Logitech International - Q1 2024
July 25, 2023
Transcript
Nate Melihercsik (Head of Investor Relations)
Good morning and good afternoon. Welcome to Logitech's video call to discuss our financial results for the first quarter of fiscal year 2024. Joining us today are Guy Gecht, our interim CEO, and Chuck Boynton, our CFO. During this call, we will make forward-looking statements, including with respect to future operating results under the Safe Harbor of the Private Securities Litigation Reform Act of 1995. We're making these statements based on our views only as of today. Our actual results could differ materially. We undertake no obligation to update or revise any of these statements. We will also discuss non-GAAP financial results, and you can find a reconciliation between non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC.
These materials, as well as the slides and a webcast of this call, are all available at the investor relations page of our website. We encourage you to review these materials carefully. Unless noted otherwise, comparisons between periods are year-over-year and in constant currency and net sales. This call is being recorded and will be available for a replay on our website. I will now turn the call over to Guy.
Guy Gecht (Interim CEO)
Thanks Nate and thank you all for joining us. It is a pleasure to speak with you today. Before we jump into our first quarter achievements, let me provide some context regarding my role and the board search process for Logitech's next CEO. I'm both honored and excited to guide this iconic brand company in the near term. During my four years on the board of Logitech, I have gotten very familiar with the company as I had the opportunity to serve as the Chair of Logitech Technology and Innovation Committee of the board and to serve as a member of the audit committee. I view my role as an interim CEO is to provide a consistent and steady hand to the many wonderful, experienced teams working hard across Logitech. I'm singularly focused on making progress and ensuring we do not lose any time in our ongoing execution.
Our strategy remains unchanged, as do the business plans that are in place. All teams are focused on executing their proven playbook. My focus is to remove obstacles, facilitate decision-making, and ensure we lose no time. A few words on the search. As we previously announced, the board is in conducting a global CEO search, including internal and external candidates. It is progressing well. There has been a lot of interest in the opportunity and we are pleased with the strong caliber of the candidates we are seeing. Needless to say, the board views this decision with the utmost seriousness it deserves, and it's working diligently, reviewing and interviewing candidates. Given the confidential nature of the search, I will not be able to add more color today. Rest assured that we will update you when we have news to share.
Before I turn it over to Chuck to review the team's progress on many important fronts, let me provide a few of the non-financial highlights of this quarter. Affirming Logitech is a global leader in design and innovation, we were awarded the industry's most prestigious Red Dot Design Team of the Year Award, previously awarded to companies such as Apple, Ferrari, and others renowned for their design. We introduced four new products in the quarter, including Rally Bar Huddle, the newest addition to Logitech's family of conference cameras that turn small meeting rooms into collaboration spaces. Designed for Esports athletes, our newest Logitech G PRO X gaming headset features graphene drivers for those that require precision audio technology.
In addition to the products launched last quarter, we are just about to start shipping Logitech Sight, a tabletop camera with 315 degrees view capabilities, delivers a truly unique video conferencing experience. At the heart of this new system is an AI director-like technology that decides which participant should be highlighted on the screen and from which angle, close or far. This benefits both people in the conference room and especially remote participants, who otherwise may feel they are not fully involved in the meeting because they are not seated around the table. Our sales teams closed a number of meaningful customer deals in Q1, including Honda, Kroger, TD SYNNEX, and the Proximus Group, as well as the European Commission. These wins represent multiple industries in both the public and private sectors.
Finally, last week, we announced the acquisition of Loupedeck, a small tack-in deal that is adding a differentiated technology, initially in gaming and streaming, and later in other areas. We will continue to screen for more deals that will help us accelerate the execution of our strategy, as well as bringing our unique technology to new sets of users. These were just some of the recent highlights, although most importantly for today, is that we started our fiscal year with an encouraging set of results and an updated outlook. As we move through the remainder of the fiscal year and toward our expected return to growth, you should expect to see unwavering commitment to the principles and capabilities that have become the hallmark of Logitech.
Innovation to capitalize on the growth trends that fuel our business, which is video everywhere, hybrid work, gaming, and digital content creation. Design-led engineering and product innovation, a maniacal focus on lean manufacturing and operations, a capital allocation strategy that is focused on M&A, paying a dividend, and share buyback. We will do all of that with continued commitment to our values. As an example, this week, we released our annual impact report, where you can read about the progress our teams have been making in the areas of sustainability and social impact. With that, I will turn it to Chuck to provide the financial details of our first quarter and to review the outlook for the reminder of the year. Chuck?
Chuck Boynton (CFO)
Thank you Guy. I also appreciate everyone joining us on the call today. First and foremost, I want to thank all of our employees for the strong execution and teamwork in the quarter. It really shows in our results, especially our strong operating cash flows. Before we get into the details in our financial performance, let me spend a minute on some reporting changes we've made to our product category classifications. Our slide presentation and quarterly fact sheet provide additional information, as well as a five-year set of comparables. Many of you have asked for these updates over the last several quarters, so we hope the changes provide a simpler and clearer view of our business. These reclassifications do not impact our previously reported financial statements. Moving on to the business results for the first quarter.
Net sales and constant currency declined by 15% to $974 million. Sales out was quite strong, particularly for headsets, tablet accessories, and gaming. As we discussed at Analyst Day and in the last earnings call, we believe in the benefits of lean on-hand and channel inventory. For the fifth consecutive quarter, we reduced on-hand inventory significantly with our inventory turns improving to 4.2. We remain committed to our goal of improving to five turns or better over the next one or two. Likewise, channel inventory was also reduced in the quarter, and I'm proud of the team for hitting the targets that we set. This has improved linearity and predictability.
We plan to keep reducing channel inventory during the seasonally soft months of July and August, and then replenish the channel in September, October and November as part of the normal build for the December quarter. Net net, we expect channel inventory to be roughly the same at the end of Q2 as it was at the beginning. In Q1, gross margins expanded quarter-over-quarter to 39%, slightly better than anticipated, as significant reductions in our on-hand inventory drove down or drove some one-time benefits in the quarter. On a year-over-year basis, margins were pressured by FX and mix, but partially offset by cost improvement and less reliance on expedited shipping. Again, thank you to our operations team for such amazing execution. Sequentially in Q2, we anticipate gross margins to be pressured, and as a reminder, gross margins in our December quarter have both headwinds and tailwinds.
We have the seasonally higher consumer sales and holiday promotions, but those are somewhat offset by overhead absorption. While there will be quarter-to-quarter fluctuations, we feel our business is structurally positioned to generate 40% gross margins in the next four-six quarters. Operating expenses were $271 million in the quarter, up slightly versus our internal expectations. A portion of our operating expenses were attributable to some one-time administrative expenses and the weakening US dollar in the quarter. I continue to be pleased with the team's cost focus and ability to quickly dial up or dial down OpEx based on business performance. Our long-term model is to maintain operating expenses at around 25% or less of revenue. Operating income was $109 million in Q1 and better than our internal expectations due to improved demand and strong gross margins.
One big highlight for the quarter was our working capital execution. Cash flow from operations was $240 million, a first-quarter record for the company, leading to a cash balance of $1.25 billion. Our capital allocation strategy remains consistent: evaluate M&A opportunities, pay an increasing annual dividend, and return excess capital to our shareholders through share repurchases. We are making progress on all three fronts. As Guy mentioned, we announced the acquisition of Loupedeck. They provide valuable technology for Logitech G, and while modest, an acquisition price reflects our consistent and disciplined approach to M&A. In May, we announced a CHF 0.10 increase in our dividend, which will be voted on by our shareholders at our September annual general meeting. Just last month, our board of directors approved a new $1 billion three-year share repurchase program.
Our existing buyback program expires at the end of July, and in total, we will have returned more than $1.1 billion to our shareholders as part of this program. Our new program will replace the expiring program upon its approval by the Swiss Takeover Board. Moving on to our outlook. We are raising the first half outlook we confirmed in May, expecting first half 2024 revenue of $1.875 billion to $1.975 billion. Our corresponding operating income is expected to be between $180 million and $220 million. In our last earnings call, we said we plan to revert to full year estimates either this quarter or next quarter. Today, we are updating the first half and have provided full year estimates based on the progress we made in Q1....
Now with one quarter behind us, we are providing a full fiscal year 2024 outlook. We are expecting revenue of $3.8 billion-$4 billion. Our corresponding operating income is expected to be between $400 million and $500 million. I'll close with where I started. Thank you, thank you to all of our employees for driving such strong execution this quarter, and with strong market share and some great new products launching, we are cautiously optimistic. We are going to show a short video on one of our new products, Sight. Nate, roll the video, and then we'll take Q&A.
Nate Melihercsik (Head of Investor Relations)
Hello, everyone, and thank you for joining. As a reminder, if you'd like to participate in Q&A, please raise your virtual hand, and we will get you in queue. I will start today with Asiya Merchant from Citi. Hey, Asiya.
Asiya Merchant (Technology Equity Research Analyst)
Hey, good morning everyone. Hopefully, you can hear me.
Chuck Boynton (CFO)
We can hear you well.
Asiya Merchant (Technology Equity Research Analyst)
Thank you for the color. Thank you for the color Chuck and Guy. Great to see you on video, Guy. Chuck, actually this is for both of you. If you guys can talk a little bit about seasonality. You know, it seems like, at least in the implied guide, the September quarter or the calendar third quarter, which typically is up, you know, at least in the low double digits, seems to be kind of guided flattish, maybe slightly higher. Maybe you can talk about that. As you kind of look into the December quarter, you know, if you can kind of talk to us about the visibility that you're seeing and which product segments you feel very strongly about. Then on gross margins, I think, Chuck you mentioned there were some one-time benefits.
Clearly, gross margins seem better than what we were expecting and you know, in terms of hitting your 40% target, you can talk about some puts in place to get there as the year progressed. Thank you.
Chuck Boynton (CFO)
Yeah. Sounds great Asiya, thank you so much for the questions. First, on seasonality, we outlined last quarter, as you'll recall, that if you looked at the last kind of four years, on average, the quarters were roughly 24% Q1, 24% Q2, 30% Q3, 22% Q4. You know, I'm not sure that's going to be this year. Our Q1 was better than we'd expected. You know, we performed better than our internal expectations. It was a strong quarter compared to where we expected, both top line and bottom line. We're cautiously optimistic on the back half of the year, but there are still uncertainties, you know, foreign exchange, you know, the various uncertainties in the environment. Last year, the December quarter had some margin pressure because of promotions.
We don't know what's going to yet happen with our December quarter this year, our single biggest quarter. The read-through, though, the June 18 holiday in China was quite strong. We don't have the final results back from Prime Day, but it looks like it performed reasonably well. So I'd say we're cautiously optimistic, but we don't want, you know, the first quarter here providing, you know, estimates for the full year. We want to make sure that we're appropriately providing an outlook that is manageable. The second question on margins, it was a great quarter, 39% is the low end of our long-term operating model. We feel good about that. However, there were some benefits.
Specifically, when we brought our on-hand inventory levels down by over $100 million, that had a benefit to the overall inventory reserves that provided really a strong uplift for the quarter. We see a little bit of pressure going into Q2 on margins. For the back half of the year, you know, we're again, cautiously optimistic that we'll be in that kind of, you know, that range that's probably a little below 39% or in that range. We're optimistic. There are tailwinds. Freight costs have come down significantly. Cost pressures on components. Our operations team has done a great job doing cost reduction and improvement. What we don't know is how the mix will impact.
We have a couple of new products that are coming out that are going to provide, we think, a nice tailwind and could help on the margin side, but there is still uncertainty in the back half of the year.
Asiya Merchant (Technology Equity Research Analyst)
Thank you, I appreciate the color.
Chuck Boynton (CFO)
Thank you so much.
Nate Melihercsik (Head of Investor Relations)
Great. Next up, we'll go to Adam Angelov at Bank of America. Hey, Adam.
Adam Angelov (Equity Research Associate)
Thanks for taking the question. Just firstly, on the inventory decline, sounded like that was a bit of a surprise. Maybe you could dig into that and why?
Chuck Boynton (CFO)
Inventory, I would say, it was not a surprise. Our operations team, we have targets. Our operating model, our goal, is to operate with on-hand inventory at about five turns. We hit 4.2, which is great progress considering where we've been. It was not a surprise. It was strong execution, it was deliberate. The great news is that not only was on-hand inventory reduced, but channel inventory came down as well, significantly. High single-digit decline in channel inventory. If you couple that on-hand inventory and channel inventory are down, we've leaned out the supply chain, and that is great news for us and our channel partners. With lower inventory levels, we make more money, our channel makes more money, and it's good for everyone.
Adam Angelov (Equity Research Associate)
Okay, got it. That makes sense, thanks. Just a quick one on video collaboration. I think it declined again in the quarter. Maybe you could just touch on, yeah, how you're feeling about that market into H2? Are you seeing sort of some stabilization from the enterprise customers, or is it still a lot of uncertainty?
Guy Gecht (Interim CEO)
First of all, not the numbers we wanna see on the business, B2B video conferencing side. I would say in the last, you know, 30 days, I talked to customers in every region, met face-to-face in Asia and North America, going to Europe this afternoon. Our brand is strong and the wins are significant. What we're seeing is actually big companies decided to standardize on Logitech, and they just deploy at some pace where budget get open, they deploy us in conference rooms. That should play definitely better for the future. The second thing is, if you look at the market, it's there's the high to the mid-range. We're actually doing quite well. We grew double-digit at that category.
Where we have some pressure is kind of the lower mid-range to the bottom, to the lower end, where we didn't have a product for some time, and we're about to launch a product, Rally Bar Huddle, that's a great product. It will play really well in this category, energize ourselves, supposed to go in. Between this and the Sight that I talked about, this is gonna be a really good way for us to come back to customers, try to push the deployment, win some more big accounts. I feel very positive about the future of this business after talking to channel, after talking to customers, I think the opportunity there is significant, it's, of course, the talking to the margin. This is the best margin category we have, that will help a lot.
Chuck Boynton (CFO)
I would just add, you know, we gained 2 points of share in the quarter. We feel good about our the strength of our position. Sequentially, the video category was down $5 million, relatively modest quarter-over-quarter. With these new products that Guy just mentioned being launched, we're again, cautiously optimistic about our execution in the back half of the year.
Adam Angelov (Equity Research Associate)
Got it, that's great. Thank you.
Guy Gecht (Interim CEO)
Thank you.
Nate Melihercsik (Head of Investor Relations)
Thanks, Adam. Next question will be from George Wang at Barclays. Hey George.
George Wang (VP and Senior Analyst)
Hey guys, thanks again for the question. Firstly, can you talk about gaming? you know, just in terms of our checks, we picked up some incremental improvement especially on, kind of, on the downstream, just not sure whether it necessarily flowing to the gaming peripherals. based on your guide for below seasonal 2H, so they imply the gaming to be down again on year-over-year basis for the F4Q. curious whether you think it's less conservative or how much visibility you have on the gaming side?
Chuck Boynton (CFO)
Well, we haven't provided, you know, specific estimates for gaming for the back half of the year, but clearly the December quarter is the biggest quarter for gaming. Our gaming team has been operating incredibly well. We've got some new products coming out that we think will help. Overall, it was a really good quarter for gaming. The China team executed flawlessly for the 6.18 promo, which is a really important event for us in that market. Overall, we've got strength in Japan and elsewhere, but I'd say, you know, the real test will be the December quarter for us. That's the biggest quarter for gaming.
George Wang (VP and Senior Analyst)
Great, thank you. Just, if I can squeeze in a follow-up. You know, I guess you guys are always sort of looking to expand the new categories, right? Just, adjacencies. That's one of the kind of growth pillars. You know, any high-level thoughts on if Logitech were to enter into any sort of a brand-new category, which area or which vertical do you think will be most likely in the next few years?
Guy Gecht (Interim CEO)
George, great question. I found great plans in the company to expand the TAM, expand into new use cases where we are going after higher value application and use cases. It's just too early for us to talk about it. You will see in the coming quarters more discussion about this expansion.
George Wang (VP and Senior Analyst)
Okay, great. Thank you, I will go back to the queue.
Guy Gecht (Interim CEO)
Thank you George.
Chuck Boynton (CFO)
Thanks George. Our next question will be from Alex Duval at Goldman Sachs.
Alex Duval (Head of Europe Technology Hardware and Semiconductors Equity Research)
Yes. Hi, everyone, many thanks for the question. Just a couple, firstly, on OpEx, it looks like you've made some good strides on cost control in the quarter. I wonder if you could talk a bit about how much further headroom there is for cost control going forward in the remaining quarters? I have a quick follow-up on FX. Can you just remind us how much support we should expect to be seeing from FX in coming quarters? Many thanks.
Chuck Boynton (CFO)
Certainly. First, on the FX side, this quarter, we still have headwinds in the year-over-year comps. That starts to change next quarter, it's more balanced with where rates currently are. I think we should be back into kind of a year-over-year balance starting in Q2 and beyond. First question was, Can you remind us? It's early here. Sorry.
Alex Duval (Head of Europe Technology Hardware and Semiconductors Equity Research)
Cost control.
Chuck Boynton (CFO)
Cost control.
Alex Duval (Head of Europe Technology Hardware and Semiconductors Equity Research)
That's the one.
Chuck Boynton (CFO)
Thank you. My favorite topic. We have done a phenomenal job lowering costs. OpEx for Q1 was a little higher than our internal targets. There was a couple one-time administrative charges. I think you'll see sequential improvement on OpEx. Our long-term operating model is to have OpEx below 25% of revenue. We may or may not get to that level this year, but we'll have to wait and see. We're on that trajectory, and we believe that, you know, by the end of the year, roughly, we should be kind of at a billion-dollar run rate, approximately, but the real long-term target is to be below 25% of revenue.
Alex Duval (Head of Europe Technology Hardware and Semiconductors Equity Research)
Thank you very much.
Chuck Boynton (CFO)
Thank you.
Nate Melihercsik (Head of Investor Relations)
Thanks Alex. Our next question is from Ananda at Loop Capital. Good morning Ananda.
Ananda Baruah (Senior Equity Analyst)
Hey, guys. Sorry no video. Got it Nate. Cool. Thanks for taking the question. just two quick ones, if I could. Guy and Chuck as well, the decision to give the second half guide today and as opposed to 90 days from now, can you tell us, I mean, just give some context around, you know, sort of visibility that gives you guys confidence in the ability to do that and the thought process around doing it? I just have a quick follow-up as well.
Chuck Boynton (CFO)
Well, on the guide, you know, we deliberated it, what we had outlined last quarter that we would either provide it this quarter or next quarter. Given the strong first quarter we had relative to expectations, with one quarter behind us, we felt now was the right time. You know, is visibility better? You know, in some areas, yes, inflation in the U.S. has come down a little bit. It's higher in U.K. and other markets. The U.S. inflation has come down a little bit. FX is starting to stabilize a bit, we just felt that with one quarter behind us, that it was the right time to update our estimates for the full year, and we're pleased to have done that, one quarter kind of ahead of expectations.
Ananda Baruah (Senior Equity Analyst)
Okay, that's helpful context Chuck. I guess just bigger picture question, any thoughts, and maybe you guys haven't, you know, sort of reached this conclusion yet, but would love any context, thoughts on, you know, sort of when you kind of re-normalize the revenue base? You know, I've just done some quick analysis. It seems like exiting fiscal 2024, you could be there, but just would love your thoughts on that. That'd be helpful, thanks.
Chuck Boynton (CFO)
I'll start, Guy you can add color but you know, as we look at the year-over-year and sequential change, things are starting to stabilize. The year-over-year comps are getting, you know, they're still not where we want them to be. We're not happy. They're still declining, but the rate of change is getting more favorable. I can't tell you when we're going to hit bottom and, you know, if we're at an asymptote, but it feels like things are starting to stabilize, and that's reflective in our, you know, cautiously optimistic estimates for the year.
Guy Gecht (Interim CEO)
I would say the last 42 days here as an Interim CEO, just to reaffirm my conviction, this is a growth company in a growth markets with a growth trajectory. This will come, let me tell you another thing. We'll not just wait for the market to improve. The team here is working really hard to push whatever we can. New products obviously going to help win some share and get to this point where we start to be plus in front of our number again, and just a matter of time. There is a clock in our head. We want to get there. Obviously, it will take some time. We will get there.
Ananda Baruah (Senior Equity Analyst)
Guy, is the right way to think about—I mean, I guess, like, sort of, as we sit currently, does the company want sort of the financial community to think about normalized growth go forward, the same as we have kind of pre-COVID or different, whether positive or negative?
Guy Gecht (Interim CEO)
Look, we and you know me from my life, we always want more. We always want to be a higher growth, and we will continue to plan, look at the right acquisition that can accelerate that, look at the right product. There's a lot of potential here, and a lot to build on. This company is super strong. The muscles in innovation, in design, super strong. The leadership team is super strong. We have a lot to build on. You know how ambitious I am, and, you know, as we go forward, you will hear more, but we certainly like to do better.
Ananda Baruah (Senior Equity Analyst)
Awesome, thanks a lot guys. Appreciate it.
Guy Gecht (Interim CEO)
Thank you Ananda.
Nate Melihercsik (Head of Investor Relations)
Our next question will be from Erik Woodring at Morgan Stanley. Good morning Eric.
Erik Woodring (Head of US IT Hardware)
Hey, good morning guys, thank you for taking the question. Guy, good to see you again. You know, I just wanted to kind of double-click on Asiya's seasonality question, because I understand there are uncertainties today, but you're guiding to the worst seasonality in at least a decade, but also telling us the channel is normalized. That would, I guess, would imply demand would be worsening, but I don't really hear that from your comments, actually. I was just wondering if you could kind of help me square that circle and understand really why we were expecting such a below-seasonal September quarter. I have a follow-up. Thanks.
Chuck Boynton (CFO)
Well, I think, you know, overall, we haven't provided updated seasonality or targets for December or the March quarter. I would say if the December quarter is really strong, then, you know, we would be above the estimates. If the December quarter and the state of the consumer is difficult because of rising interest rates and inflation and global conflicts, et cetera, then, you know, that's a different situation. I feel like we feel coming into the year, we started off strong, relative to expectations in Q1. We feel like we've got a plan that we can manage to, and that we're in a pretty good place, and we'll have to just wait and see how the December quarter happens and what happens in the March quarter. March is typically our seasonally worst quarter of the year.
If you look at the outline of what I mentioned earlier, generally, March is, the March quarter is 22% of the year. Could be lower, we don't know, but I think I'd say we're balanced, and that would be my view. Guy, do you have a different point of view?
Guy Gecht (Interim CEO)
I agree with you. You know, Chuck and I were part of a very extensive review, operational review, that we have done last week, and it informed us in decision to issue the guidance and for the full year. I would say Erik, you're spot on. We are not anticipating demand to be worsening. That's definitely not what we're seeing or hearing or planning on.
Erik Woodring (Head of US IT Hardware)
Awesome. Thank you for that color. Chuck, just a question for you to follow up on one of your comments there. In terms of OpEx below 25% of revenue, I think last quarter, we kind of talked about Logitech exiting the year at maybe like a $250 million quarterly run rate for OpEx. If you did do below 25%, you'd get, you know, call it $8 million-$10 million below that. Just wondering if you are thinking you can cut OpEx beyond your prior expectations. Secondarily, you know, if you are growing next year, would you expect to keep cutting OpEx, or would you kind of then lean into reinvestment and try to grow OpEx base alongside your revenue base? That's it for me. Thank you so much.
Chuck Boynton (CFO)
Yeah, yeah. Good questions, and maybe I wasn't super clear. Our target by the end of the year is to have OpEx at a run rate of roughly $1 billion, which would imply an approximate $250 million Q4, maybe a little higher, maybe a little lower, but in that range. We have taken a lot of costs out of the company. We do not have a cost reduction plan in place right now to reduce headcount or OpEx further. That's not our plan. We're focused on the top line and getting back to a year that has a four in front of it. If we're at $4 billion in revenue, a $1 billion OpEx run rate is 25%.
Our—if we're below the $4 billion, we're still gonna stay at approximately $1 billion in OpEx or run rate. The Q4 plan is, think of that as approximately $250 million if we're below $4 billion, and as we start to grow again, we would have OpEx be below that 25% of total revenue number. That is the long-term operating model.
Guy Gecht (Interim CEO)
Right. Just to be explicit Erik, when we come back to growth, we like the 25%, and we take the extra investment in growth areas. There's plenty here, opportunities to invest in, but 20%-25% is we like it as a long-term model for us.
Erik Woodring (Head of US IT Hardware)
Super, thank you so much, guys.
Guy Gecht (Interim CEO)
Thank you Erik.
Nate Melihercsik (Head of Investor Relations)
Our next question is from Joern Iffert at UBS. Hello, Joern.
Joern Iffert (Head Equity Research in Switzerland)
Thank you, good morning everybody. Two to three questions, please, from my side. I would take them one by one, if it's okay. The first one is, can you please be so kind and clarify again on gross profit margins? What exactly was the one-off benefit in Q1, and where you see gross profit margins trending to in Q2?
Chuck Boynton (CFO)
Okay. If you look year-over-year, gross margins were 39%, down from 40 a year ago. The primary difference there is gonna be FX. There's other puts and takes, but if you broadly, you know, it says roughly 100 basis points. The quarter, though, was quite strong because of significantly reduced on-hand inventory. As we look forward into Q2, there will be some pressure because we don't think we can reduce inventory by another $110 million. Of course, there's a lot of dynamics with mix and FX and all those things, but generally, all things being equal, we see a strong gross margin trend here, but there's a bit of a one-time benefit in Q1 that will put a little bit of pressure on the results for Q1.
In four to six quarters, we see that trend improving structurally to a 40%-ish gross margin as a company. Our long-term model for gross margins, 39%-44%. Now, to get to the high end, mix shift, more video, things have to happen, but in four to six quarters, we see structurally 40%-ish gross margins. Next question there. You said you had three. That's the first of three?
Joern Iffert (Head Equity Research in Switzerland)
Yes, exactly. It means in four to six quarters, you will reach the 40% gross profit margin run rate, not in the next four to six quarters, just to be clear.
Chuck Boynton (CFO)
Well, we may have quarters where it's above 40, we may have quarters where it's below, but I think structurally in four-six quarters, we see the business on average being 40% and growing, because we said the long-term model is 39%-44%. There's a lot of puts and takes that can happen with gross margins, primarily mix being one of the biggest impacts. Now, Guy mentioned earlier, we've got some new products coming out. Those could be really helpful and be a tailwind, but it's uncertain as to what's gonna happen in the short term. We're just, we've got more conviction in the intermediate term that we can hit our long-term operating model.
Joern Iffert (Head Equity Research in Switzerland)
Okay, thanks. This second question would be, please, on Q2, on the revenue guide. I mean, usually Q2 is significantly higher versus Q1 due to normal seasonality. What have you seen in July so far? I mean, in the first weeks of July, do you see a stable flattish development year-over-year, or have you started with some growth quarter-on-quarter? Sorry, I was speaking about quarter-on-quarter, not year-over-year. Just to double-check this, what you're seeing in the first weeks of July?
Chuck Boynton (CFO)
Yeah. The data that we have so far is, you know, the first couple weeks, I would say we're, you know, we're cautiously optimistic about the results so far. We don't have the final analysis in yet from Prime Day. You know, we still have a lot of wood to chop for the quarter, I think we feel like we're in a good position for the second quarter.
Joern Iffert (Head Equity Research in Switzerland)
Okay, thanks. The last question please, on video conferencing. Video conferencing, you said it's around $5 million down. We can assume it's bottoming out here, that Q2 in video conferencing and also gaming should be up quarter-on-quarter. Is this a fair assumption for these categories?
Chuck Boynton (CFO)
We haven't provided that level of specificity. Has video bottomed out? I hope so, but I can't guarantee that. It's fairly in line with last quarter, down a little bit. With new products coming, I think we've got tailwinds in video.
Joern Iffert (Head Equity Research in Switzerland)
All right, thank you.
Guy Gecht (Interim CEO)
Thank you.
Nate Melihercsik (Head of Investor Relations)
Thanks Jordan. Our next question is from Andreas Mueller at ZKB.
Andreas Mueller (Technology Analyst)
Yes, hello. Thanks for taking my questions. I've got a question about the difference of growth rate between keyboard and combos and my standalone. What was the other reason?
Chuck Boynton (CFO)
Keyboard and combos was down a bit, but better than our expectations. It was quite a strong quarter relative to our internal expectations. Pointing devices also performed quite well with share gains. I don't have a lot more to offer in terms of color. Generally, I would say both categories were a little better than expectations. Pointing devices being a hallmark of our company, we're just thrilled to see additional share gains.
Andreas Mueller (Technology Analyst)
Okay. Then the cash on the balance sheet, this is now really high. Would you accelerate the share buybacks? I think it's running a bit lower than $100 million. Is there room to improve that?
Chuck Boynton (CFO)
There is room to improve. First of all, in Q1, we pay our annual dividend, so that's being paid this quarter. That will reduce the cash balance. We have put in place a new buyback plan. The old buyback plan of $1.5 billion, we were able to execute $1.1 billion of buybacks on the old plan that's now expiring. The new plan will go for shareholder approval at the AGM. We have announced an acquisition. I would say we're executing on our capital allocation strategy of targeting M&A for growth. Loupedeck is a modest purchase price. We are targeting M&A for growth, paying the dividend, growing the dividend, then excess cash returning back to shareholders. I think we're following our playbook, you know, right down the middle.
Andreas Mueller (Technology Analyst)
Okay, understood. Last question on the administrative cost, this one-timer, what was that exactly?
Chuck Boynton (CFO)
We don't disclose the individual details, but it was a kind of, you know, millions of dollars, so it's not a huge number either, but that was sort of a one-timer. We should see a benefit in Q2.
Andreas Mueller (Technology Analyst)
Okay, perfect. Thanks a lot.
Chuck Boynton (CFO)
Thanks Andreas. Our next question is from Michael Foeth at Vontobel. Michael, I think you're still on mute. Michael, we'll circle back. Let's go to Samik Chatterjee at JPMorgan. Hey Samik.
Samik Chatterjee (Executive Director of Networking Equipment and IT Hardware Senior Analyst)
Hi, can you hear me?
Guy Gecht (Interim CEO)
Good morning Samik.
Nate Melihercsik (Head of Investor Relations)
Yes.
Samik Chatterjee (Executive Director of Networking Equipment and IT Hardware Senior Analyst)
Yep. Okay, great. I jumped in a bit late, I apologize if you've gone through this already, in some of the PC companies we track, there are expectations for a second half seasonal improvement in PC volumes related to the first half. I'm just wondering, as you look at your sort of momentum into the back half of the year, are you associating any improvement, given the attach rate that you would typically expect to see with PC volumes into your model? Are you largely keeping that as more of potential upside that comes, if that comes through, good, otherwise, you're sort of going to more track flattish, half over half? I have a quick follow-up. Thank you.
Guy Gecht (Interim CEO)
You know, part of our analysis and reviews, we're closely tracking PC ship, and our attach rate with that, and so obviously, those are good news from our perspective, the, the outlook we're seeing with some of the big PC providers. As Chuck said, we're trying to be cautious here. It's just the first quarter. We're very pleased with the overachievement, don't get me wrong, we're not gonna build on other companies talking a little bit more bullish on the second half.
Samik Chatterjee (Executive Director of Networking Equipment and IT Hardware Senior Analyst)
Yeah, okay. For my follow-up, it was an interesting acquisition, Loupedeck, to see sort of what you're doing there, but maybe if you can sort of highlight how you're thinking about what addressable market does that have, and as you look at your portfolio, what are these other sort of niche opportunities that you're thinking of in relation to M&A?
Guy Gecht (Interim CEO)
Yeah, on the Loupedeck, it's a small, relatively small team, but very important IP that will allow us to add very sophisticated capabilities, to keyboard and mice in the future. We will use it, first in for gamers and creators, but we're seeing the potential beyond that. I'll leave it at that. We'll talk about it when we get to this. As far as M&A, we review you the M&A funnel. We encourage the team to replenish it, look at that. We have the optionality. We're not desperate for M&A. Organically, I like our chances on the growth trajectory, but I think we can accelerate in certain areas, whether by small tack-in or by something a little larger than that.
We wanna see, you know, we obviously have to bring it to the board for approval. If we have targets, we wanna see what else is out there that can allow us to accelerate the coming back to growth and the growth beyond that.
Samik Chatterjee (Executive Director of Networking Equipment and IT Hardware Senior Analyst)
Great, thanks for taking my questions. Thank you.
Guy Gecht (Interim CEO)
Thank you Samik.
Nate Melihercsik (Head of Investor Relations)
Thank you. Michael I believe you're back.
Michael Foeth (Senior Equity Research Analyst)
Yeah.
Nate Melihercsik (Head of Investor Relations)
Michael Foeth from Vontobel. Hey Michael.
Michael Foeth (Senior Equity Research Analyst)
Can you hear me now?
Chuck Boynton (CFO)
Yes.
Nate Melihercsik (Head of Investor Relations)
Yes.
Michael Foeth (Senior Equity Research Analyst)
Perfect, thank you. Just one, you changed your reporting structures for some of the categories, I was wondering if what's in other now, so the speakers, if you're planning to phase any of these products out, and if that has any impact on your rather cautious guidance for the full year as well?
Chuck Boynton (CFO)
No, we are not phasing those products out. The challenge I gave to the general manager of that group was grow it, so it's its own standalone category. We just trying it for housekeeping, we don't want a bunch of small cats and dog categories, the idea is put those together so it's, that we're focused, then if they can outgrow, we'll create a separate line for them. That's the challenge to the general manager, and he's accepted that challenge.
Michael Foeth (Senior Equity Research Analyst)
Okay. If you can talk maybe just a few words about, you know, UE BOOM, and if there is any plan to reposition that for growth going forward?
Guy Gecht (Interim CEO)
It's a great question. We actually, the company invested not much in this, but invested, and we're actually expecting two new products in the coming months to do, and the reminder of the year to ship, and hopefully will energize the category there. It's too early to say. As Chuck just said, he told the GM wants to go out of other, we wanna see good growth, and we'll get you out of other category. At this point, to give you the best transparency on our product categories, we feel like it's better suited than the others.
Michael Foeth (Senior Equity Research Analyst)
Okay, perfect. Good to hear, thank you.
Guy Gecht (Interim CEO)
Thank you very much.
Nate Melihercsik (Head of Investor Relations)
Our final question for today is from Serge Rotzer at Credit Suisse. Hey Serge.
Serge Rotzer (Director and Equity Analyst)
Yes, good morning, everybody. Basically, I had a similar question like Michael because of this other. I'm wondering that you want to see growing these product categories, as in the past, you always said that you take out research and development costs and that you squeeze them down, and we know that these product groups has the lowest margin, so it gives no sense for me that you want to grow now again in these product groups, as it will dilute your margins. For me, it sounds more that you want to close these product categories, at least on your old strategy.
Chuck Boynton (CFO)
Clearly, our goal is to grow the company profitably, and there's a margin threshold. The challenge for the team is to build great products and grow those with attractive margins that make sense for the company. If they don't meet our thresholds, then we will not seek to grow those. What we have been doing historically in those categories is kind of profit max, not investing necessarily, but harvesting the profits. I believe there's a strategy that they can execute to do both. We'll see. That's why it's in the other category. It's small, it's not worth you focusing on as an investor today. The challenge for the internal team is to build great products with attractive margins, and if they can get to the level that it's worthy, then it'll create its own standalone category.
Guy Gecht (Interim CEO)
Rest assured, there is no product development here that is targeted at low margin category. We are, our dollars, our R&D dollars are going after higher margin, higher growth products.
Chuck Boynton (CFO)
That's where Guy and I are aligned. It's really portfolio management.
Guy Gecht (Interim CEO)
Right.
Chuck Boynton (CFO)
How do you manage the portfolio for growth and profit, not either/or?
Serge Rotzer (Director and Equity Analyst)
Probably follow up here, is there a significant Google position linked to these products? speakers, Jaybird, UE BOOM. Can you give me any information here?
Chuck Boynton (CFO)
I don't believe so. I think that any goodwill associated with those acquisitions would be fairly immaterial.
Serge Rotzer (Director and Equity Analyst)
Okay, good. The last one, you have increased slightly the CapEx from $90 million to $100 million. Is there any reason, or do you start to capitalize some of the OpEx? Although it's a very small position, I know.
Chuck Boynton (CFO)
It's tied to our new building here in Silicon Valley, we hope to have you all visit us here and host you if you're in town, the Silicon Valley, we've got a really a new office that we're just opening and that we're calling in from today using our great technology. Come visit us here, and we'll give you a tour of our new facility.
Serge Rotzer (Director and Equity Analyst)
Still, $10 million for a new building, change quarter, sequential change only in three months.
Chuck Boynton (CFO)
It's the accounting rules for leases has changed now, where you capitalize operating leases. I wouldn't read into it too much.
Serge Rotzer (Director and Equity Analyst)
Okay, got it. Many thanks. Bon voyage for the next quarter.
Chuck Boynton (CFO)
Thank you.
Guy Gecht (Interim CEO)
Thank you.
Nate Melihercsik (Head of Investor Relations)
Thanks Serge. Guy, Chuck, that wraps up our Q&A for today.
Guy Gecht (Interim CEO)
Thank you, Nate. Thank you, everybody, for joining us. Pleasure to be on the call with everybody. I also wanna extend many thanks to the very hardworking Logitech team that allow us to deliver this over achievement and build for a great future. Thank you.
Chuck Boynton (CFO)
Thanks all. Thank you.