Inflationary Price Hikes Will Be Category-Specific, Says Logitech CEO

Logitech shares touched a 52-week low Tuesday at $62.32 after the company shaved revenue guidance for fiscal 2023 and reported a 20% Q4 net sales decline for the quarter ended March 31. Q4 revenue set a new high at $1.23 billion after 76% growth a year earlier. Shares closed 3.1% lower Tuesday at $64.28.

In trimming its fiscal 2023 outlook , Logitech stripped out the estimate of annual sales that would have been generated in Ukraine and Russia, said Chief Financial Officer Nate Olmstead. The outlook now calls for 2%-4% growth vs. previous guidance of mid-single digits, said Olmstead, citing the “uncertain environment” in Eastern Europe that “continues without sign of resolution” in the near term. Operating income guidance, using non-generally accepted accounting principles, was given as $875 million-$925 million, down from $900 million-$950 million.

Guidance takes into account various considerations, with some, like war in Ukraine, objective and “easier to quantify,” said Olmstead. The follow-on effects that the war could have on European demand, oil prices and logistics costs are less certain than direct sales, he said. Other FY ’23 challenges are currency headwinds, logistics disruptions, costs, inflation and the COVID-19 factory shutdowns in China, he said.

Logitech monitors challenges closely but can’t predict how they will play out, Olmstead said. At the beginning of the pandemic two years ago, Logitech’s initial perception was that it would have a supply challenge due to the shutdown of its factory in Suzhou, China, so initial planning was on how to recover from that. Then “it quickly turned into, wow, we have a lot of demand coming in as a result of this, and we had to adapt to that," Olmstead said.

CEO Bracken Darrell noted this year has more “What will happen with…?” questions than in a typical year, citing COVID-19 as the leading driver, plus inflation and currency swings. “We’re pretty good at adjusting,” he said. On plans for pricing increases to offset rising costs, Darrell said it’s category-specific, not across the board: “We’ll go 10%-plus in some places…and completely flat in others.” The company tries to be “very aggressive on the low end because that tends to be price sensitive.”

Logitech expects gross margins to shrink in FY ’23, with first half lower than the second half, Olmstead said. The company worked to reduce its reliance on air freight in Q4, Olmstead said. In first half FY ’23, margins “could come down further due to ongoing cost increases, unfavorable currency rates and higher levels of air freight" as the company works to recover from COVID-19 supply disruptions in China, he said.

Part of the company’s inventory strategy is to “buy ahead of cost increases,” said Olmstead. With costs rising, “holding a little bit more inventory has given us a short advantage,” he said: “You can’t buy a year’s worth," but buying long in some areas allowed the company to avoid or delay cost increases.

Keyboards and combos were Logitech’s sole growth category in Q4 -- 5% to $231 million -- after the company experienced two years of elevated sales across most categories from hybrid work trends. In Q4, video collaboration fell 37% to $243 million, and PC webcams sank 42% to $84 million. Pointing devices were flat at $178 million; tablet accessories dropped 43% to $67 million. Smart home and audio and wearables, two categories Logitech is moving away from, were $2 million and $84 million, the company said.

Gaming revenue, one of Logitech’s tentpole categories for long-term growth, slipped 2% to $316 million. Darrell called gaming a “juggernaut,” saying long-term momentum is “unstoppable,” though the category will experience “strong growth quarters and lower ones.” Gaming is evolving and adding new growth engines, he said, spotlighting the metaverse and casual gamers. Olmstead referenced “pressure” in gaming headsets for consoles and PCs; the company is expanding into wireless mice and steering wheels and is beginning to “gain traction with the social gaming segment.”

Commenting on the gaming category's potential reach, Darrell noted Logitech's Song Breaker Awards event that went live Saturday in the metaverse; it has drawn 6 million people so far. “That just didn’t exist before,” he said, noting Lizzo as one of the performers in “a cartoon-based” format. “It’s kind of remarkable to see how far we’ve come, and you can only imagine how far this is going to go.” Social experiences are happening “in-game,” Darrell said: “The games are completely secondary to the social experience.”

Hybrid work continues to “thrive,” said Darrell, saying sales and upgrade opportunities exist across “a billion workspaces.” Most meetings in the future will be a mix of onsite and virtual, “and video helps bring more meeting equity to all participants.”