Q2 2022 Logitech International SA Earnings Call
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This is the upgrading here in California, you'll be up at a low.
Look we are in the monsoon season.
Okay.
Nicole wherever you are sitting in that virtual background of beers vessel, that's what our new office needs to look at.
It's fair to all.
It's not reality.
Jerome.
No I'm not.
Okay.
Yes samad.
To start with a safe harbor, a flag ones on it in here.
Good morning, everyone and thank you everyone for joining larger checks Q2 fiscal 2022 earnings call. This call include forward looking statements, including with respect to future operating results and business outlook under the Safe Harbor of the private Securities Litigation Reform Act of 1995.
We're making these statements based on our views only as of today, our actual results could differ materially due to a number of risks and uncertainties, including those mentioned in our earnings materials and S. SEC filings, including our most recent annual and quarterly reports, we undertake no obligation to update or.
<unk> any of these statements. They will also discuss non-GAAP financial results you will find a reconciliation between non-GAAP and GAAP results and information about the use of non-GAAP measures in our press release and in our SEC filings. These materials are well.
As well as our prepared remarks slides and a webcast of this call are available on the IR page of our website. We encourage you to review these materials carefully unless noted otherwise comparisons between periods are year over year and in constant currency in sales. Our net sales. This call is being recorded be avail.
A replay on our website and with that I'll turn the call over to Bracken.
Thank you Nicole and thank you for a grouping of surprising same route the safe Harbor provisions.
This month, we celebrated our 40th anniversary your watchword.
We've grown from a software startup with combination computer mice to a design company with leading market share across many categories.
And we're growing share in the majority of our key product categories, including releasing category to Nash.
I mentioned, our 40th anniversary not not really look back pretty freely to looking into the future.
Just as the PC growth print supported our 30 year surround the PC growth period.
Collection of long term trends will support our strong growth for many years ahead.
Gaming will grow to become the biggest collection esports in the World One day for both a participant and a spectator standpoint.
Video collaboration will almost totally replace audio only collaboration.
Almost everyone will create content as well as watch each other's charter.
And the mouse and the keyboard those original categories will keep growing as more people work create and learn at a desk or a cable where they can move away from that tiny screen on the phone and be comfortable for hours at a time.
I Love logistics positions in this landscape with long term market trends gaming video collaboration streamers improves and our workspace product categories, we are ideally positioned to grow and evolve.
That's the long term outlook, but much look more near term.
Most organizations are settling into new ways of working hybrid.
And the evidence is overwhelming the employees prefer working from home two to three days a week.
Many employers who have embraced this reality and a large share of the rest or at least acceptable.
Companies across all industries are adjusting their offices planning redesigns are relocating to accommodate the shift.
Many companies, including lobster are reshaping offices to support hybrid work practices.
And enable more place for meeting for collaborating and for creating together, while still continuing to have dedicated workspaces for those who prefer a leader.
Today's the simple our work in the office and then they go home or over for so many of US are used to be your workplace was the office we.
We've entered the next era, where your workplace is your workspace wherever that is.
Traditional office desks.
Hot desk.
Home office <unk>.
<unk> table conference room, the child's room or a coffee shop.
There are a variety of workspace is growing and that world with people distributed across so many places the video enabled spaces in the office must grow too.
Conference rooms, huddle rooms collaboration spaces, all will need video and must continue to grow.
What an amazing opportunity. This is for Logitech, we offer solutions, we offer solutions for all of those wherever your Workspaces and most of this will we will need more than one.
When we're not working we want to create and messages play.
Humanity has always had the need to create new things connect to each other.
Now most people, creating a digital world.
Digital creation has been growing strongly for many years and not surprisingly it's serge during the pandemic.
But that surge continues the total number of hours watched across all streaming platforms, including Twitch Youtube and Facebook increased 20% year on year. This past quarter for $7 5 billion hours to two to almost $2 9 billion hours in Q2 of 2000 22021, that's 20.
Percent on top of incredible growth, we already saw last year.
Those trends in mind, let's say, let's examine our performance in Q2 of this year last year, we reported a tremendous Q2 growth was 73% accelerated by the pandemic.
On top of that substantially larger base, we not only sustain that growth we actually grew again this quarter.
We delivered record sales.
Double digit sell through across all regions and grew market share across almost all of our revenue.
I believe we're innovating does it anytime in the 40 year history of the company to <unk>.
<unk> engineering and sustainability.
Our PC peripherals categories remained very strong with double digit sales growth in pointing devices and PC keyboards and combos.
Here's one example are two examples of how our design centered approach is so powerful.
On one hand, this quarter, we launched immix keys many.
And many for the Mac. These keyboard these keyboard.
We're designed to result of the input request the creator community.
New keyboard offers the best features of popular standard saw some X keys, which is the larger keyboard was sitting in front of me, but in a minimal wireless keyboard I'm using it right now and it's absolutely awesome right here, it will likely skewed 30% to 35 and older.
On the other hand, just go look at our website and tighten later idealistic.
Keep listening to me for enough typing pop keys in the search bar.
You'll see a lot of mechanical keyboard with replacement of <unk> was very colorful, let's just launching in China is so far and so cool it's perfect for Guernsey.
It will skew strongly under 30 and female.
Our gaming category had another strong quarter, great quarter with market share growth in PC console and simulation game.
Underlying sell through grew double digits in this category as well.
Our tablet category was more than double the size it was two years ago.
Portfolio is stronger than ever.
Education and online learning, our strong and growing opportunity not just for K 12, whereas universities Democratizes learning with online courses and the adoption of numerous learning platforms grows in popularity.
Remote teaching us has become easier.
Easier and there's much more we can do to help educators believe their class through both in person and the students are at home.
As organizations worldwide continue to reestablish ways of working remote on premise and hybrid people are indeed, using more and more video or court. According to market research firm Frost <unk> Sullivan are the nearly 90 million meeting rooms worldwide only about 8% or video enabled.
Accordingly.
That's 111th of the total rooms out there.
We're working to change that and help our customers evolve with the new ways of working because it's simply a must to have videos and the rooms in the future.
Lack of video access creates a terrible experience for remote attendees, who have experienced the benefits of face to face video interaction over the last year.
Every it decision makers thinking about this.
Thoughtful reformatting the way companies work as they go hybrid as a watershed moment for many of these departments because for the first time the structure of offices and the technology officers in the technology and the rooms. The primary role of these departments will be a driver of the cultural evolution of every company.
So it isn't surprising company it departments are making careful broadly aligned and systematic steps here.
We're investing in building out solutions for these IP leaders and investing deeply in this area.
Next I wanted to touch on the impact of the well discussed supply chain industry challenges they've been headline news globally.
While we manage these are global supply chain challenges judge as well throughout the pandemic <unk> is not immune to the effects.
We continue to proactively manage our supply chain, but expect ongoing headwinds from higher logistics costs and prolonged delays and challenges of component availability we.
We do believe our long term supplier relationships as well as our wholly owned production facility should help us remain competitive in the current unprecedented supply chain environment.
And before I close and hand, it over to <unk>, Let me give a quick sustainability update.
We recently raised our climate goals, we announced that we will be carbon neutral this year and have plans to be climate positive in 10 years.
At that point, we'll be taking more carbon out of the environment. Then we generate these are industry leading commitments.
We're addressing our carbon footprint across the entire value chain designing our products for sustainability using renewable energy at 92% right now in our facilities and supporting third party certified carbon removal projects.
We're excited about the long term trends that are driving growth in our business.
These trends drove our business pre pandemic.
Accelerated during the pandemic will be a driving force for years to come.
Our long term strategy remains unchanged the current market trends play to our strengths and we are doubling down to become even stronger.
Now, let me turn the call over to date for further comments on our business performance this quarter.
Alright.
Thanks, Bracken, we delivered a solid quarter and continue to execute well on a number of fronts and.
In Q2 and for the first half of the year.
We grew the top line maintaining maintained strong gross margins gained share in most categories and returned a record levels of cash to shareholders.
We're confirming our full year outlook, despite unprecedented supply chain industry challenges.
Turning to the Q2 results our total company top line grew 2% in constant currency with strong momentum and are pointing devices and keyboard categories, both growing double digits.
Webcam sales decreased this quarter by 9% after more than tripling last year.
We gained share in all three categories and each has good long term growth potential driven by hybrid work and greater category awareness.
Q2 video collaboration sales declined 4% with sell through grew double digits in all regions.
Net sales for Americas, and Asia Pacific grew year over year, and while EMEA net sales declined versus the prior year. They grew sequentially in EMEA sales more than doubled versus two years ago.
Gaming grew 9% against 84% growth last year and delivered impressive share gains across PC gaming simulation and console headsets.
<unk> been an excellent first half for gaming enabled by a very strong lineup of innovative products solid marketing execution and our position as the leader in the fastest growing categories like wireless mice and keyboards.
Sales in our tablet accessories category declined 3% in Q2, and excluding Japan, where we had a large education order in Q2 through Q4 last year sales grew more than 30%.
Importantly, our tablet category is still more than double the size. It was two years ago and our portfolio is stronger than ever as demonstrated by six points of share gain in the corner.
Our music categories declined as expected in Q2 down, 14% overall, including mobile speakers down 11%.
Q2, non-GAAP gross margin remained strong at 42%, although down 370 basis points versus last year's elevated levels, we anticipated that gross margins would be down from last year and as we look out to the rest of this fiscal year I expect gross margins to be lower than current levels for three primary reasons.
First we expect our promotional spending will continue to increase although still remain below historical levels.
We will continue to invest in retail point of sales marketing, which was significantly curtailed last year due to store closures and broad based supplier shortages.
And lastly, while we continue to manage our supply chain, we expect to be impacted by industry wide component answering cost increases.
Turning to expenses, we executed our plan to strategically invest to grow our business over the long term our.
Our non-GAAP operating expenses increased 52% in Q2 to $337 million.
The increase was largely driven by investment in marketing sales coverage and product development.
As a percentage of sales opex was higher than Q2 of last year, but still down versus Q2, two years ago, highlighting our significantly increased scale as a company.
Rounding out the P&L, our Q2 operating profit decreased 40% to $211 million and operating margins were 16, 2% of sales down about 12 percentage points versus the prior year and up about four points versus two years ago.
Cash flow from operations was negative $63 million in Q2, we returned significant cash to shareholders with $120 million of share repurchases paid an annual dividend of $159 million and ended the quarter with a cash balance of approximately $1 $1 billion.
At the end of September our inventory was $828 million up $433 million from last year.
Inventory turns were three seven times versus an unusually high seven times in Q2, a year ago.
Historically, our Q2 cash flows tend to be positive, but they were negative this quarter as inventory turns were slower due to longer transit times and our continued strategic use of the balance sheet to secure long lead time components for key product categories.
I expect to see positive cash flow generation in the second half of <unk>.
Even that logistics bottlenecks and supply dynamics will remain challenging for at least the rest of this year, our cash from operations will be lower than our initial outlook.
This dynamics should be temporary and as lead times in transit times improve cash flow will rebound due to reduced working capital.
Our Q2 cash conversion cycle was 69 days up from an exceptionally low 19 days last year and up from 43 days two years ago.
The primary driver of the change in our cash conversion cycle is higher inventory days, which are up about 25 days versus pre COVID-19 Q2 levels.
Looking ahead, we are tracking to our plan of sustaining the increased revenue scale from last year and investing to build a larger faster growing and more profitable company for the long term.
We are confirming our fiscal year 'twenty two outlook of flat sales growth in constant currency, plus or minus 5% and maintaining our fiscal year 'twenty two non-GAAP operating income outlook of $800 million to $850 million.
We are well positioned in the market and this outlook reflects our focus on driving long term growth.
Now, let me hand back to Bracken.
Thank you Nate our consistent operational execution and ability to capitalize on long term trends like hybrid work video everywhere gaming and content creation continue to drive our performance these trends that drove.
<unk> performance pre COVID-19 accelerated during COVID-19 continue to position us really well for the future as well.
As I said at the top of the call. We May have started 40 years ago as only a metals company, but we're far from that now our portfolio today is diverse our pipeline of upcoming products is strong and we continue to build our capability in the world and World class design and sustainable innovation.
Many of our employees listen to this call and at this point I want to thank each one of you for the hard work throughout this quarter in the last year and a half.
I am confident about this year and Super excited about the years to come now Nate and I are ready for your questions.
As a reminder, you can chat me if you'd like to ask a question on the that are have ICM merchant from Citi asked the first question.
Yes Hello.
Oh, Hey, I for some reason I can start and maybe I assume baked Apple, let's take this April that Sanjay.
Sure.
On the one for <unk> one for Nate.
So as Bracken you are talking about long term growth you guys, obviously had a very robust outlook and seems like some of your competitors HP in callison combined Eric.
Eric hurdles are indeed, a very attractive category and should seek early but in the face of this we are seeing some normalization.
<unk>.
Okay.
Initially think of normalization here with sell in versus sell through.
Are you expecting as we exit the year and when you sell in and sell through kind of normalize hopefully.
That we should start to see growth, which is more in line with our target model or you know relative to what investors are concerned about that they will be this period of sustained low single digit flattish growth given the extraordinary growth that we've seen during the pandemic and I had a question for Nate as well.
Okay I think the.
The reality is that.
I've got a chart in front of me that actually looks back over the last couple of years of growth and the numbers are astonishing, but you have to remember that they really reset a base for us. So for example, I'll just take the.
The mouse and keyboard and keyboard and.
Welcome keyboard categories.
We've really now just got these multiple extra workspace is always another upgradable via our business pre pandemic was really just an upgrade mostly an upgrade business.
The upgrade businesses for multiple place with some of the office so at home and companies want to standardize so yeah I believe as we go into the next year and the year after that new aircraft, we're going to see long term growth in these categories.
And I think it will start to as you call it normalized and I'm really excited about it I think we're in a really good position. The other thing I'd say is we're not sitting on our chair waiting for the market to happen most of most of our categories. We're the market leader and we're making it happen. So we have the best innovation engine in the history of the company I believe right now that's why we're gaining share in a huge piece.
<unk> of our categories. So it's.
I think we can make this happen rather than watch it happen.
As it relates to video collaboration Bracken things like even to get to the low end of your guide 10% to 25% I think that was shared at the analyst event.
Youre going to have to see some strong growth I know there is some sell in sell through dynamics that are going on there, but should we then expect as reported video collaboration sales to be in that range or are we still going to go through this period of sell in sell through dynamics in the back half of this fiscal year for you guys.
For example, we're in pretty good shape, but I think we could end up falling below that range that we gave at the beginning of the year I think it just depends I mean, one of the things. So I think we are seeing is that there is a longer period of decision may be happening in a lot of companies about how to restructure their offices, that's probably delaying their purchases and really how theyre going to set up video inside the office.
So I think thats possible. The good news, though is we're really diverse we've got a great strong diverse portfolio. This has been the story for us for as long as I've been here, especially the last five years.
One thing.
Forming a little above what we thought the other way and sometimes a low and vice versa. So right now if you look at our pointing devices keyboards, jobber business and gaming all of them are performing above kind of what we've already so I'm convinced that the mix of these will continue to give us really strong growth for the year.
Great and then just for me.
Sorry go ahead Nick.
About the inventory levels.
Significant discounting if this demand. So you guys can do have elevated inventory at this point I know some of that is just strategic buying given everybody else can get the components they need.
Gives you confidence that youre not going to lead to an environment, where there will be significant discounting.
Alright, let me just complementing bracken.
All the right points on your earlier question I, just think on the sell through from a selling and sell through dynamic you remember last year, our sell in was greater than sell through on the growth rates. So really all you're seeing is normalization of that this year with kind of the reverse taking place totally expected.
But a lot of that just has to do with sort of last year. There was really no promotion taking place there was very little marketing taking place.
MDF type marketing retail marketing.
And this year, we're doing those things as we've communicated.
That's the primary driver that Youre seeing there Austria.
Not a surprise and not a concern probably will normalize as we get out in next year, but we'll see as this situation unfolds.
In terms of inventory again, I think as we've communicated.
We have I mean, I think our strategy is working quite well I think if you look at our share gains as Bracken mentioned really across the board.
We've been gaining share and that's actually something we didnt do last year, we had pockets of share loss last year and web cameras and in many areas, where we were short so I think the best we've made.
On components.
Finished goods and inventory replenishment and have been playing out well.
The other thing I would say is on inventory and again I've said this before is that.
The places, where we are making inventory best R&R fastest selling longest product lifecycle in places, where we have high market share. So we're making those bets very strategically and very thoughtfully.
And again, we have number one or number two position and really most of these categories. So I feel really good about our ability to.
I feel great actually about having this inventory available aspirin this type of environment.
Yes.
Great. Thank you.
Can I add one more point.
The implication of that is somehow we just if we have extra inventory reduced burn it off by selling everything.
Rock-bottom discount we just don't do that it says that's not been our practice in the past, but I cant imagine doing out in the future.
Okay fair enough. Thank you.
The next question the Paul Chung from Jpmorgan.
Hey, Paul.
Okay.
Hey, guys. Thanks for taking my question. So just on DC you know, we're starting to see some return on the increased investments over the past year can you talk about the reception.
Some of the new products, we believe can be skewed and how those are trending tapped oxytone Airbus et cetera.
Yeah, I'll just jump on that yes, it's probably too early to really react to those.
<unk> new sales.
Sales cycles are a little longer in D C, but overall I'd say I feel really good about our.
My video adoption patiently, but overall I feel really good about our innovation engine and video collaboration and the whole business. I mean, I think we've we continue to just have great products coming and scribes, probably one of the our newest products. It's the whiteboard for.
Video and that's been really exciting the reception has been great actually logic bolt, which is a more secure way to too.
They basically secure software software enabled service that comes with our workspace recruitment has also been super well received so I feel really good about what we're what we've already come out with and what's coming.
And I'll just add on to that too as you heard we had double digit sell through growth year over year in D C across all regions.
Which really indicates very strong demand and I think as our installed base grows I think the portfolio. A comment you made is really important.
As our installed base grows it just we're going to keep working with those customers being able to help them build out their conference room solutions more holistically than just with the camera like Bracken mentioned scribe and other products that go in there as well so.
And in good good progress on that on the development side, that's been an area of key investment for US. If you look at the P&L and you look at the increases in R&D.
A good chunk of that has gone towards VC and building out that roadmap.
Okay and speaking of regions, what kind of drove the relative strength in Asia.
What trends are you seeing emerge there.
As for U S and Europe markets as well.
I would like to highlight our Bracken go ahead, yes.
No go ahead go ahead Nick.
All I can say, China was really a highlight in Asia, Paul and we actually had and this.
Speaking at the total company level.
As well actually from VC, but China was really a highlight but we had good strength down in other parts of Asia too.
I think the nice thing to see in China is obviously they have been in the pandemic the longest and have been out of it probably the longest to when we get on video calls now it's always interesting to see groups of people in conference rooms, and so forth. So I think it's positive to see that even in a in a large country like that.
Large market like that where they sort of transition to a different stage of the pandemic, we still see very strong demand across the portfolio.
Okay and then.
Yes last last question on guidance, so you've generated about 54% of operating profit in the first half already that's typically in that 40% range historically.
Are you keeping kind of a bigger cushion this year on supply chain increasing in promotions. If you could expand there thanks guys.
Yes, yes.
Yes, you're right Paul.
I think the second half of this year, obviously with Q3 being our historically our biggest quarter of the year. Thank you really isn't an unprecedented time and so I think I am making sure that we can get through this quarter.
And I think listen Bracken mentioned, we're not immune to supply challenges, we have good stock and supply our channels are at good levels, but there are some products, where we're chasing components adjacent supply and I think demand during the holiday can be rather perishable I mean people are buying for the holiday and so we need to make sure that we can that we can fulfill all the demand that we see.
Again, with a strong double digit sell through demand.
Pretty healthy.
Thanks, guys.
Paul.
Just adding to that Paul I guess the incremental margin.
Things that were facing like everyone else is just incremental logistics costs, which have gone up even since Q1. They have gone up two to three times on the ocean year over year. So I think some of the Ashwin I'm factoring in as I look into it into the back half of the year, we will be spending more on airfreight have already approved a lot more air freight this quarter than what.
Our initial plans were but we're using the P&L and we're using the balance sheet.
Fill the demand that's out there.
Okay.
The next question is from <unk>.
Capital please.
Hey, Thanks, guys. Good morning, Yeah good.
Alright, thanks for take everybody here.
Yeah, good to see you too.
Two if I could.
I guess, the first is heavy and I apologize. If you guys spoke of this already there's a couple of things going on this morning.
But could.
Could you bracket voted recommend a speak to.
Like over the last 90 days.
What you guys have seen.
Yes.
<unk> been different from what you were anticipating and yes sort of.
Yes, it's sort of the things that are germane.
Sort of to the running of the business or the things they're germane.
To the to the key end markets and the key product areas and then I have a follow up as well.
Sure I'll take the first one.
But what do you think that you can say, yes, I would say nothing is really a major change, but I would say if there's a change I think the the supply chain challenges, especially in logistics have gotten worse.
Think that's probably will.
Well covered in the media and we're not immune to it as we said at the beginning of the call I think we've managed it really well so far but it has certainly gotten more challenging you manage would you add anything else Dave.
I think thats, probably been the biggest change here.
If that's the only one and I guess so then the second question is.
The stack here.
More folks coming in to the spaces.
Are you guys competing and quite frankly to some extent to which you guys have helped with annualized.
Sorry, like sort of evangelize in the mainstream.
Part of that threat.
What is the right way well, what's the way that that you guys would like.
Folks in our community.
To think of.
The idea of increased competition.
And I ask it that way because it like at least on the surface. It seems like an HP is a good example from last week, but theyre not the only ones. It seems like folks are kind of.
Poking their heads around dipping their toes in and it's hard to discern.
But from our vantage point.
Our contact.
Of what.
Increased competition issue may look like.
So anything you can talk to that.
Talk to you about that in the way that you would like us to sort of think of that and then <unk> positioning in the context of that.
Thanks.
Thank you and then we've always we've always expected more competition in good categories that we play in great categories. So we've always expected new competition. That's why we've invested so we've been investing in innovation, even investing in our go to market. We're really excited about the capabilities. We're building in both.
I think so I feel really good about where we are in.
In a way feel really awkward if we didn't have more competition because it would suggest something dark about the future of the category I think these categories are super.
Great categories have breakup, great competitors, we love to compete so you want to add anything that.
Yeah, I mean, I think one one benefit of some of these competitors and others just the awareness they bring to the category as well as they are trying to grow their business, they're going to bring more awareness to categories, where we are very strong and that we're passionate about.
I think the keys to our success Orange continue to segment the market to identify specific customer needs.
And then go address those of innovation and Great design course, so I think it doesn't change our strategy. It doesn't change our focus on execution, but I think to the extent it brings more awareness of some of these categories that see that as a benefit.
I would just double down on that I think you mentioned in the beginning he said you know we've been out there kind of evangelizing with category beginning it'll be nice to have or people evangelize. The category I think it will drive higher growth. We're still it's such a small fraction of rooms enabled copper stands for example, 111 total rooms according to Gartner.
So yes I think this is it's just a it's probably an indicator of how strong this market opportunity.
And if you guys get if you're getting legitimate.
Sort of competition coming in whatever however that shows up but yes.
Sure.
It feels legitimate.
View.
Do you feel that you can still prosper is there enough room for you to still prosper and the way that you've laid out at your last analyst day hit the growth goals hit the profit goals.
We noticed you've been getting all our competitors are legitimate or not at all I think it's important.
We'll go ahead now.
Absolutely we've had we've had legitimate competitors in almost all our categories with volumes that are out now we started out as an OEM maker of mice and keyboards.
We're selling directly and competing directly with those players over time. So so we're we expect that the competition there'll be great competitors, they will make us better.
And we will invest in making sure that we are better.
Yeah, that's great. Thanks, guys I appreciate it yeah, let me just add a little too I mean, I don't build our models here internally, assuming no competition and obviously youre seeing an increased investment in marketing and brand for us too.
And I mean that goes directly to your point, which is that we expect competition. We think these categories have gotten stronger.
And we will see more competition and so the increased investments that we're making in brand marketing innovation those are wrong.
Part of our strategy to compete.
Thanks, guys.
Thanks Amanda.
The next question is Charles April Juergen, rather.
Hey, Gary.
Yeah, Hi, Thanks for letting me on.
Yes, hi.
Follow up on the inventory questions I'm afraid can you split it up between finished goods and what are those key components you mentioned in your introductory remarks.
And what is the visibility you currently have on on the Christmas business across your divisions.
Sure. So let me take on the inventory side.
We are holding more components as a percentage of our mix than we have in the past as I mentioned I think.
A key part of the strategy.
The other thing is our in transit inventory is higher too so as the port delays in shipping delays and things like that occur more of our inventory sits in transit. So you can think about that is finished goods I guess credits.
Not as productive because of these delays and thats. The primary driver of the increased days of inventory that I mentioned in my prepared remarks Juergen is poor.
That delays things are taking weeks longer just in transit these days and so.
And again as as that improves and I think it's not going to happen in the near term and that's why I made the adjustment to the cash flow outlook for this year.
Those transit times improve as the lead times for components improve I do expect to see our days of inventory come back down to kind of more historical levels. I don't think its going to look like it did last year, obviously last year was very unusual.
Because of the strength of the demand and we were chasing supply in the entire year, but I do think days of inventory will come back down to our more historical levels, but I think that's going to take some time in probably I don't expect it to be this year.
Okay.
And on the visibility into the Christmas quarter, I would say.
Nate and I, both feel like us.
Last year, we set aside our view of the normal seasonality of the business with the stranger. The pandemic I think we're familiar really set aside the normal our normal seasonality and said okay. This is another strange year.
Especially given the supply challenges. So I think when you put that together I think our visibility.
Probably about that we'd normally look to have but I think we've got a plan in place that we've got we've got products. We've got we've got the right strategic investments in inventory and we feel good about where we are and I think we have recommitted to the guidance because we feel good about that.
And do you have certain product categories, where you have a better visibility at the moment.
Good answer that Nate or how would you answer that.
Well.
I mean, I think we've always said video collaboration you have a little bit more visibility because you can build a pipeline you're working with enterprise customers.
Certainly for the larger deals you have more visibility to those but a lot of that business is more what one might call it run rate.
As well, so some better visibility on video collaboration but.
Yeah.
Okay.
20% of our overall sales is video collaboration.
But I would also say this is in a way that's not so different than the rest of our business. We've never we're kind of in the same visibility state with normal.
As you go into the holidays.
Always a little bit well the shopping cart.
Usually those we'll take a real issue.
Okay. Thank you.
Okay. Thank you. Thank you Sir.
The next question is from UBS your effort.
Darrin Hello here and there.
<unk>.
I hope all is well.
It is currently two three question. Please the first one is on your marketing spend sales being up slightly marketing spend up around.
65, 66% if I extrapolate for the full year, it's maybe around one being marketing and selling line being maybe than 89% of sales historically for 16 and 17% pre the crisis.
Does it mean your growth is becoming more capital intensive or is there room to streamline and the marketing and selling expenses in the second half.
Falling demand from somewhat.
The first question, please and I would have I wanted to follow up please.
And one for Eric and I can start on that one so that one we're executing right now yes. It is this strategy of <unk>.
Shifting you've seen our gross margins go up and we're reinvesting some of that gross margin expansion in the sales and marketing yarn to try to drive up the brand and the awareness, which provide us with long term benefits and I think long term leverage as well.
But that's the strategy we're executing the same one that we talked about pre pandemic as well as the shift from.
Pushed to Paul.
And.
I think we were able to move more quickly on that because of the strength in the margins that we saw last year and put us in a great position to go execute that strategy aggressively this year bracket you want anthem.
I guess I would just say, we're when you look at our overall operating our operating income our operating margin, you'll really keep an eye on that and our mission is we're going to we view that as a constraint were going to deliver certain operating margin. So that we're going to invest back in the marketing to the extent that we could drive longer stronger long term growth and it's really it really performs marketing billing.
Marketing engine really takes time, but I'm excited about the about where we're headed and we've got a great team in place and were really really changing our approach and I think it'll be it'll be we'll keep learning through it and making sure that the investments make sense and delivering that operating margin long term operating margin we're committed to it.
Uh-huh.
And thank you for this and then maybe a second and third question.
The second question and a follow up here on your medium term guidance. I mean, you increased your medium term targets, 8% to 10% from 7% to 9% and before the show reflecting confidence of course, but now maybe some things becoming more shaky you mentioned videoconferencing could be below your initial targets I mean, how should we think about the base I mean, what is the baseline.
From where you think you can grow 8% to 10% is this coming down now.
In the current environment.
And then I would have a last technical question. Please.
Oh, sorry go ahead.
Can start goodness.
We did obviously confirm the outlook for this year. So there's really no change in base.
And as Bracken mentioned theres different mix of growth.
And what we initially thought at the start of this year, but again, that's not unusual and I think it really highlights one of the benefits of our portfolio and thats diverse.
And then there's good profit generation across our portfolio, we've been able to sustain the investment plan that we have despite the different mix of <unk>.
Online revenues Bracken sorry.
The only thing I'll add to that data. So I think we talked about that 8% to 10% long term guidance in our raise in our long term our long term view of our growth rate capability.
Comes from the fact that both the categories are attractive for the long term and our innovation engine to attractive long term absolutely nothing has changed from either one of those I feel really really good about.
Alright.
Thanks for this and the last question when you initiate it.
<unk> in March and then your updated it I think in April on non-GAAP EBIT.
Most of the fish number I mean, what is roughly the additional freight logistic and component costs, which have exceeded your budget. Obviously think about 50 $100 million just to have a rough idea about this what other additional costs you're facing right now.
Oh boy.
<unk>.
I don't think I can do the math quickly I'll tell you I'll give you something on that whenever you are in which is this this quarter.
Year over year, we had about.
<expletive> to gross margins.
Increased freight costs, mostly from from Ocean.
So.
I can tell you in the quarter, that's kind of what we had.
And we'll probably see that throughout this year I think.
We have actually reduced the amount of airfreight, we've used year over year, which was my expectation, but the airfreight rates have gone up so should we really haven't seen a real benefit from the reduction of airfreight volume and at the same time as we shifted thanks to the ocean. We've been we've incurred some additional costs on freight there. So it's all included in our P&L to date and it's all included in our outlook, but it hasn't been a headwind.
I think since March.
Alright, Thank you very much.
Thank you take care.
Terrific.
Got me there.
Hum.
[laughter].
Okay. The next question is from Jay Z kv from Andreas Mueller.
Hello, Andrew.
I'm sorry.
Thanks Hope here.
<unk>.
Two questions if I may one.
Ross really I was wondering.
Gaming.
If you saw an effect in China from this gaming law that teenage girl Shouldnt be.
That long on online gaming haven't seen an impact I mean, Jonathan channel was good.
First question.
But what are we stuck with our will answer that one then you go ahead.
If the answer is yes, our gaming business actually skews 18, plus net loss leather skus with the vast majority of its 18 plus so.
That law is for 18 number so no we haven't really seen a big effect on our business from that.
And then secondly.
And probably in all these trials people spend to save time in front of the PUC doing.
Something else and gaming.
But I think maybe just to add a little more color to that and I think.
If you are going to play you're going to buy some peripheral so unless you start playing completely.
Still going to Youre still going to buy some gaming equipment whenever that is I think Andreas soon so.
But just to add a little data to what we did not have any slowdown in growth in China gaming actually had very very strong quarter across was similar to last quarter.
Yes.
And the growth behind the pointing devices keyboards.
I wish it was that.
Really still demand from the home office or was it really back to full deal face demand.
That DLC.
The emphasis just had some sort of an investment cycle in these type of products.
I think it's a little bit of both.
This is a strong growth in the in the <unk> part of our business, but also in the <unk> and that's probably people.
I think we're headed into a place where people we've got a bigger base down people are upgrading.
And.
I know it just anecdotally.
I talked to people now regularly that told me they went out to buy a new MX master the astronauts aboard.
Something for the pandemic.
Our old business was really the upgrade business and as I said in the beginning of the call I'm. So excited about our innovation engine and this this old category of the old category, So the mouse and keyboard.
Are really alive and exciting again, we just launched I do encourage you to go look at <unk> on our website.
We might even make this category of sexy believe it or not so it's I think the innovation engine. There is part of the reason, we're believing report at all.
Okay.
Thank you very much.
I didn't get you excited about keyboards and mice speaks actually did I address.
Yes.
The other reminder, shop, maybe like to ask a question.
The next one is from da Davidson Tom Ford.
And you talked about.
Great. Thanks, So one question and one follow up so far chain standpoint, and a logistics standpoint can you remind me to what extent you have control I think you have some owned and operated assets in the manufacturing side.
So to what extent do you have influence on your supply chain and logistics and to what extent.
Are you have less influence.
Well, we have our own manufacturing in China, and then we manage contract manufacturing in China and outside of China, We make about half of what we sell in the owned manufacturing logistics standpoint, really we're really manage our logistics through the normal.
Since they are used broadly.
Alright, so the commentary primarily than the components then.
Constraint, if not having the raw materials. It isn't that you don't have capacity or the ability to increasingly it seems like in Asia, you have to make the product and then you have to deal oftentimes with the plant shutdowns because they don't have electricity. Then you have to say where the product then you get to head up the product set.
So youre going to chime in.
Well I actually was going to go where you're gone too is I think this is a supply chain right. There's links of it and I think what's really apparent as you look at what's happening globally across industries.
How how does those different lengths are owned by different people right and so.
Yes.
Is to our advantage I think right now that we have our own factory, we control the purchasing for a lot of our components and in fact, we control the purchasing for a lot of our components, even when we use a partner for manufacturing and so I think that is to our benefit.
But youre right I mean throughout the supply chain, you're going to hear stories about warehouse capacity being tight you are certainly hearing stories about trucking capacity being tight.
I mean, when we look out and see these pictures of ships and containers a containership second part.
And may not be that the problem is that support itself with the crane and such but it can be it can be with trucking. It can be with warehousing there needs to be a place for these guys to go and I think that's why this is not a quick fix that's why you're seeing things like president of binding jumping in and getting involved in and.
We described this is unprecedented I mean, the supply chain is bottled up now in a few places.
Can it take some time for that to work out but it is to our advantage I think in this environment to have the factory our own factory and again to manage and control a lot of the purchasing.
Excellent. So thanks for clarifying that for my follow up question I wanted to talk about the demand side in particular from gaming. So it looks like you had very impressive growth that type of growth and it was widespread across all your categories can you talk about demand for gaming and if at all for example, if consumers arent able to get their hands again.
Xbox and Playstation this year, but does that have any input does that just mean well the better next 12 months, how should I think about that.
The demand was very broad across every segment, including stimulation, which is mostly steering wheels console gaming, which is one you just referred to in PC gaming.
Console gaming part of our business is relatively small so.
I'm not too concerned about whether they're concerned to the cloud so buying side.
So I think we'll probably probably be okay, regardless, but but it's.
Exciting to see gaming, so strong coming out of pandemic or coming out of the worst defender.
And.
And I think the console demand is just a big positive and I think that tells you how strong gaming is in general that people are still buying those next generation of Xbox.
Hey, Serge.
Yes.
I think those are on the right points mean.
You got to be on shelf to sell and so I think again that is why that is part of our strategy and I think part of the reasons why we gained share.
It'll be an interesting holiday I think for a lot of companies now.
I am sure you walked through your local stores or look online and then there is some tightness out there I'm not speaking to logitech, but im speaking across a lot of goods and so.
I think that is a big part of it.
Firms ask user in order here is make sure they can get on shelf.
Yes, Im just hoping we're not celebrating the holiday in January but alright, thanks for taking my questions.
Okay.
Yes.
The next question is from credit Suisse search.
Yes, hi, good morning, or good afternoon, depending where you are.
But you can see me don't know why.
Okay.
I'm only shadow silver Shadow.
I will start with that.
One question on the first of all several question, but the first one is.
Can you give us a feeling about the preorder situations you have seen the beginning of the month beginning of the quarter has this been in better or worse were equal to last year. So from a consumer perspective, because you should have a very good visibility now because two months Christmas is over.
In addition that you pointed out several times investments into point of sale more promos is also should lead to higher sales of course, you'll have lower margins, but it has also to do with your folks moving then at the end of the day you know.
So therefore.
Yeah.
In addition to sell through was low so the channel inventory seems to be quiet.
Clean now so why do you don't have more confidence going into the next quarter also in relation to guidance.
My first question.
I guess I'll start and then you can finish.
We do have confidence going into the rest of the year. That's why we reconfirmed our guidance we grew double digit in all three of our four main categories. So usual.
Buying filter.
Very good indicators, we feel really good about that.
And I agree with you Serge I think that the channel is at a good level right now.
Broadly, but again, we didn't have tightness in some areas.
So I need to go into which one I think but.
We have some catching up to doing some some spots that are big holiday items and like I mentioned, we're playing.
By not using airfreight to cover those.
A lot of work ahead of us.
We're prepared to have a good good quarter.
But do you believe that you can match the back book you have for the current quarter because of a longer transit and lead times.
I think we can deliver.
You are starting to deliver the backlog do you think we can fulfill the backlog we have yes.
I think we are I think we've kind of said at the beginning.
We're not immune to the supply chain challenges.
Certainly a rally that we've lived with and I think there are worse now than they were in the first half of the year, but I feel good about where we are I mean in terms of really deliver what we need to for Q3 Q4 to deliver our guidance. We're in a spot where if you feel good about it.
But I do think there will be we will continue to have supply chain challenges.
Okay, and probably another one two video collaboration.
Parcel not sure what is limiting the growth. Currently you know is it demand is it does it takes longer reach the enterprise customers is it that you still are missing direct sales is it that you are not successful as the procurement companies of this world that do come into this.
In their portfolio and how should I read the subscribers numbers I see from teams consume switch or still a show high growth.
Well I can see the spread in your numbers.
Well first of all I think we mentioned we had a little bit of Destocking and we grew 22% this quarter. So there is growth.
And I think helps the sell through.
So.
The real long term Grossman is because theres, so much long term potential growth.
We're still in penetration.
So my floater potential I think Thats just a question how does the decision making happen people make.
Suited for video, enabling all of your rooms, it's something that we did a long time ago not many companies have done yet so there's a lot of thinking to go through there and people are also rethinking their formats their footprints and things inside of that I know we are.
So I think both of those are in play you want to add anything.
Well, I mean, I'd say Americas and Asia.
Did grow in.
Both sell through and net sales in EMEA again, it was nice for net sales slowed but if you just look at <unk>.
Last year, and we mentioned that this will be true in the second half as well and one reason why ground for the overall company and for <unk> I think will be slower in the second half.
As the compares on V C.
Last year in our massive and a lot of that's in Europe was exceptionally strong and I do think Europe has slowed down a bit on some of the decision making on some of that demand for video collaboration but even there we had double digit growth in sell through in EMEA. So it hasnt grown.
Crown Jewel.
And is still strong so and I think someone mentioned earlier too about new.
Competitors coming in I mean, I think they're seeing the same things that we are so this is a long term growth category and I wouldn't be.
I'm not really concerned about.
The changes in the demand profile from last year I think we're in this for the long term and we're investing as such yes.
Just to throw a data point out there have you ever looked at it video collaboration in Q2 of last year grew 150%.
So more than doubled.
So don't get me wrong, I think youre doing a great job, that's not the point, but.
You have introduced quite many new products.
You mentioned that you these products will be available in the winter you know winter is quite short. Meanwhile.
[laughter].
Not only for Goldman.
So.
But what does it mean will it be at an inflection point when you can ship and these new products do you believe that this can increase the pace then or is it not that important.
Well I mean, I think we have availability now in most of our products or mobile.
I'll keep that up and we are launching products that will be launching products next year or two so no I don't think thats, a particular inflection point.
Okay. So I hand back for the time being thank you so much.
Alright.
Serge Hello, Eric.
Hey, Eric.
Hey, guys how are you.
<unk> from Morgan Stanley.
Thank you.
No sorry.
So if you go you know I I'm based here in Manhattan. If you go to any local retailer youll see or at least I believe that the logitech has more shelf space than you have had has historically and you.
You might not see as many competitors on the shelf as maybe you have historically would you say that's an accurate comment have you been able to gain shelf space with some of your retailers and then.
Is that also what is contributing to some of the higher spending with retail point of sale and then I have a follow up thanks.
Actually actually I would say not.
It's probably not a good characterization, we during the pandemic, we probably lost some shelf space a webcast. For example, we are also a lot of shelf space because we just didn't have supply.
E Tailers and retailers really needed to bring in other people to fulfill the demand now we're back and we're gaining the share back and probably gaining some shelf space back, but I don't think he's gone above where we were prepared to make.
Yes.
Youre muted there.
Okay.
Alright. Thanks.
One is for you just you know as we can.
Think about it I know, we're kind of throwing seasonality out the window to some degree, but when you think about the back half of the year from an Opex perspective.
Some years you have seen a sequential decline in opex from the holiday quarter and to March should we generally be thinking about.
Opex this year following that same trend or again kind of throw a seasonality out the window and yeah.
It will end up where it ends up the central thanks, guys.
Thank you.
Eric so much more of our.
Spend is variable now than what it was before because a lot of it is marketing oriented. So yeah I kind of agree with you I don't think there's really as much seasonality even to the spend this year.
At least I'm not really looking at it that way, we're making the investments based on long term decisions on where we see opportunities.
I think that's why I'm thinking about it.
Okay, great. Thank you.
Thank you thanks a lot.
Okay.
I think that was our last question if I'm reading you right that goal. It is I think that's our last question.
Hello, Serge is back with was a good reserve.
Sure.
Yeah.
Hey, guys good afternoon.
Yes, sorry, sorry, no embed a culture of my time now.
Probably quickly back to say, it's a marketing costs you know if I keep it remind me correctly you mentioned that most of the incremental costs go to direct sales seem to collaborations and gaming is just still through or can you give me a better feeling of where you are spending your money.
Yes, no I don't think it goes to direct sales and gave me, it's where it's very broad I mean, if youre marketing sales and.
R&D or engineering across most all of our categories. So it's pretty broad.
Okay, and then probably the last one.
Currently the M&A market is quite hot we have seen high brakes, we have seen turtle Beach, we have seen steel series.
Or would you reckon.
It's always hard for us I mean, we're always looking at stuff. We've got we've got things under evaluation right now and we've done things in the last year. Several of them are relative most of them are relatively false we've talked about.
And we're always looking we're always in the market, it's a great strategic deployment and we're going to stay in the market and the M&A approach.
Forever.
Okay got it many thanks him and enjoy the Christmas break.
Right.
Okay, I think that brings us to a close I want to thank all of you.
This has been quite a year this year and quite a year last year, but I'm Super excited about the year Scott.
I know you can feel it in our tone, but we really feel like we've got our innovation engine humming.
We've got a world, that's really strange and we're managing through it I think pretty well.
Keep proactively doing that but thanks, a lot for all your questions. They were great and we will see you again next quarter. Thank you.
Okay.
Okay.
Okay.