羅技 (LOGI) 2019 Q3 法說會逐字稿

Good day, and welcome to the Logitech Third Quarter Fiscal 2019 Financial Results Conference Call.

(Operator Instructions)

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. Ben Lu, Head of Investor Relations.

Thank you, Sharon.

Welcome to the Logitech conference call to discuss the company's financial results for the third quarter of fiscal year 2019.

The press release, our prepared remarks and slides as well as a live webcast of this call are available online at the Investor Relations page of our website, ir.logitech.com.

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

The forward-looking statements involve risks and uncertainties, and actual results could differ materially as noted in our quarterly and other filings with the SEC.

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 a non-GAAP basis, except as otherwise noted.

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 from 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 and slides provide a reconciliation between GAAP and non-GAAP numbers and are posted on our IR website.

We encourage listeners to review these items.

Unless otherwise noted, comparisons between periods are year-over-year and in constant currency.

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

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

I will now turn the call over to Bracken.

Well done, Ben.

Thank you, Ben, and thanks all of you for joining us.

We all know that we're operating in 2 overlapping worlds, the long-term world and the short-term world.

In the long-term world, we all know there will be global secular growth.

In the short-term world, uncertainties created by economic cycles and increasingly, political issues threaten to dent the smooth trajectory of that long-term secular rise.

Logitech's strategy answers well to both the long and the short term.

Our cloud peripheral strategy clearly harnesses the long-term secular growth.

We grow by riding the strong waves of new cloud services.

But at the same time, the increasing number and character of our categories creates more diversity and resilience in the short term.

Like any portfolio, in the face of short-term uncertainty, our portfolio buffers volatility.

Our fortunes won't be driven by a single category of single brand or by the aggregation of a growing number of categories and brands.

For most of them, we are or we nearly are the leader, so our portfolio offers long-term growth and short-term diversity and resilience.

And our model delivers something else: both growth and strong profit.

Q3 demonstrates our business model's inherent growth and profit power.

Our overall Q3 sales grew 8%, or our highest ever, against a really strong comparison period a year ago when we grew 18%.

That growth story results from what we've now -- what has now become our 3 largest businesses on a run rate basis: Creativity & Productivity, no surprise; Gaming; and Video Collaboration.

In fact, those new -- those now -- those 3 now comprise 75% of our net sales.

While our top line growth was strong, our profitability was just as impressive.

Our operating profit grew a significantly better-than-expected 22% to $143 million.

The backbone of our strong performance is our ability to consistently execute operationally, but the heart of our business is our innovation engine.

That innovation engine drove impressive double-digit growth in all 3 of our largest businesses this quarter.

Let's dig into our categories a little deeper.

First, Video Collaboration grew 64% in Q3.

While I don't expect the growth ahead to be that strong, we continue to be excited about our opportunity there, as you know.

We're expanding our product portfolio to address conference rooms of all sizes.

We started this business with products that targeted huddle rooms and small-sized conference rooms with an average product ASP of just a few hundred dollars.

Our integrated video and audio camera, MeetUp, that we launched last year -- or 1.5 years ago, quickly became our top-selling Video Collaboration product, and sales have more than doubled since last year this quarter.

Now our latest Rally family of Video Collaboration products extends our award-winning audio and video solutions to midsized and even large-sized conference rooms.

This not only expands our addressable market, but it also expands the number -- the price points.

You can expect us to serially innovate and explore new products, both hardware and software, to capture the cloud-based Video Collaboration market opportunity.

But great products don't get much attention without a good go-to-market approach.

And here, we continue to invest in building out our direct sales -- our direct enterprise sales force.

We've talked a lot about Gaming, and it's getting more and more exciting.

Sales in Gaming grew 25%, with all 3 regions delivering double-digit growth.

Within our Gaming business, we have 3 groups: our core PC gaming, which we can think of as mice and keyboards and headsets; ASTRO, which has historically been console gaming headsets, but soon we will extend into console controllers; and finally, our simulation products, a niche category that is comprised of racing wheels and flight simulation controllers and joysticks.

In Q3, our PC gaming sales growth actually accelerated versus the prior quarter.

At the same time, ASTRO continued to deliver strong double-digit growth despite very strong comparison from last year.

And simulation, which is more cyclically tied to gaming title launches, declined as expected off an especially tough comparison when several racing game title launched last year at the same time: Gran Turismo, forces -- Forza and Need For Speed last year.

So as you can see, the underlying growth trajectory we're seeing in Gaming outside of niche racing wheels is really strong.

Even in China, we achieved very consistent growth momentum this past quarter despite some worries that the China gaming market is slowing down due to government game approval delays.

As we look into our future, Gaming will continue to offer multiple paths for growth: further market share gains outside of our mice -- outside of mice, our shares are good, but they can be a lot better; the ever-rising popularity of eSports, which is destined to be the world's biggest spectator sport; and adjacent market expansions, such as ASTRO's new PlayStation 4 Controller.

By now the consistent performance in our PC peripherals group should not be surprising anyone.

It's secular.

This quarter, sales growth was 13%, especially strong.

Despite choppiness in new PC shipments, we've always said that as long as we innovate on how consumers engage with their PCs, this is the very strong consumer reception to our MX Vertical mouse, we can drive continued peripheral refreshes against the very large PC installed base.

And there's actually something else going on here: the growth of content creation or broadcasting.

Whether that's through gaming, framing, social media generation or video blogging has simply reenergized PC peripherals for content creation, much as eSports reenergized them for gaming.

You can see that this quarter as pointing devices, keyboards and webcams all continue to -- all contributed to a strong growth in Q3.

That said, I wouldn't encourage anyone to expect us to continue to deliver double-digit growth in PC peripherals.

Last year's compare was easier than usual as well, but we have consistently planned for low single-digit growth in this category, and we should be able to do at least that.

And we'll keep innovating to outperform the broader market.

Our Tablets & Other Accessories group delivered its fourth consecutive quarter of double-digit growth, with sales up 36%.

In fact, we're on track to deliver back-to-back years of double-digit growth in this category.

New products like Crayon, our first digital pencil for the 9.7-inch iPad, as well as the existing products like our Slim portfolio (sic) [Slim Folio] drove the performance in Q3.

In fact, that Slim -- Slim Folio is now the best-selling tablet we've had ever -- tablet product we've had ever.

Now let me update everyone on our recent Blue Microphones acquisition.

Blue contributed approximately 3 percentage points to our overall Q3 sales growth.

The acquisition has been off to a great start, and we've already introduced 2 new products since acquisition: the Yeti Nano, a $99 compact version of its flagship Yeti mic; and the Blue Ember XLR mic that brings professional recording features to a more consumer-friendly price point.

It's still early days, but I can't wait to see how the exciting opportunities that Blue will bring to our Logitech family.

In Mobile Speakers, sales were down steeply again this quarter.

While Creativity & Productivity performed well against a weaker quarter compare a year ago, Bluetooth speakers were transitioning against a really strong compare a year ago.

Last year, we grew 35% globally and 50% in the Americas.

Despite the lower sell-in, we made good progress in transitioning out our older products to our new systems, BOOM 3 and MEGABOOM 3, but the softer market for Bluetooth speakers has made this transition longer than we would have liked.

The overall mobile speaker market remains soft, which is why we've taken actions to better align our investments and resources against this reduced market outlook, but this doesn't mean we'll stop innovating.

This really demonstrates the power of our portfolio.

When one category faces challenges in the market or in execution, we can continue to adjust and innovate for the future long term, while other categories can continue to drive growth and overall results in shorter term.

Audio & Wearables sales increased 18% in Q3.

As I mentioned earlier, Blue Microphones contributed roughly 3 percentage points to our overall Q3 sales growth and offset declines in desktop speakers and Jaybird.

As we said before, we refocused the Jaybird business on product innovation and are laser-focused on reaching runners.

And Tarah Pro, the new -- our -- one of our latest products, is the best product yet for runners from any company, I believe.

It's a testament to where we're heading.

We still have a long way to go, but we are super excited about the path we're on and for what's ahead.

And with that, let me turn the call over to Vincent to walk through our financial metrics.

Thanks, Bracken, and good morning, everyone.

We delivered a strong and record P&L for our holiday quarter, with sales up 8% and operating profit up 22%.

I read this morning that the growth of 8% might not be as strong as some may have expected.

While some categories are better than expected, actually most of them, and others are lower, I would like to remind everyone that last year, Q3 sales grew an exceptional 18%.

The comparison is particularly tough when you consider that the Americas grew 30% year-over-year in Q3 last year.

And so for this quarter, it might make sense also to keep in mind the sequential growth when analyzing the results.

This quarter, we grew sequentially 25%, 5 points above our last 5-year average, and that is slightly better than expected.

Asia Pacific continued its strong performance despite choppiness in China's macroeconomic trends.

EMEA returned to high single-digit growth as the team there continues to improve efficiency around our promotional spend.

And in the Americas, a stable quarter, partly due to the tough comparison against the 30% growth last year.

Sequentially, Americas sales were up 36%, better than our past 5-year seasonality.

These results demonstrate once again the robustness and the breadth of our portfolio and the ability to overcome weaknesses in some categories with the strength of our 3 main businesses.

After 5 quarters of strong growth in ASTRO, we clearly have a winner here.

Blue is off to a strong start as well and will be another successful acquisition and integration.

We have now done many acquisitions over the past few years.

And with each, we are learning how to better select our targets, integrate faster and leverage and accelerate the innovation and growth of these assets with Logitech's core capabilities.

We view this as another key strategic differentiator.

In Q3, our non-GAAP gross margin improved by 370 basis points to 38.1%.

I would remind everyone that approximately 150 basis points of that increase was due to gross margin in Q3 last year being impacted by temporary duplicate distribution center costs in the Americas.

The core margin improvement come from better product mix and greater cost reductions than we had anticipated.

And finally, a favorable impact of ASC 606 more than offset incremental China tariff cost this quarter.

Nevertheless, gross margin did, indeed, come in higher than expected.

While quarterly gross margins may fluctuate from time to time, above or even below our range, we remain committed to a long-term annual gross margin range of 35% to 37% with a pronounced focus on delivering at the high end of that range and reinvesting a portion of the excess gross profit to build our portfolio of products and brands and drive sustainable top line growth.

As for China tariffs, we had mentioned last quarter that we are deploying multiple levers to minimize the impact of the new tariffs.

As you all know, the incremental increase in the tariff rate to 25% has been delayed until end of February, but we are continuing to develop and deploy our mitigation actions.

By around midyear, we expect that the impact on our gross margin from the new tariffs imposed last summer as well as those expected for March should become immaterial.

Our non-GAAP operating expenses increased 15% this past quarter, partially driven by the Blue Microphone acquisition, business investments and variable compensation tied to the strong profit performance.

R&D investments increased 18% and sales and marketing expenses rose 14%, both to support the expected strong top line growth in the year and in the long term.

G&A spend was around the prior quarter's run rate of about $20 million, absorbing our volume growth.

The one thing you can continue to expect from us is a very disciplined approach to spending, creating efficiencies, but also investing in resources to support long-term growth opportunities, which are funded by gross margin expansion.

The better-than-expected gross margin, combined with disciplined spending, drove an increase of over 20% in our non-GAAP operating income and EPS to $143 million and $0.79, respectively.

In the quarter, we generated $176 million cash from operations, with year-to-date cash from operations at $273 million, up $17 million from the same period last year.

That cash generation improvement versus last year was in spite of our planned inventory increase of about $60 million compared to last year to enable strategic inventory pull-in in anticipation of tariffs, inventory builds for the holiday period and the addition of Blue Microphones.

In the quarter, we also spent $3 million for stock repurchases, leading to a total cash and short-term investment balance of $586 million at the end of December compared to $565 million at the end of Q3 last year.

We have a lot of work and many opportunities in front of us, but how we finish this biggest quarter of the year sets us up to finish fiscal year 2019 on a very strong note.

And with that, Bracken, I'll pass it back to you.

Thank you very much, sir.

On the back of those strong Q3 results, we're raising our outlook for fiscal year 2019 non-GAAP operating income to $340 million to $345 million on sales growth of 9% to 11% in constant currency.

As we look to the last stretch of our fiscal year, we're getting super excited about next year.

So with that, we will open it up for questions.

Vincent and I are, as always, very available for absolutely anything.

Fire away.

(Operator Instructions) Your first question comes from Asiya Merchant with Citigroup.

Very quickly.

So you guys have gross margin expansion, which is driven by favorable product mix, some onetime cost improvements that you've talked about previously at your Analyst Day.

And I understand you continue to invest to grow your market opportunities here.

How should we think about -- sorry, offsetting that, you have, like you -- like Bracken mentioned, some short-term political uncertainties, et cetera.

So how should we think about going into fiscal '20 or even towards the end of fiscal '19 and then into fiscal '20, quite a bit high single-digit growth rate on the top line, as you continue to invest given that you have strong margin expansion?

And then the other question that I fielded from some investors, if you could dig a little bit more into the mobile speakers market, why that continues to underwhelm.

I understand there are some product mixes, that you're trying to transition to the new products.

But just if you could kind of talk about how you look at the mobile speakers market going forward as well.

Yes, let me jump into part of that, and then Vincent and I will kind of ping-pong this back and forth.

First, I really enjoyed Vincent's opening because he was almost apologetic for our high gross margin.

So thank you for raising the point so I can rib him a little bit.

In terms of -- yes, I mean, we're -- our whole -- you know our view of the world, which is if we have a higher gross margin, our principle is we want to invest that back because we want higher growth.

And then you're obviously -- you're raising the right point.

The question is, "Okay, if you're investing that higher gross margin to higher growth, are you going to get higher growth than you normally expect?" It's a little too early for us to talk about next year.

I mean, we save that for our Analyst and Investor Day.

But it is -- it's really great when you do have extra gross margin that you can invest.

And we're always looking -- we've got -- always got our list of new investment opportunities to go after.

I'll let Vincent respond to that a little bit.

I'll jump into the PC speaker -- or the, sorry, the Bluetooth speakers question real quickly.

Yes, I mean, the Bluetooth speakers market is softer than we would have liked.

I mean, it is what it is.

And we've kind of accepted that it is what it is for the last few quarters.

We did -- we've had a longer transition as a result around the world getting out of our old product into our new.

And I think by the time we get to the end of the next quarter, we'll be completely into the new product, which is terrific and we're super excited about.

But I think it's a good illustration of our portfolio.

We're going to have -- you're going -- in a diverse portfolio, you're going to have some categories that are growing really strongly, like 64%, others that are going to be declining really strongly, especially short term.

And in the near -- and that will certainly moderate out in Bluetooth speakers.

And overall, we'll continue to deliver good strong growth.

That's the whole concept of our model.

Do you want to add anything, Vincent?

No.

I just wanted to clarify Bracken's point.

I'm not apologetic.

If I was, it's just of not raising our long-term target range.

And I think we've said it for a long time, we're building great product, good innovation, we're building brand.

And with that, we should get also price premium and gross margin expansion.

It's our goal to drive at the high end or higher if we can.

Some quarter, we will.

Some quarters, we will not.

And then to reinvest that into a strong growth focus.

Because if gross margin is our -- definitely, operationally, our goal, as you know, we have so many opportunities that reinvesting for growth is the goal.

Now when we'll have our Analyst and Investor Day, we'll talk about long term and all these things that are shifting in our portfolio.

And we'll see you in March to discuss that topic.

Yes.

By the way, we haven't announced yet but -- and if I could give you a specific date now that we think we've locked in on it.

But it will be in early March.

The Analyst and Investor Day will be in Zurich.

Your next question comes from Jörn Iffert with UBS.

Two to 3 questions, please.

Number one is focusing on the Americas segment.

If I look on the sell-through, that was slowing down, and if I exclude Blue Microphones, it seems that the Americas is negative on organic growth the first time since 6 or 7 years.

Can you elaborate on this?

Why is this happening?

Is this only due to your Mobile Speakers or the other categories are impacted here and how you see this to turn around?

Second question would be on Europe.

I think you made really progress on sell-in.

I know you changed the distribution setup, et cetera.

But sell-through at 1%, it's not looking like high single digit.

What you are potentially focusing for?

Can you help us to understand what should support Europe in the quarters to come?

And the last question for Vincent on the gross profit margin, please.

Vincent, can you please tell us what was the one-off benefit?

Is it 50 basis points, 100 basis points just so that we have a better picture here.

Yes, let me go after a couple of those and then, Vincent, you can add to it.

First of all, on Europe, you're right.

One of the things we've really done is we tried to, actually in both EMEA and AMR, we tried to pull back on some of our Black Friday and promotional activities.

And so you're seeing -- you see a slightly lower sellout growth versus a year ago, but it's improved.

And it's actually reflected in our gross margin, the fact that we're promoting less.

And that same answer is kind of in the AMR thing -- AMR story, which is we did -- we went much less deeply in some of our promotional activity at Black Friday, especially in Bluetooth speakers and Jaybird.

And as a result, we -- or you see our gross margin improvement.

So I think that's -- that was a strategic choice.

And the nice thing about that is it's in our base for next year, so we like where we are there.

And neither one of those regions do we see secular problems with growth.

I think the opportunity for us is, in both regions, to have good, strong secular growth.

Yes.

So on the EMEA, as Bracken mentioned, I think we talked on the call last quarter that we would see some improvement in EMEA.

We knew the first steps to do this rebalancing between promotion and more marketing brand-driven activities, we would manage promotion much tighter going into Q3.

So you see the improvement in the sell-in coming from that lower contra-revenue.

And that gave us some room to invest -- somebody should go mute.

But it gave us some room to invest.

Overall, we feel pretty good about where the overall channel inventory is.

It's very flat weeks on hand year-over-year.

And AMR, I would say the main driver between the gap is the tough compare last year, right?

It was plus 30%, driven by a 50% growth in Mobile Speaker.

If you look at PC peripherals, Gaming and Video Collaboration, all are very strong in the Americas, in line sell-through versus sell-in.

And finally, I think...

So would you say that -- yes, go on.

No, I was going -- just to finish on your third question, Jörn, which is onetimer 606 versus China tariffs.

We said last quarter, China tariff is about 0.5 point, the 606 is slightly more than 1 point.

The whole thing is net to less than 1 point onetime benefit this quarter.

All right.

And on EMEA and Americas, on the sell-through, do you think -- or do you expect this to accelerate already in the next quarter?

That sell-through is coming back to positive territory, in particular in the Americas?

Yes.

Just to be clear, even in Americas, sell-through was in positive territory, growing low single digits, and the same for EMEA, but less than the sell-in, which was your point.

And yes, we definitely see some rebalancing.

I also caution investors to not overpay attention to that metrics.

You need to look at trends in those.

And as I said, there's a third thing, the channel inventory weeks on hand is flat year-over-year, so feeling good about that.

Your next question comes from Ananda Baruah with Loop Capital.

So just a few for me, if I could.

Bracken, you mentioned just with regards to kind of the strength in the traditional business.

This is part clarification.

I believe I heard that it was -- or I believe that -- my interpretation was it's driven in part by content creation, you're kind of broadcasting, podcasting, like that, so all that stuff.

Did I hear that accurately?

And it seems like if I did, that's what you're communicating.

If I recall, this is the first time that you seem to be speaking to that as a new catalyst there of support for that business?

Yes, you're perceptive and you picked right up on that.

I think we've -- over the last couple of years, we've really continued to look carefully at what's the impact of the 2 biggest secular trends for people under the age of 30 or 35.

One of them is gaming, and you know we've repositioned a lot of our business around gaming.

And the second one is the fact that so many young people especially, but even old people like me, are video blogging and streaming and doing new things, either mobile or at their desk, in their home or in their office.

And we think that's probably part of the impact of why it's appealing, not only to buy a new webcam because your camera is often not good enough on your notebook, your PC and you want to sit back from it so that you can get some impact visually.

But also, if we can improve the experience of the keyboard and a mouse, we do think that's driving part of this.

So more to come on that later.

Okay.

Do you think you will get data around that at some point that either -- sort of to shed light on that dynamic it had like did it have impact longer term?

It's really hard to link that directly to the purchase of our products, but it's easy to look at the fundamental change that's happening in the world.

And there's plenty of data on how much especially people under the age of 30 or 35 are doing this.

So I think that data exists.

And the implied outcome is really it's part of the impact on our business, certainly our webcam business.

Got it.

Got it.

And then with regards to your enterprise sales build-out comments, would love to get your thoughts on how high up sort of the priority list that is.

And I'm thinking particularly with regards to Video Collaboration and huddle room versus other areas that are as common that kind of fill us in on that as well.

I mean, I guess, when I'm thinking about it, I know you've commented before that you want to build out the enterprise sales force.

One of the things that you would have gotten with Plantronics was an incremental enterprise sales force.

Do you think you can get to where you want to be growing organically on enterprise sales force?

And how do you think about sort of -- I don't want to use the term threat, but -- that someone could get to a huddle room and take some of the market you think is rightfully yours if you can't get the sales force to where you want it to be, which is the last thing you wanted?

And I have one more thing.

Yes, let me -- you asked a couple questions.

First of all, yes, it's very high in our priority list to make sure we have the right sales staffing, not only for direct enterprise sales force but also indirect.

And so we're certainly -- that's right at the top of our priority list.

We have -- 1 of our top 3 things all the time, has been for the last few years and won't go away.

Can we do that organically?

Yes, definitely.

We're -- we've made a tremendous progress here.

Will this be a great market for lots of people?

Absolutely.

Like most great growth markets, like gaming, there are going to be lots of people that are going to get a lot of growth here.

And we have no misconceptions about that, but there's so much opportunity here for the long term that it's just an incredibly exciting market.

I'm sitting in rooms all day long that are video-enabled, but the vast majority of companies still have just a fraction that are video-enabled.

So it's a massive opportunity, and we're going to be right there going after it aggressively and resourcing it appropriately.

Okay, great.

And then just one quick last thing for me.

It doesn't sound like you guys are suggesting that you feel like you saw any incremental impact from -- sort of from macroeconomic dynamics, but I wanted to just check that with you.

Economics in general?

You mean macroeconomics?

Macroeconomics, yes.

Yes.

I mean, obviously, every company, I guess, is somehow impacted by macroeconomics.

But -- and overall, global growth has been pretty good.

But one of the points I tried to make in the opening, which I really believe strongly in, is we're kind of in a good spot because most of what we sell is at an affordable price point.

Even the video conferencing stuff that we sell, actually, if there were macroeconomic slowdown or something like that in an area or all over the world, it would help you avoid having to buy an expensive plane ticket.

So we're really not only converged from a category standpoint, which gives us the room to kind of maneuver and improve one category dynamics as we grow another one, like we did this -- with Bluetooth speakers and Jaybird and have strong growth in other areas, but also in the event that there is an economic slowdown, I believe we'll be really well positioned because our products are relatively cheap.

They tend to be affordable luxuries, let's say.

Or they really improve the productivities and where you can actually spend less money on traveling.

I answered more than you asked, but I couldn't help myself.

Your next question comes from Andreas Müller with ZKB.

I've got a question on the progress on these tariff mitigation actions you mentioned last time.

Can you be firm on, say, the individual actions or just an update on the status how far have you progressed?

And I was expecting actually a big tax or costs from this implementation of these actions and haven't seen really that much.

I mean, how costly is the whole kind of plan here to be prepared if the tariffs went up to 25%?

Yes.

So Andreas, quickly, last quarter, we said that the tariffs will have an impact of about 0.5 point of margin, both Q3 and then again in Q4.

And as we work our mitigation item, we had plans for the tariffs to go to 25% in January.

The 3 actions we've taken is, as I said, kind of classifications and bundling products together.

The second one is really relocation of manufacturing.

And then the third one, at the high level, is considering price increases.

We've been working our plans all along and have adjusted it.

We said that by the spring/summer of this calendar 2019, we would feel the impact of those tariffs to be mainly mitigated or being immaterial into the gross margin.

Outside of the push from January to end of February, nothing has changed in our plan.

We did align pricing to end of February to align when we know more about the incremental tariffs.

But otherwise, we are on track to plan.

In terms of incremental costs, we've kind of built that into the equation to say that by summer, we will be somewhat immaterially impacted.

Okay, great.

And then on the pull-in of inventory to mitigate tariffs, I mean, is that fully implemented out there?

Or what's there?

Kind of what can we expect of the inventory progression?

Yes.

Yes.

So the pull-in is -- at the high level, right, inventory increased $63 million to be exact then year-over-year.

And about 1/3 is for the tariff pull-in, so 1/3 for the Blue acquisition coming in with all of its inventory.

And then 1/3 for the incremental new product introduction here in Q3.

The tariffs pull-in will be burned here going into Q4 or will be used, if I can say.

Because new tariffs may be implemented in March, we may still have a little bit of impact in Q4 of extra inventory we would pull in to mitigate most of the short-term impact.

But by the end -- after Q4, I think you'll have a full go-down to normal levels.

So you'll see already some correction in Q4.

And by Q1, we'll be done in terms of the pull-in.

Okay, great.

And last question on the China progression, which seems to be still doing well, at least in the last quarter.

Can you talk a bit maybe for the next 2 or 3 quarters what you expect from China in general, but also Asia, given that the growth is currently relatively high?

Yes.

We don't guide by region, of course, but I'll give you some high-level color.

The Asia Pacific, in general, and China specifically, have been really strong for us for the last couple of years.

And I think they'll continue to be strong.

Will they be as strong as they are now?

Surely not.

I mean, it's hard to imagine that we'll be able to sustain that kind of growth.

But the other regions will pick up the pace, so I think overall, we'll end up with the same kind of good growth story globally.

And that's kind of the way it's always worked for us, where one region kind of stepped down, another would step up.

And I think you saw that over the last year with EMEA down for 3 or 4 quarters and AMR down for a quarter or 2 or I don't know what it will be and then Asia Pacific has been very strong through and we'll probably -- so who knows?

I think overall -- I just got back from China.

I was in Asia for a week right after -- I went directly from CES.

And I think there is concern about just generally I think in the macroeconomics over there from a lot of people, not in our company, but just generally.

And I think that seems like it's for real.

And then you just saw the latest GDP number that came out at 5.5%, the lowest since 1990.

But the truth is this is a very high-class problem.

5.5% is a very strong growth.

Remember, we don't sell cars, so we're not -- the categories we're in are not sort of hypersensitive to macroeconomic growth.

So I'm really optimistic.

I continue to be very optimistic about China and Asia in general.

Your next question comes from Michael Foeth with Vontobel.

Two questions from my side.

Blue Micro, you mentioned it contributed around 3% to your total growth.

My question is, what is the actual growth of that business currently?

Can you give us an indication and -- so organically and what sort of trajectory you're looking at?

That would be the first one.

And the second one is on Jaybird.

Can you maybe tell us where you see yourselves standing in that whole refocusing on running process?

And where do you stand in the transition?

And when do you expect sales to stabilize for Jaybird?

Yes, let me take the Jaybird one, and I'll hand over the Blue Mic over to Vincent.

I think Jaybird is a long-term project for us.

When we got in this category, we knew that you're in -- it's kind of an exception to our rule.

It's just we're in a category -- a really large category that is going to have really large players in it like some of the ones you know.

And we don't really like to compete head-to-head with them.

So I'll remind you that our strategy is to narrow our focus.

In the beginning, it was super narrow into running itself.

And that is -- that was a change for the business.

So it's a long-term project, and we view it as a long-term project.

I think -- where are we on that?

I think we really just launched our first -- the first product I think is at the level you could expect from us long term, which is Tarah Pro.

And Tarah Pro is a killer.

It's the best product for running that's ever been done.

Okay, I'll just say it out there.

If you haven't tried it, please do.

Every element of that product was made for a runner, with the runner in mind.

And I think the team has done an amazing job.

But that's only the first one.

So more will come.

I think as you go into Q4 and into next year, I think we'll be pretty well in a position over the next several quarters to feel like, "Okay.

Now we've got the distribution tight enough and small enough that we can really exploit this running opportunity." We've probably been too broadly distribution -- distributed up until now.

So we're going to keep doing this till we get it right.

It's a small business.

It can -- we can afford it.

And we want to make sure we really get this thing nailed from a positioning standpoint for the runner.

And then for Blue, if you consider what they did stand-alone, then not enough base, but stand-alone, they grew double digit this quarter and it's really on the back of the 2 new products being introduced.

We haven't really driven yet the distribution expansion, which is the next leg of growth for that business.

And then as Bracken mentioned, the market itself, right, is prone for structural growth as more and more people are streaming and blogging, et cetera.

So double digit structurally is -- as a category is...

Yes.

We're not going to talk about overall long-term growth by all of our product lines, but I would say the market definitely supports what you just said, yes.

Yes.

The next question comes from Paul Chung with JPMorgan.

So first question on keyboards.

Can you just expand what's been the growth drivers there over the last 12 months?

It's been pretty impressive.

I know you mentioned kind of easier comps and that helps, but if you could just expand on what are the kind of leverage there, whether it's ASPs, market share, unit sell-through, maybe some channel expansion.

Yes.

I don't think there's any channel expansion there.

Keyboard has continued to do well.

I've been here almost 7 years, and the keyboard has just continued to do well.

And part of that is that you really do still need keyboards, and the keyboard can improve the experience dramatically.

And we keep innovating keyboards.

Last year, we launched Craft, which was a really different kind of keyboard, sold at $199.

And that certainly was a good story.

And we had a period there a couple years ago where living room keyboards were really the answer and we've relaunched the living room keyboard.

So we're just continuing to systematically innovate there.

I think you can't -- we can't fool ourselves.

I think part of our keyboard business growth is probably gaming.

Because I imagine there are people buying keyboards, getting a better keyboard experience, not going all the way to mechanical keyboards, but using keyboards for gaming.

And I wouldn't be surprised that, that's part of what is driving this long-term secular growth.

So I think it's a combination of things, but people definitely still get a great experience through keyboard.

And I imagine everybody in this call is still using theirs regularly.

Even though you've added a whole bunch of other ways to input digitally, the keyboard is still the best thing out there if you really want to compose something that's long.

Got you.

Okay.

And then my next question is kind of on capital deployment.

So you repurchased about $3 million this quarter.

I know your higher priorities are dividends and acquisitions underscored by Blue Microphones just recently.

But given the stock weakness over the quarter, should we expect some more material buybacks in the near term?

Or did you do any in January?

So the answer is yes.

You're right in the priorities.

First, invest in the business.

And alternatively, also looking at acquisition, maintaining or growing dividends and then buyback.

I think you may recall in November, there were some rumor we had to confirm that blocked us from buying into the quarter.

So those activities prevented us to buy.

And at the same time, we saw the share price dropping to a level that we think are very attractive for buybacks.

So you should expect us to continue to buy back in open windows.

Your next question comes from Tom Forte with D.A. Davidson.

So I have 2 questions on different topics.

Sure.

So the first question is, how should we think about the impact of the U.S. government shutdown?

So you've talked about the impact on sales, doesn't sound like it was much of an impact, but we're hearing that there's been some disruption at the ports.

So is it affecting your supply chain?

And then the second question on Gaming growth.

I think you parsed it into 3 buckets and suggested that virtual accessories performed at a different level than, say, ASTRO and the third bucket.

Can you talk about, I guess, the level of variance?

How much faster did the 2 other buckets grow versus the virtual accessories?

Yes, you bet.

Just real quick on the shutdown.

No, we don't see any impact, I mean, on the -- from the port impact of the shutdown.

Maybe we'll find out something later, but so far, there's been absolutely no impact and we don't see anything coming.

In terms of Gaming, yes, we -- I broke them into 3 pieces.

Simulation is the word that I use for that niche category that includes steering wheels and joysticks, and that category declined and -- just to give a little more color there, and a pretty strong decline.

Because what happens in that category is you have -- when the racing games come out, it's mostly wheels -- by the way, there's some really cool stuff happening there.

When the racing games come out, like Forza, they spike the business because when people go out and buy a game, that's when you're most likely to buy a wheel.

We still have wheels sales that happen in between every year, but you have your biggest drive -- biggest ramp-up happens right as they come out over the next 3 to 6 to 9 months and that's really what happened last year.

So it's cyclical.

It'll happen again.

And so that's the key story there.

The other 2 parts of the business, which are ASTRO, which is console gaming, and then our PC gaming, are -- both look very similar and very good growth.

Quarter-over-quarter looks strong.

No real change there.

(Operator Instructions) And we have a question from Nehal Chokshi with Maxim.

So I do want to follow on, on Tom's question there, especially on the PC gaming.

You did note in your introductory comments that you saw an acceleration in PC gaming.

I forgot if you did define what was the driver of that acceleration though.

I mean, we didn't go into specifics.

We just said basically there's slight acceleration quarter -- from this quarter over last quarter.

I would say the bottom line is we continue to see a very good PC gaming market around the world, even in places like China, where there are a lot -- there's a lot of press around the government dampening controls on releases of new games.

They kind of put there -- pulled their -- the damper off a little bit.

And I always think, "Gosh, the worst thing you can do if you want to try to stem the growth of something is to make it less legal or just try to discourage, either the government or a parent." And I think -- I don't think it had much impact on the interest in gaming in China.

So overall, the PC gaming business continues to be quite strong.

That's the bottom line around the world.

And if I can add to that, last year, we had said, in PC gaming, in general, we're growing about 20% to 25%.

Structurally, the market is growing double digits.

And we've been outgrowing our -- this year our expectations of 20% to 25% in PC gaming specifically.

I wouldn't overpay attention to one quarter versus the other.

Sometimes, we'll be a little bit above, sometimes under.

But we've been structurally outgrowing that market and growing pretty nicely.

Okay.

And I want to shift to mice and keyboards.

You talked about you continue to expect that, that business will grow low single digits despite the fact that's been growing much faster than that lately.

And underpinning that, I think you talked about at your Analyst Day that assumes a flat PC market.

A, is that correct?

And B, is that your outlook for calendar '19 at this point in time?

Yes.

We've tried to start to disconnect our forecast -- or our -- the guides we're giving you on our PC peripherals.

We're trying to increasingly just disconnect or suggest that you disconnect the PC market from that.

I mean, right now, the PC market is growing.

And I think it's kind of choppy.

It was growing for the first couple months of the quarter and then last month, it wasn't.

I would -- our view of it is there's an installed base out there, and the installed base is so big compared to the new products that are shipped in.

And this is a case where people aren't retiring PCs.

The installed base is out there and it's not going anywhere.

So somebody buys a new one, they just buy a new one, and the installed base stays very similar in size.

And because the installed base is so large and it is getting older, the opportunity to refresh it with a new mouse or keyboard or improve the experience with a webcam is significant and probably getting more significant and not significant in how much it costs to do it.

And so we're taking advantage of that and innovating as aggressively as we possibly can in that space, where we think there's still a big opportunity to improve the -- your work life, whether it's working in the office or working at home.

And I think that's the story.

So it's not really -- I wouldn't spend too much time thinking about, personally, is the PC market growing or not, at what percentage is it growing.

It's such a low impact on the overall installed base.

Great.

That's a fair point.

And then finally, I didn't hear you guys mention whether or not you still are standing by that $2 per share EPS target for next year -- next fiscal year.

Nehal, we -- this was like a 3-year plan that then we did confirm at Analyst Day.

Analyst Day is coming in March.

But if you do the math, it's going to be very difficult not to achieve it.

And at this time, I will turn the call over to the presenters.

Well, thank you all very much.

It was a very engaged call, delightfully engaged.

I promise that when we go to video, we'll give you a special prize when you can buy all your video cameras from us so that you can -- we can do a video analyst call.

I've got Vince sweating bullets now because he thinks we're really going to do that next quarter, which we probably won't.

But thanks a lot.

It's -- it was a good quarter.

We're excited about the next, and we're getting ready for next year.

Thank you.

This concludes today's conference call.

You may now disconnect.