羅技 (LOGI) 2015 Q1 法說會逐字稿

Good day, and welcome to the Logitech first quarter financial results conference call. At this time, all participants are in 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 of Logitech. Please go ahead, sir.

Welcome to the Logitech conference call to discuss the Company's financial results for the first quarter ended June 30th, 2014. The press release, our prepared remarks and slides, as well as the live webcast of this call, are all 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/A for the fiscal year ended March 31st, 2013 and subsequent filings, which are available online on the SEC EDGAR database, and in the final paragraphs of the press release and prepared remarks from Logitech reporting first quarter financial results for fiscal 2015.

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.

Please note that the preliminary financial information for the first quarter of fiscal 2015 discussed in this call was compiled by the Company and has not yet been reviewed by its independent auditors.

These preliminary results, and the results for the corresponding period of fiscal 2014, may be subject to material adjustment for the reasons described in our press release and until we can file our quarterly report on Form 10-Q for the first quarter of fiscal 2015. Complete financial information, including balance sheet and cash flow information, will be provided when the Company files that quarterly report.

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'd now like to turn the call over to Bracken.

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

Q1 gives us a strong start to fiscal 2015. We exceeded expectations, delivered strong sales growth with our retail sales growing for the fourth time in the last five quarters, improved profitability significantly, and generated strong cash flow. Vincent and I will give you a brief overview of our Q1 performance and then I'll come back and discuss the outlook.

Sales in our growth category increased by 17% compared to the prior year. That's against a comparison to last year when we had over 90% growth because we had a one-time shift in the seasonality of our new product launches. Let's look a little more deeply at each of the businesses within our growth category.

First, PC gaming grew 17%. We're starting to see the impact of our new product programs. In our Americas region, where much of our updated portfolio is now available, we gained over four points of market share, the first increase in several years.

Now for mobile speakers, our mobile speaker sales more than doubled for the fifth consecutive quarter. The strong momentum has been driven by our flagship product, UE BOOM. It was our bestselling product in Q1 and it continues to receive awards of all types, with the most recent being the Industrial Design Society of America Gold Award for the entertainment category.

Finally, it was a weak quarter for our tablet and other accessories, our third growth category. The 15% decline in our net sales resulted from two key factors, the first a slowing in the market for iPad shipments, and second the impact of the incremental inventory reductions we took to align with the slowdown in the iPad market.

We acted quickly to ensure we have a lean channel ahead of any new iPad products that might come. Despite the slowing iPad tablet market, both sell-through of our iPad keyboards and our market share continue to grow.

As you might recall, we've broadened the focus of our strategy to actively target the Samsung opportunity where the attach for keyboard covers is growing rapidly. Our Samsung keyboard business was too small as of yet to offset the slowdown in iPad keyboard sales in Q1, but we're expanding our offerings. Just last month we introduced the Logitech Type S, a protective keyboard case for the Samsung Galaxy Tab S.

Our focus for tablet accessories in fiscal 2015 is to first expand our offerings for the Samsung platform; second, prepare for the launch of the next iPad when it might come; and third, increase our share in the covers market through continued innovation in functionality and design.

While the iPad market was relatively weak, we benefitted from a stronger than expected PC market in Q1. It's premature to directly correlate a better PC market with a weaker tablet market, but it is true in Q1 that, as tablet sales softened, notebook and desktop PC sales strengthened. Q1 sales in our profit maximization category, which is primarily composed of PC peripherals, were up by 1%.

In spite of the ongoing structural decline in the consumer webcam market, we delivered 10% sales growth in our retail video category, the first year-over-year growth in three years. This might surprise you, given the expected decline in consumer webcams, but the growth is a net number, reflecting both the continued steep webcam decline and a very strong growth from our video collaboration offerings.

What is video collaboration? This video collaboration subcategory offers high quality audio and video to small and midsize conference rooms, and works with any platform from Skype to LifeSize to Polycom and more.

Our Logitech branded product portfolio for video collaboration is very strong, and I expect the market adoption of low price, high quality video collaboration solutions to continue through fiscal 2015.

We also had a strong quarter in PC keyboards and desktops, with sales up 8%. In spite of a weak PC market over the last few years, this is the fifth time in the last six quarters that we've grown this category. Our results demonstrate the appeal of our Living-Room keyboards as well as the strong value proposition of our keyboard and mouse combo offerings.

Our profit maximization category also made a major contribution to our Q1 non-GAAP gross margin, with a key driver being reductions in product cost as we execute our strategy for managing our PC related categories.

Complementing this gross margin improvement and contributing to the substantial increase in our overall profitability, we continued to demonstrate disciplined management of our spending, delivering an $18 million reduction in our non-GAAP operating expenses compared to the prior year.

Before wrapping up my comments, Vincent has some comments on the quarter as well.

Thank you, Bracken.

In Q1, we continued to make good progress in improving operational execution and reducing our cost structure while delivering 3% sales growth for our retail business and 1% for the Company overall.

In the quarter, we delivered a record high non-GAAP gross margin of 38.3%, an improvement of 240 basis points over the prior year. Note that about 100 basis points of this improvement is related to the unusual situation of our accounting books still being open for Q4 of the prior year. Please refer to the prepared remarks posted on our website for more information on that topic.

Even without that unexpected benefit, we are very pleased with our Q1 gross margin performance. As planned, a key driver of the improvement was the success of our cost optimization initiatives in our profit maximization category combined with a slight improvement in our growth category, as some of these products begin to achieve scale.

While we don't guide gross margin, we could see up to a point of margin upside for fiscal year 2015 compared to our long term financial model of 35%. We expect to float about two-thirds of the incremental gross profit to the bottom line as we march towards our long term operating profit margin goal of 10%, and invest the rest to accelerate our product innovation.

Q1 was the fifth consecutive quarter that we have reduced the absolute level of our non-GAAP operating expenses. As a percent of sales, our non-GAAP operating expenses were 29.2%, an improvement of 420 basis points compared to the prior year.

We are pleased with our progress as we continue to drive reductions in our indirect procurement spending as well as our global infrastructure to create investment capacity and support future growth opportunities.

You should expect our spending to grow sequentially in Q2 as we prepare for our seasonally strong Christmas quarter.

Note that our non-GAAP operating expenses in Q1 of the current year exclude $8.7 million of one-time costs related to the ongoing Audit Committee investigation.

The improvement we have made in managing our working capital efficiently continues to drive strong cash generation. In Q1, we generated approximately $28 million in cash flow from operations, delivering our best Q1 in the last five years.

For the last 12 months, we delivered approximately $230 million in cash from operations, up by approximately 89% year-over-year. Our quarter ending cash balance of about $485 million was up by $166 million over the prior.

Our capital allocation strategy remains the same with a focus on three areas: first, business investment and small acquisitions as a priority; second, annual dividends; and third, opportunistic share buybacks.

Let me wrap up by saying that my team and I are working diligently on completing the incremental accounting work necessary to file our Form 10-K. As soon as we have more information on that topic, we will share it with you.

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

Thanks, Vincent.

Based on the strength of our better than expected Q1 performance, highlighted by a solid increase in profitability, we've raised our full year outlook for non-GAAP operating income in fiscal year 2015.

We continue to expect sales of $2.16 billion, and we've raised our outlook for non-GAAP operating profit by about 17% to approximately $170 million compared to the previously expected $145 million.

It's early in the year, and there are many uncertainties at this stage: tablet growth rates, PC growth rates, and more. I feel very good about our Q1 start, and I'm excited about our product portfolio and the progress we're making as we target the many opportunities before us.

Of note, we've grown our retail sales four of the last five quarters. In this fast paced world, we want to be growing regardless of the dynamics of a single business. We're managing a more balanced portfolio that includes a number of growth businesses, and we intend to add more as we invest to drive future growth.

With that, Vincent and I are available now to take your questions. Please follow the instructions of the operator.

Thank you. (Operator instructions.) Youssef Essaegh, Barclays.

Hello. Thanks for taking my question. I just wanted to ask you, on the new guidance, I saw you raised your guidance by about $25 million, $30 million for the year. And given the better gross margin in the first quarter, why don't you feel confident that you can carry that over for the rest of the year? And also, if you think about next year, do you think that is sustainable also into next year? Thank you.

Yes. Hey, Youssef, this is Vincent. So, with regard to the guidance, it's mainly coming from improvement in the gross margin and the strong quarter we have had. A portion is coming from the one-time event in Q1. And as I explained the gross margin, a portion is coming from cost optimization in our overall profit maximization category.

We feel really good that about two-thirds of that improvement is sustainable and structural in nature. And then, as I mentioned, we want to invest a third to accelerate the top line growth and accelerate the innovation to find new products.

So, we don't guide for FY 2016, and I'll leave it at this year. We'll see for next year.

And do you expect also therefore the mix in your revenue to continue to change through 2015?

Yes, we expect the growth category to well out gross the profit maximization. You've seen the IDC numbers.

While PC category was still in decline but slightly better here in our first quarter, for the second calendar quarter, you also see that the remaining of the year is still a decline of 5% to 6%. And that's what we've used in our guidance.

And then, the growth category, as Bracken mentioned, is a portfolio mix. But, we feel really good about double digit growth for that category.

Paul Coster, JPMorgan.

Yes, thanks very much. A couple of questions. First of all, can you give us a little bit of color around what you've done to achieve this very impressive improvement in gross margins? What are the cost optimization actions that you've actually taken?

Yes. Actually, Vincent mentioned about 100 basis points of that gross margin improvement is actually because we've left our Q4 open. And so, some of that improvement actually would have been -- some of the costs would have been pushed back into Q4 according to accounting principles.

But, the rest of it is real and sustained in this quarter. And it's really driven by a couple things and it's across most of the business. We've got cost reduction programs going, aggressive cost reduction programs going in our PC peripherals business, and that's a large piece of it.

But, you've also got improvement in our growth businesses too, where -- we mentioned in the spoken remarks that we're starting to hit scale in several products, including products like our music products where, as they hit scale, the costs go down.

So, if I can add, Paul, quickly in three that I mentioned, right, we've designed for lower costs. We standardized some of the components and work on the procurement aspect of it. And then, as Bracken mentioned, as we always planned and said, as the new growth categories start to scale, we benefit from those advantages of higher scale.

Right, got it. Okay. And then, is there anything in the current quarter, which is the back to school quarter I guess, that we should be sort of really focused on in terms of the product categories that are most likely to move things one way or the other?

You're right, it is the back to school quarter. I mean, our kind of outlook for the quarter is we expect to have a pretty flattish quarter from a top line standpoint.

And at the end of the day, this is always a quarter where we have several new product launches. You'll see things coming soon. Some of those new product launches are a little dependent on when we're ready, when the market's ready for them. Some could hit this quarter, some could next quarter, which makes it a little more uncertain for us to be able to give you specifics.

But, no, I don't think there are any particular surprises this quarter that we're aware of, so far anyway.

My last question is on the gaming front. What is it that's sort of -- outside of some market share gain, it seems like the gaming category seems to be doing quite well from a secular perspective as well. Why is that?

Well, a couple things. I mean, first to be really high -- 50,000 feet, people just have more free time and there are more and more people playing games. I have two kids, and they're -- I have three kids, actually, but two boys. All three of my kids play PC games, and that's where we're focused.

So, we think you're going to continue to see a growth of -- well, it's called PC gaming, but I think it'll become PC gaming and mobile gaming. And I don't think you can expect anything but a long term trend for that to continue to increase.

I'm not so sure about console gaming. I think you'll see a bump and a decline in that and maybe a little bubble up and down a little bit as times goes on. But, PC gaming and mobile gaming are probably here to stay, at least for the next five plus years.

All right. Thank you.

Thank you, Paul.

Tavis McCourt, Raymond James.

Thanks for taking my question. The first one is on the tablet and mobile accessories. Can you talk about where you are now in terms of commercial launches in that category outside the tablet keyboard? So, I think you guys have had a couple of launches there. Explain what the strategy is there and kind of what the outlook is for the rest of the year.

And then, in terms of the video category, can you give us a sense of the percentage of revenues now that are non webcam or kind of enterprise related? Thanks.

Sure. First, in tablet keyboards, we really didn't exist in the keyboard cover category a year ago. We had a couple of small products in there. We've expanded that lineup recently, and I think we've got some pretty good products out there now.

We can do even better. As time goes on, I think you'll see us come with much -- with even more impressive -- an impressive portfolio, although I think what we have out there now, to be honest, is the best thing you can buy. But, you probably expect to hear that from me.

On the Samsung side, which is a keyboard cover story, we've really just gotten started on trying to drive attachment rate in Samsung like you have on iPads. And it's a little too early to declare victory, but I'd say there are some green shoots out there that suggest that the attachment rate for a keyboard with Samsung could look very similar to what we see on the iPads.

So, too early to say, but I'm optimistic that we can do something there. So, that's basically our strategy.

On the video side, yes, I'm sure that is an interesting story for you. Yes, webcams are certainly in decline. The video collaboration products we're talking about, we have two products in particular -- three products I guess, that really are used for companies and people who are trying to create a video conference room out of a room that wasn't a video conference room before.

So, it's really about enabling all of this plethora of rooms that could be video enabled for small collaboration video calls. And we're relatively new to the business, but it's a really exciting business and we have a terrific portfolio.

And is it still pretty de minimis in terms of the overall revenues there, or is it big enough to start moving the needle?

Yes. It started to move the needle in the video category. It's still too small to move the needle overall for the Company. The market opportunity obviously is big, and we're very focused on that category.

Great. And then, a clarification, Bracken. When you say flattish next quarter, I presume you mean year-over-year and not sequential, right?

That's exactly right.

Great. Thanks.

Michael Foeth, Bank Vontobel.

Yes. Hi, gentlemen. Just a question on these one-time costs you had relating to the Audit Committee investigation. I was just wondering how we should look at that in the current quarter. Is there a similar amount going to come again, or what that it more or less, if you can comment on that. Thank you.

Yes. Hey, Michael, this is Vincent. So, the costs that we have reported obviously are one-time in nature for the period of Q1. The investigation is still ongoing.

We don't have yet a final timeline. Once we have a timeline, we'll communicate that appropriately. And you should expect that, for as long as it's open, we're going to continue to have a run rate for that activity.

And is that mostly external costs, or is that costs that you basically book within the Company because a lot of people are working it?

No, no, it is 100% external variable costs.

Okay, great. Okay, thank you very much.

Andrew Humphrey, Morgan Stanley.

Hi. Thanks for taking my question. I wonder, could you firstly tell us if you have any update on attach rates for iPads for keyboard accessories, if you have some visibility on that. I know it's a slightly weak market at the moment, but any update nonetheless.

And secondly, I think on OpEx, if I look at the non-GAAP number, you had a pretty strong quarter. So, I'd be interested to understand whether there are any temporary effects there, or if you view that sort of new run rate as sustainable.

I'll take the first one and I'll let Vincent answer the second one.

On attach rates for the iPad, yes, it's always a calculated number. So, I think you can't take anything we say in one single snapshot as 100% certain, but over time it is.

We continue to see attach rates grow. I mean, it's a little bit of a mixed bag. The large iPad in the US looks like it flattened a little bit, globally still growing. The small iPad continues to grow.

But, as I said, we're going to keep an eye on that all the way through. The attach rates for the Samsung keyboard certainly look like they're growing. And so, I'd say overall you can safely say the iPad attach rates are still growing.

Andrew, on the OpEx, obviously we're pleased by delivering the commitment we've made on the operating expenses. If you look at the ratio as a percent of sales, 29% non-GAAP basis for the quarter is definitely excellent progress, a reduction of four points year-over-year.

We're still far from our operating model on the long term, right? We have a business model of 25%. And when you look at where we still need to make improvement, it's in the infrastructure and what you don't see in the P&L, but in direct spend.

So, we'll continue to focus on creating those savings. And then, we'll reinvest a portion of that into new activities. If you look at the R&D costs, we have achieved a good run rate, but we want to continue to invest in R&D to drive new products, and then the same for field and merchandising activities.

In terms of dollars, obviously that will fluctuate with the revenue. And as I mentioned, you should expect OpEx to grow sequentially in Q2 and Q3 as we prepare for the busiest quarter.

Okay, thank you.

Andy Hargreaves, Pacific Crest Securities.

Thanks. Just to clarify, Vincent, the comment that two-thirds of the gross margin improvement is sustainable, is that including or excluding the 100 basis point accounting benefit?

No, that is excluding. So, we have about 240 basis points, one point coming from the one-time benefit of our Q4 books still being open. The remaining about two-thirds will be sustainable.

Okay. And then, just a follow up sort of on the video collaboration stuff, is that sold through the traditional retail channel, or is that sold through LifeSize or resellers? How is that packaged and sold?

Yes, that does not go through the traditional retail. It also does not go through LifeSize, although LifeSize does offer part of that video collaboration equipment as part of their offering with the new cloud, their new iCloud. But, that would be an insignificant part of it so far.

So, yes, it's sold through the traditional resellers who would go into small and medium size business.

Okay. And then, just last, did you launch the new Ultrathin and Big Bang cases in the June quarter, or is a lot of that launch, in terms of actually shipping it to partners, coming in September?

No, no, no, we launched that in our current quarter, in the June quarter. The last quarter, yes, Q1.

Joern Iffert, UBS.

Hello. Thanks for taking my questions. The first one would be on tablet profitability. Can you give us a feeling, please, what top line do you need in the tablet segment to reach average group margins?

The second question would be you were talking about M&A. Are you also screening targets, or are there targets available with revenues of more than $100 million, $150 million? And if yes, in which categories would this be?

And the last question would be on the dividend. Is it fair to assume that a yield of 2% to 3% should be in our models? Thanks very much.

I'll answer the middle one and I'll let Vincent take the other two.

Yes, in terms of acquisition targets, we're certainly screening acquisition targets of all shapes and sizes. It would be a long shot to have us buy one that would be really large, but it's not out of the question.

To be clear, though, we're not reliant on acquisitions to deliver our commitments for this year or our longer term projections. I think we can do that completely organically.

But, if we see opportunities, we're certainly going to go after them. And we are screening literally weekly.

On the gross margin side, Joern, for the benefit of everyone listening, our average gross margin of 35% to 36% is delivered by profit maximization being a few points above that and the growth category being a few points under.

The reason growth categories are a few points under is, A, scale and, B, investment as we continue to accelerate merchandising and penetration of those growth categories.

At this point in time, tablet is within the average obviously of the growth category. And it will all be a relationship of top line growth versus margin maximization at this point in time. Also, the quarter is negative growth and the market has slowed down.

We still believe we have a very strong opportunity to other platform and gain market share in the iPad market to continue to run that category at a suboptimal gross margin versus the corporate average.

And then, on the dividend, I mentioned our three capital allocation strategies, investment in the business, dividend, and then opportunistic share buyback. Obviously at the right time, the Board will meet and decide, in terms of dividend increase, what the strategy is and we will communicate that appropriately.

All right, thanks. And maybe a short follow up on LifeSize. Is LifeSize profitable on GAAP EBIT level at the moment?

So, LifeSize, as you know, we took a big restructuring at the mid of last year. We made it profitable for the second half of the year. In Q1, they had a sales decline of 14%. On non-GAAP basis, we lost $1 million.

Thank you very much.

(Operator instructions.) Alex Peterc, Exane.

Hi. Thanks for taking my question. Just a quick one on the tablet market. You mentioned that sales were down quite heavily because you were clearing channel inventory. Is it all behind us now, or do you still have some more inventory adjustment to be done this quarter? Thank you very much.

Yes, we'll continue to reduce our inventories in the channel this quarter as well, I believe.

It really depends on what happens to the market overall, but we expect to bring it down a little further. And I think once we do that, we'll be in a pretty good position going into Q3.

Alex, if I can add quickly, we are monitoring sales through very closely. And obviously we intend to adjust our channel inventory aligned with sales through. So, it's all a factor of what the sales are, then sales through demand will be.

Okay. Thank you very much.

Felix Remmers, Credit Suisse.

Hi, everyone. A quick two questions, one follow up on LifeSize. I was wondering to what extent the video collaboration offering in video is cannibalizing the sales in LifeSize. And what can we expect from this cloud solution you launched recently? Shall we expect here sales to further decline in this category?

And the second question I've got is on tablet accessories. Is it fair to assume that this category is unlikely to grow in this year?

Okay. Let me address your first one, yes. Is there interaction between our video collaboration and the LifeSize business? No, not really. I mean, at the end of the day, the overall -- the number of smaller rooms, and this is really newer rooms coming in and becoming video enabled, is growing very rapidly.

And those tend to be done at a pretty low cost, much lower cost than a conventional system. So, for the most part, that is certainly unlikely to be cannibalizing anything in LifeSize, or even Cisco or Polycom or anything in that industry.

Now, that said, part of the mission that LifeSize has is to build a cloud-based system that can work anywhere on any room size. And I'm sure most of you haven't tried it yet. It's a terrific new system, and it will absolutely work with our equipment. So, over time, you could see that actually helping to grow that.

On your comment on tablets and accessories, I think your -- or your question, I think your question was do we expect that category to grow this year. It's really tough to predict. We'll see.

I think we do continue to see -- if you read the IDC forecast, the forecast is for continued growth in the tablet area. And we certainly would expect to grow at least that strongly over time net of any kind of supply chain inventory reductions we'd be doing.

Okay. Thank you very much.

Thank you.

Tavis McCourt, Raymond James.

Thanks. Just a follow-up. Vincent, can you talk about if there was any shares repurchased in the quarter, and how should we think about the pace of share repurchases? Thanks.

Yes. Hey, Tavis. So, the Board approved a buyback program back in March of $250 million to complete over multi years. We said it would be driven as an opportunistic share buyback, and we have our own valuation model.

Unfortunately, until we're back on file, that program had to be put on hold and we cannot buy back in the market until we are current with our filing.

Understood. Thank you.

Thanks, Tavis. Any last questions?

No, there are no further question at this time. I'll turn the conference back over to Mr. Darrell for closing remarks.

Okay, thanks.

With the first quarter behind us, we're confident about our trajectory in fiscal year 2015. Our team is focused on delivering sales growth and improved profitability. Our strategy is working.

We're improving the profitability of our PC peripherals business, and we're striving to build an expanding portfolio that will grow regardless of how computing platforms, PC, tablet, smartphone, or operating systems, Apple, Microsoft, Android, evolve.

Now it's up to us to create more growth engines, and we will. Thank you for joining us today.

Thank you. That concludes our conference call for today. You may all disconnect. Thank you.