羅技 (LOGI) 0 Q0 法說會逐字稿

Good day, and welcome to the Logitech second 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 at Logitech. Sir, you may begin.

Welcome to the Logitech conference call to discuss the Company's financial results for the second quarter ended September 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 dated May 30th, 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 second 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.

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.

I am very pleased with our Q2 performance. First, our retail sales demonstrate consistent growth. Excluding the nonstrategic retail products that are in last year's base but are essentially gone now, we grew retail sales 4% and have grown our retail sales for six consecutive quarters.

Second, our profitability continues to improve strongly, creating more capacity to invest to drive more growth ahead.

And third, cash generation is simply excellent. We delivered our highest Q2 cash from operations in five years and generated $250 million of cash from operations over the past four quarters. Vincent and I will look a little deeper into our Q2 performance, and then I'll come back to discuss our outlook.

Sales in our growth category increased by 27% compared to the prior year. One of the benefits of having a portfolio of growth products is that we can deliver sales growth without the need for the product categories to all grow at the same rate.

This quarter, our mobile speaker business was the strongest performer. And we expect continued strong growth in the coming quarters.

Looking at each of the categories within our growth portfolio, PC gaming grew 10%. And we believe this business is positioned for much stronger growth ahead. The PC gaming markets are very strong, and our sellout to consumers is significantly stronger than our sell-in, as we saw our channel inventory levels fall as a result of constrained supply of several key components and products.

We're gaining share in our Americas region, while in EMEA, we've improved our in-store presence dramatically, driving stronger underlying performance. We're very excited about our product portfolio, especially our new mechanical keyboard we just announced.

The new Logitech G910 Orion Spark mechanical keyboard launches later this month. It features our exclusive new Romer-G mechanical switches that deliver significantly faster actuation than any other mechanical switch on the market.

With this recent addition of the most advanced mechanical gaming keyboard in the world, we've filled a hole in our lineup and enter the holiday selling season with our strongest PC gaming portfolio ever. We still face component constraints for some of our key products through the holidays, but we'll be well positioned to grow in all PC gaming categories.

We now have the fastest mouse in the world, the fastest keyboard switch in the world, the longest-lasting wireless mouse in the world with up to 20 times the battery life of its nearest competitor. And all three of these are relatively new products. We're designing great products for this growing market, where speed, accuracy, and science win.

Let's discuss mobile speakers. Our mobile speaker sales more than doubled for the sixth consecutive quarter, as we benefit from our broader portfolio and continue to gain share in this growing category.

This strong momentum continues to be primarily driven by UE Boom, which was our bestselling product in Q2 and is a foundation around which we're building an exciting mobile speaker portfolio. More to come there.

Finally, it was a weak quarter for our tablet and other accessories. While I'm pleased with the early results of our keyboard covers designed for the Samsung platform, our sales in the category continued to be negatively impacted by the decline in the market for iPad shipments.

Of course, we'll have new offerings shortly for the new iPads announced by Apple. And during Q2, we continued to reduce channel inventories in anticipation of these new iPads.

I look forward to improved performance for our iPad lineup starting in Q4, when our new offerings will benefit from a full quarter of sales. We also expect sustained momentum from our Samsung offerings in Q3 and Q4.

Let's move to the profit maximization category, which is primarily composed of PC peripherals, where our sales declined by 2%. We continue to plan that our sales in this category will decline at similar rates to the market for new PC shipments.

Within profit maximization, we experienced strong growth in the remotes category in Q2, driven by the launch of our exciting new line of products focusing on broadening Harmony's position to be a home control hub.

While it's very early, I'm excited about our long-term potential, as home control becomes more commonplace in more homes around the world. This is the very beginning. And we combine our expertise and leadership in universal remotes with expanded home automation product capability or compatibility.

We delivered 3% sales growth in our retail video category that there are two stories underneath this, one, a continued steep decline in the Webcam category that was more than offset by very strong growth from our video collaboration offerings. Our Logitech branded product portfolio for video collaboration delivers a compelling value proposition. And I expect the market adoption of affordable, high-quality video collaboration solutions to continue during the remainder of the fiscal 2015.

Sales in our PC keyboards and desktops category were essentially flat. But, we're well positioned for the second half with a strong lineup, including our new Bluetooth multi-device keyboard K480, the first desktop keyboard designed for use with up to three devices on any major operating system at the same time.

Before handing it over to Vincent, I just have to say how pleased I am with our non-GAAP operating margin of 11.1%, the best for a Q2 in the past six years, and a reflection of our commitment to drive increased profitability through improved operational execution.

Vincent now has further detail on the quarter.

Thanks. As Bracken mentioned, in Q2, we continued to make good progress in improving our operational execution and reducing our cost structure, while delivering once again sales growth for our retail business.

We delivered a record high non-GAAP gross margin of 38.8% in Q2, an improvement of 270 basis points over the prior year. Please note that about 100 basis points of this improvement is related to the unusual situation of our books still being open for Q4 of fiscal 2014 and Q1 of fiscal 2015.

Even without that one-time benefit, we're very pleased with our Q2 gross margin performance. As planned, a key driver of the improvement was the success of our cost optimization initiated in our profit maximization category combined with the solid improvement in the mobile speaker category. The improvement in mobile speakers reflects the benefits from the economies of scale that we were focused on delivering in any fast-growing business within our growth category.

While we don't guide on gross margin, we continue to see up to a point of margin upside to fiscal 2015 compared to our long-term model of 35%. This gross margin enables us to improve operating profit margin while investing in new products and accelerating our long-term growth potential.

Q2 was the sixth consecutive quarter of year-over-year reductions in our non-GAAP operating expenses, demonstrating our focus on disciplined spend management. As a percent of sales our non-GAAP operating expenses were 27.8%, an improvement of 130 basis points compared to the prior year.

While we continue to drive reductions in our indirect procurement spending as well as our global infrastructure and related processes, you should expect our spending during the second half to grow on a year-over-year basis as we selectively ramp our investments to drive future sales growth.

Know that our non-GAAP operating expenses in Q2 of the current year exclude $8 million in G&A costs related to the recently completed audit committee investigation.

The improvements we have made managing our working capital continue to drive strong cash generation. In Q2, we generated approximately $33 million in cash flow from operations, delivering our best Q2 in the last five years. And in the last 12 months, we delivered approximately $250 million in cash flow from operations, doubling the prior year.

Our quarter-ending cash balance of about $500 million was up by $205 million over the prior year. Our cash positions, the highest level in nearly four years, enables us to drive a healthy capital allocation strategy moving forward, focused on small acquisitions as a priority, annual dividends, and finally share buyback.

Let me wrap up by saying that the audit committee investigation is now closed, and we expect to be current with all of our financial filings as soon as possible. Once our filings are current, our 250 million share repurchase program will be available again for our use.

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

Thank you, Vincent.

Looking at the remainder of the year, we're confirming our outlook for fiscal year 2015 of approximately $2.16 billion in sales, assuming relatively stable exchange rates, and approximately $170 million in non-GAAP operating income.

I am really excited about our progress and momentum through the first half of the fiscal year, which positions us well to achieve our full-year objectives. We have many outstanding products and many more to come.

We're gaining share on most of our categories. We're performing well in the PC peripherals core and have positioned ourselves for sustained growth in our growth businesses. And we are behind the scenes creating engines for new growth.

With the holiday selling season just getting started, I'm particularly excited about our product portfolio, which continues to improve as we execute our strategy of creating fewer bigger products. The runaway success of the UE Boom is the perfect example of this strategy in execution. And we are creating similar potential flagship products in the quarters to come.

And with that, Vincent and I are available to take questions. Please follow the instructions of the operator.

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

Hello. Thanks for taking my question, actually a very short one regarding the gross margin. I understand that you are a bit stretched at the high end at the moment in terms of what you can do with gross margin. But, the fact that you just pretty much guided for it to be at 36% for the full year implies a huge decline in the second half of the year, much more than not having anymore the support of the open books and even wider volumes. So, just can you just give us a little bit more detail and to help us understand what's going on there?

Yes, absolutely. Good morning. It's actually Vincent. So, gross margin this quarter, 38.8%, about a point of this one-time event of subsequent event. As you mentioned, as soon as we're on file, we won't benefit from that one-time change.

It still leaves a second half gross margin that is lower than first half. Per the historical trend, you can see last year also our first half gross margin was about a point, a point plus higher in the first half versus the second half. And that's because we used some of that gross margin to stimulate the sales growth as we get closer to the Christmas season. So, that's definitely one aspect of the gross margin. And then you have the normal mix impact that will also drive the margin down in the second half.

Okay. Thank you. If I may, just a quick other one. Can you give us a sense of what's your exposure to Apple Stores? I just want to understand a little bit here in particular because we have seen in the press a lot of announcements that some key products that were sold so far in the Apple Store are not sold there anymore and seems to be more or less in line with what Apple is doing as well with [Beats]. So, if you can give us a sense of how much that is out of your total sales, that would be awesome. Thank you.

We don't give that information publicly. But, I can say it's -- Apple's an important customer for us, especially in the US market, around the world. And certainly, our exposure to any of our customers is relatively limited in scope. No single customer would be particular significant, to be honest. There are a few that would be bigger. But, Apple would be one of those. And it certainly wouldn't be our top customer by any stretch.

The reference you made to what's happening within the Apple Stores, there are always changes happening within Apple. We feel very good about our performance in Apple now. And we expect to continue to do well there ahead.

Thank you.

Thank you, Youssef.

Tavis McCourt, Raymond James.

Hey, guys. Thanks for taking my questions.

Hey, Tavis.

Good to talk to you, Bracken. My first one's just a housekeeping for Vincent. On the GAAP income statement, there doesn't appear to be a restructuring charge, but if I look in the non-GAAP, there's an $8 million special charge. I guess, where does that show up on the GAAP income statement? Is that split between the different compact components?

No, it's really G&A. And this is $8 million related to the audit committee investigations made of lawyers, accountant, forensic accountant type of expenses.

Okay. So, that's primarily G&A. And do you have a capital spending number for the quarter and for the year to date?

Year to date, we are roughly the same than last year. We spent about $40 million in CapEx on an annual basis.

Okay. And then, Bracken, if I was kind of hearing the qualitative comments around the growth categories for next quarter, it sounds like the tablet keyboard business probably doesn't really turnaround a bit until the March quarter. But, we should expect stronger growth in the computer gaming business as the product availability becomes better on these new products. Wanted to make sure I was hearing that directly.

And then on the mobile speakers, anything you're willing to give on -- you basically have a homerun product here. Looks like that category will be doing $150 million, $200 million in revenues this year. What are the plans to expand that product category, whether it's distribution expansion or expanding beyond kind of the one SKU, which I suspect or the one product that I suspect is the majority of the revenues?

Yes, related to your first question, I think you characterized it about right. I think the -- yes, I won't repeat what you said, but yes, we expect music to continue to be strong. I think PC gaming will be strong. I think our tablet and accessory business this quarter will probably be similar to last quarter. But, as we get into Q4, we've got a full lineup, and we've really drained out the prior product inventory. I think you should see a significant improvement in Q4.

In terms of the music portfolio, actually, music is already a more balanced portfolio than you might suspect, but there's no doubt the UE Boom is a homerun product. And we're certainly working to make sure that we have future homerun products in every one of our categories, including music. So, stay tuned.

Great. And, Bracken, any way to frame what the recent exchange rate movements will impact the December quarter by relative to previous? I know year over year in the September quarter was kind of flattish. But, I suspect it starts becoming a headwind. Is that going to be noticeable in the results, or was it manageable based on your forecast?

I'm going to let Vincent answer that one.

Hey, Tavis. So, as you know, in Q2 on a year-over-year basis, there was not a lot of currency impact on a global basis. Compared to when we gave guidance last time, you know that the US dollar's appreciated about 8% compared to the euros. We've assumed a middle of the road for the exchange rate moving forward in second half. And obviously, volatility may impact that.

Our euro-based revenue is about 20% to 25% depending on the quarter of our total revenue. And you can understand what it is. We feel pretty good about the operating profit commitment as we have multiple levels in our P&L to drive the business.

When you say you assumed a middle of the road, does that mean kind of a euro exchange rate with the dollar that's halfway where it was and where it is today, or -- ?

-- Yes, that's correct.

Okay.

Yes.

Thanks, Tavis.

Joern Iffert, UBS.

Yes, hello. And thanks for taking my question. The first one would be on the share buyback. Assuming -- you're assuming it shortly and it's executed over the next two to three years as planned, can you give us a feeling if there should be any EPS accretion at all or will all be used for the long-term incentive plans of the management? And if you also could help us, what should be a fair base case according to your current view for the number of shares outstanding end of the fiscal year?

Then the second question, if I may follow up on FX again, taking the transition risk you have with the US dollar and the euro, if the euro stays here weaker versus the US dollar on the current spot rate, can you just give us a rough sensitivity on what is the impact here on the earnings for the second half versus your midpoint you just mentioned?

And then maybe the last question, if you can give us a feeling as you have done the last conference calls on what you expect roughly on the Christmas quarter, is it a flattish top line, a slight declining top line, or slight increase? And this would be appreciated. Thanks very much.

Thanks, Joern. There's lots of questions here. Let me take a few that are more financially driven. So, on the buyback, right, as soon as we are current in our filing, we will be able to resume our program, you know that the Board-approved $250 million program to buy back shares in an opportunistic way over the next coming years.

The goal really is to create value for the shareholder. Management is not compensated on EPS. In other words, management compensation is not affected by the buyback. It's really a Board decision and one of the multiple ways for us to return cash to shareholders.

When it comes to currency and spot rates, I mentioned the 8% appreciation in US dollars. When we gave our initial guidance, the US-euro currency rate was 1.36. It finished the quarter at 1.26. We assume for our forecast going forward that around 1.3.

I mentioned that about 20% to 25% of our sales is in euro. And I think you can quickly do the math. If you do the math, depending on your model, you'll see that, if it goes to 1.26, 1.25, you could have a $20 million to $25 million impact on the top line. That gives you enough for your modeling. Obviously, those things may change based on the different revenue mix we may have in the quarter.

When it comes to guidance for second half, you remember last year Q3 was a very strong quarter. And then Q4 was a little bit weaker. We obviously -- on the year-over-year compare, we're going to have the opposite compare. We're going to have Q3 from a year-over-year growth perspective a little bit less strong than Q4. And I would advise to your model that way. Flattish to slightly positive would be our guidance today.

Thanks very much.

(Operator Instructions). John Bright, Avondale Partners.

Thank you. Bracken, Vincent, strategically speaking, there seems to be a growing attach rate to tablets of mice and keyboards. A, are you seeing that growing attach rate, and how much of an opportunity do you see in that looking forward?

The attach rate on mice and keyboards for tablets I think has been very, very low up to this point. There might be some growth there. And we certainly keep an eye out for that in case it happens. We'd obviously be extremely well positioned if we do see a growing attach rate in mice and keyboards. And I think it could happen.

On keyboards, there's no doubt. Let me break them apart. On keyboards, there's no doubt that there's been a growing attach rate. And we're seeing it growing right now and for Samsung products. And it's already at a pretty good rate and for iPad products. So, let me just say, on keyboards, there's no doubt.

On mice, we haven't seen that yet, but could happen. And if it happens, we'll be very well positioned. And regardless, we continue -- you saw this quarter we had a -- the nice thing about tablets and PC is that they seem to play kind of in combination with each other. If the tablet market's soft, the PC market seems to be stronger. And we have something for both. So, we're trying to make sure we're really in a neutral position depending on which one grows. If they both grow, we'll be in an even better spot.

Operationally speaking, you talked about some component constraints during the quarter. I think it was related to the PC gaming category. Can you flesh out some -- what are those components? Was it only PC gaming, or were there others? And how big of an impact was that?

Yes, we -- I can't give you a specific impact. What I can say is, in the -- and there were a few constraints we had throughout the business. What I would say is, within the gaming segment, we continued to be very constrained of mechanical switches for mechanical keyboards.

I think we'll start to solve that this quarter as we get into Q4. And we're selling products with our own mechanical switches as well as others. I think we'll really unlock that. So, we should start to finally have a good look at what unconstrained supply gives us from a business standpoint in the mechanical keyboard part of PC gaming.

We also have a couple of other constraints on components within the PC gaming segment. They're less severe, but they're there. And I suspect we'll see those ease as we get into Q4. So, we're in a good shape as we go into Q3 in PC gaming in general, but we'll be in even better shape as we go into Q4.

Final question for -- I think it's probably for Vincent. Vincent, on the guidance front, you did -- you're not passing through the operating income [beat] in the quarter. I suspect that's because of the predicted gross margin change. Am I correct in assuming that?

Yes, you're correct. So, in Q1, we had gross margin upside. We passed that through an increase in our profit guidance for the year. This quarter, we have a gross margin upside we're using in two ways. One is obviously the second half gross margin will be used to stimulate growth. And then secondly, we're going to ramp up OpEx and invest to position us well for FY 2016.

I am going to throw one more in. I said final. On the inventory front, it looks like you really have pretty healthy inventory levels at this juncture. The channel as well?

Yes, that's correct, right? You can see that, on our slides that we posted on our Website, our sell-through was up 6% this quarter for selling of 2%. When you look at a year-over-year basis on a dollar -- on a total dollar basis, we are down. And we feel pretty good about the position in the change -- in the channel.

Gentlemen, thank you.

Thank you, John.

(Operator Instructions). Andreas Mueller, ZKB.

Yes, thank you very much. Hello. Good afternoon.

Hi, Andreas.

I've got a question on the cash conversion cycle, which was 28 days. Can you drive that structurally further down, or are you apart from seasonal effects already there? You wanted to be -- I think the goal was in the past below 30 days.

Yes, so, as you know, cash conversion cycle, first from a formulaic perspective, is impacted by your cost of goods sold or your high margin. Margin in the second half will be lower. I would use when you model it at 35% to 36% gross margin to calculate that.

I would go back to the operational improvement. We've significantly made our own inventory more efficient, our supply chain more efficient, lowering the own inventory. And that has enabled us to improve our cash from operation in the quarter last quarter and in the last 12 months.

You know that, in March, we gave a long-term target of cash from operations at about one time non-GAAP operating profit. We'll be slightly above that. But, I wouldn't model much higher than that at this point in time.

Okay. Then a follow up. Can you discriminate between the mobile speakers within America, which was tripling between North America or in particular US and then the countries in South America?

North America, South America?

Yes, exactly. Was it the same growth, or was it different?

Yes, no, we would've had lower growth in South America, much lower base. That's a relatively much, much smaller mobile speaker market. But, the overall mobile speaker market around the world is growing very rapidly. We're growing faster than the overall markets. And we're growing share. We think we're very well positioned so far to continue to gain share. And there's more in the oven, so to speak, cooking for the future in speakers. So, we're really excited about the category.

Okay. And my last question will be on the OpEx side. Can you share with us a bit more where you want to invest and what kind of products, maybe also markets?

Yes, we're going to continue to invest primarily in our growth products, so the growth products that you see and the growth -- the potential growth products that you don't that are not out yet. So, those are our two areas of investment.

In terms of markets, most of our investment right now is going into mature markets. And that will probably continue. But, as we see the emerging markets start to come back, we'll start to throttle down a little more into them, too.

Okay. Thank you.

Thank you. Thanks, Andreas.

Michael Foeth, Bank Vontobel.

Hi, Michael.

Yes, hi. Hi, Bracken. Hi, Vincent. I just have one question regarding Lifesize, if you could comment on the kind of business environment and where you stand in the repositioning of that business.

Yes, so on Lifesize, right, you know that last year we took a restructure. We right-sized the cost structure to the opportunity. We stabilized sales. And then Lifesize really embarked into its biggest transformation.

They've launched a Cloud solution and are migrating the customer or the clients with a more software approach with the Cloud offering. It was launched a few months ago, very good beginning, too early to really translate into financials, but from an interest perspective, from a lead perspective, definitely very promising.

In the meantime, as you know, the hardware infrastructure on premise that used to make some of the revenue is going down as it's migrated to the Cloud. So, we'll maintain efficient cost structure, running the business at about breakeven, and really pushing into the Cloud offering.

Okay. Excellent. Thank you. And maybe just one follow up regarding this gross margin impact there that you see from the books still being open. Can you re-explain exactly how that is going to impact the gross margin once you close the books?

So, once books are closed, normally any adjustment to accrual estimates force into the normal periods. We have about a $1.4 million to $1.5 million that are pushed back into the last open period, which at this point in time would be Q4 or Q1. As soon as we are on file, we go back to a normal cadence of driving a quarter, closing it, and then moving into the next, not having to re-evaluate that long a period. And we can more technically follow up in our call later on.

Okay. Thanks.

Thank you. It appears there are no further questions. At this time, I'll turn the conference back over to Mr. Darrell for closing remarks.

Thank you very much.

Well, thanks to all of you for joining us today. I'm really excited about both the progress we've made to date, but the things we control and about the potential ahead of us. Of course, we face short-term challenges with -- that we've discussed on the call, currency fluctuations and component supply shortages in gaming products. But, I'm really, really optimistic about the future. And I believe we'll continue to execute a winning formula here for long-term growth, great products, and more to come.

I look forward to keeping you updated on our progress. Thanks a lot for joining us today.

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