It stopped raining here in California you'll be happy to know. It feels like we're in this monsoon season. Nicole, wherever you're sitting in that virtual background of yours, that's what our new office needs to look like..

It's virtual. It's not reality. So I'm going to start with the Safe Harbor. Hopefully, anyone on the line can hear me. Good morning everyone and thank you everyone for joining Logitech's Q2 Fiscal 2022 Earnings Call.

This call includes forward-looking statements, including with respect to future operating results and business outlook under the Safe Harbor of the Private Securities Litigation Reform Act of 1995. We're making these statements based on our views only as of today.

Our actual results could differ materially due to a number of risks and uncertainties, including those mentioned in our earnings materials and SEC filings, including our most recent annual and quarterly reports. We undertake no obligation to update or revise any of these statements. We will also discuss non-GAAP financial results.

You will find a reconciliation between non-GAAP and GAAP results and information about the use of non-GAAP measures in our press release and in our SEC filings. These materials as well as our prepared remarks, slides and a webcast of this call are available on the IR page of our Web site. We encourage you to review these materials carefully.

Unless noted otherwise, comparisons between periods are year-over-year and in constant currency and sales are net sales. This call is being recorded and will be available for replay on our Web site. And with that, I'll turn the call over to Bracken..

Thank you, Nicole, and thank you for that gripping and surprising summary of the Safe Harbor provisions. This month, we celebrated our 40th anniversary here at Logitech.

We've grown from a Swiss software startup that found a niche and computer mice to a designing company with leading market share across many categories, and we're growing share in the majority of our key product categories including the original category of the mouse.

I mentioned our 40th anniversary not really to look back but as a prelude to looking into the future. Just as the PC growth trend supported our 30 years around the PC growth period, a collection of long-term trends will support our strong growth for many years ahead.

Gaming will grow to become the biggest collection of sports in the world one day, from both a participant and a spectator standpoint. Video collaboration will almost totally replace audio-only collaboration. Almost everyone will create content as well as watch each other's content.

And the mouse and the keyboard, those original categories will keep growing as more people work, create and learn at a desk or a table where they can move away from that tiny screen on their phone and be comfortable for hours at a time.

I love Logitech's position in this landscape of long-term market trends; gaming, video collaboration, streamers and creators in our workspace product categories. We are ideally positioned to grow in all of them. That's the long-term outlook. But let's look more near term. Most organizations are settling into new ways of working hybrid.

And the evidence is overwhelming that employees prefer working from home two to three days a week. Many employers have embraced this reality and a large share of the rest have at least accepted it. Companies across all industries are adjusting their offices, planning redesigns, or relocating to accommodate this shift.

Many companies, including Logitech, are reshaping offices to support hybrid work practices and enable more places for meeting, for collaborating and for creating together while still continuing to have dedicated workspaces for those who prefer a meeting. The days of the simple, I work in the office and then I go home are over for so many of us.

It used to be your workplace was the office. We've entered the next era where your workplace is your workspace, wherever that is; traditional office desk, hot desk, home office, kitchen table, conference room, your child's room or a coffee shop. There are a variety of workspaces growing.

And in that world with people distributed across so many places, the video enabled spaces in the office must grow to conference rooms, huddle rooms, collaboration spaces, all will need video and must continue to grow. What an amazing opportunity this is for Logitech.

We offer solutions for all of those, wherever your workspace is, and most of us will need more than one. When we're not working, we want to create, connect and just play. Humanity has always had the need to create new things and connect each other. Now most people create in the digital world. Digital creation has been growing strongly for many years.

And not surprisingly, it surged during the pandemic. But that surge continues. The total number of hours watched across all streaming platforms, including Twitch, YouTube and Facebook increased 20% year-on-year this past quarter from 7.5 billion hours to almost 9 billion hours in Q2 of 2021.

That's 20% on top of the incredible growth we already saw last year. Those trends in mind, let's examine our performance in Q2 of this year. Last year, we reported tremendous Q2 growth of 73% accelerated by the pandemic. On top of that substantially larger base, we not only sustained that growth, we actually grew again this quarter.

We delivered record sales, double digit sell-through across all regions and grew market share across almost all of our revenue. I believe we're innovating better than any time in the 40-year history of the company too; design, engineering and sustainability.

Our PC peripherals categories remain very strong, with double digit sales growth in pointing devices and PC keyboards and combos. Here's one example or two examples of how our design centered approach is so powerful. On the one hand this quarter, we launched MX Keys Mini and Mini for the Mac.

These keyboards were designed to resolve the input and request of the creative community. The new keyboard offers the best features of popular standard size MX Keys, which is a larger keyboard that's sitting in front of me, but in a minimal wireless keyboard. I'm using it right now and it's absolutely awesome. It’s right here.

It will likely SKU 30 or 35 and older. On the other hand, just go look at our Web site and type in -- later ideally so you keep listening to me for now -- type in POP KEYS in the search bar. You'll see a line of mechanical keyboards with replaceable emoji keys with very colorful that's just launching in China.

It's so fun and so cool, it's perfect for Gen Z. It will SKU strongly under 30 and female. Our gaming category had another strong quarter with market share growth in PC, console and simulation gaming. Underlying sell through grew double digits in this category as well. Our tablet category is more than double the size it was two years ago.

Our portfolio is stronger than ever. Education and online learning are a strong and growing opportunity not just for K-12, but as universities democratize learning with online courses and the adoption of numerous learning platforms grows in popularity.

Remote teaching has become easier, and there's much more we can do to help educators to lead their classes of both in-person and when students are at home. As organizations worldwide continue to reestablish ways of working remote, on-premise and hybrid, people are indeed using more and more video.

According to market research firm Frost & Sullivan, of the nearly 90 million meeting rooms worldwide, only about 8% are video enabled. According to them, that's one-eleventh of the total rooms out there.

We're working to change that and help our customers evolve with the new ways of working, because it's simply a must to have videos in the rooms of the future. The lack of video access creates a terrible experience for remote attendees who have experienced the benefits of face-to-face video interaction over the last year.

Every IT decision maker is thinking about this. Thoughtful reformatting of the way companies work as they go hybrid is a watershed moment for many of these departments, because for the first time the structure of offices and the technology in the rooms, the primary role of these departments will be a driver of the cultural evolution of every company.

So it isn't surprising company IT departments are making careful, broadly aligned and systematic steps here. We're investing in building out solutions for these IT leaders and investing deeply in this area. Next, I want to touch on the impact of the well discussed supply chain industry challenges that have been headline news globally.

While we've managed to see some global supply chain challenges well throughout the pandemic, Logitech is not immune to their effects. We continue to proactively manage our supply chain, but expect ongoing headwinds from higher logistics costs and prolonged delays and challenges with component availability.

We do believe our long-term supplier relationships as well as our wholly-owned production facility should help us remain competitive in the current unprecedented supply chain environment. And before I close and hand it over to Nate, let me give a quick sustainability update. We recently raised our climate goals.

We announced that we will be carbon neutral this year and have plans to be climate positive in 10 years. And that at that point, we will be taking more carbon out of the environment than we generate. These are industry leading commitments.

We're addressing our carbon footprint across the entire value chain, designing our products for sustainability, using renewable energy at 92% right now in our facilities, and supporting third party certified carbon removal projects. We're excited about the long-term trends that are driving growth in our business.

These trends drove our business pre-pandemic, accelerated during the pandemic and will be a driving force for years to come. Our long-term strategy remains unchanged. The current market trends play to our strengths and we are doubling down to become even stronger.

Now let me turn the call over to Nate for further comments on our business performance this quarter.

Nate?.

Thanks, Bracken. We delivered a solid quarter and continue to execute well on a number of fronts. In Q2 and for the first half of the year, we grew the top line, maintained strong gross margins, gained share in most categories and returned record levels of cash to shareholders.

We are confirming our full year outlook despite unprecedented supply chain industry challenges. Turning to the Q2 results, our total company top line grew 2% in constant currency with strong momentum in our pointing devices and keyboard categories, both growing double digits.

Webcam sales decreased this quarter by 9% after more than tripling last year. We gained share in all three categories and each has good long-term growth potential, driven by hybrid work and greater category awareness. Q2 video collaboration sales declined 4%, but sell through grew double digits in all regions.

Net sales for Americas and Asia Pacific grew year-over-year. And while EMEA net sales declined versus the prior year, they grew sequentially and EMEA sales more than doubled versus two years ago. Gaming grew 9% against 84% growth last year and delivered impressive share gains across PC gaming, simulation and console headsets.

It's been an excellent first half for gaming enabled by a very strong lineup of innovative products, solid marketing execution and our position as the leader in the fastest growing categories like wireless mice and keyboards. Sales in our tablet accessories category declined 3% in Q2.

But excluding Japan, where we have a large education order in Q2 through Q4 of last year, sales grew more than 30%. Importantly, our tablet category is still more than double the size it was two years ago and our portfolio is stronger than ever, as demonstrated by 6 points of share gain in the quarter.

Our music categories declined as expected in Q2, down 14% overall, including mobile speakers down 11%. Q2 non-GAAP gross margin remained strong at 42%, although down 370 basis points versus last year's elevated levels. We anticipated that gross margins would be down from last year.

And as we look out to the rest of this fiscal year, I expect gross margins to be lower than current levels for three primary reasons. First, we expect our promotional spending will continue to increase although still remain below historical levels.

Second, we will continue to invest in retail point of sales marketing, which was significantly curtailed last year due to store closures and broad-based supply shortages. And lastly, while we continue to manage our supply chain, we expect to be impacted by industry-wide component and freight cost increases.

Turning to expenses, we executed our plan to strategically invest to grow our business over the long term. Our non-GAAP operating expenses increased 52% in Q2 to $337 million. The increase was largely driven by investment in marketing, sales coverage and product development.

As a percentage of sales, OpEx was higher than Q2 of last year but still down versus Q2 two years ago, highlighting our significantly increased scale as a company.

Rounding out the P&L, our Q2 operating profit decreased 40% to $211 million and operating margins were 16.2% of sales, down about 12 percentage points versus the prior year and up about 4 points versus two years ago. Cash flow from operations was negative 63 million in Q2.

We returned significant cash to shareholders with $120 million of share repurchases, paid an annual dividend of $159 million and ended the quarter with a cash balance of approximately $1.1 billion.

At the end of September, our inventory was 828 million, up 433 million from last year, while inventory turns were 3.7x versus an unusually high 7x in Q2 a year ago.

Historically, our Q2 cash flows tend to be positive, but they were negative this quarter as inventory turns were slower due to longer transit times and our continued strategic use of the balance sheet to secure long lead time components for key product categories. I expect to see positive cash flow generation in the second half.

But given that logistics, bottlenecks and supply dynamics will remain challenging for at least the rest of this year, our cash from operations will be lower than our initial outlook. This dynamic should be temporary and as lead times and transit times improve, cash flow will rebound due to reduce working capital.

Our Q2 cash conversion cycle was 69 days, up from an exceptionally low 19 days last year and up from 43 days two years ago. The primary driver of the change in our cash conversion cycle is higher inventory days, which were up about 25 days versus pre-COVID Q2 levels.

Looking ahead, we are tracking to our plan of sustaining the increased revenue scale from last year and investing to build a larger, faster growing and more profitable company for the long term.

We are confirming our fiscal year '22 outlook of flat sales growth in constant currency plus or minus 5% and maintaining our fiscal year '22 non-GAAP operating income outlook of $800 million to $850 million. We are well positioned in the market, and this outlook reflects our focus on driving long-term growth.

With that, let me hand it back to Bracken..

Thank you, Nate. Our consistent operational execution and ability to capitalize on long-term trends like hybrid work, video everywhere, gaming and content creation continue to drive our performance. These trends that drove our performance pre-COVID and accelerated during COVID continue to position us really well for the future as well.

As I said at the top of the call, we may have started 40 years ago as only a mouse company but we're far from that now. Our portfolio today is diverse, our pipeline of upcoming products is strong and we continue to build our capability in world class design and sustainable innovation. Many of our employees listen to this call.

And at this point, I want to thank each one of you for the hard work throughout this quarter and the last year and a half. I'm confident about this year and super excited about the years to come. Now Nate and I are ready for your questions..

As a reminder, you can chat me if you'd like to ask a question. And with that, I will have Asiya Merchant from Citi ask the first question..

Hello, Asiya..

Hi. For some reason, I can't start the video. It seems like the host has disabled it. So I'm just going to ask on audio. So one for Bracken and one for Nate. So Bracken, you're talking about long-term growth. You guys obviously had a very robust outlook.

And it seems like some of your competitors, HP and Dell, seem to buy into the idea that peripherals are indeed a very attractive category and should see growth. But in the face of this, we're seeing some normalization. We're seeing some normalization here with selling versus sell through.

Are you expecting as we exit the year and when you're sell-in and sell through kind of normalize hopefully, that we should start to see growth, which is more in line with your target model, or relative to what investors are concerned about that there will be this period of sustained low single digit or flattish growth given the extraordinary growth that we've seen during the pandemic? Then I have a question for Nate as well..

Okay. I think the reality is that -- I've got a chart in front of me that actually looks back over the last couple of years of growth and the numbers are astonishing. But you have to remember that they really reset a base for us.

So, for example, if I'll just take the mouse and keyboard and keyboard and -- mouse and keyboard categories, we've really now just got these multiple extra workspaces all of us, and now they're upgradable. Our business pre-pandemic was really just an upgrade, mostly an upgrade business.

And now we're at the upgrade businesses for multiple places, some at the office, so at home and companies want to standardize. So yes, I believe as we go into the next year and the year after that and the year after that, we're going to see long-term growth in these categories. And I think it will start to as you call it normalize.

And I'm really excited about it. I think we're in a really good position. The other thing I'd say is we're not sitting on our chair waiting for the market to happen. Most of our categories, we're the market leader and we're making it happen. So we have the best innovation engine in the history of the company I believe right now.

That's why we're gaining share in a huge percentage of our categories. So I think we can make this happen rather than watch it happen..

As it relates to video collaboration, Bracken, it seems like even to get to the low end of your guide 10% to 25% I think that was shared at the analyst event, you're going to have to see some strong growth. I know there is some sell-in, sell-through dynamics that are going on there.

But should we even expect as reported video collaboration sales to be in that range or are we still going to go through this period of sell-in, sell-through dynamics in the back half of this fiscal year for you guys?.

I think from a channel inventory standpoint, we're in pretty good shape, but I think we could end up falling below that range that we gave at the beginning of the year. I think it just depends.

One of the things I think we're seeing is that there's a longer period of decision making happening in a lot of companies about how to restructure their offices, and that's probably delaying their purchases and really how they're going to set up video inside the office. So I think that's possible. The good news though is we're really diverse.

We've got a great strong diverse portfolio. This has been the story for us for as long as I've been here, especially the last five years. When one thing's performing a little above what we thought, the other one is sometimes below and vice versa.

So right now, if you look at our pointing device, keyboard, combo business and gaming, all of them are performing above kind of what we already know. So I'm convinced that the mix of these will continue to give us really strong growth for the year..

Great. And then just for Nate -- yes, sorry. Go ahead, Nate..

No, go ahead..

Just for Nate about inventory levels, significant discounting if this demand soars. You guys do have elevated inventory at this point.

I know some of that is just strategic buying, given everybody else can get the components they need? What gives you confidence that you're not going to lead to an environment where there will be significant discounting?.

Let me just comment. I think Bracken hit all the right points on your earlier question. I just think on the sell through, the sell-in and sell-through dynamic, you remember last year, our sell-in was greater than sell through on the growth rates.

So really all you're seeing is normalization of that this year with kind of the reverse taking place, totally expected. But a lot of that just has to do with sort of last year, there was really no promotion taking place. There was very little marketing taking place.

MDF type marketing, retail marketing and this year we're doing those things as we've communicated. So that's the primary driver that you're seeing there, Asiya. Not a surprise and not a concern. Probably it will normalize as we get down to next year. But we'll see as the situation unfolds.

In terms of inventory, again, I think as we've communicated, we have -- I think our strategy is working quite well. I think if you look at our share gains, as Bracken mentioned, really across the board we've been gaining share. And that's actually something we didn't do last year.

We had pockets of share loss last year in web cameras and in many areas where we were short. So I think the bets we've made on components and finished goods and inventory replenishment have been playing out well.

The other thing I would say is on inventory, again, I've said this before is that the places where we are making inventory bets are in our fastest selling longest product life cycle, places where we have high market share. So we're making those bets very strategically and very thoughtfully.

And again, we have number one and number two position in really most of these categories. So I feel really good about our ability to -- I feel great actually about having this inventory available as we're in this type of environment..

Great. Thank you..

Thanks..

Can I add one more point to that? The implication that if somehow we just -- if we have extra inventory, we just burn it off by selling everything at a rock bottom discount. We just don't do that. That's not been our practice in the past. I can't imagine doing that in the future..

Fair enough. Thank you..

The next question is from Paul Chung from JPMorgan..

Hi, Paul..

Hi, Paul..

Hi, guys. Thanks for taking my questions. So just on VC, we're starting to see some return on the increased investments over the past year.

Can you talk about the reception of some of the new products you've released in VC and how those are trending tag, docks, some of the earbuds, et cetera?.

Yes, I’ll just jump on that. Yes, it's probably too early to really react to those. They're just brand new. The sales cycles are a little longer in VC. But overall, I'd say I feel really good about our -- oops, my video is off for some reason. But overall, I feel really good about our innovation engine in video collaboration in the whole business.

I think we continue to just have great products coming in. Scribe’s probably one of our newest products. It's the whiteboard for video and that's been really exciting. Their session’s been great.

Actually Logi Bolt, which is a more secure way to basically secure a software enabled service that comes with our workspace equipment has also been super well received. So I feel really good about what we're already come up with and what's coming..

And, Paul, I'll just add on to that too. As you heard, we had double digit sell-through growth year-over-year in VC across all regions, which really indicates very strong demand. And I think as our install base grows -- I think the portfolio comment you made is really important.

As our install base grows, we're going to keep working with those customers, being able to help them build out their conference room solutions more holistically than just with the camera, like Bracken mentioned, like Scribe and other products that go in there as well. So I think good progress on the development side.

That's been an area of key investment for us. If you look at the P&L and you look at the increases in R&D, a good chunk of that is going towards VC and building out that roadmap..

So speaking of regions, what kind of drove the relative strength in Asia and what trends are you seeing emerge there? Any lead indicators for the U.S.

and Europe markets as well?.

China was really the highlight there. Bracken, go ahead..

No, it’s okay. Go ahead, Nate..

I was going to say China was really the highlight in Asia, Paul. We actually had -- and this is speaking at the total company level as well actually for VC, but China was really the highlight, but we had good strength down in other parts of Asia too.

I think the nice thing to see in China is obviously they have been in the pandemic the longest and have been out of it probably the longest too. When we get on video calls now, it's always interesting to see groups of people in conference rooms and so forth.

So I think it's positive to see that even in a large country like that, large market like that where they've sort of transitioned to a different stage in the pandemic, we still see very strong demand across the portfolio..

Okay. And then last question on guidance. So you've generated about 54% of operating profit in the first half already. That's typically in that 40% range historically. Are you keeping kind of a bigger cushion this year on supply chain and increase in promotions, if you could expand there? Thanks, guys..

Yes, you're right, Paul. I think the second half of this year obviously with Q3 being historically our biggest quarter of the year, I think it really is an unprecedented time. And so I think I am making sure that we can get through this quarter. And I think -- listen, Bracken mentioned we're not immune to supply challenges.

We have good stock and supply. Our channels are at good levels. But there are some products where we're chasing components and chasing supply. And I think demand during the holiday can be rather perishable. People are buying for the holiday. And so we need to make sure that we can fulfill all the demand that we see.

And again with the strong double digit sell through, demand’s pretty healthy..

Thanks, guys..

Thanks, Paul..

Just adding to that, Paul, I guess the incremental margin thing that we're facing like everyone else is just incremental logistics costs which have gone up. Even since Q1, they've gone up 2x to 3x on the ocean year-over-year. So I think some of that's when I'm factoring in as I look into the back half of the year.

We will be spending more on air freight. I’ve already approved a lot more air freight this quarter than what our initial plans were. But we're using the P&L and we're using the balance sheet to fulfill the demand that's out there..

The next question is from Ananda Baruah from Loop Capital..

Hi, Ananda..

Hi. Thanks, guys. Good morning. Good to see you guys. Thanks for taking the questions. Yes, good to see you too. Two, if I could. I guess the first is -- and I apologize if you guys spoke to this already. There's a couple of things going on this morning.

But could you -- both Bracken and Nate speak to like over the last 90 days what you guys have seen that have been different from what you were anticipating and just sort of the things that are germane sort of to the running of the business or the things that are germane to the key end markets or the key product areas? And then I have a follow up as well..

Sure. I'll take the first one. And Nate, if I've left anything, maybe you can too. Yes, I would say nothing's really a major change. But I would say if there's a change, I think the supply chain challenges, especially in logistics have gotten worse.

I think that's probably well, both covered in the media, and we're not immune to it as we said at the beginning of the call. I think we've managed it really well so far. But it's certainly gotten more challenging to manage.

Would you add anything else, Nate?.

I think that's probably been the biggest change..

Cool, that's pretty good if nothing else -- if that's the only one. And I guess -- so then the second question is the specter of more folks coming in to the spaces that you guys competed, and quite frankly to some extent to which you guys have helped evangelize, or like sort of evangelize in the mainstream sense been part of that thrust.

What is the right way -- well, what's the way that you guys would like folks in our community to think of the idea of increased competition? And I ask it that way because it -- at least on the surface, it seems like an HP is a good example from last week, but they're not the only one.

It seems like folks are kind of poking their heads around, dipping their toes in and it's hard to discern from our vantage point the context of what increased competition may look like? And so anything you can talk to that -- talk to about that, and the way that you would like us to sort of think of that, and then Logitech positioning in the context of that? Thanks..

Thank you, Ananda. We've always expected more competition in good categories and we play in great categories. So we've always expected new competition. That's why we've invested. So we've been investing in innovation. We've been investing in our go-to-market. We're really excited about the capabilities we're building in both.

And I think -- so I feel really good about where we are. And I would in a way feel really awkward if we didn't have more competition, because it would suggest something dark about the future of the category. I think these categories are super and great categories have great competitors. We love to compete.

You want to add anything, Nate?.

Yes. I think one benefit of some of these competitors, Ananda, is just the awareness that they bring to the category as well, right? As they're trying to grow their business, they're going to bring more awareness to categories where we are very strong and that we're passionate about.

I think keys to our success are to continue to segment the market to identify specific customer needs, and then go address those with innovation and great design, of course. So I think it doesn't change our strategy. It doesn't change our focus on execution.

But I think to the extent it brings more awareness to some of these categories, I see that as a benefit..

I'll just double down on that. I think you mentioned at the beginning, you said we've been out there kind of evangelizing this category at the beginning. It will be nice to have more people evangelizing this category. I think it will drive higher growth.

And we're still such a small fraction of rooms enabled in the conference cams, for example, 111 total rooms according to Gartner and so forth. So yes, I think it's probably an indicator of how strong this market opportunity is..

And if you guys get -- if you get legitimate sort of competition coming in however that shows up, but it sort of feels legitimate.

Do you feel that you can still prosper? Is there enough room for you to still prosper in the way that you've laid out your last Analyst Day, hit the growth goals, hit the profit goals?.

All our competitors are legitimate, Ananda. I think it's an important place to start. Bracken, go ahead..

Absolutely. We've had legitimate competitors in almost all our categories for as long as we've been around. We started out as an OEM maker of mice and keyboards and we were selling directly and competing directly with those players over time. So we expected the competition. They'll be great competitors. They'll make us better.

And we will invest in making sure that we are better..

That’s good..

Yes, let me just add a little bit. I don't build our models here internally assuming no competition, and obviously you're seeing an increased investment in marketing and brand from us too. That goes directly to your point, which is that we expect competition. We think these categories have gotten stronger, and we will see more competition.

And so the increased investments that we're making in brand, marketing, innovation, those are all part of our strategy to compete..

Thanks, guys..

Thanks, Ananda..

The next question is from Stifel, Jürgen Wagner..

Hi, Jürgen..

Hi. Thanks for letting me on. A follow up on the inventory questions, I'm afraid.

Can you split it up between finished goods and what are those key components you mentioned in your introductory remarks? And what is the visibility you currently have on the Christmas business across your divisions?.

Let me take on the inventory side. We are holding more components as a percentage of our mix than we have in the past. As I mentioned, I think that's a key part of the strategy. The other thing is that our in transit inventory is higher too. So as these port delays and shipping delays and things like that occur, more of our inventory sits in transit.

So you can think about that as finished goods I guess, but it's not as productive because of these delays. And that's the primary driver of the increased days of inventory that I mentioned in my prepared remarks, Jürgen, is port delays. Things are taking weeks longer just in transit these days.

And so again, as that improves and I think it's not going to happen in the near term and that's why I made the adjustment to the cash flow outlook for this year. As those transit times improve, as the lead times for components improve, I do expect to see our days of inventory come back down to kind of more historical levels.

I don't think it's going to look like it did last year. Obviously, last year was very unusual because of the strength of the demand that we were chasing supply the entire year. But I do think days of inventory will come back down to our more historical levels. But I think that's going to take some time and probably I don't expect it to be this year..

Jürgen, on the visibility into the Christmas quarter, I would say, Nate and I both feel like gosh, last year we set aside our view of the normal seasonality of the business because of the strange year of the pandemic.

I think another year will really set aside our normal view of seasonality and say, okay, this is another strange year, especially given the supply challenges. So I think when you put that together, I think our visibility's probably not we'd normally love to have.

But I think we've got a plan in place that we've got products, we've made strategic investments in inventory and we feel good about where we are. And I think we've recommitted to the guidance because we feel good about that..

And do you have certain product categories where you have better visibility at the moment?.

Do you want to answer that, Nate, or how would you answer that?.

Well, I think we've always said video collaboration, you have a little bit more visibility, because you can build a pipeline, you're working with enterprise customers. Certainly for the larger deals, you have more visibility to those, but a lot of that business is more what one might call run rate as well.

So some better visibility on video collaboration, but --.

Okay..

It's still less than 20% of our overall sales is video collaboration..

But I would also say, this is in a way that's not so different from the rest of our business. We've never had -- we're kind of in the same visibility state we're normally in, which is going into the holiday, it's always a little bit well, will the shopping come? It usually does and I think it will this year..

Okay. Thank you..

Thanks, Jürgen..

Your next question is from UBS, Joern Iffert..

Hi, Joern..

Hello, Joern..

Hi, there. .

Good to see you. .

Hi, Nate. Good to see you. I hope all is well..

It is..

Quickly and two, three questions please. The first one is, on your marketing spend, sales being up slightly, marketing spend up around 65% or 66%. If I extrapolate this for the full year, it's maybe around 1 billion in marketing and selling line being maybe then 80%, 90% of sales historically, about 16%, 17% pre the crisis.

Does it mean your growth is becoming more capital intensive or is there room to streamline the marketing and selling expenses in the second half supporting the margin somewhat? That would be the first question please. And I would have one or two follow ups please..

If you want, Bracken, I can start on that one.

So what we're executing right now is this strategy of shifting ECR gross margins go up, and we're reinvesting some of that gross margin expansion into sales and marketing, Joern, to try to drive up the brand and the awareness, which provide us with long-term benefits and I think long-term leverage as well. But that's the strategy we’re executing.

It’s the same one that we talked about pre-pandemic as well, the shift from push to pull. And I think we were able to move more quickly on that because of the strength in the margins that we saw last year, and put us in a great position to go execute that strategy aggressively this year.

Bracken, you want to add some?.

Yes. I guess I would just say, when you look at our overall operating income or operating margin, we don’t really keep an eye on that. And our mission is, we view that as a constraint. We're going to deliver certain operating margin so that we're going to invest back into marketing to the extent that we can drive stronger long-term growth.

And it really performs. And marketing -- building a marketing engine really takes time. But I'm excited about where we're headed, and we've got a great team in place. And we're really, really changing our approach.

And I think it will be -- we'll keep learning through it and making sure that the investments make sense, and delivering that operating margin and long-term operating margin we're committed to..

Thank you for this. And then maybe a second and third question. The second question to follow up here on your medium-term guidance. You increased your medium-term targets to 8% to 10% from 7% to 9% before. This is reflecting confidence, of course, but now maybe some things becoming more shaky. You mentioned video conference.

It could be below your initial targets. How should we think about the base? What is the baseline from where you think you can grow 8% to 10%? This is coming down now in the current environment? And then I would have a last technical question please..

Go ahead, Nate. You can start..

We did, Joern, obviously confirm the outlook for this year. So there's really no change in the base. And as Bracken mentioned, there's a different mix of growth than what we initially thought at the start of this year. But again, that's not unusual.

And I think it really highlights one of the benefits of our portfolio is that it's diverse, and that there's good profit generation across that portfolio, so we've been able to sustain the investment plan that we had, despite the different mix of top line revenues.

Bracken?.

The only thing I would add to that, Nate, is I think we talked about that 8% to 10% long-term guidance and are raised in our long-term view of our growth rate capability.

That really comes from the fact that both categories are attractive for the long term and our innovation engines are attractive for long term, and absolutely nothing's changed on neither one of those. I feel really, really good about them..

All right.

And so this in the last segment question, when you initiated your guidance in March and then you update it I think in April on non-GAAP EBIT versus this number, what is roughly the additional freight, logistics and component cost which has exceeded your budget? Obviously, 150 million, 100 million, just have a rough idea about this what are the additional costs you're facing right now?.

I don't think I can do the math that quickly. I'll give you something on that, Joern, which is this quarter year-over-year, we had about a point hit to gross margins from increased freight costs mostly from ocean. So I can tell you in the quarter, that's kind of what we had. And we'll probably see that throughout this year I think.

We have actually reduced the amount of air freight we've used year-over-year, which was my expectation, but the air freight rates have gone up such that we really haven't seen a real benefit from the reduction air freight volume. And at the same time, as we shifted things to the ocean, we've incurred some additional costs on freight there.

So it's all included in our P&L to date and it's all included in our outlook. But it has been a headwind I think since March..

All right. Thank you very much..

Thank you, Joern. Take care..

You too..

Okay. The next question is from ZKB, Andreas Mueller..

Hi, Andreas.

How are you?.

I'm fine. Thanks. Hope you're well too. Two questions, if I may. One was really I was wondering gaming if you saw an effect in China from this gaming law that teenagers shouldn't be that long on online gaming. Have you seen an impact? China’s channel was good. That's the first question. And the second --.

Andreas, why don't we start with an answer to that one, then you can ask the next one. The answer is our gaming business actually SKUs 18 plus -- not just SKUs, the vast majority is 18 plus. So that law is for 18 and under. So no, we haven't really seen a big effect on our business from that. .

Probably these Chinese people spent the same time in front of a PC doing something else than gaming, isn’t it?.

But I think maybe just to add a little more color to that. I think if you're going to play, you're going to buy some peripherals. So unless you stop playing completely, you're still going to buy some gaming equipment, whatever that is I think Andreas too.

But just to add a little data to it, we did not have any slowdown in growth in China gaming; actually had a very, very strong quarter. The growth was similar to last quarter year-over-year..

The growth behind the pointing devices, keyboards and combos, was that really still demand from the home office or was it really back to the office demand that the offices just had some sort of an investment cycle in these type of products?.

Well, I think it's a little bit of both. We see strong growth in the B2B part of our business, but also in the B2C part and that's probably -- I think we're headed into a place where people -- we've got a bigger base now and people are upgrading.

And I know -- just anecdotally, I talk to people now regularly that told me they went out to buy an MX Master, they asked me what to buy, they had something for the pandemic. Our old business was really not great business.

And as I said in the beginning of the call, I'm so excited about our innovation in this old category -- of these old categories called the mouse and keyboard. They are really alive and exciting again. We just launched -- I do encourage you to go look at Pop Keys on our Web site. We might even make this category sexy, believe it or not.

So I think the innovation engine there is part of the reason that we're going to really report it off..

Okay. Thank you very much..

I didn't get you excited about keyboards and mice being sexy, Andreas..

As a reminder, chat me if you like to ask a question. And the next one is from DA Davidson, Tom Forte..

Hi, Tom..

Great, thanks. So one question and one follow up.

So from a supply chain standpoint and a logistics standpoint, can you remind me to what extent you have control? I think you have some owned and operated assets in the manufacturing side? So to what extent do you have influence on your supply chain and logistics, and to what extent you have less influence?.

We have our own manufacturing in China. And then we manage contract manufacturing in China and outside of China. We make about half of what we sell in that owned manufacturing. From a logistics standpoint, we really manage our logistics through the normal systems that are used broadly..

Right. So the constraints are primarily the components then. The constraint is not having the raw materials. It isn't that you don't have capacity or the ability.

So increasingly, it seems like in Asia, you have to make the product and then you have to deal oftentimes with plant shutdowns because they don't have electricity, then you have to store the product, then you get to ship the product. Sorry, Nate, you were going to chime in..

Well, I actually was going to go where you're going too, because I think this is a supply chain, right? So there's links of it. And I think what's really apparent as you look at what's happening globally across industries is just how those different links are owned by different people, right? And so, yes, it is to our advantage.

I think right now that we have our own factory and we control the purchasing for a lot of our components. In fact, we control the purchasing for a lot of our components, even when we use a partner for manufacturing. And so I think that is to our benefit. But you're right.

Throughout the supply chain, you're going to hear stories about warehouse capacity being tight. You're certainly hearing stories about trucking capacity being tight.

When we look at and see these pictures of ships and containerships stuck at port, it may not be that the problem is at the port itself with the cranes and such, but it could be with trucking, it could be with warehousing. There needs to be a place for these goods to go. And I think that's why this is not a quick fix.

That's why you're seeing things like President Biden jumping in and getting involved and why we describe this as unprecedented. The supply chain is bottled up now in a few places and it's going to take some time for that to work out.

But it is to our advantage I think in this environment to have the factory, our own factory and again to manage and control a lot of the purchasing..

Excellent. So thanks for clarifying that. For my follow-up question, I want to talk about the demand side, in particular from gaming. So it looks like you had very impressive growth on top of growth and it was widespread across all your categories.

Can you talk about demand for gaming? And if at all, for example, if consumers aren't able to get their hands again on the new Xbox and PlayStations this year, does that have any input? Does that just mean, well, the better next 12 months? How should I think about that?.

The demand was very broad across every segment including simulation, which is mostly steering wheels, console gaming, which is when you just refer to PC gaming. The console gaming part of our business is relatively small. So I'm not too concerned about whether -- they're constrained on the console buying side.

So I think we'll probably be okay regardless. But it's exciting to see gaming so strong coming out of pandemic or coming out of the worst of pandemic. And I think the console demand is just a big positive. And I think that tells you how strong gaming is in general that people are still buying those next generation Xbox and PlayStation.

Do you want to add anything, Nate?.

I think those are all the right points. And you got to be on shelf to sell. And so I think again, that's why that is part of our strategy. And I think part of the reasons why we’ve gained share. It will be an interesting holiday I think for a lot of companies.

I'm sure you've walked through your local stores or looked online and there's some tightness out there. I’m not speaking to Logitech, but I'm speaking across a lot of goods. And so I think that is a big part of what firms have to do during all the years to make sure they can get on shelf..

Yes, just hoping we're not celebrating the holiday in January. All right. Thanks for taking my questions..

Gift cards, Tom..

The next question is from Credit Suisse, Serge..

Yes, hi. Good morning or good afternoon depends on where you are. You can’t see me don't know why. I'm only silver shadow.

So I will start with one question, the first of several questions, but the first one is, can you give us a feeling about the preorder situations you have seen beginning of the month -- beginning of the quarter? Has this been better or worse or equal to last year from a consumer perspective because you should have a very good visibility now because in two months, Christmas is over? In addition, you pointed out several times investments into point of sales, more promos also should lead to higher sales.

Of course, you have lower margins, but this has also to do with Xbox [ph] moving then at the end of the day. So, therefore -- and then in addition, the sell-through was low, so the channel inventory seems to be quite clean now.

So, why you don't have more confidence going into next quarter also in relation to guidance? This would be my first question..

I guess I'll start, and Nate you can finish up. And I would say, we do have confidence going into the rest of the year. That's why we reconfirmed our guidance. We grew double digit on all three of our four main categories, so we feel the underlying sell through. So that's a very good indicator. So we feel really good about that..

And I agree with you, Serge. I think the channel is at a good level right now broadly, but again, we do have tightness in some areas and don't need to go into which ones I think. But we have some catching up to do in some spots. They are big holiday items.

And like I mentioned, we're planning on using air freight to cover those, but we have a lot of work ahead of us, but we're prepared to have a good quarter..

But do you believe that you can match the backlog you have for the current quarter because of the longer transit and lead times?.

I think we could deliver the backlog. You're saying deliver the backlog.

Do you think we can fulfill the backlog we have?.

Yes..

I think we've kind of said at the beginning, we're not immune to these supply chain challenges. That's certainly a reality that we've lived with and I think they are worse now than they were in the first half of the year. But I feel good about where we are.

In terms of really delivering what we need to for Q3 and Q4 to deliver our guidance, we're in a spot where we feel good about it. But I do think there will be -- we'll continue to have supply chain challenges..

Okay. And probably another one to video collaboration, I'm a little bit puzzled.

Not sure what is limiting the growth currently? Is it the demand? Is it that it takes longer with the enterprise customers? Is it that you still are missing direct sales? Is it that you're not successful with the procurement companies of this world that you come into this -- in their portfolio? And how should I read the subscribers' numbers? I see from Teams and Zooms, which are still -- show high growth in -- why I can't see this better in your numbers?.

Well, first of all, I think we mentioned we had a little bit of destocking and we grew 22% this quarter. So there is growth. And I think --.

On sell through, yes..

The real long-term question is because there's so much long-term potential growth at 8% penetration, there's so much long-term potential, I think that's just a question of how does the decision making happen.

People making a decision for video enabling in all of your rooms is something that we did a long time ago, but not many companies have done yet. So there's a lot of thinking to go through there and people are also rethinking their formats and their footprints and things inside of offices, I know we are. So I think both of those are in play.

Do you want to add anything, Nate?.

Well, I'd say Americas and Asia broadly did grow in both sell through and net sales. And EMEA, again, was the place where net sales slowed.

But if you just look at last year, and we mentioned this, this will be true in the second half as well, and one reason why growth for the overall company and for VC I think will be slower in the second half is the compares on VC last year are massive. And a lot of that's in Europe. It was exceptionally strong.

And I do think Europe has slowed down a bit on some of the decision making and on some of the demand for video collaboration. But even there, we had double digit growth in sell-through in EMEA. So it hasn't ground to a halt and it's still strong. And I think someone mentioned earlier too about competitors coming in.

I think they're seeing the same things that we are is that this is a long-term growth category. And I wouldn't be -- I'm not really concerned about the changes in the demand profile from last year. I think we're in this for the long-term and we're investing as such..

Yes. Just to throw a point out there if you haven't looked at it, video collaboration in Q2 of last year grew 150%, so more than doubled..

Don't get me wrong, I think you are doing a great job. That's not the point. But you have introduced quite many new products and you mentioned that you -- these products will be available in winter. Now winter is quite short meanwhile with the --.

Not only for the winter though..

Yes.

But what does this mean? Will this be an inflection point when you can ship then these new products? Do you believe that this can increase the pace then or is it not that important?.

Well, I think we have availability now on most of our products, and we'll keep that up. And we are launching products now. We'll be launching products next year too. So, no, I don't think that's a particular inflection point..

Okay. So I hand back for the time being. Thank you so much..

Thank you, Serge. Hello, Erik..

Hi, Erik..

Hi, guys.

How are you?.

Last question comes from Erik from Morgan Stanley..

Thank you, guys. So if you go -- I'm based here in Manhattan. If you go to any local retailer, you'll see -- or at least I believe that Logitech has more shelf space than you have had historically. And you might not see as many competitors on the shelf as maybe you have historically.

Would you say that's an accurate comment? Have you been able to gain shelf space with some of your retailers? And then is that also what is contributing to some of the higher spending with retail point of sale? And then I have a follow up. Thanks..

Yes. Actually I would say not -- that's probably not a good characterization. During the pandemic, we probably lost some shelf space. In web cams, for example, we lost a lot of shelf space because we just didn't have supply and e-tailers and retailers really needed to bring in other people to fulfill the demand.

Now we're back and we're gaining the share back and probably gaining some shelf space back, but I don't think we've gone above where we were pre-pandemic. You're muted, Erik..

You’re right. Thanks. Nate, this one is for you. Just as we think about -- I know we're kind of throwing seasonality out the window to some degree. But when you think about the back half of the year from an OpEx perspective, in some years you've seen a sequential decline in OpEx from the holiday quarter into March.

Should we generally be thinking about OpEx this year following that same trend, or again kind of throw seasonality out the window and it will end up where it ends up essentially? Thanks, guys..

Thanks, Erik..

Erik, so much more of our spend is variable now than what it was before because a lot of it is marketing oriented. So I don't -- yes, I kind of agree with you. I don't think there's really as much seasonality even to the spend this year. At least I'm not really looking at it that way.

We're making the investments based on long-term decisions and where we see opportunities. And so I think that's the way I'm thinking about it..

Okay, great. Thank you..

Thank you, Erik. Thanks a lot. I think that was our last question, if I'm reading you right, Nicole..

That is. I think that’s our last question..

No, Serge is back with one. He couldn't resist before we hang up. You got to go off mute..

But he is on mute..

Serge, you got to get off mute..

Yes, sorry. Now I'm back on with my cam. Now probably quickly back to sales and marketing costs. If I keep -- remind me correctly, you mentioned that most of the incremental costs go to direct sales in video collaboration and gaming.

Is this still true or can you give me a better feeling of where you are spending your money?.

Yes. No, I don't think it goes to direct sales in gaming, it's very broad. They're marketing sales and R&D or engineering across all of our categories. So it's pretty broad..

Okay. Then probably last one, currently, the M&A market is quite hot. We have seen HyperX, we have seen Turtle Beach, we have seen Stealth series.

What about you, Bracken?.

It's always hot for us. We're always looking at stuff. We've got things under evaluation right now and we've done things in the last year. Several -- some of them were relative -- most of them were relatively small, so we didn't talk about them. And we're always looking. We're always in the market.

It's a great strategic deployment and we're going to stay in the market in the M&A front for forever..

Okay, got it. Many thanks and enjoy the Christmas quarter..

Thanks, Serge..

Thanks, Serge..

Okay. I think that brings us to a close. I want to thank all of you. It was a -- this has been quite a year this year and quite a year last year, but I'm super excited about the years to come. I know you can feel it in our tone, but we really feel like we've got our innovation engine humming.

We've got a world that's really strange and we're managing through it I think pretty well. And we'll keep proactively doing that. But thanks a lot for all your questions. They were great, and we'll see you again next quarter..

Thank you..