Q3 2021 Logitech International SA Earnings Call
Good morning, everyone.
Or are you backing good morning, Ben how are you very good so let me start.
Did you get my notes.
Let me start this call.
You bet.
Okay. Thanks, everyone welcome to Logitech video call to discuss our financial results for the third quarter of fiscal year 2021, joining us today are bracken, Darrell, our president and CEO and Nate 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 Reform Act of 1095, we are making these statements based on our views only as of today, our actual results could differ materially and 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 affect our financial results press release, and our filing with the SEC, including our most recent annual report and subsequent filings these materials as well as the 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 if you use materials carefully and.
Unless noted otherwise.
Between periods are year over year and in constant currency and sales or net sales. This call is being recorded and will be available for replay on our website I will now turn the call over to bracket.
Thank you Ben and thanks for joining us.
Q3 was our biggest quarter in company history.
And this will clearly be the biggest year in logistics history.
Last quarter, we predicted that as the world opened up few companies would've would opt for a full work from home or a full work from the office approach.
Sure. Most companies we serve are likely to adopt a hybrid model with many of his working a few days a week in the office in a few days a week at home.
With another quarter behind us I have greater conviction that most companies will move to a hybrid at work at home model.
I had a meeting with almost 60 other Ceos this week and while we didn't take a poll I would guess the vast majority of them will adopt hybrid work is the new norm.
Logitech is well positioned to serve customers moving to hybrid work, we can upgrade and improve workspaces at home and in the office and the explosive growth of video calling drives the need for high quality video at home.
This workspaces ended media groups.
For logistic that simply means growth.
The global trend propelling gaming towards becoming the largest collection of spectator and participant sports in the World continues.
Over 1 billion people watch some part of the league of legends funnel last quarter 1 billion people over 100 million people watched the final line. The same number as the Super Bowl last year.
Streaming and creating is poised for long term growth as well there now $1 8 million podcasts to listen to an untold tick Tucker's Instagram versus streamers to watch this.
These are examples of the democratization of digital content that we've talked about for some time and this trend grew into the pandemic during the pandemic and will surely growth after the pandemic.
Given the increasing pervasiveness of this type of content.
Extremely in creating could one day become one of our biggest product categories.
In other words, we're really well positioned for the long term.
Now, let's look back at our third quarter of interest and it.
We delivered another strong quarter with sales up 8% and non-GAAP operating profit more than tripling.
To put this in context this quarter's year over year sales volume growth is greater than the total growth from the three prior years combined.
On top of that Q3 profit was more than we delivered in all of last fiscal year.
Our creativity and productivity categories delivered a mid 30% growth in pointing devices and keyboards and combos.
The transition to a work from anywhere culture, and a mixed learning environment creates increased peripheral attach opportunities for us against the large and growing installed base.
And customers, who upgrade their devices can benefit from improved aesthetics performance ergonomics are all day, but we simply have upgrade opportunities across every workspace.
In the world.
<unk> sales more than quadrupled in Q3 and year to date sales have more than tripled. While these growth rates may seen tremendous and they are the incremental units. We sold this year or just a drop in the bucket compared to an installed base of nearly 600 million monitors and almost $1 5 billion Pcs.
600 million monitors $1 5 billion Pcs to support the growing prevalence of video communications, we're working to expand our capacity to support the higher demand for Logitech webcams.
As video conference use has exploded.
Conferencing is exploded the opportunities to innovate our camera technology have come into sharper focus where.
We're the market leader and webcams, and we're increasing our product investments to provide customers with even better experiences when they have today.
Tablet and other accessories sales for the quarter increased more than fourfold to $138 million.
The first time, we've achieved sales over $100 billion in a single quarter.
The real highlight this quarter was the tremendous growth we delivered in our education tablet keyboards.
Governments schools educators parents and students around the world, we're all adapting to a digital learning environment.
While we have significant demand from various countries, Japan was one of the biggest contributors for education tablet keyboard sales in Q3.
We mentioned last quarter that Japan's education Ministry has allotted over $3 $5 billion to improve schools for online teaching.
And this program is expected to last through the remainder of our fiscal year.
Video collaboration sales more than tripled to another record high of $293 million.
Sales of our conferences products also delivered an impressive quarter doubling over year over year.
As I said last quarter and to lead off these remarks companies are starting to reconfigure their office layout and work cultures to enable workers to collaborate remotely and flexibly I say started because most people are not backend offices yet.
Not only are companies video, enabling their onsite offices, but they're equally if not more quickly equipping their employees with enterprise grade webcams and headsets, both for the whole and for the office Workspaces.
Just last week, we announced the complete refresh of our video conferencing conference room product portfolio the.
The products are rally Barb, many for smaller rooms rally bar for medium sized rooms, and roommate with our current <unk> system for larger rooms.
In addition to exceptional audio and video one of the key features of these products is to run these products and appliance mode.
So that you can have zoom room or a Microsoft team rooms for example, without a separate monitor.
This greatly simplifies the rollout of these products. It allows managers to scale up scale out deployments to every room.
We're ready for when people go back to work.
Based on the feedback from dozens of large enterprise customer beta trials. We believe this new portfolio raises the bar for logitech and the entire BDC industry.
Gaming sales grew 73% in this quarter.
Growth was strong across all three regions and across all of our Canadian categories.
On the back of several new product introductions, which helped us achieve a record high market share in PC gaming.
We believe that the deep integration of gaming into consumers' digital and social networks will greatly enhance the stickiness of gaming for years to come.
Xtreme labs had another strong quarter with continued growth in subscribers and paid conversion, we couldnt be more excited with the stream will have seen Georgia I hope you heard that who are teaching those capabilities as they experiment with various initiatives to increase user engagement and customer acquisition.
Blue microphones and retail headsets also had another great quarter with sales growth.
Both up triple digits versus same time same quarter last year.
Mobile speakers and smart home categories remained soft this quarter as we expected.
You know that we actively manage our portfolio and as such we continued to focus our investment priorities on other fast growing market opportunities. It will manage these two product categories to maximize profitability rather than growth.
Now let me call it.
Ill turn the call over to unite to walk through the rest of our key financial metrics in Q3.
Thanks Bracken.
We delivered another excellent quarter of financial results on the strength of our diverse product portfolio, the global reach of our sales and marketing capabilities and the execution of our operations team our.
Our results were strong across nearly all dimensions.
Grew revenue significantly and gained share across our categories expanded gross margins and <unk>.
<unk> significantly and our strategic priorities and brand and delivered more than $500 million of free cash flow.
Gross margin increased 760 basis points to 45, 2% in the quarter.
The gross margin improvement was the result of very strong sales volume reduced levels of sales promotion favorable product mix and some tailwind from currency exchange rates.
While our recent gross margin has been above our target range I do expect margins will come down from these highs in the quarters ahead at.
As supply normalizes and retail stores continue to reopen we plan to actively pursue opportunities to invest in joint marketing and appropriate levels of promotion to drive continued growth.
We have always said that we are focused on delivering sustainable and long term growth, while keeping margins at levels that we believe strike the right balance of profitability and investment.
And so it is with this philosophy in mind that we will continue to manage the business going forward.
Non-GAAP operating expenses increased nearly 50% to $278 million and yet opex reached a record low of 16, 7% of sales.
As we discussed last quarter, we ramped up the pace of investments in sales and marketing and R&D and we will do so strongly again in Q4.
Our sales and marketing spending increased over 50% year over year as we deployed investments against various marketing priorities, including our global brand awareness campaign, and local country and category specific marketing activations.
Utilize new marketing platforms, and bolstered our influencer marketing campaigns.
Go to market investments also included the continued expansion of our sales coverage for video collaboration duration education and the overall <unk> channel.
All of these activities will continue in the March quarter, as we leveraged the strength in investment capacity from our current demand to improve our potential growth over the longer term.
R&D spending increased 23% of growth similar to the prior quarter as we continued to reallocate engineering resources from mature and declining categories to faster growing opportunities I'm pleased with our pace of innovation and we announced several significant new products, including the conference camera solutions, Bracken mentioned exciting gaming peripherals, and refreshed mice and keyboards.
The recent months and we have a strong road map of new products teed up for FY 'twenty, two and FY 'twenty three.
G&A expenses rose, 73% as we invested in our it and customer care infrastructure to support a vastly higher sales volume and we also launched a few short term investments and projects that should wind down by the end of the fiscal year.
The teams did an incredible job in scaling our business. So quickly and we have invested more in the areas to help serve our growing customer base.
While we are accelerating our investments into our business, we will maintain the financial discipline you have come to expect from Logitech.
Significant portion of our second half investment is variable, allowing us to align our spending with future gross profit.
And while we're managing risk by variable line, our costs, where possible. We also believe.
At fixed cost investments in the business are essential to help drive long term growth and we plan to continue to enhance our marketing capabilities brand awareness and selling capacity.
Now, let me move to our cash flow and balance sheet.
We delivered another strong quarter of operating cash flow, which reached $530 million.
Up from $181 million in Q3 last year.
These results bring our year to date operating cash flow to over $900 million.
Record fast inventory turns and healthy cash collections led to a cash conversion cycle of 15 days or.
Our cash conversion cycle is typically lowest in this quarter in Q3 due to the faster inventory turns during the holiday. So you should not be concerned to see an increase in this metric next quarter.
Our cash balance is nearly $1 4 billion exiting Q3.
And in addition to funding acquisitions share repurchases and dividends, we view, our strong balance sheet as a strategic tool to support our growth via investments in both supply and expanded manufacturing capacity and.
And once again as with prior quarters, our operations team executed this strategy well, all while adhering to strict COVID-19 safety measures and travel restrictions.
Rounding out uses of cash in the quarter, we repurchased $50 million of our own shares, bringing our year to date share repurchase total to $72 million.
And now I will return the call to Bracken for guidance in his closing remarks.
Thank you.
Nice job. This morning, we announced an increase in our fiscal year 'twenty, one outlook, which implies that for the final quarter of the year, our our Q4 sales growth, 40% to 50% and our non-GAAP operating income will increase about 30%.
This means that our revised fiscal year 'twenty, one outlook will be for sales growth of 57% to 60%.
Our non-GAAP operating income to be approximately 1.05 billion.
This is up from our prior annual outlook, there is 35% to 40% sales growth for the year in a range of 700 $725 million non-GAAP operating income.
You have all come to appreciate logitech for our commitment to delivering sustainable long term growth that commitment remains firm, we see so many new and expanded market opportunities as we emerge from the pandemic, we will invest aggressively to capture the growth potential there.
Next several years will be so exciting and I can't wait to innovate expand and drive change.
So with that Nathan that are ready to take your questions baked into Cuba.
Thank you Bracken.
Thank you.
UBS Your line is now open.
How are you.
Hi, Hi, and thanks for taking my questions and Hello to you Greg.
Three questions. Please the first one is taking.
Taking <unk> <unk> in fiscal year 'twenty, two I mean do you see the risks that we have some pulling forward demand and.
In the gaming end market.
And also in via collaborations where corporates are doing the homework preparing when employees are coming back to the office.
Second question would be please on the cross profit margin and just on a technical point of view volume wasn't much higher quarter on quarter, given the higher scale benefit.
FX benefits.
And also on point number three can you elaborate a little bit more on your incremental marketing spend of 50 million quarter on quarter was head count related and.
And global brand campaign, you are in rolling out at the moment. Thanks a lot.
I hope I hope everybody else's not experiencing slight.
Slight negative feedback on gaming zone.
But I'll bet you are so.
If one of US is talking EBITDA.
Choppy, please don't hesitate to re ask the question.
I'll jump in and then.
Share back and forth that we are we experiencing pull forward demand in gaming and boosted the gain the demand per game has been so long term and so strong for many many many years and I think it's certainly the case.
People are playing a lot of games during the pandemic.
Lot of what drives the growth of gaming is really the games themselves.
Remember the fortnite effect this years ago.
And then before that I would say legal legend is probably the biggest phenomenon there will be more so I'm really optimistic the game was just going to keep chugging, along and growing long term, we're not going to we're not going to guide anything today for next year that will come in the next few weeks, but I'm really optimistic about gave you. The long term I would say just as optimistic not warrants.
So it's about D. C D C is.
If you look at just the personal video enablement.
The typical percentage of Webkinz, it's not very good.
We so and if you look at the number of web counts, we sell relative to the number of monitors and the number of Pcs out there 600 million monitors $1 4 billion Pcs.
It's just a drop in the bucket, it's up to us to figure out how to unlock the demand it ought to be out there for webcams long term because you get such a better experience. Many of you right now we're looking after the distance instead of looking right at the right into the camera for example, or the quality of your pictures not very good and Youre looking at yourself out four or five times, a day for folks out of the minutes.
Four five times a day.
I think we have opportunity and then in the office.
We see the video enablement of office is just brilliant start I mean, if you think about what's going to happen when people go back into these hybrid work environments I cant believe youre going to see.
A very strong growth of video conferencing long term, so I'm really optimistic about it.
You take the gross margin point and just to say, although although I'll give you the shortcut the answer which is.
As well I wanted to let I'll, let you do it incremental marketing spending it's a combination.
Nate mentioned in his script.
You know us we try to be very.
Aggressive.
And risk managed so a lot of the spending we're putting it is variable. So we're always ready to two if it's working we'll keep we'll double down on it if it's if it looks like it's not as effective as we'd like we will pull it back but.
But we also are making long term fixed investments we have so many opportunities right now around the world. So we're going to keep making those you want to add anything to any of those.
Yes, let me just on the gross margin question yarn and again apologize for the feedback if you're getting at as well.
The primary difference sequentially. Thank you Arne would be mix of products in that in Q3. We mentioned, we had a very strong <unk> quarter, which tends to be a little bit lower gross margin than other parts of the portfolio is still very good business for us. So that's the primary reason why I suppose you could say gross margins are not higher although they were quite strong.
And then as Bracken said on the marketing side, I mean, frankly, we couldn't add that much headcount in one quarter or two to drive that kind of cost increase so most of that was variable on the marketing side and then as Bracken said I think it could become a long term investment for US we'll judge the effectiveness of it.
But as.
As we've been saying so many of these trends, we really firmly believe our long term multi year growth drivers force and when we have confidence in that will make fixed.
Fixed cost investments to support those.
It simply wouldn't make any sense, even if there were a quarter where demand pulled back if we believed in the long term strength of that trend you would want to continue to invest through that.
Potential slow down to make sure that youre competitive over the longer term.
Absolutely.
Okay.
Thanks Sharon.
Sure.
Paul from Jpmorgan. Your line is now open.
Hey, guys great quarter, Thanks for taking my questions.
So first up can you talk about the pricing dynamics across segments.
Given your elevated demand did you raise or are you raising prices in any segments or is the gross margin benefit must see product mix and scale with some FX in there and a follow up.
Okay.
The answer is no we have not raised price.
We are doing a lot less promotions.
You see our promotion numbers now and the growth that we really pulled way back on the promotion levels that we stayed back I hope we can keep it.
Some of that benefit coming out of but I'm sure. Some promotion will go back that certainly Hudson I'm sure. It's not an effect on our average pricing, but most of the most of our price benefit is really as you said, it's mix mix within category mix Cross category.
Yeah, and I think Paul maybe to where youre going with.
The sustainability of these gross margin levels as I mentioned in my comments earlier do you expect gross margins will come back down towards probably the high end of our prior range. There are some things in there that are probably more sustainable like some of the mix benefits growth in DC. Its a nice category from that standpoint.
But I think we're going to need to move back to more reasonable levels of promotion as supply and demand normalizes.
And so that again is included in our outlook on something I would expect to see in the near term and then quarters Ed.
Okay. Thanks for that and then on V C more and more enterprises are looking to switch to zoom enabled rooms.
Is your market share kind of accelerating in the larger conference rooms, now what's been the kind of initial feedback on their roommate product.
Yes.
So, yes, more and more companies are growing.
The Microsoft.
To Google.
The kind of plug and play solutions that are cloud based are all growing really well.
You asked about our market share in large conference. It's a little hard to judge that exactly I would say first of all large rooms are a really small percentage of the total but we've now got a phenomenal products for large rooms, and I think we are we're definitely growing in large rooms, you'll see but overall as you see.
Our growth has been extremely strong and we're super optimistic about our all of our product portfolio, including the newest reset that I mentioned in the earlier in the call, but not reset new introductions I mean, I think we really raised the bar on the industry.
You asked about feedback we're getting from beta customers has been very very strong very strong.
Yeah, I mean, I think our performance in those larger rooms has been very good as you can see the conference cameras continued to grow quite well I think theres a lot more room for us there Paul we've been adding capacity selling capacity more coverage into large accounts and we've had some really nice large wins.
But I think theres a lot of room for us to continue to grow in those spaces. Okay. Great. Thank you.
Thanks, Paul.
Alex from Goldman Sachs. Your line is now open.
Hi, Alex Alex Hi, everyone.
Hi, and congrats on the robust results.
Two very quick questions. Firstly, just on the guidance for next quarter, you seem to be implying she'd 90, which is meaningfully below what we would see normally and just given that obviously, we continue in many countries to be in a lockdown scenario.
In the current fiscal quarter I just wondered.
What plays into that in terms of that sort of sub seasonal forecast and then secondly, sorry interest and you talked about governmental spend particularly in Japan, we've seen a few news articles.
In terms of other regions talking about home education, and peripheral is required for that and I wondered if he could talk about what youre seeing on a global basis.
That could go beyond the current quarter.
Which you obviously referenced.
Okay, you want me to take that.
You want to start with that one I'll take the guidance sure.
I'd say on the education front, yes, we there are a lot of governments around the world that are investing in education technology for education, and I don't think that's going to let up and we see it as a lot more than a one quarter trend. We think it's a long term trend we're excited about the education space.
Yes, Alex on the guidance and the seasonality sequentially.
Honestly I do like to look at our business in terms of typical seasonality. This year has sort of not been typical and you saw that in fact in Q3, where we grew sequentially.
About 33%, which was pretty well above our typical seasonality Q2 was above typical seasonality.
Youre correct our outlook for Q4, it does imply.
A sharper slowdown than what we have seen in.
Recent times Q3 to Q4, but I think its appropriate just again given the strength that we had this quarter.
And some of this increased promotional spend which we expect to reactivate that.
That will also put a little bit of pressure on revenue sequentially. So nonetheless, it still implies 40% to 50% growth year over year.
Into a quarter, where as you know Q4 of last year, we started to see some pretty strong pickup in demand. So I think the guidance looks pretty reasonable.
Great. Thanks.
Thanks, Alex.
Hi, Eric from Morgan Stanley. Your line is now open.
Eric Awesome, Thanks, Dan Hey, Bracken.
So two questions on my end first congrats on the quarter.
So for the second consecutive quarter, we kind of saw sell in meaningfully outpaced sell through so just wanted to understand kind of the dynamic there why that has been the case and whether you think that has to reverse in coming quarters.
Hello.
Sure do you want me to take that one bracken.
Got it.
Yeah.
It's a good point.
Really two drivers of that is primarily the first is that sell through is reported on a.
Gross basis, those numbers do not reflect promotions, it's before promotions.
So as we've talked about we got some benefit from the reduced promotions and so you see that net sales you don't see that in the gross sales are in the sell through numbers. So that's the first reason why you'd have some difference the other would be channel inventory so sell in.
To replenish channel inventory is still at very reasonable levels and in fact still short in some categories like last quarter and so thats really the two drivers there would be.
The difference in the calculation because one is before promotion and one is after and then the other would be channel fill but again channel inventories at appropriate levels and.
Forget about how we look going into the March quarter.
Okay Super helpful. Thank you and then maybe if I just turn to the balance sheet. It is kind of a two part question. So one on the cash balance obviously, you have more than $1 billion of cash. So just looking just wondering if you. If you are looking to be more aggressive in deploying that cash and how you would do that.
And then the second part is just again your inventory levels are nearly double what they were at the end of last year. So is that a sign you know you you're holding on to more inventory for perhaps direct to consumer purposes is that going to be worked down over the coming quarters. Just any color on both of those are on both of those line items. Thanks, Amit Let me take the first one.
Okay.
We have the same approach with our cash that we had before.
We're obviously paying a dividend.
We will surely increase the dividend cash for the board, but we normally do in September.
But kind of a normal level.
Second thing is we will keep doing stock buybacks.
And I'm sure, we'll want to keep doing that but again it gets free for the board, but the rest of the board, but I would expect that in terms of M&A. That's the key we continue to look hard for great strategic opportunities and they are out there now will they be large enough to take that kind of cash we're always looking at small medium and large it takes the <unk>.
That's really aligned to find something large so we're going to stay after it is lot of cash we're generating a lot of cash, but I'd look we'd love to put it to use strategically, but we have so much organic opportunity to were certainly going to keep plowing into that and you might want to add to that too.
<unk>.
Yeah, I mean, I think the other thing thats been.
Important and we've mentioned this couple of times, it's just the use of that cash to invest in working capital, which really gets to the related question.
It really gets to your second question on inventory, yes. So obviously the inventory balances has increased but we're supporting a much higher volume. So if you look at days of inventory. That's continued to come down. We had are actually best inventory turns and history. This quarter and again I'd want to point out of it I think our operations team has done such a nice job not only a day scale.
Scale to help scale the business to capture the incremental volume that we've had but they've also continued to drive operational improvements at the same time so.
It Hasnt just been an environment where.
We're chasing supply, we're actually trying to make our stay on path with our structural improvements whether that's manufacturing diversification into other countries, whether that's efficiencies in our supply chain cost reductions things that benefit us over the longer term and in fact some of that is what's driving the improved inventory performance that we see right now.
So.
I think we're getting some benefit on inventory from the higher sales velocity and but we're also making efforts to improve things structurally. So that we can continue to be more efficient on working capital going forward, but no concerns for me on the inventory again it's.
It's all appropriate given the increases in volumes, it's all fresh it's on fast moving products. So we feel very good about where we're at.
Absolutely awesome. Thank you guys. Thanks.
Thank you Sir.
Thanks, Our next question comes from Austin <unk> from Citigroup.
Hey, good morning, everyone.
Thanks for the opportunity.
Couple of quick questions on travel spending you guys talked a little bit about resumption in parallel spending.
Point are we looking at that in the March quarter or do you think just given all the COVID-19 lockdowns et cetera. This is likely going to be a fiscal 'twenty two event.
If you can.
Parse out the impact of lower promo spending in any way on margins year to date or even in third quarter that would be great and then I just have a follow up for bracken as well on screen labs. He mentioned that obviously, that's going well for you any anecdotes you can share there on how that's driving higher you.
Their engagement slash higher use of your peripherals and when do you see that services or subscription really showing up at mobile meaningful driver of revenues across your portfolio. Thank you.
You would take the first one day.
Sure.
On promo.
A little bit careful on this one obviously because this can be something that's important for competitive reasons, but I'll just reiterate I don't think the current levels of promotion are sustainable I think it's healthy for us to have some promotion to continue to drive growth drive growth and.
Investing in our categories. So.
I would expect to start seeing that promotion turn on.
Again in the March quarter, but we'll see how things look you know, it's something that we can do quickly and we can manage dynamically in terms of the impact on the margins themselves. It was the largest derived from lower promotions were the largest driver of the year over year improvement in gross margins.
It's a bit of an unusual year, so ill step maybe away you'd normally we wouldn't talk too much about besides that impact, but it's been kind of an unusual year in that respect. So I think it's good to share it was probably about a 5% to six point impact in our gross margins favorably year over year from lower promotions similar to what we saw last quarter.
So.
It's important to keep that in mind as we look forward again, we benefited from it I think we're managing it wisely.
That's something that we're going to have to continue to evaluate in the future.
Yes.
Your question about services and general and streamlines in particular, Xtreme labs, a little bit of color on that where we're offering a subscription service now index shifts in services is doing really well I mean, the team has done an extremely good job of mining the subscription service opportunity I'd say, so it's growing really well, but I'd say the more important part of that.
Not per se the exact service, we're selling today are the or even the size of that business. It's the learner.
So we're really learning hard on this because we're also offering services quietly.
Video conferencing business, we've got things in the works and gaming we've got some things in the works and CMP.
I wouldn't expect any of that.
Individually or collectively to become a really big number next year or even the year after that but.
But I think I'll predict what's going to have with our services business that over time, we're going to be you're going to we're going to be working working work, you're going to hear a little bit better than one day, it's going to really pick up.
Because we're in the learning mode.
And we want to have a stickier relationship with our customers across every business. So stay tuned it's a long term play of Super excited about it I'm reminded of.
When I first joined Logitech I went down to.
Meet with a bunch of a lot of venture capitalists.
Kind of advice on what Logitech should do them at the time. So many of them were investing deeply into hardware hardware enabled service businesses.
So some of them you know kind of a panel of the heads that you guys probably should.
Try to find another job because we're.
We're coming for you.
And I walked out so you can guess Rio turnaround to do and that's easier said than done I think I'll just focus on what we're doing and do it well and hardware eight years later, we're worth.
So a lot more than 10 times, we were then and logos a lot of those investors have gotten out of hardware.
But they were right that services. Our goal. It's just a question of timing and services are going to be a really critical part of so many experiences you buy and we know that so we've been investing we're going to keep the best and we're going to build that so I'm excited about the future of the new both services, but it can take time to develop.
Alright, Thanks for your question Okay.
Okay, great. Thanks, Thank you for NAV.
Our next question is from search from credit Suisse.
Sure.
Yes.
Sir your line.
We cannot hear you.
Our search.
So can you hear me now yeah, yes, sorry, it's always me here with the problems with the hardware so.
Give me one.
Okay. Congrats guys don't your growth results I have several questions at least two I would like now you already mentioned that this order from chapter and it has been a one off at least in the press release before you mentioned, though you could expect more to come of that so I'm wondering.
Can you give me a size of this contract will not be any deep data, but because if you get the feeling with what this means and do you see other such tend to act.
One time orders in mice keyboards, or we see an all day coming also from corporates and not only from government.
To give some some color here.
Yeah, I don't think we've disclosed nor do I think we should probably disclose the size of that order in Japan, but what I would say is we do see very size of orders coming from corporates.
Still think its got early days for that we've had some bulk buying in mice and keyboards that are really exciting and I think but I don't think those are kind of temporary things I think youre going to see some of that will come as people were operating people are homes, but it's also going to start out on the office, we never we never had a direct.
Relationship with a lot of the largest companies in the world because we just didn't have the scale or haven't made the decision to scale with sales force selling into the enterprise for example, moving cost education for a minute and the same thing was true of education and because of they see this as one of the synergies we're creating now for the future. This V C.
We now have a direct conversation with the largest companies in the world and that enables us talk about things like our workspace, our desktop business mice and keyboards webcams.
In a way we never could before so our market shares we're underdeveloped in the in the enterprise business and <unk> in general.
We are completely committed to changing that going forward. So I think that's one of the growth opportunities. We have ahead and education I think there is most people who are involved in the <unk>.
Education around the World will tell you this true.
While the while the move well students at home all the time, it's probably not going to change remote work and more technology enabled work is the future and so I think the investments are going about education in Japan or curve.
Sure.
Exemplify what's going to happen whats starting to happen around the world in places like Germany, and other countries that will we'll invest and keep investing in education technology, and we're gonna be part of that so we're putting ourselves in position for that.
Okay. Good.
Good.
Follow up question is you mentioned that you still have some supply constraints mainly in webcams.
For enterprise type camps, or only to the consumer webcams and do you have any.
Product categories, where youre short.
And when do you believe that Youre coming out of this situation.
Yes, it's really both we also have some shortages in microphones and a few others a few other places.
In terms of when we think of come out of it.
Almost embarrassed to predict that.
Predicted every quarter, we're going to be out of it a quarter or two and I've been wrong. The demand has been stronger than when we bought.
In each case that continues to be very very strong.
We are expanding our capacity both in May in the assembly are making as well as in the components we need.
I would guess sometime next year, we will see.
Really get to full capacity on webcast, you would add anything to that day.
I think that's right.
Next year first of all kind of in there.
Fiscal.
Please go and sort of getting the last question where is the main bottleneck existing components or is in production already.
Yeah.
Right now it's <unk>.
A little bit we're I'd say, we're pretty good at a pretty good place on assembly, we think.
Don't really know till you everything so its components.
Okay.
Thanks, Eric.
Thank you Serge.
Our next question is from Tom from D. A Davidson.
Great.
And then congrats on a net outstanding quarter. So two questions from me. The first one is how should we think about the influence of the new gaming platforms for Sony and Xbox on the gaming industry's ability to grow on top of the pandemic in general and Logitech in.
<unk>.
I apologize I missed the first part of that comment because one of my personal systems sort of talked me.
Sure.
How should we think about the new gaming platforms.
Sony and Xbox and that enabling the gaming industry in general and Logitech in particular to generate growth. This year on top of the pandemic led sales in gaming.
Yeah, I think the I think the new gaming platforms from those two plus other companies are all drivers of long term growth gave me.
We're excited about cloud based gaming in general in those two platforms because if you look at our Astral business has done really well this year.
We expect that to continue to do really really well this has been a banner year.
An amazing period for for the new consoles.
I think the new consoles are starting to spillover into PC gaming and Theres an interaction between them.
We're excited about I think I think the gaming business has never been more excited.
Don't see how that will let up.
Excellent and then my second question is can you give us your current thoughts on the long term opportunity for logitech and virtual reality, especially in gaming.
Yeah. So so we've been working in virtual reality now for about four or five years four years I think.
Our dedicated team located a couple of different places in the world. Our goal is the.
Our goal there is really to try to be in the.
In the early stage.
As augmented reality becomes.
More accessible for productivity creativity and gaming.
And but also in virtual reality.
There is obviously can be virtual reality, playing gaming we've got a couple of things we can't talk about right now, but I think as that continues to grow we're going to stay in the mix. We've got a current out now that is not a gaming product is called <unk>.
In addition, it's the stylists that you can draw and create in three dimensions.
Got a couple of large companies using that to current design things, it's not a big product for us.
It's another opportunity for us to learn I love the team we have on this I hope they're listening.
Super sophisticated people working on this both hardware and software and it's an exciting future.
Maybe another call, we'll talk about where the future will be 1 billion offices and homes and how virtual reality and even more augmented reality will be will probably be played there and we think we can really play a big role of bigger role there. So that's exciting.
Great. Thanks.
Thank you.
Thanks.
Our next question is coming from Andreas around those that can be.
Yes Hello.
Hi.
Our first question can you be more color into the investments into customer per infrastructure, rich, which propped up both the G&A line what is that exactly.
Yes.
Maybe you want to take the yes sure.
So just as that business has grown I mean, our needs to support our customers have grown as well and so we've just added scale and capacity into.
Call centers and.
And if more enterprise oriented support to support some of the V. C growth that we've had so those types of areas and on the it side.
Some of its projects that we had planned maybe over a longer term Andreas that we simply have had the pull forward you know.
As some of the scale of the company that we had planned for is pulled forward and we've had to increase the scale of some of the it investments.
Investments that we have to support that growth.
There is also some investments in G&A as I mentioned in my in my.
Prepared remarks that the you know.
That I expect will wind down by the end of the share so I'm not expecting this level of G&A to be our new run rate.
But it is one area, where we've put some investment into it and I think very appropriately.
And that will and that will remain so a portion of what you saw on G&A as variable more probably for this year and certainly a portion of it it's more fixed still variable over the longer term if volumes do not sustain at these levels, but.
We think it's certainly appropriate, but given where we're at right now.
And by the way still you still see G&A below 2% of sales so.
I don't think it's something that you should have real concern over.
Okay.
Revenue.
<unk> can we see a normalization in the supply chain to be able to bring it down this lumpy logistics calls telling me. It's currently probably its sales still high.
What needs to be in.
Place to break them down.
Scott.
Yes, it's true that our logistics and supply chains are basically our airfreight express both have been Super high.
I think it will start to Covid, a little bit this quarter I don't know, how you feel but thats.
Maybe a little bit and then as we go into next year, we expect it to be more normalized.
Yes, I think that's I think that's true I think I'll also say, though that you know.
Expedited free.
It's something that is a good option to have and <unk>.
Especially as you start to address more business users.
And large deployments and that may continue to be.
Something that we want to utilize so.
I agree with Bracken I think it will come down as supply catches up again in some of these categories, but we have been chasing all year, but I also would say that it's an option that is available to us if we want to.
Just kind of manage potential niche mismatches in the future between demand supply mix volume some of these large deals things like that.
Thank you good luck. Thank you your interest.
Our next question is from Michael from Vontobel.
Yeah. Thank you hi, everybody.
Two questions actually from my side first of all on the use of cash you already talked about your cash allocation strategy.
And you talked about organic opportunities. My question was here should we expect you would see R&D step up more materially going forward and where would the priorities be.
In R&D.
And along the same lines.
Your Capex plans last quarter, I think you announced an increase in your and your Capex projections.
Question would be here, if that guidance is still unchanged and.
Where are you where are you expecting to invest capex going.
Going forward and then I have a follow up.
I'll jump in there day, yes, I think yes, we are increasing our investments in R&D will keep increasing our investments in terms of priorities.
Share too much for competitive reasons, but do you know.
We're refocused strongly in four broad areas and you can bet that the Ole.
Or potentially hungry for investment that we should make and we will do so.
We're going to we're going to really keep investing engineering has been the lifeblood of this company long term designed as unlock the power of engineering, it's really always been about we have great engineering work to keep investing there.
On the Capex side, it's been an unusual year for Capex, because we've invested a lot work best of normal it's still relatively low.
I think we're at the very low end of what most companies our size would be doing from a capex standpoint, I don't know whether it will be to spend that much capex in the future.
And I think I think that's right maybe just to be.
Be very precise I mean, we're guiding for $75 million to $80 million Capex spend this year, Michael which again, we've looked at we've said it's not.
A significant amount when you look at the cash we're generating and I think the return on it is very strong.
In terms of R&D, just to put them a little more color on that year to date R&D expense was up 21%. So I think we've been investing in it.
Finally, this year again, because that's more long term oriented that does that is more fixed cost, but again its fixed costs addressing longer term growth opportunities. So very consistent with that the other thing within R&D and we've mentioned this in the script. If you heard was shifting resources between product categories and so while it's 21 per cent for the year.
Growth of 23 per cent in the quarter growth within that we're reallocating resources. So.
Some of the priorities the Bracken mentioned, they're seeing growth well in excess of the 20% growth that you see at the company level because of that reallocation internally.
Okay, Great and then my second question would be in terms of your sustainability.
<unk>.
Two questions what are your priorities going forward.
In fiscal 'twenty, one in terms of sustainability and where do you think you, making the best progress.
Currently.
Where we're really really excited about what we're doing with sustainability.
We've gone from.
We just got growth the Dow Jones industrial Europe sustainability index.
Sure.
We signed up with the Paris accord.
We're on track to deliver our first year revenue against that.
One of the house free rise trying to keep the globe to wanted to ask the rise in temperature.
We announced last quarter that we are we're going to be 50% of our mice and keyboard.
A lot of volume.
We will contain because it's a recycled or recycled plastic.
And by the time, we get to we Havent announced that publicly but over the next year or two after that we'll get to 60, and then 70% and higher.
We announced that we're gonna be carbon labeling that we've got the first seven kind of product platforms on carbon labeling every single product in our portfolio and trying to encourage all of our competitors everyone in tech and beyond to do the same thing. So that we can try to get the part of the world moves to making a labeling carbon a little.
Like labeling salaries, so once it's on the package.
Some consumers will look at it and it will put pressure on all of us to try to bring that down.
We've moved to renewable energy everywhere, we can so far and we're aggressively going after that we're investing in carbon offsets to offset whatever we can't be so far.
We're making big progress there. So we have a big program going again sustainability, it's absolutely value of the company and we're not going to let up.
Perfect. Thanks, a lot and keep up the pace. Thank you. Thanks Michael.
Thank you Michael My last question is from rental from research partners IRA.
Yes, Hello, Thank you for taking my question.
Two of them first one you already touched on it before but I was wondering how much of your revenues.
They are sold.
So youll be to be channel in the quarter of <unk>.
How much easy.
Is your addressable market going to change our increase.
Sales of your investments into the <unk> channel is it simply going to dump on or if that's wrong thinking and then my second gone almost a question what's the.
<unk>.
Education order from Japan.
Impact your growth margin in the quarter.
Cause I believe to remember that's the marching to medications and dedication of our load growth.
Average growth marching, but maybe I'm wrong there.
Yeah, that's true.
In Japan. It is true that education is below or the group margin on the other hand, it also through lower opex, so far by a long shot so it's pretty efficient and profitable.
I would say in terms of the B to B as a share of the quarter, we don't really break that out.
And your other question around.
The addressable market size increases I think this is a good moment, where I can invite you to our analyst Investor day, which will be coming up quite soon we would love to have you join.
And I think some of those questions, we will be able to answer it a little more clearly.
And rather than try to hustle through it at the end of an earnings call I think it deserves more discussion of that.
Do think youre right that our overall addressable market or Tam. This year has dramatically increased and we're excited about that and the real question is how do we unlock the power of the I think that's the.
Advertising for AIB, which will be sometime in the next several not too far away.
Alright, thank you.
Thank you Jane.
Thank you everyone and that concludes our Q&A session I will turn it over to bracket for his closing remarks.
It was obviously a.
Super strong quarter, it's been a very strong year, but don't confuse the Super I mean this is a long term thing for us where we're we're completely committed.
Most of the people the companies that are working on next year and year after that not this year. So it's been extremely exciting.
It's been a really great challenging and collaborative.
Investors and analysts partners for us all year long, we appreciate it keep challenging us I hope you will all come we haven't announced the date you heard our analyst Investor day, but we will shortly and I hope all of you who joined.
We're excited about this year, we're really excited about next year. Thanks, a lot see you next quarter.
Thank you.
Yeah.
Yeah.