Q3 2024 Logitech International SA Earnings Call

Unnamed Host: to join us for the third quarter of fiscal year 2024. Joining us today are Hanukkah Faber, our CEO, and Chuck Boynton, our CFO. During this call, we will make forward-looking statements, including with respect to future operating results, under the safe harbor of the Private Securities Litigation Reform Act of 1995. We're making these statements only as of today. Our actual results could differ materially. We undertake no obligation to update or revise any of these statements.

Full year 2020 for joining us today are hanukkah favor, our CEO and Chuck Boynton, our CFO. During this call we will make forward looking statements, including with respect to future operating results under the Safe Harbor of the private Securities Litigation Reform Act of 1095, we're making these statements based on our views only as of today, our actual results could differ materially.

Charles D. Boynton: We undertake no obligation to update or revise any of these statements. We will also discuss our non-GAAP financial results and you can find a reconciliation between GAAP and non-GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward looking statements in our press release and in our filings with the SEC.

Unnamed Host: We will also discuss our non-GAAP financial results, and you can find a reconciliation between GAAP and non-GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC. These materials, as well as a shareholder letter and a webcast of this call, are all available on the Investor Relations 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 and net sales. This call is being recorded and will be available for a replay on our website.

Charles D. Boynton: These materials as well as the shareholder letter and a webcast of this call are all available at the Investor Relations page of our website. We encourage you to review these materials carefully.

Speaker Change: Les noted otherwise comparisons between periods are year over year and in constant currency net sales. This call is being recorded and will be available for replay on our website I will now turn the call over to Hanukkah arnica.

I'll now turn the call over to Hanneke. Thank you, Nate, and welcome everyone. I'm very excited to be here today for my first earnings call at Logitech. Now, you may have noticed that this quarter we introduced a new document as part of our earnings material, a shareholder letter. This letter is intended to be a comprehensive review of our quarterly results and includes commentary that previously would have been covered at the beginning of the call. So today, after brief opening remarks, we will move directly into Q&A. Now let's move on to this quarter. Our team delivered really solid results in the third quarter.

Hanukkah Arnica: Thank you Nate and welcome everyone.

Hanukkah Arnica: I'm very excited to be here today for my first earnings call at Logitech.

Hanukkah Arnica: Now you've probably noticed that this quarter, we introduced a new document it's part of our earnings material shareholder letter.

Hanukkah Arnica: This letter is intended to be a comprehensive review of our quarterly results and includes commentary that previously would have been covered at the beginning of the call.

Hanukkah Arnica: So today after brief opening remarks, we will move directly into Q&A.

Hanukkah Arnica: Now, let's move on to this quarter.

Hanukkah Arnica: Our team delivered really solid results in the third quarter.

And I am proud of the product innovation, the share gains, the operational discipline, and the prudent financial management throughout the quarter, resulting in really healthy gross margins and exceptional cash flow generation. Our disciplined execution, tightly managing costs, and promotional spend drove a 22% increase in our operating margin. That is tremendous work by all of our teams.

Hanukkah Arnica: And I am proud of the product innovation the share gains the operational discipline and prudent financial management throughout the quarter, resulting in really healthy growth gross margins and exceptional cash flow generation.

Hanukkah Arnica: Our disciplined execution tightly managing costs and promotional spend drove a 22% increase in our operating margin.

Hanukkah Arnica: That is tremendous work by all of our teams.

But we will not be satisfied, of course, until we return to top line growth, which will be a gradual process. As we look forward, I am delighted with Logitech's position. Our portfolio is designed to take advantage of indisputable trends in hybrid work, video conferencing, gaming, and content creation, and disruptive technologies like AI will provide additional opportunities for us. As we work our way back to growth, we have demonstrated consistent, disciplined operational excellence that builds a highly cash-generative P&L and a very strong balance sheet. This discipline, coupled with an innovation engine that introduces new products at a global scale, drives our market leadership across multiple categories. I've spent the last two months visiting with our employees, partners, customers, and shareholders. It's been a really exciting time for me, and I am as optimistic about Logitech's future as when I joined them on day one.

Hanukkah Arnica: But we will not be satisfied of course until we return to top line growth, which will be a gradual process.

Hanukkah Arnica: As we look forward I am delighted with logitech positioning.

Hanukkah Arnica: Our portfolio is designed to take advantage of indisputable trends in hybrid work video conferencing gaming and content creation.

Hanukkah Arnica: And disruptive technologies like AI will provide additional opportunities for us.

Hanukkah Arnica: As we work our way back to growth, we have demonstrated consistent disciplined operational excellence that builds a highly cash generative P&L and a very strong balance sheet.

This discipline, coupled with an innovation engine that introduces new products at a global scale drives our market leadership across multiple categories.

Speaker Change: I've spent the last two months visiting with our employees partners customers and shareholders.

Speaker Change: And it's been a really exciting time for me and I am as optimistic about <unk> future as when I joined them day one.

We will be hosting an analyst and investor day later this spring, and I'll provide you with a more detailed perspective on our strategy and our approach to capital allocation then. Additionally, we will then provide our outlook for fiscal year 2025. I really look forward to seeing you all at that event. Thanks again, and let me turn it to Chuck to discuss the numbers. Chuck, thank you, Hanukkah.

Speaker Change: We will be hosting an analyst and Investor day later, this spring and I'll provide you with a more detailed perspective on our strategy and our approach to capital allocation then.

Speaker Change: Additionally, we will then provide our outlook for fiscal year 2025.

Speaker Change: I really look forward to seeing you all at that event.

Speaker Change: Thanks, again, and let me turn it to Chuck to discuss the numbers Chuck Thank you Hanukkah.

Chuck: Thank you all for joining us on the call today. You've seen our detailed financial results in the press release and shareholder letter, but I'd like to highlight three metrics this quarter that really stand out. First, our gross margins of 42.3% were better than expected year over year due to lower product and logistics costs and reduced promotional activities, specifically in North America. Second, we've spoken for several quarters about our focus on driving lean operations. For the seventh consecutive quarter, we reduced our on-hand inventory, and this quarter, it was down 44% year-over-year, with our inventory turns hitting 6.5.

Chuck: Thank you all for joining us on the call today.

Chuck: You've seen our detailed financial results in the press release and shareholder letter, but I'd like to highlight three metrics this quarter that really stand out.

Chuck: First our gross margins of 42, 3% were better than expected year over year due to lower product and logistics costs reduced promotional activities specifically in North America.

Chuck: Second we spoken for several quarters about our focus on driving lean operations for the seventh consecutive quarter, we reduced our on hand inventory and this quarter. It was down 44% year over year with our inventory turns hitting six five and finally in Q3, we delivered four.

Chuck: And finally, in Q3, we delivered $443 million of operating cash flow, one of our best ever. This was driven by an improvement in the cash conversion cycle and strong operating margins. We are updating our outlook for the full year. We are now expecting revenues of $4.2 to $4.25 billion, up from $4 to $4.15 billion. Our operating income is expected to be between $610 and $660 million, up from $525 to $575 million.

Chuck: Hundred $43 million of operating cash flow one of our best ever this was driven by an improvement in the cash conversion cycle and strong operating margins.

Chuck: We are updating our outlook for the full year. We are now expecting revenues of $4 two to $4 to $5 billion up from 4% to 415 billion.

Chuck: Our operating income is expected to be between 610, and $660 million up from $5 $25 million to $575 million.

Chuck: One final note regarding fiscal year 2025. If you look at our last four quarters, as well as the midpoint of our fiscal 2024 outlook, you will see the declines in our net sales have moderated. Looking ahead to fiscal 2025, we do not anticipate an inflection point in the slope of this curve.

Chuck: One final note regarding fiscal year 2025.

Chuck: If you look at our last four quarters as well as the midpoint of our fiscal 'twenty four outlook you will see the declines in our net sales have moderated looking ahead to fiscal 'twenty five we do not anticipate an inflection point in the slope of this curve while the rate of our net sales declines has improved.

Chuck: While the rate of our net sales declines has improved, there are a number of headwinds and uncertainties that may impact our net sales throughout fiscal 2025. Thank you to all of our employees for their hard work and impressive execution. With that, Nate, let's move on to Q&A.

Chuck: There are a number of headwinds and uncertainties that may impact our net sales throughout fiscal 'twenty five.

Chuck: Thank you to all of our employees for the hard work and impressive execution with that let's move on to Q&A.

Unnamed Host: As a reminder, please raise your hand if you are interested in asking a question and come off video when called upon so we can see you. And with that, we'll start with Tamek Chatterjee at JP Morgan. Hi guys, hope you can hear me. Thank you. Thanks for the call.

Speaker Change: Great as a reminder, please raise your hand, if you are interested in asking a question and come off video when called upon so we can see you and with that we'll start with summit Chatterji at J P. Morgan.

Thank you thanks for the color.

Unnamed Host: And congratulations on the robust results here. Maybe just to start with your ending comment there about the headwinds you're thinking of for Festival 25. Maybe just flesh that out a bit more for us in terms of, I mean, obviously, there's been an improvement in the pace of declines or the moderate to those declines, but why shouldn't the scope sort of carry you back into growth? What are the headwinds you're thinking of?

Summit Chatterji: Some of the rumors for those years.

Summit Chatterji: Maybe just to jump just to start with Dr and income in the automotive headwinds you're thinking.

Maybe just.

Summit Chatterji: Fix that out a bit more for us in terms of I mean, obviously.

Summit Chatterji: The movement in the pace of declines are you moderate those declines, but why shouldn't assume sort of get you back into growth what are the headwinds youre thinking.

Chuck: And I have a quick follow-up. Yeah, that's a really good question. We thought very, very hard about what next year was going to look like. And if you look at the fundamentals of our business, they're very strong right now. We feel really good about the execution.

Speaker Change: Thank you.

Yes, that's a really good question, we thought very very hard about what next year is going to look like.

Speaker Change: And if you look at the fundamentals of our business. They are very strong right now we feel really good about the execution. If you look at this last quarter in Q3, a lot of it was driven by really strong discipline on pricing and promotional activity. The baseline business in Q3 outside of the promotional windows was a little.

Chuck: You know, if you look at this last quarter in Q3, a lot of it was driven by really strong discipline on pricing and promotional activity. The baseline business in Q3, outside of the promotional windows, was a little softer than we would have thought. The promotional windows were incredibly strong with great pricing discipline, but the overall pace of the run rate business was a little soft. And if you look forward into Q4, the midpoint of our outlook for the year would indicate a 1% decline in Q4. Now, the high end of our outlook would imply a little bit of growth in Q4. But if you look into next year, there's just so much uncertainty around, you know, will there be rate cuts in the U.S., the macro situation globally, whether it's in China or the Middle East or Europe.

Speaker Change: Softer than what we would've thought the promotional windows were incredibly strong with great pricing discipline, but the overall pace of the run rate business was a little soft and if you look forward into into Q4, the midpoint of our outlook for the year would indicate a 1% decline in Q4 now the high end of our outlook.

Speaker Change: <unk> would imply a little bit of growth in Q4.

If you look into next year. There is just so much uncertainty around.

Speaker Change: Will it be rate cuts in the U S.

The macro situation globally, whether it's in China, or middle East or Europe, and so we're taking a cautious approach to next year and as we look out we're confident this is a great business.

Chuck: And so we're taking a cautious approach to next year. And as we look out, you know, we're confident this is a great business, profitable, with strong margins. As Hanukkah said, and her comment makes sense, it's if, not when.

Speaker Change: <unk> strong margins.

Speaker Change: As Hanukkah said.

Speaker Change: Her comment it makes sense if not win but if you just look at the overall market. We just think that we don't want to be I have people get too optimistic about what next year is going to look like given these overall headwinds and the geopolitical situation.

But if you just look at the overall market, we just think that we don't want to be too optimistic about what next year is going to look like given these overall headwinds in the geopolitical situation. And Anika, if I can, I know it's early days in your role, but as you sort of look across the customer base, particularly if you look at them as enterprise versus consumer, and you think about the next couple of years, where do you see the bigger opportunities? Where are we more likely to return to growth in which customer segment faster than in others? Just share your thoughts on that. Yeah, sure. And it's nice to meet you, Sameek.

Speaker Change: I think if I can I know its early days.

Speaker Change: But as you looked at across the customer base, particularly if you look at them as enterprises versus consumer and you think about sort of the next couple of years, where do you see the bigger opportunities whether it'd be more likely to return to growth in this customer segment.

Speaker Change: Then the other would just share your thoughts on that thank you.

Speaker Change: Sure and it's nice to me is to make.

I see opportunities everywhere when it comes to our customer base. So we're really, really strong in retail. And you saw that over the holiday period, just great execution in store after store, whether it was here in the US or in Europe or in Asia. We also have grown online a lot with our e-retail customers. And then, of course, there's B2B, and we're newer to the B2B business. But the opportunity there is gargantuan. You know, so many meeting rooms that are not yet enabled with video.

Speaker Change: I see opportunities everywhere when it comes to our customer base. So we really really strong in retail.

Speaker Change: And you saw that over the holiday period.

Speaker Change: Great execution in store after store, whether it was here in the U S or in Europe or in Asia.

Speaker Change: We also have grown online a lot with our retail customers.

Speaker Change: And then of course, Theres b to B and we're newer to the B to B business.

Speaker Change: But the opportunity there is gargantuan.

Speaker Change: So many meeting rooms that are not yet enabled with video.

And as that corporate spending comes back, I think we're really well positioned with products that are fantastic, easy to use, great value for that B2B segment. So there is opportunity everywhere. B2B is a little newer to us, but I'm quite bullish on that. I'll leave it there. Thank you.

Speaker Change: And is that corporate spending comes back I think we're really well positioned with products that are fantastic easy to use great value for that <unk> segment, selling opportunity everywhere <unk>, a little newer to us, but I'm quite bullish on that.

Speaker Change: I'll leave it there thank you.

Unnamed Host: Thanks for the question. Our next question is from George Wang at Barclays. Hey, thank you for taking my call. Just two quick ones.

Speaker Change: Good questions.

Speaker Change: Our next question is from George Wang at Barclays.

Speaker Change: Yeah.

George Wang: Hi, Thank you for taking my call just two quick ones firstly.

Unnamed Host: Firstly, can you talk about kind of gross margin, you know, the December quarter was super strong. And any thoughts on kind of outlook going forward, you know, for Q and FY25, and that kind of as it relates to sort of a long-term model for 39 to 44. Just curious about any kind of thoughts on kind of modeling for the margin going forward. Yeah, thank you, George.

George Wang: Can you talk about kind of gross margin the December quarter was super strong.

George Wang: Any thoughts on the outlook going forward.

<unk> FY 'twenty five.

George Wang: And then kind of as it relates to the long term model also has 39 to 44, just curious kind of any thoughts on kind of modeling for the margin going forward.

Speaker Change: Yes. Thank you George no change to our long term model, we believe the 39% to 44% is a is the right range. This past quarter was stronger than we'd expected 42, 3% gross margins, we had expected somewhere in the 38% to 39%. So we were really.

Chuck: No change to our long-term model. We believe that 39 to 44% is the right range. This past quarter was stronger than we'd expected, you know, 42.3% gross margins; we'd expected somewhere in the 38 to 39% range. So we were really pleasantly surprised at the results for the quarter. The real drivers, if you look overall, you know, kind of year over year, it was roughly in line. If you look at it, or, sorry, quarter over quarter, it was roughly in line.

George Wang: <unk> surprised at the results for the quarter.

George Wang: The real drivers if you look overall.

George Wang: Kind of year over year. It was roughly in line. If you look at it or sorry quarter over quarter was roughly in line year over year, we saw pretty good margin expansion, that's really driven by a couple of factors. One we did a great job on the operations side getting product costs down logistics costs, certainly benefited all the industry participants.

Chuck: Year over year, we saw pretty good margin expansion. That's really driven by a couple factors. One, we did a great job on the operations side, getting product costs down. Logistics costs certainly benefited all the industry participants with lower shipping and freight costs.

George Wang: With lower shipping and freight costs.

Chuck: And, you know, that was the big primary driver. And then, of course, the great execution primarily in the Americas on pricing and promotions led to about 100 basis points of improvement. So I'd call it, you know, overall about 400 basis points of benefit on product and shipping costs. A lower promotional spend led to higher margins and was offset a little bit by mix that we had forecasted.

George Wang: That was the big primary driver and then of course, the great execution, primarily in Americas on pricing and promotions.

George Wang: About 100 basis point improvement, so I would call. It overall about 400 basis points benefit on product and shipping costs.

George Wang: Lower promotional spend led to higher margins and offset a little bit by mix that we had forecasted.

Got it thank you.

Quick quick follow up if I can.

Unnamed Host: Thank you. Yeah, just a quick follow up, if I can. I just want to double click on the gaming.

George Wang: Just want to double click on the gaming.

It seems very strong kind of has been better than expected for the last couple of quarters. Just maybe you can give more color just on the gaming peripherals.

Chuck: Seems very strong, kind of been better than expected for the last couple quarters. Just maybe you can give more color just on the gaming peripherals, and maybe, you know, if you can pass out within gaming, kind of, any particular areas are doing a bit better, you know, mice, keyboards, you know, gaming headsets, no, we're not. Just, you know, because gaming traditionally has a kind of short refresh cycle versus other, you know, PC-related peripherals. So maybe you are seeing kind of the COVID cohort to start refreshing, maybe could potentially drive the results higher. Just curious if you can double click on the gaming category. Yeah, certainly. I can go first, Hanukkah.

George Wang: And kind of maybe if you could parse out within gaming chemical any particular areas are doing a bit better.

George Wang: Mice keyboards headsets.

George Wang: Yes.

Speaker Change: No we're not.

Speaker Change: Just because the gaming traditionally at kind of the shortest the refresh cycle versus other PC related protocols. So maybe you are seeing kind of the Dakota cohorts have started refreshing maybe.

Speaker Change: Maybe could potentially drive the results higher just curious if you can double click on the gaming category.

Speaker Change: Certainly I can go first hanukkah so the gay.

Speaker Change: Gaming as you know covers many different categories, we saw particular strength in simulation in our steering wheels.

Speaker Change: A really really good quarter overall go to market was impressive how we promoted and discounted. If you contrast that to a year ago. The teams were very disciplined in what products. They promoted.

Chuck: So gaming, as you know, covers many different categories. We saw particular strength in simulation and our steering wheels, a really, really good quarter. Overall, the go-to-market was impressive, how we promoted and discounted. If you contrast that to a year ago, the teams were very disciplined in what products they promoted and which channels. As Hanukkah mentioned, retail was really, really strong, and that led to better margins and better revenue. In the PC segment, we have a really, really strong position with mice and keyboards in that PC segment. We have gained some share. The console was a little bit off.

Speaker Change: Which channels.

Speaker Change: As Hanukkah mentioned retail was really really strong that lead to better margins and better revenue.

Speaker Change: The PC segment, we have a really really strong position with mice and keyboards that PC segment.

Speaker Change: <unk> gained some share.

Speaker Change: Console was a little bit off that we have a new product out there that's really really exciting the $8 50 that was released kind of just at the end of the holiday. So we didn't quite see.

Speaker Change: The sales on the console side, that's a very very competitive category.

Chuck: We have a new product out that's really, really exciting, the A50, that was released kind of just at the end of the holiday, so we didn't quite see the sales on the console side. It's a very, very competitive category.

Speaker Change: But we feel like the future looks bright in console, although it is very competitive but the areas that we generate higher margins mice and simulation incredibly strong other parts.

But, you know, we feel like the future looks bright in console, although it is very competitive. But the areas that we generate higher margins, mice, and simulation, are incredibly strong. Other parts, you know, maybe not quite as strong, but will help along the way with new products. Anything you want to add, Hanukkah? No, I think long term, again, I'm super optimistic about gaming as a big, growing category. It used to be focused on pretty narrow audiences, younger males.

Speaker Change: Maybe not quite as strong but will help on the way with new products anything you want to add hanukkah.

Speaker Change: Now I think long term again I'm Super optimistic about gaming is a big growing category. It used to be focused on pretty narrow audiences younger male.

That continues to explode with more females gaming with older people gaming.

Speaker Change: With gaming as a way to connect socially sell them.

In.

Speaker Change: A category, where all the macros are in favor and then with our strong execution and our strong innovation.

But that continues to explode with more females gaming, with older people gaming, and gaming as a way to connect socially. So, a category where all the macros are in favor, and then with our strong execution and our strong innovation, I think we look really good in that space. Great, thank you. I'll go back to the desk. Our next question is from Asia Merchant at Citi. Morning, Asia.

Speaker Change: I think we look really good in that space.

Speaker Change: Great. Thank you I'll go back to the queue.

Speaker Change: Our next question is from IC, a merchant at Citi. Good morning Oscar.

IC: Great. Thank you for taking my questions good morning, everyone.

Just dial into a little bit on the growth stuff.

IC: I understand there are macro headwinds, but it seems like on the PC side.

IC: That's turned around just a little bit we're starting to see some recovery maybe you can talk us through.

Unnamed Host: Great, thank you for taking my questions. Good morning, everyone. If we could just dial in a little bit on the growth stuff, you know, I understand there are macro headwinds, but it seems like on the PC side, things have turned around a little bit, we're starting to see some recovery. Maybe you can talk us through, you know, on the maybe you feel a little bit better about the PC peripherals. And what would it take to kind of get back into your kind of target model that was laid out at the analyst event last time, both in terms of gross margins and top line growth? Thank you. Yeah, actually, it's great to see you.

IC: On the maybe you feel a little bit better about the PC peripherals, and what would it take to kind of get back into your kind of target model that was laid out at the analyst event last time, both in terms of gross margins as well as the top line growth.

Speaker Change: Thank you.

Obviously, great to see you.

Speaker Change: So if you think about the long term model I'll talk I'll talk long term first so we have a target long term financial model of 8% to 10% growth one key tenant and there is M&A we've been light on M&A. The last couple of years.

Speaker Change: I would expect us to do more over the next couple of years not right away, but I would expect us to do more over the next couple of years and that'll be an important part of getting back to that 8% to 10% growth. Another key tenant of our ability to return to growth and get to higher levels of growth.

Chuck: So, if you think about the long-term model, I'll talk about the long term first. So, we have a target long-term financial model of 8% to 10% growth. One key tenant in there is M&A.

Speaker Change: Is rationalization of the corporate office footprint.

Speaker Change: You look at what's happened in the headlines this past quarter, North American vacancies have approached 20%.

Chuck: We've been light on M&A the last couple years, and I would expect us to do more over the next couple years. Not right away, but I would expect us to do more over the next couple years.

Speaker Change: And so corporates are still looking at the overall real estate footprint and how they want to outfit rooms. The Tam is enormous the installed base is relatively small there will be an upgrade cycle of that installed base to new modern tech like ours, and there will be greenfield deployments that will grow. So if you look out 10.

Chuck: And that'll be an important part of getting back that 8% to 10% growth. Another key tenet of our ability to return to growth and get to higher levels of growth is rationalizing the corporate office footprint. If you look at what's happened in the headlines this past quarter, North American vacancies have approached 20%. And so, you know, corporations are still looking at their overall real estate footprint and how they want to outfit rooms. The TAM is enormous, but the installed base is relatively small.

Speaker Change: In years. It makes perfect sense that every conference room will be video enabled it's just hard to say, what's going to happen over one year or two years. So I think this is another thing like electronic I mentioned or if not when it's unclear what that deployment cycle will look like.

Speaker Change: Lastly on the on the <unk> side.

Companies like ours are looking at their it budgets carefully controlling things like capex and spend they're prioritizing things like AI and cyber security, absolutely employee productivity and office room fit outs are going to happen, but there are more discretionary spend versus mandatory and so I think the <unk>.

Chuck: There will be an upgrade cycle of that installed base to new modern tech like ours, and there will be greenfield deployments that will grow. So if you look out 10 years, it makes perfect sense that every conference room will be video enabled. It's just hard to say what's going to happen over one year or two years. So I think this is another thing like Hanukkah mentioned, if not when.

Speaker Change: <unk> needs to improve a little bit potential rate cuts, maybe more confidence in the future on the corporate side the consumer the right right now is quite strong.

Chuck: It's unclear what that deployment cycle will look like. And lastly, on the B2B side, companies like ours are looking at their IT budgets, carefully controlling things like CapEx and spend, and prioritizing things like AI and cybersecurity.

Speaker Change: So I think overall I feel really good about our positioning but overall enterprise b to B office rationalization, and then to hit the longer term rates, a little bit of M&A sprinkled in there as well.

Speaker Change: Yeah.

Speaker Change: And then when you think about gross margin also in that target range. I know you guys are obviously at 40% feel really good about that.

Chuck: Absolutely, employee productivity and office room fit-outs are going to happen, but they're more discretionary IT spend versus mandatory. And so I think the economy needs to improve a little bit, potential rate cuts, maybe more confidence in the future on the corporate side. The consumer right now is quite strong. And so, overall, I feel really good about our positioning, but overall, enterprise, B2B, office rationalization, and then to hit the longer-term rates, a little bit of M&A sprinkled in there as well. And then when you think about gross margins, also in that target range, I know you guys are obviously at 40%, and feel really good about that. Just if you could talk a little bit about getting to kind of even the midpoint of your gross margin, which is 39 to 44%. Well, we were really close to that midpoint this past quarter, at 42.3. So I feel, you know, really good about this quarter and last quarter. We did have a couple of one-timer clients this quarter.

Speaker Change: Just if you could talk a little bit about getting to kind of even the midpoint of your gross margin of 39% to 44%.

Speaker Change: While we were really close to that mid point this past quarter at $42 three so I feel real.

Speaker Change: Really good about this quarter and last quarter. We did have a couple of one timers. This quarter. So if you look overall at the impressive inventory reductions that we achieved we drove down inventory more than $80 million decrease quarter over quarter in inventory when inventories come down good things happen and we saw.

Speaker Change: That again this quarter with things like <unk> releases.

Speaker Change: <unk> releases, because effectively as you reduce inventory you have to reserve less inventory and so we saw benefits there that will not recur, we don't expect inventories to come down they could actually grow a little bit in Q4 with the Suez Canal challenges.

Speaker Change: But overall, if you look at where we think margins will be in Q4, it's our trough quarter. So theres less overhead absorption. So it's a little bit of a headwind on a quarter over quarter compare and then we also have.

Speaker Change: <unk>.

Speaker Change: Additional freight challenges so I think overall, we will have.

Chuck: So if you look overall at the impressive inventory reductions that we achieved, we drove down inventory, you know, more than $80 million decrease quarter over quarter in inventory. When inventories come down, good things happen. And we saw that again this quarter with things like, you know, E&O releases because, effectively, as you reduce inventory, you have to reserve less inventory. And so we saw benefits there that will not recur. We don't expect inventories to come down; they could actually grow a little bit in Q4 with the Suez Canal challenges. But overall, if you look at where we think margins will be in Q4, it's our trough quarters. There's less overhead absorption, so it's a little bit of a headwind on a quarter-over-quarter comparison. And then we also have these additional freight challenges. So I think overall, we'll have maybe the low end of that target range in Q4, and I would expect it to be in that overall operating model on average over the next year. Will it be at the high end? It's possible.

Maybe the low end of that target range in Q4, and I would expect it to be in that overall operating model on average over next year will it be at the high end, it's possible low end as possible.

Speaker Change: So I think a lot of it will just depend on how next year unfolds from a consumer sentiment standpoint, and enterprise demand standpoint.

Speaker Change: Great. Thank you.

Speaker Change: Our next question is from Erik Woodring at Morgan Stanley.

Speaker Change: Okay.

Erik Woodring: Hey, good morning, guys. Thank you for taking my question kind of connects to see for the first time I'm looking forward to working with you.

Erik Woodring: Maybe if we start Chuck I'm going to.

Erik Woodring: Pick on gross margins again, just because they were so impressive.

Erik Woodring: I guess, maybe my question is.

Erik Woodring: Last quarter, we had talked about them being in the 38% to 39% range you, obviously did more than 42% So I guess.

Erik Woodring: Was.

Erik Woodring: Is there something that outperformed your expectations that you that you didn't necessarily foresee 90 days ago I'm, just I'm just trying to pick on that because I would think that generally when it comes to component costs, you kind of have a lock on that 90 days ahead of the quarter and so I'm just trying to understand where the biggest delta was between your expectations and how you are.

Unnamed Host: The low end is possible. So I think a lot of it will just depend on how next year unfolds from a consumer sentiment standpoint and enterprise demand standpoint. Great, thank you. Our next question is from Eric Woodring at Morgan Stanley. Hey, good morning, guys. Thank you for taking my questions, Hanukkah. Nice to see you for the first time.

Erik Woodring: Really materially outperformed.

And if I could win as.

Erik Woodring: As we look to the fiscal fourth quarter.

Erik Woodring: Historically generally seen gross margin expansion. Despite the loss of revenue leverage less promotions, a little bit more be there'd be a mix than consumer mix and so why should we think about gross margins coming down so much sequentially.

Unnamed Host: Looking forward to working with you. Maybe if we start, Chuck, I'm gonna pick on gross margins again just because they were so impressive. And I guess maybe my question is, you know, last quarter, we talked about them being in the 38 to 39% range; you obviously did more than 42%. So I guess, you know, where was there something that outperformed your expectations that you didn't necessarily foresee 90 days ago?

Speaker Change: Maybe I'll start with that and then I have a follow up thanks.

Speaker Change: Yes, Eric.

Speaker Change: Really really good question. So first of all this past the last few quarters.

Speaker Change: <unk> brought our inventory down significantly when you bring this inventory number down you release reserves. So there are some benefits that we've seen quarter over quarter. The last couple of quarters quite frankly.

Speaker Change: Bringing inventory levels down those are kind of more onetime in nature. What is durable the great work that our operations team has done to reduce product costs that has been a real real benefit overall to the company and that is durable that we'll see those benefits throughout next year.

Chuck: I'm just, I'm just trying to pick on that because I would think that, generally, when it comes to component costs, you kind of have a lock on that 90 days ahead of the quarter. And so I'm just trying to understand where the biggest delta was between your expectations and how you actually materially outperformed. And if I could weave in, you know, as we look to the fiscal fourth quarter, we have historically generally seen gross margin expansion despite the loss of revenue leverage, you know, less promotions, a little bit more B2B mix than consumer mix. And so, why should we think about gross margins coming down so much sequentially? Maybe I'll start with that, then I have a follow-up question. Yeah, you know, a really, really good question.

Speaker Change: So I think our team precaution his team did such a great job on product costs shipping and logistics that was a real tailwind better than we had expected now thats reversing so you look at what's happening now with shipping rates Theyre going back up again fairly material on the Ocean. We also expect.

Speaker Change: Because of these disruptions to have to do more air and while we don't want to we don't want stock outs, where if a customer first mentality, but first thing is take care of the customer. So we will eat some margin.

Speaker Change: Take care of customer satisfaction, so air shipping.

Speaker Change: Higher Ocean rates, that's just a reality of where things are right now from a shipping standpoint is that transitory is that is that going to last throughout the year I can't predict but that is a headwind going into Q4.

And then the the overall.

Speaker Change: Leverage that you mentioned, that's just straight math and if you have peak quarter to trough quarter. There is an impact if you look at the impact you said last year you saw margin expansion that was primarily because of a fairly poor Q3 last year. So that was a I think that we over discounted and drove less volume in Q3, a year ago.

Chuck: So first of all, in the last few quarters, we've brought our inventory down significantly. When you bring this inventory number down, you release reserves. So there are some benefits that we've seen quarter over quarter, the last couple quarters, quite frankly, on bringing inventory levels down. Those are kind of more one-time in nature. What is durable, the great work that our operations team has done to reduce product costs, that has been a real, real benefit overall to the company. And that is durable; we'll see those benefits throughout next year. So you know, I thank our team. Prakash and his team did such a great job on product costs, shipping, and logistics. That was a real tailwind better than we expected. Now that's reversing.

Speaker Change: And our our.

Speaker Change: Global commercial teams, just really executed so well this past quarter and pricing discipline and Eric we had talked about that are on the the last few calls we were set up with our retailers and E. Tailers, we had really gone through the promotional plans and the account planning and our teams on the ground just land that's such a great quarter.

Speaker Change: From a promotional standpoint, so I think that that 38% to 40% gross margin. If you do the math and you deduct what is the range for for Q4, it's roughly 38% to 40%.

Chuck: So you know, what's happening now with shipping rates; they're going back up again, fairly material on the ocean. We also expect, because of these disruptions, to have to do more air. And while we don't want to, we don't want stockouts. We have a customer-first mentality. The first thing is to take care of the customer.

Speaker Change: Midpoint to high end is doable at the low end it would be more air shipping. So I think we're set up for a really strong fiscal Q4, but these uncertainties on the freight and logistics side are what gives us pause at this point in time.

Speaker Change: Okay very fair. Thank you for that detail Chuck and then I don't know if this is properly posed to you or to hanukkah, but you bought back more stock this quarter than I think any quarter over the last 10 years.

Chuck: So we will eat some margin to take care of customer satisfaction. So air shipping, higher ocean rates, that's just a reality of where things are right now from a shipping standpoint. Is that transitory? Is that going to last throughout the year? I can't predict.

Speaker Change: You also reduce capex relative to your prior expectations. So are you guys maybe signaling a change in your capital allocation priorities.

Chuck: But that is a headwind going into Q4. And then the overall, you know, leverage that you mentioned, that's just, you know, straight math. And if you have, you know, you know, peak quarter to trough quarter, there is an impact.

Speaker Change: And why not.

Speaker Change: Kind of striving to get back to growth realize the macro is a big factor here, but maybe why not utilize the excess cash you generated to lean into capex, and whether thats more product launches or better expansion or whatever it might be but but why not kind of lean into that capex to maybe help get you back to that kind of target.

Chuck: If you look at the impact, you know, you said last year that you saw margin expansion, that was primarily because of a fairly poor Q3 last year. So that was, I think, you know, that we over discounted and drove less volume in Q3 a year ago. And our global commercial teams just really executed so well this past quarter in terms of pricing discipline. And Eric, we had talked about that on the last few calls; we were set up with our retailers and e-tailers, we had really gone through the promotional plans, and the account planning, and our teams on the ground just had such a great quarter from a promotional standpoint. So, you know, I think, you know, that 38 to 40% gross margin, if you do the math, and you deduct what the range is for, you know, for Q4, it's roughly 38 to 40%. Midpoint to high end, it's doable at the low end; it'd be more air shipping.

Speaker Change: Growth range little easier faster, however, you might think about it and that's it for me. Thank you.

Speaker Change: Really good question, there I'll talk a little more detail Hanukkah and maybe you want to talk about our capital allocation strategy at a higher level.

Speaker Change: First of all on Capex, I would not read into that Capex itself.

Speaker Change: At this point is down but don't read into that that's just operating discipline. We are very very focused on driving.

Speaker Change: Efficiency and spend we will invest for growth growth is our top priority.

Speaker Change: How we invest in our capital allocation model and then overall.

Speaker Change: If you think of the buybacks we sat in the beginning of the quarter, we saw the cash numbers, improving getting better and better and better and so what we did is we decided to increase the buyback given how great of a cash quarter. We had we generated 443 million of operating cash flow one of our best quarters ever and when we saw that day.

Unnamed Host: So I think we're set up for a really strong fiscal Q4. But these uncertainties on the freight and logistics side are what give us kind of a pause at this point in time. Okay, very fair. Thank you for that detail, Chuck.

Speaker Change: They are coming in we decided to increase the buybacks to return more capital to shareholders, but don't read into the Capex spending because it will go back up next year, we've done very little M&A, we have invested heavily in the business. We will we would definitely we will invest and prioritize investments in technology.

Chuck: And then, I don't know if this is properly posed to you or to Hanukkah, but you brought back more stock this quarter than I think any quarter over the last 10 years. You also reduced CapEx relative to your prior expectations. So are you guys maybe signaling a change in your capital allocation priorities? And why not, you know, as you're kind of striving to get back to growth, realize the macro is a big factor here, but maybe why not utilize the excess cash you generated to lean into CapEx and, you know, whether that's more product launches or better expansion or whatever it might be, but why not kind of lean into that CapEx to maybe help get you And that's it for me. Thank you so much.

Speaker Change: To drive long term growth so don't read into the the Capex reduction as being a we're pulling back. We are we are focused on driving growth.

Speaker Change: It's really more operational discipline Hanukkah do you want to talk about the high level capital allocation strategy, Yes, sure and let me first just confirm what you just said I mean.

Hanukkah Arnica: We we will make the right capex investments in case of future.

Hanukkah Arnica: We're looking at those for next year right now so don't take this as we're pulling back on Capex.

Hanukkah Arnica: In terms of our long term capital allocation strategy that really hasnt changed.

At the top of their list paying the dividend number two M&A when the right thing comes along we are definitely looking and then only number between returning cash to shareholders in the form of buybacks.

Chuck: Yeah, that's a really good question there. I'll go into a little more detail, Hanukkah, maybe you want to talk about our capital allocation strategy at a higher level. You know, first of all, on CapEx, I would not read into that. CapEx itself, at this point, is down, but don't read into that. That's just operating discipline.

Speaker Change: Thank you Eric.

Speaker Change: Okay.

Speaker Change: Great. Our next question is from <unk> Wagner at Stifel.

Wagner: Yeah. Thank you for letting me on.

Wagner: And that'll come Hanukkah. My first question would be to you now that you are 60 days.

Chuck: We are very, very focused on driving efficiency and spending. We will invest for growth. Growth is our top priority, and that is how we invest in our capital allocation model. And then overall, if you think of the buybacks, we sat at the beginning of the quarter, we saw the cash numbers improving, getting better and better and better. And so what we did is we decided to increase the buyback given how great of a cash quarter we had. We generated 443 million in operating cash flow, one of our best quarters ever.

Wagner: Logistic can you say or can you share.

Wagner: Already some thoughts.

Logistic: What needs to be addressed or what you need to do differently.

Logistic: And as a follow up you mentioned M&A as a second priority when would you be in a position to become more active again.

Speaker Change: Yes. Thank you a very nice to meet you.

Speaker Change: I'm 60 days in so it's a little early to say anything about anything.

Speaker Change: So, let's say upfront we have a.

Speaker Change: At an Investor day planned for May.

Chuck: And when we saw that data coming in, we decided to increase the buybacks to return more capital to shareholders. But don't read into the CapEx spending because it will go back up next year. We've done very little M&A.

Speaker Change: We'll come out with much more detail, but I'll give you a few first impressions.

Speaker Change: This is a really good company would be my top line impression, we're really well positioned for future growth with the spaces that the portfolios in cell hybrid work gaming and video conferencing. All are good places good neighborhoods to plan.

Chuck: We have invested heavily in the business. We definitely will invest in and prioritize investments in technology to drive long-term growth. So don't read into the CapEx reduction as being a we're pulling back. We are focused on driving growth. It's really more operational discipline.

Speaker Change: Then we have fantastic and I've been so impressed.

Hanukkah, do you want to talk about the high-level capital allocation strategy? Yeah, sure. And let me first just confirm what you just said.

Speaker Change: Onboard it with our product our engineering and our design capabilities that allows us to innovate and that will allow us to win going forward.

I mean, we will make the right CapEx investments for the future, and we're looking at those for next year right now. So don't take this as we're pulling back on CapEx. And in terms of our long-term capital allocation strategy, that really hasn't changed. At the top of the list, paying a good dividend. Number two, M&A; when the right thing comes along, we are definitely always looking. And then only number three, returning cash to shareholders in the form of buybacks. Thank you, Eric.

Speaker Change: And then there are few things that I've been impressed with is the brand.

Speaker Change: Really solid global brand.

Speaker Change: But that also brings me to an opportunity, we probably have an opportunity to make that brand truly iconic and.

Speaker Change: Take it from good to great. If you will.

Speaker Change: And then finally.

Speaker Change: Nice mix of <unk>.

Speaker Change: We touched on that earlier and the last thing would be this company really is a sustainability pioneering tech which is great to see and something we'll definitely want to continue to be.

Unnamed Host: Great. Our next question is from Juergen Wagner at Stiefel. Yeah, thank you for letting me on, and welcome.

Speaker Change: So I would say all of those things will want to keep and cherish.

Speaker Change: And leverage to drive growth going forward.

Unnamed Host: Hanneke, my first question would be to you now that you have been 60 days at Logitech. Can you say, or can you share? already some thoughts about what needs to be addressed, what you need to do differently, and as a follow-up. You mentioned M&A as a second priority; when would you be in a position? and Hamoy.

Speaker Change: A few things I would change as well, but it may be too early to talk about those right now.

Speaker Change: When it comes to M&A again details much too early but an important part of our capital allocation strategy.

Speaker Change: Okay. Thank you.

Speaker Change: Our next question is from Ananda Brown at loop.

Yeah, Juergen, thank you. Very nice to meet you. I'm 60 days in, so it's a little early to say anything about anything. And so I'll say up front, we have an investor day planned for May, where we'll come out with much more detail. But I'll give you a few first impressions.

Oh, yes. Thanks, Thanks, guys. Good morning, Thanks for taking the questions Hanukkah lump into the conversation.

Speaker Change: Yes, So I guess just real quick on the Chuck on the long term growth model you mentioned I think I think you said high single digits.

This is a really good company, would be my top line impression. We're really well positioned for future growth with the spaces that the portfolio is in. So hybrid work, gaming, and video conferencing, all are good places, good neighborhoods to play in.

Speaker Change: I guess the question then you mentioned M&A.

Speaker Change: Being a meaningful contributor to that so I guess the question is is that does that high single digit organic can you talk to that yet over time or is that high single digits with the M&A and.

Then we have fantastic, and I've been so impressed as I've onboarded with our product or engineering and our design capabilities. That allows us to innovate, and that will allow us to win going forward. Another few things that I've been impressed with are the brand, a really solid global brand. But that also brings me to an opportunity.

Speaker Change: Sort of any organic TBD.

Speaker Change: Damn it.

Speaker Change: I.

Speaker Change: I really thank you.

The 8% to 10% is basically that number is derived from the historical growth rates pre pandemic, obviously the pandemic of U.

We probably have an opportunity to make that brand truly iconic. Take it from good to great, if you will. And then finally, a nice mix of B2B and B2C. We touched on that earlier. And the last thing would be that this company really is a sustainability pioneer in tech, which is great to see and something we'll definitely want to continue to be. So I would say all of those things we'll want to keep and cherish and leverage to drive growth going forward. There probably are a few things I would change as well, but it may be too early to talk about those right now.

Speaker Change: 70 ish percent growth. So you got to kind of take those those those years out, but that's really the add the average growth rate.

Speaker Change: For the 10 years pre pandemic some years it was 4% some years it was 14, but it averaged in that 8% to 10% range that included importantly, many key acquisitions. We are very good at M&A, we find the right companies, we exploit that technology and if you look at what we're great at and we have these global.

Speaker Change: Distribution channels at scale. So we can go buy companies plug them into our network and exploit that technology. We have an operations team that can drive product costs down and do a really good job as Hanukkah mentioned this iconic brand. So I think we have this great machine that can plug companies.

Unnamed Host: And when it comes to M&A, again, details much too early, but an important part of our capital allocation strategy. Okay, thanks. Our next question is from Ananda Baruah at Loop. Oh, yeah, thanks. Thanks, guys. Yeah, good morning. Thanks for taking the questions. Hanukkah.

Speaker Change: And so the eight to 10.

Speaker Change: Accounts M&A, that's part of the Formula for sure.

Speaker Change: But there.

Speaker Change: There is nothing planned in the short term horizon Hanukkah is brand new.

Unnamed Host: Welcome to the conversation. Yeah, so just real quick on the long-term growth model you mentioned, Chuck. I think you said high single digits. I guess the question, and you mentioned M&A as being a meaningful contributor to that. So I guess the question is, is that high single digits organic?

Speaker Change: Working on the strategy, so I wouldn't expect any big announcements anytime soon but it's an important part of our long term growth rates, nor are we predicted to get back to that rate anytime. Soon this is a long term financial model. The part that we are executing on today is the is the gross margins of 39 to 44, keeping opex at roughly.

Chuck: Can you talk about that yet over time? Or is it high single digits with the M&A and, you know, sort of in the organic TBD? Yeah, really, yeah, thank you.

Speaker Change: <unk> 25 in generating a very healthy operating income that is right now thats today, we feel very good about that a couple of quarters ago. We said that was six or eight quarters out. We're very excited about executing on that part of the long term financial model today, but overall.

Chuck: That, the 8 to 10% is basically, that number is derived from the historical growth rates pre-pandemic. Obviously, the pandemic, if you, you know, it's 70-ish percent growth. So you've got to kind of take those years out.

Speaker Change: Growth is the focus we just want to be cautious going into next year and then we'll talk at analyst day more about the model and our thoughts on M&A and whatnot, but yes eight to 10 is not organic it's organic plus M&A and M&A is a key key part of that.

Chuck: But that's really the average growth rate for the 10 years pre-pandemic. You know, some years it was 4%, some years it was 14, but it averaged in that 8 to 10% range. That included, importantly, many key acquisitions. We are very good at M&A. We find the right companies, and we exploit that technology. And if you look at what we're great at, we have these global distribution channels at scale. So we can go buy companies, plug them into our network, and exploit that technology.

Speaker Change: Got it that's super helpful and clear.

Clarification quickly then I have a quick follow up question. When you say next year, we're talking fiscal 'twenty five so really go calendar 'twenty four.

Speaker Change: Yes fiscal 'twenty five starting April one of next year, that's right or this year sorry, Yeah, Yeah got it and you guys had mentioned in the prepared remarks, I think it may have been high and mentioned this.

Chuck: We have an operations team that can drive product costs down and do a really good job, and, as Hanukkah mentioned, this iconic brand. So I think we have this great machine that can plug companies in. So the 8 to 10 counts of M&A. That's part of the formula for sure. But, you know, there's nothing planned in the short-term horizon. Hanukkah's brand new.

Speaker Change: AI as an opportunity for the company any context, you can give there and I guess really what I'm wondering is are there things that sort of you look and say to the incrementally new to the company.

Speaker Change: Turns of value add for market cap of Kennedy's categories, which you could go in that.

Chuck: You know, we're working on the strategy. So I wouldn't expect any big announcements anytime soon. But it's an important part of the long-term growth rate. Nor are we predicting to get back to that rate anytime soon.

Speaker Change: That youre thinking about that that sort of behind closed doors that classically fit into the ecosystem of products with the company has had historically.

Speaker Change: Yes.

Yes, Im happy happy to take that because that's one of the other areas where am I see a lot of opportunity.

Chuck: This is a long-term financial model. The part that we are executing on today is the gross margins of 39 to 44, keeping OPEX at roughly 25, and generating a very healthy operating income. That is, right now. That's right now.

Speaker Change: Really two ways that we're leveraging AI at logitech today.

Speaker Change: And of course as internally on productivity like every other company and that's table Stakes, but it's well underway here.

Chuck: We feel very good about that. A couple quarters ago, we said that it was, you know, six or eight quarters out. We're very excited about executing on that part of the long-term financial model today. But overall, you know, growth is the focus. We just want to be cautious going into next year, and then we'll talk more about the model and our thoughts on M&A and whatnot. But yes, 8 to 10 is not organic.

Speaker Change: Whether thats in supply chain and marketing using co pilot chat GPT and our own large language models, so that's well underway.

Speaker Change: I'm more excited about is in our products and our innovation and again.

Speaker Change: I'll mention three things that I'm excited about and that are already out there, but they are there.

Speaker Change: They can tell you a little bit about what's to come as well so on the video conferencing site.

Chuck: It's organic plus M&A, and M&A is a key part of that. Got it. That sounds super helpful, and I have just a quick clarification, and then I have a quick follow-up question. When you say next year, we're talking fiscal 25, so really calendar 24, yeah, fiscal 25 starting April 1st of next year. That's right. Or this year, sorry.

Speaker Change: Side of the business with a new product out Culp site, which is a panoramic video conferencing camera that can fit right in the middle of the year conferencing table that one is like having a television producer in your meeting and you'll get perfectly framed your audio it's perfect.

Speaker Change: Video is perfect. So I love that and that Leverages AI to get that done so that's on the video conferencing.

Unnamed Host: Got it. And you guys had mentioned in the prepared remarks, I think it may have been Hanukkah who mentioned this, AI as an opportunity for the company. Any context you can give there, and I guess really what I'm wondering is, are there things that you would consider to be incrementally new to the company in terms of value add for market share opportunities, new categories that you could go into that you're thinking about that sort of behind closed doors that classically fit into the ecosystem of products that the company has historically offered? Yeah, I'm happy to take that because it's one of the other areas where I see Really, there are two ways that we're leveraging AI at Logitech today.

Then on headsets.

Speaker Change: The zone to wireless headset.

Speaker Change: Just out again also leverages AI technology and here to consumer insight is and I hate this myself youre talking to someone you have a headset on that other person is at an airport or in there is outside and there is a ton of ambient noise on the other side.

Speaker Change: Leveraging AI this new headset canceled ambient noise on both sides, which is super cool so really great chronic so those are two product examples the last one.

Speaker Change: Is on their software.

One, of course, is internally and productively, like every other company, and that's table stakes. But it's well underway here, whether that's in supply chain and marketing, using Copilot, ChatGPT, and our own large language models. So that's well underway. The other area I'm more excited about is our products and our innovation. And again, I'll mention three things that I'm excited about and that are already out there, but they can tell you a little bit about what's to come as well. So on the video conferencing side of the business, we have a new product out called Sight, which is a panoramic video conferencing camera that you sit right in the middle of your conference table. That one is like home.

Phil.

Speaker Change: If you have any of our products, whether it's a mouse or keyboard you can download software that goes with that.

Speaker Change: One of the features it's called Smart actions, where you automate somewhat repetitive tasks.

We've seen in the last four or five months is that by far the number one repetitive tasks that our users are simplifying.

Speaker Change: Called reply with Todd GPT.

Speaker Change: Nine times as much as any other smart action. So again it shows how we can help both through our hardware and our software.

Speaker Change: White consumers more with AI, sorry, it's a bit of a lengthy answer but I am excited about the opportunities for innovation.

Speaker Change: We can leverage in our products and aggressively could get from that.

Speaker Change: That's helpful.

It's like having a TV producer in your meeting, and you get perfectly framed. Your audio is perfect. Your video is perfect.

Speaker Change: In the three you just mentioned right there like to me that would be more suggestive of potential market share gain opportunities or product stickiness opportunity something along those lines.

So I love that, and that leverages AI to get that done. So that's on video conferencing. Then on headsets, the Zone 2 wireless headset, which is just out, again, also leverages AI technology. And here the consumer insight is, and I hate this myself. You're talking to someone. You have a headset on.

Speaker Change: Got it great. Thanks, guys appreciate it.

Speaker Change: Our next question is from Yoran <unk> at UBS.

Yoran: Hello, everybody and nice to meet you arnica.

Yoran: For taking my questions.

Speaker Change: The first one would be please to you Hanukkah may I quickly.

Speaker Change: Ask you when you look over the next three to five years.

Speaker Change: Do you think the categories and the segments logic has right now is the right base to be too to try if your crow's vision.

That other person is in. They're in an airport or are outside, and there's a ton of ambient noise on the other side. So that's on the video conferencing side of the business. Leveraging AI, this new headset cancels ambient noise on both sides, which is super cool. So really great products. So those are two product examples. The last one is about our software. So if you have any of our products, whether it's a mouse or a keyboard, you can download the software that goes with that. One of the features is called smart actions, where you can automate some of your repetitive tasks.

Speaker Change: I also willing to go into new end markets like for example health care.

Speaker Change: It would be necessary to maintain the growth model going forward.

Speaker Change: I think and we're planning some really great spaces. So.

Speaker Change: Big space.

Space work and play.

Speaker Change: What people do in lifestyle, we plan some gargantuan spaces in there.

Speaker Change: They give us good growth within that are there verticals, we could step on a little harder, possibly and that's what we're exploring in our strategy work right. Now so early for me to say, yes, or no, but we'll be back on that in May.

What we've seen in the last four or five months is that by far, the number one repetitive task that our users are simplifying is something called reply with chat GPT, nine times as much as any other smart action. So again, it shows how we can help, both through our hardware and our software, delight consumers more with AI. Sorry, it's a bit of a lengthy answer, but I'm excited about the opportunities for innovation that we can leverage in our products and the growth we could get from that. Yeah, no, that's helpful.

Speaker Change: Yeah sure I appreciate this.

Speaker Change: And then the second question.

Speaker Change: The coupon on the quarter. Please.

Speaker Change: Mentioning.

Speaker Change: That outside the promotion.

Speaker Change: Season, which was black Friday, cyber Monday volumes without a bit short of your expectations.

Speaker Change: This is linked to two macro end market weakness or is this linked to the market share losses. I think you also mentioned a couple of market share losses also gains of course, but also some share losses like gaming keyboards for example.

Unnamed Host: And so, like in the three you just mentioned right there, to me, that would be more suggestive of potential market share gain opportunities or product stickiness opportunities, something along those lines. Got it. Great. Thanks, guys. Our next question is from Joern Iffert, AUBS. Hey, Joern.

Speaker Change: China and then other than other stuff. So is it also link to share losses. Many macro yes, I think generally I would characterize the quarter from a share standpoint, as a strength not a weakness so on balance.

Speaker Change: We executed well and I think when the dust settles and the final reporting comes in it's not all finally, India, we need to see all the final data coming in.

Unnamed Host: Yeah, hello, everybody. And nice to meet you, Haneke. Thanks for taking my questions. And the first one would be, please, to you, Haneke.

Speaker Change: It'll show on balance we gained share across key categories. The categories, where we may have some challenges is where we had older products and NPI or new product introductions are on the way so I feel on the share side.

May I quickly ask you, when you look at the next three to five years... Do you think the categories and the segments Logic has right now are the right place to be to drive your growth vision, or are you also willing to go into new end markets, like, for example, healthcare, which could be necessary to maintain the growth model going forward? I think we're playing in some really great spaces, so the big, for a call. Yeah, sure, I appreciate this. And then the second question, a little more technical one on the quarter, please. You were mentioning that outside the promotion season, which was back on Friday, Saturday, and Monday, volumes were a little bit short of your expectations. Is this linked to macro and market weakness, or is this linked to market share losses?

Speaker Change: Pretty good I think overall.

Speaker Change: The consumer as it was a year ago was looking to buy on promotion.

Speaker Change: In the run rate business globally.

Speaker Change: Was more challenged outside of the promotional windows.

Speaker Change: And we're seeing that so far in the first few weeks of this quarter. So I don't.

Speaker Change: Is it hard to its hard to say is that interest rates is it consumer confidence is okay. Right. Now is in enterprise spending I think it's kind of all of the above I think theres, just a little bit of uncertainty out there and that gives us a little bit of caution going into Q4 and into next year on when will that return I think there is news about.

Speaker Change: Sticky inflation and maybe your rates won't get cut there's a lot of macro factors that we read in the news every day and I think that translates into our customers.

I think you also mentioned a couple of market share losses, also gains, of course, but also some share losses, like gaming keyboards, for example, China, and other stuff. So is this also linked to share losses or mainly macro? Yeah, I think generally, I would characterize the quarter from a share standpoint as a strength, not a weakness. So on balance, we executed well.

Speaker Change: Buying our products and other company's products, but I don't I would not say that is a share issue I think our share is strong and is doing quite well across the board outside of some key pockets that were addressing anything hanukkah you'd like to add.

There is that okay.

Speaker Change: Okay. Thank you erinn, thanks, a lot.

Okay.

Speaker Change: Our next question is from Andreas Mueller <unk> Andreas.

Andreas Mueller: Yes, hi, everybody.

Andreas Mueller: Hi, <unk> good to see.

Andreas Mueller: <unk> booth.

Chuck: And I think when the dust settles and the final reporting comes in, it's not all finally in yet; we need to see all the final data coming in. I think it'll show, on balance, we gain share across key categories. The categories where we may have some challenges are where we have older products and NPIs or new product introductions are on the way. So I feel on the share side, pretty good.

Andreas Mueller: Can you discuss maybe the gap between sandal selling and sell through particularly in the Americas.

Andreas Mueller: Is this seasonal or do you see your clients already increasing inventories sustainability there.

Speaker Change: Thank you Andreas.

Speaker Change: The chart, you're referring to in our earnings deck shows.

Speaker Change: Sell through and sell in and I'll, just say I don't like that chart in general we've.

Chuck: I think overall, you know, the consumer, as it was a year ago, was looking to buy on promotion, and the run rate business globally was more challenged outside of the promotional windows. And we're seeing that so far in the first few weeks of this quarter. So I don't, you know, it's hard to say, is that interest rates?

Speaker Change: We've agreed to keep it through this year and will revise it to make it more meaningful at analyst day.

Speaker Change: Data shows that Americas sell through was down 4%, yet we saw fairly strong.

Speaker Change: Revenue growth actual.

Chuck: Is, you know, consumer confidence okay right now? Is it enterprise spending? I think it's kind of all of the above.

Speaker Change: And so you look at that and say Gee, how can sell through be down but sell in go up you must be built channel inventory, we did not actually Americas channel inventory was roughly flat.

Chuck: I think there's just a little bit of uncertainty out there, and that gives us a little bit of caution going into Q4 and into next year as to when that will return. I think there's, you know, news about, you know, sticky inflation, and maybe rates won't get cut. There are a lot of, you know, macro factors that we read in the news every day. And I think that translates into our customers, you know, buying our products and other companies' products. But I don't, I would not say that it's a stock issue.

Speaker Change: What's driving that is less promotional activity or selling at a higher price and promoting less so the sell through is in gross dollars and the revenue is in net dollars and Thats just that delta of 700 basis points as the margin expansion.

Speaker Change: Spansion based on less promotional activity and efficient promo activity. So we're going to revise that chart to give you a little more view into kind of the changes in channel inventory, which is I think the better metrics. So I wouldn't read into that too much to kind of comparing apples and oranges, a little bit, but we didn't want to pull it.

Chuck: I think our share is strong, and it's doing quite well across the board outside of some key pockets that we're addressing. Anything, Hanuki, you'd like to add there? Okay. Thank you, Jarn. Thanks a lot. Our next question is from Andreas Mueller at GKB. Hey, Andreas.

Speaker Change: Just less than a year ago, I didnt want to pull that chart without replacing it with something to give you a better visibility. So there will be an update to that coming in may.

Speaker Change: But I would not read into that overall other than saying, we did a great job on driving north American promo activity during the holiday period.

Unnamed Host: Yes. Hi, everybody. Happy Hanukkah to you both.

Speaker Change: Okay. Thanks.

Speaker Change: My next question on the gross margin brokers, the lower product costs.

Unnamed Host: Can you discuss, perhaps, the gap between sell-in and sell-through, particularly in the Americas? Is this seasonal, or do you see your clients already increasing inventories sustainably there? Thank you, Andreas.

Speaker Change: You mentioned can you give some more details.

You mentioned.

Speaker Change: Production efficiency, but also.

Chuck: The chart you're referring to in our earnings deck shows sell through and sell in. And I'll just say I don't like that chart in general. We've agreed to keep it through this year, and we'll revise it to make it more meaningful at Analyst Day. That data shows that America's sell-through was down 4 percent, yet we saw, you know, fairly strong revenue growth, actual revenue growth. And so you look at that and say, gee, how can sell through be down but sell in go up? Oh, you must have built channel inventory. We did not do so.

Speaker Change: What was the impact of raw materials for example Asian currency re we tried that.

Speaker Change: Can you say something here.

Speaker Change: Certainly I missed the very first part of it was was it gross margin in Q4, yes.

Speaker Change: Yes.

Speaker Change: On the production side or products.

Speaker Change: Yes, so we had about 200 basis points of benefit year over year on product costs quarter over quarter. It was roughly in line, but a year ago to this year about 200 basis points of expansion that should be durable and should translate into future quarters as well.

Chuck: Actually, America's channel inventory was roughly flat. What's driving that is less promotional activity or selling at a higher price and promoting less. So the sell-through is in gross dollars, and the revenue is in net dollars.

Speaker Change: 200 basis points year over year was logistics Ocean Air freight and then there was some other kind of noise between lower promo and and.

Chuck: And that's just that delta of 700 basis points is the margin expansion based on less promotional activity and more efficient promo activity. So we're going to revise that chart to give you a little more view into kind of the changes in channel inventory, which is, I think, the better metric. So I wouldn't read into that too much, kind of comparing apples and oranges a little bit. But we didn't want to pull that out. I started just less than a year ago.

Speaker Change: And mix, but overall.

Speaker Change: The freight side is going to come back we're going to have more freight headwinds in Q4 that will be a challenge and then on the FX side.

Speaker Change: Year over year.

Speaker Change: Q3, it was about 100 basis point benefit as you look into.

Speaker Change: Q4 to Q4 and Q3 to Q4 <unk>.

Speaker Change: Currently FX is roughly flat so there'll be there should be no currency impact of course rates can change, but as we sit here today and you look at the euro and the pound and the the.

Chuck: I didn't want to pull that chart without replacing it with something to give you better visibility, so there will be an update to that coming in May. But I would not read into that overall, other than saying we did a great job driving North American promo activity during the holiday period. Thanks. And then my next question on cross-marching brokers, lower product costs were mentioned. Can you give me some more details?

Speaker Change: The various currencies around the world on balance.

Speaker Change: Year over year and quarter over quarter were roughly in line from Q3 to Q4.

Speaker Change: Okay.

Speaker Change: Then my last question because this is something about the opex items R&D and G&A.

Unnamed Host: I mean, you mentioned the product, production efficiency, but also Searstow, Georgia. Certainly. I missed the very first part.

Speaker Change: And do you expect the progression going forward.

Speaker Change: <unk>, how much was the impact.

Chuck: Was it gross margin in Q4? Yes, on the production side or on the products, you know. Yeah, so we had about 200 basis points of benefit year-over-year on product costs. Quarter-over-quarter, it was roughly in line, but a year ago to this year, about 200 basis points of expansion.

Speaker Change: Or was the increase actually one time in nature.

Speaker Change: Certainly so our Opex model is fairly straightforward, we want to spend roughly 25% of our revenue on Opex of course, an opex run a prioritize things like engineering product development.

Speaker Change: Go to market those are things that build health and build value long term then you have things like G&A and other costs that are necessary, but you want to be efficient on the spend so that's the overall model as a whole now if you look overall the details of what's happened in the quarter, we had CEO.

Chuck: That should be durable and should translate into future quarters as well. 200 basis points year-over-year was logistics, ocean, air, and freight. And then there was some other kind of noise between lower promo and mix.

Chuck: But overall, the freight side is going to come back. We're going to have more freight headwinds in Q4. That will be a challenge.

Speaker Change: <unk> costs that basically were onetime in nature and then we have really over performed this year financially and a year ago. We were underperforming. So as a result things like sales commissions and then variable compensation a year ago were unfunded.

Chuck: And then on the FX side, year-over-year, to Q3, it was about 100 basis points of benefit. As you look into Q4 to Q4 and Q3 to Q4, currently, FX is roughly flat. So there should be no currency impact. Of course, rates can change.

Speaker Change: Or are funded at a much lower level this year, where funding above plan given the above planned performance and so I wouldn't expect the over performance on variable comp to continue so much. So there are some one timers, but overall if you look at where opex as a percent of revenue obviously in our peak quarter it looks very.

Chuck: But as we sit here today and you look at the euro and the pound and the various currencies around the world, on balance, year-over-year and quarter-over-quarter, we're roughly in line from Q3 to Q4. And my last question, can you say something about the OPEX items R&D and G&A here and the expected progression going forward? For G&A, how much was the impact, or was the increase actually one time in

Speaker Change: Very impressive.

Speaker Change: But our model really is 25% approximately.

Speaker Change: Of revenue and it'll be a little higher likely in Q4, because it's our trough revenue quarter. So we're saying on average it's about 25% range, but we.

Chuck: Certainly. So, our OPEX model is fairly straightforward. We want to spend roughly 25% of our revenue on OPEX. Of course, in OPEX, we want to prioritize things like engineering, product development, and go-to-market. Those are things that build health and build value long-term. Then you have things like G&A and other costs that are necessary, but you want to be efficient with the spend. So, that's the overall model as a whole. Now, if you look overall at the details of what happened in the quarter, we had CEO transition costs that were basically one-time in nature, and then we really overperformed this year financially. A year ago, we were underperforming.

I feel really good about where this year is shaping up from an investment standpoint, and again prioritize investments on those things that grow shareholder value.

Speaker Change: Okay. Thank you very much and good luck.

Speaker Change: Thank you.

Speaker Change: Our next question is from Torsten <unk> at Kepler a thorsten.

Torsten: Hi, everyone.

Torsten: Congratulations to another strong quarter in fact, it feels like in the good old days right just with a few new faces regulatory meet Johan again, very happy to work with you.

Speaker Change: Thank you actually I have two little questions for me Firstly, a more technical one.

Speaker Change: See you have again touch the <unk> guidance to a very very low level can you. Please shed some light on that and also maybe try to give an outlook down.

Chuck: So, as a result, things like sales commissions and variable compensation a year ago were unfunded or funded at a much lower level. This year, we're funding above plan, given the above-plan performance. So, I wouldn't expect the overperformance on variable comp to continue so much. So, there are some one-timers, but overall, if you look at where OPEX is as a percent of revenue, obviously, in our peak quarter, it looks very impressive. But our model really is 25% approximately of revenue, and it'll be a little higher likely in Q4 because it's our trough revenue quarter. So, we're saying, on average, it's that 25% range.

Speaker Change: Certainly yes.

Speaker Change: Yes, if I may just to have it said already and we've seen the departure of your design has a list of Curtis I think I have considered some of key person right.

Speaker Change: So maybe can you walk us through the strategy with respect to running to design operation to design team that lets you take going forward. Thank you certainly I'll take the first one and into the second one.

Speaker Change: On the tax side, we had reached agreement with the Canton, Nevada, where we're headquartered this past quarter or two.

Speaker Change: Increase the basis of the business overall that allows for a larger amortization.

Chuck: But I feel really good about where this year is shaping up from an investment standpoint. And again, prioritize investments in those things that grow shareholder value. Thank you very much and good luck. Thank you. Our next question is from Torsten Sauter at Kepler. Hey, Torsten. Hi, how are you?

Speaker Change: And a tax deduction and this is because we have significantly grown our footprint in Switzerland, we're very proud of the incredible talent that we have.

Unnamed Host: Well, congratulations on another strong quarter. In fact, it feels like the good old days, right? Just with a few new faces.

Speaker Change: And Lazard, so with our increased investment and having a much larger employee base.

Very glad to meet you, Harnik, and very happy to work with you. Yeah, thank you. Actually, I have two little questions, if I may. First, a more technical one.

Speaker Change: We reached agreement with the government and they were really great to work with and they're proud of are the work we've done there.

Speaker Change: And because of that there is kind of a onetime benefit that you saw this quarter. There's a couple of other smaller items as well on the U S tax side, we have a.

Unnamed Host: I see you have again cut the tax guidance to a very, very low level. Can you please shed some light on that and also... I'm not sure I think you went out there.

Chuck: And if I may, just to have it said already, we've seen the departure of your design head, Alistair Curtis. I think I had considered him a key person, right? So maybe you could guide us through the strategy with respect to running the design operation, the design team at Logitech? Certainly, I'll take the first one, and you can take the second one.

Speaker Change: One time larger deduction.

Speaker Change: In the U S for our foreign operations that basically is a standard kind of.

Speaker Change: Practice that we had gone through analyze this and our tax team just did a phenomenal job in.

Chuck: On the tax side, we reached agreement with the Canton of Vaud, where we're headquartered, this past quarter to increase the basis of the business overall, which allows for a larger amortization and a tax deduction. This is because we have significantly grown our footprint in Switzerland. We're very proud of the incredible talent that we have in Lausanne.

Speaker Change: This past quarter those are onetime in nature. So if you look at the results. This quarter those will not repeat if you think structurally whereas the company next year on a tax standpoint, the GAAP tax rate is going to be in the low 20% range. So low twenties on the GAAP side and of course that can change.

Speaker Change: Share price is a fairly big impact on the overall GAAP tax rate, but think low twenty's from a GAAP standpoint, and the non-GAAP side for next year is going to be low teens, and that's sort of the cash tax rate that we pay plus accruals. So the non-GAAP tax rate is cash taxes paid plus accruals low.

Chuck: With our increased investment and having a much larger employee base, we reached an agreement with the government, and they were really great to work with, and they're proud of the work we've done there. And because of that, there's kind of a one-time benefit that you saw this quarter. There are a couple other smaller items as well.

Speaker Change: Teens GAAP low Twenty's. This quarter was really a one time based on the really hard work that our team did in and based on our investment in Switzerland et cetera. So.

Chuck: On the U.S. tax side, we have a one-time larger deduction in the U.S. for foreign operations that basically is a standard kind of practice that we've gone through, analyzed this, and our tax team just did a phenomenal job this past quarter. Those are one-time in nature, so if you look at the results this quarter, those will not repeat. If you think structurally, where the company is next year from a tax standpoint, the GAAP tax rate is going to be in the low 20% range, so the low 20s on the GAAP side, and of course, that can change. The share price has a fairly big impact on the overall GAAP tax rate, but think low 20s from a GAAP standpoint.

Speaker Change: We did provide guidance in the materials for this year non-GAAP, 9% to 11%. So overall, though I would in the models for next year.

Speaker Change: On the low teens non-GAAP low Twenty's gap Hanukkah, you want to talk about design yeah. Thanks for asking the question.

Speaker Change: Design plays a really really special.

Roll at Logitech, and it's a real point of difference for us.

Speaker Change: Now.

Speaker Change: Alastair over the last decade built a fantastic design organization Thats one of the other things I learned in my first six.

Chuck: And the non-GAAP side for next year is going to be low teens, and that's sort of the cash tax rate that we pay plus accruals, so the non-GAAP tax rate is cash taxes paid plus accruals, low teens, GAAP, low 20s. This quarter was really a one-time gain based on the really hard work that our team did and based on our investment in Switzerland, et cetera. So we did provide guidance in the materials for this year, non-GAAP, 9% to 11%. So overall, though, I would, in the models for next year, count on the low teens, non-GAAP, and low 20s, GAAP. Hanukkah, do you want to talk about design?

Last week.

Speaker Change: We have more than 200 internal designers.

Logitech.

Speaker Change: And they are fantastic. So it's actually in the last quarter. They as a team won the global Red Dot design team Award.

Speaker Change: Again in this industry and beyond I really prestigious award so.

Speaker Change: I am thankful for the organization and the culture. The design culture Thats been created Logitech and I think with the with the team that we have.

Yeah, thanks for asking the question. Design plays a really, really special role at Logitech, and it's a real point of difference for us. Now, Alistair, over the last decade, has built a fantastic design organization. That's one of the other things I learned in my first six weeks.

Speaker Change: Of designers I have no doubt, we're going to continue to excel in design.

Speaker Change: Thanks for asking.

Speaker Change: Great. Thank you.

Speaker Change: Our next question is from Martin inflation at BNP.

Martin: Yes, hi, everyone. Thanks for taking my question and I Hope you can hear me.

We have more than 200 internal designers at Logitech, and they're fantastic. So actually, in the last quarter, they, as a team, won the Global Red Dot Design Team Award, which is, again, in this industry and beyond, a really prestigious award. So I'm thankful for the organization and the culture, the design culture that has been created at Logitech, and I think with the team that we have of designers, I have no doubt we're going to continue to excel in design. So thanks for asking. Great, thank you. Our next question is from Martin Jumflesch at BNP. Yeah, everyone. Thanks for taking the question. I hope you can hear me.

Martin: So congrats on the strong set of numbers so maybe two questions.

Martin: First one is on coming back on the cost side I think the webinar.

Martin: Simba.

Martin: So you mentioned that R&D will remain a key focus area for you and you also just pointed out a few innovations.

Martin: Q3, R&D costs up 9%.

Martin: Expect this cost trying to keep increasing that.

Martin: Magnitude in the coming quarters.

As well.

Martin: And then the second question is on the China gaming curves.

Martin: These routes have been taken off the website.

Speaker Change: Good morning.

Speaker Change: But just wondering if you've seen any negative impacts so far if you would expect.

Unnamed Host: And also, congratulations on the strong set of numbers. So maybe two questions. First, I want to comment on the cost side. I think at the webinar in early December last year you mentioned that R&D will remain a key focus area for you, and you also just pointed out a few innovations. Now in Q3, R&D costs are up 9%. We expect this cost line to keep increasing by that magnitude in the coming quarters, as well. And then the second question is on the Chinese gaming curbs. These rules have been taken off the website this morning.

Speaker Change: It could have impacts and also if you could just remind us on the rough.

Speaker Change: Posted that you have in China and gaming. Thank you.

Speaker Change: Yes, I didn't understand the comment that the China comment from this morning ill in general.

Speaker Change: China gaming.

Speaker Change: Is a really important market for us we have an iconic brand.

Speaker Change: And the consumers in China preferentially pick our brand at the high end Theres lots of low end competition, it's a big market overall.

Speaker Change: China's results were roughly flat so we had.

Asia was down.

Speaker Change: In general so more challenging across Asia, but China actually we performed quite well relative to our expectations are clear.

Unnamed Host: But just wondering if you have seen any negative impacts so far, or if you would expect any negative impacts. And also, if you could just remind us of the rough, hostages that you have. China.

Speaker Change: Clearly.

It's a big market and it's very competitive, but preferentially they choose better technology and a better brand at the high end do you want to add anything on China, but before we talk about opex.

Chuck: Yeah, I didn't understand the comment, the China comment from this morning. In general, China gaming is a really important market for us. We have an iconic brand, and the consumers in China preferentially pick our brand at the high end. There's lots of low-end competition. It's a big market. Overall, China's results were roughly flat.

Speaker Change: Important.

Speaker Change: And I like what I'm seeing in terms of our premium offering there so the pro lite mice, especially.

Speaker Change: And it's.

Speaker Change: In any business, China is super competitive that keeps us honest, so we'll be all over that market, great and then on the Opex question.

Chuck: Asia was down in general, so it was more challenging across Asia, but China, actually, we performed quite well relative to our expectations. Clearly, it's a big market, and it's very competitive, but preferentially, they choose better technology and a better brand at the high end. Do you want to add anything about China before we talk about OpEx? It's very important, and I like what I'm seeing in terms of our premium offering there, so the ProLite mice, especially. In any business, China is super competitive.

Speaker Change: Would expect engineering quarter over quarter to be roughly in line with the prior quarter and I would expect G&A and sales and marketing to come down and the reason I believe that is because sales and marketing has variable commissions tied to sales and with peak quarter to trough quarter, you have less commissions that you pay based on.

Speaker Change: On the sales change just due to normal seasonality and then of course, the onetime transition costs that you see in the G&A line. So overall R&D quarter over quarter should be roughly in line and then of course next year.

That keeps us honest, so we'll be all over that market. Great Then on the OpEx question, I would expect engineering quarter over quarter to be roughly in line with the prior quarter, and I would expect G&A and sales and marketing to come down. The reason I believe that is because sales and marketing has variable commissions tied to sales, and with peak quarter to trough quarter, you have fewer commissions that you pay based on the sales change just due to normal seasonality, and then, of course, the one-time transition costs that you see in the G&A line.

Speaker Change: We will have to talk about that at analyst day, but again in total I would be estimating roughly 25% of revenue in your models.

Speaker Change: Perfect. Thank you.

Speaker Change: Hanukkah Chuck our last question for today is from Michael foot at Vontobel.

Speaker Change: Hey, Michael Yes, hi, good to CEO. Thanks for letting me on two two last questions for me. The first one is on inventories you, obviously made a great job in reducing inventory levels. My question is where.

Chuck: Overall, R&D quarter over quarter should be roughly in line. Then, of course, next year, we'll have to talk about that at analyst day, but again, in total, I would be estimating roughly 25% of revenue in your models. Thank you. Thank you. Hanukkah Chuck, our last question for today is from Michael Foeth at Vantabel, and Michael. Yes, hi, good to see you all.

Speaker Change: We're sort of is the limitation to that inventory reduction and if you can give a bit more specifics on the whole <unk> situation any disruptions there in terms of fuel supply chains or deliveries shipments.

Speaker Change: And the related inventory that you would need to build up to counter that.

Speaker Change: And then my second question would be.

Speaker Change: And I'll ask it straight away.

Unnamed Host: Thanks for letting me on. Just two last questions from me. The first one is on inventories. You obviously did a great job reducing the inventory levels. My question is, where sort of is the limitation to that inventory reduction? And if you can give a bit more specifics on the whole Red Sea situation, any disruptions there in terms of your supply chains or deliveries, shipments, and the related inventory that you would need to build up to counter that. And then my second question would be, and I'll ask it straight away, you mentioned obviously in terms of growth for 2025, the trajectory that you depicted in your shareholder letter. It leaves a little room for interpretation in terms of where the trajectory goes. It looks like it would go slightly into the positive, but maybe not to that high single-digit growth. Is it correct that you're expecting it to turn slightly positive, but maybe not as fast as your long-term model?

Speaker Change: You mentioned, obviously in terms of gross for 2025% trajectory.

Speaker Change: That you've depicted in your in your shareholder letter it Lee.

Speaker Change: A little bit room for interpretation.

Speaker Change: And in terms of where the trajectory goes it looks like it could go slightly into the positive but maybe not.

Speaker Change: To that.

Speaker Change: High single digit growth is it correct that you.

We're expecting it to turn slightly positive, but maybe not as fast as your long term loans suggest.

Speaker Change: Certainly on the inventory side.

Speaker Change: Again, it was such an impressive quarter on inventory we had.

Speaker Change: Stated now for the last few quarters that we want to drive down on hand inventory and channel inventory and I just want to thank our employees and our teams for executing on this plan because its really really paid massive dividends improving linearity improving return on invested capital again, if you have less.

Chuck: Certainly on the inventory side, you know, again, it was such an impressive quarter on inventory. We have, you know, we've stated now for the last few quarters that we want to drive down on-hand inventory and channel inventory. And I just want to thank our employees and our teams for executing on this plan because it's really, really paid massive dividends, improving linearity, improving return-invested capital. Again, if you have less inventory, you have higher return-invested capital or, you know, ROAC, as you say in Europe, or R-O-A-C-E. That is such an important metric. And we have driven down inventory levels by 6.5 turns in the quarter. It's a really great number. We said our operating model is between 5 and 6. That would be on an annualized basis.

Speaker Change: Inventory you have higher return on invested capital or ROE Archie as you say in Europe or ROA that is such an important metric and we have driven down inventory levels six five turns in.

Speaker Change: The quarter is a really great number we said our operating model is between five and six that would be on an annualized basis. So again, we're going to go now to into our trough quarter. So the turns will probably come down I don't think inventory will come down.

Speaker Change: Q4, with the Red Sea challenges.

Speaker Change: Is there more room there is more room, we can do better, but we're getting to that point of diminishing returns because importantly, we don't want stock out so we want to carry inventory on and.

Speaker Change: In our distribution centers to meet our customers' demands customer sat is number one.

Chuck: So again, we're going to go now into our trough quarter, so the turns will probably come down. I don't think inventory will come down in Q4 with the Red Sea challenges. Is there more room?

Speaker Change: But we want to do that the right way. So I think we're approaching that point of the efficient frontier on inventory levels and we are targeting five to six.

Chuck: There is more room. We can do better, but we're getting to that point of diminishing returns because, importantly, we don't want stockouts. We want to carry inventory in our distribution centers to meet our customers' demands. Customer satisfaction is number one, but we want to do that the right way. So I think we're approaching the point of the efficient frontier on inventory levels, and we're targeting 5 to 6. You know, Prakash is so good, maybe he can get to 7 occasionally, but I would say, you know, 6 is kind of hitting that best-in-class or upper quartile. As it relates to the Red Sea, it adds about four weeks of lead time, so it's not that material.

Speaker Change: Precautious. So good maybe he can get to seven occasionally, but I would say six is kind of hitting that that best in class or upper quartile as it relates to the Red Sea. It adds about four weeks of lead time.

Speaker Change: So it's not that material there will be an impact to air as I mentioned earlier and a little higher costs. So I would expect a little bit of inventory increase maybe we can keep it flat, but I would I would I would expect a little bit of inventory increase as we get into.

Q4, and then.

Speaker Change: The last part Hanukkah.

Speaker Change: The gradual growth and does that leave room for interpretation I'll, let you answer that one.

Chuck: There will be an impact on errors, as I mentioned earlier, and a little higher cost. So I would expect a little bit of an inventory increase. Maybe we can keep it flat, but I would expect a little bit of an inventory increase as we get into Q4. And then what was the last part, Hanneke? The gradual growth, and does it leave room for interpretation?

Speaker Change: I'll go back to where we started I think growth is it really a question of when not if we will get back to growth.

Speaker Change: There are so many uncertainties out there that we're just a little cautious on giving you exact numbers of when and how much we will at analyst day, So stay tuned.

I'll let you answer that one. Yeah, I'll go back to where we started. I think growth is really a question of when, not if.

Speaker Change: In the middle of May we will have an analyst day and talk about our view on our outlook I think the idea now is just like be cautious going into next year people are getting excited and I think overall, it's a great business a great operating model, but.

We will get back to growth, but there are so many uncertainties out there that we're just a little cautious about giving you exact numbers of when and how much. We will at Analyst Day. So, you know, stay tuned. And, you know, in the middle of May, we'll have Analyst Day and talk about our view and our outlook. I think the idea now is just, like, be cautious going into next year. People are getting excited.

Speaker Change: We need to be cautious looking out into next year given the uncertainties.

Speaker Change: Alright. Thank you thanks a lot.

Speaker Change: And with that Hanukkah, that's our last question today.

Hanukkah Arnica: Well, thank you Nate and thanks, everyone. It's been really nice to meet you guys.

Speaker Change: Thanks for joining us for your interest in Logitech.

And I think overall, it's a great business, a great operating model, but we need to be cautious looking out into next year, given the uncertainties. All right, thank you. Thanks a lot. And with that, Hanukkah, that's our last question today.

Speaker Change: And of course, a huge thank you to all the logistic teams around the world for everything they continue to do.

Speaker Change: Look forward to speaking with you guys next quarter take care.

Speaker Change: Yes.

Unnamed Host: Great. Well, thank you, Nate. Thanks, everyone. It's been really nice to meet you guys. Thanks for joining us, for your interest in Logitech. And, of course, a huge thank you to all the Logitech teams around the world for everything they continue to do. I look forward to speaking with you guys next quarter. Take care. Thank you.

Speaker Change: Yeah.