Logitech International S.A. Q1 FY2021 Earnings Call

Good morning. Welcome to Logitech’s video call to discuss the financial results for the first quarter of fiscal year 2021. Joining us today are Bracken Darrell, our President and CEO; and Nate Olmstead, our CFO. During this call, we may make forward-looking statements, including with respect to future operating results under the Safe Harbor of the Securities Litigation Reform Act of 1995. We’re making these statements based on our views only as of today, July 21st. Our actual results could differ materially and we undertake no obligation to update or revise any of these statements. During today’s call, we will discuss non-GAAP financial results. You can find a reconciliation between GAAP and non-GAAP, as well as more information about our use of non-GAAP measures and factors that could impact our financial results in our press release and our filings with the SEC including our most recent annual report and subsequent filings. These materials, as well as our prepared remarks and slides and a webcast of this call, are available on the Investor Relations page of our website ir.logitech.com. We encourage you to view these materials carefully. Unless noted otherwise, comparisons between periods are year-over-year and in constant currency, and sales are net sales. This call is being recorded and will be available for replay on our website. I will now turn the call over to Bracken. Bracken, your line is now open.

Good. Thank you, Ben. And thanks to all of you for joining us. It’s nice to see so many familiar faces, as usual. Early in my time with Logitech, many analysts described our business as one in which we needed to continually catch the next wave, like a surfer at the beach. I actually never liked that analogy. I always felt it suggested that we seek short-term trends like a fashion business. We don’t. We make our investment decisions based on long-term trends, very long-term trends. These long-term trends, unlike a surfer’s waves, don’t subside. They enable us to travel to a completely new era. COVID-19 and its repercussions have dramatically accelerated the path to a new era, as if someone hit the hyperspeed button, accelerating us to a point when the secular trends that we focused on for many years have become a fundamental part of daily life. Video everywhere, one of our secular trends, seemed like a long way off when we started to say it a few years ago. Because of COVID-19, video calls now for most people have simply exploded. And where are most of them done? At home. Imagine when people return to the office. A second trend, a big second trend, is work from anywhere, which was kind of a struggle even up to six months ago. We knew it was coming. Most companies knew it was coming, but they were stubbornly accepting work-from-home Fridays and remote workers on an exception basis. As we sit on this call right now, more than 1 billion people are working from home. And the offices they left behind will surely be reconfigured over time to be proportionally more meeting space than working space. Companies will let most of their employees work some at home and some in the office. Siemens announced just last week that they would allow 140,000 of its employees to work two or three days a week at home at their own discretion. That’s a lot of new desktops to be created, improved, and upgraded. The third trend was esports. Everyone knew esports had become a phenomenon, but who would have guessed that they’d be the only sports we could watch or play for four straight months? That’s accelerated the growth of gaming in a way that not even Fortnite could have done. The World Economic Forum reported that game hours during peak hours have now increased 75% post-COVID-19 compared to a 20% increase in overall web traffic. That’s a significant amount of gaming. And another huge phenomenon, another huge secular trend, seems like it’s hidden in plain sight. It’s the explosion of creators online. All this time at home and so much uncertainty about things. In all this turmoil, we need to express ourselves, entertain each other, and stay connected. This has taken the democratization of content creation to a whole new level. Musicians, magicians, makeup artists, gamers, comedians, dancers, thinkers, public speakers, podcasters—according to the June quarter Streamlabs & Stream Hatchet industry report, total streaming viewership almost doubled versus last year and grew 55% from just the March quarter. Online creation has taken off. And these people need tools. And today they’ll buy them, over time, and more and more will join them as this network effect grows. In this moment, we’re seeing an acceleration into a new standard, new levels for all of these trends. And while COVID shutdowns and related economic slowdowns will likely create uncertainty in the quarters, and perhaps even years, to come, we’re at the doorstep of a new era. And over the long term, this era favors Logitech. Before I proceed, I want to thank two groups. First, I want to thank our employees for their resilience, flexibility, and patience as we adapt and have been adapting to this new way of working. I’m so impressed with the quality, commitment, and ingenuity of our teams all over the world. Second, I want to thank our customers, and many of you are our customers, I hope, past, present, and future. At Logitech, I think we’ve never felt so alive with purpose and relevance. What we do matters now in ways and to a degree, it simply never has before. These are surreal times with remote work, remote schooling, offices closed, brick-and-mortar distribution slowed, reopenings of offices slowed or delayed. Logitech was 60% to 70% brick-and-mortar around the world before March 1st. So, now, let’s talk about how our business did this quarter. We had a very strong quarter. Our Q1 sales grew 25% and non-GAAP operating income grew 75%. Video adoption skyrocketed. Video Collaboration sales grew significantly with strong growth across systems but also in business-centered webcams and headsets. Sales of some products, like our $199 Brio webcam, more than tripled. BC equipment sales grew on par with what we’ve seen in the past few quarters, despite the fact that the vast majority of offices were closed to employees. While we’ve seen cases where companies pushed out their video deployments as they rethink their office layouts, many others have accelerated video adoption as we equip rooms with more video to drive engagement and effectiveness for employees who work in the office or will be. With so many people working, creating, and learning from home, our PC Peripherals category sales grew 19%. The only product within PC Peripherals negatively impacted was, not surprisingly, our Presenters category, where sales declined 80% as live presentations at offices and conferences temporarily disappeared. But that Presenter decline was more than offset by growth in the rest of our categories. Excluding Presenters, Pointing Devices sales grew 9%, Keyboards & Combos grew 15%, and overall PC Peripherals grew 24%. PC Webcams continued the strong momentum exiting last quarter, with Q1 sales more than doubling to the highest quarterly level in a decade. While we ramped our supply of webcams starting in March, we’re ramping our capacity to meet demand, working to overcome component shortages as we do. We expect Q2 supply to improve, but it could still remain pretty tight throughout the quarter. No doubt, this underlying market tailwind will continue for some time, but we expect the pace to moderate significantly as we head into the back half, particularly as we face tougher webcam sales comparisons in Q4. Tablet and Other Accessories sales grew 22%, with our education channel particularly strong, with sales increasing over 50%. Schools around the world moved quickly to learn from home. Many are now adapting to a hybrid learning environment where some students will take classes in person while others will attend virtually. We’re seeing substantial demand from educators for our iPad tablet products, which offer a superior typing experience through a smart connector combined with a protective case. It’s perfect for younger students. Gaming sales grew 38% this quarter. Gaming accelerated as it became an ideal way to stay connected to friends in a community. This quarter, the strongest growth in gaming was actually our simulation products, with our $399 G29 Wheel as the number one seller in gaming. Streamlabs continued to do well, adding roughly 2 percentage points to overall company sales growth. As expected, recent physical retail store closures hurt Mobile Speaker sales more than other categories, with sales declining over 40% in the quarter. Given some of the near-term headwinds and structural challenges of the Mobile Speaker market, we continue to reallocate resources toward other initiatives. Similar to Mobile Speakers, Jaybird total sales were also negatively impacted by closures of brick-and-mortar stores. We continued to transition our Jaybird portfolio toward true wireless, where our Jaybird Vista product had very strong double-digit growth in Q1 to become over 80% of our total Jaybird sales mix. Two other products that benefitted from stay-at-home orders are Headsets and Blue Microphones. Collectively, sales in these two categories increased 70%. We knew when we acquired Blue that we were entering a category with long-term growth potential, but we didn’t expect to see 3X sell-through, three times the sell-through versus the year-ago period. Supply for Blue Mics will continue to be somewhat tight in Q2, but we’re working to source alternatives to meet the strong demand. Now, let me turn the call over to Nate to walk you through the rest of our key financial metrics in Q1.

Thanks, Bracken. As Bracken just said, we had another strong quarter where performance came in better than we expected, with sales up 25% and non-GAAP operating profit up 75% to $117 million. We accomplished this despite multiple challenges that we had to overcome in the quarter, including significantly higher air freight costs, supply constraints across multiple product SKUs, and continued currency headwinds. Bracken spoke at length about growth highlights, but gross margin resiliency was also particularly impressive this quarter. Non-GAAP gross margin increased 140 basis points to 39.2%, despite our initial view that gross margin could fall toward the lower end of our 36% to 40% target range. We spent more on air freight this quarter than we spent in all of last year. But we were able to offset those high costs through lower promotional and marketing spending as well as favorable product mix. Our sales and operations teams did a great job managing costs to deliver these strong results. Looking ahead to Q2 and the second half of the year, a few factors will likely put some downward pressure on gross margins, although we expect margins to remain in our target range. First, we expect logistics costs to remain elevated due to our higher volumes, but especially from higher air rates across the industry. We anticipate that as supply catches up to demand in Q2 and more retail locations reopen, our promotional and marketing spending will increase. Finally, we are expecting strong sales of our education tablets, as Bracken mentioned, which is a relatively lower-margin category and thus will be unfavorable from a mix standpoint. Nonetheless, we had great margin results in Q1 and a great recovery by our operations team from the February factory closure. Our non-GAAP operating expenses reached $193 million, which is a 10% increase versus last year but was notably below our net sales growth rate. While we maintained investments in our key priorities, we began the quarter cautiously as we weren’t sure if the demand surge from March was sustainable. However, as the quarter progressed favorably, we accelerated our investments and expect to accelerate our spend further in Q2 and for the remainder of the year. We’re prioritizing the same areas as before but moving faster to develop our brands, increase our sales coverage, and expand our hardware and software roadmaps. Now, let me move to our cash flows and balance sheet. We delivered another strong result in cash flow from operations, which ended at $119 million, up from $37 million in Q1 last year. This was due to profitable business growth and a significant improvement in our cash conversion cycle, which ended at a multi-year low of 27 days, thanks primarily to faster inventory turns. We are fortunate to have a strong balance sheet, and we will use this to our advantage by replenishing and increasing inventory buffers on key products in our own distribution centers. While this may increase our cash conversion cycle, it will ensure we are better prepared for future demand spikes. Let me wrap up by saying that our strong Q1 results highlight the powerful combination of our multi-category growth strategy, operational discipline, and execution capabilities. As we look out to future quarters, the recent strong demand may not sustain, so we will remain nimble and be prepared for multiple scenarios. Regardless of the top-line dynamics, we will continue to execute well and invest for the long term because our goal is not to deliver a great quarter or a great year, but to create value over the long run. Now I’ll turn the call back to Bracken for guidance and his closing remarks.

Thanks, Nate. This morning, we’re raising our fiscal year 2021 sales growth from mid-single digits to between 10% and 13%, our non-GAAP operating income from between $380 million and $400 million to between $410 million and $425 million. While we don’t specifically guide for quarters, we’re experiencing double-digit sales momentum again in Q2, which could wind up as strong as Q1. There are tailwinds and headwinds in Q2. The tailwind comes from our supply catching up with final end demand, while the headwind is a likely increase in promotional spending to more normalized levels as supply and demand rebalance. Looking at the back half of the year, we believe we can see a moderation of demand as the current macroeconomic conditions play out into the holiday quarter and beyond. That said, our incredible operations team is working to increase supply in categories where we are stressed, so we can supply a range of scenarios, as Nate put it, including beyond our outlook. Therefore, you could say we have one foot on the accelerator, assuming a good flow of supply. On the other hand, we’re managing our business for the potential back half moderation of demand, so the other foot is near the brake. Regardless of the next few quarters’ performance, we’re optimistic that the fundamental trends I described in the beginning will continue strongly ahead in the long term. Logitech is uniquely positioned to grow across our product categories. The trends are in our favor. We’ve never had such strong capabilities. It’s up to us to execute. And we continue to execute well, as we did this quarter. Looking ahead, ubiquitous video, work from anywhere, especially home, PC gaming as the biggest collection of sports in the world, and 1 billion-plus creators, that era is coming. That’s what we’ve built our portfolio of businesses for. We are on the doorstep of that Logitech era. And with that, Nate and I are going to take your questions. Ben, let’s queue them up.

Thank you, Bracken. Jürgen, your line is now open for Q&A.

Hi, Jürgen.

Yes, hi, Bracken. Hi, Nate. And hi, Ben, and thanks for taking my questions. The first two questions are more strategic. First of all, when Zoom announced its entry into hardware services, they did not announce you as a partner. What was the rationale behind this move from your side? The second question is on the cash pile; you are accelerating every quarter. What is the capital allocation plan now for the next one or two years? We understand smaller complementary deals, but I mean, you would be able to pay out your full equity free cash flow, still having a very strong balance sheet. So, why do we still have this high cash pile in the balance sheet? And what is the strategy going forward? My last question is on the gross profit margin. I understand that you are again looking for a couple of headwinds, but on the other hand, you also have very strong mixed benefits. So I struggle to understand why the gross profit margin should fall from the current levels into 39% to 40%. If you can provide us more clarity on what impact you’re seeing over the next one or two quarters.

Of course, Jürgen. I’m going to let Nate take that last one. But I’ll address the first two. Zoom, now has hardware as a service, and they partnered with several companies, and we were not named. The companies they named were companies that offer all-in-one products. As you probably know, we have not yet announced that. If we had that, we would have been part of their program. We partner very well with Zoom, and with Microsoft and Google. In fact, we enable more rooms for Zoom than anyone. But, if we were to have that all-in-one product, I’m quite sure we would be a partner. On the cash pile, you’re right—we just keep generating more cash and we’re at record levels right now. From a capital allocation strategy, we continue to believe we have great options from an M&A standpoint. We’re looking at small, medium, and larger M&A. As you know, large M&A is really difficult because the stars have to align. But we see M&A targets out there and we’re going to keep pursuing them; they’ll be our top priority. Of course, we are increasing our dividends right now, and we’ll continue stock buybacks. Nate, would you cover the gross margin piece?

Certainly. So, I think on gross margin, Jürgen. Yes, gross margins were stronger than we expected this quarter, just over 39%. But as Bracken mentioned, we had some favorable offsets for those higher air freight costs that we were expecting. Looking forward, we still expect some higher air freight costs. Industry rates are pretty high right now and with our volumes we’re still catching up on supply; it’s forcing us to use more air freight. So, we continue to see that headwind continuing into Q2. One of the tailwinds we had in Q1 was this lower promotional spend because as we were as supply was really short of demand, we weren’t promoting as much. With retail locations closed down, we weren’t spending as much on in-store marketing as we normally would. So as that supply starts to normalize in demand in Q2, I think promotional spending is going to rise back to more normal levels. We’ll also be spending more money on in-store marketing, which is going to be less favorable for us than it was in Q1. So I think the combination of those things, plus a little bit of that mix impact. Mix, as you mentioned, was favorable year-over-year and probably still favorable year-over-year in Q2 as well, but much less so because we’re going to see an increase in some of these education products, which is a good business for us, good category, but it is lower margin. I expect, again, just the moderation of some of those favorable items in Q2, the net result is, I think there’s some compression on gross margin from the nice levels we were at in Q1.

Did we cover everything, Jürgen?

Thank you. Paul, your line is now open.

Paul? Hello, Paul.

Hey, Bracken. How is it going?

Good.

So, just on Asia, what were the big drivers of the pretty outperformance there in that market? And do you see those trends kind of further accelerating in Europe and the U.S. as retail stores open up more? I have a follow-up.

Yes. I mean, as you’re suggesting, Asia, especially China is ahead of us in terms of the COVID-19 reaction, and so we’re probably one or two or three months ahead of us. Obviously, we had really strong growth there. I think you’re seeing we had strong growth both on personal webcam, personal collaboration side as well as in the office. We had strong growth in our PC Peripherals business; we had a strong gaming business. So really across the board, we saw very strong growth. It’s super exciting to see because they are a little ahead of us relative to the rest of the world. Do we expect that to continue? I think so. The fundamental trends that drive our business continue, and we’re quite optimistic about it.

Okay. And then, on BC, can you give us a sense for the breakdown between the high-end Brio for webcams? You mentioned a triple, which is pretty impressive. If you could expand also on the verticals you’re seeing, some of that demand ahead of the workers heading back to the office. Do you see that 40% kind of annual growth you’ve seen for five years now extending? You’ve got a nice start this year. And if you could comment on the competition, any thoughts on maybe some of the software providers kind of introducing hardware solutions? Thank you.

Sure. I’ll try to cover that. I think overall, in terms of breakout, we’re now seeing kind of two engines of growth in Video Collaboration. We had very strong conference cam growth, and then the personal collaboration growth was very limited because very few people needed a high-end webcam. Now, we’re seeing, as you suggested, strong growth in the product that I’m using, which is a Brio, a $199 webcam, which I mentioned tripled, as well as continued growth in the conference cams. At the initial stages, we wondered will we have the same strong conference cam growth that we’ve had, or will that move strongly into webcams? We’re actually seeing, what I think is going to happen is that we’re going to have both. People are eventually going to go back into offices. I mentioned the Siemens announcement, which was last week where they’re giving people two or three days a week or 140,000 of their 350,000 employees two or three days a weeks to work at home and the rest of them they can work in the office. They’re going to need two different setups and they’re still going to need lots of—by the way, the other thing happening is that companies that were way behind in terms of video adoption, just almost never did video calls, are now doing video calls all the time and from home for God’s sake. When those employees go back to the office, they’re going to expect video, and companies are going to give it to them. I think you’re going to have video setups happen throughout the offices as we do start to go back in and we already are in China. But as we start to go back in, in bigger numbers in the offices and I think companies will set up for that. But we’ll still be video at home, which is why this Brio is such a cool product to have. In terms of competition in that set, we have great competitors in there and we’re going to have great competitors. So, you can’t be in a good category and not have great competitors in. It makes you better, requires that you invest more, and that you’ve got a great product portfolio. So, I feel very good about that. In terms of the—you call them software competitors, the service players. You never know what they’re going to do. We grew up in an environment where we always had the people we partnered with in the PC market making the products that we sell. And I think in some ways it might never happen, because at the end of the day, there’s such an incredibly important role for the service piece in the hardware to support that, and that’s really our sweet spot. That’s what we do best. If we do have competition, direct competition from those players, it will look more like our PC business and we’re used to that. If we don’t, terrific. We’ll try to do our very best to make their experience better.

Ben, if I can jump in real quick on the BC trends just a little bit for Paul as well. Bracken talked about the webcams. One of the things we sort of expected early on and we started to see is that we start seeing some companies make larger bulk orders of some of these webcams as well as Bracken said, as they’re trying to help their employees be more productive from home. So that’s a nice trend that we saw. It may cause a little bit of lumpiness as some of those large deals closed one quarter and not another quarter. But it’s a positive trend, again, that companies are looking to standardize that webcam portfolio across their employee base, whereas before a lot of that may have been done through retail.

Thank you, Nate. Asiya, your line is open.

Hi. Great, good morning. Congratulations, guys, on the strong results. Just a couple of questions. Just given all the pandemic stuff, supply constraints from some of your competitors, as well as your retailers and partners adjusting to this, what are some of the commentary that you’re sharing or observing in the marketplace from your competition that leads you to be a little bit more cautious in the back half of the calendar year? I know, this strong Q1 would suggest to be a little bit more conservative. But, just what are you observing that would suggest a promotional spending little ratchet up, retailers are starting to demand more promotions, etc.? And what are you observing from your competitors? Thank you.

Certainly, we’re seeing something from competitors that are causing us to look in the back half as a moderation period. It’s really more just—as we look into—there’s real uncertainty. I think we’ve been living in a very uncertain period for a while now, and we’re still in it. At some point, things go one way or the other. As we look into Q3, for example, we’re going to have unemployment. I don’t want to be doom and gloom, but we’re going to have unemployment that’s going to drag on for Q3 at levels we haven’t seen in a long time around the world. On the other hand, things are going to start to open up. You’ll probably have movie theaters and restaurants, things that many parts of the world haven’t been able to do, are going to open up. So, there could be reallocation of spending into some of those other discretionary things and away from things that are for. Then, there might be some pull forward that’s happening, especially in gaming from the holiday period into Q1 and Q2. We look at the—all those things. Our tendency is to say, Gosh! We should really make sure that we view the future as a possible moderation period in Q3 and Q4. On the other hand, we’re going to be capacitized and set up to deliver if that’s not true, if we continue to have really strong growth.

Okay. And then just generally speaking, like what are some of the business practices that you think you’ve adjusted or changed within Logitech as a function of this new normal? Are there any things that you can point to that would suggest sustainable margin, even margin expansion within your target range?

Well, I’ll let Nate comment directly on whether he’s going to suggest that we can have margin expansion. What I would say is in terms of some practices that we’ve learned, and there are a lot, I would say there are a few. One is, we’ve got probably a better finger on the pulse of this business than we’ve ever had. We were always pretty good at execution, but we have—for example, Nate and I have a biweekly meeting now; we used to do this once a month, a biweekly matching of our supply and demand, because it’s been so uncertain. That’s given us the ability to really stay right on top of what’s happening all the time. That’s exciting. I’d say that’s one key change. But there are many others. Nate, I’ll let you respond to the gross margin comment. I think that’s probably really underneath your question.

Yes, just jumping on top of what Bracken just mentioned too. With our strong balance sheet, like I mentioned in my prepared remarks, we’re really using that to our advantage here. Because as Bracken said, we’ve got to be ready for demand surges, but we’ve also got to be prepared for things slowing down. We’re having to manage a little wider range, which is fine. We’re good at doing that. But like Bracken said, we’ve had to increase the frequency of some things we do to check in and make sure that we’re really staying on top of it. In terms of margins, again, I’ll come back a little bit to what we mentioned earlier. The air freight rates right now in the industry with the reduction in consumer travel have taken a lot of capacity out of the industry, which has pushed up the rates. A lot of other companies are in the same situation we are. They were shut down in February, and they’re still recovering some supply and so they’re having to use more of that air freight capacity. The long-term drivers for our margin really remain unchanged, in that we’re focused on mix and we’re focused on bringing products to market that have higher margin contributions. We added Streamlabs, which is still relatively small, but it has a nice margin profile as well. The margin drivers for us long term really remain unchanged. If we see continued demand at the levels we’ve had, certainly it’s going to help us sustain stronger margins. But again, that’s not the outlook by which we’re using to manage our business. I’d say on top of that though, we are going to invest aggressively. I think our priorities haven’t changed. But we’re confident that the long-term trends on which we’ve built our business have just continued to come into sharper focus through this period. So, I think our investment decisions similarly have come into sharper focus, and that’s something we expect to continue doing in Q2 and into the second half.

Thanks, Nate. Alex, your line is now open.

Hey. Congrats on the great results. Just a couple of quick questions. First of all, just to come back to this point. You obviously hit the consensus on EBIT by around $50 million in the quarter and Nate, you only raised consensus or rather the full year guidance, EBIT by around half that much. I just wondered if you could talk a bit more about the reasons for that. Obviously, you just alluded to the macro uncertainty; that’s certainly understandable. But as we go down the P&L, what are the key components to bear in mind? Secondly, just curious, you’ve recently been moving more of your production out of China and diversifying a little bit there. I just wondered if you could comment a bit on the latest state of play in terms of your manufacturing footprint and your latest thinking in terms of what you need to get there, particularly just given any logistical issues in terms of the COVID situation.

Thanks, Alex. Let me respond to your second question first and I’ll let Nate take the first, and then we’ll move on. In terms of our manufacturing footprint, yes, we have established significant manufacturing outside of China. We now have, I would say a more distributed network. I don’t want to overstate that; we’re still manufacturing a lot in China. I feel pretty good about where we are right now. I think one of the good things about the tariffs for us was it really accelerated something that we felt like we needed to do anyway, which was to establish a few beachheads in Southeast Asia outside of China, which we did. I think we’re in a good spot now. We’re going to keep looking at that all the time. One of our strengths in manufacturing is our ability to move manufacturing in and out of different locations. We’ve always done that with manufacturers in China into our factory and out of our factory into them. We’re now doing the same thing in other parts of Asia. I feel pretty good about our flexibility and our ability to manage that; it’s not like we can do things overnight, but we can do things very, very fast now. I think the flexibility is the key. Nate, do you want to take the other question?

Sure. Yes. I think when I think about the change in the outlook, Alex, we took up at the midpoint the revenue by about $200 million. Obviously, some of that showed up in Q1. Some of it shows up in Q2 through Q4. If you just look at the changes to the outlook on the top-line and the bottom line, at the midpoint, again, it’s close to $200 million revenue increase. We flowed that through at about 15% of the bottom line, which is kind of typical for our structure. As I just mentioned, we’re going to continue to invest. We see this as a year for us to really accelerate some of the priorities we had to strengthen the hardware roadmap, to strengthen the software roadmap, and make sure we’re setting ourselves up for long-term success.

Serge, your line is now open.

Yes. Thank you, Ben. I hope you can hear me. I have two or three questions, if I may. The first, as you mentioned that you have seen tremendous demand in Asia, although it was phase one of this COVID wave or cycle, and then Europe, and then the U.S. I’m wondering whether you can give us more color on what kind of product in each of the regions has been demanding. If COVID had a change base stores reopening or totally closed or internet? Can you give a little bit of flavor? What you can expect going forward, shops in the U.S. will reopen and what that does mean for the online channel? Because you guys are guiding a little bit weaker margin too, not only because of transportation costs and promotions but also due to sales mix is my impression.

I wish I could give you something more of what you’re looking for; there’s a problem, which is that China, which is the biggest part of our Asia Pacific number, actually doesn’t look like the rest of the world. It’s predominantly online. It’s about 70% online. While the brick-and-mortar did open up back in China, I don’t think it’s kind of as relevant or strong. If you step back though and you look at the categories—I kind of mentioned this in the first question we answered. I think the categories look very similar to the rest of the world, meaning we’re still seeing very strong demand in conference cams and in personal and in webcams. Gaming continues to be super strong. I think the PC Peripherals business is good and I think could be even better. Do you want to add anything else to that, Nate?

I think you’re right. I think the dynamics between the regions were similar in terms of product demand, but they have different channel structures. Some are—like Bracken mentioned, China’s more heavy on e-tail than elsewhere in the world. But I think from a product standpoint, Serge, it was pretty consistent.

Okay. And probably can you help me on the promotion topic? When I talk to the channels, people tell me that Logitech normally had this kind of 20% to 30% off the official prices. Now I’ve learned also that Amazon didn’t make any promotion during the last month. So, do I have to expect that the underlying growth has been 20% or 25% lower? So that means that instead of 23%, we would have been reporting 15% growth? Can I expect then this going forward that the growth will be—you’ll get such a hit?

Do you want to take—I don’t—go ahead.

Yes. I mean, in general, I think your comment is right in that our promotions came down. Our net sales grew faster than our unit sales, if you will, our sell-in revenues, because we were able to hold on to more of the value that sell-in through lower promotions. Some of that, again, was due to the fact whether we had supply on our product or not. In some cases, the sell-in as I’ll call it was hindered on places like webcams or headsets or places where we saw a really sharp increase in demand—we were constrained on supply. But you’re right. The net sales growth was faster than the sell-in growth in the quarter.

Great. Thank you. Ananda, your line is now open.

Hi, Ananda.

Hey, guys. How are you doing? Congratulations on a strong performance.

Thank you.

Just a couple if I could on gaming and Video Collaboration. What’s your best guess on some of what you’re seeing in gaming, sort of serving as de facto pull forward ahead of the console launches at the end of the year? If there isn’t much pull forward on the console launches, do you think that can also be sort of a catalyst as we get into the holiday season and through the beginning part of next year? I have a follow-up on Video Collaboration after that.

Okay. Well, the ASTRO business is the primary business affected there, which is the headset for consoles. Historically, as there has been a console launch, we’ve had a slowdown in the console headsets because there weren’t compatible with future ones, so people would slow down and wait; then buy the new one, and later you have a delayed effect. So you have kind of more than a plateau, you kind of have a dip that happens in the middle. The difference this time is that, at least in the case of Microsoft, forward compatibility is already announced. We’re optimistic that that’s also going to be true on the new Sony console. So, we may or may not see that slowdown, but we’re prepared for the potential.

Yes, so it sounds like you’re not seeing it yet.

No, we’re not. In fact, we saw the console hit that category quite strong. In fact, we couldn’t meet all the demand for that category.

Yes. I mean, I would just add to that Ananda. Bracken’s right; the sellout was stronger than what we were able to sell in because we were a little short on supply. Again, because we made the assumption that you probably see that normal slowdown going into the console refresh, and that was before we made that decision prior to COVID lockdown. As people were at home more, demand picked up.

Do you think it’s possible that you could see the demand—when you get to the consoles, you don’t actually see the demand you typically see because there is some pull forward due to this COVID situation?

Yes. I mentioned that. I think it’s possible. We don’t—it’s hard to predict. A little bit of the holiday period gets pulled forward and that could be also Q1 and maybe also Q2—it could be. It’s just really, really hard to know where that’s coming from.

Cool, thanks. And then, on Video Collaboration, you had mentioned Bracken, sort of as those get back into the office, there’s going to be an increased demand for call it enterprise video collaboration. Can you give us some more detail around some of the things that you’re sort of hearing around, I don’t know, sort of what CIOs or CEOs, CMOs are telling you from an initiative perspective, just anecdotally? And does it sound to you—my hunch is yes, but does it sound to you that whatever you guys were expecting, like the pace and depth of that is being shifted because now people are really embracing Video Collaboration in a new way?

Well, I think there’s a whole series of discussions happening out there. A lot of anybody who’s listening is in the middle of is going to relate to this around how do we come back in the office? It’s already started obviously in Europe where we have about 20 offices open but only moderately open. In the U.S., we have no offices open. In China, we have all our offices open and the rest of Asia, most of our offices are closed, so we’re really a mixed bag. CIOs and IT departments dealing with those would be—and CHROs are wrestling with this right now; it’s a live discussion. I’ll give you the range of topics that are being discussed. There’s guys, when you come back to the office do you need more video in more rooms? You want people to be able to be socially distanced when they’re on call, so you might even have two people on a video call, and you actually want them in different rooms. They might have two different video rooms doing calls to somebody who’s not in the office. So they’re all in video. That’s a possibility. I don’t know how much that’s going to happen; it’s possible. I think it’s more likely and from what I’m sensing, it’s more likely you’re going to—people are going to say everybody’s so used to video calling. In their homes, they’re doing video calling all the time. We’re going to be a mixed group. There are going to be more people at home than they were in the past. When we do a call, it’s going to be video, and companies will understand that. I don’t know exactly what that’s going to do to their short-term growth rates. But I do believe there will be a lot of video deployments in offices as we start to really get serious about what the future of work looks like in the office-home combination.

Thank you, Tom.

Great. Thanks, Ben. So, one question and one follow-up. For my first question, how should we think about your e-commerce sales trends on Amazon, Direct, and elsewhere?

Okay. Well, it probably won’t surprise you. Every number you see that looks good, you can imagine that it looks even better if you look at online. We’ve really had—and like most companies, had really strong growth in e-commerce and even stronger on our own e-commerce, our own dotcom website. It’s exciting. The gratifying thing, or the more exciting part of that, is that we were moving down this path. It started in China for us about four years ago, and China became mostly online; it almost overnight over three or four months, it flipped from being a brick-and-mortar business for us, about 10% or 15% was online to 70% online. That gave us the model for what we’re now taking into other parts of the world in terms of supporting online people like Amazon and others in our own for how to support this from a marketing standpoint. We were already in the middle of deploying that model in Europe, and then we just organized the whole world to do the same thing, so the Americas as well. We’re going to be set up pretty well as we go forward for an online world, and I’m optimistic we’re going to do well in it.

Hey Tom, to just add on to that one real quick. It’s not only the pure play e-tail where we saw growth, but we actually had a lot of traditional brick-and-mortar partners that did a really good job of being able to move their business online, at least for our products. I think that was one of the positives in the quarter and I’m sure that they’re looking at their business and trying to determine if that’s a long-term trend or was something that they had to do in the moment.

Yes, I want to echo that. I’m super impressed by how effectively a lot of these so-called brick-and-mortar players have gone to online. They’re really doing well.

All right. So, Nate saw my second question and then jumped in. The question I had was on physical stores reopening and then reclosing. How are you managing that, and how is that impacting your business?

Good question. I mean, we talked about a number of scenarios that we’ve got to be ready for and I think being nimble on. It’s really about being nimble. I mean, when everything moves online, there probably needs to be less inventory overall in the channel because you’re fulfilling essential distribution for a lot of those orders. If things move back to retail, we’ve got to distribute more broadly. It’s a balance for us between those two things. That’s one of the reasons why I’m increasing the inventory buffers—not buffers out in the channel—but in our own distribution centers on our balance sheet, making sure that we have the inventory necessary to support our customers for these changing market dynamics they’re dealing with.

Thanks, Tom.

Thank you, Tom. Andreas, your line is now open.

Hi, Andreas.

Yes. Hello. Thank you for taking my questions. I’ve got one on inventories. You have seen the first quarter basically being at or below 50 days of inventories. You mentioned the biweekly meeting matching basically supply and demand. Now, I was wondering, of course, it goes up probably inventory in the next quarter. But, is there any potential to be substantially below what you have in the last couple of years? Basically, that inventory sustainability coming down apart from fluctuation between the quarters?

Let me take that one, Nate. I think, first the answer is, can we—is there a potential to be substantially lower inventory relative to last years? I’ve always felt, and I’ve said before on these calls, I think there is. I think we should be able to operate at a lower inventory level. On the other hand, if you look at the short term, you’re going to see the opposite. We have such uncertainty on what the demand is really going to look like out there in the back half of this year that we don’t want to get caught flatfooted and not have enough inventory to supply. So, short term, I think you might see the opposite relative to where we are today. Long-term, yes, I think we should be able to operate at a lower inventory level than we did a few years ago.

Hey, Andreas. I think about inventory the same way I think about operating expenses in that we need to find efficiencies to fund our growth. As we find efficiencies and we drive those initiatives in inventory, to get more efficient or to simplify our portfolio in some ways so that we can be more effective, we may take that efficiency and then reinvest it to go grow the business by having more products available, the strategic products, more availability. Bracken is absolutely right; we’re continuing to find ways to be more efficient in our supply models, but you may not see that really show up in lower days of inventory because we may decide to buffer up more, which will help us grow the business.

Okay. My next question will be on the webcams, basically at home. I mean, do we have figures or color on how the penetration is currently and what’s the left potential going forward?

Well, I hate to do this because I don’t want to mislead you. There are a lot of people who use a webcam that’s built into the computer. The reality is that’s not the solution for a lot of people because if you have a laptop and you dock it, most screens don’t have a webcam in them—or if they do have a webcam, it’s not good enough, especially if you’re looking at yourself all day long like we are now. Having a really high-quality webcam gives you a better appearance, makes you feel better about yourself. There are many reasons why webcams are attractive in general, and attractive as a supplement to what might be built into a computer screen. The reality is, while our webcam business has really grown a lot, we might sell 5 million more webcams this year than last year, but there are about 1 billion people who are going to be working from home and maybe 1 billion people studying at home. There’s a lot of opportunity out there. Is that—it’s so big, it’s kind of not helpful, right? I don’t know where the webcam business will go exactly. But I do think there’s a really big opportunity for us to keep capitalizing. We’ve got to keep improving our products, so they deliver extra benefits that you now need when you’re on screen so much of the time.

Okay. Thank you.

Thanks, Andreas. Michael, your line is now open.

Hey, Michael. I think you’re on mute.

Thanks. Hi, everybody. Thanks for taking my question. Two questions. First one on Streamlabs. I think it’s the first time that you gave an indication on the revenue contribution. My question is, can you maybe give a little bit more color on how you’re integrating Streamlabs in your overall strategy and your gaming strategy, and maybe also an indication of the growth trajectory of Streamlabs at least in the past? The second question would be on France. In your prepared remarks, you mentioned that France sales were down because the Amazon distribution center was closed temporarily. Can you give us an indication of how sales have trended after the reopening, just to understand if there was also an underlying demand problem in France or on the contrary, if there was very strong pent-up demand following the reopening?

Yes. Streamlabs has improved dramatically since that reopening. So, I think there’s not—I don’t believe there’s an underlying demand problem. In terms of Streamlabs, you asked how we’re integrating it with the gaming business; actually, we’re not. We’re integrating it with our streaming business. We see that as much more than just a gaming play. We do report it with gaming, but it’s got—and it’s mostly gamers coming online to stream themselves playing games, but we’re really spending that beyond gaming right now. One of the reasons we bought the business was we thought there was an opportunity to support all kinds of streamers, not just gamers and not just people who want to entertain gamers. We’re in the middle of that now and we’re quite optimistic they’re going to make a lot of headway there. They’ve got some cool things coming out and we love the team and the business.

Any insight into the sort of growth that you have seen at least in the past quarter?

Yes. It’s been really strong now. I think there’s a—we’re also dealing, like every business that’s more than a year or two old, you’ve got a mix within that business. So, you get some things are going down, some things are going up. The things that are going down, we completely expected and things that are going up we did too. That team is very innovative. We’re seeing really strong growth exactly where we were hoping. We are bringing more and more people into their prime offering, which is I’m enabled to stream now through Streamlabs, and I can sell merchandise and make money, and I pay for that prime experience. We’re bringing more and more people into that. It’s a really fun and cool business in so many ways. It’s great from a business standpoint, it’s also just great from a personal standpoint that you know you’re helping people kind of start to try to live a dream, which is like, can I create a following big enough that people would actually want to wear my shirt, a shirt with my name or my symbol on it? It’s a cool business.

All right. Thanks a lot. Congrats.

Thanks, Michael.

Thank you, Michael. Bracken, we have no more questions. So, I will turn the call over to you for your closing remarks.

Okay. Let me wrap it up by stating the obvious. We are really navigating some extraordinary times. We’re seeing a surge in the underlying secular trends that have been driving Logitech’s growth over the past several years. It’s been very consistent over the last several years. At the same time, we are only four months into this global pandemic, and changes in how people work, learn, and play. Are these going to be long-term changes? We think so. We believe with the acceleration we saw starting in March has fundamentally reshaped the trajectory of those trends in the markets we play in. At the same time, it’s difficult to extrapolate the next year or two based on four months of strong performance. While we’re prepared for the upsides, we’re managing the business for potential downsides, as you know. That’s why we’re taking a more measured approach in the second half versus strong growth we’re likely to see in the first half. Whether you’re an investor and invest in Logitech for a quarter or for 12 months or for multiple years, please measure us against that commitment. We’ll sustain this commitment. We will sustainably grow high single digits or better over many years. That’s been true for the past five years, and I expect it to be true ahead. In some years, we’ll grow faster, and others we might grow slower. What Logitech investors have been able to count on and should appreciate in the years ahead is our dedication to consistent strong performance. With that, I’m going to close this call and get back to work. Nate, you get back to work too, and we’ll see you after Q2.

Thanks, everybody. And that concludes our call.

Thanks, Ben.

Thank you, Ben.