羅技 (LOGI) 2014 Q3 法說會逐字稿

Good day and welcome to the Logitech third-quarter financial results conference call.

At this time all participants are in a listen-only mode.

We will be conducting a question-and-answer session and instructions will follow at that time.

This call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech.

I would like to introduce your host for today's call, Mr. Joe Greenhalgh, Vice President of Investor Relations and Corporate Treasurer at Logitech.

Please proceed.

Welcome to the Logitech conference call to discuss the Company's financial results for the third quarter ended December 31, 2013.

The press release, our prepared remarks and slides, as well as a live webcast of this call, are available online at Logitech.com.

As noted in our press release, we published our prepared remarks on our website in advance of this call.

Those remarks are intended to serve in place of extended formal comments today and they will not be read on this call.

During the course of this call we may make forward-looking statements including forward-looking statements with respect to future operating results that are being made under the Safe Harbor of the Securities Litigation Reform Act of 1995.

Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated in the statements.

Factors that could cause actual results to differ materially include those set forth in Logitech's annual report on Form 10-K dated May 30, 2013, and subsequent filings which are all available online on the SEC Edgar database, and in the final paragraphs of the press release and prepared remarks from Logitech reporting third-quarter financial results for fiscal 2014.

The forward-looking statements made during this call represent management's outlook only as of today and the Company undertakes no obligation to update or revise any forward-looking statements as a result of new developments or otherwise.

Please note that today's call will include results reported on both a GAAP and a non-GAAP basis.

Non-GAAP reporting is provided to help you better understand our business.

However, non-GAAP financial results are not meant to be considered in isolation or as a substitute for or superior to GAAP results.

Non-GAAP measures have inherent limitations and should be used only in conjunction with Logitech's consolidated financial statements prepared in accordance with GAAP.

Our press release includes a table detailing the non-GAAP measures together with the corresponding GAAP numbers and a reconciliation to GAAP.

This information is also posted on our Investor Relations website.

The slides that accompany this call include both GAAP and non-GAAP measures and are also available on our Investor Relations website.

We encourage listeners to review these items.

This call is being recorded and will be available for replay on the Logitech website.

Joining us today are Bracken Darrell, President and Chief Executive Officer, and Vincent Pilette, Chief Financial Officer.

I would now like to turn the call over to Bracken.

Thanks, Joe, and thanks to all of you for joining us.

I'm pleased by our solid performance in Q3.

We grew our total retail sales by 4% and our retail growth categories by 62% with sell-through growth closely aligned to those.

We also delivered a substantial improvement in the Company's profitability.

We still have more work ahead but our turnaround is on track.

A few comments before we open for questions.

Our tablet sales nearly doubled in Q3.

Like the categories we're joining, we are getting faster.

In another big step forward in our execution our new products were on shelf within days of the iPad Air.

Earlier this month at CES we announced the protective Keyboard Folio for Samsung's soon-to-be launched Galaxy Pro tablets.

And our Keyboard Folio will be available concurrent with these tablets.

I'm also very pleased with the sales of our Bluetooth wireless mobile speakers which grew by 131% in Q3 and 126% on a year-to-date basis.

The growth has primarily been driven by UE BOOM, which continues to generate strong demand.

It was even our best selling product across all categories in Q3 and it is getting lots of amazing reviews.

PC Gaming delivered 25% sales growth in Q3, with growth achieved across all regions.

Our results from the category in EMEA, which were relatively weak in Q2, have already begun to improve and confirm that we are moving quickly to implement operational improvements in the region.

As we expected at the start of the quarter, sales of our profit maximizing product categories such as porting devices, keyboards and desktops and video declined in Q3 given the ongoing weakness in the market for new PCs which was down by around 6%.

Our focus on improving profitability paid off nicely in the quarter with better margins across most of these product categories.

Before I wrap up my comments I'd like to turn it over to Vincent for additional commentary for the quarter.

Thank you, Bracken, and hello, everyone.

Our ability to deliver 84% growth in non-GAAP EPS on a single-digit sales growth demonstrates our progress in adjusting our cost structure.

The actions we have taken to restructure the business, combined with our ongoing focus on streamlining our operations, are creating the opportunity for operating leverage.

As we anticipated, the cost reduction initiatives we have implemented have resulted in reduced spending in both our cost of goods sold and our operating expenses.

Our product costs have improved across most of our product categories resulting in healthy relatively stable gross margins through the first three quarters of the fiscal year.

Our non-GAAP operating expenses declined on a sequential basis from Q2 to Q3 for the first time in five years.

We spent less sequentially in sales and marketing while delivering 18% sequential sales growth, which demonstrates our progress in unlocking operating leverage while continue to invest in our growth categories.

We are very pleased that were able to return LifeSize to profitability one quarter sooner than we had expected.

The improved bottom-line performance was achieved through portfolio rationalization and reduced spending as we accelerated our actions to streamline the business.

Cash flow from operations was $94 million in Q3 and $108 million year to date with the year-to-date total closely aligned with our non-GAAP operating profit for the same period.

This alignment is a key element of our business model and one that we will continue to manage going forward.

On that note I will turn it back to Bracken.

Thanks, Vincent.

Based on our Q3 performance which combined better-than-expected sales and a significant improvement in operating income, we raised our full-year outlook for fiscal year 2014.

We now expect sales of just under $2.1 billion compared to the previously expected $2 billion, and non-GAAP operating income in the range of $120 million to $125 million compared to the previous expected $100 million.

The entire Logitech team is aligned with the goals we outlined when I joined the Company.

When I took over as CEO in January of 2013 I told you I didn't join Logitech for a quick turnaround, but to build an amazing Company, medium and especially long term.

We know that a turnaround in growth and profitability is a critical step in building a path to that amazing Company.

With these Q3 results we have moved Logitech another important step forward.

And with that Vincent and I are available now to take your questions.

Please follow the instructions of the operator.

(Operator Instructions).

Alex Duval, Goldman Sachs.

Well done to the management team on a strong set of results.

Just wanted to touch first on the question of OpEx.

Given that, on a GAAP basis, you are now almost at the fiscal 2014 run rate you had laid out in your long-term plan, I was wondering to what extent there could be scope for another round of restructuring.

And given that Logitech did double-digit margins for seven consecutive years before 2008, I wondered to what extent there could be scope to approach those kind of levels, specifically given the traction you are showing on some of these new products.

My second question, finally, is just on the gross margin, how I should think about that.

You cited in your remarks that you printed that you've seen some drag in the quarter from the robust growth in tablet accessories and audio wireless.

I was wondering to what extent there's scope for that to normalize upwards and what kind of effect we could see on the overall gross margin?

Thank you very much.

Hey, thanks, Alex.

I will take it first on OpEx, this is Vincent.

So we very pleased -- back in May when we laid out a three-year plan for our turnaround we said that the first step was really to right size the cost structure, the Company took some restructuring actions and then committed to some savings.

We are very pleased to be slightly ahead of that plan in this year in terms of delivering on the savings.

And as you know, in that three-year plan it was about to keeping the OpEx at a certain run rate to create the operating leverage as the Company returns to growth.

So you continue to see us focus on getting efficiencies in our overall cost structure and the savings we will capture will be used to fund and fuel the growth moving forward.

You'll also remember that the operating profit margin that was on a GAAP basis were laid out at slightly below 7% for FY '16, that is slightly higher than 8% on a non-GAAP basis.

And we are still on track, now that we have right sized the cost structure, to have this operating leverage and deliver this operating profit margin growth over the next two years.

So that is for OpEx.

On the gross margin level, as we said, we're somewhat very stable on a gross margin level, within a point.

Obviously things may change based on mix, but we're working really hard at creating the product cost savings to make sure that we can offset any negative impact of mix.

So from a gross margin perspective I would say stable, trending slightly up over the next two years.

Great, that is very clear.

And I had a quick follow-up just in terms of PC Gaming.

You have shown a very solid performance in this quarter and clearly rectifying some of the issues in Europe.

How do think about your longer-term target that you had set out, which initially, to me anyway, seemed quite aggressive?

Do you think that that is still on track for the longer-term given the renewed focus of resources on the PC Gaming category?

Yes, I think the PC Gaming number did come back, it is still -- we still have plenty of room to do better than that over time.

I mean we are not -- we don't yet have the portfolio that we need to have in PC Gaming across the board.

It is not going to happen overnight.

And we will absolutely fill it in.

So, yes, I still feel good about the targets we had set back at the Analyst and Investor Day.

And of course, March 6 we'll be really talking about all of the categories.

That is very helpful.

Many thanks.

Alexander Peterc, Exane BNP.

Congratulations for great results.

I just have a couple of category questions on audio.

Obviously the market share in streaming audio, speakers is not where it is in your leading categories which are mice and keyboards.

Do you have any plans for expansion of your lineup in audio or do you think that your current positioning is satisfactory?

And if so how are you planning forward with this specific category, which is really booming?

The second category I would like you to address is how do you feel about your addressing the smartphone segment?

You have obviously started supplying the gaming controller, but do you intend to expand also in charging cases?

I saw that audio was (inaudible) already on sale.

Will you be generating the distribution and do you have greater plans for smartphones?

And just a small housekeeping question on G&A.

The hike in Q4, is that a one-off just this quarter, calendar Q4 and fiscal Q3?

How should we think about the G&A shaping in the coming quarters?

Thanks.

I will take the first two and then I'll hand the G&A question off to Vincent.

On the speaker's question, will we continue to expand the lineup for Bluetooth speakers -- we are certainly always looking at areas where we can continue to offer new products that can meet consumer needs.

But I say I think we have a lot of room left to grow in BOOM.

BOOM had a very good -- a very good year so far.

As we said, it was our number one selling product in the third quarter.

But we can do much better in distribution and in the execution of our distribution around the world.

So we have a lot of room left.

On the smartphone business, yes, we did launch a small initiative, a very small initiative in a couple of places, and we are expanding that a little bit over time.

We are learning.

In the whole smartphone space, we would like to have an initiative in there.

We don't have anything that I would look at right now and say, boy, we should call that out as a big new growth area today, but the goal is to try to build something.

And the game controller, which is a little bit different, it's really early days.

This is the birth of a category and birthing new categories sometimes comes really quickly, sometimes it takes time.

We are prepared for it to take time.

And I think we will continue to look at that category both from a developer standpoint, from an operating system standpoint and from a product standpoint to continue to evolve and change over time.

G&A?

Yes, so, Alexander, in term of G&A, so G&A is growing on a year-over-year basis.

If you remember last year disappointing results and the variable compensation was at an all-time low.

This year not only we are meeting the target, but we also are taking in some areas from accelerators.

And so, the G&A increase on a year-over-year basis is due to that variable compensation.

As we move forward, if we perform at plan or at target I would expect G&A to be stable to slightly down.

Now if you remember when we tackled and talked about the cost structure our first priority was to make sure that we right sized the businesses that were losing money.

LifeSize is one example of that and we did that across all categories.

Moving forward our next step in terms of efficiencies is really to work on the infrastructure functions, which a lot of them are in G&A, and capture the savings from there to do one of two things -- either protect on the downside to deliver the operating profit that was committed; or, if we continue to perform, to fund into new products and the growing categories that we have.

Okay, thank you very much.

Paul Coster, JPMorgan.

You've had a little bit of experience now with the Apple category, the tablets.

And can you give us some sense of what percentage of lifetime revenue for the keyboard case you get in the quarter in which the new Apple product launches?

And really the reason I am asking this is because my view is that you had some stock outs even on it for the Air products, which is a good thing I suppose, whereas you didn't for the keyboard cases for other -- for prior generation Apple's.

It is a great question and it is one that we continue -- that I don't think there is a really definitive answer for because I think it is changing.

At one point we said it was about a third happening when somebody buys one, about a third happening in the first couple months, three months and another third happens later.

That is as good as any estimate right now.

But I think it will continue to change over time.

We have really had a good -- a very good experience building a business now around the iPad and we expect to continue to do that.

But the iPad continues to change and it is going to continue to change.

We are also, as you know, trying to build the same kind of ecosystem around Samsung tablets now and we will go beyond that when we think there's enough scale.

So there is plenty of opportunity in this tablet space and the consumer buying behavior continues to evolve.

Okay.

And my follow-up question is, obviously at least Best Buy, as a proxy for what is happening in bricks and mortar, is illustrating the margin pressure that that channel is experiencing on line.

Can you talk a little bit about online versus bricks and mortar distribution, the channel inventory exiting 4Q and the possibility of some margin squeeze from some of your channel partners?

This is not new to our business.

The margin pressure, the retail margin pressure versus the eTail margin pressure is not a new thing; I mean it has been happening now for years.

It's certainly been happening as long as I have been here and it is not going to change.

And it is happening all over the world.

Some places are more extreme than others in terms of the amount of eTail development versus retail so far, but across the world eTail is climbing up there.

I think we have got a pretty good way to manage that honestly and do the best we can to make sure that we are not experiencing margin pressure from that.

But it comes back to one simple thing; if you have great products your margins will be sustained.

If you don't, they won't.

Right.

And --.

And if I can add -- sorry, go ahead, Paul.

No, sorry, Vincent.

I was just going to add two comments in term of (inaudible) inventory just to put some numbers.

So our sale on the retail side, our still into the channel was up 4% on a year-over-year basis.

The sell-through was up 6% and on a year-to-date those two metrics are fairly aligned.

When you look at the total dollar perspective we are lower than we were a year ago.

So we feel really good about our overall channel inventory now (inaudible) by SKU it may change here and there, but I think we are very comfortable about our position moving forward.

Yes, right, thanks.

And then just one quick one, tax rate was a little lower than we expected.

Anything interesting happening there?

Yes.

He asked about tax rate.

I'm sorry, tax rate.

So on a GAAP basis -- sorry I didn't hear the question.

On the tax rate there was a one-time special reserve release due to statutory expiration, that is on a GAAP basis.

As you know, we're focusing on the operational rate which the best proxy is the non-GAAP tax rate, the non-GAAP tax rate for the year is estimated at 14.7% and the guidance from an operating profit that we have given, which is $120 million to $125 million of operating profit.

All right, thank you very much.

John Bright, Avondale Partners.

Vincent, can you talk about LifeSize, the magnitude of the LifeSize cost reductions that were better than you expected?

And I'm going to assume those were probably the sales and marketing component of that?

Yes, Jon, so just as a reminder, operationally and that is filed in our 10-Q.

We lost money on an operating basis (inaudible) last quarter.

It was in the tune of about $3 million.

And this quarter we are profitable at around 5% of revenue.

On a stabilized revenue stream when we look at the business footprint it was frankly across all of the functions obviously sales and marketing, they still have a better skill set tailored to the revenue but also to the way the market is evolving today.

On the R&D side as well we're moving from hardware centric to hardware and software loaded kind of solutions, a lot more cloud-based type of solutions.

So that also was part of the reduction.

And on the G&A we also right size.

So my answer would be it has been right sized for the current level of revenue, it was across all functions and now the team is entirely focusing on profitable growth.

What is the status of -- Harmony's profitability?

I know you don't want to give specifics, but maybe give us an idea of the status of Harmony's profitability?

We promised that -- or we committed to you and to ourselves that as we exited this year the back half of the year we would -- Harmony would be profitable.

Harmony was certainly profitable in Q3 and it will -- we will absolutely meet that goal.

Bracken, let me stay with you for a second.

Strategically one of the important areas will be potentially new products and new category development.

I know it is something that you want to hold close to the vest as you go into this year, but could you give us a flavor for any new categories or particular product developments that you might want to share with us?

As you said, we are going to hold things pretty a close to the vest.

What I would say, John, rather than get into specific new categories what I would say is if you -- four of our top six products this quarter were new categories within the last 24 months.

Now a couple of those were iPad -- iPad Air products or iPad products.

But I think that demonstrates we have the ability here to create new categories in this new world that we are entering.

And it is one of the reasons why I came to the Company.

I am really excited about the capability to do that.

It doesn't happen overnight.

But I think you are going to see more from us over time.

Thank you.

Youssef Essaegh, Barclays.

I'm going to have two, if I may.

So the first one is about the mix of products in keyboards.

I was very surprised this morning when I read about the volumes continuing to deteriorate in line with the category, but then the sales were up.

So you have given some indication more wireless keyboards [in this quarter].

With the replacement cycle of corporate PCs starting next April, assuming those XP support stops, do you expect the mix to go back to something more normal?

And my second question is regarding the tablet category.

You have benefited obviously from a very strong Christmas and a focus on tablets and potential of the new iPads, and although this happens fortunately only once a year.

So I was wondering going forward for the next few quarters how do you see your growth, happening.

And also with Apple becoming less and less of the growth of tablets how do you see your strategy to address the non-Samsung and non-Apple tablets?

Thank you.

Okay, on keyboards if I understood your question well, why did we see the -- see growth in sales or -- it's a decline in sales actually -- but a decline in sales and decline in volume.

The truth is the keyboard category will keep evolving; it is not a sudden change in any direction, but it will keep evolving.

You might remember we have -- we've seen quite a bit of growth in the keyboard for the living room.

I think that is going to continue.

And we will see -- you talked about the replacement cycle on corporate PCs, which is everybody's favorite topic.

But honestly we are really not counting on any of that.

We are still expecting a trend line on the overall PC category to look like it has, which is down 10% for this year.

So I don't expect any big changes in the overall keyboard category going forward.

I think you will have some ups and downs, but it should be -- our trendline should be the same.

If we have a much better PC number over time that certainly will help us overall and help us in the keyboard category.

On the tablets, I still feel very strongly -- very good about the tablet -- our tablet growth potential.

We have grown well around the iPad, there's still a lot of attachment rate left to go.

We've got room across Samsung and probably other tablets going forward.

In terms of quarter over quarter, we had a very strong quarter this quarter.

Next quarter certainly won't be as strong.

I think Q2 to Q1 this year is probably what -- you could look at Q4 to Q3.

I don't know whether it will be quite that different, but -- you'll have a low bit of a seesaw.

But over time the overall trend line on tablets will continue to be very good.

Thank you.

Tavis McCourt, Raymond James.

Nice quarter.

Bracken, I wonder if you could give us a little bit of perspective on where you guys are in the Bluetooth speaker category.

Obviously the BOOM had a great quarter.

It is a highly, highly competitive category.

And so, I guess any perspective you can give on where you are on a market share basis now, what is reasonable to expect?

Because I think it is a relatively large market, but just kind of the things you expect to bring to the table to maintain growth there in a relatively crowded space?

Thanks.

Yes, it is a crowded space, a different business for us.

And we brought this UE BOOM to market under the UE brand, not Logitech, for the reason you describe, it is a crowded space, some different competitors.

We are still relatively small, but we are growing market share, I can't give you specifics because we don't have them yet; the market shares will come out for Q4 shortly and it varies around the world.

We have got places around the world where our market share has done very, very well, other places honestly where we have a lot of room to grow.

Overall I feel pretty good about where we are.

I think we've got a product that is getting really strong reviews and it demonstrates our capability to create products in that category that can be very attractive even relative to the competitive set we are in.

And we are learning, we are still relatively young in this category.

And as we learn and apply we will get better and better and better.

So I'm optimistic that we can perform well in this whole Bluetooth speaker space.

Okay, thanks a lot.

(Operator Instructions).

Andrew Humphrey, Morgan Stanley.

Congratulations on a great quarter.

I had a couple, if I may.

One is on OpEx.

I think it would be great if you could outline some of the specific initiatives on OpEx that you think have yet to come to full fruition, so where there could still be some cost savings to come.

And any extent to which you can quantify them.

And secondly, I wanted to ask about iPads.

You have given us lots of useful color there.

I wanted to ask specifically about the contribution of covers in the quarter relative to keyboards.

And what I am driving at there is if we have kind of reached the point where keyboards have had a good chunk of the refresh cycle from the most recent iPad, to what extent are you expecting cases to take over in the next quarter or two?

Yes, well, first -- let me answer that one first and then I will hand off the OpEx question to Vincent.

We have had a very good growth curve on the keyboard covers and we launched covers a little while ago; we launched more covers this quarter.

And we are gaining ground there I would say.

It is still a relatively small part of our overall tablet portfolio but it is growing.

And it is a very interesting category for us.

It is another new category that has the potential to be quite sizable and I think between it and keyboard covers, as I said, I continue to feel that we can see good strong growth over the next year or two.

On the OpEx question, Andrew, we worked really first, as I mentioned earlier, on making sure that certain businesses that were losing money were being right sized.

And that was across all functions.

The Company overall, as you remember, took a restructuring, we lowered our headcount in the tune of 10% to 15% depending on where you were in the business.

And today you see the result.

So we see a big decline getting into where we think is the right cost structure now to support the growth moving forward.

Savings moving forward will come from indirect procurements.

We work a lot around making our OpEx more variable, less fix in nature and now we are going to centralize some of those variable cost pools and get some efficiencies out of that.

The infrastructure functions supporting all of the businesses and the way we approach supporting both regions and businesses also can get more efficient.

Those efficiencies will be used to fund some new growth initiatives and then used also to improve the operating profit margin as we create the operating leverage in the business.

In terms of quantifying, I would go back at this point in time to the model we shared back in May.

And obviously we're on track to that model and will stay committed to it.

And then on March 6 (inaudible) we will review the overall business model and the impact on the P&L.

That is great, thank you.

Joern Iffert, UBS.

The first one would be can you a little bit more quantify your success with Samsung and the tablets?

And I think you started to introduce products I think it was September/October 2013.

And if it is not so successful what makes it more difficult versus success with the Apple and tablets?

And the second question would be on the 2015 and 2016 EBIT guidance of $90 million and $150 million.

Is this under review now?

What is your thinking about this?

Thanks very much.

I will take both of those.

On the Samsung, you asked me to quantify our level in Samsung, we are not sharing obviously specifics with specific products.

What I would say is the attach rate on a Samsung product for a keyboard folio is much, much lower than it is for an iPad.

But we believe it is growing and the potential there -- there is no reason why you couldn't see very similar attach rates over time.

It probably won't happen overnight.

There is a big ecosystem now around the Apple iPad that supports that keyboard cover attach rate and should support it and continue to grow.

Samsung, it hasn't been there but it is coming.

A lot of this is how well do we merchandise in-store around Samsung product.

How much have we promoted it?

What is the awareness of that?

So there is a lot going on there.

And I would say it is a good -- it's a cycle, whatever that means, a year or two behind where the iPad is.

But I think the potential is certainly there.

In terms of our 2015-2016 guidance or the outline we gave in the Analyst and Investor Day, that's still the number for now.

As you know, on March 6 we're going to have another one.

We will have another -- and I invite you, please come.

We will have another one coming up.

And at that we will certainly update where we are.

All right, thank you very much.

Felix Remmers, Credit Suisse.

Actually I have two.

The first question would be on gross margin.

I was wondering how the gross margin progression is in tablet accessories.

So do you still see some volume benefits as this category is growing?

And if it is already at the average of the overall Company?

And the second question would be on unified communication, do you think there is a chance that you can take on the players like Plantronics or [Jabra] in this market because they are growing quite nicely here?

And then what would you need to like be successful in this market?

Okay, Felix, this is Vincent.

Let me take the first question and then pass it to Bracken For the second one.

So in term of the gross margin, as I mentioned, we've improved almost across all categories our gross margin on a category-by-category basis and tablet is in that camp of having improved the gross margin on both a year-over-year and sequential basis.

As we said, in that category the most important criteria of success is first speed and time to market.

And I think this quarter demonstrates that we've made tremendous progress in that area.

And then as some of those products within that category are getting more mature and higher in volume gross margin is improving.

The whole category has improved on a year-over-year basis, but it is still slightly below the corporate average.

And on that Unified Communications front, Unified Communications is a really interesting space.

As we have talked about in these conference calls before, we are developing products both that work with Lync and with Jabber.

And we are really excited about it.

I think it is one of these hidden gems that we don't talk about much, but I think has really big potential.

We are seeing it so we are certainly seeing the growth come here.

We don't break that out separately yet, but it is a very interesting category for us.

And you are right, it is a different competitive set -- we compete with different players in different parts of our business and that competitive set is very focused on Unified Communications.

But we feel very good about our positioning there and the capabilities we are bringing to that and I think we can -- I think we will have a very successful business there, short-term and over time.

Okay, thank you.

It appears there are no further questions.

At this time I will turn the conference back over to Mr. Darrell for closing remarks.

Thank you and thank you all so much.

I hope we see you March 6. I will close by saying the actions we've taken to streamline both the processes and costs are helping us to be significantly faster and more profitable.

We are committed to building a design company, a design company that leverages technology, innovation and consumer insights.

And I can't wait to see all of you or we can't wait to see all of you at Analyst and Investor Day in New York on March 6. Thanks so much.

Thank you.

That concludes our conference call for today.

You may now all disconnect.

Thank you.