Logitech International S.A. (NASDAQ:LOGI) Q2 2024 Earnings Call Transcript

Logitech International S.A. (NASDAQ:LOGI) Q2 2024 Earnings Call Transcript October 24, 2023

Nate Melihercik: Good morning and good afternoon. Welcome to Logitech’s Video Call to discuss our Financial Results for the Second Quarter of Fiscal Year 2024. Joining us today are Guy Gecht, our Interim 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 are making these statements based on our views only as of today, and our actual results could differ materially. We undertake no obligation to update or revise any of these statements. We will also discuss non-GAAP financial results, and you can find a reconciliation between non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC.

These materials, as well as the slides 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. 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. One brief note before we move on to the quarterly results. Next quarter, we will plan to update and modernize our earnings materials. The totality of the information we provide today will not change. I’ll now turn the call over to Guy. Guy?

Guy Gecht: Thank you, Nate, and thank you all for joining us today. I’m very proud of the Logitech’s team performance and execution this quarter, driving better than expected results despite continued challenges, especially in Asia. Our new products, combined with sales execution, led to a significant progress toward the return to growth, and we did it while delivering record operating and growth margins exceeding any time in our history outside of the peak pandemic periods, along with OpEx control coming in slightly better than our 25% target. While we pause to congratulate the team and indeed, they deserve a huge thank you for the results, you will not find here any complacency, especially not before we return to healthy growth.

That may take time as we work through pandemic pull-forward demand, but we are actively working toward it. Looking longer-term, I’m confident about Logitech’s positioning. Our portfolio aligns with doable secular trends in hybrid work, video conferencing, gaming and content creation that will continue playing out, and we see no reason to why we will not maintain the number one positioning Logitech currently holds in the majority of our growth categories. Now, let me briefly comment about the state of the business in these growth categories, and then Chuck will give you a lot more color on our performance in the quarter. I’m going to jump right into the video collaboration where our results are sequentially improving, but still far from where we wanted them to be.

We’re still facing market-related challenges, where some customers are taking a measured approach to equipping conference rooms, focusing first on hybrid work enablement by getting their workflow back into the office. But the need for equitable video and audio is only increasing, and our new site tabletop camera shipped this quarter, uniquely provides the best experience for hybrid meeting. We expect to continue to see gradual improvement in this business, and we’ll be back in growth mode. Our solution for personal workspaces like keyboard and mice are on the verge of growth again. Mobile accessories and our sales into the enterprise are areas of specific strengths this quarter. Between business interest and new consumer products, we see this category well positioned for the holidays season.

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Q&A Session

PC gaming improved sequentially, and the year-over-year declines are moderating. Simulation and console gaming remain challenged as we work through unfavorable comps that should ease in FY’25. Current and upcoming products refreshers, and of course, our gaming portfolio in the next several quarters, will further boost us in this industry that’s improving, but still not back to growth. Our design-led innovation was on full display this quarter, with 16 new products. We expanded the PRO series gaming portfolio with the Lightspeed keyboard and Superlight 2 mouse. We launched the Logitech G Litra Beam Light, and two Yeti microphones. We also launched the first product in a new category for Logitech, the Casa pop-up desk, which is a all-in-one ergonomic desk setup.

We also continued to introduce new AI-powered products like our Zone Wireless 2 headsets. This headset uses AI for far-end noise suppression, resulting in a unique two-way noise-free canceling experience. Products like this demonstrate how AI can improve the user experience. More broadly, Logitech sees AI as a major strategic opportunity. Just as we have enabled people to be productive by accessing PC and cloud capabilities, we envision Logitech providing the interface tools people need to access and benefit from AI. As artificial intelligence transforms how people work and leave, we plan for Logitech to be at the forefront, delivering the solutions that seamlessly bridge human and machines. This is an exciting new frontier for us that you will hear more about in coming quarters.

This quarter, it wasn’t just our innovation on full display, but also our commitment to climate action and equity within a recent impact report. We aligned with two major private sector initiatives for the UN sustainable development goals. We firmly believe businesses play a critical role driving progress on these goals, and we are proud to foster alignment across companies. As our Chief Operating Officer, Prakash said during Climate Week in New York City, when it’s come to the environment, we need progress, not just pledges. Let me close with an update on our CEO search. Over the last four months, the board has been conducting a global CEO search, including internal and external candidates across industries and geographies. From the first days of the search, there was a tremendous interest in the opportunity that afforded the board the chance to meet with incredibly strong, diverse, and experienced candidates.

Our board, masterfully led by chairperson, Wendy Becker, deserves real credit for the work. You might sense from my update that we are getting closer to finalizing a decision, and indeed we are. Until then, I hope you understand I will not be able to add more color to this topic. In summary, this quarter, we have made real progress, but aren’t satisfied. We want consistent growth and consistent financial performance, and we are very focused on delivering that. Thank you, again, and let me turn it to Chuck to discuss the numbers. Chuck?

Chuck Boynton: Thank you, Guy. Thank you all for joining us in the call today. I’d like to echo Guy’s comments about the great focus and execution of our employees throughout the quarter. Their commitment to the customer is certainly reflective in our 16 product launches ahead of the holiday season, while also demonstrating the discipline to operate the business in a responsible way and generating strong operating cash flows. Tremendous work by everyone. Now, moving on to the business results of the second quarter. Net sales and constant currency declined by 9% to $1.06 billion. Overall, our Europe team had a very strong quarter, with both sequential and year-over-year topline growth in US dollars. In constant currency, we were down mildly from the prior year.

Both Americas and Asia Pacific were down year-over-year, but showed sequential growth. Our personal workplace solutions had a really great quarter while gaining market share in keyboards and combos, pointing devices, and webcams. Our video and Logi G business still had pressure versus more difficult comps last year. We’ve been talking on our earnings calls and our Investor Day about the benefits of lean on-hand and channel inventory. This quarter, we continued our progress in leaning out the supply chain. In fact, our sales out was stronger than expected, which not only led us to overperforming in the topline, but also reducing channel inventory. We are currently shipping at a fast pace, getting ready for the peak holiday season. We expect to reduce channel inventory in the March quarter to align with the seasonally lower revenue we see in Q4, as well as Q1 and Q2.

Please note, this will create a negative year-over-year comparison for Q4. For the sixth consecutive quarter, we reduced on-hand inventory significantly with our inventory turns improving from 3.2 to 4.6 year-over-year. We are getting close to our target operating model of five turns or better. Lastly, it’s important to know that similar to last quarter, the reduction in channel inventory and on-hand inventory had a one-time positive impact on gross margins. And Q2 gross margins expanded quarter-over-quarter to 42%, better than anticipated, and in the upper range of our long-term financial model. Year-over-year increases were driven by cost improvement, including less reliance and expedited shipping, along with lower promotions, partially offset by unfavorable product mix.

Comparing sequentially, increases were driven by cost improvements, favorable mix, as well as leverage and scale. Though we are encouraged by the gross margin improvement, Q3 gross margins are typically pressured by promotions and mix, and discounting typically increases during the holiday season, and our sales are more consumer-led than enterprise. We expect these headwinds to be partially offset by overhead absorption. In the back half of the year, we expect gross margins to be approximately 38% or 39% based on the previously mentioned one-time benefits in Q2 and sequential headwinds. Looking further ahead, with our slightly larger scale cost reduction and lower promotions, we believe the business is positioned to structurally attain the 39% to 44% gross margin target on average, although there will be quarters where we’ll be below our long-term target due to various factors such as seasonality, mix, or promotions.

Operating expenses were $261 million in the quarter, in line with revenue declines down 9% year-over-year. I continue to be pleased with the team’s cost focus and ability to quickly dial up or dial down OpEx based on business performance. Our long-term model is to maintain operating expenses at around 25% or less of revenue. Note that we expect OpEx to rise mildly in Q3 due to seasonality and certain one-time costs. Operating income was $183 million in Q2 and better than our expectations due to improved demand, strong gross margins, and cost discipline. Following up on our record Q1 for cash generation, the team delivered strong Q2 cash flow from operations at $223 million, leading to a cash balance of approximately $1.2 billion. Q2 is also reflective of our consistent capital allocation strategy, particularly our commitment to returning capital to shareholders, which totaled approximately $276 million in Q2.

In September, our shareholders approved and increased to our dividend, and we returned $182 million to shareholders, and we started our new $1 billion three-year share repurchase program that was approved in June. In the second quarter, we repurchased nearly $1.9 million shares for a total consideration of $124 million. Actual cash outflow is $94 million in the quarter, with the remaining balance to be paid in Q3. Please note the shares repurchased were under both the 2020 and 2023 program. Moving on to our outlook, we exceeded our first half outlook on both the top and bottom lines, driven by stronger than anticipated demand, lower promotional intensity, and more aggressive cost reductions. Although uncertainty still exists, we remain cautiously optimistic that our business will continue to slow our rate of decline and eventually get back to growth.

Therefore, we’re raising the full-year outlook for fiscal year 2024. We are now expecting revenue of $4 billion to $4.15 billion. Our corresponding operating income is expected to be between $525 million and $575 million. Before we start Q&A, we’re going to show a short video highlighting our PRO line gaming products. Nate, roll the video and then we can take Q&A. [Video Presentation]

Nate Melihercik: Our first question today comes from George Wang at Barclays.

George Wang: Oh, hey guys. Thanks for taking my question. I have two quick ones. So, firstly, just to kind of see if you can reconcile the fiscal 2H just based on the implied guide is still kind of below seasonal, and then kind of from 2H to H kind of flat versus the historical survey trends kind of – up kind of 15% to 20% sequentially from 2H to H. Just curious how much visibility you have and kind of try to reconcile, you talk about improving demand sequentially, yet you are guiding kind of below seasonal for the back half. Just curious if – any color on that.

Chuck Boynton: Certainly, George. Thank you for the question. So, if you think about the math, we are in the rate – the rate of change, the negative is slowing down. So, the rate of change in Q1 versus year ago was worse than Q2, and we’re projecting Q3 and Q4 to be slightly better than Q2. And so, if you look at absolute dollars, because it’s – the rate of change is slowing, the halves might look somewhat comparable, but we’re sort of cautiously optimistic that the back half of the year will be – it’s still probably going to be negative, still down year-over-year, but should be down a little bit in line with Q2, a little bit better than Q1, and that rate of change, we’re sort of confident that or optimistic that we’re in an improving state.