Logitech International - Q1 2025

Transcript

Nate Olmstead (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 2025. Joining us today are Hanneke Faber, our CEO, and Meeta Sunderwala, our interim CFO. During this call, we will make forward-looking statements, including with respect to future operating results, under the safe harbor of the Private Securities Litigation Reform Act of 1995. We're making these statements based on our views only as of today. Our actual results could differ materially. We undertake no obligation to update or revise any of these statements. We will also discuss non-GAAP financial results, and you can find a reconciliation between GAAP and non-GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC.

These materials, as well as a shareholder letter and a webcast of this call, are all available at the Investor Relations page of our website. We encourage you to review these materials carefully. Unless noted otherwise, comparisons between periods are year-over-year and in constant currency and net sales. This call is being recorded and will be available for a replay on our website. I will now turn the call over to Hanneke.

Hanneke Faber (CEO)

Thank you, Nate, and welcome, everyone, to our first earnings call of our 2025 fiscal year. Pleased to say that we started the year off strong. We delivered 13% year-over-year growth and 430 basis points of margin expansion, while generating strong levels of cash, further bolstering our balance sheet. Given the healthy momentum in our business to market share gains we've seen in most of our key product categories and the confidence in our ability to execute, we are raising our fiscal 2025 outlook, which I'll touch on shortly. You can read the full details of our quarter in our shareholder letter, which will give you a full review of our operating and financial performance. But I'd like to spend a few minutes on this call to provide some color and context to our results, and then we'll transition to Q&A.

Let me briefly touch on three points. First, I'm super pleased to see Q1 net sales growth in the low teens, our second consecutive quarter of growth. As a reminder, we told you last quarter that our strategic working capital investments would be a part of this story this quarter, as we prepared our own and channel inventories for big selling seasons like June 18, Amazon Prime, back to school, and into the holiday season. Even after you normalize for these planned channel investments, demand was nearly one-third of our top line growth. The teams delivered on our plans exceptionally well. Together with our strong top-line results and our focus on execution and operational discipline, we drove healthy growth and operating margin expansion. These results were also enabled by our ability to balance the needs of our distribution partners with continued focus on lean working capital management.

At the end of Q1, our owned inventory was down nearly 20% from last year, and our Q1 inventory turns were at 5.4, a notable increase from 4.2 last year, demonstrating our strong command of the business. Our channel inventory levels, in terms of weeks on hand, remain well within the upper and lower ranges in which we've operated since the beginning of fiscal year 2024. Second, I'm excited about our product innovation lineup for this fiscal year, advancing our strategic priority that I talked about last quarter to innovate. You saw us launch 11 products in the first quarter across almost all of our product categories. This ability to launch a diversified set of innovations with a design-led focus at global scale is a competitive advantage that we will continue to leverage.

Many of these products are finding smart ways to leverage the power of AI. For example, the recently released AI Prompt Builder has now been used in over 5.5 million instances. Our recently introduced MeetUp 2 conference camera with RightSight and RightSound technologies leverages proprietary data models, our own, and machine learning algorithms to deliver a truly equitable meeting experience for those in the meeting room or participating remotely. Third, given our solid start to the year, we are updating our fiscal year 2025 outlook, modestly increasing our fiscal 2025 targets for both net sales and non-GAAP operating income. Fiscal year 2025 net sales growth is now expected to be between 1% and 3%, and non-GAAP operating income is expected to be between $700 million and $730 million. This updated fiscal 2025 outlook contemplates two discrete trends.

Our top-line growth in Q1 was clearly strong. End customer demand, coupled with the working capital investments I discussed earlier, drove a healthy increase in net sales. At the same time, though, this positive business momentum occurred amidst this uncertain and volatile global economic backdrop. So while we're pleased with our third quarter-first quarter results, we remain pragmatic about future risks and uncertainties. Now, before we move to Q&A, I'd just like to highlight our 2024 impact report that we published yesterday. You've heard us talk about our commitment to sustainability, and this annual scorecard holds us accountable.

There's a lot to be proud of in this report, such as the fact that three out of four of our products now use recycled plastic, and 66% of our products are carbon labeled, helping consumers and enterprise technology buyers make informed decisions about the environmental impact of their purchases. Sorry. I'm very comfortable with this approach to sustainability. We set ambitious goals and provide an annual transparent scorecard. And above all, we pursue this commitment to sustainability while delivering strong business results. So in summary, I'm pleased with our ability to execute on our strategic priorities as we focus on extending human potential in work and play. Our first quarter results demonstrate that we're on the right track. Thank you. And with that, Nate, let's go to Q&A.

Nate Olmstead (Head of Investor Relations)

Great! Layla, we are now ready for our first question.

Operator (participant)

Thank you, Nate. At this time, if you would like to ask a question, please click on the Raise Hand button, which can be found on the black bar at the bottom of your screen. You may remove yourself from the queue at any time by lowering your hand. When it is your turn, you will hear your name called and receive a message on your screen asking to be promoted to panelist. Please accept, wait a moment, and once you've been promoted, you may unmute your video and audio and ask your question. As a reminder, we are allowing analysts one question and one related follow-up today. We will now pause a moment to allow the queue to form. Our first question comes from Samik Chatterjee from JPMorgan.

Nate Olmstead (Head of Investor Relations)

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

Operator (participant)

Yeah, Samik, I see your mic is open. You may need to change the input. We'll go ahead and move to our next analyst, and we'll return to you, Samik. Our next question will come from Joern Eifert from UBS.

Joern Eifert (Financial Analyst)

Thank you. Thanks for taking my question. Hello, everybody. Can you hear me?

Hanneke Faber (CEO)

Yes. Good morning, Joern. How are you?

Joern Eifert (Financial Analyst)

I'm all right, thanks, and thanks for taking the questions. There's one starting question, and then a follow-up, please. The starting question is, please, do you see sell in and sell out, so say, through to trending to the same corridor now in Q2? Because you have not reiterated your above seasonality, guidance for Q2, in the report.

Hanneke Faber (CEO)

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

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

Joern Eifert (Financial Analyst)

Thank you. Then allow me to follow up. Given the consumer weakness we have seen from so many companies recently, do you see that promotion have increased again in the exit rates, so by May, June, in your Q1?

Hanneke Faber (CEO)

Yeah.

Joern Eifert (Financial Analyst)

Or not really?

Hanneke Faber (CEO)

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

Joern Eifert (Financial Analyst)

Thank you very much.

Nate Olmstead (Head of Investor Relations)

Thanks, Joern.

Operator (participant)

Our next question comes from Ananda Baruah from Loop Capital.

Ananda Baruah (Senior Equity Research Analyst)

Yeah, good morning, guys. Thanks for taking the question. Really appreciate it. Yeah, 2, if I could. I guess the first one is, Hanneke, on the last call, and this is really more big picture. I think you talked about the most impactful opportunities as you see them being geographic wallet share, you know, kinda true up, B2B, and expansion of work and play. And I guess just any incremental thoughts there or, you know, kind of progress/actions the last 90 days that have been taken, you know, to sort of go with those. And then I have a quick follow-up as well. Thanks.

Hanneke Faber (CEO)

Yeah, absolutely. No, thanks for that question. Clearly, we're working on all of those three things, and it's too early to see massive changes, but there's a few things I'm pleased by. When it comes to geography, we're seeing really broad-based growth in the quarter. So, the Americas up 9%, EMEA up 20%, and APAC up 13%. So that's really broad-based, and a particularly standout performance from EMEA, where our execution just has been outstanding. When it comes to B2B, yes, we are doubling down, and pleased to see growth in the segments, up 9%. Market probably a little more robust than it has been, which is also great to see, and we continue to build capabilities.

And that's both on the product side, where we had a great launch of the MeetUp 2 in the quarter, but also on the organizational talent and services side. So I'm excited about the steps we're taking there to really double down on that B2B business, where we still have so much opportunity. And then finally, on work and play expansion, that's clearly a multi-year program. But again, some green shoots. We had terrific results in education in the quarter. That's a new space for us. I talked about how, you know, today we mostly focus on offices when it comes to B2B. You know, you and I on a video conference, you and I at our desk, but most people in the world don't work in offices.

Education is the first other workplace we've started to focus on, and our again, our results in the quarter, very, very strong. More than 20% growth in education behind great products like the rugged portfolio. So love that. And then more is to come. We also announced the launch in the quarter of the MX Ink, which is a stylus for the Meta Oculus headset. Again, you can imagine how that goes into new work verticals as well in the future. And again, these will be small to start with. This is a multi-year effort, but I'm excited about some of the green shoots that we're starting to see.

Ananda Baruah (Senior Equity Research Analyst)

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

Hanneke Faber (CEO)

Mm.

Ananda Baruah (Senior Equity Research Analyst)

Any context there would be great.

Hanneke Faber (CEO)

Yeah.

Ananda Baruah (Senior Equity Research Analyst)

In near term and even bigger picture.

Hanneke Faber (CEO)

Yeah. I think the top line is we're very bullish on mice and keyboards. You know, that's, that's the core of the core of our business. That's where we started, and it's still a great business. We are not 1-to-1 correlated to PC refreshes, but it certainly can't hurt if people are buying new PCs, so that's a good thing. And then AI will play a big role. You know, we've always been the human-machine interface ever since the start of this company 40 years ago, and we can now really be the link between the human and the large language model via our mice and keyboards. So we've started to do that. The Logi AI Prompt Builder is a free piece of software that sits in all our mice and keyboards since April.

It allows you to shortcut to ChatGPT, and it's quite popular. 5.5 million unique user interactions since the middle of April. That's pretty good. So I'm excited. Again, this is just a start of how we're serving as that interface to the large language models, through our mice and keyboards, but it's exciting.

Ananda Baruah (Senior Equity Research Analyst)

Thanks a lot. That's super helpful. Appreciate it.

Hanneke Faber (CEO)

Thanks, Ananda.

Ananda Baruah (Senior Equity Research Analyst)

Thanks, guys.

Hanneke Faber (CEO)

Great to see you.

Nate Olmstead (Head of Investor Relations)

Yeah.

Operator (participant)

As a reminder, if you would like to ask a question, please select the Raise Hand icon, which can be found at the bottom of your Zoom window. Then accept the invitation to become a panelist and turn your camera on. We will now also accept further follow-ups. There are no raised hands at this time, Nate.

Nate Olmstead (Head of Investor Relations)

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

Operator (participant)

Yes, we appear to have a follow-up from Joern. He's now being promoted to panelist. He'll be with us in a moment.

Nate Olmstead (Head of Investor Relations)

Great. Thank you.

Joern Eifert (Financial Analyst)

Thanks, and sorry, I think it takes a while until I can join as a panelist again, so sorry for the silence. Yeah, a follow-up, please. I mean, can you distinguish between your price and volume performance for the quarter? Is price still a significant contributor here, price at mix, or is it mainly volume driven? To start maybe with this one, if I may.

Meeta Sunderwala (CFO)

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

Joern Eifert (Financial Analyst)

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

Hanneke Faber (CEO)

... Yeah, I'm not sure that we actually said that APAC should be. I think we talked about, you know, what might be impacts on gross margins. So, mix is an impact on gross margin, and if, Europe and the US are a little better, APAC is a little worse, that's a tailwind on gross margin. And the same is true with our video conferencing business. If that grows faster, that's a tailwind on gross margin. So I think we talked about it that way. That said, you know, I'm super pleased with the broad-based profile of our growth.

APAC had a robust result at +13%, but Europe really was a star, and again, driving a good portion of that increased demand that was a little unexpected versus what we were seeing last quarter. The execution in Europe has been particularly strong. If you've been to MediaMarkt recently, you're seeing a fantastic user-centric shelf there that we've built, which looks fantastic, where you can really see, you know, MX versus Ergo versus our mobile line versus our baseline. Really good way for people to shop, and we're seeing double-digit increases where we place that in stores. And then Europe has also done a great job with Logi PLAY and Logi PLAY Race Days, where we engage consumers in store and online with our simulation wheels.

They actually play with our product, and again, that's a great driver of sales. Kudos to our European team. You know, the market in Europe is okay, but certainly not growing 20%. That's really testament to the execution of our teams there.

Meeta Sunderwala (CFO)

Joern, I just wanted to make one-

Joern Eifert (Financial Analyst)

All right... Yeah, sorry.

Meeta Sunderwala (CFO)

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

Joern Eifert (Financial Analyst)

Okay. Great, thank you very much.

Hanneke Faber (CEO)

Thank you, Joern.

Operator (participant)

Our next question comes from Lukas, Lukas Daul from Berenberg. Please go ahead, Lukas. Lukas, your line is open. Feel free to ask your question. All right, while we wait for Lukas, as another reminder, the Raise Hand button can be found at the bottom of your Zoom interface. We'll then promote you to panelist. All right. Nate, we seem to have no further questions at this time.

Nate Olmstead (Head of Investor Relations)

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

Hanneke Faber (CEO)

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