Q1 2023 Logitech International SA Earnings Call
During this call we will make forward looking statements, including with respect to future operating results under the Safe Harbor of the private Securities litigation react of 1995.
We're making these statements based on our views only as of today and 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 and you can find a reconciliation between non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results in our press release and in our filings with the SEC.
<unk>, our most recent annual report and subsequent filings these.
These materials as well as our prepared remarks and slides and a webcast of this call are all available at the Investor Relations page of our website.
We do encourage you to review these materials carefully.
Unless otherwise noted comparisons between periods are year over year and in constant currency and sales or net sales and.
And finally this call is being recorded and will be available for replay on our website.
And with that I will now turn the call over to Bracken good morning Bracken.
Thank you Nate and thanks, all of you for joining us logic like many other companies is experiencing the impact of a wide range of overlapping macroeconomic and geopolitical issues.
Warren Ukraine directly reduce our net sales were up 2% versus last year as we talked about earlier foreign currency headwinds have increased dollar shrinking to nearly one to one of the euro now.
Inflation rose further and consumer confidence has weakened.
None of these fundamentally affect our optimism for our target markets, our strategy or our business model, but as we looked at the quarter and ahead into the rest of the year. We believe it's prudent to take a more conservative view than we had previously.
Impacted by these charges, our net sales were down 9% in constant currency this quarter.
There were clear highlights for sure solid growth in video collaboration keyboards, and combos in pointing devices with hybrid energy returned to work trends continued to take shape.
We grew market share and.
And we delivered solid gross margins at 40%, despite worsening inflation and currency impacts.
As I just said our overall net sales in Q1 combined with the worsening macroeconomic picture made us take a hard look at our assumptions for the rest of the fiscal year.
We can't affect current exchange rates or inflation of course, but we can adjust our business to the current conditions.
And although we can't predict the depth duration of these methods macroeconomic conditions, we can conservatively manage our business until we have evidence that the markets will return to stronger growth in short we can't change the macros, but we can't adjustable.
That's what we're doing.
Based on current conditions and performance, we're implementing plans to reduce operating expenses by approximately 10% or about $150 million versus last year predominantly.
Predominantly through variable cost reductions.
As our sales nearly doubled since fiscal year 'twenty, we added disproportionately variable cost, which makes us ready to meet the moment.
We will continue to raise prices to offset currency and inflation and target to keep a strong margin profile.
We will continue to invest in exciting new innovative products. This investment has been a key driver of our sustained share gains and we believe it will be into the future.
All of that's leading us to provide you with an updated outlook for fiscal year, 'twenty, three reducing expectations for both revenue and operating profit.
We believe this updated appropriately takes new account, the macroeconomic and geopolitical environment as well as our own plans to lower costs and take control of all the variables within our grasp.
Before I, let me take you through our financials and outlook in more detail. Let me just say at the macro picture, we're dealing with now is challenging but we believe it's temporary.
I was optimistic as ever about the long in the medium and long term I can't think of anywhere I'd, rather be for the long term and riding a secular trends logical gifts.
Hybrid work or the idea of work from anywhere is simply the future.
As I said in a few months ago. The debate is over hybrid one.
It will favor logitech as offices are renewed for new footprints and more video.
And homes continue to upgrade for better offices.
While the gaming market was softer over the past two quarters. We believe the interest in gaming will increase over the long term as gaming content expands cloud gaming grows and more and more people become gamers socially or even competitive.
And the streaming and content creation trend will grow and grow.
From individual creators producing content from home to businesses, leveraging podcasts and creators for two new markets. The use of streaming content continues to expand driving growth of this trend.
So we're going to continue to focus on great long term growth, but run the business conservatively short term.
What does that mean.
Our product teams across our largest businesses video collaboration CMP and gaming will continue to launch a series of new products throughout the remainder of the year.
As in the past you can expect these products to be packed with innovative features with innovative features full of lifestyle design enhancements and critical to the work of play of both consumers and enterprises.
Our operations team will continue to optimize our supply chain for the short and long term as we source components from a diversified set of vendors now much more diversified.
Adjusting routes and mitigate transportation costs and risks and finally diversified manufacturing outside of China.
They'll be working hard to flip the inflationary trend through cost reduction as the macroeconomic tide turns and it always turns.
Our sales teams, especially our enterprise teams will continue to refine and improve their go to market capabilities across the globe.
And we'll go we'll go all out to help companies reconfigure offices expand video enablement and create workspaces appropriate to this hybrid world.
We will bring down expenses significantly to align with the market really Alex that we project for this fiscal year.
And as we do this we will focus on organizing for maximum effectiveness over the next few years.
Our capital allocation priorities remain unchanged <unk>.
Investment in our product design and development capabilities.
Accretive M&A and.
And returns of capital to shareholders in the form of share repurchases and dividends.
And finally, you can expect our commitment to sustainability to remain firmly in place.
We were just named by <unk> as one of the top 1% of sustainability companies in the world and.
And our plans to turn sustainability into a driver for good and for growth will continue.
Now, let me turn the call over to Nate for a breakdown of our financial performance this quarter and our new outlook mate.
Thanks Bracken.
Bracken described our perspective on the quarter and environment.
Signals that we need to be prudent about the rest of the year or until economic trends become more consistent and favorable.
I'll spend a few minutes on the quarter and then walk you through our updated outlook.
In Q1, net sales were down 9% to $1 $6 billion after growing 58% in Q1 of last year.
We grew in video collaboration keyboards, and combos in pointing devices, while facing the tough compares in the macro environment.
Gross margins remained essentially flat sequentially. Despite the litany of external factors that pressured profitability.
Mentioned last quarter that cost increases and unfavorable currency rates and higher shipping rates may pressure have one fiscal 'twenty three margins and while we did see these impacts we managed pricing and reduced our reliance on airfreight to help offset these pressures.
However, we anticipate Q2 margins will be lower than Q1 as these headwinds remain.
Operating profit was down as expected after doubling last year.
Cash from operations was negative $36 million also as expected and an improvement of $79 million versus Q1 last year.
Let's review some of the results across our product categories.
Similar to last quarter, the gaming market continued to decline in Americas, and Europe , while growing in Asia and our results reflected these trends with sales down 13% globally.
We outperformed the market, however, and gained PC gaming share.
We saw momentum from our products geared towards both social and professional gamers offset by ongoing headset demand weakness in core PC and console gaming.
Video collaboration sales increased 7% as conference room cameras and systems grew double digits to more than offset double digit declines in business oriented webcams, which are part of our video collaboration category.
And creativity and productivity keyboards, and combos grew 7% in pointing devices were up 3%.
Our solid and consistent demand during the quarter for PC peripherals and introduced a series of new products.
Our Master series line added two mechanical keyboards, and an upgraded mouse and we also released a line of keyboard combos to support our enterprise customers.
Taken together these results highlight the performance of our categories addressing the secular trends in gaming video collaboration and hybrid work safe.
Sales of our creativity and productivity gaming and VC products exceeded 80% of our total net sales this quarter and were flat year over year in constant currency.
If you exclude Russia these categories actually grew 2%.
We have growth opportunities in other categories as well, but I wanted to highlight the performance of these key areas that directly address the strategic secular trends that bracken referenced.
Looking regionally Asia Pacific grew nicely in the quarter, driven by gaming, while Americas and EMEA sales declined.
Through the excellent work of our operations and sales teams, we were largely able to recover from the Covid Lockdowns in China.
For those that track the sell in and sell through data in our earnings slides you can see that globally. These metrics are in balance.
The timing of the Shanghai reopening however resulted in the bulk of our China sales occurring later in the quarter, which is why Asia selling was stronger than sell through.
Turning to expenses I mentioned last quarter that we wouldn't hesitate to reduce our variable expenses, including marketing if conditions warranted given.
Given the weaker top line results that is what we did in Q1.
We reduced marketing and sales spend by 10% and reduce G&A by 9%.
We've also said that investment in product design and development will remain a priority for logitech, even during trying economic times and Youll note that we increased R&D investment by 9%.
We are not done in reducing or eliminating unproductive expenses from our business and we are driving efficiency in all our spend including fixed cost product and freight costs and our go to market investments in the channel.
We can't offset every headwind that we predict for this year, but we are taking aggressive actions to align our spend with our sales while sustaining investment we believe supports our longer term growth ambitions.
We ended the quarter with a cash balance of approximately $1 1 billion.
After returning nearly $121 million in capital to shareholders through our share repurchase program.
As a sign of our confidence in cash generation and our commitment to returning cash to shareholders. Our board approved an increase in our repurchase authorization by another $500 million.
And we proposed a 10% increase to our dividend per share for approval at our September annual meeting.
Finally, I'll spend a minute on our updated fiscal year 'twenty three outlook.
In May we provided an annual outlook of 2% to 4% growth in constant currency and an operating profit outlook of $875 to $925 million since that time we.
We've seen continued and in some cases intensified deterioration of economic conditions across the globe <unk> discuss the external environment earlier.
So when we developed this new outlook, we made assumptions about a number of factors, including potentially protracted economic volatility and sustained revenue and profit pressure from the stronger U S. Dollar.
Given these considerations and the actions we are taking to reduce cost versus last year. We now expect full year revenue to be down 4% to 8% in constant currency and full year non-GAAP operating income to be between $650 and $750 million.
At the midpoint our outlook for profit is down $200 million versus our prior estimates at.
At a high level that comes through two headwinds and two partial offsets.
The headwinds total about $400 million, including approximately $250 million of reduced profit from lower volumes and cost increases and $150 million of lower profit from currency changes.
Offsetting these unfavorable impacts our opex reductions and pricing.
So in summary, we see about $400 million of incremental profit headwinds for the full year of which we have plans to offset 50% through actions we are taking.
Nate we can open the line for questions. Thank you.
Great. Thank you Nate and as a reminder for everyone. Please raise your hand or you can message me if you would like to ask a question.
We'll start with Paul Chung from JP Morgan Good morning, Paul.
Good afternoon, guys. Thanks.
Thanks for taking my question, so <unk> keyboards for kind of.
A nice bright spot in a tough quarter.
BCE, you're kind of seeing some relative strength and conference can so what are you seeing demand across verticals regions is this for new conference terms kind of replacement legacy competitors any update you have there and seeing in terms of competition as well.
Yes, I mean, the conference Kim number was strong ethical.
Critical script with Commscope number grew very strong double digits. This quarter of <unk> and it was about what you would have expected I mean, it was pretty pretty much a global story. The Americas in particular were very strong and I think thats.
That kind of reflects the serve the return to work what's happening here in the west you want to add anything to that.
Yes, I think it was pretty consistent Bob.
And the sell through has remained pretty consistent actually going back several quarters, it's been a little bit tough to predict sometimes on.
On the sell in because of the start and stop nature of some of the reopening but if you just look at the sell through.
Another quarter of double digit sell through.
As well as net sales.
Gotcha, and then on capital allocation. So the pace of buybacks has been quite elevated over the last four quarters.
The increase in authorization suggest kind of more of the same over the next 12 months.
Maybe at a similar pace or higher pace is that the right way to think about it and then separately private market valuations looking more attractive today and from your seat.
We're seeing opportunities there.
Let me take the buyback, yes, I think Paul really if you think about this is is the board.
Gave us the option to do.
To increase repurchases, but.
<unk>.
I would just think about it is we're seeing consistent to our strategy around capital allocation right, we still prioritize investing in the business.
And then from there we have a balanced approach really on dividends and share repurchases. In fact, if you look back over the last several years going back to FY 'twenty.
We've returned.
About $1 3 billion to shareholders through repurchases and dividends and Thats been roughly 50 50.
A little bit more weighted toward share repurchases to your point recently, I think about 60% over that time share repurchases, but.
Yes, we have confidence will continue to generate cash and we think it's great to have that option.
Yes ill just add.
First of all I'm really thankful of the board for giving US the increase in the authorization I feel really good about the buyback program, we've got going.
In terms of M&A, we never stopped on M&A we've been.
Aggressively going after what we saw available we did nothing really established.
Valuation standpoint before.
But youre right I mean, there's no doubt that valuations have come down across the board. So we're well.
We always get a lot of activity going on and we have a lot of activity going now so it's not going to let up.
Thank you Paul.
Thanks, Paul.
Thanks, Paul next up we will be ICM merchant from city warehouse Yep Yep.
Hey, good morning, everyone.
Question.
For the guidance that you guys are providing I guess the question is if.
And if you can help us understand through each of the categories, what's kind of baked.
Is the worst that it gets.
And if you can kind of walk us through how the minus eight or minus four makes sense in the current environment.
Suggests that it will improve from here on it that just a function.
Our comps through the rest of the year and if you can walk us through some of the category.
That would be great. Thank you.
They want you to take the first part of that and then I'll come in for the back and talk more about categories.
Okay, I'm going to start with CAGR.
So I think it's really about the year.
You can always look at it year over year, and you got a quarter over quarter, let me try to explain to you a little bit about how I thought about a quarter on quarter.
What the outlook reflects is that we don't think that we've seen.
Every bit of bad news, yet in Q2 will be softer than what it has been historically.
Normally we see an increase sequentially from Q1 into Q2 and kind of the mid teens on growth the outlook sort of reflects that it's probably mid single digits.
Q2 is not going to see the same spike that as before.
That's sort of a continuation of some of the trends that we saw in Q1.
And then from there if you think about the range that we have for the full year. The 48% really the difference there is how we think about the holiday in the back half of the year. So at the low end of the range.
Holiday is a little bit weaker than typical seasonality at the high end of the range, we're starting to get back with typical seasonality in the back half. So that's what it really reflects as Q2, our outlook reflects a weaker than normal seasonality in the back half of the year.
Pending on which end of the range you talk about kind of at the midpoint still weaker than normal seasonality in Q3, and then summary, and some return to normalcy in Q4.
And then to your point on the year over year compares that just comes down to some easier compares but thats, how I think about it sequentially.
Yes, I'll just add the categories and you can jump back in.
Think we're I think from a CAGR standpoint.
We argue is about the same as what you're seeing this quarter and we think we're going to continue to have a pretty good workspace business most of keyboards and were actually constrained a little bit we're still constrained a little bit on mice, which shows up both in the mouse and the keyboard business. So I think thats going to continue to be a solid business for us and of course, the VC business copper trends, we think opportunities are going to continue.
To be enabled that's that's that's a good thing we think the gaming business pullback is probably going to stay pulled back.
I don't think it will.
Good.
We don't expect a big Big change that we think it would pullback now all that said we just we just finished product this year fibers in Q2, so and last year in Q1, our Prime day was up 24% versus a year ago. So that's a cost of goods Hudson dollar slower.
So it's not all.
I'll pull back here I mean, theres still plenty of interest in our categories. I think that's kind of a good reflection of the future, but I do think it's prudent for us to really look at the world the macroeconomic where we're looking at and just moderated across most of our categories in light of what's happening.
Yes, and just to kind of re highlight something I mentioned in my prepared remarks, I said that.
Those four categories that I talked about gaming video collaboration keyboards and combos in pointing devices. Those are the ones that are predominantly addressing these secular trends that we talk about so often adv over 80% of our net sales. This quarter combine those categories are flat or grew if you exclude the impact of Russia.
So and Thats with the gaming decline rate of 13% in there. So it does indicate some.
Some durability, if you will or continued interest in those categories, which I think is very healthy.
Okay, and when capital still remains kind of high up on good income line I know you guys talked about the variable cost structure and being able to manage that.
On Capex and why you guys are keeping that at a high level relative to where you guys have been in ESCO and relaxed with Gilead for example, yes.
I mentioned this before I really what you see here is a catch up this year some investments in facilities.
Over the past couple of years as offices have been closed we haven't been making investments are expanding footprints.
As we've invested in our head count and in our in our people we have the need to invest in Capex. This year. So the increase as you see this year is predominantly.
Into facilities not necessarily a new run rate, but we have some catch up to do because it's been low the last couple of years.
Okay.
Alright, thank you.
Thanks, Our next question will be from Torsten Souter from Kepler Chevron <unk>. Good morning, good afternoon.
I hate horses.
Hello, everyone. Thanks for taking my questions actually I have two.
First is that fair to assume that you can cut your opex lets say $150 million to $200 million Youre still listen if needed and if so could you cut without hurting our franchise.
And then if I may secondly, wonder to what extent.
Deliberate direct <unk> sales channel for video collaboration also supported and capitalized sales in other categories in other words, how much non VC products are you selling in the.
The enterprise channel.
Let me take the second one and they don't want to let you take first one I would say not.
Not much yet.
The direct enterprise sales force has been we're really organized the focus completely on regardless care business.
I used to say for years I would say I really don't want to hear the word valves come out of anybody's mouth, and the enterprise Salesforce, because we're really good advice.
Conference gaps, but thats changed we're now at a point, where I feel like we're we've got to build big structured enterprise sales force.
That I feel good about and I think now we are ready to add to it. So we're in the very early days, we're taking advantage of that for the rest of our business, but we are seeing large sales through their already but it's still very early days.
And then on your question on Opex that is our plan is to reduce spend year over year in opex of $150 million.
We've talked about it before as we've invested over the past few years, we've invested both in fixed and variable costs.
The majority of it actually in variable cost sourcing. So I think we've been prepared for <unk>.
Such a time like this where we have to reduce those expenses and so we will go execute those plans.
Also as important probably keep in mind Opex is not the biggest portion of our spend in the company we spend.
About $3 billion in cost sales.
And so we're looking at all areas of spend so there's $4 $5 billion of spend that I really go after and look at make sure. We are spending wisely and efficiently looking for opportunities now.
What's been different and you got to think about it uniquely in this environment, where we're seeing cost pressure in cost of sales, it's difficult to reduce it but we still need to make sure that we optimize it so.
We're not focused on one piece of it we're looking at all of them.
Great. Thanks.
Yes, thanks, Jonathan.
Our next question will be from your efforts from UBS.
Hello, Your Heng, Hi, I cannot switch on my video as a whole it is not allowing it so I have to ask questions.
<unk>.
Maybe the first question is please.
On the guidance again for the full year the minus eight minus 4% can you help us understand what is the FX impact what is roughly the volume impact of the price impact.
But underlying trends maybe I'll take the question on one of mining stop with just one if I may okay sure.
Well.
The straight volume impact if you will if you went to the midpoint to midpoint you are and we were at plus 3% constant currency mid point now minus six so there is a $9 swing there.
Excluding the impacts of currency as you can think about is as volume.
And then the currency impact itself increased by about three points. So we had about a one point currency impact.
That's now gone to four points for the year.
And between U S dollar and constant currency growth is expected to be about four points versus just one point previously.
And on pricing versus volumes.
Yes, so if you flow that through.
Kind of mentioned this in my prepared remarks, if you flow through that volume impact down to profit.
It's about.
One of the big problems the currencies flow through at a very high rate right because our costs cost of goods are primarily in U S. Dollar. So when we have an unfavorable currency impact.
Flow through at a very high rate to operating profit frankly, if things reverse the opposite is true if closer to very high rate favorably to profit.
So that currency flow through which about three points you can think of its about $175 million of currency pressure on the top line that flows through at a very high right now right down to profit that is one of the reasons why we've taken some pricing actions because normally our strategy when currency moves and favorable it would be to do that so we've taken some pricing actions to help offset some of that.
But then you've also got the volume impact as well from weaker demand in many of those macroeconomic factors.
Which flow through and that demand side nine points like I mentioned about $475 $500 million of volume flowing through we can offset more of that.
And that flows through at more traditional rates, but.
It's a combination of the Opex and the pricing actions, we've taken that are offsetting those volume and currency impacts that I mentioned.
Okay second question. Please.
On the $200 million.
Recycling savings out of the font me, an incremental negative impact on non-GAAP EBIT.
Can you help us to provide any more clarity where executives to Amin recycling is coming from our cost savings coming from.
This concrete examples.
Yeah.
So the $200 million about.
Three fourths of that will be the opex reductions I mentioned $150 million year over year and the other 50 from from pricing the.
The opex very easy to measure, we know where all those are the pricing you can make some assumptions about what the impact is on volume and so forth, but that looks like what our capture rate is.
We put those increases in a lot earlier in the year. So.
I think have pretty good visibility to what that is but the opex will primarily come out of variable expense and a lot of that will come out of variable marketing as we've talked about.
But there's other areas that we're looking at two and <unk>.
Our plans to reduce again, mostly on the variable side.
Very similar to what we've been talking about for the last few quarters action.
And the last question if I may in terms of your end markets and speaking about gaming for example, do you see that consumer sales trends have stabilized recently after then weakening over the last couple of months light instead of declining more than you do not know exactly when the trough is materializing.
Jamie.
I would say I would say we're in the middle of the summer I don't know if you can remember what you were doing last summer it was clear, but I know I cant do anything interesting there.
Summer everybody and traveling whether you are in Europe .
For Jive up everybody is on the move so the.
I'd say the trends are really tough to read right now and good evening.
It's a very soft gaming market now when they come back when people come back in the fall.
Just thinking about your 12 week summer and Youre travelling for two or three weeks of it that's a very different picture. So it's really hard for us to extrapolate from what we're seeing this summer.
In the middle of summer right now to whats going out for the rest of the year, but I would say.
I think the.
The reality is that we're we're going to have a gaming market there will be down for the year and probably significantly down like we're seeing right now and really the key question is when does that start to recover it will recover.
And I think it's going to be as we get further into the back half of the year.
Alright, Thanks, a lot. Thank you.
Yes.
Thank you and our next question really from Alex Duval of Goldman Sachs.
Yes, Alex Thanks.
Thanks very much the question if we look at the lowered top line guidance that you put out today as well as the.
<unk> EBIT guidance, it looks like Youre, assuming around 60% of EBIT loss for every last dollar of revenue.
But of course, we know that your group gross margin would be close to 40%. So I wonder if you could just talk a little bit too.
The drop through that Youre, assuming how come it so high given that obviously are taking some cost out.
And I wonder is that because you're baking in an expectation of.
Further pricing pressure so as to carry inventory how should we be thinking about that and then I'll have a quick follow up.
The primary reason, Alex why you see higher flow through is because currency is a big portion of that right. I said it was about $175 million of incremental currency pressure on the top line and that flows through at almost 100%.
We can offset some of that and again thats growth, excluding the impact of pricing.
So you can think about which rich headwind you want to use the pricing is an offset to when you think about the math, but the real reason why it's a high flow through is going to be currency.
Okay very clear I appreciate that.
Some of the best in wholesale we are seeing even with the new guidance, obviously your revenues and EBIT would still be at a level significantly higher than pre pandemic.
So to what extent that amendment till you're too concerned about a mean reversion to a web beforehand.
Is the risk more about sort of consumer demand at the moment.
Or are you sort of seeing signs in any of these categories.
Pull forward.
Instead of any anything that would prompt you to kind of reassess. Your thesis that these are more structural trends that will ingest the long term.
Yes, right now I wouldn't service for you anything that would suggest that our struggle with structural or secular trends that we've been seeing are going to are going to slowdown.
The this this period of kind of adjustment to sooner brokerage feels like a temporary period. If you just go through each one of them you know the hybrid worked around and we are still only 110th of all the temperature is enabled.
<unk> Tam number is growing strongly and I think we're still.
You talked to companies around the world. So many of them, including US are really looking at their footprint. So im trying to decide what are we going to do.
We've landed are playing now we cannot overdo it around the world with a lot of companies really haven't yet if you go into work Workspaces just a number of workspace suite has increased so significantly with the replacement rate because the sheer replacement rate on upgrading.
Workspaces looks like kind of what it did pre pandemic just a lot more of them and there is a lot more operating to do because you have a different dynamic as part of your home decor.
We're kind of living with it all day long so.
And youre going to be working in the home and some of the Argus II. So and then there's gaming and gaming.
Absolutely as much confidence as ever on the gaming business.
He is like.
Like Microsoft or.
More and more of the large meta who are coming into the gaming space. They are investing in the gaming space because gaming is going to be a very very long term strong growth engine and thats what drives our business the investment in content the creation of new compelling things. This generation is below so I wouldn't I'm definitely don't think anybody should be overreacting to what's happening in gaming right now.
Do think you get there you got a very very strong two years of gaming and now you've got a lot of people who are back out again and doing other things.
<unk> spending their money on trips and totally get it and getting back out, but I think the secular trends will continue.
Okay and one other comment on gaming I think specifically, Alex if we went back and looked at our analyst day, a couple of years ago.
So this is.
I thought the gaming market of our gaming business might be kind of flat year over year. After a really strong FY 'twenty, one plus or minus 5%. We ended up growing 17% last year and but you're thinking back then was hey, listen as things reopen there'll be some substitution effect other forms of entertainment for policy gaming take pause slow down a bit and I think.
What I'm seeing right now is I think that that's taken another year from what I thought originally right things didn't really reopened last year.
We thought they would but we're seeing that now.
The weakness that we see in that he and the market is in headsets.
Be clear all of the other category to decline as well, but headsets in particular have been down a lot and certainly on the console side, we know that some of that is due to shortages.
Timing of title releases and things like that shortages on consoles themselves, but I think also some of the headset demand probably during the past couple of years was from non gaming use as well people using buying headset using them for zoom calls and hybrid work.
So not unexpected to see some particular pressure I think in that category, but for the reasons Bracken mentioned I think the fundamental drivers of the gaming industry.
Remained strong.
Thanks, a lot sure.
Sure.
Thank you.
Alright next step will be Erik Woodring from Morgan Stanley Good morning, Eric.
Hey, good morning, guys. So maybe if I can I'll pose one to you and then want to make.
As we move kind of further into this kind of post COVID-19 hybrid work environment, obviously, you own a number of the markets youre, establishing mice keyboards webcams headset, how should we think about your desire to enter newer adjacent markets or maybe accelerated investments into markets like me.
Where you can regain firmer hold on the share that you once had kind of a obviously on a request all in all and a goal to get back to kind of that 8% to 10% growth range. Just curious how you think about.
That question, we're always we're always looking at new categories. Since I've been here I think we've gone from about a little over a dozen categories to over 25 or 30, now so and so.
We've got things in development all the time to try to go into new categories. We really try to start to see programs first and then we will acquire something if it makes sense to either augment that accelerated or replace it. So we're going to keep doing that.
And I would say, we've done actually quite a bit of category expansion in the enterprise space and I think that is a good opportunity for us we've got a a cabling and Wi for cameras.
Inter meeting room.
Screams and so and we will continue to look across the whole business with that to your point.
Music is one in particular, we've talked about really pulling back on our Bluetooth speaker business, because we just didn't love the fundamentals of that business.
And I still feel the same way about that I don't think youll see us by doubling down on that we're still in it it's still a great contributor in many ways, but I don't think thats a space to look there, but we see spaces across the board to keep expanding but the good news is I really think the fundamentals of our current categories can deliver that.
Walter guidance, you talked about already I mean, the fundamental growth opportunity in conference rooms, the workspace opportunity.
When I came here or there would a dream that we'd have the kind of growth opportunity. We have in mice and keyboards that we have not heard of us.
And of course gaming, we just spent time talking about and the only other thing we haven't talked about is the streaming and creating phenomenon.
It's super exciting.
If you just think most of you are not in the flow of discussions on what's the future of marketing and a lot what what many of us would say future marketing.
It will be disproportionately large for creators themselves, where they will actually be selling transacting or at a minimum directly strongly influencing the sale and those are that's aspirational for for all of our kids and everybody under the age of 30 or so many people want to be a streamer creators. So we're in all those spaces.
A lot of growth ahead in all of them.
Okay. That's helpful. Thank you Bracken.
Maybe you want to you Nate so sales and marketing down call. It 10% in the June quarter, you've alluded to containing variable cost of sales and marketing I assume as a sizable chunk of that how does the pullback in those efforts impact year need to discount products.
And any way you can kind of help us think about the impact of discounting in fiscal 'twenty three on kind of your net sales growth outlook that you provided last night.
Sure.
I wanted to start with this one and Brian you may want to come in a little bit too on the marketing strategies.
It.
We have seen some pockets Eric.
Not unexpected where promotional activity has increased but that's really we're sticking with our strategy, which is really to drive market, even at lower levels of marketing investment drive marketing to increase the value of the brand and to drive preference for logitech without having to be so promotional and that's really our it's been our long term strategy, we're continuing to do that even during this year.
No I think again.
At gross margins have come down for some of the.
More temporal regions that we've talked about before cost increases.
Logistics rates increases now currency.
That has put some pressure on the cost structure and so the place that we're going to go address that right now is with variable spend.
I think it makes a lot of sense.
To invest as much in marketing in the demand environment is volatile in some cases weaker. So I think you should think about it is we'll probably put that marketing back in when it makes sense.
But in this environment and it makes more sense to pull back on that continue to drive the investment in innovation and.
In the long term roadmaps.
You said everything.
David I don't think it makes sense to overinvest in marketing when the markets themselves are retracting. So it played out.
And I guess I wouldn't think about that as a signal that we're going to get more promotional as a result of that.
Heard me talk about having to manage pricing to <unk>.
Try to offset some of those pressures and so I think that remains the focus in fact this year, if I look at margins year over year.
Increased promotion was not one of the big drivers of margin pressure really the things that drove margins down year over year, where currency.
Cost inflation and logistics rates those were the biggest drivers.
So I think.
We're starting to see some of those things settle down a little bit the cost increases have definitely slowed logistics rates.
At still at very high levels relative to where they've been historically, but are no longer increasing.
Month over month quarter over quarter like they have been month over month, I would say that they stopped increasing so hopefully we'll see some of those things bottom out and then as the economy continues to go through this cycle, we can see some favorability and some return to the costs that we had previously in those areas, which will give us a nice lift on gross margin.
One more thing I think is in the.
In my experience.
When markets were track like gaming directing right now.
Your marketing has just left less effective.
I don't think you want to spend as much in.
And that's where we're going now you will come back. This is temporal so we'll come back and it goes will probably increase the marketing again, but we still have a lot of marketing spending forgive me wrong with these numbers, we're still gonna be spending a lot of market.
I think to Eric sometimes.
Sometimes we just talked about our business model and what's the shape of the P&L and I think theres adjustments, we're making to the spend or really to help sustain the shape of the P&L, we've run opex at about 25% of sales.
And on this lower.
Revenue outlook and with these.
Opex reductions should be seen as still manage roughly to that same area youll see a lower mix of sales and marketing.
While we continue to sustained investments in R&D.
If I could just sneak one last one bracken just for you you mentioned earlier in the prepared remarks diversification of supply chain outside of China can you, maybe just elaborate on that a bit what you mean by that obviously you have a big manufacturing base, there, but any incremental details would be helpful and thats. It from me thanks, guys Yeah.
We started.
When we start when the tariffs happened three years ago, I think we heard about.
Less than 1% of our total manufacturing outside of China. So we have we had flexibility because we're really good at moving things in and out of our factory, but we really didn't have a supply chain that was set up there. So even though we have the ability to move things in and out with the ability to move things in that very quickly.
So we've really been working on that first big wave of work happened during the post tariff.
But in the middle of a tariff activity. We've got two boats I'd say 15, 17% our goal is to get up closer to 30%.
And that will give us flexibility not only.
In case of other tariffs, but also just better cost positions and things. So we feel very good about the progress we're making we are still very high on China as a manufacturing site, but we want to be flexible we want to be able to move even beyond the 30%, we need to or if we need to either for cost or for geopolitical reasons.
Super Thanks, guys. Thank.
Thank you Eric.
Thanks, Eric next up Adam Angela from Bank of America.
Hello, Adam.
Hmm.
Hello, Thanks for letting me on.
I think we've we've gone through most of my questions. So just one from me please.
The revenue outlook is worse than your guidance.
Do you think you have further flexibility to them.
He cut opex if needed.
All of these opportunity like I said, well I would just say again I would think about opex, but I would also think about costs overall.
$4 $5 billion, if you think about opex and cost of goods sold so again, all that cost is different but it's a big number if youre, 1% inefficient on $4 5 billion, it's $45 million. So we're not going to wait and find out if the revenues worse, we're working on all those things today, but it certainly will become tougher I mean.
The more costs you have to take out it gets a little bit tougher around the edges, but I think that our outlook.
Captures the majority of the outcomes, but if things get worse.
Make some decisions at that time.
We're always going to try to manage our business for the environment, but for the long term. So we want to do things that make sense for the long term health.
Of the company.
Yes, I'd add in there.
<unk> point I think the way I think about.
Any businesses you just you have to adjust to the.
To the size of the business you just have to consult with us. So it's not a question for Ken We will the question is how fast are we going to do with what happened.
But we don't think thats going to happen, but if it did go we'll face into a deal with it.
Got it great. Thank you.
Yes.
Yes.
Thanks, Adam our next question will be from Ananda loop capital Good morning Amanda.
Hello.
Good morning, guys. Thanks.
Yes, they will let me get majority of MBNA.
Nate give me give me a heads up on that like in China, but let me just jump in Chile. There guys. Thank you I hope you guys. Thanks.
Thanks for taking the question.
Second this.
Thanks, Dan.
Yes, so just two if I could the first is tracking you made mention in the prepared remarks are actually I think it was sort of the questions about asset segments.
You you expect keyboards and mice.
We continued to hold up well wed love to get your thought process behind that and then I have a follow up.
Just.
I guess I have a.
Several things contributing to that comment.
Beliefs that we have.
One of them is that we're also dependent on those today and I think in a hybrid world youre going to still be dependent it's not like the category is going to go away. When you go to the office of few days a week and many of you probably are experiencing that.
And I think the awareness is up and so theres a lot of interest were seeing it when we launch new products we have.
Much stronger demand than we had before as we launch a new broad was for character keyboard to do extremely well.
So I think this is one key dynamic the second news from.
If you go back to really the heart and soul of this business. It started as a <unk> business in the winter most acute mice and keyboard we have an incredibly good innovation engine and a very very good strategy for segmentation and.
I just feel very good about the vision strategy with the execution of the whole thing. So I think we're we're in more control of our own destiny.
It's almost anywhere else we operate.
And so I'm excited about those geographies like I said when I came to a company like IRA actually joined Logitech because all of these categories are going to be in a long term secular decline they've been a long term secular growth trend the whole time, it's getting better and better.
Is there an ananda is.
We actually were tight on supply in some areas of the keyboards and mice market too.
So I think our results there actually could have been a little better.
If we had the suppliers I mean thats always the case every quarter, we've got something we're short on in the recent quarters, it's been there.
You guys you guys have any sense.
Most of the channel sell or what day shell share like not your enterprise sales force.
As Bracken mentioned.
Earlier, but do you have any sense.
Hi.
Any sense like even if it's cheap abroad, how much goes.
How much.
How much of licensed keyboard sales.
<unk> for folks.
And their business environment.
For context, and then secondarily, how much is sort of middle class upper middle class, so sort of less income sensitive Israeli.
It's really less inflation sensor because employment is pretty good. So we don't have an employment initiate an inflation issue.
So there's still have discretionary income.
Okay.
To answer your first question, yes, we have a sense. It's really as you would guess kind of a hard number to measure, but it's probably about a quarter.
We're underdeveloped in that quarter, we've never done a particularly great job a familiar talking to go to market through the enterprise of the workspace, where you can bet that we're focused enough.
So we're going to work.
All of that one.
In terms of.
Kind of a high end versus low end or people with a lot of economic availability versus less the I'll just remind you that the average miles we sell sells for I think.
$29 $24 in the marketplace. This is not a economic hardship for most people.
And especially if it's your job.
If youre, creating on the side.
We're going to customers.
We've actually got two jobs going at once.
This is the lifeblood of your business Youre doing it well and also just the health of making sure that your hands don't hurt all of that stuff. So I think we're not too.
Too sensitive to.
Were not especially most of the people I don't think its super sensitive to the economic environment and Thats one of the reasons why when we lowered our discussion where the revenue is going to be you don't hear us too negative on mice and keyboards, I think even in a recessionary environment theyre going to be okay.
That's helpful and then.
Ask one more quick one here.
How is the webcast.
The Green is the high end, but that's in the video video cloud segment had those saw that during the quarter.
Sorry, let me add.
Have they hold out there and also like what's that lithia outlook for them yes.
General just pulled way back and I think thats not too shocking.
People really scrambling to get on camera and now most people found a way to get on cameras multiple back now it's still way up versus what it was two years ago. So it's a much bigger business today than we got.
We're excited what we're kind of innovation, we can do there, but I don't want to mislead you I don't think were going to turn <unk> into a strong growth category in the future I think it's a good solid category boots.
Attractive for us, but it's not going to be a heavy focus for us we're going to innovate there.
And I think we'll be well there will be a great market share and we're gaining market share there, but I'm not I wouldn't point to that would say gosh. That's wanted to really look at it as a bellwether for harvest.
No we fixed could happen there.
And Bracken.
I think about web games excuse me is really think about the entire workspace right.
It's a point sale sure, but it's really part of the essential works Workspaces, So as Youre doing more video calls I.
I think the web cameras definitely.
As more and more essential than what it was before so I think thats exciting the installed base is bigger than it was before because of the sales over the last couple of years certainly it's pulled back off of those highs.
But our strategy is not about that about the entire workspace. So it's the web cameras, the mouse or keyboard the headsets.
How do we how do we gain more control more business of that entire <unk>.
<unk> workspace <unk> part of that absolutely.
I know the webcams that are classified in video collaboration at the high end Web games did they also.
Do they also socket like reporting segment, yes.
Similar to the reported segment not quite not not not.
Not down quite as much but similar.
<unk>.
Cool thanks, guys. Thank you.
Great. Our next question is from Michael <unk> from Vontobel.
Hey, Michael.
Hi, Thank you for taking my question.
Actually two or three.
First one is on capital allocation and Youll buyback.
The question is actually what are you going to do with all those shares.
Are you considering canceling some of them or is it all for employee shares or.
Do you have other intentions for those shares in order to make them the value of the shareholders.
That will be the first question and the second one is really.
<unk>.
Similar or adding up to what you just said on <unk>.
Webcams, when you think about sort of the creator economy.
And all of the devices.
These people need I guess, its mice keyboards and web cams headset.
How come there is such a disconnect between mice and keyboards and the other sort of creator economy type of products.
And then I have.
An add on just a norm.
Detail.
You want to take the capital allocation discussion and I'll jump off.
Yes, Michael.
There is there are several uses everyone. Some is for employee grants.
We could cancel some.
Take some proposals to shareholders at the general meeting.
We don't have anything on the proxy for this year, but.
So on a relatively small percentage of that total.
So it's not really a decision we face today.
But yes general General uses like we've had in the past I would say is the message right now.
<unk>.
<unk> you want to take the second one would generally say, yes I'd.
I would say I think what Youre, saying would you just described what the opportunity. We see is there is a big difference between what people are buying and what they probably need four to a creative economy and as you said.
Most of <unk>.
Super well wire wire cameras that we've got one camera this position for the audience and then we've got a new sub cameras that we've launched called <unk>, which is very very small and I think you're really getting our getting our story R.
Our marketing stories correct to make sure were placed in the right places all those things are really critical to having long term really great growth business. It's small today and the opportunity is really big I think.
Making sure that a creator feels like they know what they need we just launched lights for example.
Very very small we've watched one light products, so far and it's super interesting to see.
How many people are looking for that.
And we're in very limited distribution, so far so I think theres, a big opportunity there Michael I think we've just got to keep working to make sure. We've got the right portfolio the right positioning for those in the right distribution.
Okay. That's great. Thank you and the add on would be in the.
And the audience. Please.
Wearables space, there can you give us a bit more detail on what happened in there.
<unk> sales on what went well.
Wanted to actually how did the microphone business.
<unk> platform.
I would say.
You want to cover the overall side will talk about Mexico in particular.
Sure.
Are you, including mobile speakers and your question, Michael or overall no no no just just.
Audio <unk> wearables.
Yes so.
And I think on one hand, we had headsets in there and I mentioned earlier I think headsets overall is kind of a tough market. So that was probably one of the biggest drivers of the decline microphones is also an area that was weaker than Bracken I'll, let you follow up with a comment on that one but microphones was weaker year over year again coming off of I think.
Our pandemic period, where.
There was probably some additional demand for microphones above and beyond the normal creator demand.
And then the other pieces of that category of sort of declining as expected PC speakers.
The CAGR, we have very high share, but the market. There has been some decline and then the last piece of advice they would be <unk>.
We've made a decision to not launch new products. There. So we're seeing the expected decline in jaybird is while <unk> did you want to comment on mikes.
Mike.
As they said the mic business grew dramatically during the pandemic is still up I think more than 50% versus February .
A lot of that growth was driven by people just felt like their micro isn't good enough on their desktop and so they were not really in that segment. You. Just described with really interesting. They are in another segment.
The microphone is working and most people have found their way of dealing with that but the underlying business of <unk>.
Stringers and creators and broadcasters I believe it is still very healthy.
Independent image a lot of people got into podcasting, but weren't in it before.
Probably a big Big Spike and then that's come down, but I think after we get through this period of kind of a weird.
Reduction to the point, where you say okay. This is the real core market will see further strong growth again, I think the need for streaming and <unk>.
And creating products.
As in the road ahead is going to be bigger and bigger and so we're pretty optimistic about it and we haven't innovated much of that.
Either and Thats covering systems there.
Yes, it's still very strategic for US I think also keep in mind that have some exposure to the gaming market, which we've talked about has been slower in the last couple of quarters.
Okay. Thanks very helpful. Thank you Michael.
Okay. Our final question today will come from Serge roster of credit Suisse.
Yes, hi, good morning, everybody I have two quick one saying that case.
First of all I need.
<unk> had a very favorable sales mix in Q1 with redecoration keyboards, <unk> combos pointing devices for the high gross profit margin products growing the low gross profit marching products declining. So now we have to expect even not improving margins.
<unk>.
But still we can expect higher volume sequentially is not high single digit growth as Nate mentioned, but higher volumes in Q2 than in Q1 does this imply that that high gross profit margin product with a high gross profit margin will decline in Q2, So we see lower sales in vehicle ratio collaboration milestones.
Keyboards, where I'm wrong.
I think the reality is that the other impacts are just larger than the impact of a.
Category mix, we did see favorable category mix year over year search and I saw that in my gross margin bridge. It just wasn't as big as the other ones that I called out.
So that.
I think that story is still remains D. C. I think has gone it's now over 20% of our of our mix it was down about 10% prepay.
Pre pandemic, so it's doubled in size relative to the overall company.
But the other factors are just just two big the cost increases that logistics rates. The currency those are kind of overwhelms most of the other impacts.
For the second one is that in your inventory can you remind me how much is finished or our finished products and how much of semi finished products. Because these days probably you will not ship finished products around the world, giving the high cost you mentioned once you do this only if it keeps sense.
So I'm wondering if this ratio and then secondly, obviously are there any impairment on some of the inventory because it's at the wrong place or you have some room products in your inventory.
Okay.
Can you I just want to be sure I understand your mix question between sort of.
How much of the finished products and then how much is components.
Anyway, you know.
And then secondly, I fear that on finished products. It could have an impairment of <unk>, because we will not ship finished products from Asia to Europe , and wherever you know because it sounds worse to do that so over time, you could have impairment risk on your inventory.
Sam can you help me there.
On the impairments thing obviously, it's something we look at every quarter and we have taken reserves in the P&L.
Really over the last year I would savings, including some this quarter. We didnt have very many of those during the height of the pandemic growth period, because everything selling but we've sort of been reverting to more normal levels of reserves I think over the last 12 months. So that continues and something that obviously gets us very close inspection every quarter to make sure that things that are aging are slow moving.
Are things to come back from customers.
<unk> reserves and Thats all reflected in the P&L.
The other thing to keep in mind too searches our business mix has shifted so we started off your question is talking about we see two very different category than say music speakers, right, which was which is a category. We deemphasize. It's now just a couple of points of our sales. So that was a category and Bracken mentioned why sort of the unattractiveness of that business model, who is a much more discretionary.
<unk> purchased at much higher Holly.
Holiday sales D. C is a much steadier demand product longer life cycles, and so forth. So I think the overall amount of risk in the types of inventory that we're holding is different than what it was a few years ago as our business has shifted to more mice and keyboards, which have long.
Product life cycles, more VC, which have long product life cycles things like that.
I'd just add I think we're also.
You know this because you can pause for a while but I'll say if anybody else here we're not in.
In a business that house big obsolescence risk, where new technology is going to come in and really obsolete our category.
If we have a risk.
We are a little too much inventory one place or another one that we need to just be patient and get it out not hyper discounted to get it out that's generally the approach we've taken.
I'm not saying that.
Inventory risk you always do but it's not.
It doesn't look like many of the categories.
Probably would go outside of us.
Right.
Okay got it many thanks and thanks, everybody Bye bye.
Thanks, Serge and thanks, everyone for your questions Bracken and Nate. Thank you that's a rapid arc I'll break it any final comments no.
I really appreciate it was a great high engaged discussion very thank you very much we will look forward to talking to you again next quarter.
I will stay tuned.
It's an exciting time in the World every quarter every first quarter of the year seems to be very different from the last one over the last three or four years and we're in another one now so but I'm very optimistic about the future I think we're in a great spot.
Wonderful thanks, everyone. Thanks Pat.