Logitech International S.A. Q3 FY2023 Earnings Call

Okay. Good morning, and good afternoon, everyone. Welcome to Logitech's video call to discuss our Financial Results for the Third Quarter of Fiscal 2023. Joining us today are Bracken Darrell, our President and CEO; and Nate Olmstead, our CFO. As a reminder, during this call, we will make forward-looking statements, including with respect to future operating results under the Safe Harbor of the Private Securities Litigation Reform Act of 1995. We're making these statements based on our views only as of today. Our actual results could differ materially. We undertake no obligation to update or revise any of these statements. We will also discuss non-GAAP financial results and you can find a reconciliation between non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC, 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 will all be available at the Investor Relations page of our website. We encourage you to review these materials carefully. And unless otherwise noted, comparisons between periods are year-over-year and in constant currency and sales are net sales. And finally, this call is being recorded and will be available for replay on our website. And with that, I will now turn the call over to Bracken. Good morning, Bracken.

Good morning, Nate, and thanks for joining us. As you saw in our pre-announcement, our third quarter results were disappointing. Enterprise demand deteriorated versus last quarter, and consumer purchases were soft and more concentrated during promotional weeks than is typical. Those factors compressed our net sales and gross margins and resulted in a revised fiscal year 2023 outlook. I've discussed for the past few quarters the ongoing macroeconomic and geopolitical challenges impacting Logitech and the world. A strong dollar, global inflation, and low consumer confidence continue. In the midst of these, we focused on what we can control: product innovation, a strong go-to-market strategy, and disciplined P&L management. So what changed during Q3 that pressured our results? First, our enterprise demand declined. Our VC business had delivered consecutive quarters of 7% growth and fell 16% this quarter. You all have read the headlines. Google, Amazon, Microsoft, banks, and other businesses have announced layoffs and cost containment actions. Initially resilient in the face of pressured macro conditions, businesses are increasingly cautious in their spending, given the economic volatility and uncertainty. And of course, that is impacting our enterprise business, too. The second change in this quarter was a shift in our consumer’s purchasing patterns. Consumer sales remained weak. And importantly, of those consumers that did buy, these purchases were concentrated in time with higher promotional intensity, resulting in lower sales and pressured margins. While current macroeconomic conditions and even the variables that changed in the third quarter aren't going away this quarter, they don't impact our view of the long-term potential of this business. We remain committed to the long-term growth trends, strong market strategy, the markets, and the business models we have in place over time. I fully expect us to return to more predictable, less volatile economic conditions. And I believe this will support business investment, rising consumer confidence, and sustained growth at Logitech. Because if we look beyond the whipsaw of the daily headlines, I'm actually struck by what hasn't changed. While the pace of return to offices remains uneven, hybrid work is inevitable. Company's approach to return to the office has been different across industries and geographies. I hear a familiar story from CEOs and customers across industries. They're still working to determine what hybrid model works best for their teams. Logitech is no different. We're relocating and redesigning buildings in the Bay Area and across the globe focused on a hybrid work environment. As companies settle out on their definitions of hybrid work, we should see investment in personal workspaces and collaboration rooms. This investment will happen. It's just a question of timing. Product innovation matters more than ever. The winners will have great products. That's why we keep investing. We're also diversifying the ASPs in our portfolio through innovation across our categories. Our oldest business, Pointing Devices, had ASPs 25% higher this quarter than four years ago as we've systematically expanded the category into new segments, with differentiated features. This is obviously by design. Making sure we have category-defining products across a broad range of base fees is our goal. Innovation requires investment, and our R&D investment this quarter was up 50% more than we invested in Q3 2020. Few companies have the financial resources and the management discipline to sustain investment in product development during challenging times, while driving efficiency at the same time. We continue to press that advantage and are enhancing our product portfolio. The big durable trends we've been highlighting, video everywhere, hybrid work, the explosion of gaming and content creation, continue to move ahead. People today want to work, play, and free from anywhere. And we believe that our products will be a great enabler of this trend. Let me provide a little more perspective on this quarter's performance. I mentioned consumer spending was weak in the quarter, and it was with sell-through, excluding currency, and our prior business in Russia and Ukraine, only declined mid-single digits. We grew market share in Gaming, Video Collaboration, Pointing Devices, and Tablet Keyboards. In Video Collaboration, while the number of conference cam units declined year-over-year, we continued to drive ASPs per room higher. The mix of our conference room sales is skewing to higher-end cameras. And the attach rate of accessories and services to our conference room cam sales is growing, which drives our sales revenue per room higher, evidence that our strategy of developing integrated room systems is working. In keyboards and mice, we continue to gain share in the fast-growing high end of the market. So what can you expect from us in the near term? You should expect us to operate in a conservative, disciplined manner, consistent with the last few quarters. Namely, we'll focus on decreasing our expenses. We plan to reduce operating expenses by $150 million, or 11% by the end of fiscal year 2023. We're on track to well exceed that goal. For Q3, OpEx was down 23%. You've watched us be aggressive on our OpEx as we saw the market weaken, and you can expect us to continue to manage our costs based on market conditions. We'll continue to invest in product development, though. Customer needs are evolving quickly. We have the engineering and design expertise, customer insights, and financial flexibility to bring new products to market to meet this demand and to accelerate refresh cycles. And we will lean into our global operations and go-to-market capabilities. One final note before I hand it over to Nate. First, regarding our CFO search, our search is progressing well, though we don't have an update to share with you today. Second, I'm really pleased to announce that our current Head of Global Operations and Sustainability, Prakash Arunkundrum, has been appointed Chief Operating Officer here at Logitech. Prakash has been here for close to seven years and is a frequent presenter at our annual Analyst and Investor Day. So many of you already know him. In this newly created role, Prakash will be one of my key partners in making sure we are structured strategically and operationally for the short and long-term road ahead. With that, I will hand it to Nate to provide some additional color on our results. Thanks, Nate.

Thanks, Bracken. Hello, everyone. Let me walk you through the quarter in more detail. Our Q3 results were impacted by a challenging macro environment. Net sales were down 17% to $1.27 billion. This reflects consumer purchasing concentrated in promotional weeks throughout the quarter and lower enterprise and consumer spending. Gross margins decreased versus last year to 37.9%. Versus the prior year, currency was unfavorable three points. Promotions were also unfavorable three points, and cost inflation was unfavorable two points. These eight points of headwinds were partially offset through our pricing actions and by driving down our use of expedited shipping. Operating profit was $204 million, reflecting lower demand and gross margin pressure, partially offset by reductions in operating expense. Cash flow from operations was $280 million in Q3, and cash flow is up $118 million year-to-date versus last year. Turning to results across our product categories. Gaming was down 10%. Growth in our simulation products was essentially flat and more than offset by declines in PC and console gaming. Asia Pacific was down only modestly, while Americas and Europe remain pressured. Despite these declines, we gained market share in nearly all Gaming categories. The largest negative swing in our portfolio versus last quarter was in Video Collaboration, which was down 16% after posting consecutive quarters of 7% growth. Video conference room cameras and peripherals declined single digits, but we gained share. And business-oriented webcams were down more than 40%. Pointing Devices were down 8% driven by pressure in the low end of our portfolio, but we grew market share in total Pointing Devices. Keyboards & Combos net sales declined 17% with gains in the high end of the market, offset by losses in the low end of the market, and consumer webcams were down nearly 50% year-over-year. Turning to expenses. Consistent with last quarter, we reduced our OpEx, which was down 23% versus last year. As Bracken mentioned earlier, we remain committed to investing in product design and development to strengthen our category leadership. And while R&D was down modestly versus last year, the $63 million we invested in R&D in Q3 is more than 50% higher than our R&D investment level just three years ago. In Q1 of this fiscal year, we communicated our plan to reduce our annual operating expenses by $150 million versus last year, and we achieved that goal this quarter, one quarter ahead of schedule. I now expect that for the full year, we will reduce operating expenses by approximately $215 million or 15% versus last year. We will continue to focus on finding efficiencies throughout the organization as we manage our costs based on market conditions. We ended the quarter with a cash balance of more than $1 billion and continued a strong share buyback program, returning $90 million to shareholders in the quarter. We revised our financial outlook for FY 2023 based on three items: softer than expected third quarter results; enterprise and consumer demand, which may remain weaker than we previously expected; and uncertainty in supply availability related to the recent COVID outbreaks in China. Our outlook calls for full year revenue in FY 2023 to be down 13% to 15% in constant currency. The US dollar weakened versus last quarter, but currency still projects to be a roughly 5-point headwind to US dollar growth for the full year. Therefore, our outlook for full year revenue in US dollars would be down 18% to 20%. Our full year non-GAAP operating income outlook is now between $550 million and $600 million. Nate, we can now open the line for questions.

Great. Thanks, Bracken. Thanks, Nate. Our first question is from George Brown at Deutsche Bank. Good morning, good afternoon, George.

Hi, George.

Hi, guys. Good afternoon. Thanks for taking my questions. I have two, if I may. Firstly, in terms of product launches, you released quite a few products in Q2 out of the holiday season. Can you provide some detail on how they performed and in particular, I'm interested in how Logitech G CLOUD has performed and whether that's met your expectations or not. And I'll leave it at that.

Overall, we announced 20 new products that we're launching in Q3 or within the next three to four months after that. Our launches are progressing well. The G CLOUD launch is quite focused, as we initiated it only in the US. So far, everything is on track, and we're now expanding into Europe and Japan. This is a new category for us, and we always approach new ventures cautiously to avoid taking unnecessary risks, but everything is going well so far. Generally, I feel optimistic about our innovation overall. We continue to generate strong, insight-driven innovations, and the performance of all our new products is also progressing well.

Perfect. And then just a second question. Just in terms of the level of discounting going forward, after there was clearly some pull forward of demand during the Black Friday and Cyber Monday period. What could we expect going forward into Q4 and beyond from a promotional perspective, given inventory stands at quite a high level?

Yes, I wouldn't say that we're in a position to offer discounts due to our inventory levels. Our channel looks good, and our internal inventories have decreased from the previous quarter, as you may have noticed. We're committed to being responsive to the market conditions, so I can't specify exactly what our overall promotion levels will be. However, I did notice that promotional activities were particularly high as a percentage of our business this quarter, and I don't anticipate that happening again.

Yes, George, just two quick comments on your questions. First, I think from an NPI standpoint, I agree with Bracken, off to a good start. I wouldn't say there was anything in there that was financially really that significant in the quarter. So still ramping up there. And then on the discounting, as Bracken said, we definitely saw consumer preference towards more promoted products this quarter. I think there's some of that assumed going forward here in Q4. Too early to say what that looks like out into next year, I would say. But that seems to be the environment that we saw during the holiday with certainly the weeks with the higher promotions had the higher percentage of sales.

Perfect. Thanks, guys.

Thanks, George. Next up, good morning, Asiya Merchant from Citi. Good to see you, Asiya.

Hey, Asiya.

Hey, Asiya.

Good to see you all. I have a couple of questions. First, regarding the venture capital side, can you share any insights on how your discussions with customers are progressing? The current environment remains quite challenging with layoffs, but have there been any changes since the last reported quarter in terms of demand for venture capital? Secondly, I noticed in the press release, which Nate also mentioned, that there are some supply concerns for your March quarter. Can you elaborate on how significantly this will impact the March quarter, and do you expect these supply issues to continue beyond March? Thank you.

Okay. I'll take the first, and Nate, I'll let you take the second one. Yeah, I would say, overall, we just came back from CES. And I would say, generally speaking, the tone was about the same. Everybody seems very committed to the long-term, making sure they've got the right setups, and that I wouldn't say, there's any real change in the secular term from what I see. But I do feel – I do sense the conservatism. I think you could hear it in some of our salespeople, who were saying March, March, March. And I'm not sure that was the right date, but they were saying a lot of the companies are really pushing out spending into future quarters. So I think that's probably still out there. And we're certainly assuming that as we go into Q4, and it's reflected in our guidance. Nate, do you want to take the China question or I'm happy to?

Yeah. No, I think – listen, I think the thing that we probably all learned over the last few years with COVID is it's a little hard to predict. So I've made some assumptions that, there could be some disruptions on supply in the quarter. We're working hard on those things. We may have opportunities through expedited freight, and so forth to recover some of that. But still a fluid situation, Asiya. So there's not really a specific number, I would say, we called out. We just tried to factor in a range of possibilities in the outlook. And so that was one of the things that caused us to adjust the full year outlook.

Yeah, I would just add to that. I think we're in the – we're probably in the middle of the most uncertain period right now, because it's – the New Year just started. All of our factory people went back to their homes. And it's anybody's guess on what that's going to do to COVID rates, and whether we'll have a problem getting people back or some of our suppliers. So we're in this kind of uncertain period now. But I think, it will settle out over the next few months. It's not an unlimited risk. So we bracketed it pretty well, I think, in our outlook.

I think the other thing that we've done certainly over the last couple of years through investment has been increasing the amount of automation in the factory. So, we can't fully offset the risk of labor disruptions and things like that. But we have improved the company's ability to do that versus a couple of years ago by driving up that automation in the factory, which has somewhat reduced the reliance on labor, but still something that we've got to really manage tightly.

Great. And then just in terms of growth outlook beyond the March quarter, you guys obviously have a target model out there. Any indication on when we should expect that growth? Are we at a point where post the March quarter, we can return to kind of the growth rates that you guys have outlined just given the macro trends that you're so confident on will continue?

Certainly, we're planning Analyst and Investor Day. We'll have the date out there shortly. I think, it's too early for us to tell you what next year is going to look like and – but hopefully, we'll have a clear picture of that when we come into March. I don't think – I can't imagine that, we're going to see a snapback in the macroeconomic picture in a quarter. So I wouldn't expect it to, our fiscal year to end and then things suddenly get better. But I think – I'm pretty optimistic about somewhere out there in the next – over the next year or so that you'll see the market come back, but I think everybody on this call has an opinion on how long this is going to last.

Okay. Thank you.

Thank you.

Thanks, Asiya.

Great. Next up will be Paul Chung from JPMorgan. Good morning, Paul.

Hello, Paul.

Hey, Paul.

Thanks for taking my questions. Just on gross margins, as we kind of think about a couple of quarters down the line, how do we think about pricing increases you've done kind of lapping some FX headwinds, lapping some component inflation and lower shipping costs. Can we rebound comfortably into your kind of target of 39% to 44% in a couple of quarters?

I'll take that one, Bracken. This quarter, we faced eight points of headwinds year-over-year, mainly due to currency, which was the largest factor. We also experienced some challenges from an increased promotional mix and inflation. As I noted last quarter, we're optimistic about some trends regarding inflation, as we're starting to see costs decrease. We're making progress on ocean freight rates, and currency looks more favorable than last quarter. However, we didn't see much of that benefit materialize this quarter, and I don't expect to see significant improvements in the next quarter either, as it takes time to manage the current inventory levels. Yet, looking into next year, a number of these headwinds could potentially transform into tailwinds. I previously misspoke; those are indeed headwinds. Taking action early this year to raise prices across various categories has helped mitigate some of these pressures. We'll see how the promotional landscape evolves over the next few quarters and whether we can maintain those prices. There are many factors at play, but I believe we've been absorbing a lot of these headwinds this year, and I anticipate that some will start to reverse next year.

Maybe, Paul, I'll add one more piece of perspective. I think the thing that makes me feel the best about this year is the incredible amount of headwind we're facing from a gross margin standpoint. Exactly when that reverses is a little unclear. I mean clearly, currency is on its way now. We're not seeing it yet, but it's caught on hedges and natural hedges and technical hedges, et cetera. But I'm super excited that we have 800 basis points of a headwind because that's going to come back out. Again, we're not going to see 800 basis points of improvement. But getting out of range again, I would sure hope we do it next year.

So by next year, you mean next fiscal year, I assume? So maybe by 2Q…?

That's right.

Okay. And then just a follow-up on OpEx, pretty material cuts. Where do you kind of see it normalizing? I assume more aggressive cuts maybe in the near term. Do we get back to that 25% of sales, or where are you seeing further opportunities to kind of right-size cost while top line is challenged? Thank you.

Paul mentioned that for the full year, the operating expenses will likely be around 25%, which is consistent with past figures. He also referenced the earlier discussion on gross margin, emphasizing that the two are closely related. If we are confident about expanding our gross margin, it allows us to invest more, provided there are good returns to support growth. Our strategy remains the same, shifting from a promotion-driven approach to a more holistic strategy that focuses on increased marketing investments. We are certainly committed to investing in product innovation, as we believe it is essential. Bracken, do you have anything to add?

No, you got everything. Perfect.

Both thank you.

Thanks, Paul.

Thanks.

Thanks, Paul. Next up from Morgan Stanley, Erik Woodring. Good morning, Erik.

Hey, guys. Good morning. Thank you for taking my questions. I guess, maybe, first, if we take a step back and think about kind of your four major end markets, where do you think some of those are furthest along in terms of kind of facing the brunt of the challenges the world faces today? Meaning, we saw PCs correct earlier perhaps than consumer electronics, which perhaps is corrected earlier than enterprise. And so, just curious where you think you could perhaps see maybe a rebound first relative to other of your end markets? And then I have a follow-up. That's a great question. While I can't provide a definitive answer, I can share my thoughts. I think we might see it happen first in Gaming, but it really depends since the Gaming market has been quite responsive to promotions this quarter, which makes me hesitant to say that for sure. Enterprise spending usually comes in later and starts after, remaining stable longer before it eventually drops off in a weakening economy, that's generally how it goes. Our personal workspace business falls somewhere in between. However, I reserve the right to change my perspective, as honestly, our visibility isn't as clear as we would prefer. It's challenging for us to predict. On the bright side, I feel very optimistic about the long-term prospects for all three sectors. I truly believe the underlying trends are very strong.

Okay. No, that's helpful. And then, just because you mentioned it, Bracken, I'd love to just maybe get some color from you guys on, maybe, why visibility is different than historically? Is it different purchasing patterns? I know you mentioned the purchasing during promotional-heavy periods in the December quarter. But maybe just taking a step back, are enterprises purchasing at a different cadence than they used to or consumer preferences for purchasing changing? Would just love some more color on just maybe how that visibility has changed and/or when it could improve, and why it might improve? And that’s it for me. Thank you, so much.

Absolutely. Thanks, Erik. I'll just highlight two points. On the consumer side, you covered it all. Consumer demand has indeed weakened, and in this quarter, it was particularly focused on promotions. As Nate mentioned, we expect it to remain promotional as we move through the year. I hope that trend begins to fade soon, as promotions typically peak during the holiday quarter. We might still see that in Q4, but we need to wait and see. We're prepared for it, but I hope the promotional stress lessens. It's unusual to have heavy promotions extend beyond holiday quarters throughout the year. So, we’ll see. On the B2B side, it really boils down to significant changes happening. I wouldn’t say turmoil is the right word, but there’s a lot of adjustment going on. I can’t recall having encountered this many layoff announcements in just the last 90 days since I took on this role. There seems to be considerable re-evaluation of spending, which naturally reduces visibility. What you thought was certain visibility suddenly feels postponed by a quarter or two. I find it encouraging that this reduction is sharp because it may lead to a quicker recovery. That could be my optimistic side coming through. I'd prefer that to a gradual adjustment. So, while I don’t feel great about our current business situation, I’m optimistic about the adjustments happening. It suggests that people are making the right moves, and we should see more clarity as we enter next year.

If I could add just a little bit to that, Erik.

Yeah. Please, please. Yeah .Please, of course,.

You asked what causes it to be different. I think we're transitioning out of, obviously, a unique period globally from shutdowns. And so the diversification that we have, again, I'll come back to this in the portfolio by product, by category, by geography, are all things that I love having in a time like this, because that transition is obviously different in those categories and in those geographies. We still see places that are doing better, that are growing a little bit. They maybe went into the lockdown at a different time. They've come out of it differently. So that diversification continues to be, I think, a really, really important thing. Obviously, this quarter, we're disappointed with the volumes. But the shape of the P&L held up pretty well. And I think we continue to manage well in this environment. We continue to do well from a market share standpoint. We continue to invest in our long-term priorities and continue to manage OpEx, I think, very well and do a good job with cash generation. So lots of things haven't changed. And again, I think the diversification in our business is really key to us being able to deliver a good strong quarter in what's the challenging macro environment.

Okay. That's super helpful. I was just the last very quick follow-up was when you mentioned enterprise demand weakness, did it spill over into any other segments besides VC, or was it mostly concentrated in VC? Just wanted to touch that clarification. That's it for me.

Yeah. So we see it also in CNP, mice, and keyboards, mice, and keyboards and traditional mice and keyboards, and Video Collaboration, our two biggest areas in B2B. VC is a good proxy for it, because it's pretty much all B2B, but we also see it in mice and keyboards.

Okay. Thank you.

By the way, I should say, it's not like people weren't buying any conference cams. They were. So we didn't suddenly go terribly negative. It was down mid-single digits. So – but that was after being up double digits before.

All right. Thank you, guys.

Thank you, Erik.

Thanks, Erik. Next up will be Adam Angelov from Bank of America.

Hey, Adam.

Hey, Adam.

Hi, there. So I just wanted to check on the channel inventory situation. So, maybe if we could go by division. I think Gaming was positive sell-through in the quarter. Is that a sign that the inventory levels there are kind of at reasonable levels, and perhaps the sell-in can match the sell-through going forward? And maybe, if there is any other specifics by different division, if you could add that, that would be great? And then second one, so on 2023, the calendar year, are you thinking about further price increases? And maybe if you could just share your thought process on price increases versus potentially prolonged promotion period as we – as you mentioned already? Thanks.

Nate, I'll let you take the first, and I'll take the second.

Yeah. I think channel is in good shape. It's down year-over-year, which should be consistent with the overall trends in the business. I mean, I think – we continue to see our customers, I think, being pretty cautious and conservative around restocking. Same sorts of visibility challenges that we were talking about a moment ago, I think probably applied to them as well. So being a little cautious on reordering, but the channel is in good shape. As Bracken mentioned, Gaming was one of those areas that was more – seemed to be more promotional this holiday period. And so we did make some progress in reducing some of the inventory levels there. I'll just quickly say on the pricing side, and then I'll let you jump in there too, Bracken. It's really a function of a lot of things, Adam. What happens with currency, what happens with inflation? So lots of elements there for us to consider. But Bracken, something you'd want to add on that?

Yes, I'll be even more definitive. I mean, if something doesn't change, I can't imagine us raising price further. I think those 900 basis points or 800 basis points of headwinds that are going to eventually drop would suggest that we won't need to. Now, if something radically changes again, who knows. But I don't think as long as currently keeps heading in the direction it is and inflation keeps heading in the direction we all think it's going to go, I don't think we would need to raise price again.

Yes. Then on the inventory side, too, you asked about channel. Again, Bracken had mentioned it, I think, in his remarks. Third consecutive quarter where we've reduced our distribution center inventory sequentially. And we made good progress I think there this quarter. We'll be able to reduce that more into the fourth quarter and continue to normalize those levels. Not in a big hurry to do so. It's all good fresh inventory that I expect we'll sell, but it continues to be a focus for us.

Right. Thank you.

Next on the line will be Joern from UBS. Good afternoon, Joern.

Hey, Joern.

Hey, Joern.

Yes. Hi. Good morning. Thanks for taking my questions. And the first one would be please on your implied Q4 outlook, which is targeting or guiding for sales being down around 25%. Can you really get us a rough indication, is one-third of this destocking, one-third consumer demand weakness and one-third China? Is this how we should think about it? Because it seems when you're saying sales-through for your key categories, ex Russia was only down mid-single-digit in Q3. It seems a quite sharp deceleration. So if you can provide some more color here would be definitely appreciated. And the second question would be, please, just focusing on the freight costs, which they came down to pre-COVID levels for a couple of areas. Do you feel that this will be a very strong contributor to the scenario to your earnings growth in 2024? Maybe to start with these two questions. Thanks.

I’ll take the last question.

I’ll start with the first question. The outlook for the fourth quarter suggests typical seasonality, Joern. The third quarter was weaker than anticipated, and based on that, we expect a normal mid-20% decline moving into the fourth quarter, which is reflected in our guidance. While we have one quarter left, the full-year guidance essentially indicates this for Q4. Regarding freight costs, we benefited this quarter from a significant reduction in air freight usage compared to last year, as we were not facing the same supply challenges as before. Consequently, we experienced some year-over-year savings. Ocean rates are declining, but they remain higher than pre-pandemic levels. Although there are improvements month-on-month, there is still a distance to cover before reaching those pre-pandemic levels.

Okay. And then maybe the last question, if I may, on your operating expenses. When we look at 2024, after accounting for the $215 million in operating expenses from fiscal year 2023, is that sufficient now? Are you streamlined enough, for instance, to handle a stable 2024? Do you feel good about this? Can we expect further adjustments in the upcoming quarters regarding your plans?

I want to clarify real quick, Bracken. I'm not sure if you said 250, but I said 215, 1-5.

15, yes, yes. Thanks.

Okay. I wanted to make sure that you heard that clearly. Bracken, sorry, did you have a comment?

Yes, 215. We're committed to managing our operating expenses and will not slow down our efforts. When assessing our top line, we recognize the need to continue making reductions, and you can rely on us to be proactive in this regard. We will adapt to market conditions, as you've observed, which informs our approach to managing costs.

Okay. Thank you.

Thanks, Joern. Okay. Our next question is from Andreas Müller at ZKB. Hi, Andreas.

Hi, Andreas.

Yes. Hi, everybody. Hope you are well. I have two questions. One is, really, can you say something about the Chinese sales in the quarter? And do you expect that the impact from the lifted restrictions going forward, is that the benefit or not? And then, probably, also the status. I mean, you mentioned something in your own production facility. Are you completely 100% operational right now? And what's there the status basically?

I’ll answer the first one. You want to take the first one, Nate? Chinese sale.

Yes. Unfortunately, our sales in China were negatively affected this quarter due to rising infections. We experienced about a one-point headwind in December sales. I believe that, in the long run, this situation could be viewed positively, but COVID remains unpredictable. I hope this was just a one-time event, although I can't know that for sure. It is encouraging to see the government taking a more open stance, but there are still challenges this quarter.

Yes, I think the opening of China is a positive development. You inquired about our production facility in relation to this. Currently, our production is still affected by the Lunar New Year, which has made us cautious about the impact during this time as many people return home and the uncertainty of how many will come back. We will manage whatever comes our way. Despite the negative news surrounding China, I feel optimistic. I believe as China opens up, it will benefit us since it's our second largest market and has consistently performed well. Throughout my time here, there have been very few extended periods of slow growth. I'm excited about the opportunities in China. We hold significant market share, have a strong brand presence, and are gaining valuable insights into the Chinese consumer. Therefore, I remain optimistic.

Thanks, Andreas.

Okay. Then I have another question about your priorities. When you go through your portfolio, do you see a need for changing some priorities for some categories with the downturn, maybe to earmark also a category as non-strategic one more besides a mobile speaker and earnings buds, for example?

Yes, we have been doing that regularly and will continue to do so. As you noted, we identified a few categories as non-strategic, which indicates we're reducing our investment in them, and we are committed to that approach. There are no immediate changes to report since our last update, but we will provide more information during the Analyst Investor Day. I am very optimistic about the 80% of our portfolio where we are focusing our investments. We are gaining market share in those areas and are making significant engineering investments. At the same time, we are effectively managing our costs during this challenging economic period. I believe this positions us well for the future. We will keep you informed about any categories we are deemphasizing.

Okay. Thank you very much.

Thanks, Andreas.

Thanks. Our next question is from George Wang at Barclays. Hey, George.

Hi, George.

Hey, Bracken. Yeah. First question is maybe you can give more color just in terms of the latest B2B consolidation in terms of the go-to-market kind of sales force? And how are you guys applying learning's from the consumer vertical kind of innovation there to apply to the B2B vertical?

Okay. Well, first, I would say, we're trying to unlearn our consumer vertical into the B2B because I think our strength in consumer is something that really doesn't lend itself too much to the B2B side right now. We've taken – we leverage as much of that as we possibly could have during the first five or six years in the business. And now we're building new muscle, which is how to be a B2B company. And I'm excited about our potential there. We have a long way to go to really be, I think, first class in that space, but I think that's the upside here is how do we become a great execution engine in B2B. So I think it's still early days in that path. We've got the right resources in place. We've got the right capacity. And we're putting step by step, process by process, compensation plans, everything into place to really become stronger in B2B. So keep asking us about that. I think it's more of the hot spots of our business and one of the areas where as we improve, I think we can improve our performance.

Maybe you can unpack a little bit in terms of the installed base refresh/kind of upgrade cycle kind of against the macro, if the economy will slow further, how do you think this installed base refresh going to play out? Do you think that it's going to be delayed, or do you think it's just a more temporal kind of headwind there?

You're talking about on the desktop side, the mice and keyboard?

Yeah. Just across the portfolio, mostly on the PC installed base and also on the gaming as well?

I think, if there's a dramatic slowdown that goes on for a long time, it's certainly – it is going to delay the installed base refresh across almost every category you can think of in the world, including probably ours. But I think ours are – if you look at our products, whether it's personal workspace or video, they kind of are required for the new world we're in. So I'm not sure that you can – on the – in the office, for example, Video Collaboration. While there may be a delay, it feels like there is short term, it's really hard to imagine that lasting a really long time, because in the hybrid world where you're doing so much video like we are all right now, it's really hard to imagine not to enable many rooms. So I think that's – I think, I'm pretty positive on that. Yeah, it could be – there could be some kind of a delay in that. It looks like there was this quarter, but I don't know how long that can go on. We'll see. On the workspace side, this is so central to what we do now. Everybody on this call is sitting in front of a desktop with some stuff in front of them. And I would guess 90% of you don't have really exactly what you need, even if you don't realize it quite yet. So I think that upgrade cycle is coming, and it's already started, and it will continue for a very long time. And maybe if you're really an optimist, then I'll stay away from going too far on this, but I think you can imagine it's become more central to our lives as part of our homes and things. So the upgrade cycle could even accelerate. But I think regardless, I think there's a good strong upgrade cycle ahead of us. And could it be slowed down a little bit? Yes. Will it be stopped? No.

I would like to ask my last question, if possible. Can you provide more details about the recent market share gains in key categories? They are very encouraging and it seems like you are outpacing the industry. What factors and differentiators do you have to maintain the current market share growth?

We announced last quarter that we launched 20 new products, which reflects our strategy. Numbers don't tell the whole story, of course, as we aim to focus on fewer but larger initiatives. This reflects our long-standing investment in design, emphasizing the user experience, which we've developed over the last nine to ten years. We've also significantly increased our engineering spending by over 50% in four years, and this growth is evident across all our categories. I feel very positive about our innovation capabilities, which are a key factor driving our growth, but not the only one. There is also substantial opportunity in our B2B market strategy, and we will continue to invest in that area.

Bracken, thank you.

You started to mention the go-to-market strategy. I think some of the efforts from the teams around analytics and in e-tail, particularly on Amazon, have been impressive. The in-house share numbers look strong at Amazon across various categories. It begins with the products, and when you check the product ratings, you'll see they are quite favorable. However, we also need to acknowledge the go-to-market team and their work around analytics.

Really agree with that.

Great. Thank you.

Thanks, George.

Our final question this morning is from Michael Foeth at Vontobel. Good morning, Michael.

Hi, Michael.

Yes. Good morning. Hi. Thank you. I have two questions. Could you provide more details about Prakash's appointment to the CEO position? What gaps do you think need to be addressed there, and what improvements are you observing on the operations side? The second question is about your views on the creator economy. As we approach a recession, do you notice any specific dynamics emerging there, and how are you positioning yourselves to take advantage of those opportunities?

That's a really interesting question. Prakash has been with us for seven years, having joined us directly from a consulting firm, and his growth has been remarkable. Much of our sustainability initiatives can be attributed to his leadership. He has a fantastic team, and my entire staff has collaborated with him in our efforts to improve our environmental impact. However, it's important to note that Prakash has taken the lead in this initiative with great passion and intellect. The next step for him and for us is expanding his role to include more responsibility in both the company's operational execution and its cost structure. We've made structural changes quietly and quickly behind the scenes, and we will continue to evolve. Prakash will be a key partner for me, our CFO, and the entire team in determining the course ahead. He will oversee the company's operating costs and has significant responsibility for our M&A strategy. While there are others with significant responsibilities, this announcement marks an important step for him. Regarding the broader economy, particularly in the context of a recession and our future prospects, the creator economy is impacting many areas. It plays a quiet role in driving interest in personal workspaces. I believe the growth related to the new developments in technology, like ChatGPT, will fuel this creator economy. If we enter a deeper recession, many individuals may shift to full-time jobs if they aren't already in them, but they will continue to engage in the creator economy. What's exciting about this space is the shift towards direct selling to friends, and we are experimenting with this approach, as are many companies. While it may not be significant in the short term, I foresee a growing network of activities aimed at driving sales through the creator economy.

Thank you.

Thanks, Michael. And thanks, everyone, for joining. I think that's a wrap, Nate and Bracken.

Great. Thank you. Thanks, everyone.

Great. Thank you.