Logitech International SA

SIX:LOGN

Earnings Call Transcript 2023-Q2

[Nate Melihercik, executive]

Okay. Good morning and good afternoon. Thank you, everyone, for joining us. Welcome to Logitech's video call to discuss our financial results for the second quarter of fiscal 2023. A call to discuss our financial results for the second quarter of fiscal 2023. Joining us today are Bracken Darrell, our President and CEO; and Nate Olmstead, our CFO.

During this call, we will make forward-looking statements, including with respect to future operating results under the safe harbor Private Securities Litigation Reform Act 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, and we will also discuss non-GAAP financial results. You can find a reconciliation of these 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 annual -- 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 encourage you to review these materials carefully. Unless noted otherwise, comparisons between periods are year-over-year and in constant currency and sales are net sales. This call is being recorded and will be available for a replay on our website.

With that, I will now turn the call over to Bracken. Bracken?

[Bracken Darrell, executive]

Thank you, Nate, and thanks to all of you, as usual, for joining us. Last quarter, we discussed the ongoing macroeconomic and geopolitical challenges impacting Logitech and the world. And the short story is that the industry is volatile. Inflation continues to be an issue, the dollar remains strong, the war continues, and consumer confidence appears to be tepid.

Despite this volatility, we're committed to a straightforward approach as we manage the business. We'll continue to invest in product innovation, volume manage the near term conservatively.

First, let's talk about innovation. We love the categories we're in. We're optimistic about their growth trends on the markets, the strategy and our business model. We just had one of the most impressive sets of product launches in the history of Logitech.

All told, we announced more than 20 new products in the quarter, 20. In my time at Logitech, I don't think we've ever launched this many. More important than the sheer number, though, is that I believe this year, they have never been more innovative.

We've increased our product development investments over the past 3 years, and you're seeing the results of those investments as we further separate ourselves from others in the market.

And with everything going on in the world, our teams are doubling down. It's so exciting. Many of these new products, by the way, are additive to our existing portfolio. We're increasing our addressable markets.

And equally as important, they're designed to take advantage of the big durable trends we've been highlighting, video everywhere, hybrid work and the explosion of gaming and content creation. We continue to develop products to help businesses and employees thrive in this new and evolving work-from-anywhere world.

And as the environment changes, we're continuing to learn something new every day, every week about what the future holds. And it's that evolution that creates the demand for innovation, and that's the kind of markets we like to be in, markets where our expertise in design and user insights is rewarded by customers.

For example, for B2B customers, we announced Logitech Sight, addressing the question we hear most from enterprises about videoconferencing. What do I really need in a conference room to make hybrid work, work? We're passionate about creating an equitable experience for remote participants and in-room participants.

Sight is the next step bridging this gap. It's a tabletop camera that will be sold as part of our conference room solutions, and it uses AI to more intelligently track conversations and provide a more natural video perspective to enhance meeting effectiveness.

I'm especially excited about this product because it highlights two important areas where we continue to make strides. It's powered by AI software, an excellent example of our increasingly software-driven solutions.

And it's a perfect example of a product that's completely additive to our existing portfolio of conferencing products, seamlessly working with Rally Bar in [ Scribe ], just to name a couple of them. Nobody else has a solution like this. It's such an important product. I think of it as the missing piece of the conference room setup.

For the personal workspace, we launched a new set of keyboards and mice design, especially for Mac users, which will expand our addressable market and the work-from-anywhere trend.

And now let's look at Gaming, where the team had a really strong quarter of product launches. Similar to the trend in video and hybrid work, we're seeing more gamers demanding products to let them game from anywhere. We announced G CLOUD, a gaming device designed for cloud gamers that accesses PC and console games from nearly anywhere. And as of Sight for B2B customers, this product is completely additive to our Gaming lineup.

Gamers want on-demand access to their favorite games and high-quality gaming experiences wherever they happen to be. And that's exactly what G CLOUD provides. Later in the quarter, we released our lineup of PRO Racing Wheels and Pedals, which I believe are far and away the best in the industry.

These are the high-end, high-performing products, and the response has been incredibly positive. List goes on and on.

Gaming launched its Aurora suite of products, a new set of keyboards, mice, microphones and headsets targeting a larger customer set, with expanded color and design choices, and new features like headsets more easily worn with earrings and a broader range of hair styles. For creators, we have a new studio-quality microphone and lighting.

We're pushing ahead on the metaverse and in partnership with Meta, released an immersive audio solution, Logitech Chorus. You get the point. So what's the common thread that runs through these product launches?

They offer a high-quality, seamless experience for people to work, play and create, wherever and whenever they want. They're tightly integrated with our existing product portfolio and in some cases, expand the addressable market.

By investing in our product roadmap, while also focusing on operational efficiency, we'll ultimately come out of this downturn better positioned and poised for strong growth.

Many companies talk about investing through times of economic uncertainty. We're doing it. But make no mistake, we're not operating in normal times, and we're acutely aware of the macro challenges. We're focused on what we can control.

Last quarter, we discussed a plan under this theme. What you saw this quarter were the first steps in executing that plan, we decreased our expenses, focused on operational efficiency. We committed to reducing operating expenses by $150 million or 11% by the end of the fiscal year. We're on track to meet that goal.

For Q2, OpEx was down 15%. And part of the operational efficiency is realigning our org structure. Earlier this year, we merged our commercial organizations into one team. The goal was to serve B2B customers in a coordinated way, leveraging one Logitech to sell a portfolio of Logitech's relevant products.

This quarter, we evolved our business group and engineering structures to directly align with our new commercial structure and customer audiences, B2B customers, end users and gamers plus streamers. Along with operational efficiencies, this will allow us to better compete within the enterprise market and better serve end users at the same time. We executed targeted pricing increases, and our operations team continues to look for more cost-effective ways of getting our products to market.

Our gross margin for the quarter was a strong 38.6% given inflation and currency headwinds, and we've, not yet started to see the lower shipping rates flow through our P&L. Looking ahead, you should expect us to continue to operate this way. And we'll be prudent in the near term while investing in our priorities to grow in the long term.

And that's why I'm so optimistic about our future. People will invest in their workspaces. People will participate in video calls. People will game, people will create content. And Logitech will be right in the middle of all of it.

Before I turn the call over to Nate for a breakdown of our financial performance, I'd like to say a few things about what you saw in our press release about Nate's next steps. Nate's been my CFO for nearly 4 years. We've worked through the pandemic and have grown this company nearly twice the size when I hired him.

He has done an amazing job as CFO in a period that's unlike anything Logitech's ever gone through. Nate and I talk regularly about his personal aspirations and those for the company.

And over the course of these conversations, we came to an understanding that now would be a reasonable time for him to move on to the next opportunity. He's built a best-in-class finance team over the last few years that will support the transition for a new CFO.

And as important, Nate plans to stay on Board until his replacement's in place. I am very grateful to you, Nate, for everything you've done for Logitech, and I can speak for the Board and say they are too. So Nate, with that, can you take us through the quarter's financial performance?

[Nate Olmstead, executive]

Thanks, Bracken, and thanks for your kind words. Let me walk you through the quarter in more detail. In Q2, net sales were down 7% to $1.15 billion. While sales were down, this was the third consecutive quarter of improved year-over-year growth performance. We grew in Video Collaboration and Pointing Devices, while Gaming showed nice sequential improvement in year-over-year growth, down 4% after being down 13% in Q1.

Gross margins decreased versus last quarter, as expected, to 38.6%. Versus the prior year, product cost and freight rate increases were unfavorable 3 points, and currency was unfavorable 2 points. We partially offset these headwinds with our pricing actions and by driving down our use of air freight.

Operating profit was $156 million, reflecting lower demand, inflationary cost pressures and unfavorable currency and our continued investment in our product development capabilities. Cash flow from operations was $73 million in Q2, and cash flow is up $215 million year-to-date versus last year.

Turning to results across our product categories. Gaming showed some resilience in the quarter, led by growth in Racing Wheels. For Q2, Gaming was down 4%, which is a marked improvement from last quarter. Americas and Europe Gaming sales remained pressured, while Asia continues to grow up 25%.

As with last quarter, we outperformed the market and gained PC gaming share. We think our product portfolio is in great shape, with strong new product introductions as we head into the holiday season.

Video Collaboration posted a second consecutive quarter of 7% growth. Video conference room cameras and peripherals grew nearly 30%. This growth was offset by a decline in business-oriented webcams, which were down more than 30%, although their sales remained more than 3x higher than pre-pandemic levels.

We talked about this dynamic for several quarters, pressure in webcams following the incredible dynamic and pandemic-driven growth, somewhat offsetting solid and strong growth in conference room cameras and peripherals.

Pointing Devices were up 3%, driven by our new Lift Ergonomic mouse and our high-end MX Master 3S. Keyboards and Combos net sales declined 10% due to low end market softness in China and Europe, partially offset by a strong start from our new high-end MX mechanical keyboard. Keyboard sell-through was essentially flat in the quarter. And as with our business webcams, consumer webcams were pressured and down 33% from pandemic highs.

In any given quarter, results across our categories may not move up or down in concert. It's the benefit of having a diversified portfolio that we like so much. This quarter was no different. So what we focus on is the performance of the categories that are addressing secular trends in Gaming, Video Collaboration and hybrid work.

Sales of our Pointing Devices, Keyboards and Combos, Gaming and VC products were 80% of our total net sales this quarter and were up 1% year-over-year in constant currency and excluding Russia. Their sales grew 1% year-over-year in constant currency and excluding Russia.

It's also important to note that the combined gross margins for this set of categories are above the company average. So our biggest categories addressing attractive secular trends grew and produced above average margins.

Turning to expenses. Consistent with the first quarter, we reduced our expenses, most notably in sales and marketing, which was down 21%. As Bracken mentioned earlier, we remain committed to investing in product design and development to strengthen our category leadership, and we increased R&D spend by 3%.

Last quarter, we committed to reduce our annual operating expenses by $150 million versus last year, and we are on track to meet that commitment by year end. We will continue to focus on finding efficiencies throughout the organization as we align our spend with our sales.

We ended the quarter with a cash balance of $869 million. In September, our shareholders approved our proposed dividend distribution, which when combined with our continued buyback program, returned $276 million to shareholders in the quarter.

We are now halfway through the fiscal year. And despite the headwinds, we remain confident in our ability to meet the outlook we announced last quarter. As a reminder, that outlook calls for full-year revenue in FY '23 to be down 4% to 8% in constant currency.

The U.S. dollar continued to strengthen versus last quarter, and currency now projects to be a roughly 5-point headwind to U.S. dollar growth. Therefore, our outlook for full-year revenue in U.S. dollars would be down 9% to 13%.

Our full-year non-GAAP operating income outlook remains between $650 million and $750 million, despite the incremental currency pressures. This pressure is expected to be offset by incremental efficiency gains throughout the organization and favorability in logistics rates.

Much like last quarter, our intent is to provide you with a range of reasonable outcomes, given a highly volatile -- given the highly volatile nature of the global economy. We've made assumptions about a number of factors, including potentially protracted economic volatility and sustained revenue and profit pressure from the stronger U.S. dollar.

At the high end of our outlook, we assume a relatively normal holiday cycle. While at the low end, we've assumed a holiday lift generally aligned with the worst in the last decade.

And while it continues to be challenging to forecast with a level of precision and certainty in line with pre-pandemic business cycles, we believe maintaining our forecast is prudent and reasonable. [ You there, ] Nate? It's time to open the call for your questions. Thanks.

[Nate Melihercik, executive]

All right. Great. Thanks, Bracken. Thank you, Nate, [Operator Instructions] We'll start today's Q&A with Asiya Merchant from Citi.

[Asiya Merchant, analyst]

And surprised and sad to see you leave, Nate. Best of luck. And thank you for always sharing your insights and providing clarity on callbacks, et cetera. So a couple of questions that I've gotten as the release came out.

The macro conditions remain volatile. And I know you guys talked about seasonality in the back half of this year. Can you give us any anecdotal evidence or qualitatively how you guys are thinking about the back half of this year, especially in terms of the holiday season and calendar 1Q, which is your fiscal 4Q?

And then another question on inventory, if I may. I think that declined. If my numbers are correct, that declined sequentially ahead of a holiday season. If you can walk us through what were some of the dynamics there, that would be great.

[Bracken Darrell, executive]

Yes, Nate, why don't you take both of those? I think Nate talked a little bit about the first one, and the second one we can cover quickly.

[Nate Olmstead, executive]

Sure. Yes. So I think as far as the back half of the year, Asiya, like I said, the outlook really represents kind of two ends or two multiple scenarios.

But you can think about it, I guess, at the high end, hey, it's a pretty normal holiday lift that we would see. And then on the low end, we've assumed something that really aligns with kind of the worst sequential growth that we've seen over the last decade.

So we're thinking about it in kind of two ways. I think some of the -- normally in the holiday, right, you'll see very strong performance from some of the consumer products.

And so maybe those will be a little bit more muted because consumer confidence has been a little bit weaker. But you saw the performance in Video Collaboration, again, this quarter grew 7%. And we're excited about some of the opportunities for us in B2B.

So really thinking about it across the spectrum. We've got a very diversified portfolio. So that's kind of how I would answer your first question.

I guess on the second question, yes, it came down sequentially. We did build up some inventory because of all the supply constraints that have been out there, the logistics disruptions.

Some of those are starting to alleviate. We're starting to see some some better performance from logistics providers as well as reduced costs that we think will benefit us in the second half of the year. And so we'll be working down that inventory. We'll do it prudently, but it should come down further, in fact, in Q3.

[Bracken Darrell, executive]

Yes. I'll just add to that. We expected us here to bring inventory down in this quarter, even though it was going into our holiday quarter, and we did. So it's -- we're pretty much right on track.

[Nate Melihercik, executive]

Next question, we'll go to Paul Chung, JPMorgan.

[Paul Chung, analyst]

And Nate, you will be missed. Very nice working with you. Just first on OpEx flexibility, providing some cushion here on your operating profit outlook, which areas are you cutting back? Are there any trade-offs on revenues as a result?

And you mentioned some board structure changes, et cetera? And should we expect kind of a bounce back in OpEx when kind of top line comes back or continued focus on efficiency here in the near term?

[Bracken Darrell, executive]

Let me jump in first, Nate, and then you can [ answer ]. Overall -- maybe I'll answer what are we not cutting back. We're actually growing our product development investment, as you know. We're pulling back in different areas throughout the business, including marketing, where, as Nate talked about in script, we pulled back pretty significantly.

But really on that top of the funnel marketing that we feel like at the end of the day, when the markets are generally softer, [ top of the ] marketing is not as effective, whereas search engine optimization, the things you'd expect us to keep investing and we'll certainly keep investing in. So that's really the kind of the headline. Go ahead, Nate.

[Nate Olmstead, executive]

Yes. I mean I obviously agree with all that. Paul, if you recall, we talked in the past about as we were building -- as we were investing more and as the revenue growth was very strong in FY '21 and even FY '22, we were conscious of the fact that we wanted to be investing in a variable way if possible and where it made sense.

And so that has helped us as we've had to reduce expenses or we've taken actions to reduce expenses here in the first half. And so you're seeing some of the benefits of that strategy in the execution that we talked about before.

I think even when you look at our marketing spend, though, we're really aligning it with sales. And if you look back historically, we're kind of at levels right now that are consistent with the level of investment we had there before.

So we haven't cut back, as Bracken said, on all marketing, but we're just being very thoughtful about where it makes sense to invest now. I think if conditions change and we start to see more revenue growth and gross profit expansion, you may see us increase those investments again.

[Paul Chung, analyst]

Got you. And then just a follow-up. Can you talk about the cadence of product releases? I think you mentioned 20 or so. And then kind of your commitment to R&D, you just doubled since [ '19 ] levels. Where are you kind of seeing relative strength from new product lines like the [ Mitra ], the G Cloud, Mac line of keyboards? And what products are kind of resonating the most with customers?

[Bracken Darrell, executive]

Yes. Let me -- first of all, in terms of the cadence, we usually do launch quite a few products in Q2 ahead of Q3. And this was really a record. I mean, I think -- I don't know, we try to go back and count, but we announced 20 new products this quarter. I mentioned that in the call. So I am super excited about what we're doing. Our innovation engine is just sort of firing on all cylinders.

The other cool thing about it is that a lot of those products are completely new markets. I mentioned in the script, new addressable markets, things like G CLOUD, [ Logitech Sight ].

And you asked what I'm excited about. That's a good example. I mean, I think this -- the ability to -- I think anybody who's been in a video call lately and been one of the remote participants, has had somebody stand with their back to the camera, they feel really out of it. And this really answers that.

And the cool thing about it is you need our existing products to use it. And so you have to -- and you don't have to wait to buy them. You can buy them now, and this will just be a complement when it comes out. So it's a really cool product.

I'm excited about the Mac line of products we have. We already had a very high-end MX Master and MX Keys version. Now this brings us into a lower price point. So everybody can afford to really have an alternative to Apple's experience, which is great.

And I can probably keep going, G CLOUD is going to be really interesting to see how it does. I think we're going to just keep an eye on that category. Netflix started one day and now look at it. I think these cloud gaming services are going to be really big over time. And we're the first one out that was really a mobile experience inside the home. So it's super exciting across the board.

[Nate Melihercik, executive]

Next question will be from Alex Duval, Goldman Sachs.

[Alexander Duval, analyst]

And thanks so much, to Nate, for the conversations over the years. A couple of quick ones. Firstly, you saw a 7% decline organically, constant currency, in the quarter.

So I wondered if you could just help us understand a bit more about how you get to minus 6% at the midpoint for the full year. To what extent it's the story of comp effects or product launches? How should we be thinking about that?

And secondly, related to this, if you look at video conferencing, you referenced the backed office dynamic. Just wondered, to what extent we should think about that benefiting you from a few more quarters? How are you thinking about that as well?

[Bracken Darrell, executive]

Why don't I take the last one, Nate. I think we're seeing at the very beginning of really the reenablement of an office. I think there's a lot of -- there's -- one of the most common questions -- I talked to a lot of CEOs and non-CIO there's -- one of the most common questions is, "Gosh, how is this going to work long term?"

I mean we're an interesting example. We're -- we've redone an office -- one big office we have in Switzerland. We just changed offices in [ Cork ]. So we're just moving into it. We're changing offices next year in Silicon Valley, all caused or at least accelerated by what's happened during the pandemic with hybrid work becoming the way we work.

So I think we're pretty representative maybe a little bit on the front of the curve of most companies. So I think most companies over the next few years are all going to be adjusting size structure inside the office, the whole thing.

And that really bodes well for us because then you really got to rethink, how many rooms we're going to have, how many rooms are going to have video, how many workspaces do I need? I'm sure they're going to upgrade those. They're going to change the structure inside.

Oh, and the people at home, they really now do need better stuff. And like I said, on many calls, everybody on this call can upgrade their workspace, I can guarantee us a [ workspace ]. I'll tell you exactly what you should do.

So it's a really -- I think it's a very good-looking future for us in the whole B2B space, whether it's B2B, in the office or B2B at home.

[Nate Olmstead, executive]

And then on your question around the guidance, Alex, yes, I think you kind of hit some of it in your question. The compares are much different for the first half and the second half. In the first half of last year, we grew 24% in constant currency. And in the second half of last year, we declined 9% in constant currency.

So it's a pretty big difference in the year-over-year compare half to half. And so we think that this full-year outlook is reasonable.

[Nate Melihercik, executive]

Next question will be from Adam Angelov, Bank of America.

[Adam Angelov, analyst]

So firstly, on the gross margins and the 3 percentage points of inflation headwinds you mentioned, just wondering, is there any reason as these things probably ease further over the next few quarters why you wouldn't see the benefit?

So you mentioned shipping is not really coming through the P&L yet. Is there any long-term contracts there on the component side, on the shipping side that would prevent you seeing the benefit?

And then secondly, just on G CLOUD, kind of curious to see like more strategically, kind of teased it a little bit there, but more strategically, is this a move into more of the center of Gaming and away from peripherals? Just anything you could kind of give on that.

[Bracken Darrell, executive]

Yes, I'll answer the last one first, Nate, and then you can jump into the first one. The answer is we've been systematically expanding categories for 10 years. So this is another category expansion.

As you said, you could argue it's more into, as you call it, the center of Gaming, although needless to say, I am the CEO of Logitech. So I think our products really are the center of [ Gaming ]. They're the last things you touched, the central things that they're [ volume gain ].

But we're going to keep expanding categories. We think there are opportunities not only in Gaming, but across the board. And several of the products we launched this time, as I said earlier, were really new addressable market opportunities for us. So yes, I'm pretty optimistic about that.

[Nate Olmstead, executive]

In terms of the cost, Adam, up in cost of goods sold, I mean that's one of the reasons why I wanted to call that out is I want to give you visibility of what some of the drivers are of the margin. And in the case of cost, you kind of got 2 big buckets, you've got logistics and the logistics cost and product cost.

Those will begin to flow through as benefits in the second half, but we have to remember, we have to work down inventory before we start to see some of those benefits. Some of it is contracts that we have, although we're able to buy on the spot rate in some cases as well.

So I do believe logistics will probably see some of that benefit a little bit earlier. And then as we get into next year, probably see more of that favorability start to flow through the P&L. Of course, you always got to keep in mind that we may decide to take pricing actions going in the other direction. There's a lot of moving pieces to it.

But net-net, I would expect some of those cost pressures to start to become tailwinds as we move into the back half of this year and then more so into FY '24.

[Bracken Darrell, executive]

But I will say, and if you listen carefully to Nate's script, that's 5 points of headwind. We still have delivered almost 39 points of gross margin with 5 points of headwinds between currency and cost. And as you're suggesting, Adam, neither one of those is likely to last forever. The cost is certainly at a high and currency is at an incredible high.

So I certainly wouldn't make any commitments about the next 12 months, a year or something. But long term, that's -- I'm really excited about that. And I think the fact that we could deliver 39 points of gross margin with 5 points of headwinds that are pretty [ temporal ], and some time frame it's exciting.

[Nate Olmstead, executive]

Yes. I mean I think that's exactly the right point, Adam, is there's a lot of earnings power here, right? We're getting more efficient on our costs. Obviously, an uncertainty involved at a time right now from a macro standpoint, but our gross margins remain strong. And you can see what some of the headwinds are there.

And so we have to make some assumptions about how long it's going to take for some of those cost pressures to reverse, but there's some strong margin power in this model.

[Nate Melihercik, executive]

Our next question will be from Jörn Iffert from UBS.

[Joern Iffert, analyst]

The first one I would be please on your APAC operations. Quite important success factor in the quarter. Where is this growth exactly coming from? Is it category growth? Is it share gains? Is it new regions? If you can put some light on this, it would be quite helpful.

And the second question would be, please, Bracken, you mentioned this, there are a couple of changes in the organization in the B2B go-to-market strategy and also in business group and engineering. Can you give us more details what exactly you are doing here?

[Bracken Darrell, executive]

Yes, absolutely. We did kind of shorthand, I guess. Nate, I'll take the last one. You take the first one. Yes. So what are we doing? What are we talking about? So this set of changes really started at the end of last fiscal year, at the beginning of this one, and we quietly put 2 salesforces together.

Why did we do that? Because we really wanted to bring all of Logitech to B2B customers as one. So now you've got one organization bringing -- one commercial organization bringing all of Logitech, whether it's a personal workspace or a room.

The reason we did that was because, I think I mentioned this in the last call, as we were aggressively selling in video conferencing equipment, we are increasingly having people say, "Oh and, before you leave, could you please -- can we talk about mice and keyboards?"

And so we were -- we're underdeveloped in the B2B market in our whole personal workspace or as we call it B2B personal workspace mice, and keyboards and things. So by changing that commercial alignment, we have now one message to the customer, one idea of what is Logitech and one thing we can talk about.

That was the first step. The second -- this last round of changes, we didn't change the business group structure to adapt to that. That was part of the driver here. So we have one B2B organization that interfaces directly with that group. So it's a kind of a pitcher and a catcher now. So we've got one team, and this should make us much stronger on our overall B2B business.

We did a couple of other things on top of that. We centralized our software engineering for most of the business now and our hardware engineering for the first time. That's more efficient.

But the more important thing is, I think it's going to give us the ability to move step by step further and further into services and software-enabled services and also to leverage the fact that we have all the hardware things on one desk, all the names of people buying things, all the data that's coming in and the ability to get our products to work and do more things together.

So I am really, really excited about the set of changes. It's a big new chapter for Logitech.

[Nate Olmstead, executive]

Yes. And Jorn, to answer your question about AP region. Normally, we talk a lot about China there. China actually didn't have a strong quarter as it had recently, but that was more than offset by really good performance in Australia and Korea.

So just like a lot of places, we're diversified even within region. And the strength that we saw -- other than Gaming, which we saw really good performance across the region, I would say. But in Korea and Australia, it's really kind of across the portfolio, the mice, keyboard, Video Collaboration, all had very, very strong quarters.

[Joern Iffert, analyst]

And may I ask why? Why was Australia and Korea so strong in the quarter?

[Nate Olmstead, executive]

Well, again, I think countries, you got to look at prior-year compares. And I think the way that the world has been evolving has been different by country, right? The pandemic had different timing in different places and reopenings and transitions back into retail and so forth.

So there's really just a number of factors. I mean I think we saw the market was a little bit stronger in some of those areas. We had some share gains. A number of factors.

But the portfolio, I think with the new product introductions that we talked about on this call, I think we're seeing some of the benefits of that. And those are investments that we kicked off and have been increasing over the last several years.

[Nate Melihercik, executive]

Our next question will be from Rob Sanders at Deutsche Bank.

[Robert Sanders, analyst]

Yes. I just had a question regarding the upcoming selling season. I was just wondering what's your priority? Is it preserve profitability, maybe hold on to elevated inventory? Or will you look to clear the channel? I mean, I noticed you haven't been too active on the promotional front so far, but I was wondering if that might change? And I have a follow-up.

[Bracken Darrell, executive]

Yes, I'll jump in on that, Nate. I wouldn't be surprised if it's a little more promotional in Q3 than -- just because Q3 is always a little more promotional. And so it wouldn't be too surprising.

But I think our real priority is -- we've got great innovation. So I feel super about the product lineup we have and the portfolio we have, going into the Q3 and Q4 and beyond. So our -- the holiday season and beyond that.

So I think our priorities are not going to change too much. It's -- we've really got what we need to sell, and now we need to go sell it. Do you want to add anything to that, Nate?

[Nate Olmstead, executive]

No.

[Robert Sanders, analyst]

I just had a quick follow-up. Just if you could just remind us, I know you've taken a lot of share post previous downturns because a lot of companies have kind of exited, et cetera.

I was just wondering, like historically, when have you taken the most share? Is it basically as those companies kind of flame out because they start losing money? Or is it you look to kind of press your advantage and press the brand even at this stage?

[Bracken Darrell, executive]

I think I'd characterize our share gains a little differently. I think we've gained share because we've really innovated and we focused on brand building. If you look at what we've done inside of our Gaming business, we've just consistently gained share every year.

It wasn't -- didn't have much to do with -- honestly, didn't have too much to do with competition. It was about us. We really innovated well and built a brand and build relationships with gamers and influencers and brought that to market.

If you look at our -- if you go to Google search -- Google search trends and type in Logitech G and just look over the last 10 years, and you'll see how much -- how long that's been headed up into the right. And by the way, that's [ Halo ] in all of Logitech, too. So it's gone beyond that.

So I think generally -- and it's really not been about competitors flaming out or something. Very few competitors have left our business. It's really about us performing.

[Nate Olmstead, executive]

Yes, Rob, I just want to echo that. We've been talking for a while about moving from push to pull, right, and making investments in marketing, reducing reliance on promotion. And that's not something you just turn on in one quarter. That's a long-term journey.

And we accelerated that through the strength of our results during the pandemic and increased our investments. And I mean, I think that what you're seeing and what you have seen consistently over the last several quarters has been the benefits of those investments and decisions we made.

[Bracken Darrell, executive]

Exactly. Absolutely, great point, if we do say so ourselves. We pat ourselves on the back.

[Nate Melihercik, executive]

Next question is from Erik Woodring at Morgan Stanley.

[Erik Woodring, analyst]

Nate, you will be sadly missed. I will give a shameless plug to someone that maybe used to work for you that might be on -- might be looking for a CFO job. No. But it...

[Bracken Darrell, executive]

He seems to have a fan club out there.

[Erik Woodring, analyst]

In all seriousness, Nate, thanks for all of your help. Maybe I'll direct two at you. One was just getting back to your comments on gross margins. Because if you look at historically, sequentially, you see pressure in the December quarter owning to the fact that it is a bit of a more promotional period. But then you talked about some of these more temporal headwinds, inflation, logistics.

And so I'm just wondering if there's any reason why that type of seasonality this quarter shouldn't exist? Or any -- maybe if you could walk us through some of the puts and takes to at least help us think about gross margins for December? And then I have a follow-up.

[Bracken Darrell, executive]

I know that was for Nate, but I have to jump in here. First, while those headwinds are temporal, they're not that temporal. You'll see a huge change in Q3.

[Nate Olmstead, executive]

Yes. My outlook really doesn't assume much change in gross margins at current levels, Erik. There's a lot of factors why Q3 gross margins might be up or down. Category mix is another one intended -- historically -- you were talking historically. Historically, Mobile Speakers was a much bigger part of our portfolio. It's now a few percent. And that was one of our lower-margin categories when it was scaled.

And so you did have some mix impacts as you went into the consumer period as well as like you said, a little bit more promotion for Black Friday and those types of big events.

I think as our business portfolio has shifted towards little bit more of the business customers, that mix effect will lessen a little bit. But yes, typically, I would still expect margins to come down a little bit in Q3.

But there's lots of big factors at play here in the back half, as Bracken mentioned, and he's absolutely right. We are not assuming a big significant swing in costs and seeing that favorability to flow through. I do believe that, that will happen, but we're not predicting that to be super significant here in the second half.

[Bracken Darrell, executive]

And I would add, I do think it will be -- if somebody ask the question, I think it will be a little more promotional in Q3 just because we always are. And I think that's just the reality of the world we're in right now, too.

[Erik Woodring, analyst]

And then maybe just as a follow-up, year-to-date, I guess, your cash flow from operations is tracking below operating income. The guide is for those to eventually converge by year-end.

Maybe just talk about some of the factors that give you confidence in the cash flow recovery in the back half of the year. Is that largely inventory? Or is there anything else that you would call out as a driver of that improvement? And then that's it for me.

[Nate Olmstead, executive]

Got it. Yes, I think inventory, working capital, in general, will be one of the big drivers. That's -- basically, your cash flow is going to be two big components. It's going to be your profit and your working capital. I think in the back half of the year, you'll see some efficiency improvement in working capital.

The quarter was a little bit back-end loaded as customers were -- a lot of our large customers were adjusting inventory levels early in the quarter. They started to repurchase again in the back half.

So our collections was -- we didn't finish all the collections of all the sales this quarter, so we'll see some benefit from that in Q3. Aging is great on AR, no problems there, just a little back-end loaded, and so we'll see higher collections in Q3.

[Nate Melihercik, executive]

Our next question will be from Serge Rotzer, Crédit Suisse.

[Serge Rotzer, analyst]

Yes. Good morning, gentlemen. First question, I have two or three. You mentioned that you launched 20 new products. And I'm wondering, will these new products be margin accretive, no impact or dilutive? And secondly, even more important, what's about the availability now? Are these products already in the shelf for Q3? Or is this something for next fiscal year?

[Bracken Darrell, executive]

Yes. So first of all, I would say, with 20 products, probably on average, their margin, they are neutral -- margin neutral. But we've got some that are accretive and a few of them are diluted. Generally, they're available. We've got a few that are coming later.

Logitech Sight is going to come later. We announced it early because we -- it really is complementary. You could buy a room system and then get it all set up, have it ready to go, get used to it and then bring this in and drop it right into the middle of the table, literally, and it will improve the overall experience. So that's an example on what's not available.

On the other hand, other things like G CLOUD are available now. So it's kind of a mixed bag. But generally, everything is available.

[Serge Rotzer, analyst]

[ Probably ] to take again G CLOUD, is it available only in the [ U.S. dimension ]? And in big volumes or only available -- let's say, a dilutive or accretive to the gaming? You mentioned that Gaming margin is increasing.

[Bracken Darrell, executive]

Yes, we're going to keep it pretty limited because -- limited production to start. We try to do that with brand new categories, and then we can always turn this -- [ picking it on ] if we need to.

[Nate Olmstead, executive]

And Serge, one thing I need to -- you asked about margin, but also keep in mind the ASPs and things like [ Sight ] is relative to the rest of our portfolio, it's a high-ASP product. PRO Racing Wheels are high ASP product. G CLOUD is a high-ASP product.

So it's not universal across the board. But you're seeing, again, it's not like we just flip the switch on this stuff. We've been working on these things for a while. There's a lot of software content in there, a lot of value. So I feel very good about that.

[Serge Rotzer, analyst]

That's a good point. Probably a year on the guidance, you increased the currency impact from 4% to minus 5%. And you said reported sales will be lower or decrease is higher but you left EBIT unchanged. So basically, it's a guidance upgrade. Is this true? Do you see it as the guidance upgrade? And what's the main factor for this guidance upgrade if you'd like so?

[Nate Olmstead, executive]

Yes. I called out two things briefly in my prepared remarks, additional efficiencies that we're finding across the organization. So that could be in OpEx. It could also be in COGS. Keep in mind, we've got $3 billion plus of spend up in our cost of goods sold. So there's a big pool of spend there for me to look for efficiency with the teams.

And then also, we do think we're starting to see some of those spot rates on logistics come down, especially on the ocean. And so as we get into the back half -- really into the back half of the second half of the year into Q4, we'll probably see some favorability from that, that will help offset the currency pressure.

[Serge Rotzer, analyst]

Okay. It's a . So -- and then the last one, restructuring charge minus $11 million; and other income, minus $25 million. Is this all related to the new organization? Or can you give us some flavor here? And should we expect this to continue in the next quarters?

[Nate Olmstead, executive]

The restructuring is related to the org changes Bracken went through. The other item was a write-down of an investment that we had on our books from years ago. Lifesize, if you remember, was a company that we used to own, that we spun out. And we wrote down the value of that this quarter.

[Bracken Darrell, executive]

Noncash.

[Nate Olmstead, executive]

Noncash, yes.

[Nate Melihercik, executive]

Our next question is from Michael Foeth at Vontobel.

[Michael Foeth, analyst]

And thanks, Nate, also for all the conversations. Just one left for me on pricing strategy. You said you've taken some pricing actions in the quarter already. Two questions there. One is how much leeway do you have with pricing, given that consumers, especially in Europe, are already quite squeezed? So what's your view on that? And then, how much did those pricing actions actually offset the other sort of headwinds that you had on gross margin?

[Bracken Darrell, executive]

I'll let Nate answer the second, but I'll answer the first one. How much leeway do we have? I think that remains to be seen. I think we've raised prices a couple of times in the last year, and they weren't really small price increases either.

The last round, I would say, was really a response to the continued currency challenges, and we focused it in Europe and Japan, a couple of other places. And I think it remains to be seen. I think it's -- we feel pretty good about it on the high end on our more higher-end products.

On the low end, it's going to be competitive, and we're not going to give up any [ share ] on the low end, so we'll make sure to stay competitive there. So we may moderate a little bit on the low end if we have to, but we're holding the line for now. We haven't seen competitors follow in most cases actually in the second round. So we always raise and then wait. And if we have to, we play hardball.

[Nate Olmstead, executive]

And then the second part of your question, Michael. I mentioned we had 5 points of headwinds. I mentioned those gross margins were down less than 5 points year-over-year. We've got about 1 point of benefit year-over-year from pricing thus far to help offset some of those cost pressures in currency.

[Bracken Darrell, executive]

And there is Ananda.

[Nate Melihercik, executive]

Ananda from Loop.

[Bracken Darrell, executive]

I am down the street from all of you in New York or around New York today. I'm here in the New York.

[Ananda Baruah, analyst]

Is that right? Is that right? All right. Well, let's -- we'll get coffee about 45 minutes after this call ends back in -- you just gave up the [ goose ]. You should have hit me -- yes, you should have it before the call. [ We're ] really good at [ big ] cooking.

Listen, thanks for the question. I appreciate it. Nate, we'll miss you, man. Really enjoyed the conversations. Hopefully, we can continue them in a different context. So different context, different setting. So I look forward to the call back.

[Bracken Darrell, executive]

We're not letting him go just yet. So...

[Ananda Baruah, analyst]

200%. Understood. I guess my question is, what's the -- how would you guys context like the visibility to the guidance maintenance relative to sort of normally -- it feels like we're still kind of like at the front end of macro making like a commercial impact, impact on commercial spend.

And certainly, it seems like we're -- we'd probably not -- we're probably still in the first half of the game of interest rate increases and things like that. So I guess I'll sort of leave the question there, but would love to get how you guys relate to sort of the conviction in the guidance maintenance.

[Bracken Darrell, executive]

If I could jump in first, I think we have a relatively wide range on the guidance, right? And I think Nate -- when Nate introduced, he talked about the range of outcomes. So I think this is -- reflects the fact that there isn't a person on this call who could -- who can accurately predict what's going to happen over the next 2 quarters.

So -- but within a range, we feel pretty good. Do you want to add to that, Nate?

[Nate Olmstead, executive]

Yes. And I'd just come back to diversification, Ananda. I think it's really important. In times of uncertainty, diversification is really your friend.

And I call -- I mentioned those big 4 categories, 80% of the sales actually grew a little bit, excluding currency in Russia. And so that's -- it's very important. I think the -- yes, so I'll probably just say that. I think diversification really helps. And as Bracken said, we've given a range.

[Ananda Baruah, analyst]

Let me look, it's helpful. It makes -- I totally get maintaining -- I mean you guys -- you hit the quarter, and it sounds like it's tracking to expectations right now. So that all makes sense.

And can you remind us, Nate, what was -- sort of when you lowered the guide previously, what were the main drivers of that adjustment?

[Nate Olmstead, executive]

Yes. Two things. One was currency. We had not pushed through all of the impact of currency until last quarter. And then the other was really just the increased volatility and what looked to be a sustained volatility in the macro climate and the number of factors that we have to keep an eye on.

So I think it was really those two things. I think all the way back to March, beginning of the year at AID, I think the war had just begun. And so like -- there was a lot of uncertainty about what would happen there. And obviously, unfortunately, that has persisted. So...

[Ananda Baruah, analyst]

Yes. I actually think you did your Analyst Day like 10 days before it started, something like that.

[Bracken Darrell, executive]

Something like that.

[Ananda Baruah, analyst]

Cool. That's it for me, guys. I appreciate it. I'll get you -- listen, Bracken. Bracken, I'll [ see ] you at coffee shop, I'll see you [ there ].

[Bracken Darrell, executive]

I am here for any of you in New York in -- [ I'll tell ] you, Ananda, I'm here. I'm ready for coffee, [indiscernible] .

[Nate Melihercik, executive]

Okay. Bracken and Nate that looks to be a wrap on questions for this morning.

[Bracken Darrell, executive]

All right. Well, thanks, everyone, and we'll see you next quarter.

[Nate Olmstead, executive]

Thanks a lot.

[Bracken Darrell, executive]

See you there.