it to. We're not providing guidance for the back half of the year.

Speaker 10

Probably still the last one. You mentioned VC stable, but VC Quarter over quarter was minus down 20%. So what do you mean by stable when something is down by 20%?

Speaker 2

Yes. That's a good question. So We're going to realign the categories that we show you next quarter. So you'll see we're going to break out in a bit more detail The quarterly businesses. So in the video category, we have professional webcams And some other solutions in there.

Speaker 2

And webcams across the board, business to business, consumer, Those have seen some significant declines and whereas the room solutions have been fairly stable and that's what we're referring to.

Speaker 10

Okay, got it. This is very helpful. So bon voyage, thank you so much. Bye bye.

Speaker 1

Thank you. Thank you. Yes, I'm glad you said that, Chuck, because I think that can't wait till we do that realignment because it will I think it will clear up things for people.

Operator

Great. Our next question is from Andreas Mueller at GKB. Hi, Andres.

Speaker 11

Hi, everybody. Thanks for taking my questions. I have one on Windows 11, if that's Going to help you in at some point, you mentioned this correlation with PC sales, of course, is not that much strong, but From a product perspective that this operating system will help you in some ways with your product that Some new innovations coming in.

Speaker 1

My experience with Windows upgrades is just kind of ignore them from a volume Same point for the near term and then the long term, they're good because they keep the PC industry vibrant. So That's kind of the way we're thinking about it now, but I'm sure it will be a good thing overall, good for users. And our products are always Well, integrated with the latest Windows update upgrade. So it's going to we're going to be in good shape there, but I wouldn't expect anything significantly to change because of that.

Speaker 11

Okay. And then you are very I

Speaker 1

would add one other thing. I think the bigger change we've made is our products work really well with Apple We're with the Mac, and that's happened over the last year. And we've seen really significant business improvement and potential out there because of that.

Speaker 11

That's tied to the productivity categories or also

Speaker 1

Yes, correct, Judy, Kev.

Speaker 11

Then next question, you are a cash rich company right now. And I was wondering, can you discuss if that is helpful or was that helpful at times when financing by banks Sort of far more conservative and towards clients and competitors. I mean, does that Change your position in some ways, because I saw DPOs went up.

Speaker 1

Let me just Try to briefly answer that, and I'll let Chuck jump in. I'm not sure it really changed anything for us because we don't need much support from banks. We do have great banking relationships In the event we ever needed it. But we don't really need much, so probably didn't change much. I will say, it's kind of comforting not to be Too dependent on leverage in tough times.

Speaker 1

But I think at the end of the day, we're really, as you said, we're a cash Rich company, but we're also a very good cash generator. So that means we have to make sure that we deploy our, that cash responsibly. And I think, Like Chuck, I'm really proud of the way we put the cash back in shareholders' hands last year In one way or another, and I think we expect to continue to be a great cash generator. And we're aggressively looking for strategic ways to really grow our business because Growth is what it's all about. And so we're going to keep doing that.

Speaker 1

Chuck, you want to add anything to that?

Speaker 2

Yeah, I agree. We have a very high bar for M and A, we've got a great history and a great track record. And to the extent we find great opportunities, then we'll deploy it. Otherwise, we will return The capital to shareholders as we've done, but I'm very comfortable with the cash balance that we have. It's similar to where it's been the last couple of years.

Speaker 2

And so I think it's sort of steady as she goes on the capital allocation model.

Speaker 11

Okay. And the last question on you with for you, Chuck, this $18,000,000 restructuring charge, was that it now in this program? Or Should we look for more going forward?

Speaker 2

There will be more charges. The accounting rules have kind of changed over the years where you used to just take all the charges up front. And then, you would spend against those reserves. The rules have changed a little bit, there will be additional charges that we incur over the next few quarters, but largely the actions are all done internally. It's just more timing.

Speaker 11

Okay. Thank you very much.

Speaker 1

Thank you very much. Michael.

Operator

Great. Brack and Chuck, our final question for the morning is from Michael at Vontavell.

Speaker 1

Hi, Michael. It's Viking season, so you're probably back out.

Speaker 12

Okay. I have one on sustainability. You mentioned that your carbon labeling is now I think 45% of the products. What holds you back from being faster in labeling the rest? And is the process so complex?

Speaker 12

Is that maybe a reason why it's Also holding back your peers from doing the same?

Speaker 1

Yes. There are 2 things going on there. One is that it is a We don't want to just estimate, give a really high level estimate of carbon impact because we're taking scopes 1, 2 and 3, which means from the components that go into our products, transportation, end use and end of life. So we're really taking the full period. We also need to have enough data to actually be able to draw conclusions that are accurate.

Speaker 1

So some of our products that are newer, we really have to give them a year before we have a good accurate So that's one of the drivers. The second one is it just takes a while to then implement those into individual products, Product by product. So I'm really excited about how fast we've moved actually. And I think one of the reasons why you don't see it from other people is because it isn't easy. We're trying to make it easier.

Speaker 1

So we have been working with an external provider to try to make that easier and more cost efficient because it's not terribly expensive, but it costs some money Because we really strongly believe that everybody should be carbon labeling in every industry, that this is really the One tool that we can all use, governments can use to drive basalt to be to compete with each other on carbon.

Speaker 12

Okay. Thank you. And then on your guidance for the first half of your fiscal year, What which categories are you most confident in that will support that guidance? And where Do you have more uncertainty looking in the 1st 6 months?

Speaker 1

I won't try to be Anything except just straightforward on this. It's a little hard to say. I really think, personal workspace seems pretty solid, you know, mice and keyboards. It's just kind of a it's been great for us since, I mean, since 1981, so 'eighty two, and it continues to be. And I think that the gaming category will be solid.

Speaker 1

I think video collaboration, it's I kind of think that one. They say you intercycle earlier on consumer and you exit it earlier and you intercycle later on B2B and you exit it later. So I would say, if you had to ask me, you really pressed me, I would say that my guess is that the mouse and keyboard business will be sturdier and more reliable than the others. But it's been a little hard to tell through this cycle. I mean, one of the reasons why we only guided 6 months is because it's really harder to tell right now, especially on the B2B side.

Speaker 12

All right. And then I have last one for Chuck. You mentioned return on invested capital is your ultimate metrics. Is how long do you have to wait until that becomes sort of part of your long term model?

Speaker 2

I don't think at this point we plan to use that for an outlook externally. It's an internal metric that we track. And it's So I would not expect us to publish a long term outlook there.

Speaker 1

I do love that we're using it internally, and I think it's a Super important metric.

Speaker 12

Definitely. Thanks a lot.

Speaker 1

Thank you. Well, thanks to all of you. I'll jump in here, Nate. Just I really appreciate all the discussion. 1 quarter At the minute we have more visibility, you can bet that we're of our strong visibility.

Speaker 1

We're going to go to the full year, as Chuck said. And so thanks. We'll see you in a

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Logitech International Q4 2023
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