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Logitech International SA
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Good morning, and good afternoon. Welcome to Logitech’s Video Call to discuss our Financial Results for the First Quarter Fiscal 2023. Joining us today are Bracken Darrell, our President and CEO; and Nate Olmstead, our CFO. As a reminder, during this call, we will make forward-looking statements, including with respect to future operating results under the Safe Harbor of the Private Securities Litigation React of 1995.
We’re making these statements based on our views only as of today and our actual results could differ materially. We undertake no obligation to update or revise any of these statements. We will also discuss non-GAAP financial results, and you can find a reconciliation between non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results in our press release and in our filings with the SEC, including our most recent Annual Report and subsequent filings.
These materials as well as our prepared remarks and slides and a webcast of this call are all available at the Investor Relations page of our website. We do encourage you to review these materials carefully. Unless otherwise noted, comparisons between periods are year-over-year and in constant currency and sales are net sales. And finally, this call is being recorded and will be available for a replay on our website.
And with that, I will now turn the call over to Bracken. Good morning, Bracken.
Thank you, Nate, and thanks all of you for joining us. Logitech like many other companies is experiencing the impact of a wide range of overlapping macroeconomic and geopolitical issues. The war in Ukraine directly reduced our net sales about 2% versus last year, as we talked about earlier. Foreign currency headwinds have increased with the dollar strengthening to nearly one to one in the year now.
Inflation rose further and consumer confidence has weakened. None of these fundamentally affect our optimism for our target markets, our strategy or our business model. But as we looked at the quarter and head into the rest of the year, we believe it’s prudent to take a more conservative view than we had previously.
Impacted by these challenges, our net sales were down 9% in constant currency this quarter. There were clear highlights for sure, solid growth in Video Collaboration, Keyboards & Combos, and Pointing Devices as hybrid and return to work trends continued to take shape. We grew market share, and we delivered solid gross margins at 40% despite worsening inflation and currency impacts.
As I just said, our overall net sales in Q1 combined with the worsening macroeconomic picture may just take a hard look at our assumptions for the rest of the fiscal year. We can’t affect currency exchange rates or inflation records, but we can adjust our business to the current conditions. And although, we can’t predict the depth and duration of these macroeconomic conditions, we can conservatively manage our business until we have evidence that the markets will return to stronger growth.
In short, we can’t change the macros, but we can adjust to them and that’s what we’re doing. Based on current conditions and performance, we’re implementing plans to reduce operating expenses by approximately 10% or about $150 million versus last year, predominantly through variable cost reductions.
As our sales nearly doubled since fiscal year 2020, we added disproportionately variable cost, which makes us ready to meet the moment. We’ll continue to raise prices to offset the currency and inflation and target to keep a strong margin profile. We’ll continue to invest in exciting new innovative products.
This investment has been a key driver of our sustained share gains, and we believe it will be into the future. All that’s leading us to provide you with an updated outlook for fiscal year 2023, reducing expectations for both revenue and operating profit. We believe this update appropriately takes into account the macroeconomic and geopolitical environment we’re in as well as our own plans to lower our costs and take control of all the variables within our graphs.
Before I let Nate take you through our financials and outlook in more detail, let me just say that the macro picture we’re dealing with now is challenging, but we believe it’s temporary. I’m as optimistic as ever about the long and – the medium and long-term. I can’t think of anywhere I’d rather be for the long-term and writing the secular trends logical gifts.
Hybrid work or the idea of work from anywhere is simply the future. As I said in a few months ago, the debate is over hybrid one. And that will favor Logitech as offices are renewed for new footprints and more video and homes continue to upgrade for better offices. While the gaming market was soft over the past two quarters, we believe the interest in gaming will increase over the long-term as gaming content expands, cloud gaming grows and more and more people become gamers, socially or even competitively.
And the streaming and content creation trend will grow and grow. From individual creators producing content from home to businesses, leveraging podcasts and creators to new markets, the use of streaming content continues to expand, driving growth of this trend. So we’re going to continue to focus on great long-term growth, but run the business conservatively short-term.
What does that mean? Our product teams across our largest businesses, video collaboration, C&P and gaming will continue to launch a series of new products throughout the remainder of the year. As in the past, you can expect these products to be packed with the innovative features – with innovative features, full of lifestyle design enhancements and critical to the work at play of both consumers and enterprises.
Our operations team will continue to optimize our supply chain for the short and long-term as we source components from a diversified set of vendors, now much more diversified. A just tipping routes and mitigate transportation costs and risks, and finally, diversified manufacturing outside of China.
We’ll be working hard to flip the inflationary trend to cost reduction, as the macroeconomic type turns and it always turns. Our sales teams, especially our enterprise teams will continue to refine and improve their go-to-market capabilities across the globe. And we’ll go – we’ll go all out to help companies reconfigure offices, expand the video enablement and create workspaces appropriate to this hybrid world.
We’ll bring down expenses significantly to align with the market realities that we project for this fiscal year. And as we do this, we’ll focus on organizing for maximum effectiveness over the next few years. Our capital allocation priorities remain unchanged. Investment in our product design and development capabilities, accretive M&A and returns of capital to shareholders in the form of share repurchases and dividends.
And finally, you can expect our commitment to sustainability to remain firmly in place. We were just named by EcoVadis as one of the top 1% of sustainability companies in the world. And our plan is to turn sustainability into a driver for good and for growth will continue.
Now let me turn the call over to Nate for a breakdown of our financial performance this quarter and our new outlook. Nate?
Thanks, Bracken. Bracken described our perspective on the quarter and environment. It signals that we need to be prudent about the rest of the year or until economic trends become more consistent and favorable. I’ll spend a few minutes on the quarter and then walk you through our updated outlook.
In Q1, net sales were down 9% to $1.16 billion after growing 58% in Q1 of last year. We grew in Video Collaboration, Keyboards & Combos, and Pointing Devices while facing tough compares in the macro environment. Gross margins remained essentially flat sequentially despite the litany of external factors that pressured profitability.
I mentioned last quarter that cost increases, unfavorable currency rates and higher shipping rates may pressure half one fiscal 2023 margins. And while we did see these impacts, we managed pricing and reduced our reliance on air freight to help offset these pressures. However, we anticipate Q2 margins will be lower than Q1 as these headwinds remain. Operating profit was down as expected after doubling last year. Cash from operations was negative $36 million, also as expected, and an improvement of $79 million versus Q1 last year.
Let’s review some of the results across our product categories. Similar to last quarter, the gaming market continued to decline in Americas and Europe, while growing in Asia, and our results reflected these trends with sales down 13% globally. We outperformed the market however, and gained PC gaming share.
We saw momentum from our products geared toward both social and professional gamers offset by ongoing headset demand weakness in core PC and console gaming. Video Collaboration sales increased 7% as conference room cameras and systems grew double digits to more than offset double-digit declines in business-oriented webcams, which are part of our Video Collaboration category.
In Creativity and Productivity, Keyboards & Combos grew 7%, and Pointing Devices were up 3%. We saw solid and consistent demand during the quarter for PC peripherals and introduced a series of new products. Our master series line added two mechanical keyboards and an upgraded mouse, and we also released a line of keyboard combos to support our enterprise customers.
Taken together, these results highlight the performance of our categories, addressing the secular trends in gaming, video collaboration and hybrid work. Sales of our creativity and productivity, gaming and VC products exceeded 80% of our total net sales this quarter and were flat year-over-year in constant currency. If you exclude Russia, these categories actually grew 2%.
We have growth opportunities in other categories as well, but I wanted to highlight the performance of these key areas that directly address the strategic secular trends that Bracken referenced. Looking regionally, Asia Pacific grew nicely in the quarter, driven by gaming, while Americas and EMEA sales declined. Through the excellent work of our operations and sales teams, we were largely able to recover from the COVID lockdowns in China.
For those that track the sell-in and sell-through data in our earnings slides, you can see that globally, these metrics are in balance. The timing of the Shanghai reopening however, resulted in the bulk of our China sales occurring later in the quarter, which is why Asia sell-in was stronger than sell-through.
Turning to expenses. I mentioned last quarter that we wouldn’t hesitate to reduce our variable expenses, including marketing of conditions warranted, given the weaker top line results, that is what we did in Q1. We reduced marketing and sales spend by 10% and reduced G&A by 9%. We’ve also said that investment in product design and development would remain a priority for Logitech, even during trying economic times and you’ll note that we increased R&D investment by 9%.
We are not done reducing or eliminating unproductive expenses from our business, and we are driving efficiency in all our spend, including fixed cost, product and freight cost and our go-to-market investments in the channel. We can’t offset every headwind that we predict for this year, but we are taking aggressive actions to align our spend with our sales, while sustaining investment we believe supports our longer-term growth ambitions.
We ended the quarter with a cash balance of approximately $1.1 billion after returning nearly $121 million in capital to shareholders through our share repurchase program. As a sign of our confidence in cash generation, and our commitment to returning cash to shareholders, our Board approved an increase in our repurchase authorization by another $500 million, and we proposed a 10% increase to our dividend per share for approval at our September annual meeting.
Finally, I’ll spend a minute on our updated fiscal year 2023 outlook. In May, we provided an annual outlook of 2% to 4% growth in constant currency and an operating profit outlook of $875 million to $925 million. Since that time, we’ve seen continued and in some cases, intensified deterioration of economic conditions across the globe. Bracken discuss the external environment earlier.
So when we developed this new outlook, we made assumptions about a number of factors, including potentially protracted economic volatility and sustained revenue and profit pressure from the stronger U.S. dollar. Given these considerations and the actions we are taking to reduce cost versus last year, we now expect full year revenue to be down 4% to 8% in constant currency and full year non-GAAP operating income to be between $650 million and $750 million.
At the midpoint, our outlook for profit is down $200 million versus our prior estimates. At a high level, that comes through two headwinds and two partial offsets. The headwinds total about $400 million, including approximately $250 million of reduced profit from lower volumes and cost increases and $150 million of lower profit from currency changes. Offsetting these unfavorable impacts are OpEx reductions and pricing. So in summary, we see about $400 million of incremental profit headwinds for the full year, of which we have plans to offset 50% through actions we are taking.
Nate, we can open the line for questions. Thank you.
Great. Thank you, Nate. [Operator Instructions] We’ll start with Paul Chung from JPMorgan. Good morning, Paul.
Hi, good morning. Good to see you guys.
Hi Paul, you too.
Thanks for taking my questions. So VC and keyboards were kind of a nice bright spot in a tough quarter. And in VC, you’re kind of seeing some relative strength in ConferenceCams. So where are you seeing demand across verticals, regions? Is this for new conference rooms, kind of replacement of legacy competitors? Any update you have there and seeing in terms of competition as well?
Yes. I mean the ConferenceCam number was strong. I mean I think – I don’t think we put it in the script, but the ConferenceCam number grew very strong double digits this quarter.
Double-digit, yes.
And it was about what you would have expected. I mean it was pretty much a global story. The Americas, in particular were very strong. And I think that’s – it kind of reflects the return to work that’s happening here in the West. Do you want to add anything to that, Nate?
Yes. I think it was pretty consistent, Paul. And the sell-through has remained pretty consistent actually going back several quarters. It’s been a little bit tough to predict sometimes on the sell-in because of the start and stop nature of some of the reopenings. But if you just look at the sell-through, another quarter of double-digit sell-through as well as net sales.
Got you. And then on capital allocation, so the pace of buybacks has been quite elevated over the last four quarters. The increase in authorization to just kind of more of the same over the next 12 months, maybe at a similar pace or higher pace. Is that the right way to think about it? And then separately, private market valuations looking more attractive today from your seat, where are you seeing opportunities there? Thanks.
Go ahead, Nate.
Let me take the buyback. Yes, I think Paul, really, you think about this is the Board gave us the option to increase repurchases. But I would just think about it as we’re seeing consistent to our strategy around capital allocation, right? We still prioritize invested in the business. And then from there, we have a balanced approach really on dividends and share repurchases.
In fact, if you look back over the last several years by going back to FY2020, we’ve returned about $1.3 billion to shareholders through repurchases and dividends, and that’s been roughly 50-50, a little bit more weighted towards share repurchases, to your point, recently I think about 60% over that time share repurchases. But yes, we have confidence, we’ll continue to generate cash, and we think it’s great to have that option.
Yes. I’ll just add. First of all, I’m really thankful to the Board for giving us the increase in the authorization. I feel really good about the buyback program we’ve got going. In terms of M&A, we never stopped on M&A. We’ve been very aggressively going after whatever we saw available. We did – nothing really stopped us from a valuation standpoint before. But you’re right. I mean there’s no doubt that valuations have come down across the Board. So we’ve got – we’ve always got a lot of activity going and we have a lot of activity going now. So it’s not going to let up.
Thank you, Paul.
Thanks, Paul.
Thanks, Paul. Next up, we’ll be Asiya Merchant from Citi. Good morning, Asiya.
Hey Asiya.
Hey, good morning, everyone.
Good morning.
A big question, for the guidance that you guys are providing, I guess the question is, if you can help us understand through each of the categories, what’s kind of baked in? Is this the worst that it gets? And if you can kind of walk us through how the minus 8% to minus 4% makes sense in the current environment. It suggests that it will improve from here on. Is that just a function of easier comps through the rest of the year? Or – and if you can walk us through some of the categories, that would be great. Thank you.
Nate, why don’t you take the first part of that, and then I’ll come in at the back and talk more about categories.
Okay. I was going to start with categories. No, I’m just – so Asiya, I think if you think about the year, you can always look at it year-over-year, you can get it quarter-over-quarter. Let me try to explain to you a little bit about how I thought about it quarter-on-quarter. What the outlook reflects is that we don’t think that we’ve seen the every bit of bad news yet. And Q2 will be softer than what it has been historically.
Normally, we see an increase sequentially from Q1 to Q2 in kind of the mid-teens on growth, the outlook sort of reflects that it’s probably mid-single digits. So Q2 is not going to see the same spike that it has before. And that’s sort of a continuation of some of the trends that we saw in Q1. And then from there, if you think about the range that we have for the full year, the 4% to 8%, really the difference there is how we think about the holiday and the back half of the year.
So at the low end of the range, I think the holiday is a little bit weaker than typical seasonality at the high end of the range. We’re starting to get back to typical seasonality in the back half. That’s what it really reflects is Q2, our outlook reflects a weaker than normal seasonality in the back half of the year, depending on which end of the range you talk about kind of at the midpoint, still weaker than normal seasonality in Q3 and then some return to normalcy in Q4. And then to your point on the year-over-year compares, that just comes down to some easier compares. So that’s how I think about it sequentially.
Yes. I’ll just add categories, you can jump back in, Nate. I think we’re – I think from a category standpoint, we – our view is about the same as what you see this quarter. We think we’re going to continue to have a pretty good workspace business, mice and keyboards. We’re actually constrained a little bit. We’re still constrained a little bit on mice, which shows up both in the mouse and the keyboard business.
So I think that’s going to continue to be a solid business for us. And of course, the VC business conference rooms, we think conference rooms are going to continue to be enabled. That’s a good thing. We think the gaming business pullback is probably going to stay pullback. I don’t think it will get. We don’t expect a big change in that we think it will pullback.
Now all that said, we just finished Prime Day. This year, Prime Day was in Q2. So – and last year was in Q1. Our Prime Day was up 24% versus a year ago I think, Nate. So that’s a constant currency. That’s in dollars by the way. So it’s not all a pullback here. I mean there’s still plenty of interest in our categories. I think that’s kind of a good reflection of the future. But I do think it’s prudent for us to really look at the world, the macroeconomic what we’re looking at and just moderate across most of our categories in light of what’s happening.
Yes. And just to kind of re-highlight something I mentioned in my prepared remarks, Asiya, that those four categories that I talked about, Gaming, Video Collaboration, Keyboards & Combos and Pointing Devices, those are the ones that are predominantly addressing the secular trends that we talk about so often. Over 80% of our net sales this quarter combined those categories were flat. They grew if you exclude the impact of Russia. So – and that’s with the gaming decline, right, of 13% in there. So it does indicate some durability, if you will, or continued interest in those categories, which I think is very healthy.
Okay. And then CapEx still remains kind of high at $110 million. I know you guys talked about the variable cost structure and being able to manage that. Anything on CapEx and why you guys are keeping that at a high level, relative to where you guys have been in fiscal – the last fiscal year, for example?
Yes. I mentioned this before. What you see here is the catch up this year, some investments in facilities. Over the past couple of years, as offices have been closed, we haven’t been making investments or expanding footprints. And as we’ve invested in our head count and in our people, we have the need to invest in CapEx this year. So the increase that you see this year is predominantly into facilities, not necessarily a new run rate, but we have some catch-up to do because it’s been low the last couple of years.
Okay. All right. Thank you.
Thanks. Our next question will be from Torsten Sauter from Kepler Cheuvreux. Torsten, good morning. Good afternoon.
Hey, Torsten.
Hey, hello, everyone. Thanks for taking my questions. Actually, I have two. First, is it fair to assume that you can cut the OpEx by, say, US$150 million, US$200 million if needed? And if so, where could you cut without hurting the franchise? And then if I may, secondly, I wonder to what extent has the deliberate direct B2B sales channel for video collaboration also supported and catalyzed sales in other categories. In other words, how much non-VC products are you selling in this deliberate enterprise channel?
Let me take the second one, and Nate, I’m going to let you take the first one. I would say not much yet. The direct enterprise sales force has been, we really organized to focus completely on the ConferenceCam business. And in fact, I used to say for years, I would say, I really don’t want to hear the word mouse come out of anybody’s mouth in the enterprise sales force because we’re really good at mice, and we need to get good at ConferenceCam. Boy, that’s changed. We’re now at the point where I feel like we’re – we’ve got to build a big structure at enterprise sales force where that I feel good about. And I think now we’re ready to add to it. So we’re in the very early days of taking advantage of that for the rest of our business. But we are seeing large sales through there already, but it’s still very early days.
And then on your question on OpEx, that is our plan, is to reduce spend year-over-year in OpEx $150 million. We’ve talked about it before. As we’ve invested over the past few years, we’ve invested both in fixed and variable costs, but the majority of it actually in variable cost, Torsten. So I think we’ve been prepared for such a time like this where we have to reduce those expenses, and so we’ll go execute those plans. Also, it’s important probably keep in mind, OpEx is not the biggest portion of our spend in the company. We spent about $3 billion in cost of sales.
And so we’re looking at all areas of spend. So there’s $4.5 billion of spend that I really go after and look at and make sure we’re spending wisely and efficiently, looking for opportunities. Now all that spend is different, and you got to think about it uniquely. And in this environment where we’ve seen cost pressure and cost of sales, it’s difficult to reduce it, but we still need to make sure that we optimize it. So we’re not focused just on one piece of it. We’re looking at all of it.
Very clear. Thanks.
Thanks, Torsten.
Our next question will be from Joern Iffert from UBS. Joern?
Hey, Joern.
Hello, Joern.
Hi. I cannot switch on my video. The host is not allowing it. So I have to just ask questions acoustically. Maybe the first question is, please, on the guidance again for portfolio, the minus 8% to minus 4%. Can you help us understand what is the FX impact? What is roughly the volume impact? What are the price impacts that we can better read underlying trends? Maybe I’ll take the question, one of my and start with this one, if I may.
Nathan?
Sure. Well, the straight volume impact, if you will, if you went to the midpoint to midpoint, Joern, we were at plus 3% constant currency and midpoint now minus 6%. So there’s a 9-point swing there, excluding the impacts of currency, as you can think about as volume. And then the currency impact itself increased by about 3 points. So we had about a 1-point currency impact. That’s now gone to 4 points for the year. So the spread between U.S. dollar and constant currency growth is expected to be about 4 points versus just 1-point previously.
And on pricing versus volumes?
Yes. So if you flow that through to – and I kind of mentioned this in my prepared remarks, if you flow through that volume impact down to profit, it’s about – the problem – one of the big problems of currency is flow through at a very high rate, right, because our cost of goods are primarily in U.S. dollars. So when we have an unfavorable currency impact flows through at a very high rate to operating profit. Frankly, if things reverse, the opposite is true, it flows through to very high rate favorably to profit. So that currency flow-through, which about 3 points, you can think of it’s about $175 million of currency pressure on the top line. That flows through at a very high rate down to profit.
That is one of the reasons why we’ve taken some pricing actions because normally, our strategy when currency moves unfavorably, would be to do that. So we’ve taken some pricing actions to help offset some of that. But then you’ve also got the volume impact as well from weaker demand in many of those macroeconomic factors, which flows through. And that demand side, 9 points, like I mentioned, about $475 million, $500 million of volume flowing through. We can offset more of that and that flows through at more traditional rates, but it’s a combination of the OpEx and the pricing actions we’ve taken that are offsetting those volume and currency impacts that I mentioned.
Okay. Second question, please, on the $200 million recycling savings out of the $400 million incremental negative impact on non-GAAP EBIT. Can you help us to provide really more clarity? Where exactly this $200 million recycling is coming from or cost savings coming from, this concrete examples?
Yes. So the $200 million, about three-fourths of that will be the OpEx reductions. I mentioned, $150 million year-over-year and the other $50 million from pricing. The OpEx is very easy to measure. We know where all those are the pricing. We’ve got to make some assumptions about what the impact is on volume and so forth, but that looks like what our capture rate is. We put those increases in a little later in the year.
So I think have pretty good visibility to what that is. But the OpEx will primarily come out of variable expense, and a lot of that will come out of variable marketing as we’ve talked about. But there’s other areas that we’re looking at two and have plans to reduce, again, mostly on the variable side, very similar to what we’ve been talking about for the last few quarters actually.
And the last question, if I may, in terms of the end markets. And speaking about gaming, for example, do you see that consumer sales trends have stabilized recently after the weakening over the last couple of months or it’s still in a declining mode and you do not know exactly when the trough is materializing open gaming.
I would say, it’s – we’re in the middle of the summer. I don’t know if you can remember what you were doing last summer at this time, but I know I can’t because I didn’t do anything interesting. This summer, everybody is traveling, whether you’re in Europe or maybe except for China, everybody is on the move. So the – I’d say the trends are really tough to read right now in gaming. It’s a very soft gaming market.
Now when they come back when people come back in the fall and if you just think about it, you have a 12-week summer and you’re traveling two or three weeks of it. That’s a very different picture. So it’s really hard for us to extrapolate from what we’re seeing this summer to – in the middle of the summer right now to what’s going to happen in the rest of the year. But I would say, I think the reality is that we’re going to have a gaming market that will be down for the year. And probably significantly down like we’re seeing right now. And really the key question is, when does that start to recover? It will recover. And I think it’s going to be as we get further into the back half of the year.
All right. Thanks a lot.
Thank you, Joern.
Thanks, Joern. Our next question will be from Alex Duval at Goldman Sachs. Hey, Alex.
Hey, Alex.
Thanks very much for the question. If we look at the lower top line guidance that you put out today as well as the altered EBIT guidance, it looks like you’re assuming around $0.60 of EBIT loss for every lost dollar revenue. But of course, we know that your group gross margin would be closer to 40%. So I wondered if you could just talk a little bit to the drop-through that you’re assuming? How come it’s so high given that, obviously, you’re taking some cost out? And I wondered, is that because you’re baking in an expectation of further pricing pressure so as to clear out inventories? How should we be thinking about that? And then I have a quick follow-up.
The primary reason, Alex, why you’d see a higher flow-through is because currency is a big portion of that, right? I said there’s about $175 million of incremental currency pressure on the top line and that flows through at almost 100% we can offset some of that. And again, that’s gross, excluding the impact of pricing. So you can think about which headwind you want to use the pricing as an offset to when you think about the math. But the real reason why the high flow-through is going to be currency.
Very clear. I appreciate that. And then some investors have also been asking, even with the new guidance, obviously, your revenues and EBIT would still be at a level significantly higher than pre-pandemic. So to what extent at the moment, are you at all concerned about a mean reversion to where you were beforehand? Is the risk more about sort of consumer demand at the moment? Or are you sort of seeing signs of any of these categories of a pull forward and sort of anything that would prompt you to kind of reassess your thesis that these are more structural trends that will endure for the long-term?
Yes. Right now, I wouldn’t say, we see anything that would suggest that our – the structure or secular trends that we’ve been seeing are going to slow down. This period of kind of adjustment this temporary period. It feels like a temporary period. If you just go through each one of them, the hybrid work trend, and we’re still only one-tenth of all the conference rooms enabled our ConferenceCam number is growing strongly. And I think we’re still – and if you talk to companies around the world, so many of them, including us, are really looking at their footprints and trying to decide what are we going to do? And we’ve landed our plane now. We kind of know what we’re doing around the world, but a lot of companies really have it yet.
If you go into workspaces, just the number of workspace has increased so significantly that the replacement rate, the sheer replacement rate on upgrading workspace is it looks like kind of what it did pre-pandemic just a lot more of them. And there’s a lot more upgrading to do, because you have a different dynamic. It’s part of your home decor, it’s – you’re kind of living with it all day long. So – and you’re going to be working in the home in some of the office too.
So – and then there’s gaming. And gaming, absolutely as much confidence as ever on the gaming business. There are companies like Microsoft or more and more of the large meta who are coming into the gaming space. They’re investing in the gaming space because gaming is going to be a very, very long-term strong growth engine, and that’s what drives our business, the investment in content, the creation of new compelling things. This generation is below.
So I wouldn’t – I definitely don’t think anybody should be overreacting to what’s happening in gaming right now. I do think you’ve got had a very, very strong two years of gaming. And now you’ve got a lot of people who are back out again and doing other things and spending their money on trips and totally get it and getting back out. But I think the secular trends will continue.
Thanks very much.
On to comment on gaming, I think specifically, Alex, if we went back and looked at our Analyst Day a couple of years ago, so this is – I thought the gaming market or our gaming business might be kind of flat year-over-year after a really strong FY2021 at plus or minus 5%. We ended up growing 17% last year. And – but the thinking back then was, hey, listen, as things reopen, there’ll be some substitution effect, other forms of entertainment. We’ll probably see gaming take pause slow down a bit. And I think what I’m seeing right now is I think that’s taken another year from what I thought originally, right?
The things didn’t really reopen last year like they thought – we thought they would. But we’re seeing that now. A lot of the weakness that we see and that I see in the market isn’t in headsets. Be clear, all the other categories have declined as well, but headsets in particular, have been down a lot. And certainly, on the console side, we know that some of that is due to shortages and timing of title releases and things like that shortages on consoles themselves. But I think also some of the headset demand probably during the past couple of years was from non-gaming use as well. People using buying headsets, using them for Zoom calls and hybrid work. So not unexpected to see some particular pressure, I think, in that category. But for the reasons Bracken mentioned, I think the fundamental drivers of the gaming industry remains strong.
Thanks a lot.
Sure.
Thank you.
All right. Next up will be Erik Woodring from Morgan Stanley. Good morning, Erik.
Hey, Erik.
Hey, good morning, guys. So maybe Bracken, I’ll pose one to you and then one to Nate. As we move kind of further into this kind of post coded hybrid work environment. Obviously, you own a number of the markets you’re establishing mice, keyboards, webcams, headsets. How should we think about your desire to enter new or adjacent markets or maybe accelerate investments into markets like music where you can regain a firmer hold on the share that you once had, kind of obviously all in a request all in the goal to get back to kind of that 8% to 10% growth range. Just curious how you think about that question.
We’re always looking at new categories, Erik. Since I’ve been here, I think we’ve gone from about a little over a dozen categories to over 25 or 30 now. So – and so we’ve got things in development all the time to try to go into new categories. We really try to start the seed programs first and then we’ll acquire something if it makes sense to either augment that accelerated to replace it. So we’re going to keep doing that. And I would say, we’ve done actually quite a bit of category expansion in the enterprise space.
And I think that is a good opportunity for us. We’ve gone in the cabling, into whiteboard cameras and into meeting room screens. And so we – and we’ll continue to look across the whole business at that, to your point. The music business, in particular, we talked about really pulling back on the Bluetooth speaker business, because we just didn’t love the fundamentals of that business. And I still feel the same way about that. I don’t think you’ll see us like doubling down on that. We’re still in it. It’s still a great contributor in many ways. But I don’t think that’s a space we look at, but we see spaces across the board to keep expanding.
But the good news is, I really think the fundamentals of our current categories can deliver that long-term guidance we talked about already. I mean, the fundamental growth opportunity in conference rooms the workspace opportunity. When I came here, I never would have dreamed that we’d have the kind of growth opportunity we have in mice and keyboards that we have now ahead of us. And of course, gaming, we just spent time talking about. And the only other thing we haven’t talked about is the streaming and creating phenomenon. It’s super exciting.
I mean if you just think – most of you are not in the flow of discussions on what’s the future of marketing. And a lot – what many of us would say the future of marketing is it will be disproportionately large for creators themselves where they’ll actually be selling, transacting or a minimum directly, strongly influencing the sale. And those are – and that’s aspirational for all of our kids and everybody under the age of 30. So many people want to be a streamer creator. So we’re in all those spaces. And there’s a lot of growth ahead in all of them.
Okay. That’s helpful. Thank you, Bracken. Maybe one to you, Nate. So sales and marketing down, call it, 10% in the June quarter. You’ve alluded to containing variable costs of which sales and marketing, I assume, is a sizable chunk of that. How does a pullback in those efforts impact your need to discount products? And any way you can kind of help us think about the impact of discounting in fiscal 2023 on kind of your net sales growth outlook that you provided last night?
Sure. Why don’t I start with this one, and Bracken, you may want to comment a little bit too on the marketing strategies. We’ve seen some pockets, Erik, not unexpected where promotional activity has increased, but that’s really we’re sticking with our strategy, which is really to drive marketing even at lower levels of marketing investment drive marketing to increase the value of the brand and to drive preference for Logitech without having to be so promotional. And that’s really our – it’s been our long-term strategy, and we’re continuing to do that even during this year.
Now I think, again, as gross margins have come down for some of the – I think, more temporal reasons that we’ve talked about before, cost increases, logistics rates increases, now currency, that’s put some pressure on the cost structure. And so the place that we’re going to go address that right now is with variable spend. And I don’t think it makes a lot of sense to invest as much in marketing in the demand environment. Is this volatile and in some cases, weaker. So I think you should think about it as we’ll probably put that marketing back in when it makes sense. But in this environment, I think it makes more sense to pull back on that, continue to drive the investment in innovation and the long-term road maps.
Yes, like, you said everything I would have said, Nate. I don’t think it makes sense to overinvest in marketing when the markets themselves are retracting some employee slot.
Yes. And I guess, I wouldn’t think about that as a signal that we’re going to get more promotional as a result of that. I mean, you’ve heard me talk about having to manage pricing to try to offset some of those pressures. And so I think that remains the focus. In fact, this year, if I look at margins year-over-year, increased promotion was not one of the big drivers of margin pressure. Really, the things that drove margins down year-over-year were currency, cost inflation and logistics rates. Those were the biggest drivers.
And so I think we’re starting to see some of those things settle down a little bit. The cost increases have definitely slowed. Logistics rates still at very high levels relative to where they’ve been historically, but are no longer increasing month-over-month or quarter-over-quarter like they have been.
Month-over-month, I would say, they’ve stopped increasing. So hopefully, we’ll see some of those things bottom out. And then as the economy continues to go through this cycle, we can see some favorability and some returns to the costs that we had previously in those areas, which would give us a nice lift on gross margin.
I’ll just add one more thing. I think in my experience, when markets were track like games directing right now, your marketing is just less effective. So I don’t think you want to spend as much and that’s what we’re doing now. He will come back, this is temporal. So we’ll come back, but it does will probably increase the marketing again. But we still have a lot of marketing spending. We’re going to be wrong, even with these numbers, we’re still going to be spending a lot of market.
Yes. I think too, Erik, sometimes we talked about the business model and what’s the shape of the P&L. And I think these adjustments we’re making to the spend are really to help sustain the shape of the P&L. We run OpEx at about 25% of sales. And on this lower revenue outlook and with these OpEx reductions should be seeing us still manage roughly to that same area. You’ll see a lower mix of sales and marketing while we continue to sustain investments in R&D.
If I could just sneak one last one in Bracken, just for you. You mentioned earlier in the prepared remarks a diversification of supply chain outside of China. Can you maybe just elaborate on that a bit what you mean by that, obviously, you have a big manufacturing base there? But any incremental details would be helpful and that's it for me? Thanks guys.
Yeah, absolutely. We started – when we start, when the tariffs happened a few years ago, I think we had about, we had less than 1% of our total manufacturing outside of China. So we had flexibility because really good at moving things in and out of our factory, but we really didn't have a supply chain that was set up there. So even though we had the ability to move things in and out, we didn't have the ability to move things in and out very quickly. So we've really been working on that.
The first big wave of work happened during the post tariff for kind of right in the middle of the tariff activity we got to about I'd say 15% to 17%. Our goal was to get up closer to 30%. And that will give us flexibility, not only in case of other tariffs, but also just better cost positions and things. So we feel very good about the progress we're making. We're still very high on China as a manufacturing site, but we want to be flexible. We want to be able to move even beyond that 30% when we need to, or if we need to either for costs or for geopolitical reason.
Super. Thanks guys.
Thank you, Eric.
Thanks Eric. Next up, Adam Angelov from Bank of America.
Hello Adam.
Hey Adam.
Hello. Thanks for letting me on. I think we've gone through most of my questions, so just one from me please. If the revenue outlook is worse than your guidance, do you think you have further flexibility to cut Opex if needed?
There is always opportunity. Like I said, well, I would just say again, I would think about Opex, but I would also think about costs overall. It's a $4.5 billion. If you think about Opex and costs of goods sold, so again all that cost is different, but it's a big number. If you're 1% inefficient on $4.5 billion, it's $45 million. So we're not going to wait and find out if the revenue's worse, we're working on all those things today, but it certainly will become tougher.
I mean the more cost you have to take out, it gets a little bit tougher around the edges, but I think that our outlook captures the majority of the outcomes, but if things get worse, you know, we'll make some decisions at that time. We're always going to try to manage our business for the environment, but for the long-term. So we want to do things that make sense for the long-term health of the company.
Yeah. And I'd add a nice point. I think, the way I think about any business is you have to adjust to the size of the business. You just have to, it's a must. And so it's not a question of can we? We will. The question is, how fast will we be going to do it if that happened, but we don't think that's going to happen, but if it did we'll face into it and deal with it.
Got it, great. Thank you.
Thanks Adam.
Thanks Adam. Our next question will be from Ananda, Loop Capital. Good morning, Ananda.
Hello Ananda.
Hey, good morning guys. Thanks. Yeah, Nate will let me go visual here yet neither so. Nate give me a heads up when I can on. But let just jump into it here, guys. Thanks you. I hope you're good. Thanks for taking the question. Thanks, man. Yeah. So just two if I could. The first is Bracken, you made mention the prepared remarks or actually I think it was to one of the questions about the segments. Do you expect keyboards and mice to continue to hold up well, would love to get your thought process behind that. And then I have a follow up?
I guess I have a several things contributing to that comment and that belief that we have. One of them is that, we're also dependent on it today. And I think in a hybrid world, you're going to still be dependent. It's not like the category's going to go away when you go into the office a few days a week and many of you probably are experiencing that. And I think the awareness is up. And so there's a lot of interest. We're seeing it. We launch new products we have much stronger demand than we had before. As we launch a new product, we launch a mechanical keyboard to be extremely well. So I think this is that there that's one key dynamic.
The second one is, if you go back to the really heart and soul of this business, it started as a mice business and then went to mice and keyboard. We have an incredibly good innovation engine and a very, very good strategy for segmentation. And I just feel very good about the vision, the strategy, the execution, the whole thing. So I think we're in more control of our own destiny than I'd say almost anywhere else we operate. And yeah, so I'm excited about those categories.
Like I said, when I came to the company, I actually joined Logitech, because I thought these categories were going to be in a long-term secular decline. They've been a long term secular growth trend the whole time it's getting better and better.
Amanda, we actually, we were tight on supply in some areas of the keyboard and mice market too. So I think our results there actually could have been a little better if we cleared this. If we had the supply, I mean, that's always the case every quarter, we've got something more short-on and in the recent quarters it's been there.
And do you guys, do you guys have any sense, like I know this is mostly a channel sell or web-based sell, so like not your enterprise sales force as Bracken and you mentioned a little earlier, but do you have any sense like, even if it's super broad, how much goes – how much of mice and keyboard sales are used for folks in their business environment for a business context? And then secondarily, how much is sort of middle class, upper middle class, so sort of less income sensitive. Well, it's really less inflation sensitive because employment's pretty good. So we don't have an employment issue. We have an inflation issue, so still have discretionary income.
Okay. So to answer your first question, yeah we have a sense, it's really, as you would guess, it's kind of a hard number to measure, but it's some – it's probably about a quarter and we're underdeveloped in that quarter. We've never done a particularly great job of really attacking to go-to market through the enterprise of the workspace where you can bet that we're focused there now. So we're going to work to resolve that one.
In terms of, kind of a high end versus low end or people with a lot of economic availability versus less. Yeah. I'll just remind you that the average mice we sell for, I think $29 or $24 in the marketplace. This is not an economic hardship for most people. I mean it's especially if it's your job or if you're creating on the side. I was talking to a customer the other day, who's actually got two jobs going at once. And this is the lifeblood of your business, doing it well and also just, the health and making sure that your hands don't hurt and all that stuff.
So I think we are not too sensitive to now. We're not especially mice and keyboard, I don't think it's super sensitive to the economic environment. And that's one of the reasons why when we lowered our discussion of where the revenue's going to be, you don't hear us too negative on mice and keyboards. I think even in a recessionary environment they're going to do okay.
That's helpful. And then I'm going to ask one more quick one here. How is the webcam? I think it's the ‎Brios, the high-end webcams that's in the video collab segment had those hold up during the quarter. And sorry, what's the – how they held hold up. And then also like, what's the outlook for them?
Yeah. Webcam in general just pulled way back and I think that's not too shocking. I mean, I think people are really scrambling to get on camera and now most people have found a way to get on camera. So the market pulled back. Now it's still way out versus what it was two years ago. So it's a much bigger business today and we've got – we're excited about what kind of innovation we can do there, but I don't want to mislead you. I don't think we're going to turn webcams into a strong growth category in the future.
I think it's a good solid category. That's attractive for us, but it's not going to be a heavy focus for us. We're going to innovate there. And I think we'll do well there. And we'll – and we've got great market share and we're gaining market share there, but I'm not – I wouldn't point to that one and say, gosh, that's one to really look at as a bellwether for how our business going to do. We know what thing is going to happen there.
I think about webcam is, really think about the entire workspace. Think rather it's a point sale. Sure. But it's really part of the essential work workspace. And so as you're doing more video calls, I think the webcam definitely is more essential than what it was before. So I think that's exciting. The installed base is bigger than it was before because of the sales over the last couple years. Certainly it's pulled back off of those highs, but our strategy is more about that – about the entire workspace. So it's the web camera, it's the mice, it's the keyboard, it's the headsets. How do we gain more control, more business of that entire personal workspace and webcam's a part of that.
Absolutely.
And are the webcams that are classified in video collaboration, the high-end webcams. Did they also, were they also softer like the reported segment?
Yeah, similar to the reported segment? Not quite, not down quite as much but similar. Yeah.
Cool. Thanks guys.
Thank you.
Great. Our next question is [indiscernible].
Hey Michael.
Yes. Hi, thank you for taking my question. Actually two or three, the first one is on capital allocation and your buyback. The questions actually, what are you going to do with all those shares? Are you considering canceling some of them or is it all for employee shares or do you have other intentions for those shares in order to make them re-valuable to shareholders? That will be the first question.
And the second one is really similar or adding up to what you just said on webcams, when you think about the sort of the creator economy and all the devices that these people need. I guess it's mice, keyboard and webcams, headsets. How come there is such a disconnect between mice and keyboards, and the other sort of creator economy type of products? And then I have an add-on just on detail.
Natt you want to take the capital allocation discussion and I'll jump off the next one.
Sure. Yeah, Michael, there's several uses of them, some is for employee grants. We could cancel some. We could take some proposals to shareholders at the general meeting. We don't have anything on the proxy for this year, but we still own a relatively small percentage of that total. So it's not really a decision we face today. But yeah, in general – general uses like we've had in the past, I would say is the message right now.
Bracken, do you want to take the second one or do you want me to take it?
No, I think what you're saying, what you just described, what the opportunity we see is, there is a big difference between what people are buying and what they probably need for the creator economy. And as you said, mice and keyboards are going super well, why are cameras down? We've got one camera that's positioned for that audience. And then we've got a new sub-camera that we've launched called Mevo, which is very, very small.
And I think, really getting our marketing story is correct and make sure we're placed in the right places. All those things are really critical to having a long term, really great growth business. It's small today. And the opportunity is really big. I think, making sure that a creator feels like they know what they need, we just launched lights, for example, and very, very small. We've launched one light product so far, and it's super interesting to see how many people are looking for that and we're in very limited distribution so far.
So I think there's a big opportunity there, Michael, I think we've just got to keep working to make sure we've get the right portfolio, the right positioning for those and the right distribution.
Okay. Thank you. And the add-on would be in the Audio & Wearables space there. Could you give a bit more detail on what happened in there? What drag sales down, what went well and how did the – actually, how did the microphones business perform?
Yeah, I would – Nate, you want to cover the overall segment. I'll talk about microphones in particular.
Sure. Well, are you including mobile speakers in your question Michael or…
Overall?
No just the audio and PC wearables?
Yeah. And I think on one hand we had headsets in there and I mentioned earlier that I think headsets overall was kind of a tough market. So that was probably one of the biggest drivers to decline. Microphones was also an area that was weaker and Bracken and I'll let you follow up with a comment on that one, but microphones was weaker year-over-year, again coming off of, I think a pandemic period where there was probably some additional demand for microphones above and beyond the normal creator demand.
And then the other pieces of that category are sort of declining as expected. PC speakers category we have very high share, but market that has been in some decline. And then the last piece I'd probably say would be Jaybird where we've made a decision to not launch new products there. So we're seeing the expected decline in Jaybird as well. Bracken did you want to comment on mice?
Yeah. The mics, as Natt said, the mic business grew dramatically during the pandemic, it's still up, I think more than 50% versus pre-pandemic. And we think a lot of that growth was driven by people who just felt like their mic wasn't good enough on their desktop. And so they were not really in that segment, you just described as really interesting it, they were in another segment, which is the microphone isn't working and most people have found their way around dealing with that. But the underlying business that of stringers and creators, and podcasters, I believe it's still very healthy.
Now in the pandemic, a lot of people got into podcasting that weren't in it before. So it's probably a big spike and then that's come down. But I think after we get through this period of kind of reduction to the point where you say, okay, this is the real core market, we'll see very strong growth again. I think the need for streaming and streaming products is in the road ahead is going to be bigger and bigger. And so we're pretty optimistic about it. And we haven't innovated much in that business either and that's coming.
Yeah. Still very strategic for, I think also keep in mind, it has some exposure to the gaming market, which we've talked about has been slower the last couple of quarters.
Okay. Thanks very helpful. Thank you.
Thanks, Michael.
Okay. Our final question today will come from Serge Rotzer, Credit Suisse.
Yes. Hi, good morning, everybody. I have two quick one in that case. First one is you had a very favorable sales mix in Q1 with Video Collaboration, Keyboards& Combos, Pointing Devices. So the high gross profit margining products growing the low gross profit margining product declining. So now we have to expect even not improving margins, but still we can expect high volume sequential. Isn't it? Not high single electric growth as Nate mentioned, but higher volumes in Q2 than in Q1, does this imply that the high gross profit margining product, the high gross profit margin product will decline than in Q2? So we see lower sales in Video Collaboration and mice and keyboards or where I'm wrong?
I think the reality is that the other impacts are just larger than the impact of category mix. We did see favorable category mix year-over-year Serge. And I saw that in my gross margin bridge. It just wasn't as big as the other ones that I called out. So I think that story still remains, VC I think is gone. It's now over 20% of our mix. It was down about 10% pre-pandemic. So it's doubled in size relative to the overall company. But the other factors were just too big. The cost increases, the logistics rates, the currency, those are kind of overwhelmed most of the other impacts.
Okay. Fair point. The second one is in your inventory, can you remind me how much is finished or are finished products and how much is semi-finished products? Because these days probably you will not ship finished products around the world, giving the high cost. You mentioned once, you do this, only if it gives sense, so I'm wondering in this ratio? And then secondly, obviously are there any impairment on some of the inventory, because it's at the wrong place or you have the wrong products in your inventory, your stock?
Can you, I just want to make sure I understand your mixed question between sort of…
The first one is how much finished products and then how much is components, that's say that way? And then secondly, I fear that on finished products, you could have an impairment risk because you'll not ship finished products from Asia to Europe and wherever, because it's not worse to do that. So over time you could have impairment risk on your inventory, what is them? Can you help me there?
Well, I think on the impairment thing, obviously that's something we look at every quarter and we have taken reserves in the P&L really over the last year, I would say, including some this quarter, we didn't have very many of those during the height of the pandemic growth period because everything was selling, but we've sort of been reverting to more normal levels of reserves, I think over the last 12 months. So that continues and something that obviously gets a very close inspection every quarter to make sure that things that are aging or slow moving or things that come back from customers those all carry reserves and that's all reflected in the P&L.
The other thing to keep in mind too, Serge is our business mix has shifted. So we started off your questions, talking about VC. It's a very different category than say music speakers, right. Which was a – which is a category we've de emphasized. It's now just a couple points of our sales. So that was a category. And Bracken mentioned why sort of the unattractiveness of that business model. It was a much more discretionary purchase, had much higher holiday sales. VC is a much steadier demand product with longer life cycles and so forth. So I think the overall amount of risk in the types of inventory that we're holding is different than what it was a few years ago, as our business has shifted to more mice and keyboards, which have long product life cycles, more VC, which have long product life cycles, things like that.
Yeah. I would just add to that. I think we're also just, I mean, you know this, because you've been following us for a while, but I'll say for everybody else, we're not in a business that has big obsolescence risk where some new technology's going to come in and really obsolete our category. I mean, if we have a risk it's we have a little too much inventory, one place or another one, and we need to just be patient and get it out. Not hyper discounted to get it out. And that's generally the approach we've taken.
I'm not saying we don't have any inventory risk, we always do. But it's not – it doesn't look like many of the categories that you probably look out outside of us.
Okay. Got it. Many thanks. Bye-bye.
Thanks Serge. Thanks everyone for your questions. Bracken and Nate, thank you. That's a wrap on our call. Bracken any final comments?
No, I really appreciate it. It was a great high engaged discussion today. Thank you very much. We'll look forward to talking to you again next quarter and stay tuned. It's an exciting time in the world. Every first quarter of the year seems to be very different from the last one, another, the last three or four years. And we're in another one now, so, but I'm very optimistic about the future. I think we're in a great spot.
Wonderful. Thanks everyone.
Thanks Natt.