Logitech International S.A. Q2 FY2023 Earnings Call

Okay. Good morning, and good afternoon. Thank you, everyone, for joining us. Welcome to Logitech’s Video Call to discuss our Financial Results for the Second Quarter of Fiscal 2023. Joining us today 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’re making these statements based on our views only as of today and our actual results could differ materially. We undertake no obligation to update or revise any of these statements, and we will also discuss non-GAAP financial results. You can find a reconciliation of 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 Report 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 encourage you to review 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 a replay on our website. With that, I will now turn the call over to Bracken.

Thank you, Nate, and thanks to all of you, as usual, for joining us. Last quarter, we discussed the ongoing macroeconomic and geopolitical challenges impacting Logitech and the world. And the short story is that the industry is volatile. Inflation continues to be an issue, the dollar remains strong, the war continues, and consumer confidence appears to be tepid. Despite this volatility, we’re committed to a straightforward approach as we manage the business. We’ll continue to invest in product innovation, volume managed in the near-term conservatively. First, let’s talk about innovation. We love the categories we’re in. We’re optimistic about their growth trends, on the markets, the strategy and our business model. We just had one of the most impressive sets of product launches in the history of Logitech. All told, we announced more than 20 new products in the quarter, 20. In my time at Logitech, I don’t think we’ve ever launched this many. More important than the sheer number, though, is that I believe this year, they have never been more innovative. We’ve increased our product development investments over the past three years, and you’re seeing the results of those investments as we further separate ourselves from others in the market. With everything going on in the world, our teams are doubling down. It’s so exciting. Many of these new products, by the way, are additive to our existing portfolio. We’re increasing our addressable markets. And equally as important, they’re designed to take advantage of the big durable trends we’ve been highlighting, video everywhere, hybrid work and the explosion of gaming and content creation. We continue to develop products to help businesses and employees thrive in this new and evolving work-from-anywhere world. And as the environment changes, we’re learning something new every day, every week about what the future holds. And it’s that evolution that creates the demand for innovation. That’s the kind of market we like to be in, where our expertise in design and user insights is rewarded by customers. For example, for B2B customers, we announced Logitech site, addressing the question we hear most from enterprises about videoconferencing: What do I really need in a conference room to make hybrid work? We’re passionate about creating an equitable experience for remote participants and in-room participants. Site is the next step, bridging this gap. It’s a tabletop camera that will be sold as part of our conference room solutions, and it uses AI to more intelligently track conversations and provide a more natural video perspective to enhance meeting effectiveness. I’m especially excited about this product because it highlights two important areas where we continue to make strides. It’s powered by AI software, an excellent example of our increasingly software-driven solutions. It’s a perfect example of a product that’s completely additive to our existing portfolio of conference room products, seamlessly working with Rally Bar scribe, just to name a few of them. Nobody else has a solution like this. It’s such an important product. I think of it as the missing piece of the conference room setup. For the personal workspace, we launched a new set of keyboards and mice designed especially for Mac users, which will expand our addressable market and the work-from-anywhere trend. And now let’s look at gaming, where the team had a really strong quarter of product launches. Similar to the trend in video and hybrid work, we’re seeing more gamers demanding products to let them game from anywhere. We announced G CLOUD, a gaming device designed for cloud gamers that accesses PC and console games from nearly anywhere. And as a site for B2B customers, this product is completely additive to our gaming lineup. Gamers want on-demand access to their favorite games and high-quality gaming experiences wherever they happen to be. And that’s exactly what G CLOUD provides. Later in the quarter, we released our lineup of PRO Racing wheels and pedals, which I believe are far and away the best in the industry. These are the high-end, high-performing products, and the response has been incredibly positive. The list goes on and on. Gaming launched its Aurora suite of products, a new set of keyboards, mice, microphones, and headsets targeting a larger customer set with expanded color and design choices and new features like headsets more easily worn with earrings and a broader range of hairstyles. For creators, we have a new studio-quality microphone and lighting. We’re pushing ahead on the metaverse and in partnership with Meta released an immersive audio solution, Logitech Chorus. You get the point. So what’s the common thread that runs through these product launches? They offer a high-quality, seamless experience for people to work, play and create, wherever and whenever they want. They’re tightly integrated with our existing product portfolio and, in some cases, expand the addressable market. By investing in our product roadmap, while also focusing on operational efficiency, we will ultimately come out of this downturn better positioned and poised for strong growth. Many companies talk about investing through times of economic uncertainty. We’re doing it. But make no mistake, we’re not operating in normal times, and we’re acutely aware of the macro challenges. We’re focused on what we can control. Last quarter, we discussed a plan under this theme. What you saw this quarter were the first steps in executing that plan. We decreased our expenses and focused on operational efficiency. We committed to reducing operating expenses by $150 million or 11% by the end of the fiscal year. We’re on track to meet that goal. For Q2, OpEx was down 15%. Part of the operational efficiency is realigning our org structure. Earlier this year, we merged our commercial organizations into one team. The goal was to serve B2B customers in a coordinated way, leveraging Logitech to sell a portfolio of Logitech’s relevant products. This quarter, we evolved our business group and engineering structures to directly align with our new commercial structure and customer audiences: B2B customers, end users, and gamers plus streamers. Along with operational efficiencies, this will allow us to better compete within the enterprise market and better serve end users at the same time. We executed targeted pricing increases and our operations team continues to look for more cost-effective ways of getting our products to market. Our gross margin for the quarter was a strong 38.6% given inflation and currency headwinds, and we’ve not yet started to see the lower shipping rates flow through our P&L. Looking ahead, you should expect us to continue to operate this way. And we’ll be prudent in the near term while investing in our priorities to grow in the long term. And that’s why I’m so optimistic about our future. People will invest in their workspaces. People will participate in video calls. People will game, people will create content, and Logitech will be right in the middle of all of it. Before I turn the call over to Nate for a breakdown of our financial performance, I’d like to say a few things about what you saw in our press release about Nate’s next steps. Nate has been my CFO for nearly four years. We’ve worked through the pandemic and have grown this company to nearly twice the size it was when I hired him. He’s done an amazing job as CFO in a period that’s unlike anything Logitech’s ever gone through. Nate and I talk regularly about his personal aspirations and those for the company. Over the course of these conversations, we came to an understanding that now would be a reasonable time for him to move on to the next opportunity. He’s built a best-in-class finance team over the last few years that will support the transition for a new CFO. And as importantly, Nate plans to stay on board until his replacement is in place. I am very grateful to you, Nate, for everything you’ve done for Logitech, and I can speak for the Board and say they are too. So Nate, with that, can you take us through the quarter’s financial performance?

Thanks, Bracken, and thanks for your kind words. Let me walk you through the quarter in more detail. In Q2, net sales were down 7% to $1.15 billion. While sales were down, this was the third consecutive quarter of improved year-over-year growth performance. We grew in Video Collaboration and Pointing Devices. While gaming showed nice sequential improvement in year-over-year growth, down 4% after being down 13% in Q1. Gross margins decreased versus last quarter as expected to 38.6%. Versus the prior year, product cost and freight rate increases were unfavorable three points, and currency was unfavorable two points. We partially offset these headwinds with our pricing actions and by driving down our use of air freight. Operating profit was $156 million, reflecting lower demand, inflationary cost pressures, and unfavorable currency along with our continued investment in our product development capabilities. Cash flow from operations was $73 million in Q2, and cash flow was up $215 million year-to-date versus last year. Turning to results across our product categories, Gaming showed some resilience in the quarter led by growth in racing wheels. For Q2, Gaming was down 4%, which is a marked improvement from last quarter. Americas and European Gaming sales remain pressured, while Asia continues to grow up 25%. As with last quarter, we outperform the market and gained PC gaming share. We think our product portfolio is in great shape with strong new product introductions as we head into the holiday season. Video Collaboration posted its second consecutive quarter of 7% growth. Video conference room cameras and peripherals grew nearly 30%. This growth was offset by a decline in business-oriented webcams, which were down more than 30%, although their sales remained more than three times higher than pre-pandemic levels. We talked about this dynamic for several quarters. Pressure in webcams following the incredible dynamic, pandemic-driven growth, somewhat offsetting solid and strong growth in conference room cameras and peripherals. Pointing Devices were up 3% driven by our new Lift ergonomic mouse and our high-end MX Master 3S. Keyboards & Combos net sales declined 10% due to low-end market softness in China and Europe, partially offset by a strong start from our new high-end MX mechanical keyboard. Keyboard sell-through was essentially flat in the quarter. As with our business webcams, consumer webcams were pressured and down 33% from pandemic highs. In any given quarter, results across our categories may not move up or down in concert. It’s the benefit of having a diversified portfolio that we like so much. This quarter was no different. So what we focus on is the performance of the categories that are addressing secular trends in Gaming, Video Collaboration, and hybrid work. Sales of our Pointing Devices, Keyboards & Combos, Gaming, and VC products were 80% of our total net sales this quarter, and we’re up 1% year-over-year in constant currency and excluding Russia. Their sales grew 1% year-over-year in constant currency and excluding Russia. It’s also important to note that the combined gross margins for this set of categories are above the company average. So our biggest categories addressing attractive secular trends grew and produced above-average margins. Turning to expenses. Consistent with the first quarter, we reduced our expenses, most notably in sales and marketing, which was down 21%. As Bracken mentioned earlier, we remain committed to investing in product design and development to strengthen our category leadership, and we increased R&D spend by 3%. Last quarter, we committed to reduce our annual operating expenses by $150 million versus last year. We are on track to meet that commitment by year-end. We will continue to focus on finding efficiencies throughout the organization as we align our spend with our sales. We ended the quarter with a cash balance of $869 million. In September, our shareholders approved our proposed dividend distribution, which when combined with our continued buyback program returned $276 million to shareholders in the quarter. We are now halfway through the fiscal year, and despite the headwinds, we remain confident in our ability to meet the outlook we announced last quarter. As a reminder, that outlook calls for full-year revenue in FY 2023 to be down 4% to 8% in constant currency. The U.S. dollar continued to strengthen versus last quarter, and currency now projects to be a roughly five-point headwind to U.S. dollar growth. Therefore, our outlook for full-year revenue in U.S. dollars would be down 9% to 13%. Our full-year non-GAAP operating income outlook remains between $650 million and $750 million, despite the incremental currency pressures. This pressure is expected to be offset by incremental efficiency gains throughout the organization and favorability in logistics rates. Much like last quarter, our intent is to provide you with a range of reasonable outcomes, given the highly volatile nature of the global economy. We’ve made assumptions about a number of factors, including potentially protracted economic volatility and sustained revenue and profit pressure from the stronger U.S. dollar. At the high end of our outlook, we assume a relatively normal holiday cycle. While at the low end, we’ve assumed a holiday lift generally aligned with the worst in the last decade. And while it continues to be challenging to forecast with a level of precision and certainty in line with pre-pandemic business cycles, we believe maintaining our forecast is prudent and reasonable. Nate, it’s time to open the call for your questions. Thanks.

All right, great. Thanks, Bracken. Thank you, Nate. For those who are interested in asking a question, please raise your virtual hand. We’ll start today’s Q&A with Asiya Merchant from Citi. Asiya, good morning.

Hello, Asiya.

How are you guys? Good morning. And surprised and sad to see you leave Nate. Best of luck. And thank you for always sharing your insights and providing clarity on callbacks, et cetera. So a couple of questions that I’ve gotten. As the release came out, the macro conditions remain volatile and I know you guys talked about seasonality in the back half of this year. Can you give us any anecdotal evidence or qualitatively how you guys are thinking about the back half of this year, especially in terms of the holiday season and calendar Q1, which is your fiscal Q4? And then another question on inventory, if I may. I think that declined, if my numbers are correct, that declined sequentially ahead of a holiday season. If you can walk us through what were some of the dynamics there, that would be great? Thank you.

Yes, Nate, why don’t you take both those? I think Nate talked a little bit about the first one, and the second one we can cover quickly.

Sure, yes. So I am thinking as far as the back half of the year, Asiya, like I said, the outlook really represents kind of two ends or two multiple scenarios. But you can think about it, I guess at the high end, hey, it’s a pretty normal holiday lift that we would see. And then on the low end, we’ve assumed something that really aligns with kind of the worst sequential growth that we’ve seen over the last decade. So we’re thinking about it in kind of two ways. I think normally in the holiday, right, you’ll see very strong performance from some of the consumer products. And so maybe those will be a little bit more muted because consumer confidence has been a little bit weaker. But you saw the performance in Video Collaboration again, this quarter grew 7%. We’re excited about some of the opportunities for us in B2B. So really thinking about it across the spectrum, and we’ve got a very diversified portfolio. So that’s kind of how I would answer your first question. I guess on the second question, yes, it came down sequentially. We did build up some inventory because of all the supply constraints that have been out there. The logistics disruptions, some of those are starting to alleviate. We’re starting to see some better performance from logistics providers as well as reduced costs that we think will benefit us in the second half of the year. And so we’ll be working down that inventory; we’ll do it prudently, but it should come down further in fact in Q3.

Yes, I mean, I’ll just add to that. We expected Asiya to bring inventory down in this quarter, even though it was going into our holiday quarter and we did. So we’re pretty much right on track.

Great. Thank you.

Thank you.

Thanks, Asiya. Next question we’ll go to Paul Chung, JPMorgan.

Hello, Paul.

Hey, Paul.

Hi, thanks for taking my questions, and Nate you’ll be missed. Very nice working with you. So just first up, on OpEx flexibility, providing some cushion here on your operating profit outlook, which areas are you cutting back? Are there any trade-offs on revenues as a result? And you mentioned some Board structure changes, et cetera. And should we expect kind of a bounce-back in OpEx when kind of top line comes back or continued focus on efficiency here in the near term?

Let me jump in first, Nate, and then you can answer. Overall, maybe the – maybe I’ll answer what are we not cutting back? We’re actually growing our product development investment, as you know. And we’re pulling back in different areas throughout the business, including marketing. Whereas Nate talked about in the script, we pulled back pretty significantly. But really on the top-of-the-funnel marketing that we feel like, at the end of the day when the markets are generally softer, top-of-funnel marketing’s not as effective. Whereas search engine optimization, the things you’d expect us to keep investing in, we’ll certainly keep investing. And so that’s really the kind of the headline. Go ahead, Nate.

Yes. I mean, obviously, agree with all that. Paul, if you recall, we talked in the past about as we were building, as we were investing more and as the revenue growth was very strong in FY 2021 and even FY 2022, we were conscious of the fact that we wanted to be investing in a variable way if possible, and where it made sense. That has helped us as we’ve had to reduce expenses or taken action to reduce expenses here in the first half. So you’re seeing some of the benefits of that strategy and the execution that we talked about before. I think even when you look at our marketing spend though, we’re really aligning it with sales. And if you look back historically, we’re kind of at levels right now that are consistent with the level of investment we’ve had there before. So we haven’t cut back as Bracken said on all marketing, but we’re just being very thoughtful about where it makes sense to invest now. I think if conditions change and we start to see more revenue growth and gross profit expansion, you may see us increase those investments again.

Got you. And then just to follow up, can you talk about the cadence of product releases? I think you mentioned 20 or so, and then kind of your commitment to R&D, which has doubled since 19 levels. Were you kind of seeing relative strength from new product lines like the Litra, the G CLOUD, and the Mac line of keyboards, and what products are resonating the most with customers? Thanks.

Yes, let me, first of all, in terms of the cadence, we usually do launch quite a few products in Q2, ahead of Q3. This was really a record. I mean, I think, I don’t know, we try to go back and count, but we announced 20 new products this quarter. I mentioned that in the call. So I am super excited about what we’re doing, and our innovation engine is just firing on all cylinders. The other cool thing about it is that a lot of those products are in completely new markets. I mentioned that in the script and new addressable markets, things like G Cloud, Logi site, and yes, what I’m excited about. That’s a good example. I mean, I think this – the ability to, I think anybody who’s been in a video call lately and been one of the remote participants has had somebody stand with their back to the big camera, and they feel really out of it. This really answers that. And the cool thing about it is, you need our existing products to use it. So you have to, so, and you don’t have to wait to buy them. You can buy them now, and then this will just be a complement when it comes out. So it’s a really cool product. I’m excited about the Mac line of products we have. We already had a very high end, MX Master and MX Keys version. Now this brings us into a lower price point. So everybody can afford to really have an alternative to Apple’s experience, which is great. I could probably keep going. G CLOUD is going to be really interesting to see how it does. I think we’re going to just keep an eye on that category. Netflix started one day and now look at it. I think these cloud gaming services are going to be really big over time. We’re the first one out with really a mobile experience inside the home. So it’s super exciting across the board.

Great. Thanks.

Thank you.

Thank you, Paul.

Next question will be from Alex Duval, Goldman Sachs. Hey, Alex.

Hello, Alex.

Hey, everyone. And thanks so much to Nate for the conversations over the years. A couple of quick ones. Firstly, you saw a 7% decline organically, constant currency in the quarter. So I wondered if you could just help us understand a bit more about how you get to minus 6% at the midpoint for the full year. To what extent is this a story of comp effects or product launches? How should we be thinking about that? And secondly, related to this, if we look at video conferencing, you referenced the back-to-office dynamic. Just wondered to what extent we should think about that benefiting you from a few more quarters. How are you thinking about that as well? Thank you.

Why don’t I take the last one, Nate?

Okay.

I think we’re seeing at the very beginning of really the re-enablement of an office. I think one of the most common questions I talk to a lot of CEOs, and non-CIOs is, one of the most common questions is, gosh, how is this going to work long term? I mean, we’re an interesting example. We’ve redone an office in one big office we have in Switzerland. We’ve just changed offices in Cork. So we’re just moving into it. We’re changing offices next year in Silicon Valley. All caused or at least accelerated by what’s happened during the pandemic with hybrid work becoming the way we work. So I think we’re pretty representative, maybe a little bit on the front of the curve of most companies. I think most companies over the next few years are all going to be adjusting size, structure inside the office, the whole thing. That really bodes well for us because then you really got to rethink how many rooms we’re going to have, how many rooms we’re going to have video, how many workspaces do I need? I’m surely going to upgrade those that are going to change the structure inside. Oh, and the people at home, they really now do need better work, better stuff. Like I said, on many calls, everybody on this call can upgrade their workspace. I guarantee you’ll send me a picture, and I’ll tell you exactly what you should do. So it’s a really I think it’s a very good looking future for us in the whole B2B space, whether it’s B2B in the office or B2B at home.

And then on your question around the guidance, Alex. Yes, I think you kind of hit some of it in your question. The compares are much different for the first half and the second half. In the first half of last year, we grew 24% in constant currency, and the second half of last year, we declined 9% in constant currency. So it’s a pretty big difference in the year-over-year, compare half-to-half. We think that this full-year outlook is reasonable.

Thank you very much.

Thank you.

Thanks, Alex. Next question will be from Adam Angelov, Bank of America. Hey, Adam.

Hello, Adam.

Hi, Adam.

Hey, how’s it going? Thanks for letting me on. So firstly on the gross margins and the three percentage points of inflation headwinds you mentioned. Just wondering, is there any reason, as these things probably ease further over the next few quarters? Why you wouldn’t see the benefit? So you mentioned shipping’s not really coming through the P&L yet. Is there any long-term contracts there on the component side, on the shipping side that would prevent you seeing the benefit? And then secondly, just on G CLOUD, kind of curious to see like more strategically kind of teased it a little bit there, but more strategically is this a move into more of the center of gaming, and away from peripherals? Just anything you could kind of give on that? Thanks very much.

Yes, I’ll answer the last one first, Nate, and then you can jump into the first one. The answer is we’ve been systematically expanding categories for 10 years. So this is another category expansion. As you said, you could argue it’s more into the, as you call it, the center of gaming, although needless to say, on the CEO of Logitech. I think our products really are the center of gaming. They’re the last things you touch; they’re the central things that are volume gains. But we’re going to keep expanding categories. We think there are opportunities not only in gaming, but across the board. Several of the products we launched this time, as I said earlier, we’re really new addressable market opportunities for us. So yes, I’m pretty optimistic about that.

In terms of the cost, Adam, up in cost of goods sold, I mean that’s one of the reasons why I wanted to call that out is I want to give you visibility of what some of the drivers are of the margin. In the case of cost, you kind of got two big buckets; you’ve got logistics and the logistics cost and product cost. Those will begin to flow through as benefits in the second half, but you have to remember, we have to work down inventory before we start to see some of those benefits. Some of it is contracts that we have, although we’re able to buy on the spot rate in some cases as well. I do believe logistics will probably see some of that benefit a little bit earlier. And then as we get into next year, probably see more of that favorability start to flow through the P&L. Of course, you always got to keep in mind that we may decide to take pricing actions going in the other direction. There are a lot of moving pieces to it. But net-net, I would expect some of those cost pressures to start to become tailwinds as we move into the back half of this year and then more so into FY2024.

But I will say, and if you listen carefully to Nate’s script, that’s 5 points of headwind. We still have delivered almost 39 points of gross margin with 5 points of headwinds between currency and cost. As you’re suggesting, Adam, neither one of those is likely to last forever. The cost is certainly at a high, and currency is at an incredible high. I certainly wouldn’t make any commitments about the next 12 months or a year or something. But long-term, I’m really excited about that. The fact that we could deliver 39 points of gross margin with 5 points of headwinds that are pretty temporal, is exciting.

Yes. I mean I think that’s exactly the right point, Adam, there’s a lot of earnings power here, right? We’re getting more efficient on our costs. Obviously, an uncertain environment is involved at this time from a macro standpoint, but our gross margins remain strong. You can see what some of the headwinds are there. We have to make some assumptions about how long it’s going to take for some of those cost pressures to reverse, but there’s some strong margin power in this model.

Great. Thank you.

Thank you, Adam.

Our next question will be from Joern Iffert from UBS. Nate Olmstead: Hey, Joern.

Hey, Joern.

Hi, thanks for taking my questions. The first one I would be pleased on your APAC operations. Quite important success factor in the quarter. Where is this growth exactly coming from? Is it category growth, is it share gains, is it new regions? If you can put some light on this would be quite helpful. The second question would be please, Bracken, you mentioned there are a couple of changes in the organization in the B2B go-to-market strategy and also in the business group and engineering. Can you give us more details on what exactly you are doing here? Thanks a lot.

Yes, absolutely. We did kind of shorthand, I guess, Nate, I’ll take the last one. You take the first one. Yes. So what are we doing? What are we talking about? This set of changes really started at the end of last fiscal year and at the beginning of this one, and we quietly put two sales forces together. Why did we do that? Because we wanted to bring all of Logitech to B2B customers as one. Now you’ve got one organization bringing one commercial organization, bringing all of Logitech, whether it’s a personal workspace or a room. The reason we did that was because I think I mentioned this in the last call; as we were aggressively selling video conferencing equipment, we were increasingly having people say, oh, in, before you leave, could you please – can we talk about my keyboard? We were underdeveloped in the B2B market in our whole personal workspace or as we call it B2B, personal workspace mice and keyboards and things. By changing that commercial alignment, we now have one message to the customer, one idea of what is Logitech, and one thing we can talk about. That was the first step. The second – this last round of changes, we didn’t change the business group structure to adapt to that. That was part of the driver here. We have one B2B organization that interfaces directly with that group. So it’s a kind of a picture and a catcher now. We have one team, and this should make us much stronger in our overall B2B business. We did a couple of other things on top of that. We centralized our software engineering for most of the business now and our hardware engineering for the first time. That’s more efficient, but the more important thing is, I think it’s going to give us the ability to move step by step further, further into services and software-enabled services and also to leverage the fact that we have all the hardware thing on one desk all the names of people buying things, all the data that’s coming in and the ability to get our products to work and do more things together. I’m really excited about the set of changes. It’s a big new chapter for Logitech.

Yes, Joern, to answer your question about the APAC region, normally we talk a lot about China there. China actually didn’t have a strong quarter as it had recently, but that was more than offset by really good performance in Australia and Korea. Just like a lot of places, we’re diversified even within the region. The strength that we saw, other than gaming, which we saw really good performance across the region, I would say, but in Korea and Australia it’s really kind of across the portfolio; the mice, keyboard, video collaboration, all had very, very strong quarters.

And may I ask why? Why was Australia and Korea strong in the quarter?

Well, again, I think countries you got to look at prior year compares. The way that the world has been evolving has been different by country. The pandemic had different timing in different places, and re-openings and transitions back into retail and so forth. There are really just a number of factors. I think we saw the market was a little bit stronger in those areas. We had some share gains. A number of factors. The portfolio, I think with the new product introductions that we talked about on this call, I think we’re seeing some of the benefits of that. Those are investments that we kicked off and have been increasing over the last several years.

Thanks a lot.

Sure.

Thank you, Joern.

Great. Our next question will be from Rob Sanders at Deutsche Bank. Hey Rob.

Hey Rob.

Hello, Rob.

Yes. Hi, I just had a question regarding the upcoming selling season. I was just wondering what’s your priority? Is it to preserve profitability, maybe hold on to elevated inventory? Or will you look to clear the channel? I mean, I noticed you haven’t been too active on the promotional front so far, but I was wondering if that might change? And I have a follow-up. Thanks.

Yes, I’ll jump in on that, Nate. I wouldn’t be surprised if it’s a little more promotional in Q3 than just because Q3 is always a little more promotional. It wouldn’t be too surprising. Our real priority is we’ve got great innovation. I feel super about the product lineup we have and the portfolio we have going into Q3 and Q4 and beyond, so our priorities are not going to change too much. We’ve really got what we need to sell, and now we need to go sell it. Do you want to add anything to that, Nate?

No.

I just had a – thanks for that. I just had a quick follow-up. Just if you could remind us, I know you’ve taken a lot of share post previous downturns because a lot of companies have kind of exited, et cetera. I was just wondering like historically, when have you taken the most share? Is it basically as those companies kind of flame out because they start losing money? Or is it you look to kind of press your advantage and press the brand even at this stage? Thanks.

I think I’d characterize our share gains a little differently. I think we’ve gained share because we’ve really innovated and we focused on brand building. If you look at what we’ve done inside of our gaming business, we’ve consistently gained share every year. It wasn’t – didn’t have much to do with competition. Honestly, didn’t have too much to do with competitors flaming out or something; very few competitors have left our business. It’s really about us performing.

Yes, Rob, I just want to echo that. We’ve been talking for a while about moving from push to pull, right, and making investments in marketing, reducing reliance on promotion. That’s not something you just turn on in one quarter. It’s a long-term journey. We accelerated that through the strength of our results during the pandemic and increased our investments. What you’re seeing and have seen consistently over the last several quarters has been the benefits of those investments and decisions we made.

Exactly. Absolutely great point. If we do say so ourselves, we pat ourselves on the back.

Thanks, Rob.

Thank you, Rob.

Our next question is from Erik Woodring at Morgan Stanley.

Hello, Erik. How are you?

Good morning, guys. Thank you. Thank you for taking the question. Nate, you will be sadly missed. I will give a shameless plug to someone that maybe used to work for you that might be on – might be looking for a CFO job. No. But in all seriousness, Nate, thanks for all of your help.

Thanks, Erik.

Maybe I’ll direct two at you. One was just getting back to your comments on gross margins. If you look at historically, sequentially, you see pressure in the December quarter owing to the fact that it is a bit of a more promotional period. But then you talked about some of these more temporal headwinds, inflation, logistics. I’m just wondering if there’s any reason why that type of seasonality this quarter shouldn’t exist? Or any – maybe if you could walk us through some of the puts and takes to at least help us think about gross margins for December? And then I have a follow-up.

I know that was for Nate, but I have to jump in here. First, while those headwinds are temporal, they’re not that temporal. Hopefully, you’ll see a huge change in Q3.

Yes.

Okay.

My outlook really doesn’t assume much change in gross margins at current levels, Erik. There are a lot of factors why Q3 gross margins might be up or down. Category mix is another one. Historically, you were talking historically. Historically, mobile speakers were a much bigger part of our portfolio. It’s now 2%. That was one of our lower-margin categories when it was scaled. You did have some mix impacts as you went into the consumer period as well as like you said, a little bit more promotion for Black Friday and those types of big events. I think as our business portfolio has shifted towards a little bit more of the business customers, that mix effect will lessen a little bit. But yes, typically, I would still expect margins to come down a little bit in Q3. But there are lots of big factors at play here in the back half. As Bracken mentioned, he’s absolutely right. We are not assuming a big significant swing in costs and seeing that favorability to flow through. I do believe that that will happen, but we’re not predicting that to be super significant here in the second half.

And I would add, I do think it will be – if somebody asks a question, I think it will be a little more promotional in Q3 just because we always are. That’s just the reality of the world we’re in right now, too.

And then maybe just as a follow-up, year-to-date, I guess, your cash flow from operations is tracking below operating income. The guide is for those to eventually converge by year-end. Maybe just talk about some of the factors that give you confidence in the cash flow recovery in the back half of the year. Is that largely inventory? Or is there anything else that you would call out as a driver of that improvement? That’s it for me. Thanks guys.

Got it. Yes, I think inventory, working capital in general will be one of the big drivers. That’s basically your cash flow is going to be two big components. It’s going to be your profit and your working capital. I think in the back half of the year, you’ll see some efficiency improvement in working capital. The quarter was a little bit back-end loaded as customers were – a lot of our large customers were adjusting inventory levels early in the quarter. They started to repurchase again in the back half. Our collections were – we didn’t finish all the collections of all the sales this quarter, so we’ll see some benefit from that in Q3. Our aging is great on AR, no problems there, just a little back-end loaded. We’ll see higher collections in Q3.

Thank you, Erik.

Our next question will be from Serge Rotzer, Credit Suisse. Hey, Serge.

Hello, Serge.

Hey, Serge.

Yes. Good morning, gentlemen. First question, I have two or three. You mentioned that you launched 20 new products, and I’m wondering, will these new products be margin accretive, no impact, or dilutive? And secondly, even more important, what’s about the availability now? Are these products already on the shelf for Q3, or is this something for next fiscal year?

Yes. So first of all, I would say, with 20 products, probably on average, they are margin neutral. But we’ve got some that are accretive and a few that are diluted. Generally, they are available. We’ve got a few that are coming later. Logitech site is going to come later. We announced it early because it is really complementary. You could buy a room system and then get it all set up, how it ready to go, get used to it, and then bring this in and drop it right into the middle of the table, literally, and it will improve the overall experience. So that’s an example on that’s not available. On the other hand, other things like G CLOUD are available now. So it’s kind of a mixed bag. But generally, everything is available.

Probably to take again G CLOUD, is it available only in the U.S. you mentioned? And in big volumes or only available, let’s say like that? Or is it dilutive or accretive to the gaming you mentioned that the Gaming margin is increasing.

Yes, we're going to keep the production limited initially. This is our approach for new categories, and we can always adjust if necessary.

And Serge, one thing I need to – you asked about margin, but also keep in mind the ASPs and things like site is relative to the rest of our portfolio; it’s a high ASP product. PRO Racing wheels or it’s a high ASP product. G CLOUD is a high ASP product. It’s not universal across the board, but you’re seeing, again, it’s not like we just flip the switch on this stuff. We’ve been working on these things for a while. There’s a lot of software content in there, a lot of value, so I feel very good about that.

That’s a good point. Probably a year on the guidance, you increased the currency impact from 4% to minus 5%. You said reported sales will be lower or decrease higher, but you left EBIT unchanged. So basically, is this a guidance upgrade? Is this true? Do you see this as a guidance upgrade? And what’s the main factor for this guidance upgrade if you’d like so?

Yes, I called out two things briefly in my prepared remarks: additional efficiencies that we’re finding across the organization. That could be in OpEx; it could also be in COGS. Keep in mind, we’ve got over $3 billion of spend up in our cost of goods sold. There’s a big pool of spend there for me to look for efficiency with the teams. And then also, we do think we’re starting to see some of those spot rates on logistics come down, especially on the ocean. As we get into the back half – really into the back half of the second half of the year into Q4, we’ll probably see some favorability from that, that will help offset the currency pressure.

Okay, the last item is a restructuring charge of negative $11 million and other income of negative $25 million. Is this all related to the new organization? Can you provide some insights on this? Should we anticipate this trend to continue in the upcoming quarters?

The restructuring is related to the org changes Bracken went through. The other item was a write-down of an investment that we had on our books from years ago, LifeSize, if you remember, was a company that we used to own that we spun out, and we wrote down the value of that this quarter.

Non-cash.

Okay, got it. Many thanks.

Thank you, Serge.

Great. Our next question is from Michael Foeth at Vontobel. Hey, Michael.

Hello, Michael.

Hi. Thanks for taking my question. Thanks, Nate, also for all the conversations. Just one left for me on pricing strategy. You said you’ve taken some pricing actions in the quarter already. Two questions there. One is how much leeway do you have with pricing given that consumers, especially in Europe, are already quite squeezed? So what’s your view on that? And then how much did those pricing actions actually offset the other sort of headwinds that you had on gross margin?

I’ll let Nate answer the second, but I’ll answer the first one. How much leeway do we have? I think that remains to be seen. We’ve raised prices a couple of times in the last year, and they weren’t really small price increases either. The last round, I would say, was really a response to the continued currency challenges, and we focused it in Europe and Japan, a couple of other places. I think it remains to be seen. I think it’s – we feel pretty good about it on the high end of our more high-end products. On the low end, it’s going to be competitive, and we’re not going to give up any share on the low end, so we’ll make sure to stay competitive there. We may moderate a little bit on the low end if we have to, but we’re holding the line for now. We haven’t seen competitors follow in most cases, actually, in the second round. So we always raise and then wait. If we have to, we play hardball.

And then the second part of your question, Michael, I mentioned we had 5 points of headwinds. I mentioned those gross margins were down less than 5 points year-over-year. We’ve got about a point of benefit year-over-year from pricing thus far to help offset some of those cost pressures in currency.

Okay. Thanks, guys. Well done. Thank you.

Thank you, Michael.

Ananda Baruah, Ananda from Loop.

Hello, Ananda.

Hey, guys. Good morning. I’m down the street from all of you in New York or around New York today. I’m here in New York.

Is that right? Is that right? All right. Well, let’s – we’ll get coffee about 45 minutes after this call ends, back in.

You just gave up the goose. You should have hit me – yes, you should have hit me before the call; we’re really good at big cooking. Listen, thanks for the question. I appreciate it. Nate, we’ll miss you, man. Really enjoyed the conversation. Hopefully, we can continue them in a different context. So a different context, different setting. I look forward to the callback.

We’re not letting it go just yet.

Yes. Yes. 100%. Understood. I guess, my question is, how would you guys context like the visibility to the guidance maintenance relative to sort of normally? It feels like we’re still kind of like at the front end of macro making like a commercial impact, impact on commercial spend. Certainly, it seems like we’d probably not – we’re probably still in the first half of the game of interest rate increases and things like that. I guess I’ll sort of leave the question there, but would love to get how you guys relate to sort of the conviction in the guidance maintenance.

If I could jump in first, Nate. I think we have a relatively wide range on the guidance, right? The range of outcomes reflects the fact that there isn’t a person on this call who could accurately predict what’s going to happen over the next two quarters. Within a range, we feel pretty good. Do you want to add to that, Nate?

Yes. I’ll just come back to diversification, Ananda. I think it’s really important. In times of uncertainty, diversification is really your friend. I called – I mentioned those big four categories, 80% of the sales actually grew a little bit, excluding currency in Russia. It’s very important. I think the – yes, so I apologize to say that. I think diversification really helps. As Bracken said, we’ve given a range.

Let me look, it’s helpful. It makes – I totally get maintaining. I mean you guys – you hit the quarter, and it sounds like it’s tracking to expectations right now. That all makes sense. Can you remind us, Nate, what was sort of when you lowered the guide previously? What were the main drivers of that adjustment?

Yes. Two things. One was currency. We had not accounted for all of the impact of currency until last quarter. The other was really just the increased volatility and what looked to be a sustained volatility in the macro climate and the number of factors that we have to keep an eye on. It was really those two things. I think all the way back to March, the beginning of the year at AID, I think the war had just begun. There was a lot of uncertainty about what would happen there, and unfortunately, that has persisted.

Yes. I actually think you did your Analyst Day like 10 days before it started, something like that.

Something like that.

Okay. Bracken and Nate, that looks to be a wrap on questions for this morning.

All right. Well, thanks, everyone, and we’ll see you next quarter.

Thanks a lot.