Earnings Call
Logitech International S.A. (LOGI)
Earnings Call Transcript - LOGI Q2 2022
Bracken Darrell, CEO
It has stopped raining in California. You’ll be pleased to hear that it feels like we're in a monsoon season. Nicole, wherever you are in that virtual background of yours, that’s how we envision our new office. Thank you, Nicole, for that engaging summary of the Safe Harbor provisions. This month marks our 40th anniversary at Logitech. We have evolved from a Swiss software startup specializing in computer mice to a design-focused company with a significant market presence across various categories. We are gaining market share in most of our key product areas, including our original category, the mouse. I mention our 40th anniversary not to dwell on the past but to highlight our future. Just as the growth of PCs supported our business for three decades, a series of long-term trends will bolster our growth for many years ahead. Gaming is set to emerge as the largest sport globally, appealing to both participants and spectators. Video collaboration is on track to completely replace audio-only communication. Nearly everyone will create and consume content. Additionally, the mouse and keyboard categories will continue to grow as people work, create, and learn in comfortable environments, moving away from small phone screens. I feel confident about Logitech's position in the context of these long-term market trends; gaming, video collaboration, streaming, and creator tools in our workspace categories. We are well-positioned to capitalize on all of them. That’s the long-term perspective. Now, let’s focus on the near term. Most organizations are adjusting to new hybrid working environments. Evidence shows that employees prefer working from home two to three days a week. Many employers accept this reality, and numerous companies are redesigning their offices to support this shift. Logitech and many others are adapting office spaces to facilitate hybrid work by creating areas for meetings, collaboration, and creativity, while still providing dedicated workspaces for those who prefer them. The traditional work model of heading into the office and then going home has changed for many of us. Our workspaces can now be anywhere, whether it's a traditional desk, a hot desk, a home office, a kitchen table, or a coffee shop. As people work from various locations, the need for video-enabled spaces in offices is growing; conference rooms, huddle rooms, and collaboration spaces must all be equipped with video. This presents an incredible opportunity for Logitech, as we provide solutions for all types of workspaces, and most people will require more than one. Outside of work, people want to create, connect, and enjoy themselves. Humanity has always had the urge to innovate and bond with others. Nowadays, most creation happens in the digital world, a trend that has been on the rise for years and surged during the pandemic. In fact, it continues to grow. The total viewing hours across streaming platforms, including Twitch, YouTube, and Facebook, increased by 20% year-on-year last quarter, from 7.5 billion hours to almost 9 billion hours in Q2 of 2021. On that note, let’s review our performance in Q2 of this year. Last year, we reported incredible Q2 growth of 73% driven by the pandemic. Building on that already large foundation, we didn’t just maintain our growth but experienced it once again this quarter. We achieved record sales, double-digit sell-through across all regions, and expanded our market share for nearly all revenue streams. I am proud to say that we are innovating better than ever in our 40-year history in areas such as design, engineering, and sustainability. Our PC peripherals segment remains very robust, with double-digit sales growth in pointing devices and PC keyboards and combos. For instance, this quarter we introduced the MX Keys Mini and Mini for Mac, keyboards designed to meet the needs of the creative community. This new keyboard combines the best features of the popular standard-size MX Keys, which sits in front of me, but in a more compact wireless design. I’m currently using it, and it's excellent. On the flip side, if you search for POP KEYS on our website, you’ll find a line of mechanical keyboards featuring colorful, replaceable emoji keys, just launched in China. It’s fun and appealing, especially for Gen Z. Our gaming category also posted another strong quarter with market share growth in PC, console, and simulation gaming, with underlying sell-through growing double digits in this segment as well. Our tablet category has more than doubled in size over the last two years, making our product portfolio stronger than ever. Education and online learning present significant growth opportunities, not just for K-12 but as universities adopt online courses and various learning platforms increase in popularity. Remote teaching has become simpler, and we have much to offer educators to facilitate both in-person and remote learning. As organizations globally redefine their work practices—remote, on-premise, and hybrid—video usage continues to rise. According to Frost & Sullivan, of the nearly 90 million meeting rooms worldwide, only about 8% have video capabilities. This highlights a significant gap. We are working to address this issue and help our customers adapt to new ways of working. It is essential to incorporate video technology in future meeting spaces, as lacking video access creates a poor experience for remote attendees who have recognized the benefits of face-to-face video interaction over the past year. Every IT decision-maker is considering this aspect. The careful restructuring of how companies operate in a hybrid model is a pivotal moment for many IT departments, as it will fundamentally shape office structures and technology within meeting rooms, driving a cultural evolution in organizations. This is why IT departments are approaching this transition with great care. We are committed to developing solutions for these IT leaders and are heavily investing in this area. I also want to briefly address the ongoing supply chain challenges that have been widely discussed. Although we have managed to navigate some of the global supply chain difficulties during the pandemic, Logitech has not been immune to their impact. We are proactively managing our supply chain but anticipate ongoing challenges from increased logistics costs and delays in component availability. However, we believe that our long-standing supplier relationships and our own production facility will help us remain competitive in this exceptional supply chain landscape. Finally, let me provide a quick update on sustainability. We have recently elevated our climate goals, committing to achieving carbon neutrality this year and planning to be climate positive within a decade, at which point we will remove more carbon from the environment than we produce. These are industry-leading commitments. We are addressing our carbon footprint throughout the entire value chain, designing our products with sustainability in mind, utilizing renewable energy in 92% of our facilities, and supporting certified carbon removal initiatives. We are enthusiastic about the long-term trends driving our business growth. These trends have propelled our business before the pandemic, gained momentum during, and will continue to be key drivers in the coming years. Our long-term strategy remains steadfast. The current market dynamics align with our strengths, and we are intensifying our efforts to become even stronger. Now, I will turn the call over to Nate for further comments on our business performance this quarter.
Nate Olmstead, CFO
Thanks, Bracken. We delivered a solid quarter and continue to execute well on a number of fronts. In Q2 and for the first half of the year, we grew the top line, maintained strong gross margins, gained share in most categories, and returned record levels of cash to shareholders. We are confirming our full-year outlook despite unprecedented supply chain industry challenges. Turning to the Q2 results, our total company top line grew 2% in constant currency with strong momentum in our pointing devices and keyboard categories, both growing double digits. Webcam sales decreased this quarter by 9% after more than tripling last year. We gained share in all three categories and each has good long-term growth potential, driven by hybrid work and greater category awareness. Q2 video collaboration sales declined 4%, but sell-through grew double digits in all regions. Net sales for Americas and Asia Pacific grew year-over-year. And while EMEA net sales declined versus the prior year, they grew sequentially and EMEA sales more than doubled versus two years ago. Gaming grew 9% against 84% growth last year and delivered impressive share gains across PC gaming, simulation, and console headsets. It's been an excellent first half for gaming enabled by a very strong lineup of innovative products, solid marketing execution, and our position as the leader in the fastest-growing categories like wireless mice and keyboards. Sales in our tablet accessories category declined 3% in Q2. But excluding Japan, where we have a large education order in Q2 through Q4 of last year, sales grew more than 30%. Importantly, our tablet category is still more than double the size it was two years ago and our portfolio is stronger than ever, as demonstrated by 6 points of share gain in the quarter. Our music categories declined as expected in Q2, down 14% overall, including mobile speakers down 11%. Q2 non-GAAP gross margin remained strong at 42%, although down 370 basis points versus last year's elevated levels. We anticipated that gross margins would be down from last year. And as we look out to the rest of this fiscal year, I expect gross margins to be lower than current levels for three primary reasons. First, we expect our promotional spending will continue to increase although still remain below historical levels. Second, we will continue to invest in retail point-of-sales marketing, which was significantly curtailed last year due to store closures and broad-based supply shortages. And lastly, while we continue to manage our supply chain, we expect to be impacted by industry-wide component and freight cost increases. Turning to expenses, we executed our plan to strategically invest to grow our business over the long term. Our non-GAAP operating expenses increased 52% in Q2 to $337 million. The increase was largely driven by investment in marketing, sales coverage, and product development. As a percentage of sales, OpEx was higher than Q2 of last year but still down versus Q2 two years ago, highlighting our significantly increased scale as a company. Rounding out the P&L, our Q2 operating profit decreased 40% to $211 million and operating margins were 16.2% of sales, down about 12 percentage points versus the prior year and up about 4 points versus two years ago. Cash flow from operations was negative $63 million in Q2. We returned significant cash to shareholders with $120 million of share repurchases, paid an annual dividend of $159 million, and ended the quarter with a cash balance of approximately $1.1 billion. At the end of September, our inventory was $828 million, up $433 million from last year, while inventory turns were 3.7x versus an unusually high 7x in Q2 a year ago. Historically, our Q2 cash flows tend to be positive, but they were negative this quarter as inventory turns were slower due to longer transit times and our continued strategic use of the balance sheet to secure long lead time components for key product categories. I expect to see positive cash flow generation in the second half. But given that logistics, bottlenecks, and supply dynamics will remain challenging for at least the rest of this year, our cash from operations will be lower than our initial outlook. This dynamic should be temporary and as lead times and transit times improve, cash flow will rebound due to reduced working capital. Our Q2 cash conversion cycle was 69 days, up from an exceptionally low 19 days last year and up from 43 days two years ago. The primary driver of the change in our cash conversion cycle is higher inventory days, which were up about 25 days versus pre-COVID Q2 levels. Looking ahead, we are tracking to our plan of sustaining the increased revenue scale from last year and investing to build a larger, faster-growing, and more profitable company for the long term. We are confirming our fiscal year '22 outlook of flat sales growth in constant currency plus or minus 5% and maintaining our fiscal year '22 non-GAAP operating income outlook of $800 million to $850 million. We are well-positioned in the market, and this outlook reflects our focus on driving long-term growth. With that, let me hand it back to Bracken.
Bracken Darrell, CEO
Thank you, Nate. Our consistent operational execution and ability to capitalize on long-term trends like hybrid work, video everywhere, gaming, and content creation continue to drive our performance. These trends that drove our performance pre-COVID and accelerated during COVID continue to position us really well for the future as well. As I said at the top of the call, we may have started 40 years ago as only a mouse company but we're far from that now. Our portfolio today is diverse, our pipeline of upcoming products is strong, and we continue to build our capability in world-class design and sustainable innovation. Many of our employees listen to this call. And at this point, I want to thank each one of you for the hard work throughout this quarter and the last year and a half. I'm confident about this year and super excited about the years to come. Now Nate and I are ready for your questions.
Operator, Operator
As a reminder, you can chat me if you'd like to ask a question. And with that, I will have Asiya Merchant from Citi ask the first question.
Bracken Darrell, CEO
Hello, Asiya.
Asiya Merchant, Analyst
Hi. For some reason, I can't start the video. It seems like the host has disabled it. So I'm just going to ask on audio. So one for Bracken and one for Nate. So Bracken, you're talking about long-term growth. You guys obviously had a very robust outlook. And it seems like some of your competitors, HP and Dell, seem to buy into the idea that peripherals are indeed a very attractive category and should see growth. But in the face of this, we're seeing some normalization. We're seeing some normalization here with selling versus sell through. Are you expecting as we exit the year and when you're sell-in and sell-through kind of normalize hopefully that we should start to see growth, which is more in line with your target model, or relative to what investors are concerned about that there will be this period of sustained low single-digit or flattish growth given the extraordinary growth that we've seen during the pandemic? Then I have a question for Nate as well.
Bracken Darrell, CEO
Okay. The reality is that I have a chart that reviews the last couple of years of growth, and the numbers are impressive. It's important to remember that they reset our baseline. For instance, in the mouse and keyboard categories, we now have multiple extra workspaces that are upgradable. Pre-pandemic, our business mostly relied on upgrades, and now we're upgrading for multiple locations, including the office and home, as companies aim to standardize. I believe that as we move into the next year and beyond, we will see long-term growth in these categories, which will begin to normalize. I'm really excited about our position. Additionally, we're not passively waiting for the market to change. In most of our categories, we are the market leader and are actively driving progress. I believe we have the best innovation engine in the company's history right now, which is why we're gaining market share in a significant portion of our categories. We are committed to making these developments happen instead of merely observing them.
Asiya Merchant, Analyst
As it relates to video collaboration, Bracken, it seems like even to get to the low end of your guide 10% to 25%, I think that was shared at the analyst event. You're going to have to see some strong growth. I know there are some sell-in, sell-through dynamics that are going on there. But should we even expect as reported video collaboration sales to be in that range or are we still going to go through this period of sell-in, sell-through dynamics in the back half of this fiscal year for you guys?
Bracken Darrell, CEO
I think from a channel inventory standpoint, we're in pretty good shape, but I think we could end up falling below that range that we gave at the beginning of the year. I think it just depends. One of the things I think we're seeing is that there's a longer period of decision-making happening in a lot of companies about how to restructure their offices, and that's probably delaying their purchases and really how they're going to set up video inside the office. So I think that's possible. The good news though is we're really diverse. We've got a great strong diverse portfolio. This has been the story for us for as long as I've been here, especially the last five years. When one thing's performing a little above what we thought, the other one is sometimes below and vice versa. So right now, if you look at our pointing device, keyboard, combo business, and gaming, all of them are performing above kind of what we already know. So I'm convinced that the mix of these will continue to give us really strong growth for the year.
Asiya Merchant, Analyst
Great. Please go ahead, Nate.
Nate Olmstead, CFO
No, go ahead.
Asiya Merchant, Analyst
Just for Nate about inventory levels, significant discounting if this demand soars. You guys do have elevated inventory at this point. I know some of that is just strategic buying, given everybody else can get the components they need? What gives you confidence that you're not going to lead to an environment where there will be significant discounting?
Nate Olmstead, CFO
Let me comment on that. I think Bracken addressed all the important aspects of your earlier question. Regarding the sell-through and sell-in dynamics, remember that last year our sell-in exceeded sell-through regarding growth rates. This year, we are seeing a normalization of that, which is completely expected. Last year, there was minimal promotion and marketing efforts, and this year we've increased those activities, as we've indicated. That’s the main reason for what you’re observing, Asiya. This is not surprising or concerning, and I expect it to normalize by next year, though we'll monitor how it develops. Concerning inventory, I believe our strategy is functioning effectively. As Bracken noted, we are gaining market share across the board, which is an improvement compared to last year when we experienced some share losses in certain categories like web cameras. Our decisions regarding components, finished goods, and inventory replenishment are yielding positive results. Moreover, our inventory investments are focused on our best-selling products with longer life cycles where we have significant market presence. We are making these decisions strategically and with careful consideration. I feel very confident about our ability to manage inventory effectively in the current market environment.
Asiya Merchant, Analyst
Great. Thank you.
Nate Olmstead, CFO
Thanks.
Bracken Darrell, CEO
Can I add one more point to that? The idea that if we have extra inventory, we would simply sell it all at significantly reduced prices is not something we do. This has not been our practice in the past, and I cannot envision doing that in the future.
Asiya Merchant, Analyst
Fair enough. Thank you.
Operator, Operator
The next question is from Paul Chung from JPMorgan.
Nate Olmstead, CFO
Hi, Paul.
Bracken Darrell, CEO
Hi, Paul.
Paul Chung, Analyst
Hi, guys. Thanks for taking my questions. So just on VC, we're starting to see some return on the increased investments over the past year. Can you talk about the reception of some of the new products you've released in VC and how those are trending tag, docks, some of the earbuds, etc.?
Bracken Darrell, CEO
Yes, I’ll just jump in on that. It's probably too early to really react to those since they're brand new. The sales cycles tend to be a bit longer in VC. Overall, I feel very optimistic about our innovation engine in video collaboration across the business. We continue to introduce great products. Scribe, one of our newest offerings, serves as a whiteboard for video and has been really exciting. The sessions have been fantastic. Additionally, Logi Bolt, which is a secure way to ensure a software-enabled service that comes with our workspace equipment, has also been very well received. I'm really pleased with what we've developed so far and what's on the horizon.
Nate Olmstead, CFO
Paul, I want to add to that. We experienced double-digit sales growth year-over-year in video collaboration across all regions, demonstrating strong demand. As our install base increases, it's important to focus on the portfolio. We will continue to collaborate with our customers to enhance their conference room solutions beyond just cameras, incorporating products like Scribe and others. We are making significant progress in development, which is a key investment area for us. If you examine our profit and loss statement, you'll see that a considerable portion of the increased research and development spending is directed toward video collaboration and advancing that roadmap.
Paul Chung, Analyst
So speaking of regions, what kind of drove the relative strength in Asia and what trends are you seeing emerge there? Any lead indicators for the U.S. and Europe markets as well?
Nate Olmstead, CFO
China was really the highlight there. Bracken, go ahead.
Bracken Darrell, CEO
No, it’s okay. Go ahead, Nate.
Nate Olmstead, CFO
China was truly the standout in Asia. We observed strong performance not only at the total company level but also specifically for VC. While China was the highlight, there was also positive strength in other regions of Asia. It's encouraging to see that, considering China has experienced the pandemic the longest, they have emerged more fully from it. During our video calls, it's striking to see groups of people gathered in conference rooms. This transition to a different stage of the pandemic in such a large market demonstrates that we continue to experience high demand across our portfolio.
Paul Chung, Analyst
Okay. And then last question on guidance. So you've generated about 54% of operating profit in the first half already. That's typically in that 40% range historically. Are you keeping kind of a bigger cushion this year on supply chain and an increase in promotions, if you could expand there? Thanks, guys.
Nate Olmstead, CFO
Yes, you're right, Paul. The second half of this year, with Q3 being our historically largest quarter, is truly an unprecedented time. I am focused on ensuring we can navigate through this quarter. As Bracken pointed out, we are not exempt from supply challenges. We have adequate stock and supply, and our channels are in good shape. However, there are certain products where we are pursuing components and supply. Demand during the holiday season can be quite volatile as people shop for the holidays. We must ensure we can meet all the demand we anticipate. Overall, with strong double-digit sell-through rates, demand remains quite healthy.
Paul Chung, Analyst
Thanks, guys.
Bracken Darrell, CEO
Thanks, Paul.
Nate Olmstead, CFO
Just adding to that, Paul, I guess the incremental margin thing that we're facing like everyone else is just incremental logistics costs which have gone up. Even since Q1, they've gone up 2x to 3x on the ocean year-over-year. So I think some of that's when I'm factoring in as I look into the back half of the year. We will be spending more on air freight. I’ve already approved a lot more air freight this quarter than what our initial plans were. But we're using the P&L and we're using the balance sheet to fulfill the demand that's out there.
Operator, Operator
The next question is from Ananda Baruah from Loop Capital.
Bracken Darrell, CEO
Hi, Ananda.
Ananda Baruah, Analyst
Hi, thanks everyone. Good morning, it's nice to see you. I appreciate you taking the questions. I have two inquiries, if possible. First, I apologize if this has already been addressed. There are several developments this morning. Could both Bracken and Nate discuss what you have observed in the last 90 days that differs from your expectations, particularly regarding the operation of the business or the key end markets and product areas? I have a follow-up as well.
Bracken Darrell, CEO
Sure. I'll take the first one. And Nate, if I've left anything, maybe you can too. Yes, I would say nothing's really a major change. But I would say if there's a change, I think the supply chain challenges, especially in logistics have gotten worse. I think that's probably well, both covered in the media, and we're not immune to it as we said at the beginning of the call. I think we've managed it really well so far. But it's certainly gotten more challenging to manage. Would you add anything else, Nate?
Nate Olmstead, CFO
I think that's probably been the biggest change.
Ananda Baruah, Analyst
That's quite promising if that's the only aspect to consider. The second question revolves around the emergence of more competitors in the spaces where you operate. You've contributed to promoting these areas in a mainstream sense. What is your perspective on how you would like our community to approach the concept of increased competition? I pose it this way because, on the surface, HP is a recent example, but they aren't the only player in this field. It appears that others are starting to explore this market, and it's challenging for us to understand what increased competition truly entails. Could you share your insights on this matter and how you would prefer us to view it, along with Logitech's positioning in this context? Thank you.
Bracken Darrell, CEO
Thank you, Ananda. We have always anticipated more competition in strong categories, and we are active in excellent categories, so we have been prepared for new competition. This is why we have invested in innovation and our go-to-market strategies. We are genuinely excited about the capabilities we are developing in both areas. I feel very positive about our current position. In fact, I would feel quite uncomfortable if we didn't have increased competition, as it might indicate a troubling future for the category. I believe these strong categories naturally attract great competitors, and we thrive on competition. Nate, would you like to add anything?
Nate Olmstead, CFO
Yes. I think one benefit of some of these competitors, Ananda, is just the awareness that they bring to the category as well, right? As they're trying to grow their business, they're going to bring more awareness to categories where we are very strong and that we're passionate about. I think keys to our success are to continue to segment the market to identify specific customer needs, and then go address those with innovation and great design, of course. So I think it doesn't change our strategy. It doesn't change our focus on execution. But I think to the extent it brings more awareness to some of these categories, I see that as a benefit.
Bracken Darrell, CEO
I'll just double down on that. I think you mentioned at the beginning, you said we've been out there kind of evangelizing this category at the beginning. It will be nice to have more people evangelizing this category. I think it will drive higher growth. And we're still such a small fraction of rooms enabled in the conference cams, for example, 1/11 of total rooms according to Gartner and so forth. So yes, I think it's probably an indicator of how strong this market opportunity is.
Ananda Baruah, Analyst
If legitimate competition enters the market, do you believe that you can still thrive? Is there enough space for you to achieve the growth and profit goals outlined during your last Analyst Day?
Nate Olmstead, CFO
All our competitors are legitimate, Ananda. I think it's an important place to start. Bracken, go ahead.
Bracken Darrell, CEO
Absolutely. We've had legitimate competitors in almost all our categories for as long as we've been around. We started out as an OEM maker of mice and keyboards and we were selling directly and competing directly with those players over time. So we expected the competition. They'll be great competitors. They'll make us better. And we will invest in making sure that we are better.
Ananda Baruah, Analyst
That’s good.
Nate Olmstead, CFO
Yes, let me just add a little bit. I don't build our models here internally assuming no competition, and obviously you're seeing an increased investment in marketing and brand from us too. That goes directly to your point, which is that we expect competition. We think these categories have gotten stronger, and we will see more competition. And so the increased investments that we're making in brand, marketing, innovation, those are all part of our strategy to compete.
Ananda Baruah, Analyst
Thanks, guys.
Bracken Darrell, CEO
Thanks, Ananda.
Operator, Operator
The next question is from Stifel, Jürgen Wagner.
Bracken Darrell, CEO
Hi, Jürgen.
Jürgen Wagner, Analyst
Hi. Thanks for letting me on. A follow up on the inventory questions, I'm afraid. Can you split it up between finished goods and what are those key components you mentioned in your introductory remarks? And what is the visibility you currently have on the Christmas business across your divisions?
Nate Olmstead, CFO
Let me take on the inventory side. We are holding more components as a percentage of our mix than we have in the past. As I mentioned, I think that's a key part of the strategy. The other thing is that our in transit inventory is higher too. So as these port delays and shipping delays and things like that occur, more of our inventory sits in transit. So you can think about that as finished goods, I guess, but it's not as productive because of these delays. And that's the primary driver of the increased days of inventory that I mentioned in my prepared remarks, Jürgen, is port delays. Things are taking weeks longer just in transit these days. And so again, as that improves and I think it's not going to happen in the near term, and that's why I made the adjustment to the cash flow outlook for this year. As those transit times improve, as the lead times for components improve, I do expect to see our days of inventory come back down to kind of more historical levels. I don't think it's going to look like it did last year. Obviously, last year was very unusual because of the strength of the demand that we were chasing supply the entire year. But I do think days of inventory will come back down to our more historical levels. But I think that's going to take some time and probably I don't expect it to be this year.
Bracken Darrell, CEO
Jürgen, on the visibility into the Christmas quarter, I would say, Nate and I both feel like gosh, last year we set aside our view of the normal seasonality of the business because of the strange year of the pandemic. I think another year will really set aside our normal view of seasonality and say, okay, this is another strange year, especially given the supply challenges. So I think when you put that together, I think our visibility's probably not what we'd normally love to have. But I think we've got a plan in place that we've got products, we've made strategic investments in inventory and we feel good about where we are. And I think we've recommitted to the guidance because we feel good about that.
Jürgen Wagner, Analyst
And do you have certain product categories where you have better visibility at the moment?
Bracken Darrell, CEO
Do you want to answer that, Nate, or how would you answer that?
Nate Olmstead, CFO
I believe we have always indicated that in video collaboration, there's a greater level of visibility because you can establish a pipeline while engaging with enterprise customers. For the larger deals, there's certainly more insight available, but a significant portion of that business can also be described as a run rate. Therefore, we do have improved visibility in video collaboration.
Jürgen Wagner, Analyst
Okay.
Nate Olmstead, CFO
It's still less than 20% of our overall sales is video collaboration.
Bracken Darrell, CEO
I would also mention that this situation is not very different from the rest of our business. We are currently in a typical visibility state for this time of year, where there is always some uncertainty about holiday shopping. However, it usually picks up, and I believe it will this year as well.
Jürgen Wagner, Analyst
Okay. Thank you.
Bracken Darrell, CEO
Thanks, Jürgen.
Operator, Operator
Your next question is from UBS, Joern Iffert.
Nate Olmstead, CFO
Hi, Joern.
Bracken Darrell, CEO
Hello, Joern.
Joern Iffert, Analyst
Hi, there.
Bracken Darrell, CEO
Good to see you.
Joern Iffert, Analyst
Hi, Nate. Good to see you. I hope all is well.
Bracken Darrell, CEO
It is.
Joern Iffert, Analyst
Quickly, and two, three questions please. The first one is, on your marketing spend, sales being up slightly, marketing spend up around 65% or 66%. If I extrapolate this for the full year, it's maybe around $1 billion in marketing and selling line being maybe then 80%, 90% of sales historically, about 16%, 17% pre the crisis. Does it mean your growth is becoming more capital intensive or is there room to streamline the marketing and selling expenses in the second half supporting the margin somewhat? That would be the first question please. And I would have one or two follow-ups please.
Nate Olmstead, CFO
If you want, Bracken, I can start on that one. So what we're executing right now is this strategy of shifting ECR gross margins go up, and we're reinvesting some of that gross margin expansion into sales and marketing, Joern, to try to drive up the brand and the awareness, which provide us with long-term benefits and I think long-term leverage as well. But that's the strategy we’re executing. It’s the same one that we talked about pre-pandemic as well, the shift from push to pull. And I think we were able to move more quickly on that because of the strength in the margins that we saw last year, and put us in a great position to go execute that strategy aggressively this year. Bracken, you want to add some?
Bracken Darrell, CEO
Certainly. When we consider our overall operating income or margin, it's not something we closely monitor. We see it as a limitation in our mission. We're committed to achieving a certain operating margin to reinvest in marketing, which we believe will drive stronger long-term growth. Developing a marketing engine takes time, but I'm optimistic about our direction, and our team is performing well. We are fundamentally changing our approach, and we’ll continue to learn from this process, ensuring that our investments are sound while meeting our commitments to operating margin and long-term financial performance.
Joern Iffert, Analyst
Thank you for this. And then maybe a second and third question. The second question to follow up here on your medium-term guidance. You increased your medium-term targets to 8% to 10% from 7% to 9% before. This is reflecting confidence, of course, but now maybe some things becoming more shaky. You mentioned video conference. It could be below your initial targets. How should we think about the base? What is the baseline from where you think you can grow 8% to 10%? This is coming down now in the current environment? And then I would have a last technical question please.
Bracken Darrell, CEO
Go ahead, Nate. You can start.
Nate Olmstead, CFO
We did, Joern, obviously confirm the outlook for this year. So there's really no change in the base. And as Bracken mentioned, there's a different mix of growth than what we initially thought at the start of this year. But again, that's not unusual. And I think it really highlights one of the benefits of our portfolio is that it's diverse, and that there's good profit generation across that portfolio, so we've been able to sustain the investment plan that we had, despite the different mix of top line revenues. Bracken?
Bracken Darrell, CEO
The only thing I would add to that, Nate, is I think we talked about that 8% to 10% long-term guidance and our raised in our long-term view of our growth rate capability. That really comes from the fact that both categories are attractive for the long term and our innovation engines are attractive for long-term, and absolutely nothing's changed on neither one of those. I feel really, really good about them.
Joern Iffert, Analyst
All right. And so this in the last segment question, when you initiated your guidance in March and then you update it I think in April on non-GAAP EBIT versus this number, what is roughly the additional freight, logistics, and component cost which has exceeded your budget? Obviously, $150 million, $100 million, just have a rough idea about this, what are the additional costs you're facing right now?
Nate Olmstead, CFO
I don't think I can do the math that quickly. I'll give you something on that, Joern, which is this quarter year-over-year, we had about a point hit to gross margins from increased freight costs mostly from ocean. So I can tell you in the quarter, that's kind of what we had. And we'll probably see that throughout this year, I think. We have actually reduced the amount of air freight we've used year-over-year, which was my expectation, but the air freight rates have gone up such that we really haven't seen a real benefit from the reduction in air freight volume. And at the same time, as we shifted things to the ocean, we've incurred some additional costs on freight there. So it's all included in our P&L to date and it's all included in our outlook. But it has been a headwind, I think since March.
Joern Iffert, Analyst
All right. Thank you very much.
Bracken Darrell, CEO
Thank you, Joern. Take care.
Joern Iffert, Analyst
You too.
Operator, Operator
Okay. The next question is from ZKB, Andreas Mueller.
Bracken Darrell, CEO
Hi, Andreas. How are you?
Andreas Mueller, Analyst
I'm doing well, thank you, and I hope you are too. I have two questions. First, regarding gaming, have you noticed any effects in China from the new gaming law limiting the amount of time teenagers can spend on online games? Have you seen any impact? China's performance has been good. My second question is...
Bracken Darrell, CEO
Our gaming business primarily consists of products intended for individuals aged 18 and older, so the law limiting online gaming for teenagers has not had a significant impact on our operations.
Andreas Mueller, Analyst
Probably these Chinese people spent the same time in front of a PC doing something else than gaming, isn’t it?
Nate Olmstead, CFO
But I think maybe just to add a little more color to that. I think if you're going to play, you're going to buy some peripherals. So unless you stop playing completely, you're still going to buy some gaming equipment, whatever that is, I think Andreas too. But just to add a little data to it, we did not have any slowdown in growth in China gaming; actually had a very, very strong quarter. The growth was similar to last quarter year-over-year.
Andreas Mueller, Analyst
The growth behind the pointing devices, keyboards, and combos, was that really still demand from the home office or was it really back to the office demand that the offices just had some sort of an investment cycle in these type of products?
Bracken Darrell, CEO
I believe it's a combination of both factors. We are experiencing significant growth in our B2B segment as well as in B2C. We now have a larger customer base, and many are upgrading their equipment. I regularly hear from people who have recently purchased an MX Master and sought my recommendations after using less effective products during the pandemic. Previously, our business was not performing well. As I mentioned at the start of the call, I am thrilled about the innovations we are introducing in traditional categories like mice and keyboards. These categories have become dynamic and exciting once again. We recently launched the Pop Keys, and I encourage you to check it out on our website. We might even make this category attractive again. I believe our innovation efforts are a key reason for our promising outlook.
Andreas Mueller, Analyst
Okay. Thank you very much.
Bracken Darrell, CEO
I didn't get you excited about keyboards and mice being sexy, Andreas.
Operator, Operator
As a reminder, chat me if you would like to ask a question. And the next one is from DA Davidson, Tom Forte.
Bracken Darrell, CEO
Hi, Tom.
Tom Forte, Analyst
Great, thanks. So one question and one follow up. So from a supply chain standpoint and a logistics standpoint, can you remind me to what extent you have control? I think you have some owned and operated assets in the manufacturing side? So to what extent do you have influence on your supply chain and logistics, and to what extent you have less influence?
Bracken Darrell, CEO
We have our own manufacturing in China. And then we manage contract manufacturing in China and outside of China. We make about half of what we sell in that owned manufacturing. From a logistics standpoint, we really manage our logistics through the normal systems that are used broadly.
Tom Forte, Analyst
Right. So the constraints are primarily the components then. The constraint is not having the raw materials. It isn't that you don't have capacity or the ability. So increasingly, it seems like in Asia, you have to make the product and then you have to deal oftentimes with plant shutdowns because they don't have electricity, then you have to store the product, then you get to ship the product. Sorry, Nate, you were going to chime in.
Nate Olmstead, CFO
Well, I actually was going to go where you're going too, because I think this is a supply chain, right? So there's links of it. And I think what's really apparent as you look at what's happening globally across industries is just how those different links are owned by different people, right? And so, yes, it is to our advantage. I think right now that we have our own factory and we control the purchasing for a lot of our components. In fact, we control the purchasing for a lot of our components, even when we use a partner for manufacturing. And so I think that is to our benefit. But you're right. Throughout the supply chain, you're going to hear stories about warehouse capacity being tight. You're certainly hearing stories about trucking capacity being tight. When we look at and see these pictures of ships and container ships stuck at port, it may not be that the problem is at the port itself with the cranes and such, but it could be with trucking, it could be with warehousing. There needs to be a place for these goods to go. And I think that's why this is not a quick fix. That's why you're seeing things like President Biden jumping in and getting involved and why we describe this as unprecedented. The supply chain is bottled up now in a few places and it's going to take some time for that to work out. But it is to our advantage, I think, in this environment to have the factory, our own factory and again to manage and control a lot of the purchasing.
Tom Forte, Analyst
Excellent. So thanks for clarifying that. For my follow-up question, I want to talk about the demand side, in particular from gaming. So it looks like you had very impressive growth on top of growth and it was widespread across all your categories. Can you talk about demand for gaming? And if at all, for example, if consumers aren't able to get their hands again on the new Xbox and PlayStations this year, does that have any input? Does that just mean, well, the better next 12 months? How should I think about that?
Bracken Darrell, CEO
The demand has been strong across all segments, including simulation, which mainly includes steering wheels, and console gaming, which also encompasses PC gaming. The console gaming aspect of our business is relatively small, so I'm not overly worried about any limitations on console purchases. Overall, I think we'll be fine. It's encouraging to see the gaming industry performing well as we move past the pandemic's peak. The demand for consoles is a significant positive indicator, demonstrating the overall strength of gaming as people continue to buy next-generation Xbox and PlayStation consoles. Nate, do you have anything to add?
Nate Olmstead, CFO
I think those are all the right points. And you got to be on shelf to sell. And so I think again, that's why that is part of our strategy. And I think part of the reasons why we’ve gained share. It will be an interesting holiday I think for a lot of companies. I'm sure you've walked through your local stores or looked online and there's some tightness out there. I’m not speaking to Logitech, but I'm speaking across a lot of goods. And so I think that is a big part of what firms have to do during all the years to make sure they can get on shelf.
Tom Forte, Analyst
Yes, just hoping we're not celebrating the holiday in January. All right. Thanks for taking my questions.
Nate Olmstead, CFO
Gift cards, Tom.
Operator, Operator
The next question is from Credit Suisse, Serge.
Serge Rotzer, Analyst
Good morning or good afternoon, depending on your location. I have a question to start with. Can you provide some insight into the preorder situation you've observed at the beginning of the quarter? How does it compare to last year from a consumer perspective, especially with Christmas just two months away? Additionally, you've mentioned investments in point of sales and increased promotions, which should contribute to higher sales, albeit with lower margins. Given that the channel inventory appears to be quite clean due to lower sell-through, why are you not more confident about the next quarter in relation to your guidance? This is my first question.
Bracken Darrell, CEO
I guess I'll start, and Nate you can finish up. And I would say, we do have confidence going into the rest of the year. That's why we reconfirmed our guidance. We grew double digit on all three of our four main categories, so we feel the underlying sell-through. So that's a very good indicator. So we feel really good about that.
Nate Olmstead, CFO
And I agree with you, Serge. I think the channel is at a good level right now broadly, but again, we do have tightness in some areas and don't need to go into which ones I think. But we have some catching up to do in some spots. They are big holiday items. And like I mentioned, we're planning on using air freight to cover those, but we have a lot of work ahead of us, but we're prepared to have a good quarter.
Serge Rotzer, Analyst
But do you believe that you can match the backlog you have for the current quarter because of the longer transit and lead times?
Bracken Darrell, CEO
I think we could deliver the backlog. You're saying deliver the backlog. Do you think we can fulfill the backlog we have?
Serge Rotzer, Analyst
Yes.
Bracken Darrell, CEO
I think we mentioned at the beginning that we are not unaffected by supply chain challenges. This is a reality we have been facing, and I believe the situation is worse now compared to the first half of the year. However, I feel optimistic about our position. We are well-prepared to meet our goals for Q3 and Q4 and achieve our guidance. Nonetheless, I expect that supply chain challenges will persist.
Serge Rotzer, Analyst
I'm curious about the limitations on growth in video collaboration. Is it due to demand, longer timelines with enterprise customers, a lack of direct sales, or challenges with procurement companies? How should I interpret the subscriber numbers? Teams and Zoom are showing strong growth, so why isn't that reflected in your figures?
Bracken Darrell, CEO
First of all, we experienced some destocking and achieved 22% growth this quarter, indicating positive momentum. The key long-term question relates to the significant growth potential at just 8% market penetration. The challenge lies in the decision-making process regarding video enablement in all spaces, something we've already implemented but many companies have yet to adopt. Additionally, organizations are reevaluating their office formats and layouts, which is something we're also considering. Both factors are influencing the situation. Nate, do you have anything to add?
Nate Olmstead, CFO
Americans and Asia generally experienced growth in both sell-through and net sales, while EMEA saw a slowdown in net sales. Looking back at last year, which we expect to be similar in the second half, one reason for the overall company and VC growth being slower is the strong comparisons from last year, particularly in Europe. Europe showed exceptionally strong performance, but there has been a slight slowdown in decision-making and demand for video collaboration. Nevertheless, we achieved double-digit growth in sell-through in EMEA, indicating that it hasn't completely stalled and remains robust. Competitors are witnessing similar trends, recognizing that this is a long-term growth segment. I am not overly worried about the shifts in demand compared to last year; we are committed to the long-term prospects and are making appropriate investments.
Bracken Darrell, CEO
Yes. Just to throw a point out there if you haven't looked at it, video collaboration in Q2 of last year grew 150%, so more than doubled.
Serge Rotzer, Analyst
I want to clarify that I believe you are doing an excellent job. That's not the issue. However, you've launched a significant number of new products, and you noted that these products will be available in winter. Winter is relatively brief, though.
Bracken Darrell, CEO
Not only for the winter though.
Serge Rotzer, Analyst
Yes. But what does this mean? Will this be an inflection point when you can ship then these new products? Do you believe that this can increase the pace then or is it not that important?
Bracken Darrell, CEO
Well, I think we have availability now on most of our products, and we'll keep that up. And we are launching products now. We'll be launching products next year too. So, no, I don't think that's a particular inflection point.
Serge Rotzer, Analyst
Okay. So I hand back for the time being. Thank you so much.
Bracken Darrell, CEO
Thank you, Serge.
Nate Olmstead, CFO
Okay. I think that brings us to a close. I want to thank all of you. This has been quite a year this year and quite a year last year, but I'm super excited about the years to come. I know you can feel it in our tone, but we really feel like we've got our innovation engine humming. We've got a world that's really strange and we're managing through it I think pretty well. And we'll keep proactively doing that. But thanks a lot for all your questions. They were great, and we'll see you again next quarter.
Operator, Operator
Thank you.