Logitech International S.A. Q4 FY2023 Earnings Call

Good morning and good afternoon. Welcome to Logitech’s Video Call to discuss our Financial Results for the Fourth Quarter and Full Year of Fiscal 2023. Joining us today are Bracken Darrell, our President and CEO; and Chuck Boynton, 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 are 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. 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. 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 net sales. This call is being recorded and will be available for a replay on our website. I will now turn the call over to Bracken. Bracken?

Thank you, Nate. I appreciate everyone joining us today. I'm speaking to you from New York, and it looks like Chuck is in California while Nate is in Dallas, so we're spread out across different locations. About two months ago, we shared an overview of our business and our outlook for the upcoming fiscal year, which Chuck will elaborate on. In brief, we concluded this year with our latest forecast, and our expectations for the first half of fiscal year 2024 remain the same. The macroeconomic and geopolitical challenges that affected our fiscal year 2023 results are still ongoing. Central banks are increasing interest rates to fight inflation, consumer confidence is low, and overall enterprise demand is constrained. When considering factors more relevant to our business, it's a mix of good and bad signs. The dollar is weakening, shipping costs and lead times are returning to pre-pandemic levels, promotional levels are normalizing, and supply chains seem to be less problematic now. However, there are still ongoing layoffs in the industry, companies are uncertain about returning to the office, and we're not yet seeing the product refresh cycles for items that were in high demand during the pandemic. As we mentioned last quarter, these conflicting economic signals have created a low visibility environment, prompting us to manage our business cautiously. Adjusting our business to align with market opportunities is not new to us. We navigated challenges during the pandemic, including supply chain, logistics, and manufacturing issues, and we are currently adapting to enhance our organization for quicker decision-making, faster product development, and better responsiveness to customer needs while improving our go-to-market speed. Despite the macro challenges, we finished Q4 in a strong position. Our sales teams closed several significant customer deals, including one with Snowflake, covering multiple industries, as well as contracts in education and government. We launched 52 new products in fiscal year 2023; while scaling these launches takes time, they reflect our commitment to innovation, and we achieved a record number of design awards—over 160 for the year and 82 in the fourth quarter alone. Innovation is crucial to our business and is thriving. Our dedication to sustainability remains strong, and currently, almost 45% of our products carry carbon labels. I believe no other company of this size or larger has reached this level. We have rapidly reduced operating expenses to align with our revenue realities, with revenue decline and operational expense reductions happening at an equal percentage for the year. As I noted last quarter and at our Analyst and Investor Day, we were disappointed with our fiscal year 2023 results. I always remind myself to learn from the past but keep moving forward, which is exactly our approach. We remain dedicated to the long-term growth trends, markets, strategies, and business model we’ve established. Looking ahead, we will continue to conduct our business in a disciplined way, consistent with our recent practices. We will keep adjusting our expenses to match the market and continue investing in product development. We have plans for a series of new products across Gaming, Video Collaboration, and Keyboards and Mice in the upcoming quarters, along with enhancements to our global go-to-market strategies. I am confident that the significant trends we have highlighted—video everywhere, hybrid work, and the surge in Gaming and content creation—will stimulate growth. Difficult times always sharpen your focus, and fiscal year 2023 has certainly sharpened ours. We have swiftly resized in a thoughtful manner while staying committed to our core business focus on product innovation or, as I see it, design-led engineering. We believe we've taken the necessary steps to position our categories for growth as we move beyond this economic cycle. Before I pass it on to Chuck, I want to reiterate a point I've made before. The fact that 45% of our products now have carbon labeling is monumental not just for Logitech, but potentially for the world. We are not attempting to gain a competitive edge but would love to assist others, including our competitors, in advancing carbon labeling. For all of you listening—consumers, investors, analysts, and competitors—you can make a significant impact. I encourage you to inquire about any company you interact with, including your own, regarding their approach to carbon labeling. We can accelerate this progress for the benefit of our customers and the world. Having carbon labels on all our products could be as significant as calorie counts, driving competition and reducing carbon emissions. Now, I will turn it over to Chuck for more insights on Q4 and fiscal year 2023 results. Chuck, by the way, I made sure to wear my jacket today because of the pressure you put on me about wearing it until we see growth, and I’m not a fan of jackets, so I hope it’s not for long.

Well, you look great, Bracken. Well, thank you… … and I appreciate you all joining our call today. Our Silicon Valley site is being relocated. So I am calling in from my house today using a 4K Brio Webcam, the LogiDock and our MX Series mouse and keyboard. Next quarter, we should be office in San Jose. Now let me delve into the fourth quarter and full year in greater detail. Our Q4 and full year results were in line with the revised outlook we shared during our Analyst Day in March. For the quarter, net sales in constant currency declined by 20% to $960 million. For the full year, net sales were down 13% to $4.5 billion. Examining our category performance, results were in line with expectations, with continued pressure in Video Collaboration down 25% and Gaming down 22% due to a slowdown in simulation, while our Creativity and Productivity categories either held steady or improved sequentially. In Q4, gross margins were in line with our expectations, decreasing year-over-year to 36.3%. For the year, gross margins were 38.3%, down 340 basis points compared to fiscal year 2022. Margins were pressured throughout the year due to unfavorable currency movements, inflation-driven cost increases and product mix. As we transition to fiscal year 2024, we anticipate the weakening U.S. dollar/euro exchange rate and lower manufacturing costs to contribute to improved gross margins. We judiciously reduced operating expenses over the year, while continuing to invest in our product innovation initiatives and enterprise selling capabilities. Operating income was $82 million in Q4 and $589 million for the full year. Operating income in both the quarter and the year reflected lower demand and gross margin pressure, partially offset by reductions in operating expenses. Cash flow from operations was $217 million in Q4 and $534 million for the full year. Our ending cash balance was over $1.1 billion. Notably, we returned a total of $577 million to shareholders in fiscal year 2023 through our share repurchase program and dividend payment. In March, we outlined our intentions to quickly address two opportunities; one, improve our cash conversion cycle by reducing on-hand inventory and optimizing channel inventory; and two, reduce operating expenses to a run rate of $1 billion. Although, less than two months have passed since we presented these plans, I am encouraged by the strong momentum on both fronts. I am pleased to report that our on-hand inventory was down for the fourth consecutive quarter with Q4 seeing the biggest reduction of the year. Our goal over the next year or so is to continuously improve inventory turns to 5 or better. Furthermore, we plan to keep reducing channel inventory in the first half of the year before the normal build to the December quarter. As we mentioned during Analyst Day, we believe lower channel and on-hand inventory provides better economics for us and our partners in the value chain. We are maintaining the outlook we provided in March, expecting H1 fiscal year 2024 revenue of $1.8 billion to $1.9 billion, down approximately 22% to 18% compared to the prior year in U.S. dollars. Our corresponding operating income is expected to be between $160 million and $190 million, down approximately 47% to 37%. Nate, we can now open the line for questions.

Great. Thanks, Chuck. Thanks, Bracken. And thanks everyone for joining. As a reminder, please raise your hand if you are interested in participating in Q&A and come off of Video when selected. Thank you. First question comes from Paul Chung at JPMorgan. Good morning, Paul.

Hello, Paul.

Good morning. So good to see you guys.

Good to see you in your fair city.

Yeah. So first up on gross margins, for 4Q would have thought there would be better improvement and kind of easing supply chain headwinds. What drove the pressures there? I know VC and Gaming mix has come down a bit, which may have driven some impact there. What do you see as temporary? And as we move into the next year, how should we think about those variables easing and kind of impact on gross margins at least in the first half?

Okay. Chuck, do you want to take that one?

Yeah. Certainly. Thank you, Paul. Our overall margins for the quarter were roughly in line with our expectations. The operations team did a phenomenal job reducing costs. But with inventory turns, we won’t see the benefit of that cost reduction until next quarter as it flows through. Q4 kind of compared to Q3, we did have some minor inventory charges. The mix issue as I identified in the prepared remarks. And looking forward, we see tailwinds with FX, lower costs, and obviously, not the same inventory charges, and longer-term, we expect to be in that long-term operating model of 39 to low 40s over time.

Okay. Great. And then, second, on VC, in your prepared remarks, you kind of mentioned kind of typical ASP per room has been increasing, which is great. Can you help us size both the opportunity to expand conference rooms? Where do you think that ASP can go when volume comes back and which peripherals you are seeing the most success in the conference rooms? Thanks.

I think what's exciting about our business model is that there's significant potential to raise the average selling price per room. Recently, we introduced something called site, which many of you have seen, and it's set to launch soon. It's a new peripheral for the room; for instance, by adding a rally bar mini to the center of the table, you can create a more equitable meeting environment. Additionally, we offer whiteboards priced at $1,000 each, which can be integrated into a conference room, effectively converting any type of whiteboard into a participant in meetings. We have numerous avenues to enhance the value per room, so I'm very optimistic about increasing the average selling prices over the long term. The number of rooms that will be equipped continues to be significant. We just need to navigate this current phase where some companies are uncertain about their direction. For example, we are closing one office and opening another, and while we have a clear plan for video enablement in the new location, many others are still deciding how to proceed with their existing offices, often opting for minimal changes or cost-cutting due to the current economic climate. I haven't encountered anyone who thinks that enhancing rooms with video technology is a bad idea; it's purely a matter of timing.

And I would just add, Bracken, the market sizing that we talked about at Analyst Day is roughly 50 million conference rooms with approximately 10% penetration.

Yeah.

Certainly, what you are seeing, I think, is we have won some great deals this quarter, a large food company, Bracken mentioned one of the tech giants.

Yeah.

So we are winning lots of deals. They tend to be smaller upfront with additional purchases as they re-outfit their rooms over time. So we are bullish on Video long-term and it’s a great category. These new products, I think, will provide additional fuel for growth long-term.

One other thing we didn’t mention, Paul, was Service. It’s a really small business for us today, but it’s going to keep growing. It’s growing rapidly. And every time you buy a room, you really ought to be getting the service that goes with it and our service package called Select is growing, like I said, it’s growing very rapidly and I think one day, they will be a pretty decent chunk of our revenue.

Okay. Great. Thank you.

Thank you.

Next question is from Alex Duval from Goldman Sachs.

Hey, Alex. How are you doing?

Hi, everyone. Thanks very much and for the questions. Just want to ask, firstly, on OpEx, you have done a very strong job controlling that. I just wondered how much more OpEx control you think can be done. Should we expect further cost reductions this fiscal year versus fiscal 2023? Or is fiscal fourth quarter indicative of a new run rate going forward? And secondly, some investors have been asking about PC suppliers, which have indicated there could be a possibility of stabilizing PC demand in the second half of the year? I am curious to what extent your PC-linked revenues could benefit from such a recovery? Any color there very much appreciated.

I will briefly address each point, and then Chuck can add anything I might have missed. We have made it very clear that our goal is to reach a $1 billion run rate on our operating expenses as we move from the first half of the year into the latter half, and that is the direction we are taking. Currently, our run rate isn't where we want it to be yet, but we will achieve that. Regarding your second question, we have indicated that the PC category doesn't necessarily drive our peripheral business. However, it might reflect trends, particularly in the B2B sector; if companies are reducing their spending on PCs, they likely are also cutting back on peripherals. So, there is some connection there. We'll have to wait and see what unfolds. We are not providing guidance for the second half of the year at this time, as visibility remains quite difficult. Chuck, do you want to add anything on either of those points?

Yeah. I would just add on the OpEx side. We finished the quarter with $266 million in OpEx and our plan is to get to $250 million in a quarter by the back end of this year. And so there are some headwinds on OpEx with FX, which is an overall benefit to the company, but a little bit of a headwind. But so the reductions are already mostly completed and we will see the numbers come down, I think, each and every quarter up until the middle part of the back half of the year.

That’s very helpful. Many thanks.

Thank you.

Next question is from Asiya Merchant at Citi. Good morning, Asiya.

Hi, Asiya.

Hey. Good morning, everyone. Hopefully, you can hear me.

We can.

So a quick question on gross margins. I think in the past you guys have provided some breakdown of how FX versus promotions versus inflation have kind of affected margins on a year-on-year or even on a sequential basis. So if you could go through that exercise for the March quarter. And then as you look ahead, I heard Chuck mention that margin should improve here as the dollar weakens and the inventories rightsized and flow-through of the lower manufacturing costs. So what should we kind of expect for, let’s say, even the first half of the year, how should we expect those unwinds to happen that for a headwind in the first throughout most of fiscal 2023? That’s my first question. And then secondly, Bracken, like...

Let me stop you there. Let’s answer it one at a time so we can really focus on it. And Chuck, you will correct me if I am wrong, but I think we have been saying that about 300 basis points were inflation, a couple of hundred basis points for currency and then there was a few other drips and drabs, 100 basis points on transportation, et cetera. I think all that is coming through, it’s just coming through slowly, and as it would, it has to work its way through our inventory, which takes time and we have got a pretty long inventory cycle and we were sitting on more inventory than we would have liked before. Do you want to add anything to that, Chuck?

I think that’s good. Looking at it year-over-year, inventory charges accounted for a couple of hundred basis points, and the mix also contributed a couple of hundred. While it's difficult to predict the mix, I believe that inventory, foreign exchange, and costs are all temporary, and we should see gradual improvement throughout the year.

Yeah. Sorry to interrupt.

With the promotions, was there any effect that people are trying to understand? Is there something about the competitive dynamics? You mentioned that Gaming has been soft.

Yeah.

We heard from GN, I guess, Jabra in Europe that they had done well in Gaming.

Yeah.

So maybe you can talk a little bit about the competitive dynamics, both on the Gaming side and just broadly how it’s affecting margins, whether there’s been an increased competitive intensity here and if you see that easing as the year progresses?

Yeah. First, I don’t know their earnings well enough to say for sure, but I suspect the difference between us and them comes down to category differences. We have a significant simulation business and we had a strong performance in that area, which you can find in their information. We certainly don’t believe we are losing market share in Gaming. So I think it’s likely comparable. Chuck, do you want to add to that?

Yeah. Promotional activity returned to normal in the fourth quarter after being a challenge in the third quarter. We feel very confident about our competitive position in Gaming. Our Gaming businesses are significantly larger than our competitors'. When comparing categories, we have some, like simulation, where they do not compete, and that is a strong category with excellent margins. However, there was a decline quarter-over-quarter due to the promotional boost from the December quarter.

And year ago.

Okay. So looking ahead, regarding competitive intensity, particularly with VC and HP, as well as in the Gaming sector, are we noticing that now that inventory levels have stabilized, competition is returning to normal promotional activities, and there's no longer an overwhelming push to reduce channel inventory?

I don’t...

Yeah. Go ahead, Chuck.

The B2B side is not as price sensitive as the consumer side. So I don’t think the Video category is very price sensitive. The margins are terrific and the industry participants have been behaving rationally. And so that’s really more, I think, just this kind of general issue around the economy and uncertainty that’s happening with corporate buyers. But the overall large conference or a medium conference room business is kind of stable. It’s not really taking off and growing, but it’s not really going down either. So I think that’s really more just the early indicators look good, but I think what the overall uncertainty that will come back. Other areas like webcams, I think, you see more price sensitivity.

We have identified certain areas where we need to slightly adjust pricing and lower it more significantly, but these adjustments are usually specific. Without going into details, I expect this trend to continue. Overall, I'm not overly concerned about the current level of promotions. I don’t anticipate a significant surge in price competition that would disrupt our business dynamics.

Okay. Great. Thank you.

Thank you.

Next on the line is Erik Woodring from Morgan Stanley.

Hello, Erik.

Hey. Good morning, guys. Thanks for taking my questions.

Thank you.

Bracken, maybe if I could ask you a bigger picture question and that is…

Okay.

… I appreciate the fact that you are very clear and that visibility is more limited today. Can you maybe just share some comments about why visibility is less limited today? Is it the channel? Is it spending patterns? Is it the impact and the uncertainty of the macro conditions, all of the above? If you could just double click on that to help us understand why perhaps today versus historical periods, you just have less visibility into the business?

That's a great question. I appreciate how you framed it. It's really just the economic environment we're currently in. It's difficult to predict when things will improve. We've been in a downturn for three or four quarters, making it challenging to determine when the trend will shift. We believe it will change; it's just a matter of timing. Recently, I attended an event with several midsized and smaller CEOs and HR professionals, which reinforced my strong belief and the data we're observing. On the B2B side, companies aren't in distress; they are simply spending more cautiously. This conservatism allows for better control over costs, which is why many PC companies, including us, are feeling the impact. It's hard for me to say exactly when conditions will turn, but I am confident they will. While one could analyze past economic cycles, we've chosen to adopt a more conservative approach and provide guidance for the next six months, then reassess on a quarterly basis.

Okay. That’s helpful. And then, I guess, the second question, because you guys kind of elaborated to it, but you called out some deals this quarter, which I feel like you don’t necessarily do historically. You mentioned Snowflake, Chuck, you mentioned another one. Can you just give us an understanding? I know, Chuck, you mentioned they start small, but are these needle movers? Are these mostly in the VC business? Are they currently embedded into your guidance or is this incremental, because you just announced them, so I wasn’t sure how much line of sight you had 30 days or 60 days ago? So, again, if you could just elaborate on the impact of those deals, any color you could share on the products and then whether they are incremental or not, that would be helpful? Thank you.

I will jump in, Chuck, you can add. I think we really just felt like, what we should once in a while, call out some of the customers. So you get a feel for the logos. There are a lot of big logos that we don’t get permission to talk about publicly for whatever reason. It’s not usually that they don’t want us to. We just don’t go ask them. We did mention Snowflake this time. We talked about the food company. There are many others. I would say they are pretty much part of what our overall game plan. But they are needle movers, but they are not needle movers relative to the expectations you have already said. Do you want to add anything in there, Chuck?

Yes, I believe the main point is that winning the company is crucial. Many businesses engage multiple vendors, so they are not exclusive to one provider. If we secure an account, it usually starts with a smaller deal that can grow over the years as they continue to purchase more from us. While no single transaction significantly impacts our performance, they indicate that we've won the account and can expand our services. Our sales organization has excelled in developing this B2B capability, which is a key strategic investment that I believe will yield positive results for many years ahead.

And if I could just add, I was just in a large manufacturing company’s offices here in New York this week and it’s really interesting. They started very small with us to your point, Chuck. So very small with us about two years ago. And now every single room they have has our stuff and it’s an incredible office, by the way. And so that’s kind of our game plan, where you just really want to land and expand.

If I could follow up with one last question for you, Chuck, regarding gross margins. Over the past four years, we've observed a consistent decline in gross margins from March to June. However, your comments suggest they might actually expand in that timeframe. Could you provide more insight into the direction of gross margins from March to June and highlight some of the key factors influencing this? That’s all from me. Thank you.

Thank you, Erik. We're not providing specific guidance for June, so let's focus on the longer term. Currently, we are in a transitional phase. We've significantly reduced channel inventory and will continue to do so in Q1 and Q2 before it increases again in Q3. The seasonal pattern of the company is that Q1 and Q2 each account for about 24%, Q3 is around 30%, and Q4 is approximately 22%. This profile indicates that with larger quarters, overhead costs increase, and reducing channel inventory has pressured revenue, which in turn has impacted gross margins. However, as inventory expands, we expect some benefits. While I won't claim that Q1 of the June quarter will return to normal, I believe by the end of Q2 and into Q3, we should be back on track. Additionally, while currency rates have been a significant headwind this past year, there are signs of improvement, but we remain uncertain. As for inventory charges, I believe those may now be a tailwind.

Our next question is from Ananda at Loop. Good morning, Ananda.

Hi, Ananda.

Hey, guys. Hey. Good morning. Yeah. Good to see you guys. Thanks for taking the questions.

Thank you.

A couple if I could, I mean, I guess, we could just stick right there, Chuck, with your comments around sort of seasonality, do you think that the inventory that remains to be worked down could impact seasonality in September, December quarter meaningfully? Or is the inventory really in businesses where right now where the impact would be needed? And then I have a quick follow-up. Thanks.

Overall, I feel confident about our current inventory levels. Our philosophy is that a lean supply chain benefits everyone. Considering return on invested capital as a key metric, having less inventory and channel stock leads to better economics for all. While our inventory weeks are within the normal operating model, we aim to make it leaner for improved returns for us and our partners. However, we will need to replenish channel inventory due to the seasonal demand for the December quarter, from Black Friday through Christmas. I believe that will happen regardless. Overall, we are comfortable with our current levels and even those in Q4, but we want to reduce them because it will lead to better unit economics.

That's really helpful. I appreciate it. Bracken, you mentioned earlier that the return to offices and certain refresh cycles haven't started yet. Are you seeing any signs that the underlying structural factors affecting key trends are changing? Also, could you elaborate on where you anticipate the refresh cycle will start and when it will begin? That's all from me. Thank you.

Thank you. Regarding the refresh cycle, we have not yet noticed it starting, particularly for mice, keyboards, and gaming gear. I believe this will come in the future, as these cycles typically last three to five years, with some categories refreshing sooner than others. I don't see any significant changes in the structural aspects of our opportunities. Everything seems relatively consistent. For instance, while I'm currently in an office equipped with video, I've noticed many offices down the hallway lack this feature. This highlights how hybrid work has emphasized the need for video, making it more essential. I don't believe the demand for home office upgrades has changed, nor do I see any shifts in gaming, streaming, or content creation needs. Overall, I don't perceive any fundamental changes in our perspective on category opportunities.

I like. Okay. Great. That’s helpful. Thank you.

Thank you.

Next on the line is Adam Angelov from Bank of America. Hey, Adam.

Hi, Adam.

Hi. Thanks for allowing. Yeah. Firstly, just a very quick one for Chuck to follow up on what you just answered to a previous question. Gross margins back to normal, did you mean back to the long-term guidance range, just quickly on that.

Yeah, it’s possible we can achieve that this year. Q3 usually shows really strong gross margins because it's a peak quarter. So, I think it’s quite likely that Q3 will meet those expectations due to its significant seasonal impact. However, if we consider the structural run rate annually in the range of 39% to 44%, my estimation is that we may reach that next year, but I can't predict with certainty. Historically, Q4 has been our best quarter, and we usually see high margins in Q3 because of the volume we handle.

Got it. That’s helpful. Thanks. So, next, I think, just curious on what you saw in China in the quarter? Was there any sequential improvement there, and perhaps, as you look into the rest of the year, how you would expect that to develop?

I'm going to take a shot at this, Chuck, so feel free to chime in. Honestly, I find it challenging to assess the situation in China right now. It has generally been steadily positive until recently, but the past year has been quite uneven. The competition is fierce, and while things have opened up somewhat, it's not quite back to where it used to be. However, I am optimistic about the long term. The dynamics in China are promising, with a young population entering the workforce and increasing numbers of knowledge workers. This sets the stage for a more vibrant and robust IT landscape in the country. I am genuinely excited about the long-term prospects. We have a strong brand presence there with impressive market shares across both our consumer businesses. On the Video Collaboration front, however, our performance hasn't been as robust; the market dynamics have evolved differently there, which can happen in China for certain sectors. It remains to be seen if that segment gains momentum. Overall, I anticipate continued strength in China in the long term, but it's difficult for me to make specific predictions, especially regarding our visibility for the second half of the year in China specifically.

I think regarding China, the third quarter was challenging for us, with a 25% decline year-over-year. However, in the fourth quarter, the drop was only 3% year-over-year, suggesting a recovery in China. As Bracken pointed out, our best-selling products in China are in the Gaming category, indicating significant opportunities in Video. While it poses challenges, the market is vast, and I believe we are in a favorable position as volumes year-over-year begin to stabilize.

And we do partner differently in Video in China than we do elsewhere, because they have the same service players that are not, I think, big Video conference players are not as big in China, they are much smaller.

Okay. That’s great. And if I can just squeeze one more in.

Sure.

The behavior you are seeing from the enterprise customers. I think you touched on it briefly, but just curious to know, it sounds like it hasn’t gotten worse, but equally hasn’t improved. But maybe if you could just go into that in a little bit more detail?

Yeah. Yeah. I think you captured it. It's pretty much stable. I would say it's about where it was, which doesn’t really surprise me. The news about layoffs continues, especially in tech, but it's also affecting banking and some other sectors. It seems like the major company news is nearly all out, but the impact will continue to unfold over the next three to nine months. I believe these effects will persist for a few quarters, but things will eventually turn around.

Very good. Thank you.

Thank you.

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

Hey, George.

Hey, guys. Chuck, maybe you can give more color on the capital return kind of going forward, especially given better cash flow backdrop, with some tailwinds coming back on the inventory kind of better cost of profile? Just curious if you have any color just on buyback or kind of dividend going forward?

We are very proud of our achievements in returning capital to shareholders over the past few years. This has been a strong cash quarter and a solid cash year for us. Our cash balance is currently around $1.14 billion to $1.15 billion, which is a decrease compared to the previous year, where we ended with approximately $1.2 million to $1.3 million. We returned roughly $577 million to shareholders, which is fantastic. However, our main goal, as we've previously stated, is growth. If we are not using cash for acquisitions or expansion, we intend to return that capital to our shareholders through substantial dividends and stock buybacks.

Okay. Thanks. I have a quick follow-up. Bracken, maybe you can comment on the kind of share gains. In your prepared remarks, you called out some share gains within the Gaming category. Are there any other kind of categories you want on the cloud in terms of notable share gains in the last few months?

Throughout the year, we have seen our market share increase across most of our key categories, and these gains have been broad and consistent, primarily driven by our innovation efforts. While there may be fluctuations within individual quarters, I won't detail each category. However, over the past 10 to 11 years that I have been here, we have reliably increased our market share in nearly every category. This is why we are placing such a strong emphasis on design and design-led engineering, which is reflected in our investments.

Okay. Great. Thank you.

Thank you.

Our next question is from Serge Rotzer at Credit Suisse.

Hi, Serge.

Hi, hi. So now I am ready. Good morning, everybody. Well, two simple questions. The first question is you were down 22% in sales and also in Gaming, 25%, 27% in your conference. And can you give me a feeling how much is price impact and how much is volume impact, price impact due to promotions, but also due to more competition in the enterprise business, can you give me a flavor on that?

Certainly. The year-over-year changes are mainly due to volume. We were promoting a bit more in Q3 than anticipated, but that has returned to normal. So, it’s largely about volumes year-over-year.

Any product categories where you have been able to increase prices or to increase volume?

We increased prices in several categories. There have been some positive developments. Some of the tablets and accessories have performed well. We have a wide range of products, many of which are experiencing growth. However, the overall trends you are observing are based on our year-over-year comparisons. As we move into the fourth quarter and throughout this year, I believe we will see more favorable comparisons in terms of year-over-year results.

Okay. Fair enough. I will move on to the second question. During the Capital Markets Day, you pointed out the seasonality in our sales, indicating that we see 4% to 8% of sales in the first half of the year and 52% in the second half. I am curious about the seasonality in EBIT. Historically, you generated 40% of EBIT in the first half, meaning that 60% was earned in the second half. When I analyze your guidance, which totals around $435 million at the midpoint for the full year, it falls short of consensus and expectations. Are you being overly cautious for the first half, or do you have higher expectations for the second half?

Well, what you are seeing is the profile is we are in a transitional stage. So operating expenses are coming down, we are taking costs out and we are seeing some benefits that we think will manifest into gross margins, and so that profile that you are seeing in this transitional stage is putting more pressure in the near term. We are not providing outlook to the back half of the year, because, quite frankly, we just don’t know. We hope to do that. We plan to return to annual guidance over time. Certainly, we are optimistic that the December quarter, our biggest quarter will be a strong quarter. But at this point sitting here in early May, it’s just too early right now to provide color on Q3 and Q4.

But to be honest, to improve your margin, your EBIT contribution in the second half, you need success in VC. Is this correct because it is still the highest gross profit margin product?

Certainly, if video conferencing improves, that will be an additional advantage in the mix we discussed. It's quite challenging to predict how the mix will ultimately turn out. Generally speaking, the B2B categories tend to be less seasonal, so I anticipate that other areas of the business will experience more fluctuation during the quarter due to seasonality. Video does not need to recover for us to meet our targets, but if it does, that's a positive outcome, and we are hopeful it will. However, we are not providing guidance for the latter half of the year.

Probably still the last one. You mentioned VC stable, but VC quarter-over-quarter was minus down 20%. So what do you mean were stable when something is down by 20%?

That's a good question. We will be realigning the categories we present next quarter, providing more detail on our quarterly businesses. In the Video category, we include professional webcams and other solutions. Webcams for both business and consumer markets have declined significantly, while room solutions have remained relatively stable, which is what we are referencing.

We always have areas where we feel the need to adjust pricing slightly, sometimes bringing it down more significantly, although these adjustments tend to be specific. Without going into details, I anticipate this will continue. Overall, I am not overly concerned about the current promotional intensity. I do not believe there is a significant wave of price competition approaching that would alter our business dynamics.

Great. Our next question is from Andreas Müller at ZKB.

Hi, Andreas.

Hi, everybody. Thanks for taking my question. I have one about Windows 11. You mentioned that the correlation with PC sales isn’t very strong, but I’m curious if this operating system will assist you in some way with your products and the new innovations coming up.

My experience with Windows upgrades is to generally overlook them in the short term, but in the long term, they are beneficial because they keep the PC industry dynamic. That's how we're currently approaching it. I believe it will ultimately be advantageous for users, and our products consistently integrate well with the latest Windows updates. Therefore, we are in a solid position, but I don't anticipate any major changes as a result of that.

That’s tied to the Productivity categories or also product.

Yeah. Yeah.

Then next question. You are cash-rich company right now. And I was wondering, can you discuss if that is helpful or once has helped over times when financing by banks sort of far more conservative and towards clients and competitors, mean does that change your position in some ways, because I saw the DPOs went up?

Let me briefly address that before handing it over to Chuck. I don’t think it has really changed anything for us since we don’t rely heavily on the banks. We maintain strong banking relationships if we ever need them, but our needs are minimal, so I don't believe much has shifted. It is reassuring not to be overly dependent on leverage during challenging times. Ultimately, as you mentioned, we are a cash-rich company and also a strong cash generator. This means it’s important for us to use that cash wisely. Like Chuck, I take pride in how we returned cash to shareholders last year in various ways, and we aim to keep being a strong cash generator. We are actively seeking strategic opportunities to grow our business, as growth is essential, and we will continue to pursue that. Chuck, would you like to add anything?

I agree that we have a high standard for mergers and acquisitions. We have a solid history and a proven track record, and if we come across excellent opportunities, we will act on them. Otherwise, we will return capital to our shareholders as we have done in the past. I am quite comfortable with our current cash balance, which is consistent with what it has been over the past few years, so our approach to capital allocation will remain steady.

Okay. And then last question for you, Chuck, regarding the $18 million restructuring charge, is that part of this program or should we anticipate more in the future?

There will be more charges. The accounting rules have kind of changed over the years where you used to just take all the charges upfront and then you would spend against those reserves. The rules have changed a little bit. So there will be additional charges that we incur over the next few quarters, but largely, the actions are all done internally, it’s just more the timing.

Thank you very much.

Great. Thanks for your questions, everyone. Thank you for your participation on the call. This concludes our earnings call. We will see you next quarter.