Logitech International S.A. Q3 FY2024 Earnings Call

Good morning and good afternoon. Welcome to Logitech’s Video Call to discuss our Financial Results for the Third Quarter of Fiscal Year 2024. Joining us today are Hanneke Faber, our CEO; and Chuck Boynton, our CFO. During this call, we will make forward-looking statements, including with respect to future operating results under the Safe Harbor of the Private Securities Litigation Reform Act of 1995. We are making these statements based on our views only as of today, and our actual results could differ materially. We undertake no obligation to update or revise any of these statements. We will also discuss our non-GAAP financial results, and you can find a reconciliation between GAAP and non-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 the shareholder letter 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’ll now turn the call over to Hanneke.

Thank you, Nate, and welcome everyone. I'm very excited to be here today for my first earnings call at Logitech. Now, you've probably noticed that this quarter we introduced a new document as part of our earnings material, a shareholder letter. This letter is intended to be a comprehensive review of our quarterly results and includes commentary that previously would have been covered at the beginning of the call. So today, after brief opening remarks, we will move directly into Q&A. Now, let's move on to this quarter. Our team delivered really solid results in the third quarter, and I am proud of the product innovation, the share gains, the operational discipline, and prudent financial management throughout the quarter, resulting in really healthy gross margins and exceptional cash flow generation. Our disciplined execution, tightly managing costs and promotional spend drove a 22% increase in our operating margin. That is tremendous work by all of our teams, but we will not be satisfied, of course, until we return to top line growth, which will be a gradual process. As we look forward, I am delighted with Logitech's positioning. Our portfolio is designed to take advantage of indisputable trends in hybrid work, video conferencing, gaming, and content creation, and disruptive technologies like AI will provide additional opportunities for us. As we work our way back to growth, we have demonstrated consistent disciplined operational excellence that builds a highly cash generative P&L, and a very strong balance sheet. This discipline, coupled with an innovation engine that introduces new products at a global scale, drives our market leadership across multiple categories. I've spent the last two months visiting with our employees, partners, customers, and shareholders. It's been a really exciting time for me, and I am as optimistic about Logitech's future as when I joined on day one. We will be hosting an Analyst and Investor Day later this spring, and I'll provide you with a more detailed perspective on our strategy and our approach to capital allocation then. Additionally, we will then provide our outlook for fiscal year 2025. I really look forward to seeing you all at that event. Thank you, again, and let me turn it to Chuck to discuss the numbers.

Thank you, Hanneke. Thank you all for joining us on the call today. You've seen our detailed financial results in the press release and shareholder letter, but I'd like to highlight three metrics this quarter that really stand out. First, our gross margins of 42.3% were better-than-expected year-over-year due to lower product and logistics costs, and reduced promotional activities specifically in North America. Second, we've spoken for several quarters about our focus on driving lean operations. For the seventh consecutive quarter, we reduced on-hand inventory, and this quarter it was down 44% year-over-year with our inventory turns hitting 6.5. And finally, in Q3, we delivered $443 million of operating cash flow, one of our best ever. This was driven by an improvement in the cash conversion cycle and strong operating margins. We are updating our outlook for the full year. We are now expecting revenues of $4.2 billion to $4.25 billion, up from $4 billion to $4.15 billion. Our operating income is expected to be between $610 million and $660 million, up from $525 million to $575 million. One final note regarding fiscal year 2025. If you look at our last four quarters, as well as the midpoint of our fiscal ‘24 outlook, you will see the declines in our net sales have moderated. Looking ahead to fiscal ‘25, we do not anticipate an inflection point in the slope of this curve; while the rate of our net sales declines has improved, there are a number of headwinds and uncertainties that may impact our net sales throughout fiscal ‘25. Thank you to all of our employees for the hard work and impressive execution. With that, Nate, let's move on to Q&A.

And with that, we'll start with Samik Chatterjee at J.P Morgan.

Congrats on the robust results here. Maybe just to start with your ending comment there about the headwinds you're thinking of for fiscal ‘25, maybe just flesh that out a bit more for us in terms of, I mean, obviously, there's been improvement in the pace of declines or moderating those declines, but why shouldn't the slope sort of carry you back into growth? What are the headwinds you're thinking of? And I have a quick follow-up. Thank you.

Yes, that's a really good question. We thought very hard about what next year's going to look like. And if you look at the fundamentals of our business, they're very strong right now. We feel really good about the execution. If you look at this last quarter in Q3, a lot of it was driven by really strong discipline on pricing and promotional activity. The baseline business in Q3 outside of the promotional windows was a little softer than what we would have thought. The promotional windows were incredibly strong with great pricing discipline, but the overall pace of the run rate business was a little soft. And if you look forward into Q4, the midpoint of our outlook for the year would indicate a 1% decline in Q4. Now, the high-end of our outlook would imply a little bit of growth in Q4. If you look into next year, there's just so much uncertainty around will there be rate cuts in the U.S., the macro situation globally, whether it's in China or the Middle East or Europe. And so, we're taking a cautious approach to next year. And as we look out, we're confident this is a great business, profitable, strong margins. As Hanneke said in her comment, it makes sense; it's if not when. But if you just look at the overall market, we just think that we don't want to have people get too optimistic about what next year's going to look like, given these overall headwinds in the geopolitical situation.

Hanneke, if I can, I know it's early days in your role, but as you sort of looked across the customer base, particularly if you look at them as enterprise versus consumer, and you think about the sort of next couple of years, where do you see the bigger opportunities? Where are we more likely to return to growth in which customer segment faster than the other? Just share your thoughts on that, please.

I see opportunities everywhere when it comes to our customer base. So, we're really, really strong in retail, and you saw that over the holiday period. Just great execution in store after store whether it was here in the U.S. or in Europe or in Asia. We also have grown online a lot with our e-retail customers. And then, of course, there's B2B and we're newer to the B2B business. But the opportunity there is gargantuan. So many meeting rooms that are not yet enabled with video. And as that corporate spending comes back, I think we're really well positioned with products that are fantastic, easy to use, and offer great value for that B2B segment. Opportunity everywhere. B2B is a little newer to us, but I'm quite bullish on that.

Our next question is from George Wang at Barclays.

Just two quick ones. Firstly, can you talk about gross margin? The December quarter was super strong and any thoughts on kind of outlook going forward Q4 and FY ’25? And that kind as it relates to sort of the long-term model of 39% to 44%, just curious kind of any thoughts on kind of modeling for the margin going forward?

We are maintaining our long-term model. We continue to believe that the range of 39% to 44% is appropriate. This past quarter exceeded our expectations with gross margins at 42.3%, as we had anticipated somewhere between 38% and 39%. We were pleasantly surprised by the quarterly results. From a year-over-year perspective, performance was roughly consistent, and quarter-over-quarter it was also in line. We experienced notable margin expansion year-over-year, driven by a few factors. Firstly, we effectively reduced product costs through strong operational performance. The entire industry benefited from reduced logistics costs related to shipping and freight. This was a significant factor. Additionally, our strong execution, particularly in the Americas regarding pricing and promotions, resulted in about a 100 basis point improvement. Overall, we estimate a benefit of approximately 400 basis points from lower product and shipping costs, and decreased promotional spending contributed to higher margins, although this was slightly offset by the mix we had forecasted.

Got it. Just a quick follow-up, if I can. I just want to double-click on the gaming. It seems very strong, kind of being better-than-expected for the last couple of quarters. Just maybe you can give more color just on the gaming peripherals. And kind of maybe if you can break out within gaming kind of for any particular areas that are doing a little bit better, mice, keyboards, gaming headsets, no one now. Just because the gaming traditionally kind of short is the refresh cycle versus other PC-related peripherals. So maybe you are seeing kind of the COVID cohorts that started refreshing maybe could potentially drive the results higher. Just curious if you can kind of double-click on the gaming category.

Yes, certainly. I can go first, Hanneke. So the gaming, as you know, covers many different categories. We saw particular strength in simulation in our steering wheels, a really, really good quarter. Overall go-to-market was impressive, how we promoted and discounted. If you contrast that to a year ago, the teams were very disciplined in what products they promoted and which channels. As Hanneke mentioned, retail was really, really strong. That led to better margins and better revenue. The PC segment, we have a really strong position with mice and keyboards in that PC segment; we gained some share. Console was a little bit off; we have a new product out that's really exciting, the A50 that was released kind of just at the end of the holiday. So we didn't quite see the sales on the console side. It's a very competitive category. But we feel like the future looks bright in console, although it is very competitive. But the areas that we generate higher margins, mice and simulation, incredibly strong. Other parts, maybe not quite as strong, but will help on the way with new products. Anything you want to add, Hanneke?

No, I think long-term, again, I'm super optimistic about gaming as a big growing category. It used to be focused on pretty narrow audiences, younger males, but that continues to explode with more females gaming, with older people gaming, with gaming as a way to connect socially. So, a category where all the macros are in favor. And then with our strong execution and our strong innovation, I think we look really good in that space.

Our next question is from Asiya Merchant at Citi.

Could you elaborate on the growth aspect? I realize there are macro challenges, but it appears the PC segment is showing some signs of improvement. We're beginning to observe a recovery. Perhaps you could discuss your outlook for PC peripherals and what would be necessary to return to the target model outlined at the last analyst event, specifically regarding gross margins and top-line growth.

So if you think about the long-term model, I'll talk long-term first. So, we have a target long-term financial model of 8% to 10% growth. One key tenet in there is M&A. We've been light on M&A the last couple of years. And I would expect us to do more over the next couple of years, not right away, but I would expect us to do more over the next couple of years. And that will be an important part of getting back to that 8% to 10% growth. Another key tenet of our ability to return to growth and get to higher levels of growth is rationalization of the corporate office footprint. If you look at what's happened in the headlines this past quarter, North American vacancies have approached 20%. Corporates are still looking at their overall real estate footprint and how they want to outfit rooms. The total addressable market is enormous, and the installed base is relatively small. There will be an upgrade cycle of that installed base to new modern tech like ours, and there will be greenfield deployments that will grow. So, if you look out 10 years, it makes perfect sense that every conference room will be video enabled. It's just hard to say what's going to happen over one year or two years. So I think this is another thing like Hanneke mentioned, if not when, it's unclear what that deployment cycle will look like. And then lastly, on the B2B side, companies like ours are looking at their IT budgets, carefully controlling things like CapEx and spend. They're prioritizing things like AI and cybersecurity absolutely employee productivity and office room fit-outs are going to happen, but they're more discretionary IT spend versus mandatory and so I think the economy needs to improve a little bit potential rate cuts maybe more confidence in the future on the corporate side. The consumer right now is quite strong. And so I think overall, I feel really good about our positioning. But overall, enterprise, B2B office rationalization and then to hit the longer-term rates, a little bit of M&A sprinkled in there as well.

And then when you think about gross margins also in that target range, I know you guys are obviously at 40%, feel really good about that. Just if you could talk a little bit about getting to kind of even the midpoint of your gross margins of the 39% to 44%.

Well, we were really close to that midpoint this past quarter at 42.3%. So, I feel really good about this quarter and last quarter. We did have a couple of one-timers this quarter. So, if you look overall at the impressive inventory reductions that we achieved. We drove down inventory more than $80 million decrease quarter-over-quarter in inventory. When inventories come down, good things happen. And we saw that again this quarter with things like E&O releases because effectively, as you reduce inventory, you have to reserve less inventory. And so, we saw benefits there that will not recur. We don't expect inventories to come down. They could actually grow a little bit in Q4 with the Suez Canal challenges. But overall, if you look at where we think margins will be in Q4, it's our trough quarter, so there's less overhead absorption. So it's a little bit of a headwind on a quarter-over-quarter compare. And then we also have this additional freight challenges. So, I think overall, we'll have maybe the low-end of that target range in Q4. And I would expect it to be in that overall operating model on average over next year. Will it be at the high-end? It's possible; low-end is possible. So I think a lot of it will just depend on how next year unfolds from a consumer sentiment standpoint and enterprise demand standpoint.

Our next question is from Erik Woodring at Morgan Stanley.

Maybe if we start, Chuck, I want to focus on gross margins again since they were quite impressive. My question is, last quarter, we discussed them being in the 38% to 39% range, but you clearly exceeded 42%. Was there anything that exceeded your expectations that you didn't foresee 90 days ago? I'm trying to understand the significant difference between your expectations and your actual performance. It seems that you typically have a good understanding of component costs well in advance of the quarter. As we look to the fiscal fourth quarter, we’ve historically seen gross margin expansion despite lower revenue leverage, fewer promotions, and a slightly higher B2B mix compared to consumer mix. Why should we expect gross margins to decline so much sequentially? I'll start with that and then I have a follow-up.

Yes, Erik, that's a great question. Over the last few quarters, we've significantly reduced our inventory levels. Lower inventory leads to the release of reserves, which has provided some benefits that we've observed over the past couple of quarters. However, those benefits are somewhat one-time occurrences. What is sustainable is the excellent work our operations team has done in reducing product costs, which has been a significant, lasting advantage for the company, and we expect to continue seeing these benefits through next year. I appreciate Prakash and his team's efforts on product costs. In terms of shipping and logistics, we initially experienced a favorable trend that exceeded our expectations, but that is now reversing. Shipping rates are increasing again, especially for ocean freight, which is becoming quite substantial. We anticipate needing to use more air freight due to these disruptions, even though we prefer not to because we want to avoid stockouts and prioritize our customers' satisfaction. This may impact our margins, as we will incur higher air shipping costs and increased ocean rates, which reflects the current shipping situation. I cannot predict if this trend will be temporary or persist throughout the year, but it does present a headwind going into Q4. Regarding the overall leverage mentioned, it's simply a mathematical effect—there's an impact from the difference between peak and trough quarters. Last year, we experienced margin expansion primarily due to a poor Q3. I believe we over-discounted and generated less volume during that time. Our global commercial teams executed exceptionally well this past quarter with pricing discipline. We prepared thoroughly with our retailers and e-tailers, aligning our promotional plans and account strategies, leading to a very successful quarter in terms of promotions. I think that a gross margin between 38% and 40% is achievable for Q4. While we can aim for the higher end of that range, the lower end could be influenced by increased air shipping costs. Overall, I feel optimistic about a strong fiscal Q4, but the uncertainties regarding freight and logistics are currently a concern.

Okay. Very fair. And then I don't know if this is properly posed to you or to Hanneke, but you bought back more stock this quarter than I think any quarter over the last 10 years. You also reduced CapEx relative to your prior expectations. So are you guys maybe signaling a change in your capital allocation priorities? And why not as you're kind of striving to get back to growth, realize the macro is a big factor here, but maybe why not utilize the excess cash you generated to lean into CapEx and whether that's more product launches or better expansion or whatever it might be. But why not kind of lean into that CapEx to maybe help get you back to that kind of target growth range a little easier, faster, however you might think about it? And that's it for me.

That's a great question. I'll provide more details, and perhaps you can address our capital allocation strategy at a higher level. First, regarding CapEx, I suggest not reading too much into the current decline. It's primarily due to our focus on operational discipline and driving efficiency in our spending. Our priority is growth, and that guides our capital allocation decisions. As for buybacks, at the start of the quarter, we observed an improvement in cash flow, which led us to increase our buyback program given the exceptional cash performance. We generated $443 million in operating cash flow, marking one of our best quarters ever, prompting the decision to return more capital to shareholders. It's important not to interpret the reduction in CapEx as a signal of pulling back; it will likely increase next year. We have engaged in minimal M&A but have significantly invested in the business, particularly in technology to support long-term growth. So, the CapEx decrease should not be seen as a shift away from growth; rather, it's a reflection of operational discipline. Hanneke, would you like to discuss the overarching capital allocation strategy?

Yes, sure. And let me first just confirm what you just said. I mean, we will make the right CapEx investments into the future. And we're looking at those for next year right now. So don't take this as we're pulling back on CapEx. In terms of our long-term capital allocation strategy, that really hasn't changed at the top of the list, paying a good dividend. Number two, M&A when the right thing comes along, we are definitely always looking, and then only number three, returning cash to shareholders in the form of buybacks.

Our next question is from Juergen Wagner at Stifel.

Hanneke, my first question would be to you. Now that you are 60 days at Logitech, can you say or can you share already some thoughts on what needs to be addressed or what you need to do differently? And as a follow-up, you mentioned M&A as the second priority. When would you be in a position to become more active again?

Juergen, thank you. Very nice to meet you. I'm 60 days in. So it's a little early to say anything about anything. And so I'll say upfront, we have an Investor Day planned for May, where we'll come out with much more detail. But I'll give you a few first impressions. This is a really good company would be my top-line impression. We're really well positioned for future growth with the spaces that the portfolio is in. So hybrid work, gaming and video conferencing, all are good places, good neighborhoods to play in. Then we have fantastic and I've been so impressed as I've onboarded with our product, our engineering and our design capabilities. That allows us to innovate, and that will allow us to win going forward. Another few things that I've been impressed with is the brand, a really solid global brand. But that also brings me to an opportunity. We probably have an opportunity to make that brand truly iconic, take it from good to great, if you will. And then finally, a nice mix of B2B and B2C. We touched on that earlier. And the last thing would be this company really is a sustainability pioneer in tech, which is great to see and something we'll definitely want to continue to be. So I would say, all of those things we’ll want to keep and cherish and leverage to drive growth going forward. There probably are a few things I would change as well, but it may be too early to talk about those right now. And when it comes to M&A, again, details much too early, but an important part of our capital allocation strategy.

Our next question is from Ananda Baruah at Loop.

I have a quick question regarding the long-term growth model you mentioned, which you indicated will be in the high-single digits. I'm curious whether this growth is expected to be organic, or if it will include contributions from M&A, with the organic component still to be determined. Additionally, I have a follow-up question.

Thank you. The 8% to 10% growth rate is based on historical growth rates from before the pandemic. The pandemic years, which saw significant growth of about 70%, should be excluded from this analysis. The average growth rate over the 10 years preceding the pandemic ranged from 4% to 14%. This average takes into account several important acquisitions, as we excel in mergers and acquisitions by identifying the right companies and leveraging their technologies. Our robust global distribution channels allow us to integrate these companies effectively. Our operations team is skilled at reducing product costs, which is a key factor. Hanneke also mentioned the strength of our iconic brand. Thus, our ability to integrate new companies supports the projected growth rate of 8% to 10%, which includes contributions from M&A. However, we do not have any immediate plans in the pipeline, as Hanneke is new and we are focused on developing our strategy. Therefore, we do not anticipate any significant announcements in the near term. This growth rate is a part of our long-term financial model, and we are currently focused on achieving gross margins between 39% and 44%, while keeping operational expenses around 25% to generate a healthy operating income. We feel confident about our current position. A couple of quarters ago, we indicated that this would take six to eight quarters, and we are excited to be executing on this aspect of our long-term financial model now. Overall, growth is our primary focus, and we aim to be cautious as we move into next year. We will provide more insights into our model and M&A strategies during Analyst Day. To clarify, the 8% to 10% growth rate includes both organic growth and contributions from M&A, with M&A being a significant component.

Got it. That sounds super helpful. And I have just a clarification quickly, and then I have a quick follow-up question. When you say next year, we're talking fiscal '25 or calendar '24?

Yes, fiscal '25 starts on April 1 of next year.

Got it. And you guys had mentioned in the prepared remarks, I think it may have been Hanneke who mentioned this AI as an opportunity for the company. Any context you can give there? And I guess really what I'm wondering is, are there things that sort of you would consider to be incrementally new to the company in terms of value-add for market share opportunities, new categories, which you could go in that you're thinking about that sort of behind the closed doors it classically fit into the ecosystem of products that the company has historically offered?

Yes, I'm happy to take that because I see a lot of opportunity in this area. We are leveraging AI at Logitech in two main ways. First, we are using it internally to enhance productivity, which is essential for every company. This includes improvements in our supply chain and marketing through tools like Copilot, ChatGPT, and our own large language models. The area I'm particularly excited about is how we are incorporating AI into our products and innovations. I want to highlight three exciting developments that are already available and indicate what's to come. First, in our video conferencing segment, we have launched a new product called Sight, a panoramic video conferencing camera designed to be placed at the center of a meeting table. It functions like having a TV producer present, ensuring perfect framing, audio, and video quality. This relies on AI technology for its impressive capabilities. Next, we have the Zone Two wireless headsets, which also utilize AI technology. They address a common issue where one person speaks through a headset while the other is in a noisy environment, like an airport. These headsets can effectively cancel out ambient noise on both sides, which is a fantastic feature. Lastly, in our software offerings, users of our products can download software that includes a feature called Smart Actions to automate repetitive tasks. Recently, we've observed that the most utilized Smart Action by our users is "reply with ChatGPT," being used nine times more than any other action. This illustrates how we are enhancing the consumer experience through our hardware and software with AI. I'm genuinely excited about the innovative opportunities we can explore in our products and the potential growth associated with them.

Yes. No, that's helpful. And so that taking the three you just mentioned right there, like to me, that would be more suggestive of potential market share gain opportunities or product stickiness opportunities, something along those lines.

Our next question is from Joern Iffert at UBS.

And the first one would be, please, to you, Hanneke. When you look over the next three to five years, do you think the categories and the segments Logitech has right now is the right base to be to drive your growth vision? Or are you also willing to go into new end markets, like, for example, health care, which could be necessary to maintain the growth model going forward?

I think we're playing in some really great spaces. So, the big space of work and play, that's what people do in life. So we play in some gargantuan spaces, and they give us good growth. Within that, are there verticals we could step on a little harder? Possibly, and that's what we're exploring in our strategy work right now. So a bit early for me to say yes or no, but we'll be back in May.

Yes, sure. I appreciate this. And then the second question, a little more technical one on the quarter, please. You were mentioning that outside the promotion season, which was Black Friday, Cyber Monday, volumes were a little bit short of your expectations. Is this linked to macro end market weakness? Or is this linked to the market share losses? I think you also mentioned a couple of market share losses, also gains, of course, but also some share losses that gaming keyboards, for example, in China and then some other stuff? So is it also linked to share losses or many macro?

I would describe the quarter in terms of market share as both a strength and a weakness. Overall, I believe we executed well, and once we have all the final data, it should show that we gained share in key categories. However, we faced challenges in some areas due to older products, though new product introductions are on the horizon. I'm feeling relatively positive about our share performance. Looking at consumer behavior, much like last year, many are inclined to purchase during promotions, while our global run rate business has been more difficult outside those promotional periods. We’ve noticed this trend in the first few weeks of this quarter. There are a lot of factors at play—whether it's interest rates, current consumer confidence, or enterprise spending—all contribute to a sense of uncertainty. This uncertainty leads us to approach Q4 and next year with some caution regarding when things might improve. We’ve seen discussions about persistent inflation and the possibility of rates not being cut. These macroeconomic factors influence our customers' purchasing decisions, but I wouldn't attribute this to a share issue. I believe our market share remains robust across the board, aside from some specific areas we are currently addressing. Hanneke, do you have anything to add?

I think you said it well.

Our next question is from Andreas Mueller at ZKB.

Can you discuss maybe the gap between sell-in and sell-through, particularly in the Americas? Is this seasonal? Or do you see your clients already increasing inventories sustainably there?

Thanks, Andreas. The chart you're referring to in our earnings deck shows sell-through and sell-in. And I'll just say, I don't like that chart in general. We've agreed to keep it through this year, and we'll revise it to make it more meaningful at Analyst Day. That data shows that America’s sell-through was down 4%, yet we saw fairly strong revenue growth actually. And so you look at that and say, "Gee, how can sell-through be down but sell-in go up? You must have built channel inventory." We did not actually. America’s channel inventory was roughly flat. What's driving that is less promotional activity or selling at a higher price and prompting less. So the sell-through is in gross dollars and the revenue is in net dollars, and that's just that delta of 700 basis points is the margin expansion based on less promotional activity and efficient promo activity. So we're going to revise that chart to give you a little more view into the changes in channel inventory, which is, I think, the better metric. So I wouldn't read into that too much. It's kind of comparing apples and oranges a little bit. But we didn't want to pull it. I started just less than a year ago. I didn't want to pull that chart without replacing it with something to give you better visibility. So there will be an update to that coming in May, but I would not read into that overall other than saying we did a great job on driving North American promo activity during the holiday period.

And then my next question on the gross margin progress, the lower product costs were mentioned. Can you give here some more details? I mean, you mentioned production efficiency, but also, I mean, what was the impact of raw materials? For example, Asian currency were weak, which might have helped. Can you say something here?

Certainly. I missed the very first part. Was it gross margin in Q4?

Yes, and on the production side or products.

So, we had about 200 basis points of benefit year-over-year on our product costs. Quarter-over-quarter, it was roughly in line, but a year ago to this year, about 200 basis points of expansion. That should be durable and should translate into future quarters as well. 200 basis points year-over-year was logistics, ocean, and air freight. And then there were some other kind of noise between lower promo and mix. But overall, the freight side is going to come back. We're going to have more freight headwinds in Q4. That will be a challenge. And then on the FX side, year-over-year to Q3, it was about a 100 basis point benefit. As you look into Q4 to Q4 and Q3 to Q4, currently, FX is roughly flat. So there should be no currency impact. Of course, rates can change. But as we sit here today and you look at the euro and the pound and the various currencies around the world, on balance year-over-year and quarter-over-quarter, we're roughly in line from Q3 to Q4.

Okay. Then my last question, can you say something about the OpEx items, R&D and G&A here? And do you expect the progression going forward? In G&A, how much was the impact or was the increase actually one-time in nature?

Certainly. So, our OpEx model is fairly straightforward. We want to spend roughly 25% of our revenue on OpEx. Of course, in OpEx, we want to prioritize things like engineering, product development, and go-to-market; those are things that build health and build value long-term. Then you have things like G&A and other costs that are necessary, but you want to be efficient on the spend. So that's the overall model as a whole. Now if you look overall, the details of what happened in the quarter, we had CEO transition costs that basically were one-time in nature. And then we have really overperformed this year financially. And a year ago, we were underperforming. So as a result, things like sales commissions and then variable compensation a year ago were unfunded or funded at a much lower level. This year, we're funding above plan given the above-plan performance. And so I wouldn't expect the overperformance on variable comp to continue so much. So there are some one-timers. But overall, if you look at where OpEx as a percent of revenue, obviously, in our peak quarter, it looks very impressive. But our model really is about 25% approximately of revenue, and it will be a little higher likely in Q4 because it's our trough revenue quarter. So we're saying, on average, it's that 25% range. But I feel really good about where this year is shaping up from an investment standpoint. And again, prioritize investments on those things that grow shareholder value.

Our next question is from Torsten Sauter at Kepler.

Well, congratulations to another strong quarter. In fact, it feels like in the good old days, right, just with a few new faces. Very glad to meet you, Hanneke, and very happy to work with you. Actually, I have two little questions, if I may. Firstly, a more technical one. I see you have again cut the tax guidance to a very, very low level. Can you please shed some light on that? And also, maybe try to give an outlook there.

Certainly. Yes.

And yes, if I may, just to have it said already, we've seen the departure of your design head, Alastair Curtis. I think I had considered him a key person, right? So maybe can you guide us to the strategy with respect to running the design, operation to design team at Logitech going forward?

Certainly, I'll take the first question and you can handle the second. Regarding taxes, we reached an agreement with the Canton Vaud, where our headquarters is located, in the past quarter. This agreement allows us to increase the overall business basis, which leads to larger amortization and a tax deduction. This is due to our significant growth in Switzerland, and we take pride in the exceptional talent we have in LASA. With our increased investment and a larger employee base, we collaborated well with the government, and they appreciated our efforts. As a result, we experienced a one-time benefit this quarter. Additionally, there are a few smaller items related to U.S. taxes, including a one-time larger deduction for our foreign operations, which is a standard procedure we've analyzed. Our tax teams performed exceptionally well this past quarter, and these benefits are one-time occurrences. Looking ahead to next year, we expect the GAAP tax rate to be in the low 20% range, and that number can fluctuate. The share price significantly affects the overall GAAP tax rate. For non-GAAP, we're forecasting a cash tax rate in the low teens, which includes cash taxes paid plus accruals. This quarter's results were primarily driven by our team's hard work and our investment in Switzerland. We provided guidance for this year, projecting a non-GAAP rate of 9% to 11%. Overall, for next year, plan for low teens on a non-GAAP basis and low 20s for GAAP. Hanneke, would you like to discuss design?

Yes, thanks for asking the question. Design plays a really, really special role at Logitech, and it's a real point of difference for us. Now Alastair over the last decade built a fantastic design organization. That's one of the other things I learned in my first six weeks. We have more than 200 internal designers at Logitech. And they're fantastic. So actually, in the last quarter, they as a team won the Global Red Dot Design Team Award, which is again, in this industry and beyond, a really prestigious award. So I'm thankful for the organization and the culture, the design culture that's been created at Logitech. And I think with the team that we have of designers, I have no doubt we're going to continue to excel in design. So thanks for asking.

Our next question is from Martin Jungfleisch at BNP.

I hope you can hear me. And also, congrats on the strong set of numbers. So maybe two questions. First one is coming back on the cost side. I think at the webinar in early December last year, you mentioned that R&D will remain a key focus area for you, and you also just pointed out a few innovations. Now in Q3, R&D costs are up 9%. Should we expect this cost line to keep increasing in that magnitude in the coming quarters as well? And then the second question is on the China gaming curves. These routes have been taken off the website this morning. But just wondering if you have seen any negative impacts so far or if you would expect any negative impacts? And also, if you could just remind us on the rough exposure that you have in China in gaming.

Yes, I didn't understand the comment that the China comment from this morning. In general, China gaming is a really important market for us. We have an iconic brand, and the consumers in China preferentially pick our brand at the high end. There's lots of low-end competition. It's a big market. Overall, China's results were roughly flat. So, we had Asia was down in general, so more challenging across Asia. But China actually performed quite well relative to our expectations. Clearly, it's a big market and it's very competitive. But preferentially, they choose better technology and a better brand at the high end. Do you want to add anything on China before we talk about OpEx?

Very important, and I like what I'm seeing in terms of our premium offering there, so to pro-life mice for especially. And it's in any business, China is super competitive. That keeps us honest, so we'll be all over that market.

Great. And then on the OpEx question, I would expect engineering quarter-over-quarter to be roughly in line with the prior quarter. And I would expect G&A and sales and marketing to come down. And the reason I believe that is because sales and marketing has variable commissions tied to sales, and with peak quarter, trough quarter, you have less commissions that you pay based on the sales change, just due to normal seasonality and then, of course, the one-time transition costs that you see in the G&A line. So overall, R&D quarter-over-quarter should be roughly in line. And then, of course, next year, we'll have to talk about that at Analyst Day. But again, in total, I would be estimating roughly 25% of revenue in your models.

Our next question is from Torsten Sauter at Kepler.

Well, congratulations to another strong quarter. In fact, it feels like in the good old days, right, just with a few new faces. Very glad to meet you, Hanneke, and very happy to work with you. Actually, I have two little questions, if I may. Firstly, a more technical one. I see you have again cut the tax guidance to a very, very low level. Can you please shed some light on that? And also, maybe try to give an outlook there.

Certainly. Yes.

And yes, if I may, just to have it said already, we've seen the departure of your design head, Alastair Curtis. I think I had considered him a key person, right? So maybe can you guide us to the strategy with respect to running the design, operation to design team at Logitech going forward?

Certainly, I'll take the first part and you can address the second. On the tax front, we reached an agreement with the Canton Vaud, our headquarters, this past quarter to enhance our business base, which allows for greater amortization and tax deductions. This is a result of our substantial growth in Switzerland, and we take pride in the exceptional talent we have in LASA. With our increased investment and significantly larger employee base, we collaborated effectively with the government, which was supportive of our efforts. As a result, there was a one-time benefit reflected in this quarter. Additionally, there were some smaller items on the U.S. tax side, including a one-time larger deduction related to our foreign operations, which is a standard practice we've analyzed. Our tax teams performed exceptionally well this quarter, but these items are one-time occurrences. For next year, regarding the company's tax position, the GAAP tax rate is expected to be in the low 20% range, although this can fluctuate. The share price greatly influences the overall GAAP tax rate, but it should remain in the low 20s. The non-GAAP tax rate for next year is anticipated to be in the low teens, which includes the cash taxes we pay plus accruals. This quarter's results were primarily due to the significant efforts of our team and our investments in Switzerland. We provided guidance in our materials for this year, expecting a non-GAAP tax rate of 9% to 11%. Overall, for next year, you can anticipate low teens for non-GAAP and low 20s for GAAP. Hanneke, would you like to discuss design?

Yes, thanks for asking the question. Design plays a really, really special role at Logitech, and it's a real point of difference for us. Now Alastair over the last decade built a fantastic design organization. That's one of the other things I learned in my first six weeks. We have more than 200 internal designers at Logitech. And they're fantastic. So actually, in the last quarter, they as a team won the Global Red Dot Design Team Award, which is again, in this industry and beyond, a really prestigious award. So I'm thankful for the organization and the culture, the design culture that's been created at Logitech. And I think with the team that we have of designers, I have no doubt we're going to continue to excel in design. So thanks for asking.