Good day and welcome to the Logitech First Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session and instructions will follow at that time. This call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech. I would like to introduce your host for today's call, Mr. Ben Lu, Head of Investor Relations.

Thank you, Sharon. Welcome to the Logitech conference call to discuss the company's financial results for the first quarter of fiscal year 2020. The press release, our prepared remarks and slides, as well as a live webcast of this call are available online at the Investor Relations page of our website, ir.logitech.com. During the course of this call, we may make forward-looking statements including with respect to future operating results that are made under the Safe Harbor of the Securities Litigation Reform Act of 1995. The forward-looking statements involve risks and uncertainties and actual results could differ materially as noted in our quarterly and other filings with the SEC. The company undertakes no obligation to update or revise any forward-looking statements as a result of new developments or otherwise. Please note that today’s call will include results reported on a non-GAAP basis. Non-GAAP measures have inherent limitations and are not meant to be considered in isolation from or as a substitute for or superior to GAAP results. Our press release and slides provide a reconciliation between GAAP and non-GAAP numbers and are posted on our IR website. We encourage listeners to review these items. Unless noted otherwise, comparisons between periods are year-over-year and in constant currency. This call is being recorded and will be available for replay on the Logitech website. Joining us today from California are Bracken Darrell, President and Chief Executive Officer; and Nate Olmstead, Chief Financial Officer. I’ll now turn the call over to Bracken.

Thanks, Ben, and thanks to all of you for joining us. We had a good Q1 and a strong start to the year. We delivered total sales growth of 9% in constant currency at the high end of our full year sales guidance of mid to high-single digit growth. All of you deal in investment portfolios in one way or another. An investment portfolio with only one stock is usually more volatile than one that’s more diversified. Nearly focused consumer hardware businesses are the same; they suffer the ups and downs of their single category with no offsets. Quarter in and quarter out, some categories will do better while others will do worse. Logitech differs from many other hardware companies because of our portfolio diversity. This diversity tends to smooth short-term category specific fluctuations and provide stable funding for our investment priorities. That consistent funding approach is critical to our objective of long-term sustainable growth. The key aim of our multi-brand, multi-category company is to deliver amazing customer experiences in many categories, a growing number where we can lead long term. We delivered category leadership across our broad-based portfolio through our strong capabilities in design, engineering, go-to-market, marketing and operations. That is the recipe that has allowed us to consistently deliver ahead of our peers on both the top and the bottom line, and Q1 is no different. You’ve heard us talk about the secular trends driving our business: the growth of video communication, the rise of eGaming as a sport, and the democratization of content creation. Those three major global trends continue to drive our business now and will drive it long term. We’re excited about being the world’s leading peripherals player bringing video to everybody, equipping and supporting gamers, and enabling content creators. Now let’s dig into the performance of our different categories. Video Collaboration sales grew 28% in Q1 with all three of our regions delivering double-digit growth. Our MeetUp huddle room product continued to see strong traction with customers, and sales were again very strong this quarter. Sales of our recently introduced Rally Camera system for larger conference rooms climbed to new highs. That could very well become our second best-selling SKU in Video Collaboration after MeetUp, despite being released less than a year ago. Our Tap touch controller, which is embedded with great software giving users single touch access to their video solution, just started shipping to great customer feedback. You’re beginning to see how we’ve been investing in software capabilities that go beyond the software that brings products to life, like MeetUp and Tap. Logitech Sync is a perfect example. Sync, which is in beta now, is our new video conferencing device management platform that gives our customers seamless cloud-based device administration, insights, and control. It automatically flags issues in real time and offers in-depth diagnostics so the problems can be addressed quickly. We won’t just stop there. Whether that’s Logitech Sync or Video Collaboration or Logitech Capture for our webcams to help capture the fast-growing streaming opportunities, we’ll continue to double down on building out our software capabilities to deliver amazing customer experiences. Now let me talk about our PC peripherals business. The PC peripherals business generally bounces around quarter-to-quarter from slightly negative to mid-single digits or even better. Sales were roughly flat this quarter, yet the category remains consistent and stable. As we stated in our March Analyst and Investor Day, we should be able to drive low-single digit growth for the foreseeable future. As usual, you can count on us to bring out some really cool innovations throughout the year, so stay tuned. In gaming, while sales grew just 2%, nothing’s changed regarding the long-term structural growth trajectory of the category. Why the flattish growth in Q1? The bottom line is the tough comparing headsets. Most of you are aware of the unprecedented impact of Fortnite last year on young gamers and how it brought in millions of them. In the U.S., for example, where Fortnite has had the biggest impact, we saw the console and PC gaming headset market double almost overnight. Excluding headsets, our gaming business was actually up over 20% and even accelerated versus last quarter. We don’t see a change to the structural growth in gaming overall. Gaming is here to stay and we’ll continue to bring out innovative new products that will elevate every gamer’s potential and delight them. You might have noticed the release of our newest and latest PRO X gaming headset, where the mic that was developed with our Blue Microphones technology and team. Blue VO!CE gives everyone the ability to customize and tune how they sound in a game, and it's unique to Logitech. No distortion, no noise, no outside feedback, just a clear and crisp sound of your voice that everyone hears. That can really change the game in multiplayer social games. Wired Magazine called it quite possibly the best headphone Logitech’s ever made. We also introduced a new version of our flagship ASTRO A50 headset. It has a new design, a new base station for even better wireless connection and better sound. It will be available later this summer. You’ll notice that these two products are just some of our premium-priced innovations. With the broadening of the base of new gamers as a result of Fortnite, we aim to capitalize on the tremendous upgrade potential such a big base of first-timers provides. Of course, we have more exciting gaming innovations coming throughout the year. Tablet and other accessory sales grew 21% this quarter as we rolled out the new Slim Folio for the latest generation iPad Pro. We had robust double-digit growth in both our traditional retail channel as well as in our education channel. This demonstrates our continued strength in enabling and supporting the Apple ecosystem both for consumers and education. Mobile speakers were up 51% in Q1, probably due to the successful launch of our new WONDERBOOM 2. As we’ve said before, don’t expect the cyber growth to persist as growth rates are often driven by the timing of our new product introductions. Last year in Q2, for example, was especially strong because of the launches of our newest versions of BOOM and MEGABOOM, so that will impact our mobile speakers comps this coming quarter. While the overall mobile speakers market remains soft, we’re attacking various opportunities here to deliver great music experiences for consumers, whether that’s through new channels or new products. Audio and wearable sales were up 15% this quarter, with Blue Microphones contributing roughly 2 points to our overall company growth. While we didn’t have Blue in our Q1 figures last year, if we look at their year-over-year sales, Blue delivered another quarter of double-digit growth on the back of the continued trend toward podcast creation. Next week, our Jaybird team will introduce another exciting product that I’ve been using whenever I go running. It takes everything you love about our existing Jaybird products and experiences and brings it to the next level. Now before I turn the call over to Nate, I’d like to be the first on this call to congratulate him on being named our new CFO. He is no longer interim. He’s already become a great operating and financial partner for me and my team, and I look forward to working together. So, Nate, you’re in charge.

All right. Thanks, Bracken. Q1 results were strong with balanced performance across all our financial metrics thanks to solid execution and strong financial discipline. We grew sales at the high end of our full year guidance, gained share in our key categories, invested wisely in our strategic priorities and expanded both gross and operating margins despite tariff and currency headwinds. Sales grew 9% in constant currency to $644 million and non-GAAP operating profit grew 11% to $67 million. Our Q1 non-GAAP gross margin increased 40 basis points to 37.8% in the middle of our recently revised target margin range of 36% to 40%. We continue to see the benefit from mix shifts in our portfolio and our teams did a nice job taking operational actions to mitigate cost headwinds from China tariffs and unfavorable currency exchange rates. We continue to proactively and aggressively take steps to reduce the impact of tariffs, including further diversifying our manufacturing locations and recently informing our U.S. partners of price increases for select products. We have implemented price increases many times over the past seven or eight years, and price sensitivity is never completely predictable. But we feel good about our approach for the year and are confident in our full year guidance. Our non-GAAP operating expenses increased 6% to $176 million or up 3% excluding Blue. Our sales and marketing and R&D spend were both up 7% as we continue to invest in our portfolio, brand, demand generation and coverage. At the same time, we continue to keep our G&A spending flattish at around $20 million per quarter. So with a disciplined approach to managing and balancing costs, we delivered another strong profit quarter. Now let me talk briefly about our cash flows. Cash flow from operations was $37 million in Q1, a nice increase from $12 million in Q1 last year. Our full year cash flows tend to be heavily skewed towards the second half, and we are still targeting full year operating cash flow to roughly equal our full year non-GAAP operating profit. In summary, Q1 was another quarter where we demonstrated the resilience of our diversified product portfolio. As Bracken said earlier, this is a key strength of our business model. We will continue to invest in adding new categories and capabilities so that we can consistently deliver top and bottom line growth over the long term. Now, I’ll turn it back to Bracken.

Thanks a lot, Nate. We just wrapped up Q1 and delivered a strong start to the year as we said, so today we’re confirming sales growth of mid to high-single digits in constant currency and non-GAAP operating income of $375 million to $385 million. And with that, Nate and I are ready for your questions.

Your first question comes from Asiya Merchant with Citigroup.

Congratulations everyone. Strong quarter given the backdrop that we’ve been hearing about throughout the quarter. I have a couple of questions; one, gaming. I know you addressed that head on, Bracken, about gaming headsets versus gaming keyboards and other peripherals within gaming. But how should we think about the rest of the year unfolding? I know first quarter was step prompt, but as we see the comps easing in the back half; September, December quarter, relative to the expectations like mid to high-teens growth, how should we think about the gaming category unfolding for the rest of the year?

As I said in my opening, the growth outside of the headset business was actually stronger than it was last quarter, so quite strong. That included our new controller in ASTRO and of course all of our existing businesses; a strong mouse performance. We’re going to wait and see how the headset category develops over the rest of the year, but I feel really good about the gaming business overall. I think our expectations will deliver somewhere in the range we gave earlier.

Okay, that’s good to know. And then the 4% year-on-year sell-through, that seemed relative to the sell-in that you guys reported, it seemed a little weaker. Maybe you can talk a little bit about the diversions between the sell-through versus the sell-in?

Yes, sure. This is Nate. I’ll take that one. So I think if you look at it on a dollar-to-dollar basis, the gap really wasn’t quite as large. Our U.S. dollar revenue growth was 6% and we reported the sell-through of 4%. So pretty close on those two. The widest gap you probably saw was in EMEA where similar to prior quarters as we’ve mentioned, we made some strategic decisions about how we think about demand generation investments and shipping some of those, and the majority of the spread between our U.S. dollar selling growth at 12% and the sell-through growth at 5%.

Okay, all right. Thank you very much.

Thank you very much, Asiya.

Hi, thanks for taking my question. Do you see tighter competition here already and also to this product category, can you give us some more clarity what is your current headcount on direct sales force and what you’re planning here for the next 12 months? And second question would be please going into Q2, we have a couple of companies streaming services. Do you see potential for cooperation here on the hardware side or is this independent or do you see as we’re going into the peripheral space in gaming? Thanks very much.

Okay. So you asked a lot of questions really fast. Let me go through them one at a time. So competitive entries into video conferencing. Yes, we expected them, we’re getting them, there will be more. And competition makes you better, so we will be better. We’re already better than we were six months ago. So far I don’t think it’s had any impact on our business, but we’re going to rise to the occasion. The other good thing about that is I think as Guerrino De Luca, our current Chairman, said to me a long time ago, you don’t want to be in a category with no competition because then there’s no growth. I think that really growth in this category will accelerate as we get more people out there talking about the benefits and the cost-saving opportunities in more of Video Collaboration. I love good competition and we’ve got good competitors. Direct sales numbers, well, I don’t think we’ve quoted externally our direct sales numbers. Probably I’m not going to do it now, but what I can tell you is that we’re accelerating rapidly the number we have around the world, where each region in the world is hiring and we’re trying to hire wisely. We’ve all been through the hiring surges that end up being a surge and then you lose half the people because they were the wrong ones. We’re hiring very aggressively around the world. Q2 your comment about is there a story over in China on the weaker market. I think China’s had such a period of long strong growth, for us too by the way. If you look at the last couple of years, we’ve been up 20% in China. I think 19% or 20%, 21%, 22%, 23%. No, I don’t expect it to stay like that and we didn’t see that this quarter or even last quarter. It was lower. I don’t see anything in our categories that suggest China is in for a big slowdown, but I do think it’s going to continue to be solid. Regarding Google and Apple entering the streaming business and others, no, I don’t see that as a downside at all. I see it as pure upside. A lot of this streaming entry is going to enable people to get into the gaming experience at a much lower cost for the PC, and I think that’s a great thing for us because they still need peripherals and I can’t imagine those people will ever see peripherals in gaming as a strategic category. This is our place. We love it.

Thanks, Bracken. But coming back to the streaming services and I think you have cooperation with Apple on the tablet and keyboard. Do you also see room for cooperation here with Google or with Apple or will this remain independent?

We never share anything we’re doing with any partner on the outside before we do it. What I would just say is I think we’ve always been a capable partner for these big players trying to enable their experiences, and that’s what we’re going to continue to be. And if I sound too modest there, I do feel like we’re really capable, but we’re not a threat to anybody like that. We’re just trying to help them realize their goals just like we’re trying to realize our own.

Hi, Bracken. Thanks for taking my question.

Thank you. You know Paul is my Starbucks name because if I use Bracken, it takes me forever for them to figure out what I’m saying, so my middle name is Paul.

Nice. So first up on VC, how good is your visibility into the full year? Does your enterprise channel provide you better visibility into demand relative to some of your more consumer-oriented products? And then on seasonality, have you been able to determine any patterns for this business or are we still in early days? I did notice that F1Q has been a typical low point for the year, so do you see enterprise buying patterns accelerating more so in the second half of the fiscal year?

Well, first of all on visibility, I would say yes and no. I think anything – the sales cycles are longer in Video Collaboration than they are in our consumer business. We use Salesforce.com, etc., like everyone else. We do probably have better visibility to the customer base and potential sales. On the other hand, it doesn’t mean we can tell you exactly what the sales are going to be next quarter for this quarter. This isn’t quite like some B2B businesses where you have a very clear picture of exactly what’s going to sell next quarter and the quarter after that. I would say it’s in between there, but it certainly is better. We’re going to have growth all year long and we’re excited about it. From a seasonality standpoint, sell-in or DCS is more stable this quarter. It looks a lot like last quarter, so it’s very stable. But to Nate’s point, it doesn’t sell-in. It wobbles up and down.

Okay, thank you for that. And then next question's on pointing devices and keyboards. You’ve mentioned the benefits of addressing a large aging PC installed base, and you continue to post growth in these more mature categories. But now PC shipments are actually squeezing out some growth near term, right? So we did notice some positive correlation with your mice and keyboard sales relative to kind of PC shipments over the years. Should we see some incremental benefit in these segments near term? So why didn’t we see any benefit this quarter particularly in pointing devices?

I think first of all, the install base is so much bigger than the PC shipments that I’m not sure that going forward you’re going to see a lot of correlation between PC shipments and our business or even our categories. The truth is we’ve sort of disconnected our selling from a PC shipment sale. One of the reasons why it used to be more highly correlated was that the install base was lower. Also, we had programs where we were really aggressively trying to upgrade. If somebody bought a new PC, we would, on the spot if we were lucky, have one of our retailers or even etailers trying to upgrade the mouse that they bought because we’d say, that mouse is pretty low end but if you buy higher, then you have a better experience when you get home with the PC. That’s a much smaller story now. I don’t think you see a high correlation. The opportunity we have – the thing that really drives our business now is our NPIs, our new product introductions. I think if our new product introduction cycles hit this quarter, we intend to have a better quarter; if they hit the next quarter, we expect positive outcomes. So I think that’s a driver for us long-term.

Perfect. Thank you so much.

Hi, everybody. Thanks for taking my question. Two questions also in pointing devices. Can you explain the declining sales outside of the cordless mice category? I assume cordless mice are still growing. But then you mentioned trackballs and pointers. Are these such large categories to move the needle? What’s happening there? That’s the first question.

Sure. I don’t think there’s a big story to be told on mice. We’ve had negative quarters off and on for as long as I’ve been here on the mouse business, and I do think it’s much more a function of when we launch, what’s the traction on the latest thing we’ve launched, and what’s coming up next. No, I don’t think – by the way, I think you’re right; our cordless mice continue to be strong. The kind of lets call it more niche products in the mouse category can be very attractive, and I think we’re going to continue to do those things, like the vertical mouse we launched last upgraded. You mentioned the trackball; we upgraded our trackball about a year ago. So the growth curve on that probably faded out a little, but we’ve got more stuff coming. So I wouldn’t overthink this quarter on mice. I think it’s just part of the wobble that’s happened in that business for as long as we’ve had it. Looking at all of our PC peripherals business, it looks fine at up 2%. If we’re up low-single digits, that’s good.

I agree. The second question on cash conversion. The cash conversion cycle of these 50 days cash conversion; I mean if we hadn’t had Blue Microphones, the tariffs sort of normalized, of course it’s then fluctuating with seasonality. But how many days would we have been lower without the exception of tariffs?

Yes, I’ll take that one. A few days of cash conversion cycle are tied up in those items you mentioned. Primarily on the tariff side, obviously, we did pull in some inventories we’d done in past quarters when the tariff increases were announced, and we tried to take proactive action there to help out on the cost side. We did that again this quarter. The other thing in cash conversion cycle is just the linearity of the business. Sequentially, cash conversion cycle improved seven days as the business had a little better linearity to it than it did in Q4. Year-over-year, it was up. It’s going to still move around. There’s some headwind in that number from Blue; they had a little bit longer cash conversion cycle, and as we continue to integrate that business and bring them into our operations, we could see some improvement in that in the future.

Okay, great. Thanks.

Private equity has a higher cash conversion cycle than we have, but we could definitely do better with Blue than that.

Hello, Thomas.

Great. Thanks for taking the questions. First off, I want to congratulate Nate for being named CFO. I wanted to talk about two things; first on gross margins and then second on gaming. On the gross margin front I think it’s remarkable that you had a 40 basis point increase year-over-year despite the tariffs. Just want to know if you can give some more information on what you’re doing to mitigate the tariffs. Then on gaming, in particular, I want to talk about your new premium console controller from ASTRO.

Great. Let me – I’ll take the second one first and then I’ll hand it off to Nate, although I do want to make a comment on the gross margin before I jump over to the gaming question. I also am very impressed that we had such a strong quarter in gross margin because we had 170 basis points of impact from currency. So we managed to offset that, which is great and still deliver kind of in the middle of the range of our long-term range. So I feel good about that. On the gaming side, the C40 is our first story but it’s a big category. There’s a lot of potential there and we’re optimistic about the long term.

Yes, on gross margin Bracken mentioned, there are really two significant headwinds this year; currency actually the larger of the two is actually about 120 basis points, even out our hedging. Tariffs added a little bit on top of that. In terms of tariffs, we’ve taken actions for some quarters now to diversify manufacturing locations, which is probably the most important one, as well as I mentioned pulling in some inventory ahead of the tariff increases to get you sort of a one-time benefit. Both of those were significant helps this quarter. Also on gross margin, just keep in mind, we’re continuing to see some benefits from the portfolio mix shift, things like VC which grew faster than the overall company again, have relatively higher margins and so that helps as well. Looking forward, we only had a half of – so the tariffs increased kind of in the middle of the quarter, so we’ll have some additional tariff cost increases next quarter that we’re taking steps to mitigate. I mentioned we did notify some of our U.S. partners for some selected price increases. That gives you a flavor of some of the things that we’re doing, and I’d give a lot of credit to the operations team for moving quickly and doing a really good job mitigating those costs.

Hear, hear.

Hi, Jürgen. Hi, thanks for taking my question. I would like to follow up on the gross margin. Can you quantify the impact of the product mix on the gross margin? You mentioned Video Collaboration; what was the benefit? And regarding mergers and acquisitions?

They’re both really a wet blanket on all acquisitions, so expect us to do nothing. I’m kidding. Nate’s all in on our current approach. We’re an organic growth company that uses acquisitions to accelerate or differentiate what we’re doing and Nate will speak for you. We’re always looking at new stuff and potential M&A, and our stars have to line up to make them happen. Yes, I think you can expect more M&A.

Yes, I think on the product mix, I would reframe from probably getting into too much detail on that, but I would say there are always puts and takes, but I expect some continued benefit for us. Again, with some predictability, we expect VC to grow faster. Another thing this quarter which was nice to see, obviously, we had good growth in mobile speakers and the products that did shift this quarter were higher margin than the same period in the prior year. So that was also a factor, sort of a mixed benefit within that category itself.

Hi, Ananda. Hi, good morning, Bracken and good morning, guys. Thanks for taking the questions. Congrats on the solid quarter and Nate, congrats on the appointment. I just want to start at a higher level; do you still feel the same for this fiscal year, Bracken, about the key revenue segments? And if you don’t one way or another, could you just sort of highlight what we should know about the differences? Then I have a couple of follow-ups. I appreciate it.

Okay. Look, we’ve got three businesses that are big for us; it’s Video Collaboration, it’s gaming, and it’s CMP. Then we’ve got a growing number of other businesses that are contributors, including the M&A that we’ve done in the past. I feel about the same about all of them as we did as we started the year. I think the one that was the most uncertain for us was gaming because we really didn’t know how big the Fortnite effect was. It was hard to say. Now that we’ve seen a quarter of that – which is probably the strongest year-over-year quarter, we have better visibility to it. Generally speaking, we feel good about our guidance that we started the year with based on that.

Yes. Hello and congratulations for continuing to deliver on the benefits of the diversification of the business. That’s really great.

Thank you.

On the gaming side, did I hear you correctly that excluding the headsets, gaming was up 20% year-over-year?

Yes, over 20%.

Okay, exactly. What percent does the ASTRO and PC gaming represent overall gaming in the June quarter?

What percentage is ASTRO and PC gaming? We don’t actually break that out. But the vast majority of it is obviously our PC gaming business.

Okay.

ASTRO had a great year of growth last year and now we’ve added the controller, so it’s growing there too.

Right. I guess what I’m trying to get at is that is the install base of active headsets greater than before the Fortnite phenomenon took over?

It almost has to be. Mathematically, it has to be. So yes, it is definitely bigger.

Any chance you can give a little bit of a quantification of how much bigger it might be?

No, I’m not even sure we have that. That’s a tricky number to give because you actually have to know real users. But you can figure that it has to be because so many new gamers came into it. That’s why we see upgrade potential now. Whether that happens this year or next year, it will happen, I think, because as you get into your first headset, the difference in the Blue VO!CE, for example, and just the design is significant. I think we will see upgrades, but we don’t know the exact number.

Understood. Can you just walk me through again why there was such a big differential between the EMEA year-over-year 12% and 5% sell-through?

Yes, sure. Let me try again. The U.S. dollar selling growth was 12% versus the sell-through growth of 5%. Those are both U.S. dollar numbers, and the majority of that spread is caused by the strategy of moving from transactional promotional spend down into OpEx. The sell-through numbers are reported on a gross basis versus the revenue selling numbers on a net basis. The reduction in that promo spend means that the gross revenue or the sell-through translates into a higher net revenue number just because there’s really less discounting. So it’s not a channel inventory build.

That’s right. The channel inventories were relatively stable year-over-year.

And there appears to be no further questions at this time. I will turn the call back over to Mr. Darrell for closing remarks.

As I always say to our team, a key to a good year is a good first quarter, and we just had a good first quarter. Now we need to turn it into a good year. Thanks a lot for such an engaged call. I want to again congratulate my partner in crime, Nate, and all of the rest of our team who I think did a good job this quarter, and we’ll see you guys next quarter.

That concludes our conference call for today. You may all now disconnect. Thank you.