Logitech International S.A. Q4 FY2022 Earnings Call

All right. Good morning, good afternoon, everyone and welcome to Logitech's Video Call to discuss our Financial Results for the Fourth Quarter and Full Fiscal Year of 2022. Joining us today on the call are Bracken Darrell, our President and CEO; and Nate Olmstead, our CFO. During this call we will make forward-looking statements including with respect to future operating results under the Safe Harbor of the Private Securities Litigation Reform Act of 1995. We are making these statements based on our views only as of today. Actual results could differ materially. And we undertake no obligation to update or revise any of these statements. We will also discuss non-GAAP financial results. And you can find a reconciliation between these non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results in our press release and in our filings with the SEC including our most recent annual and quarterly reports and subsequent filings. These materials as well as our prepared remarks and slides and a webcast of this call are all available at the Investor Relations page of our website. We do encourage you to review these materials carefully. And unless otherwise noted, comparisons between periods are year-over-year and in constant currency. Sales are net sales. And finally, this call is being recorded and will be available for a replay on our website. With that, I will now turn the call over to Bracken. Good morning, Bracken.

Good morning, Nate and good morning, everyone. Thanks to all of you for joining us. I am so excited about the year that Logitech has had and our team's strong performance, despite a backdrop perhaps best defined as unpredictable and certainly challenging. In spite of this headwind, our teams delivered an outstanding fourth quarter and overall a tremendous fiscal year 2022. Coming off a 74% net sales growth in the previous year, we challenged ourselves to continue the momentum and we did it. We posted our 9th consecutive year of growth, delivered strong growth in key categories like Creativity and Productivity and gaming, saw market share gains across our portfolio and geographies, and continued to invest in the future, using our strong gross profits to invest in key strategic areas like marketing and product development. Nate now will go deeper into the financial details for the fourth quarter and for the fiscal year in just a minute. But I wanted to start by offering a bit of perspective on the macroeconomic environment, world events and overall state of the global business as we head into our new fiscal year. As I talk to other CEOs, we generally agree that there is uncertainty about how the US and global economies will perform but we'll leave the predictions about that out of this call. But what is the backdrop to our thinking? I see a certain set of conditions that most of you will be familiar with - inflation, war in Ukraine, COVID lockdowns, changes to monetary policy, supply chain disruptions. These challenges are not just possibilities of course. They are happening. No business leadership team operating globally could dismiss them. We at Logitech talk about possible impact regularly. And the truth is that all businesses including ours operate in this environment with the understanding that we can't influence the outcome of each of these challenges but we all can adapt change and ultimately adjust. That's exactly what we've done at Logitech through the last decade. The dynamic nature of Logitech and we've got more dynamic as we've grown makes me proud that we've continually found ways to solve old and new challenges while ultimately serving and delighting customers. We've adjusted, adapted so many times over the past decade. So what does next year look like? Well, this may not be the most satisfying answer. The hard truth is that we just don't know exactly how and when this particular set of challenges is going to play out. But I do know we have years of experience operating in challenging environments. We changed the way we source components. We've diversified our shipping strategy. We've automated our factories. We've built a very diverse portfolio. We've changed the way we price our products. We've strengthened our balance sheet intentionally pursuing a strategy avoiding high levels of debt. The list goes on, all to ensure we can operate with excellence, discipline and a focus on the future during unpredictable times. So I prefer to look beyond the near-term and make sure we're operating in growing categories, staking out long-term leadership positions in those categories and investing in product design and engineering the absolute lifeblood of our business. And as we discussed in our Analyst Day in March, we are doing exactly that. But what's been true over the last few years is still true today. Hybrid work or the idea that we used to call work from anywhere continues to thrive. There are sales and upgrade opportunities that exist right now across more than one billion workspaces all driven by hybrid working and learning. What an incredible opportunity. Everything is moving to video including this call. Hybrid work is here to stay and most meaningfully be a mix of on-site and virtual and video helps bring more meeting equity to all participants. Gaming will continue to expand. The long-term momentum is unstoppable. Like most long-term high-growth markets there will be strong growth quarters and lower ones but that shouldn't confuse anyone. Gaming is a juggernaut and it's evolving and adding new engines of growth. Take the metaverse for example. The tools needed to experience and create the metaverse are expanding and evolving. Big picture ask yourselves, what about the fundamental premise of gaming as a cultural phenomenon has changed? The answer? Nothing. And the streaming and content creation trend hasn't changed but continues to grow rapidly. In other words, while we're very clear-eyed and measured in our approach to the near-term challenges and events, we're equally invested in and excited about the durable longer-term trends driving our largest categories. Our company's solid performance reflects the broad strength of our capabilities, including the product development that continues to introduce new products on a global scale, and also reflects our diverse portfolio and its leading position in growing markets. Our focus on operational execution and the ability to adapt quickly continues to help us navigate industry-wide supply chain challenges and disruptions. That's why I'm so incredibly excited about the future at Logitech. With that let me briefly step into our categories: Creativity and productivity. In creativity and productivity, we had a really strong year and finished the fiscal year 2022 with good momentum. Mice and keyboards continue to drive this category with another year of creative product development driving growth. There is no debate over the sustainability of hybrid work. Hybrid is here for now and in the future and Creativity and Productivity is set up to enhance workspaces around the globe. You've heard me say this before, but it remains true. Very few people have the optimal workspace set up either at home or at work. Even I continue to experiment all the time to try to find a better way. I'm excited about what you'll see in the coming quarters from this group. Gaming grew double-digits in fiscal year 2022 on top of an exceptional revenue growth last year. Gaming continues to be adopted by an increasing number of people as both a competitive esport and as a more casual way to hang out with friends. We're in the very early innings of what the metaverse can do to enhance the enjoyment and experience of gamers. Gaming is a market that demands innovation and we're doing just that with more wireless peripherals and higher-performing keyboards and mice. I'm so confident about the long-term potential of this category. In video collaboration, we continue to see pockets of increased activity with more certainty in office reopenings and hybrid work planning, but planning and purchase timing differ by region. As I said earlier, there will be near-term unpredictability and an overall choppy environment, but long-term growth. Webcams declined versus our lofty mid-pandemic peak, but the need for webcams is strong and the demand is steady and more than three times what it was two years ago. Our long-term strategy of enabling meeting space with high-quality video systems and solutions supported by an enhanced sales and support team around the globe remains well on track. Consistent with our mission to develop video collaboration tools that can make remote participants feel they can participate equally or even better than those guided in person in the room, we launched RightSight 2 an AI-based software solution that helps bridge the gap between in-meeting participants and those joining remotely. It's such a smart solution and we have much more in the works. Supporting all our products is our DEFY LOGIC marketing campaign. We're increasingly raising awareness of the brand and bringing Logitech's amazing products to the top of every consumer's consideration list. More to come in this area, but we really like the results we're seeing. Finally, it's such a fundamental part of our purpose that we focus on environmental sustainability at the core of our business. We were just recognized by The Financial Times as the European climate leader based on carbon intensity improvement score. It's nice to be recognized like this, but the truth is that this score only covers things that happen in our offices and factories. Hardware companies like us release much more carbon beyond our four walls than in them as we buy components and products, transport them and consumers like us use them. The rest of our story so far is that we are carbon neutral in Scopes 1, 2 and 3, which includes all of those carbon impacts. We're committed to being carbon negative or climate positive as it's called beyond 2030. On top of that earlier this quarter we announced that we had exceeded our initial commitment to incorporate post-consumer recycled plastic into our products, reducing our carbon impact and increasing the circularity of consumer product materials. During the last calendar year, one of every three Logitech products shipped used recycled materials and that's going up. We believe this is the right thing to do for the planet. But we also believe that a growing share of businesses and consumers will favor our products as a result of this industry-leading approach. Now let me turn the call over to Nate for further comments on our financial performance this quarter. Nate?

Thanks, Bracken. We delivered solid financial results in Q4 and for fiscal year 2022 in an environment that was often quite challenging. I'll spend a few minutes on the quarter and then provide some context and texture to our full year results. Q4 was our toughest compare for the year as we grew 108% one year ago. In Q4 this year, net sales were down 17% to about $1.2 billion, although impressively we saw continued growth in pointing devices, keyboards and combos and gaming. Gross margins were essentially flat sequentially despite ongoing cost pressures and incremental currency headwinds. We remain disciplined with promotions while still gaining share in many categories and we work to reduce our reliance on air freight. Looking ahead to the first half of fiscal year 2023 margins could come down further due to ongoing cost increases, unfavorable currency rates and higher levels of air freight as we expedite to recover from supply disruptions due to the China COVID lockdowns. Profit was down for the quarter as was cash flow from operations both as expected. For fiscal year 2022, we turned in our ninth consecutive year of growth with net sales in constant currency up 4%. As mentioned earlier, Creativity and Productivity and gaming performed particularly well over the course of the year. Overall gross margin was 41.7%, within our long-term guidance of 39% to 44%. In fiscal year 2021, we experienced an unusually low level of promotional and in-store marketing investment and as expected we planned for an increase in such spend this year. Higher promotional and retail marketing investment and increased logistics and component costs proved out as margin headwinds. For example, the cost of ocean freight is up about five times versus fiscal year 2020. Operating profit was $904 million, well above our annual guidance provided at the beginning of the fiscal year. We delivered this incremental profit while continuing to invest to improve our capabilities with an emphasis on marketing, product design and engineering. We returned over $0.5 billion to shareholders through our share repurchase and dividends. Moving into our categories. In Creativity and Productivity, keyboards and combos grew 8% in Q4 and 22% for the fiscal year. Pointing devices were up 14% for the year as a strong portfolio, excellent marketing execution and continued demand from hybrid work trends drove strong performance in these categories. Gaming delivered 1% growth in Q4 and 17% for fiscal year 2022. Delivering double-digit growth off of a record year last year was impressive. While we experienced pressure in our console gaming and PC gaming headset categories, we have an excellent lineup of innovative products, a leadership position in expanding categories like wireless mice and steering wheels and are beginning to gain traction with the social gaming segment. Q4 video collaboration sales declined 35% after growing more than 200% in Q4 last year. For the year, video collaboration was down 4% after growing more than 180% last year. Conference room cameras and systems grew double digits for the year and continue to lead the category performance, behind a refreshed and expanded product portfolio. Sales in our tablet and other accessories category declined 39% in Q4 and 17% for the year. As a reminder, last year we saw a surge in sales through our education iPad keyboards driven by Japan's government-sponsored GIGA program, which expired at the end of March 2021. Excluding sales through the GIGA program last year, fiscal year 2022 sales in this category grew double digits and we gained more than three points of share in retail keyboards driven by strong product launches and in-store marketing execution. Our mobile speaker sales declined 12% in Q4 and 15% for the full year. As noted previously, we continue to reallocate our resources to faster-growing market opportunities. Our audio and wearables sales decreased 35% in Q4 and 15% for the year as expected. Despite these declines, sales were up more than 40% versus two years ago due primarily to expanded market opportunities for retail headsets and Blue Microphones. Looking regionally for fiscal year 2022, our sales were sustained or grew in all three regions. Much like the diversification of our category portfolios, our geographic diversification helps us manage risk. For example, hedging against regional softness in demand, geopolitical issues or economic disruptions. Turning to expenses. In the quarter, we executed our plan to strategically invest to grow our business over the long term. While our Q4 non-GAAP operating expenses decreased by 13% to $342 million, our fiscal year 2022 non-GAAP operating expenses were up 27% to $1.4 billion. As we stated before, this is reflective of continued investment in marketing sales coverage, product development and operational improvements. For example, we increased the level of automation in our factory by more than 50% over the last year, which helps us reduce our costs, improve quality, and reduces our exposure to labor disruptions. Finally, Q4 cash flow from operations was positive $100 million, and we ended the year with a cash balance of approximately $1.3 billion. Our cash balance ended this fiscal year about $400 million lower than the end of last year, as we returned $571 million to shareholders through dividends and share repurchases this fiscal year. For the year, our cash conversion cycle increased to 77 days, primarily driven by higher inventory days due to industry-wide supply chain disruptions, and demand forecast fluctuations for some of our products. We also continue to leverage our balance sheet to strategically purchase hard to find and long lead time components to help ensure supply availability and maintain competitive advantage. Finally, I'll spend a minute on fiscal year 2023 guidance. At our Analyst Day in March, we guided fiscal year 2023 revenue to be up mid-single digits and non-GAAP operating income of $900 million to $950 million and noted that full year revenue from Russia and Ukraine was about 2% of our net sales and was included in our outlook. At that time, the Russian invasion of Ukraine was in its first days. As of now, this war is ongoing with no sign of resolution in the near-term and we do not expect sales in Russia and Ukraine for the full fiscal year. We continue to monitor the Russia-Ukraine situation and broader potentially challenging market conditions. Given this, we now expect full year revenue to grow between 2% and 4% and full year non-GAAP operating income is expected to be between $875 million and $925 million.

Thank you, Nate. In closing, this year we sustained our scale, delivered record sales on top of last year's 74% sales growth. We delivered many accomplishments, a ninth consecutive year of growth, strong growth in key categories, and market share gains across the portfolio. We also beat our original profit target by over $100 million. Despite strong year-over-year results, our focus is on the long term. We're riding secular growth trends in hybrid work, video collaboration, esports and digital content creation. We'll continue to deliver against those with agility, operational excellence and a diverse innovative portfolio. I'm super excited for the future. Before I open the call to Q&A, I want to thank all of our employees and partners for continuing to deliver terrific results while navigating a really dynamic and at times challenging market environment. Your hard work continues to pay off, and I'm really proud of both Q4 and the entire fiscal year 2022. Thanks to you all. Nate, we can open the line for questions.

Great. Thanks, Bracken. Thanks, Nate. We'll start the Q&A portion of the call now. For our first question, let's go with Alex Duval from Goldman Sachs. Alex, good to see you. Thanks.

Hey, Alex.

Hey, Alex.

Yes. Hi everyone and congrats on the strong results today for the quarter. Just had a couple of quick questions, firstly just to clarify on your updated full year guidance, it looks like you cited geopolitical events in Eastern Europe as the reason for the change. Just wanted to clarify if that's the only reason or is there any sort of big underlying change in terms of the drivers that you're seeing? For example, if we think about the COVID situation in China and lockdowns there. And secondly, some investors have been asking about how important the PC data is, which perhaps indicates a little bit less growth in current periods than in prior periods and what that means for Logitech. So for example, to what extent do you think yearly PC unit growth is actually directly relevant to your company given that today you sort of beat expectations on keyboards and pointing devices how should we be thinking about that? Many thanks.

Let me take the second one and then, I'll let Nate answer about guidance. How relevant is PC growth? I think we disconnected from the PC market six or seven years ago. We really stopped considering it a key driver of our business. Over the long term it would be, but we really focus on the installed base. The installed base expanded dramatically during COVID. We've got a lot of workspaces to upgrade and enable. So we don't see it as particularly relevant.

Great. Yeah, I think on the guidance let me just highlight how I was thinking about this Alex. I think there's always many things to consider. Some are very objective and easier to quantify, and others are probably more subjective and harder to quantify. I think that's the case right now as well. Direct sales in Russia and Ukraine are certainly easier to quantify. Although, the follow-on effects that this conflict could have on European demand, oil prices, logistics, things like that are certainly less certain than the direct sales which is kind of what we talked about being about 2% of the overall company. I think more broadly, we have other challenges that we have to consider as well and monitor and track just like we do every year. I mean right now Bracken talked about those in his prepared remarks things like currency, logistics, disruptions, costs, inflation. You mentioned the China COVID shutdown. I think these are some really good examples of things that frankly are, just harder to quantify, but we have to monitor and track really closely. That's what we do. I think it's also interesting. We don't know sometimes how some of these things will play out how they're intertwined. If I use as an example at the start of COVID, a little over two years ago, our initial perception of that was we have a big supply challenge. Our factory was shutdown. A lot of our planning was around how to recover from that. Quickly it turned into wow we have a lot of demand coming in as a result of this and we had to adapt to that. Today's environment is very similar to that. There are a number of factors that we consider. Like I said, some are easier to quantify than others, but the reality is you just have to track the business regularly, which of course we do, as Bracken said, adapt, change and operate and compete. So that's kind of how I think about guidance every time. I think this year is no different.

Many thanks.

Thank you.

Thanks, Alex.

Hey Hi. So, how's it going?

Great.

So I guess first up on BC, as we look forward after a very strong 2021 lapping a tough comp here in 1Q 2023, but should we still expect that 5% kind of 15% growth? And how do you see competition evolving with HP now getting into the mix here? And then I've got a follow-up…

Let me start and I'll let you jump in the latter half of this one Nate. First of all, we're still super bullish about BC. The underlying demand for conference cams was really strong, and we grew double digits this year throughout the year and it looks good around the world. We just love our product portfolio. We think we've got super cool things coming and we've got peripherals around that that are also doing well, and we're starting to offer services that are super early days. So we feel really, really good just in general. It's hard to imagine companies going back into a higher environment. I was just in one yesterday. They're on their way back, and it's hard to imagine those offices without upgrading and putting more video in. In terms of our growth expectations, I think we moderated our growth expectations for the year as you just saw. That certainly had some impact on BC. The thing I'd really highlight is that because of the diversity of our portfolio, it's always played with us. We've always been fortunate to have a diverse portfolio spanning from consumer to office. I think whatever direction we end up taking, whether it gets even stronger in BC or a little bit weaker than the 5% and 15% you mentioned, I'm confident that our portfolio will play in our favor. Do you want to add anything Nate?

Yeah. I'd like to highlight just the strength of the performance in FY 2022 on conference cams. It grew double digits, and net sales sell-through double digits. It actually grew sequentially throughout the year as well. Americas was particularly strong and consistent in that sense. Like Bracken said, there are different demand trends sometimes, and the timing of those trends could be a little bit different by region. It takes some time to build the pipeline and to close deals. But again, I think just looking out on a longer horizon, which is the way we think about planning the business and investing, we feel very good about it.

Okay, great. And then on free cash flow, do you still expect that one-time kind of pro forma operating profit for the year? And when do you expect to see working capital investments, kind of, come down, some more harvesting and then your pace of buybacks has accelerated this year? Should we expect a similar pace in 2023, maybe see the bulk of free cash flow going to dividends and buybacks? And then lastly your inorganic opportunities, it's been a while since you've done quite a material acquisition. So just any thoughts there? Thanks.

Okay. Let me try to address those. I think that’s fine. I lost track again on what the first question was. That was the one I was beginning with.

Just operating costs.

Just to clarify, the one-time adjustment pertains to operating cash flow, not free cash flow, as you need to account for the CapEx. I believe that's the appropriate approach to consider. Cash flow often involves timing and consistency within a quarter, as well as year-end factors. It’s important to be strategic about how we utilize the balance sheet to support the business, particularly with working capital. This strategy has been successful for us, and we will maintain this approach since now is not the ideal time for just-in-time inventory management. Given the current uncertainties, it's advantageous to maintain a slight surplus in certain areas. For example, as component lead times have extended and shortages have arisen, there are categories like video collaboration that maintain strong margins. The consequences of stock-outs in these areas can be significant, and these products have long life cycles. Thus, it makes sense for us to be prepared to respond to fluctuations in demand. However, we are facing some challenges such as port delays and overall supply chain disruptions, which contribute to higher inventory levels compared to pre-pandemic times. Until these issues are resolved, we won't rush to decrease inventory in our distribution centers or manufacturing; it's beneficial for us to operate with slightly higher levels than before. Toward the end of the year, we might observe a decrease in working capital levels, but projecting that far out can be difficult, and we'll manage accordingly. Nonetheless, I’m confident in our inventory position, which I view as an effective use of the balance sheet. Regarding other cash uses, we likely will continue with a strategy we've always discussed. We prioritize M&A opportunities that align with our strategy; we’ve executed several smaller deals that may not grab headlines but are significant for us strategically. These include additions like the lighting I use at home, which complements our portfolio and represents a sound use of the balance sheet. We will continue to focus on M&A when it makes sense while balancing our approach to share repurchases and dividends.

Yes. Let me add that last one. We're always in the market and Nate's right, we've done - he mentioned several small deals. Another way I'm kind of thinking about it is I think, we've crossed a threshold here where our innovation engine is really strong. We don't need to go buy new things to deliver our long-term targets. We can do it without it. Sometimes we feel like we can accelerate things by buying small kind of ingredient plays that can help us really get off the ground faster on some innovation. That's the kind of thing we've been doing in the last 1.5 years to two years, and you haven't seen them, but they're built into what we're doing. We're not going to stop looking at bigger things. If we see something that we think really makes sense, we'll do it.

All right. Thanks a lot.

Thank you.

Thanks, Paul.

Hi, good morning everyone. Thank you for the opportunity and great results for the quarter. So I'm just going to focus on the outlook a little bit. You guys talk about the quantifiable impact from Russia and Ukraine. So just to clarify, the guidance includes obviously no sales from that. What gives you confidence here that could it spread to other geos? As a follow-up, the long-term secular drivers that Bracken referred to the confidence that the underlying demand remains solid. I mean, are there indicators that you're watching that suggest that okay, this is kind of more geo-focused at this point, but the drivers outside of that region remained pretty strong across the portfolio, whether it's BC or gaming or keyboards and peripherals. And then just a clarification on gross margins, I think Nate said they would come down in the first half. Air freight was mentioned as one of them or ocean freight, I should say. But there are high levels of inventory right now that you guys are holding. Could that provide some offset to just the rising freight costs here? Thank you.

Let me address part of that, Nate, and then you can take the next question. Your inquiry about the Russia-Ukraine situation is a clearly defined issue, and the conflict itself has specific borders, which allows us to quantify its impact easily. This year presents more uncertainties than usual. We are facing the ongoing effects of COVID, inflation, currency fluctuations, and similar factors. While this feels like a typical year, the number of uncertainties is higher. We have been navigating such challenges for a decade, so we are adept at making necessary adjustments. As Nate mentioned, it's often surprising how situations can change direction rapidly. Factors that initially seem negative may turn positive, and vice versa. It's early in the year, and we are very optimistic about our categories. In terms of the fundamentals that bolster our confidence, it's difficult to overlook the strength in our four categories. Long-term trends appear to be very positive, if not improving. That’s about all I have to say on that topic. Do you want to add anything, Nate?

No, I think you covered the first part. I'll just clean up a little bit on the margin. Similar to what I said at Analyst Day, first half margins will be lower than the second half. You mentioned the inventory. That is part of the inventory strategy to buy ahead of cost increases. To the extent that costs have been rising, holding a little bit more inventory has given us a short advantage. You can't buy a year's worth, but we're a little bit long in some areas, and we've probably avoided some cost increases or delayed some cost increases more appropriately. First half margins will be pressured a little bit. We're doing our best to adapt to that and work our way around it whether it's with finding new suppliers or adjusting prices. Just like Bracken said, we go into every year and some things we have visibility to and others will change as the year goes along and we just have to keep operating and executing.

Okay. Thank you.

Thank you, Asiya.

Great. Next up is Erik Woodring from Morgan Stanley. Hey Erik.

Hey Erik. How are you?

Good morning guys. Good, good, how are you guys?

Good.

So, maybe I'll start at the top. And just to clarify obviously COVID and the lockdowns impacting China are having an impact across the Board. Maybe just a clarification question. When you talk about production or supply disruptions, is that your own factory? Is that just general sourcing of components? Has there been any change in April versus the March quarter? Just trying to understand the pace at which maybe production in some of those bottlenecks might be loosening or becoming a tailwind for you this quarter? And then I have a follow-up.

Are you going to take that one Nate? I'm happy to.

Again very dynamic Erik. I would say we obviously have our own factory there that handles a good portion of our production. We use a lot of partners. One of the things about a supply chain is it is a chain. There are links all along. That's one of the things that makes it very challenging and very much day-to-day is you just got to try to keep that whole chain strong. We have to see how China plays out. I saw just in recent days that there are some signs that Beijing has taken some stances towards lockdown. I have no idea what the Chinese government's long-term strategy is going to be on this. It's just one of those things when you're part of an operations team, you go chase supply, you work around it. There have been some things that have been positive recently about reopening some warehouses and some distribution. That's all I can say. We're just monitoring it and tracking it and trying to work our way around it. But we will have to see how that plays out.

Erik, if I can just add. I'm so impressed with our whole supply chain team in China. I think we've really outperformed a competitive set every single time. It's a little bit of magic to me sometimes how we've managed that, but they continue to do it. I don't know exactly what we'll face in there, but I'm pretty optimistic about not seeing a major disruption but I'm sure that we'll manage really well relative to everybody else.

No. I would agree with you on the outperformance versus peers. I think you see that in the data. So definitely there. And then maybe as a follow-up, how should we think about any let's call it potential pricing actions you might need to take in international markets, just in light of a strengthening dollar, basically in order to help maintain profitability, or asked maybe more broadly, how is Logitech today thinking about managing its currency risk in light of this kind of challenging FX environment?

Erik, I don't know if you were following us two years ago. I can't remember what year it was, it was 2015 or 2016 when we saw a major currency swing, the dollar strengthened dramatically relative to Euro versus the Renminbi and we had a fracas. There is a delay in what you can do there, but one of the advantages we had then and we have an even bigger advantage now is that we're the market share leader in most of our categories. Our market shares have grown dramatically. I like our position from a pricing standpoint to the extent that we feel like we need to do it. We're not going to be casual about that though. Market share has its costs in both short term and long-term. I saw pricing has costs short term and long term, and you need to make sure you're always extracting the level of value that you should and not getting greedy. We've already put through some pricing and I would suspect that we'll put through more if the dynamics here look like they're going to stay the same. I think we're in a position to do that because of the size of our business within the categories we're in.

I'd also point, Erik, to the importance of the marketing investments we've been making to raise brand awareness for the value of the products that connects with your pricing strategies. Again, difficult to quantify, but directionally it’s certainly helpful and that's consistent with our long-term strategy about how we think about investment and marketing and how we think about its relationship with our pricing.

All right. And maybe if I could just sneak in one last quick one with you Nate. If we think about kind of the midpoint of your revenue guide and how you guided operating income, you could get to a scenario where operating margins are down slightly year-over-year. Should we think about gross margins primarily driving that and you still being able to invest, or maybe just help me think about the trade-off of gross margins versus OpEx as you think about the next 12 months? And that's it for me. So thanks, guys.

Well, I think there are going to be ranges on both Erik. Again, we're looking out over a full year, so we will manage those. This won't be a year where I don't believe you'll see OpEx investment faster than revenue growth this year, like you have in the past couple of years, or at least last year. We'll see what happens with those pressures on the gross margin side. Like Bracken said, where it makes sense for us to be promotional, where it doesn't, how much we should be investing in marketing. We want to sustain investment in innovation and engineering, key to capturing the long-term opportunities that we have.

Great. Thank you, guys.

Thank you.

Thanks, Erik. I appreciate it. Next up Ananda with Loop Capital.

Hi, Ananda.

Thanks, everyone. Good morning. I have two quick questions. Regarding the fiscal 2023 outlook, what, if any, new developments related to the macro environment, supply chain issues, and lockdowns should we consider in the last 60 days since your initial forecast, which could impact your revised fiscal 2023 outlook? What new dynamics and considerations should we be aware of since then?

Nate, do you want to take that one and I'll come afterward?

The only change in the last 60 days has been the COVID lockdowns in China, which have always posed a potential threat, either from China or elsewhere. This is the environment we are in. We are uncertain about any new variants that may emerge. While things appear to be improving, there is still a level of unpredictability. In the past two months, we haven't encountered anything new; instead, we've gained more insight into various impacts and adjusted accordingly. The COVID lockdowns in China are the main new factor.

Okay, great. That's super helpful, actually. So, I guess, that also is to say that you still feel like everything else is dimensioned for inside a responsible balance with regards to your initial expectations?

I wouldn't say nothing has changed. I think that's important. I want to stress this point again. There are many things to consider and we have to track all of them. We're giving an outlook for a year, right? It’s a long period that we're going to adapt. The markets are going to change based on the trends in the business today. That's kind of what we've reflected in the outlook. We'll update it, as we always do, how we see things each quarter.

Well, that's super helpful. And, I guess, a quick follow-up. Nate, I think it may have been you who talked about gaining some traction in social gaming and how incremental could that be to the segment over time?

Why don't I jump in there, Nate? Very incremental. If you went back in the United States to when the NFL was started, football was a boys sport. Now it's everybody's sport. There are as many women playing now. Looking at gaming, regardless of identity, it’s becoming more and more popular. That social experience in gaming, which is happening across many platforms now, is primarily focused on casual gaming. We're super excited about that. It's nice to see it happening as we launch products into those spaces. They're taking off, indicating that we're really in the right place.

Can you describe what you mean by social platform gaming?

Sure. Social gamers, like in Roblox, you can see that this weekend we created the first big awards event in the metaverse, attended by millions. That social experience—people are really chatting and meeting and playing games where the games are secondary to the social experience. That's really what we're referring to.

Thanks, Ananda.

Thank you, Ananda.

Hi, Bracken and Nate. Thanks for taking my questions. The first one will be please on video conferencing. The year was a little bit falling short of your high expectations. There were COVID impacts. Now you also said, maybe fiscal year 2023, we could be below the 5% to 15% growth. Despite some pent-up demand and COVID restrictions likely becoming more manageable, so why shouldn't video conferencing grow from this revenue line?

I don't think we meant to suggest that we're suddenly pessimistic about video conferencing at all. We feel really good about it. I expect to see lots of video going into offices around the world. I think we're more clear-eyed about webcams. They are pretty stable but not expected to grow significantly; that’s a smaller part of our overall business. The conference cam market looks strong.

Yes. Thanks for clarifying that, Bracken. Just to note that there’s still the possibility to be outside the range but the distribution likely aligns with historical trends.

If you allow me one last question on gaming, can you give us an update on the gaming mice and keyboard business in the US, how this has developed in the last three to five months versus Europe? Thanks very much.

Nate, do you have those numbers off the top of your head?

Nothing particular jumps out at me. The trend is still stronger on the wireless side than wired. We're particularly strong in wireless. Both EMEA and Americas have seen pullbacks in gaming over the last several months. We’ve talked about that previously. Asia remains strong. But we should be mindful of the context of growing against a record year.

Thanks. Finally, one last question on pricing. Across many industries average price increases are observed right now between 3% and 6%. If I make the math on your increased costs, is this a fair starting point for price increases for fiscal year 2023?

I don’t think I can confirm your estimate Joern because it’s really category-specific. We apply different pricing strategies based on categories.

We don't apply one price increase across the board. We're very specific. We tend to stay very aggressive on the low-end and increase more significantly in the higher-end categories.

Hey guys. My first question is on China. I just wanted to understand your factory in Suzhou, and if you've had any disruption, how would that affect you if there was an extended lockdown?

We have had disruptions from time to time. The factory closed for nearly two weeks initially during COVID. We can recover from those delays. It will be a timing issue more than anything else. So far, we have not had major issues. Component shortages have affected us, but our factory has done very well. We have a strong factory team and confidence in our management.

I would add that our increased automation in our factory reduces our exposure to labor disruptions. We're ready to prioritize key products to navigate supply shortages if necessary.

For my follow-up, many investors have sell-through data from GFK, NPD. I just wondered if you could give an indication of how April is looking by region just so that we understand what the starting point is? What is your overview of linearity for the year?

I think typical seasonality has returned to our business, the last couple of quarters. Q3 was up 25% and Q4 down 25% sequentially. It could be an indicator that things are settling down. The back half of the year is anticipated to look typical with some adjustment for direct sales impacts from Russia and Ukraine.

Thanks a lot.

Thanks, Rob. All right. I think we've got time for one more question Adam Angelov, Bank of America.

Yes. Thanks, guys. Just a quick one for me. So I wanted to double-check on your category assumptions for the year. You touched on it, but I want to see if there's been any changes there? And then if you could just update us on the channel inventory situation of your products.

No real update on the categories. All of them have some sales in Russia impacting them. I think the channel inventories are in good shape. We're always a little short and a little long on something, but manageable. Tightness is mostly in Creativity and Productivity related to demand.

Right. Thank you.

Thank you.

Thanks, Adam. I think we're at the bottom of the hour. Bracken, Nate, I appreciate the update. Bracken, any final thoughts as we wrap here?

Thank you so much. The engagement has been terrific. I know you do this for a living, but it’s stimulating for us. I always learn when I go out on the road and meet with investors. Your questions have been valuable, and I thank you all for your support.

Thanks, guys.

See you.