Logitech Cuts Full-Year Outlook on Lower Demand, Currency Pressure

Logitech slashed its FY 2023 outlook on “continued, and in some cases intensified, deterioration of economic conditions across the globe,” said Chief Financial Officer Nate Olmstead on the company’s Q1 Tuesday earnings call for the quarter ended June 30.

The new outlook calls for a 4%-8% decline in sales growth in constant currency and $650 million-$750 million in non-generally accepted accounting principles operating income vs. previous guidance of 2%-4% sales growth and $875 million-$925 million in non-GAAP operating income. Updated guidance is based on assumptions including “potentially protracted economic volatility and sustained revenue and profit pressure from a stronger U.S. dollar,” Olmstead said.

Logitech’s full-year profit outlook is down $200 million at the midpoint vs. previous estimates due to $400 million in headwinds, including $250 million of reduced profit due to lower volume and cost increases; the $150 million of lower profit owes to currency changes, Olmstead said. Headwinds are expected to be offset by operating expense reductions and pricing, Olmstead said.

“We don’t think that we’ve seen every bit of bad news yet, and Q2 will be softer than what it has been historically,” Olmstead said. The company typically experiences an increase of mid-teens sales growth from Q1 to Q2, he said. The revised outlook reflects that revenue growth will likely be “mid-single digits,” he said. “Q2 is not going to see the same spike that it has before.”

The 4%-8% sales growth decline for the year reflects projections for the holiday season: “At the low end of the range, we believe the holiday is a little bit weaker than typical seasonality," Olmstead said: "At the high end of the range, we’re starting to get back to typical seasonality in the back half."

Q1 FY 2023 revenue fell 12% to $1.16 billion year on year due to a range of “overlapping macroeconomic and geopolitical issues” following a FY 2022 quarter that grew 66%, said CEO Bracken Darrell. The war in Ukraine affected net sales by 2% vs. last year, he said, also noting foreign currency headwinds from a strong dollar, rising inflation and weakened consumer confidence.

“Softness” in gaming continued in Q1 due to extended console shortages and a shift in consumer spending from goods to travel, said Darrell, who expects current trends to be short-lived. The executive expects an uptick in gaming interest from casual users and professional cloud gamers in years ahead.

Olmstead cited weakness in headsets, related to slower game console sales, which he attributed to console shortages and timing of title releases. Some headset demand over the past couple of years was non-gaming-related, including for videocalls and hybrid work; pressure in the headset category was not unexpected, he said.

Darrell remains bullish on hybrid work, he said when asked whether Logitech worries about productivity sales purchasing reverting to pre-COVID-19 pandemic trends. Logitech supports hybrid work with webcams, headsets, mice and keyboards, he said. “We’re still only one-tenth of all the conference rooms enabled,” he said, saying the company’s conference cam business is “growing strongly.” The number of workplaces has increased so much since the pandemic that the replacement rate on upgrading workspaces “looks like what it did pre-pandemic -- just a lot more of them,” Darrell said. Workers have “more upgrading to do," he said. Hybrid work trends are “the future,” Darrell said: “The debate is over: Hybrid won.”

Logitech cut marketing spending by 10% during the quarter and general operating costs by 9%, while growing research and development spending by 9%, said Olmstead. “We are not done reducing, or eliminating, unproductive expenses from our business,” said the executive. The company is continuing to spend in areas that support the company’s long-term ambitions, he said.

Logitech has seen some pockets of increased promotional activity, but the company is largely sticking with its strategy to increase the value of the brand “without having to be so promotional,” Olmstead said. Lower gross margin due to cost and logistics rate increases and currency changes have “put pressure on the cost structure,” with marketing one of the cost-cutting areas. “I don’t think it makes sense to invest as much in marketing “when the demand environment is this volatile and in some cases weaker,” Olmstead said. Darrell added: “I don’t think it makes sense to overinvest in marketing when the markets themselves are retracting.”

On manufacturing in China, Darrell said Logitech had less than 1% of manufacturing outside of China when tariffs were implemented four years ago. The company had some flexibility but didn’t have the ability to move things in and out very quickly, he said. It now has 15%-17% of manufacturing outside of China with a goal of “closer to 30%” to give the company flexibility in case of future tariffs and “better cost positions," Darrell said.

PC webcams (minus 46%) and audio (minus 40%) had the steepest declines among major Logitech product categories in Q2 vs. the 2021 quarter. Tablet and gaming accessories declined 16%, mobile speakers fell 22% and pointing devices were flat year on year. Keyboards and combos and video collaboration products grew 4% and 5%, the company said. Net income in Q1 dropped to $101.8 million from $189.8 million in the year-ago quarter, said the earnings release. Operating income fell 43% to $115.5 million.

Wedbush maintained an “outperform” rating on Logitech stock on hybrid work trends but its forward estimates and $86 price target “are under review,” analyst Michael Pachter wrote investors Tuesday, saying the company has faced “an increasingly challenging macro-environment” while working through “difficult comparisons.” Pachter noted Logitech’s $1.3 billion in available cash, lack of debt and a “strong M&A track record with a high likelihood of acquisitions in the year ahead.” Shares closed 3.2% higher Tuesday at $55.07.