羅技 (LOGI) 2020 Q2 法說會逐字稿

Good day, and welcome to the Logitech Second Quarter Fiscal 2020 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'd now like to introduce your host for today's call, Mr. Ben Lu, Head of Investor Relations.

Thanks, Jack.

Welcome to the Logitech conference call to discuss the company's financial results for the second quarter of fiscal year 2020.

The press release, the 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.

Non-GAAP financial results have inherent limitations and are not meant to be considered in isolation from or as a substitute for or superior to GAAP results.

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

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

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

I will now turn the call over to Bracken.

Thank you, Ben.

And thanks to all of you for joining us.

We delivered a solid Q2 with strong execution in what is obviously a volatile time in the world.

There are U.S-China trade wars, volatile currencies and Brexit.

Those activities are so newsworthy and so noisy that you can temporarily lose sight of the more relevant and proportionally bigger long-term trends affecting us: the emergence of content creation as a lifestyle and a career choice by hundreds of millions of people, and maybe one day, billions; the establishment of gaming as a new super sport virtually all over the world that will eclipse traditional sports in most dimensions, if not all; and the explosion of video communication.

From large rooms to small rooms, from phones to homes, we're moving from video calls as the exception to video everywhere in our lives.

We have consistently managed our business well and this quarter is no different.

We delivered 6% constant currency growth despite putting through the first widespread U.S. price increases in more than a decade.

We improved our gross margins despite tariffs and currency exchange rate headwinds.

In fact, we achieved record operating profits for a September quarter despite these factors, and we generated 25% more operating cash flow than the same quarter last year.

Performing at this level in a market with that much turmoil could be seen as very good.

Since the trade wars began, we've managed through tens of millions of dollars of impact to our business.

That's what you've come to expect from us and that's what we expect of ourselves.

Going forward, we will see the impact of new tariffs implemented in September and more projected in December.

But again, these types of macroeconomic challenges are part of why you invest in us, a recession-resistant portfolio of categories and countries and a practice of no excuses.

So I would say it's a solid quarter, where we managed our business and operations well despite the challenges.

The macro environment is not getting any easier.

But like we have done many times in the past, we expect to manage through all of this and deliver our targets.

Now let's dig into the performance of our different categories, many of which tap into these trends.

Video Collaboration sales grew 60% in Q2 to another record quarter.

Our recent innovations, Rally, a camera system for large conferences, and Tap, a one-touch controller that enables easy and fast access to meetings, are both delivering incremental sales on top of the continued growth we're seeing from our huddle room Meetup product.

Now because of the enterprise nature of our business, our quarterly sales growth can be uneven at times, so I wouldn't expect the 60% growth rate we just saw this past quarter to continue, just like we've said in the prior quarter that the 28% growth rate in Q1 was unusually slow due to the sell-in versus sell-out dynamic of the business.

This past quarter's strong growth is a clear testament to the tremendous market opportunity ahead of us to video enable all the conference rooms in the world.

Such momentum puts us well on track to achieve the $1 billion VC sales potential that we laid out back in our Analyst Day in March.

Last quarter, we announced Sync beta, our device management platform.

We've had great momentum, with close to 100 companies testing and giving us feedback.

We're headed to general availability by the end of the year.

So stay tuned on that one.

We love the videoconferencing business.

It's got all the things we love in it: cloud platforms we can enable, the need for regular innovation and great design, and a breathtaking market opportunity: in this case, 100 million rooms plus.

Our PC peripherals business delivered a solid quarter of 6% growth.

Pointing Devices grew 5% with contributions from both existing and new products.

Our MX Vertical mouse, that was released over a year ago, continued to grow double-digit, while our Pebble mouse continues to have great sales in China.

It's doing so well that we're ramping up distribution of it across the rest of Asia and even into EMEA.

Our recently introduced MX Master 3 is a redesigned version of our flagship premium mouse that one major blog -- the major blog The Verge described as "making the best mouse even better." I love that line.

In fact, there was even a teardown of the inner workings of the MX Master, something

you don't see often for just a humble mouse, but something that's common for devices like the iPhone.

This speaks to the technical and engineering prowess that our team has been able to achieve and put into our products.

Keyboards & Combos sales increased 7% in Q2, representing the seventh consecutive quarter of growth, and with growth from all 3 regions.

Our new slim profile MX Keys wireless keyboard has received great reviews, with PC World giving it and Editor's Choice Award and calling it easily one of the best wireless keyboards.

We also saw great contributions from several other new keyboards that were more limited in their distribution.

Let me touch upon this for a moment.

One of the important benefits of our diversified product portfolio and our global go-to-market capability is our ability to roll out new products in a limited way and see how they do.

If they resonate well with consumers, like the Pebble when it was first launched exclusively in China, then we will expand distribution to other countries.

If the product doesn't do as well as expected, then we'll keep them in limited distribution.

This is one of the ways we can manage the risk of our portfolio.

Turning to Gaming.

Q2 sales were up only 2%, similar to the trends we saw last quarter.

We've continued tough comparison headsets, offset by double-digit growth in all our other Gaming products.

The headset comparisons remain tough but we do get -- but do get easier as we head into the first half of calendar 2020.

So I expect the growth momentum in Gaming to improve with more normalized compares as we exit this fiscal year.

But it's easy to miss the big picture here and that's that the underlying gaming market is thriving and sales of several of our new products are too.

PRO X headset with Blue VO!

CE, our G815 and G915 wired and LIGHTSPEED wireless gaming keyboards are all off to a great start.

Tablet and Other Accessories declined 6% this quarter.

We maintained strong growth in our education channel offset by a decline in our traditional retail business.

As we had anticipated last quarter, Mobile Speakers were down 24% in Q2 largely due to the timing of when we launched BOOM 3 and MEGABOOM 3 in Q2 of last year.

While the overall Mobile Speaker market remains soft, continues -- conditions appear to be stabilizing somewhat, getting incrementally neither worse nor better.

This provides a more favorable environment for us to continue to innovate across new experiences and products as well as expand into new channels.

Overall, we expect our Mobile Speaker sales to be in line with the forecasts we provided at our Analyst Day, which called for a slight decline this fiscal year.

Audio & Wearables were up 12% with Blue Microphones growing double digits and Jaybird flattish in the quarter.

Now let me turn the call over to Nate to walk you through our financial metrics.

Thanks, Bracken.

I'm pleased with our overall execution and the financial results we delivered.

We grew sales 6% to $720 million and non-GAAP operating profits grew 6% to $89 million.

Drilling down further, we grew sales across all regions, gained share in key segments and improved gross and operating margins while investing in our strategic priorities.

With regards to our top line performance in Q2, overall growth was unfavorably impacted by approximately 1 point as certain U.S. customers took time to adjust to our recently implemented price increases.

We saw pockets of delayed orders in a few product categories as a result of our relatively modest pricing actions.

Those increases did, however, help offset some of the tariff costs.

Moving to margins.

Our Q2 non-GAAP gross margin improved by 80 basis points to 38.4%, the highest we have achieved since Q4 of fiscal '17.

Favorable product mix and cost savings initiatives more than offset the unfavorable year-over-year impact from tariffs and currency exchange rates.

Now as we look into the back half of our fiscal year, we will see incremental tariff pressures on our gross margins as list 4A tariffs were just implemented on September 1, but they did not have a material effect on our Q2 financials.

I expect about 1 point of margin impact sequentially in Q3 from these new tariffs net of our ongoing mitigation efforts.

Our non-GAAP operating expenses increased 7% to $187 million with sales and marketing up 9% and R&D spend up 6% as we continued to reinvest gross profit growth back into our business to capture long-term growth opportunities.

At the same time we maintained our G&A spending at around $20 million again this quarter.

So with a disciplined investment strategy funded by top line growth combined with favorable product mix, we delivered another quarter of operating margin expansion while marching toward our long-term potential as a company.

Now let me talk briefly about our cash flows.

Cash flow from operations was $107 million in Q2, a nice $22 million increase versus the prior year quarter and helped by strong inventory management.

Despite our typical inventory build into the holidays, our overall inventory balance declined $20 million versus last year and our inventory turns of 5.3x improved against 4.9x a year ago.

Our full year cash flows tend to be heavily skewed toward the second half, and we are still targeting full year operating cash flow to roughly equal our full year non-GAAP operating profit.

In terms of capital allocation, we paid out $124 million in the quarter for our annual dividend, up roughly 10% versus last year.

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

Thank you, Nate.

We just wrapped up a solid first half and are optimistic about the second half of the year as we head into the holidays.

So today, we're confirming sales growth of mid- to high single digits in constant currency and non-GAAP operating income of $375 million to $385 million.

Our guidance includes the tariffs that have been implemented to date.

And with that, Nate and I are very ready for your questions.

(Operator Instructions) Asiya Merchant with Citigroup.

Congratulations, strong quarter given all the volatility that Bracken talked about.

So can you guys maybe talk a little bit about, as we look in the second half -- the comps, I think, get easier but then you talked about all the volatility, the recent price increases and the tariffs that are going in as well -- if you could maybe help -- give some puts and takes as you look into the second half, easier comps against all this macro and tariffs, how you guys are thinking about it, and which categories you feel most confident about as we look in the back half of the fiscal year?

Yes.

I'll jump in first and let Nate add.

I think in terms of our comps, I think the comp we have in Gaming is probably the one that's going to moderate, especially as we enter next fiscal year.

We expect to continue to have good performance in our VC business, solid performance in our C&P business, and I think the Gaming business will be strong, especially when you net out the effect of -- the Fortnite effect from last year.

Yes.

I think the key story as we enter the back half of the year is we're going to continue to manage against the currency and tariff impacts.

And we're seeing more -- as you know, more tariffs will be showing up as we exit this fiscal year.

That's not assuming yet that the 4B tariffs come through in late December, so we'll see on those.

And currencies, we don't expect any big change.

So -- yes, I think as we go through Q3 and Q4, every quarter is different, but I don't expect this quarter to be dramatically different.

Anything you want to add there, Nate?

No.

I think you're right.

I mean, obviously, we're continuing to invest in our VC sales force, we have some great new product launches this last quarter in Gaming, and we're seeing continued good performance outside of headsets, but I think you laid it out correctly.

So I think the back half of the year is it really comes down to, again, just strong execution and focus on the plans that we have and delivering on those.

Hear, hear.

And then the tariff impact that you mentioned, Nate, on the gross margins, if you can help maybe clarify that more.

So you're expecting 1 point negative impact in net and that is against a favorable product mix still continuing in the back half?

Yes.

So if you look sequentially, Q2 to Q3, I expect about 1 point of headwind in that sequential compare, Q2 to Q3, from the tariffs that were implemented in September.

Those really didn't have an impact on us in Q2 because they occurred later in the quarter.

So we'll see some increased pressure there sequentially, Q2 to Q3, from those September tariffs.

We have plans, obviously, to try to mitigate those things but I do expect to see some of that pressure flow through into the P&L in Q3.

And are you seeing retailers take -- how are retailers responding to the price increases?

Are they sticking?

Are they kind of moderating their inventory?

And that's the last one for me.

Yes.

I'd say, so far, the -- our first round of price increase in the U.S. in over a decade, we saw what you would expect.

Some of the retailers initially balked at taking in more inventory, that affected us a little bit this quarter, but then in the end, as the market generally accepted the price increases, those retailers bought and it's -- and the business starts to come back.

And I think that's kind of normal in a rising price environment.

Jörn Iffert with UBS.

The first one is, please, on your guidance.

When the new list on tariffs is taking place from December, is this now reflected in your guidance or do you have then to reassess your guidance with Q3 results that you will release in January?

This would be the first question.

Second question is, please, if I look on your organic sales growth, it seems more or less everything is coming from VC now.

Do you expect this to become more balanced over the next 12 to 18 months?

And also here, a more medium-term question, if I look on your historic growth drivers, like it was tablets and it was Mobile Speaker, then it was Gaming, now it's VC, but everything slowed down at some point in time.

So what makes you confident you really can maintain your high single-digit organic growth guidance in the next 1 or 2 years here?

And yes, these would be the first questions, please.

Okay.

Well, that's a good list there, Jörn, nice job.

So let me jump into the organic sales growth and the balance.

I think you -- we have a portfolio.

We love having kind of a broad portfolio because -- both of businesses and also geographies.

We're one of the most globally dispersed companies in the world, and we're also one of the most -- we also have a really great balanced portfolio across different regions.

So when one category is going through strong growth, others will -- might slow down but then they come back.

That pattern has repeated itself over and over again across 7, almost 8 years that I've been here.

And so, yes, do I think it will become more balanced over time?

Yes, I do, Jörn.

I think as you go through and look quarter after quarter after quarter, I think you'll see more balance in our growth.

It will spread out.

We still -- we had really nice growth in the C&P business this quarter, up 6%, right in line with the total business.

And I think it reflects that, boy, that business continues to be very strong and as you said, VC was super strong, Gaming is a little softer now, that will come back again, especially as you go into next year when the Fortnite effect is over.

So as you look out a little further, the Tablet/Mobile Speaker dynamic has -- we've seen this before.

We've seen different categories slow down, other categories pick up steam.

We're always looking at new categories, both organic and inorganic.

So this is all contemplated in our long-term targets of upper single-digit growth.

So do I expect to be able to continue to deliver that?

Yes, I do.

In terms of the list 4B tariffs that you talked about in December, we never incorporate those in until they're officially confirmed.

So they're not reflected in our guidance.

Our job is to go in and really try to figure out how can we offset any of those things, and we're certainly looking at -- looking out now and saying "Okay, what's the take?" How might we do that?

Pricing, relocations, straight cost reductions.

So far they're not in, but we'll certainly be after it if they do get implemented.

Yes, I agree, Bracken.

And since they're being implemented -- if they were implemented as, I guess, currently communicated in middle of December, it would not have an impact really on our Q3 P&L.

We may look to pull in some inventory ahead of that to try to offset cost increases.

So we may see a little bit of inventory build ahead of that.

But otherwise, really no P&L impact expected in Q3.

Okay.

And maybe just a last question on M&A.

Is it likely that we maybe see a -- really a new growth category you potentially will acquire, which can be a similarity to kind of VC or Gaming in its early years?

Yes.

Jörn, we're always looking at M&A, and we're also always working organically on new categories.

So we've got 5 to 10 seeds at a time in development internally that most of which you don't know about and we don't share publicly, and many of which don't get out the door in a -- over a 6- to 12-month time frame.

So that's why we don't share them.

And in M&A, we're always looking.

So we've always got targets out there, and I'm completely dodging your question.

So there you go.

Paul Chung with JPMorgan.

So first up on Video Collaboration, it looks like you're seeing pretty nice return on your -- expanding your sales team.

So where are we in that kind of expansion of your sales force?

And how should we think about kind of the pace of OpEx spending there?

And then secondly, are you starting to see better traction for some of your higher ASP products?

And how are you kind of gaining share from your existing players there?

And then I have a follow-up.

Yes.

I'd say in terms of what's our investment in our sales force, where are we, I would view that as a work in progress.

We're going to keep investing and keep building, and we're certainly nowhere near finished but we have -- as you said, we've made a lot of progress.

So we feel good about the investments we're making, and they're going to -- we're going to keep investing.

How to put a point in time on that?

Yes, I'd say it would be hard to say we're certain percentage done because we're certainly -- we view this as a long-term investment trend, and we're going to keep going.

Now in terms of traction in our higher ASP products, we continue to see -- Rally, for example, had a really strong quarter, so did Tap, both of which are pretty high ASP products, and those are medium-sized to large huddle rooms, and Meetup continues to do super well, too.

So I'd say broadly -- and by the way, all those are really high ASP products for little old Logitech who sells a lot of mice.

So we love the whole category, and certainly within that subcategory, Video Collaboration, the higher-end products are doing well.

I think on top of that, too, I'd add, just look at some of the customer metrics that we're now able to track related to that VC business.

We are seeing deeper penetration into some of our installed base accounts.

We're able to expand and work strategically with them to add some of those higher-end products and those larger solutions.

So very nice favorable trends in that respect as well.

Okay.

Great.

And then my last question is on Streamlabs.

So I know you mentioned it's not going to be material in fiscal year '20.

I read somewhere they have around 1.6 million users and 480,000 mobile users.

But can you just help us kind of frame the opportunity here and the rationale behind the acquisition?

And then how can you kind of scale that existing user base?

What's the kind of revenue potential and margin impact?

Then what are your kind of expectations for kind of cross-selling some of the -- your existing products?

And then lastly, is there kind of a shift in your acquisition strategy?

Is there a preference now to kind of find smaller software tuck-ins that are potentially more accretive to gross margins?

Thanks, Paul.

That's a great one.

Thank you for offering that question because we wanted to talk about it.

Yes, we're super excited about Streamlabs.

It's the first sizeable acquisition we've done that is -- that really has no hardware component at all.

And I think if you say, "How does that strategically fit into what we're doing?" It's really a direct hit.

If you look at what we're doing from a broadcasting and streaming perspective, we make the webcams, we now have the microphones, even keyboards and mice that are used by streamers to put themselves out there.

And what this is, this is the layer that sits between the streamer or between the podcaster and Twitch or any of the other platforms that people are using.

So it's a really, really cool addition to our business and a way for us to expand into services.

And as you said, there are millions of people using this platform.

So it's very -- it was really a great opportunity.

In terms of cross-selling, et cetera, early days.

We haven't even closed the acquisition yet.

I hope that happens in the next few days, but we're just about there, but we'll see.

I think the key is to make sure that that business is successful.

And I think the way that business is successful is by enabling people to either have that lifestyle experience of streaming or to actually generate some income or revenue or even a job out of it.

And that's what those guys are doing today.

We want to keep enabling them, and their geographic dispersion continues to be an opportunity we think, as does just the sheer number of people doing them and even that we see other growth opportunities as well I won't get into here.

So I'm optimistic about it.

I'm excited about it.

It's hard for us to dimensionalize.

You mentioned it, yes, the gross margins there are significantly higher than our core business.

So that's pretty cool too.

And I think you will hear more from us over time on this business and others like it.

Jürgen Wagner with MainFirst Bank.

You gave us the gross margin hit from the additional tariffs.

What would the gross margin impact for the remainder of this fiscal year be from FX if the U.S. dollar versus euro stays where it is today?

And a follow-up question on M&A and organic growth.

We see that assets with larger focus on enterprise solutions have become a bit cheaper over the last year or so.

At what point would you consider buying into the enterprise space to reaccelerate your organic growth that's coming down currently?

Okay.

Let me answer that first and then we'll -- I'll let Nate dig into the FX question.

We look at a very broad range of targets, categories we're in today, categories we're not publically in today.

And that would include enterprise -- the enterprise space.

We love the enterprise space, as you know.

I mean it's pretty clear from our results over the last couple of years that it's an area we believe in, we're investing in, and we're learning a lot from and building capability in, both from a technology standpoint and also from a go-to-market standpoint.

So absolutely, we would consider additional M&A in that space.

But we continue to be excited about the consumer business.

There are more and more spaces we feel like are relevant to us, and the latest one we've talked about is broadcasting and streaming.

So let's -- that's a cool opportunity for us, a little bit like Gaming probably was a few years ago.

And we're excited about that, too.

Now as for the FX, you want to jump into that one, Nate?

Sure.

Jürgen, was your question on gross margin?

Yes.

Sorry.

Yes.

FX is about $10 million a quarter year-over-year impact for us at current exchange rates.

Ananda Baruah with Loop Capital.

Just a couple from me.

Just from a macro perspective, Bracken, you guys -- you obviously sound pretty confident about the tempo of the business.

You also mentioned, just opening the call, ongoing macro headwinds.

Have you seen or experienced -- do you feel like you're experiencing anything incremental over the last 90 days with regards to macro impact?

And just in doing the calculations it seems that the Q-over-Q growth, sequential revenue growth in September, wasn't as strong as the last couple of years.

And so is there anything to that or is that just sort of a business -- sort of mix dynamics like that?

I have a couple of follow-ups, too.

Okay.

I'm going to let Nate respond to that second one.

I would say in terms of the incremental macro, no, I don't think there's anything really significant that you don't know about.

I mean -- so the tariff changes are kind of what you'd expect.

I don't think from a macroeconomic environment, we see any real difference over the last 90 days.

I think it's very similar.

A lot of people are talking about recession, recession, recession.

We're -- we view ourselves as kind of a recession-resistant company because of the fact that we've either got products that are really relatively low-priced and they're good escapes or are good to make you more productive at home or anywhere else you are, or they actually help you avoid needing to travel so much and you can save money if you're a company.

So I don't know whether there will be a recession.

At some point, surely, there will be.

But we're -- we feel really good about our business in that context if it were to come.

And I think regarding the seasonality, I think you've got to come back to just some of the product dynamics with extremely strong Gaming growth in the prior year and what that did to sort of disrupt what you might call "typical sequential growth rates." New product introductions also get into your baseline.

So you have some of those impacts.

I think this quarter was roughly in line with what we expected, again, other than VC probably just being a little bit stronger than what we had in our models.

But again, that was somewhat just offsetting Q1 being a little bit slower just because of the timing of sell-in versus sell-out in that business.

But I didn't see anything really sequentially that looked -- that was surprising to me.

Okay.

That's great and helpful context.

And then just moving over to Gaming real quick.

You guys -- Bracken, just bigger picture, you clearly sound as enthusiastic as you have in the past about the market opportunity.

Just for fiscal '20 -- and you sound sort of enthusiastic about the second half and the ramping into fiscal '21.

Just for fiscal '20, do you feel that the market -- that the Fortnite effect is having a greater impact, just a greater headwind than you anticipated?

Or do you think that you get back up into that forecasted range or there's at least potential to as you go through the second half of the year?

Yes.

Well, I think the Fortnite effect was huge.

I mean it really was.

If you look at any of our -- any of the quarters we've had kind of when you add the 2 years together, it looks like a more normalized growth rate.

But it certainly was a big effect.

And I'd say it was strong, I mean really strong.

The good thing about that is that I always feel like, I always love it when you have a hard compare because that means you're going to emerge from that and then the compares get easier.

We're pretty close to that.

So I think as we go into fiscal year 2020, I'm excited about the fact that we had that compare this year and we won't have it next year.

And as you said, I am really optimistic, Ananda, about the long-term secular growth trend here.

I don't think -- I don't see anything about this that's not going to continue.

We get calls every day or almost every day -- every few days either get calls or letters from somebody who's interested in putting their gaming program into a high school or into a university or a small college.

And I think that bodes well.

It just says that the fundamental engine here continues to grow and drive and young people are coming into gaming as a sport.

Okay.

Great.

And I guess let me ask a bigger picture one, Bracken.

Do you feel any differently about the Gaming opportunity than you did at the start of this year?

No.

No.

I really don't.

I feel exactly the same.

I think it's just a great opportunity for us and for a lot of other companies.

Okay.

Great.

I have one last bigger-picture strategic question.

Really, sort of Streamlabs is a part that fits into this and just kind of broader Unified Communications as a service, UCaaS.

So as distinct from -- a little bit distinct from what -- sort of what took place at Plantronics last year, any way you could give us context around what the potential or the opportunity is to develop more of a service offerings aspect of the portfolio?

Streamlabs is a toe in the water there.

But services like that could become increasingly very large.

Unified Communication -- UCaaS is obviously service, kind of, bent oriented.

What's the appetite to kind of dip into that pond as you go forward?

Whether it's those or others that we're not aware of yet as you evolve the model?

Yes.

You know, I think the -- from a -- the Streamlabs is a consumer service opportunity and Synch, S-Y-N-C-H, is a B2B service opportunity that we're -- part of a B2B service opportunity that we're really starting now where you can actually track and monitor conference room equipment or a conference room activity.

And we think that's a place that we can and should be playing.

I don't want to overset expectations.

I think we're going to do this at the right pace as we build capability, both organically and inorganically, as you saw with Streamlabs.

But I do think building a service opportunity inside of our business on the back of a very strong, continued hardware capability is in our future, Ananda, and you can expect more from us there.

Michael Foeth with Vontobel.

A few questions from my side.

The first one is regarding your VC business again.

Can you maybe comment on how your visibility is on the sales development in VC and how that differs from the rest of your portfolio?

And the second question would be, maybe if you can give us a general initial comment on how you see channel inventories going into the holiday season?

How is it building up?

Have you already seen a lot?

I mean I think that the sell-in and sell-through data that you're showing is not suggesting any significant inventory building yet.

And then the third and final question would be regarding tariff mitigation measures.

You have mentioned price increase, obviously, but are there any other specific measures that you have taken during the quarter that you can comment on?

Yes.

So let's go through those.

I'm going to let -- I'll let Nate talk about the channel inventory, but I think you generally described it correctly.

I don't think you see a big impact there.

In terms of tariff mitigation, we mentioned this before.

Within the quarter, we are relocating some manufacturing.

We continue to drive our costs very hard down.

I mean I'm personally impressed by -- and I hate -- I don't usually pat us at the back in public, but I'm personally impressed by our ability to manage gross margins in the context of both currency and tariffs.

So I think we've done a really nice job of -- and our team has done a really nice job of relocating the right things and doing it quickly and doing it well, so there's no hiccup in supply.

But I think that's been good.

We -- as we said, in July, we -- end of July, we implemented the first pricing we have in a decade, very long time in the U.S. We've done pricing around different parts of the world.

So I don't want to overstate the difficulty factor.

We know what we're doing, and we're ready do it again as we need to.

VC visibility.

VC does have a little better visibility than our core business in a way because we use sales force like everybody else in the enterprise space, and so we have a little better picture of the activity that's coming.

And so that gives us a channel -- or a sort of profile of the way sales are developing.

And I think you'll see -- we'll see that improve -- our ability to look into the future will improve over time as we spent more years in this business, but it's -- I'd say, it's a little bit better, and we're optimistic about that.

I mean I think the future of VC is -- I mean I've probably said enough about that today, but the future of video inside of all companies is bright.

And our -- and by building a sales force, building capability in the go-to-market structure, we're going to get better and better visibility into where those best opportunities are and exactly what you can expect from us quarter-over-quarter.

We don't guide quarter-over-quarter but -- and we'll -- we have better visibility than we have in the past already.

Can you maybe just quantify how many months visibility do you have?

I wouldn't -- I'd be hesitant to do that.

We haven't talked about that in the past but I'd say that our visibility is getting better and better, as you would expect, with more time in the business.

Thomas Forte with D.A. Davidson.

I just wanted to come back to the Gaming business.

Can you talk about the product life cycle in the Gaming segment for headsets and other segments in the category and how you're anticipating the effects of the Gaming segments as the new consoles are expected to roll out in the back half of next year?

Yes.

So first of all, I think the product life cycle in Gaming is faster than, obviously, it is in our C&P business, and we've launched several good headsets just recently, the new Pro Wireless, which is a really, really cool product.

And I think you're going to see a lot more activity in that space, and I would expect that to -- I would expect that you'll continue to see a ramp in activity in the -- in all areas of Gaming as time goes on, but particularly in the headset space.

In terms of the console cycle, I think it remains to be seen.

The console refreshes are coming.

In the past, the console refreshes came with no compatibility to past products.

This time, that's different.

So I'd say that bodes kind of -- that's a good counterweight to the normal trend, which would be that you have a lower sales rate in console as the new console comes in.

So this time though, the -- since you've got backward compatibility, I think it may be different.

So anyway, the bottom line is, I think our overall headset business will improve as we go through the -- especially in the first half of next year, and our overall Gaming business will improve after we escape from those Fortnite compares.

(Operator Instructions) Nehal Chokshi with Maxim Group.

So nice results, and I was wondering of the constant currency growth that you're seeing, how much of that was due to the price increases that you guys were able to implement successfully?

I'm not sure that I would attribute anything really to the price increases per se.

You know, you assume kind of an elasticity of one to one, it's probably pretty flat.

I'd say the constant currency growth is really just almost purely organic and not related to price increases.

And in fact, as I mentioned earlier, I actually saw about a 1 point unfavorable impact just as some of our customers did delay some purchases and sort of used their existing channel inventories in the quarter.

So I think there was actually a little bit of headwind.

But as tariff -- as Bracken mentioned, I think the price increase actually went about as we expected and it did help offset some of the cost increase.

So that 1 point impact that you saw, Nate, that implies in the price elasticity less than 1.0 then?

It varied a lot by product, I would say, based on the magnitude of the price increase and by the different products sold by the customer.

But I'll jump in, I think what Nate was referring to was less about elasticity in pricing and more about channel impact.

So you had -- you have customers who just don't buy.

They don't like the look of the new pricing in the beginning.

It happens every time we do this anywhere in the world.

And then after a period of digestion, where the markets change and the prices are starting to lift in the market, then they come back in.

And so it's not really an elasticity question.

It's more of a channel inventory temporary impact question, and that's largely on its way to mitigating right out.

And I think also to just the uncertainty sometimes around these tariffs, right?

It's in the news quite often as I think you have some customers who may be willing to wait a little bit and see if maybe things will turn in their favor and then they can buy again at lower prices.

So lots of dynamics.

Right.

Understood.

And presuming that the tariffs don't go away, when -- how long does it usually take for the customers to accept the new prices and say okay, let's go ahead and order?

Yes.

Most take that right away.

There are a few that will slow down or stop buying some products and then over the 30, 60, 90 days, it gets back to a normalized buying level.

And I think we're on our way there.

We're not quite there yet, but probably sometime in Q3 we'll be 100% there.

Yes.

Okay.

And then can you actually give a little bit of color as far as what was the magnitude of the price increases to offset the tariffs?

It's -- because of the competitive environment we're in, I'm a little hesitant to do that in any level, but we didn't fully reflect tariff pricing in here at all and -- but we put in the level that we thought was reasonable, and I'll stop at that.

Understood.

All right.

So Gaming has been flat year-over-year, which is actually incredibly impressive given the really tough compares.

I think you guys have a pretty good view into what does the installed base actually look like in terms of growth.

Could you share your perspective as far as what's the Gaming accessory installed base growth rate over the past 6 months?

Yes.

I'm not sure what the installed base growth rate would be at.

I think the underlying growth rate though, if you take the headset business out, we're still growing double-digits in all 3 categories in the -- all the categories of Gaming outside of that.

So that suggests pretty strongly that the installed base continues to grow around the world, and I'm quite sure that it does.

And I imagine you can expect that to continue.

Now the opportunity, big opportunity right now is the fact that we sold so many headsets, and probably first-time gamer headsets, last year that there's an opportunity to upgrade those headsets over the next couple of years and that's why we launched premium headsets this year.

And I think you'll -- we'll start to see those take hold as we go into the -- especially into next year.

But they're doing well right out of the gate and that's probably because there was an opportunity.

Great.

Finally, do you see any signs that channel inventory is elevated on the Gaming side?

Channel inventories are in good shape heading into all the holiday.

As Bracken mentioned, we had some sell-in from the new headsets, but it was pretty modest.

So everything looks clean.

It appears there are no further questions.

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

Well, thanks everybody, for joining us.

It's an interesting time in the world and it's an exciting time at Logitech.

We will see you in Q4 -- Q3.

Thank you.

After Q3.

This concludes the Logitech Second Quarter Fiscal 2020 Financial Results Conference Call.

Thank you for your participation.

You may now disconnect.