Logitech International SA

SIX:LOGN

Earnings Call Analysis

Strong Start and Optimistic Outlook

Logitech began fiscal year 2025 with a robust 13% year-over-year growth and a notable 430 basis points increase in margin. This strong performance prompted an upward revision in the fiscal year outlook, now expecting net sales growth of 1-3% and non-GAAP operating income between $700 million and $730 million. Product innovation remains a key focus, with 11 new products launched, leveraging AI technology. Inventory management also saw improvements, with a 20% reduction in owned inventory. The company's sustainability efforts continue to be strong, with three-quarters of products now using recycled plastic.

Strong Start to Fiscal Year 2025

Logitech kicked off Fiscal Year 2025 with robust growth, delivering a 13% year-over-year increase in net sales and expanding margins by 430 basis points. The company also generated significant cash flow, bolstering an already strong balance sheet. This performance was attributed to strong market share gains and exceptional execution across key product categories.

Effective Inventory Management

A key part of Logitech's success this quarter was its strategic inventory management. The company made planned working capital investments to prepare for big selling seasons such as Amazon Prime Day, Back-to-School, and the holiday season. These investments contributed nearly one-third of top-line growth. As a result, owned inventory was down nearly 20% from the previous year, with inventory turns improving from 4.2 to 5.4.

Innovative Product Lineup

Logitech's focus on innovation was evident with the launch of 11 new products across various categories. This diverse range of innovations includes the AI Prompt Builder, which has been used over 5.5 million times, and the MeetUp 2 conference camera that leverages machine learning algorithms to enhance meeting experiences. These innovative products highlight Logitech's competitive advantage and its ability to leverage AI effectively.

Updated Fiscal 2025 Outlook

Given the solid start to the year, Logitech modestly increased its fiscal year 2025 targets. Net sales growth is now expected to be between 1% and 3%, up from previous estimates, and non-GAAP operating income between $700 million and $730 million. This updated outlook takes into account strong end customer demand and working capital investments, while remaining cautious of the uncertain global economic environment.

Commitment to Sustainability

Logitech's 2024 impact report showcased its commitment to sustainability. Impressively, 75% of its products now use recycled plastic, and 66% are carbon-labeled, helping consumers make informed choices about the environmental impact of their purchases. These sustainability efforts continue to progress alongside strong business performance, emphasizing Logitech’s balanced approach.

Geographical and Segment Performance

The quarter saw broad-based growth across various geographies: the Americas grew by 9%, EMEA by 20%, and APAC by 13%. Europe was a standout performer, thanks to excellent execution. In terms of segments, the B2B segment grew by 9%, bolstered by the successful launch of products like the MeetUp 2 conference camera and strong results in the education sector.

Future Growth Drivers

Logitech is optimistic about the role of AI and new product categories in driving future growth. The AI Prompt Builder and ongoing innovations in human-machine interfaces highlight the company's forward-looking strategy. Additionally, Logitech's entry into new verticals, such as education, indicates potential for sustained multi-year growth.

Volume-Driven Growth

The growth for the quarter was primarily volume-driven, with prices remaining relatively steady. Despite the broader economic challenges, Logitech maintained strong promotional discipline, contributing to robust volume growth without significant price dependency. This reflects the company's strong demand management and market positioning.

Earnings Call Transcript 2025-Q1

[Nate Melihercik, executive]

Good morning and good afternoon. Welcome to Logitech's video call to discuss our financial results for the First Quarter of Fiscal Year 2025. Joining us today are Hanneke Faber, our CEO; and Meeta Sunderwala, our Interim 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 based on our views only as of today.

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 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 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. I will now turn the call over to Hanneke.

[Johanna Faber, executive]

Thank you, Nate, and welcome, everyone, to our first Earnings Call of our 2025 Fiscal Year. Pleased to say that we started the year off strong. We delivered 13% year-over-year growth and 430 basis points of margin expansion, while generating strong levels of cash further bolstering our balance sheet. Given the healthy momentum in our business to market share gains we've seen in most of our key product categories and the confidence in our ability to execute, we are raising our fiscal '25 outlook, which I'll touch on shortly. You can read the full details of our quarter and our shareholder letter, which will give you a full review of our operating and financial performance.

But I'd like to spend a few minutes on this call to provide some color in context to our results. and then we'll transition to Q&A. Let me briefly touch on 3 points. First, I'm super pleased to see Q1 net sales growth in the low teens, our second consecutive quarter of growth. As a reminder, we told you last quarter that our strategic -- that strategic working capital investments would be a part of this story this quarter as we prepared our own end channel inventories for big selling seasons like June 18, Amazon Prime, Back-to-School and into the holiday season. Even after you normalize for these planned channel investments, demand was nearly 1/3 of our top line growth.

The teams delivered on our plans exceptionally well. Together with our strong top line results and our focus on execution and operational discipline, we drove healthy growth in operating margin expansion. These results were also enabled by our ability to balance the needs of our distribution partners with continued focus on lean working capital management. At the end of Q1, our owned inventory was down nearly 20% from last year, and our Q1 inventory turns were at 5.4, with a notable increase from 4.2% last year. demonstrating our strong command of the business. And our channel inventory levels in terms of weeks on hand remain well within the upper and lower ranges, in which we've operated since the beginning of fiscal year '24.

Second, I'm excited about our product innovation lineup for this fiscal year, advancing our strategic priority that I talked about last quarter to innovate. You saw us launch 11 products in the first quarter across almost all of our product categories. This ability to launch a diversified set of innovations with a design-led focus at global scale, is a competitive advantage that we will continue to leverage. Many of these products are finding smart ways to leverage the power of AI. And for example, the recently released AI prompt builder has now been used in over 5.5 million instances. And our recently introduced MeetUp 2 conference camera with RightSight and RightSound technologies, leverages proprietary data models, our own and machine learning algorithms to deliver a truly equitable meeting experience for those in the meeting room or participating remotely.

Third, given our solid start to the year, we are updating our fiscal year '25 outlook, modestly increasing our fiscal '25 targets for both net sales and non-GAAP operating income. Fiscal year '25 net sales growth is now expected to be between 1% and 3%, and non-GAAP operating income is expected to be between $700 million and $730 million. This updated fiscal '25 outlook contemplates 2 discrete trends. Our top line growth in Q1 was clearly strong. End customer demand, coupled with the working capital investments I discussed earlier, drove a healthy increase in net sales. At the same time though, this positive business momentum occurred amidst the uncertain and volatile global economic backdrop. So while we're pleased with our first quarter results, we remain pragmatic about future risks and uncertainties.

Now before we move to Q&A, I'd just like to highlight our 2024 impact report that we published yesterday. You've heard us talk about our commitment to sustainability, and this annual scorecard holds us accountable. There's a lot to be proud of in this report, such as the fact that 3 out of 4 of our products now use recycled plastic and 66% of our products are carbon label, helping consumers and enterprise technology buyers make informed decisions about the environmental impact of their purchases. I'm very comfortable with this approach to sustainability. We set ambitious goals and provide an annual transparent scorecard. And above all, we pursue this commitment to sustainability while delivering strong business results.

So in summary, I'm pleased with our ability to execute on our strategic priorities as we focus on extending human potential in work and play. Our first quarter results demonstrate that we're on the right track. Thank you. And with that, Nate, let's go to Q&A.

[Nate Melihercik, executive]

Layla,we are now ready for our first question.

[Operator]

[Operator Instructions]

Our first question comes from Samik Chatterjee from JPMorgan.

[Nate Melihercik, executive]

Samik, I believe you're on mute. Layla, if you can help him out, that would be great.

[Operator]

Yes, Samik, I see your mic is open. You may need to change the input.

We'll go ahead and move to our next analyst and we'll return to you Samik. Our next question will come from Jorn Iffert from UBS.

[Joern Iffert, analyst]

There's one starting question and then a follow-up, please. The starting question is, do you see sell in and sell out or sales through to trending to the same corridor now in Q2? Because you have not reiterated your above seasonality and guidance for Q2 in the report?

[Johanna Faber, executive]

So I guess you're asking about our forward-looking outlook. So we've raised a little bit, as you can see, to 1 to 3 from 0 to 2 on the top line. And also on the bottom line, we've raised a little bit from minus 2 to plus 2, and now to 0 to plus 4. What does that reflect maybe helpful just to touch on that? So that reflects the higher demand we've seen in Q1, which we're really pleased by. At the same time, where we don't see a change is what we talked about last quarter, which is in Q1 and Q2 sell-in will be larger than sellout. That is planned.

We need to boost channel inventory because we're shifting to growth mode, and we have to get ready for the big selling seasons, especially those in Q3 at the holidays. In Q3 and Q4, that dynamic is going to reverse. So sellout will be larger than sell-in. No changes there. So what you're seeing in our new forecast is that we are flowing through the increased demand that is higher than expected that we've seen in Q1, but no change for the rest of the year.

[Joern Iffert, analyst]

And then allow me a follow-up. Given the consumer weakness we have seen from so many companies recently, do you see that promotion have increased again in the exit rate? So by May, June and in your Q1?

[Johanna Faber, executive]

No, not yet. So I think promotional discipline has been a good part of our Q1 results. And our teams have just been extremely disciplined. So not yet. But again, that is part of looking forward in a little bit of our caution is it may increase going forward. We're always going to promote as much as is necessary in the market.

[Operator]

Our next question comes from Ananda Baruah from Loop Capital.

[Ananda Baruah, analyst]

Yes, two, if I could. I guess the first one is, Hanneke, on the last call, and this is really more big picture. I think you talked about the most impactful opportunities as you see them being geographic wallet share, kind of true-up, B2B and expansion of work and play? And I guess, just any incremental thoughts there or kind of progress actions the last 90 days that have been taken to sort of go with those? And then I have a quick follow-up as well.

[Johanna Faber, executive]

Yes, absolutely. No, thanks for that question. Clearly, we're working on all of those 3 things. And it's too early to see massive changes, but there's a few things I'm pleased by. When it comes to geography, we're seeing really broad-based growth in the quarter. So the Americas up 9%; EMEA up 20% APAC up 13%. So that's really broad-based and particularly stand out performance from EMEA, where our execution just has been outstanding.

When it comes to B2B, yes, we are doubling down and pleased to see growth in the segment, up 9%. Market probably a little more robust than it has been, which is also great to see. And we continue to build capabilities. And that's both on the product side, where we had a great launch of the MeetUp 2 in the quarter, but also on the organizational talent and services side. So I'm excited about the steps we're taking there to really double down on that B2B business where we still have so much opportunity.

And then finally, on Work and Play expansion, that's clearly a multiyear program. But again, some green shoots. We had terrific results in education in the quarter. That's a new space for us. I talked about how today, we mostly focus on offices when it comes to B2B, you and I on a video conference, you and I at our desk. But most people in the world don't work in offices. Education is the first other workplace we've started to focus on. And again, our results in the quarter, very, very strong, more than 20% growth in education behind great products like the Rugged portfolio. So I love that. And then more is to come.

We also announced the launch in the quarter of the MX Inc., which is a stylist for the Meta Oculus headset. Again, you can imagine how that goes into new work verticals as well in the future. And again, these will be small to start with. This is a multiyear effort. But I'm excited about some of the green shoots that we're starting to see.

[Ananda Baruah, analyst]

And that dovetails into the follow-up. I appreciate the context. That's super helpful. Sort of throughout the quarter, there is sort of the idea in the investment community that the keyboard business is benefiting from or preparing to benefit from PC refresh, some of which is AI driven, so sort of an AI component to sort of keyboard pulls. Would love content, sort of how does the company think about that would the company agree with that? And what is the company's view around keyboards and AI pull? Any context there would be great, near term and even bigger.

[Johanna Faber, executive]

Yes. I think the top line is we're very bullish on mice and keyboards. That's the core of the core of our business. That's where we started, and it's still a great business. We are not one-to-one correlated to PC refreshes, but it certainly can't hurt if people are buying new PCs. So that's a good thing. And then AI will play a big role.

We've always been the human machine interface ever since the start of this company 40 years ago. And we can now really be the link between the human and the large language model via our mice and keyboards. And so we've started to do that. The Logi AI Prompt Builder, is a free piece of software that sits in all our mice and keyboards since April. It allows you to shortcut to chat GPT. And it's quite popular, 5.5 million unique user interactions since the middle of April. That's pretty good.

I'm excited, again, this is just the start of how we're serving as that interface to the large language models through our mice and keyboards, but it's exciting.

[Operator]

[Operator Instructions]

We will now also accept further follow-ups. There are no raised hands at this time, Nate.

[Nate Melihercik, executive]

We'll give it one minute and then we'll wrap it if there are no other questions.

[Operator]

Yes, it appear to have a follow-up from Jorn. He's now being promoted to panelists and will be with us in a moment.

[Joern Iffert, analyst]

Yes, a follow-up, please. I mean can you distinguish between your price and volume performance? For the quarter, is price still a significant contributor here, price at mix or is it mainly volume driven? To start maybe with this one, if I may.

[Meeta Sunderwala, executive]

I would say that it's mainly volume driven. Our prices have stayed fairly steady. We do have some promo in the quarter, but it has stayed fairly flat with last quarter.

[Joern Iffert, analyst]

And then if you allow me a follow-up. I think in the last earnings call, you mentioned APAC should be the key driver. Now it turns out EMEA is a key driver, but of course, it was for the full year what you mentioned. So has your view on the regions changed now over the last 2 to 3 months and also same on categories? Is it still tablet peripheral which would be the strongest growing category? Or has this changed?

[Johanna Faber, executive]

Yes. I'm not sure that we actually said that Apex should be. I think we talked about what might be impacts on gross margin. So mix is an impact on gross margin. And if Europe and the U.S. are a little better, APAC is a little worse. So it's a positive, it's a tailwind on gross margin. And the same is true with our video conferencing business. If that grows faster, that's a tailwind on gross margin.

So I think we talked about it that way. That said, I'm super pleased with the broad-based profile of our growth. APAC had a robust result at plus 13%, but Europe really was a star. And again, driving a good portion of that increased demand that we -- that was a little unexpected versus what we were seeing last quarter. And the execution in Europe has been particularly strong.

If you've been to Media Market recently, you're seeing a fantastic user-centric shelf there that we've built, which looks fantastic, where you can really see MX versus ERGO versus our mobile line versus our baseline, really good way for people to shop, and we're seeing double-digit increases where we place that in stores.

And then Europe has also done a great job with Logi Play and LogiPlay Race days. we engage consumers in-store and online with our simulation wheels. So they actually play with our product. And again, that's a great driver of sales. So kudos to our European team, the market in Europe is okay, but certainly not growing 20%. And that's really a testament to the execution of our teams there.

[Meeta Sunderwala, executive]

Jorn, I just wanted to give you one clarification, is that I was giving you a sequential number on the promos. And actually, year-over-year, we did have one point of favorability on promo. And -- but as I said before, it was mainly volume.

[Operator]

Our next question comes from Lucas Glemser from Berenberg. Please go ahead, Lucas.

[Operator Instructions]

All right. Maybe we seem to have no further questions at this time.

[Nate Melihercik, executive]

Thank you, everybody, and thank you for your questions this morning. Hanneke?

[Johanna Faber, executive]

Yes. Thank you, Nate. Thank you all. Of course, if you have other questions, Samik, Lucas, there will be follow-ups. Thanks for joining us here. Thanks for your interest in Logitech. And again, I'd be remiss to not say thank you to the logistic teams around the world for everything they did in the quarter, and we'll continue to do throughout the year. Looking forward to seeing you next quarter. Thanks, everyone.