Logitech International S.A. Q2 FY2025 Earnings Call

Good morning and good afternoon. Welcome to Logitech's Video Call to discuss our Financial Results for the Second Quarter of Fiscal Year 2025. Joining us today are Hanneke Faber, our CEO, and Matteo Anversa, our CFO. During this call, we will make forward-looking statements, including with respect to future operating results, under the Safe Harbor of the Private Securities Litigation Reform Act of 1995. We're making these statements based on our views only as of today, and our actual results could differ materially. We undertake no obligation to update or revise any of these statements. We will also discuss 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 will now turn the call over to Hanneke. Hanneke.

Thanks, Nate, and welcome everyone to our second quarter earnings call. First, it is my pleasure to introduce you to our new Chief Financial Officer, Matteo Anversa. As a seasoned public company CFO, Matteo brings skills and experience really well suited to Logitech. His background in engineering and industrial technology, his diverse B2B experiences, and his global perspective as an Italian-American who has lived and worked around the world, make him a terrific addition to our leadership team. Matteo, welcome to your first Logitech earnings call. Now to the quarter. This quarter, we did what we said we would do. We closed out the first half of our 2025 fiscal with strong results, which give us confidence looking forward. Let me touch on three highlights. First, we delivered high quality growth. This growth was driven by demand, and it was very profitable, above our long-term operating model for both gross and operating margins. The growth was broad-based across product categories and regions, including another standout quarter from EMEA. And we grew the business responsibly and with operational discipline. Channel inventories remained well within the healthy range in which we've operated for the last several quarters. Second, we achieved these results as we executed effectively against our strategic priorities. We are doubling down on B2B. In Q2, enterprise demand modestly outpaced consumer demand. Video collaboration showed sustained and profitable growth. And we saw strong growth of our personal workspace product in the enterprise channel. We continued to build the Logitech brand, and we were delighted that our brand building efforts were recognized by Time Magazine, who named Logitech one of the world's best brands of 2024 just last week. Most importantly, Q2 was an excellent quarter for innovation. Innovation is at the very heart of what Logitech does, and we launched a terrific series of new products ahead of the holidays. In gaming, we introduced 18 new products, including the PRO X SUPERLIGHT 2 Mouse, the PRO X TKL RAPID Gaming Keyboard, the G915 gaming keyboard, an all-new racing simulation series, and exciting collaborations with Genshin Impact and with MOMO. In video conferencing, we launched a software enabled solution called Smart Switching, which utilizes AI to choose the best view between the side camera on the table and the Rally Bar camera in front of the room. In personal workspace, we continue to drive the successful combo touch for the new iPad, a very strategic category. Additionally, we launched two products in two entirely new categories: the MX Inc, the first mixed reality stylus for the Meta Quest Headset, and the MX Creative Console that integrates with popular Adobe applications to streamline creative workflows. To drive awareness and generate momentum for all of these products heading into the holiday season, we held global Logi PLAY and Logi WORK events for the first time ever last month. These events were hosted live from Paris, Shanghai, and over 20 other global locations. Logi PLAY also streamed for over four hours on Twitch. These events served as a celebration of gaming and of new ways of working. They were a fantastic launchpad for new products and partnerships and facilitated great interaction with customers, partners, and influencers. The excitement was palpable around the world, and it's part of why I am so excited for the future of Logitech. In a few minutes, we'll share a short video for you to experience Logi PLAY for yourself. Finally, while results and strategy are really important, great people and culture are critical for the execution of any strategy. That's why, in addition to these high-quality results, I am especially proud of the culture here at Logitech. It's something we actively nurture, and it's gratifying to see that we were recognized by Forbes last week as one of the world's best employers. In a global survey of 300,000 employees of 850 global companies, we ranked 20th, a remarkable result for a company our size. So let me thank all of our employees around the world for everything they do and the culture they champion. In summary, this quarter's high-quality results, our progress versus our strategy, and our talented people give us confidence for the holiday quarter and for the remainder of our fiscal year. With that, let me turn the call over to Matteo.

Okay. Thank you, Hanneke, and thank you all for joining the call today. I am incredibly energized and motivated by the opportunities ahead and excited to be part of the next chapter of Logitech. The team delivered another robust quarter with a continued focus on driving sustained profitable growth. The detailed financial results can be found in the press release and shareholder letter, but let me briefly share with you what I really liked about the quarter. First, net sales were up 6% year-over-year, and importantly, demand accounted for roughly four points of that growth. The dynamic between sell-in and sell-through played out as we anticipated. Channel inventory levels ended the quarter well within our targeted range, positioning us very well for the holiday season. Second, as Hanneke mentioned, our growth was broad-based. We grew net sales year-over-year across all regions in nearly all the diverse product lines and saw demand growth in both the consumer and the business channels. Additionally, our growth was highly profitable. The gross margin rate was 44.1%, up 210 basis points year-over-year. Continued strong execution by our operating team drove continued product cost reduction, and higher demand allowed us to sell previously reserved inventory. This is the fifth consecutive quarter of year-over-year gross margin rate expansion, a testament to the durability of our cost reduction initiatives and commitment to overall operational excellence. Looking ahead, we expect the gross margin rate for this fiscal year to be in the range of 42% to 43%. Please keep in mind that our third quarter is typically more consumer-focused with slightly higher promotional intensity and higher freight costs, which are expected to pressure gross margin rate in the next couple of quarters. Second quarter operating expenses were on the higher end of our annualized range of 24% to 26%, as we continue to invest in our organic growth through initiatives such as Logi PLAY and Logi WORK. Finally, our cash generation remains robust, contributing to a healthy cash position of nearly $1.4 billion. In addition, we returned $340 million back to shareholders. We repurchased $132 million of shares in the quarter as part of our ongoing $1 billion buyback program. Additionally, our shareholders approved a $0.10 increase in Swiss francs to our dividend, which resulted in a $208 million dividend payment in September. In summary, our second quarter results continue to demonstrate our team's ability to drive sustained profitable growth in spite of an inconsistent and often volatile global economic environment. Based on our strong results in the first half, we are raising our fiscal year 2025 outlook both in revenue and in profit. And with that, let's take you to Logi PLAY as we prepare for the Q&A. So Nate, if you can please roll the video.

Our first question will come from Asiya Merchant with Citi. You may now unmute your video and audio and ask your question. Please begin speaking when you see the Logitech team on your screen.

Hi, Asiya here, can you hear me now?

Yes.

Great, thank you. I just wanted to ask a little bit about gross margins. How sustainable are these going forward? And if you can just walk us through what were the key drivers that affected gross margins here sequentially. I understand that the product costs and inventory reserves are doing better, and there was some higher promotional spending, but if you could walk us through sequentially what drove the higher margins, that would be great. And I think the commentary around 42% to 43% for the year, how should we think about that sustainably, if there are any makeshifts that you would like to call out as well. Thank you.

Sure, Asiya. Let me take this one. So first of all, we are extremely pleased where the gross margin came in the quarter. I have to say the team has done a fantastic job, the operating team, in continuously driving the product cost reduction through activities like value engineering and really continue to deliver consistent strong gross margin. On a year-over-year basis, as I mentioned in the prepared remarks, we expanded about 210 basis points. A couple of things, product cost reductions, so value engineering activities accounted for about 200 basis points of the expansion. I mentioned in my prepared remarks that the team also has done a fantastic job in selling some previously reserved inventory, which accounted for about 100 basis points of the margin lift year-over-year. These effects were partially offset by slightly negative mix, a little bit more promotional activity in the quarter. We continue to see a little bit of higher freight costs. So I think compared to what we were expecting, the gross margin came in a little better than what we had forecasted in the prior earnings call. Fundamentally, the key reasons are the ability to sell this previously reserved inventory, which we were not expecting to happen to that extent, as well as better product cost reductions by the team. And that's also what drives the sequential increase in the margin. To the second part of your question, which is what we are expecting moving forward: we expect the gross margin rate for the second half to be between 41% and 42%. We are not expecting to continue to sell previously reserved inventory to the same extent that we have done in the first half of the year. That accounts for almost 100 basis points of the sequential decrease in the gross margin rate. We are seeing continued pressure on freight costs as they keep creeping up on some of the lanes that we operate. Additionally, entering the holiday season, the third quarter tends to be much more consumer-oriented which results in slightly more promotional activity. That's a little bit the dynamic that we are seeing for the rest of the year.

And is that reasonable to assume, I mean going forward? I understand the seasonality in the second half relative to the first half. But as we look forward into some of these cost reductions, they seem pretty sustainable, absent the freight costs which are obviously affected by other things. Is the gross margin sustainable at these levels, especially as you ramp up your B2B efforts? Should we be expecting a better margin profile going forward? Thank you.

Look, I think the way I would describe it is, as I said, we are very pleased with where we are. Yes, I agree with your statement that the team has done a fantastic job and the actions taken around value engineering, taking costs out of the bill of materials, are sustainable. I think it is a little premature to talk very long term. But for the year, we are expecting gross margin rate to be between 42% and 43%, which is actually an almost 100 basis points improvement year-over-year when you take the total year into account. The cost reduction activities that the team has implemented are the key reasons why the gross margin expands.

Great. Thank you very much for the color.

Thank you.

Our next question comes from Samik Chatterjee of JPMorgan.

Thank you. I hope you can hear me. I appreciate the opportunity to ask questions. These results are strong, but this is also the second consecutive quarter where we have seen sales exceed demand, leading to some inventory accumulation. As we approach the holiday season, should we anticipate any reversal in the inventory increase? My main question is whether retailers and your customers began their holiday preparations earlier than usual. Regarding the inventory buildup, which you described as healthy, do we expect any normalization in the latter half of the year, if at all? How might this impact seasonality in Q3? I have a follow-up as well. Thank you.

Yes. I'll let me take that comment as well in detail, but just to remind everyone, we've been saying all along, the sell-in in the first half would be higher than the sell-out, and that will normalize to your point. You're absolutely right that will normalize in the second half. We were running a little light on inventory towards the back end of last fiscal year, which was leading to some stock outs. We have been selling in a bit more than sell-out here in the first half, and that's positioned us really well for the holidays, and we completely expect that dynamic to reverse in the second half.

Samik, what I would add, we are very pleased with how the quarter came in. The dynamic between selling and sell-through is actually very balanced and in line with what we were expecting. Selling was driven by demand, accounting for 4 points of the 6 points year-over-year increase in net sales. So the two things tend to narrow themselves pretty nicely in the second quarter. The dynamic is expected to reverse in the second half, where we’re seeing sell-through higher than sell-in. To Hanneke’s point, this is the dynamic we have been expecting for quite some time. So in terms of split in revenue, prior years have tended to be a little more 48%, 52% between the first and the second half. As we've indicated in prior calls, this year is probably going to be more around the 50%-50%, due to the dynamic that Hanneke has just described.

Got it. Got it. And for my follow-up, I guess it is more for Hanneke. In the shareholder letter, you outlined the areas where you're gaining share. Now if I focus on just two aspects there. One, how you're thinking about getting back to gaining share in video collaboration? And also similarly, what are you seeing in terms of market share in China and what actions you might be taking to plan for more share gains there as well? Thank you.

Yes. Great. Thank you. We see the markets actually fairly robust. So we are happy to see that with low single digits growth. Our share is flattish to slightly down, which is not something we want to continue. However, there are a whole bunch of things that are actually really good in video conferencing. We remain number one in units in video conferencing. Our service bookings were up almost 2 times in the quarter, which is very important for that segment. As I have said before, we were kind of new to services, but that is really on a roll. The launch of Smart Switching in the quarter takes our product superiority a step forward, and we are excited about that. There are still huge opportunities to go-to-market in video conferencing as less than 30% of global meeting rooms are video-enabled. We've only started to play in some of these new verticals beyond enterprise, and we are seeing strong results in education, with growth up more than 20% in the quarter, closer to 30%. So all of these factors give us a lot of confidence going forward in this segment, which is exciting for us, and it is highly profitable as well. Regarding China, there are also a few green shoots in the market. The gaming market there remains extremely robust, which is different from many other Chinese markets. Our demand grew mid-single digits in the quarter, and we continue to perform very well at the premium end of our ranges in gaming mice. Our brand remains strong in China, but the competitive environment is intense, and we can do better than these results. Therefore, we have started to make some targeted R&D and marketing investments in China to strengthen the local team and our local capabilities. It will take some time because our share problems in China are not recent, but we’re starting to see encouraging results. The first dedicated China initiatives hit the market this past quarter, including the Alto key keyboard and the M96 mouse, both very well received and performing well. We're also starting to see share gains in the social e-commerce channel, such as Pinduoduo and Douyin or TikTok. So early signs of improvement are promising, and we are committed to that important gaming market.

All right. Thank you. Thanks for taking my questions.

Our next question comes from George Wang with Barclays.

Hi. Can you hear me?

Yes.

I have a quick question about Europe. Clearly, EMEA, particularly Europe, stood out this quarter, especially with the growth from tablets and console gaming. Can you elaborate on Europe, especially regarding these two areas of growth? Are there any other sectors you believe could continue to grow in the next few quarters?

Yes. Thanks, George. Great question. Europe had outstanding execution across the board. The market there is flattish, but we far outperformed it through great execution, particularly with Logi PLAY and Logi WORK events. While they did them regionally last year, this year we took them global. Europe outperformed both the events themselves and the customer activation that happened afterwards. I was there a couple of weeks ago. If you entered MediaMarkt or Fnac, the execution by our European team is simply outstanding; the same goes for our online customers. The growth seen in Europe was really broad-based across categories. The growth in tablets and gaming headsets is particularly noteworthy. We experienced a complete change in the gross margin profile of those two segments, disclosing no exact numbers. Still, think about a 10 percentage point better situation for tablets compared to last year, thanks to innovation, and 5 percentage points better on gaming headsets, making both much more attractive for us to grow. Tablets are strategic as they help us extend beyond the PC peripherals, which is crucial for tapping into new B2B verticals. Gaming headsets, which represent a larger segment than both gaming mice and gaming keyboards, provide an opportunity to increase our share, given that our technology is superior.

Great. Thank you.

Our next question comes from George Brown with Deutsche Bank.

Hi, guys can you hear me?

Thank you.

Thank you for taking my questions. I have two, if I may. Just firstly, on China and the upcoming election in the US, how do you think about the potential of tariffs on your business?

George, are you there?

Yes, can you hear me?

Perhaps we'll move on to the next question, and we'll be back to you, George.

Our next question will be from Erik Woodring of Morgan Stanley.

Good morning guys. Can you hear me okay?

Hi, Erik.

Hi, good morning. Thank you so much for taking my questions. Maybe if we just start, Hanneke, nice to see two consecutive quarters of outperformance and year-over-year growth. I believe the full year forecast is embedding about 2% year-over-year revenue declines and something like 12% operating income declines in the second half of the year. Can you maybe help us just juxtapose that kind of worsening of trends alongside some of the comments that you're making on demand kind of being a bit better than you expected? Just help us to understand why we should expect things maybe to get worse in the second half? Is that all kind of the sell-in versus sell-through dynamics? Just maybe if you could double click on that, that would be super helpful. And then I have a follow-up. Thanks.

Yes, absolutely. And I'll let Matteo do the operating income side of that. But on the net sales side, indeed, if you do the math, the net sales in the second half would be about flat. That is that sell-in and sell-out dynamic. We are actually pretty comfortable with demand coming in as strong as it has come in in the first half. I say that with quite a bit of confidence. But because of the inventory dynamics, net sales will be a little lower than that. Matteo, you want to comment on the operating income?

Sure. Erik, on the operating income side, there are a couple of dynamics when we compare the second half of 2025 versus the second half of 2024. Let me start with the positive to the question that was asked earlier: product cost reductions and the work that the team has been doing will continue to show a year-over-year basis when comparing the second half of last year to this year. We will continue to deliver gross margin expansion. However, on the other side, some of the work that we were able to continue in the first half of this year around selling previously reserved inventory actually happened later in the year last year. This creates a comparison challenge, about 100 basis points of margin reduction when comparing the second half of the two years. We continue to see freight costs; I talked about it, and we are expecting freight costs to be higher year-over-year when you compare the two second halves, as well as a little bit more promotional activity. So really, it is a gross margin dynamic. Additionally, we spent a little bit more on OpEx year-over-year as we are investing, as Hanneke said, in the good cholesterol to grow the business, which is essential for our future, in areas like sales and marketing and product development. You see a little bit of that, too. The fundamental dynamics of gross margin will transition from about 43% in the second half of last year, which is a little elevated, to the 41% to 42% that I just mentioned earlier.

Okay. That's very helpful. Thank you Matteo for that. And then obviously looking forward to working together. If I were to follow up and maybe double-click on that comment that you just made in terms of OpEx, I would love to know if there is maybe a different approach now from a management team that is finally cohesive in that OpEx was up 15% year-over-year in the quarter. I think as a percentage of revenue for the September quarter, it was a 10-year high. Are you signaling a change in the spending intensity of this company? Obviously, you mentioned some investments in China, but I would love to just maybe step back, bigger picture unrelated to just the quarter. Are we seeing a change in how you guys spend to drive growth, how you spend on sales and marketing? Or was what we saw in the September quarter a one-off and not necessarily indicative of spending intensity as we go forward? Thanks so much.

Yes. No, for the full year, we'll be in the range that we've always talked about: 24% to 26% OpEx. I am very intentional about shifting OpEx into that good cholesterol, which is R&D and sales and marketing. That's how we will grow the top line of this business, so important for our future. This quarter is running a little high; that is okay. As you heard, we are making a few strategic investments again in R&D, in marketing, both in the West and in China. That's important. We could afford it this quarter because gross margins came in a little higher than expected. However, we will continue to operate with discipline on OpEx.

I don't have much to add to that.

Thanks so much, guys.

Thanks Erik.

Thank you Erik.

Our next question comes from Joern Iffert with UBS.

Thank you. Can you hear me?

Perhaps we'll circle back to Joern and go to the next question.

Our next question comes from George Brown with Deutsche Bank.

Hi guys, can you hear me?

Yes, George.

Perfect, thanks for taking my questions. I just have two, if I may. Firstly, on China and the upcoming election in the US, how do you think about the potential impact of tariffs on your business given that a lot of your manufacturing is currently in China? And then just a quick second question. In gaming, you mentioned that your simulation business has grown double digits for three quarters now. Can you help us understand what's driving this? Thanks, guys.

Hi, George. Let me take the first one. The team has been doing a great job for quite some time in driving the diversification of our supply chain. Today, if you look at the units that we ship out globally, about 40% is shipped from outside China. So they're not manufactured in China. We are targeting to increase this percentage to 50% in the near future. This has been a concerted effort that addresses the tariff concerns, but more importantly, it makes our supply chain more resilient anyway. So that's the answer to your first question.

Yes. We have very deep experience in navigating different circumstances regarding our supply chain, which has been managed by a great team. We are on a multi-year journey to make our supply chain more resilient and diversified, and we think we will be prepared for whatever happens after the US election. Regarding your question about gaming simulation, yes, it's a super exciting category for us that continues to do very, very well. This is due to a combination of share gains and our efforts to grow that market, not to underestimate that piece. Our superior products begin with the outstanding quality of our wheels and are discussed in the superior execution, especially in stores. I would point to Europe as an example of outstanding execution in places like MediaMarkt and Fnac, where we set up our gaming rigs, organized weekend game days for families to engage in gaming, and foster participation that creates demand and trial. This category has relatively low penetration, providing significant upside for years to come.

Thank you so much, guys.

Thank you.

Our next question comes from Michael Foeth with Vontobel.

Hi, can you hear me?

Yes, Michael.

All right. Hi. Just one left for me. I was just wondering, you were talking about opportunities and expanding your addressable market. You are very successful in the education market. So I was wondering if you can make any comments on inroads that you are making in other end markets to expand your opportunity, or is that too early at this stage?

Yes. Thanks for the question. It is probably a little too early to comment. The Total Addressable Market (TAM) we can play in on the work side of our business is much bigger than our current market presence, mostly in enterprise. If you look at all these other places where people work, whether that's education, retail, health care, or manufacturing, it more than doubles our TAM. This is a longer-term strategic priority for us, but we will take it step by step. Entering a new vertical requires new capabilities, certainly from a go-to-market point of view. Education is the one that we are doing first. We are seeing encouraging results, with high 20s growth again in this past quarter. Maybe at AID, we will talk a little bit more about what might come next.

Okay, sounds good. Thank you.

Great. See you Michael.

Thanks, Michael. Hanneke, that's our last question for today.

Super. Thanks, Nate. Thanks everyone for joining us. I really appreciate your interest in Logitech, and I just want to take this opportunity to say thank you once again to the Logitech teams around the world for the excellent growth they delivered in the last quarter and for everything they do. We look forward to speaking with you next quarter. Take care, everyone.