Logitech International SA

SIX:LOGN

Earnings Call Transcript 2021-Q3

[Ben Lu, Vice President of Investor Relations]

Okay. Thanks, everyone. Welcome to Logitech's video call to discuss our financial results for the third quarter of fiscal year 2021. Joining us today are Bracken Darrell, our President and CEO; and Nate Olmstead, our CFO.During this call, we may make forward-looking statements, including with respect to future operating results under the safe harbor of the Private Securities Litigation Reform Act of 1995. We are making these statements based on our views only as of today. Our actual results could differ materially, and we undertake no obligation to update or revise any of these statements.We will also discuss non-GAAP financial results. You can find a reconciliation between non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could affect our financial results in our press release and 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 webcast of this call are all available at the Investor Relations page on 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 replay on our website.I will now turn the call over to Bracken.

[Bracken P. Darrell, President, CEO & Executive Director]

Thank you, Ben, and thanks for joining us. Q3 was our biggest quarter in company history, and this will clearly be the biggest year in Logitech's history. Last quarter, we predicted that as the world opened up, few companies would opt for a full work from home or a full work from the office approach. In short, most companies, as we said, are likely to adopt a hybrid model with many of us working a few days a week in the office and a few days a week at home.With another quarter behind us, I have greater conviction that most companies will move to a hybrid at work, at home model. I had a meeting with almost 60 other CEOs this week. And while we didn't take a poll, I would guess the vast majority of them will adopt hybrid work as a new norm.Logitech is well positioned to serve customers moving to hybrid work. We can upgrade and improve workspaces at home and in the office, and the explosive growth of video calling drives the need for high-quality video at home, in office workspaces and in meeting rooms. For Logitech, that simply means growth.The global trend propelling gaming toward becoming the largest collection of spectator and participant sports in the world continues. Over 1 billion people watched some part of the League of Legends final last quarter, 1 billion people. Over 100 million people watched the final live, the same number as the Super Bowl last year.Streaming and creating is poised for long-term growth as well. There are now 1.8 million podcasts to listen to and untold TikTokers, Instagramers and streamers to watch. These are examples of the democratization of digital content that we've talked about for some time, and this trend grew into the pandemic, during the pandemic and will surely grow after the pandemic.Given the increasing pervasiveness of this type of content, streaming and creating could one day become one of our biggest product categories. In other words, we're really well positioned for the long term.Now let's look back at our third quarter that just ended. We delivered another strong quarter with sales up 80% and non-GAAP operating profits more than tripling. To put this in context, this quarter's year-over-year sales volume growth is greater than the total growth from the 3 prior years combined.On top of that, Q3 profit was more than we delivered in all of last fiscal year. Our creativity and productivity categories delivered a mid-30% growth in pointing devices and keyboards and combos.The transition to a work-from-anywhere culture and a mixed learning environment creates increased peripheral attach opportunities for us against a large and growing PC installed base. And customers who upgrade their devices can benefit from improved aesthetics, performance, ergonomics or all of the above. We simply have upgraded opportunities across every workspace in the world.PC webcam sales more than quadrupled in Q3 and year-to-date sales have more than tripled. While these growth rates may seem tremendous and they are, the incremental units we sold this year are just a drop in the bucket compared to an installed base of nearly 600 million monitors and almost 1.5 billion PCs -- 600 million monitors, 1.5 billion PCs. To support the growing prevalence of video communications, we're working to expand our capacity to support the higher demand for Logitech webcams.As video conference use has exploded -- as videoconferencing has exploded, the opportunities to innovate our camera technology have come into sharper focus. We're the market leader in webcams, and we're increasing our product investments to provide customers with even better experiences than they have today.Tablet and other accessory sales for the quarter increased more than fourfold to $138 million, the first time we've achieved sales over $100 million in a single quarter.The real highlight this quarter was the tremendous growth we delivered in our Education Tablet keyboards. Governments, schools, educators, parents and students around the world are all adapting to a digital learning environment.While we had significant demand from various countries, Japan was one of the biggest contributors to our Education Tablet keyboard sales in Q3. We mentioned last quarter that Japan's education ministry has allotted over $3.5 billion to improve schools for online teaching, and this program is expected to last through the remainder of our fiscal year.Video Collaboration sales more than tripled to another record high of $293 million. Sales of our conference room products also delivered an impressive quarter, doubling year-over-year.As I said last quarter and to lead off these remarks, companies are starting to reconfigure their office layouts and work cultures to enable workers to collaborate remotely and flexibly. I say starting because most people are not back in offices yet. Not only are companies video-enabling their on-site offices, but they're equally, if not more quickly, equipping their employees with enterprise-grade webcams and headsets, both for the home and for the office workspaces.Just last week, we announced a complete refresh of our videoconferencing -- conference room product portfolio. The products are Rally Bar Mini for smaller rooms, Rally Bar for medium-sized rooms and RoomMate with our current Rally system for larger rooms.In addition to exceptional audio and video, one of the key features of these products is to run these products in appliance mode, so that you can have a Zoom room or a Microsoft Team room, for example, without a separate monitor. This greatly simplifies the rollout of these products and allows IT managers to scale out deployments to every room. We're ready for when people go back to work. Based on the feedback from dozens of large enterprise customer beta trials, we believe this new portfolio raises the bar for Logitech and the entire PC industry.Gaming sales grew 73% in this quarter. Growth was strong across all 3 regions and across all of our gaming categories, on the back of several new product introductions, which helped us achieve a record high market share in PC gaming. We believe that the deep integration of gaming into consumers' digital and social networks will greatly enhance the stickiness of gaming for years to come.Streamlabs had another strong quarter with continued growth in subscribers and paid conversion. We couldn't be more excited with the Streamlabs team, George, I hope you heard that, who are teaching us capabilities as they experiment with various initiatives to increase user engagement and customer acquisition.Blue Microphones and Retail Headsets also had another great quarter with sales growth of both up triple digits versus the same time -- same quarter last year.Mobile Speakers and Smart Home categories remained soft this quarter as we expected. You know that we actively manage our portfolio. And as such, we continue to focus our investment priorities on other fast-growing market opportunities, and we'll manage these 2 product categories to maximize profitability rather than growth.Now let me call -- let me turn the call over to you, Nate, to walk through the rest of our key financial metrics in Q3.

[Nathan Olmstead, CFO & Principal Accounting Officer]

Thanks, Bracken. We delivered another excellent quarter of financial results on the strength of our diverse product portfolio, the global reach of our sales and marketing capabilities and the execution of our operations team.Our results were strong across nearly all dimensions. We grew revenue significantly and gained share across our categories, expanded gross margins, invested significantly in our strategic priorities and brand and delivered more than $500 million of free cash flow.Gross margin increased 760 basis points to 45.2% in the quarter. The gross margin improvement was the result of very strong sales volume, reduced levels of sales promotion, favorable product mix and some tailwinds from currency exchange rates. While our recent gross margin has been above our target range, I do expect margins will come down from these highs in the quarters ahead.As supply normalizes and retail stores continue to reopen, we plan to actively pursue opportunities to invest in joint marketing and appropriate levels of promotion to drive continued growth. We have always said that we are focused on delivering sustainable and long-term growth while keeping margins at levels that we believe strike the right balance of profitability and investment. And so it is with this philosophy in mind that we will continue to manage the business going forward.Non-GAAP operating expenses increased nearly 50% to $278 million, and yet OpEx reached a record low, 16.7% of sales. As we discussed last quarter, we ramped up the pace of investments in sales and marketing and R&D and will do so strongly again in Q4.Our sales and marketing spending increased over 50% year-over-year as we deployed investments against various marketing priorities, including a global brand awareness campaign and local country and category-specific marketing activations. We utilized new marketing platforms and bolstered our influencer marketing campaigns. Go-to-market investments also included the continued expansion of our sales coverage for video collaboration, education and the overall B2B channel.All these activities will continue in the March quarter as we leverage the strength and investment capacity from our current demand to improve our potential growth over the longer term.R&D spending increased 23%, a growth similar to the prior quarter as we continue to reallocate engineering resources from mature and declining categories to faster-growing opportunities. I'm pleased with our pace of innovation, and we announced several significant new products, including the conference camera solutions Bracken mentioned, exciting gaming peripherals and refreshed mice and keyboards over the recent months, and we have a strong road map of new products teed up for FY '22 and FY '23.G&A expenses rose 73% as we invested in our IT and customer care infrastructure to support a vastly higher sales volume, and we also launched a few short-term investments in projects that should wind down by the end of the fiscal year. The teams did an incredible job in scaling our business so quickly, and we have invested more in the areas to help serve our growing customer base.While we are accelerating our investments into our business, we will maintain the financial discipline you have come to expect from Logitech. A significant portion of our second half investment is variable, allowing us to align our spending with future gross profit. And while we're managing risk by variabilizing our costs where possible, we also believe that fixed cost investments in the business are essential to help drive long-term growth. And we plan to continue to enhance our marketing capabilities, brand awareness and selling capacity.Now let me move to our cash flow and balance sheet. We delivered another strong quarter of operating cash flow, which reached $530 million, up from $181 million in Q3 last year. These results bring our year-to-date operating cash flow to over $900 million.Record-fast inventory turns and healthy cash collections led to a cash conversion cycle of 15 days. Our cash conversion cycle is typically lowest in this quarter in Q3 due to the faster inventory turns during the holiday, so you should not be concerned to see an increase in this metric next quarter. Our cash balance is nearly $1.4 billion exiting Q3.And in addition to funding acquisitions, share repurchases and dividends, we view our strong balance sheet as a strategic tool to support our growth via investments in both supply and expanded manufacturing capacity. And once again, as with prior quarters, our operations team executed this strategy well, all while adhering to strict COVID safety measures and travel restrictions.Rounding out uses of cash in the quarter, we repurchased $50 million of our own shares, bringing our year-to-date share repurchase total to $72 million.And now I will return the call to Bracken for guidance and his closing remarks.

[Bracken P. Darrell, President, CEO & Executive Director]

Thank you, Nate. Nice job. This morning, we announced an increase in our fiscal year '21 outlook, which implies that for the final quarter of the year, our Q4 sales will grow 40% to 50% and our non-GAAP operating income will increase about 30%. This means that our revised fiscal year '21 outlook will be for sales growth of 57% to 60% and our non-GAAP operating income to be approximately $1.05 billion. This is up from our prior annual outlook of 35% to 40% sales growth for the year and a range of $700 million to $725 million in non-GAAP operating income.You've all come to appreciate Logitech for our commitment to delivering sustainable long-term growth. That commitment remains firm. We see so many new and expanded market opportunities as we emerge from the pandemic that we will invest aggressively to capture the growth potential. The next several years will be so exciting, and I can't wait to innovate, expand and drive change.And with that, Nate and I are ready to take your questions. Ben, can you queue them up?

[Ben Lu, Vice President of Investor Relations]

Thank you, Bracken. Jörn from UBS.

[Jörn Iffert, Director and Analyst]

Three questions, please. The first one is, taking an early view of fiscal year '22, I mean do you see the risk that we have some pull-forward demand in the gaming end market? And also in video collaboration, where corporate are doing the homework preparing when employees are coming back to the office?Second question would be, please, on the gross profit margin. And just from a technical point of view, why was it not higher quarter-on-quarter given the higher scale benefits and higher FX benefits?And also on point number three, can you elaborate a little bit more on your incremental marketing spend of $50 million quarter-on-quarter? Was this head count related? And what exactly is this global brand campaign you are rolling out at the moment?

[Bracken P. Darrell, President, CEO & Executive Director]

I hope everybody else is not experiencing the little -- slight negative feedback I'm getting on Zoom, but I bet you are. So if one of us is talking and it gets kind of choppy, please don't hesitate to reask the question.I'll jump in. And then Nate, you and I can kind of go back and forth.

[Nathan Olmstead, CFO & Principal Accounting Officer]

Sure.

[Bracken P. Darrell, President, CEO & Executive Director]

Are we experiencing pull-forward demand in gaming and PC? The demand for gaming has been so long term and so strong for many, many, many years. And I think -- well, it's certainly the case that people are playing a lot of games during the pandemic. A lot of what drives the growth of gaming is really the games themselves. You'll remember the Fortnite effect a few years ago. And then before that, I would say League of Legends is probably the big phenomenon, and there will be more.So I'm really optimistic that gaming is just going to keep chugging along and growing long term. We're not going to guide anything today for next year. That will come in the next few weeks. But I'm really optimistic about gaming long term.I would say I'm just as optimistic and not more optimistic about VC. VC is -- If you look at just the personal video enablement, a typical person has a webcam that's not very good. And yet, we sell -- and if you look at the number of webcams we sell relative to the number of monitors and the number of PCs out there, 600 million monitors, 1.4 billion PCs, it's just a drop in the bucket. It's up to us to figure out how to unlock the demand that ought to be out there for webcams long term because you get such a better experience. Many of you right now are looking off of the distance instead of looking right in the camera, for example, or the quality of your picture is not very good, and you're looking at yourself now 4, 5 times a day -- 4 or 5 times a minute instead of 4 or 5 times a day. So I think we have opportunities.And then in the office, the VC -- the video enablement of office is just -- it's barely even started. I mean if you think about what's going to happen when people go back into these hybrid work environments, I can't believe you're not going to see a very strong growth of videoconferencing long term. So I'm really optimistic about it.I'll let you take the gross margin point in just a second, although I'll give you the short cut to the answer, which is -- well, I won't -- I'll let you do it.Incremental marketing spending. It's a combination, and Nate mentioned it in his script. We're -- you know us, we're -- we try to be very aggressive and risk managed. So a lot of the spending we're putting in is variable. So we're always ready to -- if it's working, we'll keep -- we'll double down on it. If it looks like it's not as effective as we'd like, we'll pull it back. But we also are making long-term fixed investments. We have so many opportunities right now around the world. So we're going to keep making those.Do you want to add anything to any of those, Nate?

[Nathan Olmstead, CFO & Principal Accounting Officer]

Sure. Yes. Let me -- just on the gross margin question, Jörn, and again, I apologize for the feedback if you're getting it as well.The primary difference sequentially, I think, Jörn, would be a mix of products. And that in Q3, we mentioned we had a very strong EDU quarter, which tends to be a little bit lower gross margin than other parts of the portfolio, still very good business for us. So that's the primary reason why I suppose you could say gross margins were not higher, although they were quite strong.And then as Bracken said on the marketing side, I mean, frankly, we couldn't add that much head count in 1 quarter to drive that kind of cost increase. So most of that was variable on the marketing side. And as Bracken said, I think it could become a long-term investment for us. We'll judge the effectiveness of it.But as we've been saying, so many of these trends we really firmly believe are long-term multiyear growth drivers for us. And when we have confidence in that, we'll make fixed cost investments to support those. It simply wouldn't make any sense. Even if there were a quarter where demand pulled back, if we believed in the long-term strength of that trend, you'd want to continue to invest through that potential slowdown to make sure that you're competitive over the longer term.

[Bracken P. Darrell, President, CEO & Executive Director]

Absolutely.

[Ben Lu, Vice President of Investor Relations]

Paul from JPMorgan.

[Paul Chung, VP & IT Hardware Analyst]

Great quarter. So first up, can you talk about the pricing dynamics across segments? Given your elevated demand, did you raise or are you raising prices in any segments? Or is the gross margin benefit mostly product mix and scale with some FX in there? And I have a follow-up.

[Bracken P. Darrell, President, CEO & Executive Director]

Okay. Yes, the answer is no. We have not raised prices. We are doing a lot less promotions. You see our promotion numbers now in the gross to net. We really pulled way back on the promotion levels, and we've stayed back. I hope we can keep at least some of that benefit coming out and I'm sure some promotions will go back. That certainly has -- I'm sure it's had an effect on our average pricing, but most of the -- most of our pricing benefit is really, as you said, it's mix, mix within category and mix across category.

[Nathan Olmstead, CFO & Principal Accounting Officer]

Yes. And I think, Paul, maybe to where you're going is the sustainability of these gross margin levels. As I mentioned in my comments earlier, we do expect gross margins will come back down towards probably the high end of our prior range. There are some things in there that are probably more sustainable like some of the mix benefits, growth in VC. It's a nice category from that standpoint.But I think we're going to need to move back to more reasonable levels of promotion as supply and demand normalize. And so that, again, is included in our outlook and something I would expect to see in the near term and in quarters ahead.

[Paul Chung, VP & IT Hardware Analyst]

Okay. And then on VC, more and more enterprises are looking to switch to Zoom-enabled rooms. Is your market share kind of accelerating in the larger conference rooms now? What's been the kind of initial feedback on the RoomMate product?

[Bracken P. Darrell, President, CEO & Executive Director]

Yes. The -- so yes, more and more companies are going to Zoom, to Microsoft and to Google. So there's all the kind of plug-and-play solutions that are cloud-based are all growing really well.We've -- you asked about our market share in large conference rooms. It's a little hard to judge that exactly, I would say. First of all, large rooms are a really small percentage of the total. But we've now got phenomenal products for large rooms. And I think we're definitely growing in large rooms, you'll see.But overall, as you see, our growth has been extremely strong, and we're super optimistic about our -- all of our product portfolio, including the newest reset that I mentioned in -- early in the call, not reset -- new introductions. I mean I think we've really raised the bar in the industry where you asked about feedback we're getting from beta customers, and it's been very, very strong, very strong.

[Nathan Olmstead, CFO & Principal Accounting Officer]

Yes. I think our performance in those larger rooms has been very good. As you can see, the conference cameras continue to grow quite well. I think there's a lot more room for us there, Paul. We've been adding capacity -- selling capacity, more coverage into large accounts, and we've had some really nice large wins. But I think there's a lot of room for us to continue to grow in those spaces.

[Ben Lu, Vice President of Investor Relations]

Alex from Goldman Sachs.

[Alexander Duval, Equity Analyst]

Congrats on the robust results. Two very quick questions. Firstly, just on the guidance for the next quarter, you seem to be implying seasonality, which is meaningfully below what we see normally. And just given that, obviously, we continue with many countries to be in a lockdown scenario in the current fiscal quarter, I just wondered what plays into that in terms of that sort of subseasonal forecast?And then secondly, it's very interesting, you talked about governmental spend, particularly in Japan. We've seen a few news articles also in terms of other regions talking about home education and peripherals required for that. I wondered if you could talk about what you're seeing on a global basis, and if that could go beyond the current quarter, which you obviously referenced?

[Bracken P. Darrell, President, CEO & Executive Director]

I'll start with...

[Nathan Olmstead, CFO & Principal Accounting Officer]

Bracken, do you want me to take -- you want to start with that and I'll take the guidance. Sure.

[Bracken P. Darrell, President, CEO & Executive Director]

Yes, you bet. I'd say on the education front, yes, we -- there are a lot of governments around the world that are investing now in education and technology for education. And I don't think that's going to let up, and we see it as a lot more than a 1-quarter trend. We think it's a long-term trend. We're excited about the education space.

[Nathan Olmstead, CFO & Principal Accounting Officer]

Yes, Alex, on the guidance and the seasonality sequentially, honestly, I do like to look at our business in terms of typical seasonality. This year has sort of not been typical. And you saw that, in fact, in Q3, where we grew sequentially about 33%, which was pretty well above our typical seasonality. Q2 is above typical seasonality.So you're correct. Our outlook for Q4 does imply a sharper slowdown than what we have seen in recent times, Q3 to Q4. But I think it's appropriate, just again, given the strength that we had this quarter. And some of this increased promotional spend, which we expect to reactivate, that will also put a little bit of pressure on revenue sequentially. So -- nonetheless, it still implies 40% to 50% growth year-over-year into a quarter where, as you know, Q4 of last year, we started to see some pretty strong pickup in demand. So I think the guidance looks pretty reasonable.

[Ben Lu, Vice President of Investor Relations]

Erik from Morgan Stanley.

[Erik William Richard Woodring, Research Associate]

So 2 questions on my end. First, congrats on the quarter. So for the second consecutive quarter, we kind of saw a sell-in meaningfully outpace sell-through. So just wanted to understand kind of the dynamic there, why that has been the case? And whether you think that has to reverse in the coming quarters? And I have a follow-up.

[Nathan Olmstead, CFO & Principal Accounting Officer]

Sure. Do you want me to take that one, Bracken?

[Bracken P. Darrell, President, CEO & Executive Director]

Yes, you can go ahead.

[Nathan Olmstead, CFO & Principal Accounting Officer]

Yes. It's a good point. There's really 2 drivers of this, primarily. The first is that sell-through is reported on a gross basis, meaning those numbers do not reflect promotions. It's before promotions. And so as we've talked about, we got some benefit from the reduced promotions. And so you see that in net sales, you don't see that in the gross sales or in the sell-through number. So that's the first reason why you'd have some difference.The other would be channel inventory. So sell-in to replenish channel inventory still at very reasonable levels and, in fact, still short in some categories like last quarter. So that's really the 2 drivers. There would be the difference in the calculation because one is before promotion and one is after, and then the other would be channel fill. But again, channel inventory is at very appropriate levels and we feel good about where -- how we look going into the March quarter.

[Erik William Richard Woodring, Research Associate]

Okay. Super helpful. And then maybe if I just turn to the balance sheet, it's kind of a 2-part question. So one, on the cash balance, obviously, you have more than $1 billion of cash. So just looking -- just wondering if you're looking to be more aggressive in deploying that cash and how you would do that?And then the second part is just, again, your inventory levels are nearly double what they were at the end of last year. So is that a sign you're holding on to more inventory for perhaps direct-to-consumer purposes? Is that going to be worked down over the coming quarters? Just any color on both of those line items.

[Bracken P. Darrell, President, CEO & Executive Director]

Let me take the first one, Nate, and let's see. We have the same approach with our cash that we had before. We're obviously paying a dividend. We'll surely increase the dividend. I can't speak for the Board, but we normally do in September, but kind of a normal level.The second thing is we'll keep doing some stock buybacks, and I'm sure we'll want to keep doing that. But again, I can't speak for the Board -- rest of the Board, but I'd expect that.In terms of M&A, that's the key. We continue to look hard for great strategic opportunities, and they are out there. Now will they be large enough to take that kind of cash? We're always looking at small, medium and large. It takes -- the stars have to really align to find something large.So we're going to stay after it. It is a lot of cash. We're generating a lot of cash. But I'd -- we'd love to put it to use strategically, but we have so much organic opportunity too. We're certainly going to keep plowing into that.And you might want to add to that too, Nate.

[Nathan Olmstead, CFO & Principal Accounting Officer]

Yes. I mean I think the other thing that's been important, and we've mentioned this a couple of times, it's just the use of that cash to invest in working capital, which really gets to the second question.

[Bracken P. Darrell, President, CEO & Executive Director]

It's related to his question.

[Nathan Olmstead, CFO & Principal Accounting Officer]

Yes, it really gets to your second question on inventory. Yes, obviously, the inventory balances have increased, but we're supporting a much higher volume. So if you look at days of inventory that's continued to come down, we had our actually best inventory turns in history this quarter.And again, I want to point out, I think our operations team has done such a nice job. Not only have they scaled -- helped to scale the business to capture the incremental volume that we've had, but they've also continued to drive operational improvements at the same time. So this hasn't just been an environment where we're chasing supply. We're actually trying to make our -- stay on path with our structural improvements, whether that's manufacturing diversification into other countries, whether that's efficiencies in our supply chain, cost reductions, things that benefit us over the longer term. And in fact, some of that is what's driving the improved inventory performance that we see right now.So I think we're getting some benefit on inventory from the higher sales velocity, but we're also making efforts to improve things structurally, so that we can continue to be more efficient on working capital going forward. But no concerns for me on the inventory. Again, it's all appropriate given the increases in volumes. It's all fresh. It's on fast-moving products. So we feel very good about where we're at.

[Ben Lu, Vice President of Investor Relations]

Our next question comes from Asiya Merchant from Citigroup.

[Asiya Merchant, VP & Analyst]

A couple of quick questions. On promo spending, you guys talked a little bit about resumption in promo spending. At some point, are we looking at that in the March quarter? Or do you think just given still all the COVID lockdowns, et cetera, this is likely going to be a fiscal '22 event? If you can parse out the impact of lower promo spending in any way on margins year-to-date or even in third quarter, that would be great.And then I just have a follow-up for Bracken as well on Streamlabs. He mentioned that, obviously, that's going well for you. Any anecdotes you can share there on how that's driving higher user engagement/ higher use of your peripherals? And when do you see that services or subscription really showing up as maybe a meaningful driver of revenues across your portfolio?

[Bracken P. Darrell, President, CEO & Executive Director]

You want to take the first one, Nate? And then I'll take the second.

[Nathan Olmstead, CFO & Principal Accounting Officer]

Sure. On promo, I'll be a little bit careful on this one, obviously, because this can be something that's important for competitive reasons, but I'll just reiterate. I don't think the current levels of promotion are sustainable. I think it's healthy for us to have some promotion to continue to drive growth and invest in our categories. So Asiya, I would expect to start seeing that promotion turn on again in the March quarter, but we'll see how things look. It's something that we can do quickly, and we can manage dynamically.In terms of the impact on the margins themselves, it was the largest -- lower promotions were the largest driver of the year-over-year improvement in gross margins. It's a bit of an unusual year, so I'll step maybe away. Normally, we wouldn't talk too much about the size of that impact, but it's been kind of an unusual year in that respect, so I think it's good to share. It was probably about a 5- to 6-point impact in our gross margins favorably year-over-year from lower promotions, similar to what we saw last quarter. So it's important to keep that in mind as we look forward. Again, we've benefited from it. I think we're managing it wisely, but that's something that we're going to have to continue to evaluate in the future.

[Bracken P. Darrell, President, CEO & Executive Director]

Yes. And on your question about services in general and Streamlabs in particular, Streamlabs, a little bit of color on that. We're offering a subscription service now and that subscription service is doing really well. I mean the team has done an extremely good job of mining that subscription service opportunity. I'd say that -- and so it's growing really well.I'd say the more important part of that is not per se the exact service we're selling today or even the size of that business, it's the learning. So we're really learning hard on this because we're also offering services quietly in our videoconferencing business. We've got things in the works in gaming. We've got some things in the works in C&P. I wouldn't expect any of that individually or collectively to become a really big number next year or even the year after that. But I think I'll predict that what's going to happen with our services business is over time, we're going to be working, working, working. You're going to hear a little bit about. And then one day, it's going to really pick up. And -- because we're in the learning mode, and we want to have a stickier relationship with our customers across every business.So stay tuned. It's a long-term play. I'm super excited about it. I'm reminded of when I first joined Logitech, I went down to meet with a bunch of -- a lot of venture capitalists and get kind of advice on what Logitech should do. And at the time, so many of them were investing deeply into hardware-enabled service businesses. And I kind of got from some of them kind of a pat on the head, and said you guys probably should -- you ought to try to find another job because one day we're coming for you. And I walked out thinking, gosh, we've got a turnaround to do, and that's easier said than done.I think I'll just focus on what we're doing and do it well in hardware. Eight years later, we're worth a lot more than 10x where we were then and a lot of those investors have gotten out of hardware. But they were right, the services are going -- it's just a question of timing and services are going to be a really critical part of so many experiences you buy, and we know that. And so we've been investing. We're going to keep investing. We're going to build that. So I'm excited about the future that involves services, but it's going to take time as you have to develop.

[Ben Lu, Vice President of Investor Relations]

Our next question is from Serge from Credit Suisse.Serge, we cannot hear you?

[Serge Rotzer, Research Analyst]

Can you hear me now?

[Bracken P. Darrell, President, CEO & Executive Director]

Yes. We can.

[Serge Rotzer, Research Analyst]

Sorry. It's always me who has the problem with the hardware. So you should teach me once. Okay. Congrats guys to your good results. I have several questions, at least 2, I would like to ask now. You already mentioned that this order from Japan has been a one-off, at least in the press release. Before you mentioned though, you could expect more to come of that. So I'm wondering, can you give me a size of this contract? Well, not in detail, but that we get a feeling what this means? And do you see other such onetime orders in mice, keyboards or VC? And are they coming also from corporates and not only from government to give some color here?

[Bracken P. Darrell, President, CEO & Executive Director]

Yes. I don't think we've disclosed nor do I think we should probably disclose the size of that order in Japan. But what I would say is we do see very sizable orders coming from corporates. I still think it's kind of early days for that. We've had some bulk buying in mice and keyboards that are -- that's really exciting. And I think -- but I don't think those are kind of temporary things. I think you're going to see some of that will come as people are outfitting, people in their homes, but It's also going to start out in the office.We never had a direct relationship with a lot of the largest companies in the world because we just didn't have the scale or hadn't made the decision to have a scale of a sales force selling into the enterprise, for example, and moving past education for a minute. And the same thing was true of education.And because of VC -- this is one of the synergies we're creating now for the future. Because of the VC, we now have a direct conversation with the largest companies in the world. And that enables us to talk about things like our workspace, our desktop business, mice and keyboards and webcams in a way we never did before. So our market shares were underdeveloped in the enterprise business, in B2B in general, and we are completely committed to changing that going forward. So I think that's one of the growth opportunities we have ahead.In education, I think there's -- most people who are involved in the education around the world will tell you this -- while the move -- while students at home all the time is probably not going to change, remote work and more technology-enabled work is the future. And so I think the investments that are going in now in education in Japan are -- kind of exemplify what's going to happen or what's starting to happen around the world in places like Germany and other countries that we'll invest and keep investing in education technology, and we're going to be part of that. So we're putting ourselves in position for that.

[Serge Rotzer, Research Analyst]

Okay. Very, very good. A follow-up question is, so you mentioned that you still have some supply constraints mainly in webcams. Is this for enterprise webcams or only the consumer webcams? And do you have any other product categories where you're short? And when do you believe that you're coming out of this situation?

[Bracken P. Darrell, President, CEO & Executive Director]

Yes, it's really in both. We also have some shortages in microphones, a few other places. In terms of when we think we'd come out of it, I'm almost embarrassed to predict that. Now I think I've predicted every quarter we're going to be out of it in a quarter or 2, and I've been wrong. The demand has been stronger than we thought in each case and continue to be very, very strong.We are expanding our capacity both in assembly or making as well as in the components we need. I would guess some time next year, we'll see -- really get to full capacity on webcams.Do you want to add anything to that, Nate?

[Nathan Olmstead, CFO & Principal Accounting Officer]

No, I think that's right.

[Serge Rotzer, Research Analyst]

Next year fiscal or calendar?

[Bracken P. Darrell, President, CEO & Executive Director]

Fiscal.

[Serge Rotzer, Research Analyst]

And sorry, again, the last question. Where is the main bottleneck? Is it in components or is it production? Or it...

[Bracken P. Darrell, President, CEO & Executive Director]

Right now, it's moved a little bit. We're -- I'd say we're now pretty good -- in a pretty good place on assembly, we think. You don't really know until you have everything. So it's components.

[Ben Lu, Vice President of Investor Relations]

Our next question is from Tom from D.A. Davidson.

[Thomas Ferris Forte, MD & Senior Research Analyst]

Congrats on an outstanding quarter. So 2 questions for me. The first one is how should we think about the influence of the new gaming platforms for Sony and Xbox on the gaming industry's ability to grow on top of the pandemic in general and Logitech in particular?

[Bracken P. Darrell, President, CEO & Executive Director]

I apologize, I missed the first part of that comment because one of my personal assistants started to talk to me.

[Thomas Ferris Forte, MD & Senior Research Analyst]

Sure, Bracken. How should we think about the new gaming platforms, Sony and Xbox, and that enabling the gaming industry in general and Logitech in particular to generate growth this year on top of the pandemic-led sales from gaming?

[Bracken P. Darrell, President, CEO & Executive Director]

Yes. I think they -- I think the new gaming platforms from those 2 plus other companies are all drivers of long-term growth in gaming, and we're excited about cloud-based gaming in general. And those 2 platforms -- if you look at our ASTRO business, it's done really well this year. And we expect it to continue to do really, really well. This has been a banner -- I mean an amazing period for the new consoles. And I think the new consoles are starting to spillover into PC gaming and there's an interaction between them. And we're excited about it. I think the gaming business has never been more exciting, and I don't see how that will let up.

[Thomas Ferris Forte, MD & Senior Research Analyst]

Excellent. And then my second question is, can you give us your current thoughts on the long-term opportunity for Logitech in virtual reality, especially in gaming?

[Bracken P. Darrell, President, CEO & Executive Director]

Yes. So we've been working in virtual reality now for about 4 or 5 years -- 4 years, I think. We've had a dedicated team on it located in a couple of different places in the world. Our goal there is really to try to be in the early stage of -- as augmented reality becomes more accessible for productivity, creativity and gaming and -- but also in virtual reality. There is obviously going to be a virtual reality playing gaming.We've got a couple of things we can't talk about right now, but I think as that continues to grow, we're going to stay in the mix. We've got a product out now that is not a gaming product. It's called Ink Edition. It's a stylist that you can draw and create in 3 dimensions. We've got a couple of large companies using that to design things. It's not a big product for us, but it's another opportunity for us to learn.I love the team we have on this. I hope they're listening. We've got super sophisticated people working on this, both hardware and software. And it's an exciting future. I can -- maybe in another call, we'll talk about where the future will be 1 day in offices and homes, and how virtual reality and even more augment reality will be -- will probably be played there, and we think we can really play a big role, a bigger role there, so, it's exciting.

[Ben Lu, Vice President of Investor Relations]

Our next question is coming from Andreas from ZKB.

[Andreas Müller, Research Analyst]

First question, can you give a little bit more color into the investments into IT and customer care infrastructure, which brought up also the G&A line? What is that exactly?

[Bracken P. Darrell, President, CEO & Executive Director]

Nate, do you want to take that one?

[Nathan Olmstead, CFO & Principal Accounting Officer]

Yes, sure. Obviously, just as the business has grown, I mean, our needs to support our customers have grown as well. And so we've just added scale and capacity into call centers and more enterprise-oriented support to support some of the VC growth that we've had, so those types of areas.And on the IT side, some of it's projects that we had planned maybe over a longer term, Andreas, that we simply have had to pull forward as some of the scale of the company that we had planned for has pulled forward. We've had to increase the scale of some of the IT investments that we have to support that growth.There's also some investments in G&A, as I mentioned in my prepared remarks, that the -- that I expect will wind down by the end of this year. So I'm not expecting this level of G&A to be our new run rate. But it is one area where we've put some investment into it and I think very appropriately, and that will remain.So a portion of what you saw in G&A is variable more probably for this year and certainly a portion of it is more fixed, still variable over the longer term, if volumes do not sustain at these levels, but we think it's certainly appropriate given where we're at right now.And by the way, still -- you still see G&A below 2% of sales. So I don't think it's something that you should have real concern over.

[Andreas Müller, Research Analyst]

Okay. Good. When you think you will see a normalization in the supply chain to be able to bring down these logistics costs? I mean it's -- currently, probably it's still high, but what needs to be in place to bring that down to logistics costs?

[Bracken P. Darrell, President, CEO & Executive Director]

Yes. It's true that our logistics and supply chains are basically our airfreight and express both have been super high. I think it will start to come down a little bit this quarter. I don't know how you feel, Nate, but I think maybe a little bit. And as we go into next year, we expect it to be more normalized.

[Nathan Olmstead, CFO & Principal Accounting Officer]

Yes. I think that's true. I think I'll also say, though, that expedited freight is something that is a good option to have. And -- especially as you start to address more business users and large deployments, that may continue to be something that we want to utilize. So I agree with Bracken. I think it will come down as supply catches up, again, in some of these categories where we've been chasing all year. But I also would say that it's an option that is available to us if we want to just kind of manage potential mismatches in the future between demand/supply mix, volumes, some of these large deals, things like that.

[Ben Lu, Vice President of Investor Relations]

Our next question is from Michael from Vontobel.

[Michael Foeth]

Two questions actually from my side. First of all, on the use of cash, you already talked about your cash allocation strategy and you talked about organic opportunities. My question was here, should we expect you to see R&D step up more materially going forward? And where would the priorities be in R&D?And along the same lines, your CapEx plans last quarter, I think you announced an increase in your CapEx projections. Question would be here if that guidance is still unchanged and where are you expecting to invest CapEx going forward? And then I have a follow-up.

[Bracken P. Darrell, President, CEO & Executive Director]

I'll jump in there, Nate. Yes, I think -- yes, we are increasing our investments in R&D, and we'll keep increasing our investments.In terms of priorities, I wouldn't share too much for competitive reasons. But though, we're focused strongly in 4 broad areas, and you can bet that they all are potentially hungry for investment that we should make and we will make, so we're going to really keep investing. Engineering has been the lifeblood of this company long term. Design has unlocked the power of engineering, but it's really always been about -- we have great engineering, and we're going to keep investing there.On the CapEx side, it's been an unusual year for CapEx because we've invested a lot more capacity than normal. It's still relatively low. I mean I think we're at the very low end of what most companies of our size would be doing from a CapEx standpoint. I don't know whether we'll need to spend that much CapEx in the future.Do you want to add anything, Nate?

[Nathan Olmstead, CFO & Principal Accounting Officer]

No. I think that's right. Maybe just to be very precise, I mean we're guiding for $75 million to $80 million of CapEx spend this year, Michael, which again, as Bracken said, is not a significant amount when you look at the cash we're generating, and I think the return on it is very strong.In terms of R&D, just to put a little more color on that, year-to-date R&D expense is up 21%. So I think we've been investing in it consistently this year, again, because that's more long-term oriented that does -- that is some more fixed cost. But -- again, it's fixed cost, addressing long-term growth opportunities. So very consistent with that.The other thing within R&D, and we mentioned this in the script, if you heard, was shifting resources between product categories. And so while it's 21% for the year growth or 23% in the quarter growth, within that, we're reallocating resources. So some of the priorities that Bracken mentioned are seeing growth well in excess of the 20% growth that you see at the company level because of that reallocation internally.

[Michael Foeth]

Okay. Great. And then my second question would be in terms of your sustainability initiatives, two questions. What are your priorities going forward in fiscal '21 in terms of sustainability? And where do you think you're making the best progress currently?

[Bracken P. Darrell, President, CEO & Executive Director]

We're really, really excited about what we're doing in sustainability. We've gone from -- we just got named on Dow Jones Industrial Europe Sustainability Index. We're -- we signed up for the Paris Accord, and we're on track to deliver our first year of commitment against that. It's the 1.5 degree rise -- trying to keep the globe to 1.5 degree rise in temperature.We announced this last quarter that we're going to be -- 50% of our mice and keyboards, which is a lot of volume, will contain a consumer recycle -- recycled plastic. And by the time we get to -- we haven't announced that publicly, but over the next year or 2 after that, we'll get to 60% and then 70% and higher.We announced that we're going to be carbon labeling, and we've got the first 7 kind of product platforms done. Carbon labeling every single product in our portfolio and trying to encourage all of our competitors and everyone in tech and beyond to do the same thing, so that we can try to get -- be part of the world that moves to making labeling carbon a little bit like labeling calories. So once it's on the package, some consumers will look at it, and it will put pressure on all of us to try to bring that down.We've moved to renewable energy everywhere we can so far, and we're aggressively going after that. We're investing in carbon offsets to offset whatever we can't do so far, and we're making big progress there. So we have a big program going against sustainability. It's absolutely a value of the company, and we're not going to let up.

[Ben Lu, Vice President of Investor Relations]

Our last question is from Reto from Research Partners.

[Reto Huber, Senior Analyst]

I actually have 2 of them. First one, you already touched on it before, but I was wondering how much of your revenues were sold through your B2B channel in the quarter versus B2C? And how much is your addressable market going to change or increase as a result of your investments into the B2B channel? Is it simply going to double or is that a wrong thinking?And then my second or almost third question would be how the education order from Japan impact your gross margin in the quarter? Because I believe to remember that margins in education are below the group average gross margin, but maybe I'm wrong there.

[Bracken P. Darrell, President, CEO & Executive Director]

Yes, that's true. By the way, in Japan, it is true that education is below the group margin. On the other hand, it also has very -- it's a little lower OpEx so far by a long shot. So it's pretty efficient and profitable.I would say in terms of B2B as a share of the quarter, we don't really break that out. And your other question around addressable market size increases, I think this is a good moment where I can invite you to our Analyst/Investor Day, which will be coming up quite soon. We would love to have you join. And I think some of those questions we'll be able to answer a little more clearly and rather than try to hustle through it at the end of an earnings call. I think it deserves more discussion than that.I do think you're right that our overall addressable market, our TAM, this year has dramatically increased, and we're excited about that. And the real question is how do we unlock the power of that. And I think that's the -- I'm advertising for our AID, which will be some time in the next several -- not too far away.

[Ben Lu, Vice President of Investor Relations]

Thank you, everyone. And that concludes our Q&A session. I will turn it over to Bracken for his closing remarks.

[Bracken P. Darrell, President, CEO & Executive Director]

It was obviously a super strong quarter. It's been a very strong year, but don't confuse that as temporary. I mean this is a long-term thing for us. We're completely committed. We're -- most of the people in the company now are working on next year and the year after that, not this year. So it's been extremely exciting. You guys have been really great, challenging and collaborative investors and analyst partners for us all year long. We appreciate it. Keep challenging us.I hope you will all come. We haven't announced the date of our Analyst and Investor Day, but we will shortly, and I hope all of you will join. We're excited about this year, and we're really excited about next year. Thanks a lot. See you next quarter.

[Nathan Olmstead, CFO & Principal Accounting Officer]

Thank you.

[Ben Lu, Vice President of Investor Relations]

Thank you.