Good day and welcome to the Logitech Fourth Quarter Fiscal 2019 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. [Operator Instructions] This call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech. I’d like to introduce your host for today's call, Ben Lu, Head of Investor Relations.

Thank you, James. Welcome to the Logitech conference call to discuss the Company's financial results for the fourth quarter of fiscal year 2019. The press release, our prepared remarks and slides, as well as a live webcast of this call are available online at the Investor Relations page of our website, ir.logitech.com. During the course of this call, we may make forward-looking statements including with respect to future operating results that are made under the Safe Harbor of the Securities Litigation Reform Act of 1995. The forward-looking statements involve risks and uncertainties and actual results could differ materially as noted in our quarterly and other filings with SEC. The Company undertake no obligation to update or revise any forward-looking statements as a result of new developments or otherwise. Please note that today’s calls will include results reported on a non-GAAP basis, except as otherwise noted. 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 from or as a substitute for or superior to GAAP results. Non-GAAP measures have inherent limitations, should be used only in conjunction with Logitech's consolidated financial statements prepared in accordance with GAAP. Our press release and slides provide a reconciliation between GAAP and non-GAAP numbers and are posted on our IR website. We encourage listeners to review these items. Unless noted otherwise, comparisons between periods are year-over-year and in constant currency. This call is being recorded and will be available for replay on the Investor Relations page of the Logitech website. Joining us today from California are Bracken Darrell, President and CEO and Vincent Pilette, CFO. I’ll now turn the call over to Bracken.

Thank you, Ben, and thanks all of you for joining us. Logitech delivered another great year with fiscal year 2019 sales and profits up double-digits for the third year in a row. Sales were up 10% and profits were up 23%. Our three growth businesses, and it's kind of fun to call this first one growth business, creativity and productivity, Video Collaboration and Gaming all performed well and will continue to drive growth through this year as well. I'm excited about the secular trends underpinning growth in these large categories. There are three major global trends driving these businesses and they're just a few of the many reasons why we're so excited and where we about being the world’s leading cloud peripherals player. First, the first trend, if you're under 30 or have kids who are, you know that there are only two kinds of calls you make. Audio calls when you're moving and video calls when you're stationary. But when you look at your offices, you will probably see that most rooms are not video enabled. The cloud's changing this by making it accessible, affordable and easy and we're in the very, very early stages as today only a low single-digit percentage of those rooms or video equipped. I believed in the not-so-distant future every single close face will be designed for video and that's why we're so excited about the growth opportunities ahead of us in our Video Collaboration business. Just look at the recent successful IPO of our cloud video partner Zoom. We're ready to outfit all of those cloud video enabled rooms with our best-in-class solutions. The second trend is one that you've heard me talk about time-and-time again. PC game play is destined to become one of the biggest, if not the biggest of sport…

Thanks, Bracken. For the record, I’m wearing a jacket, but no tie. As Bracken mentioned, we delivered another year of strong financial performance, the sixth one to be exact. Fiscal year 2019 sales reached $2.8 billion, up 10% in constant currency. While our non-GAAP operating profit was 23% to $352 million better than we expected. Non-GAAP EPS was $2.01, a significant milestone for U.S. because three years ago, we had laid out the roadmap towards doubling EPS to $2 and we did it a year earlier. From here we will focus on driving continued topline growth, diversifying the portfolio and delivering operating leverage as we recently raised a long-term operating margin target to 14% on the high-end of our range versus 12.6% in fiscal 2019. Our fiscal 2019 gross margin reached 37.8%, up 190 basis points at the mid point of our recently raised long-term range of 36% to 40%. As you recall from our recent Analyst Day in Zurich, we took up the high-end of our gross margin target range to 40% and that is due to three factors. One is normal cost structure improvements, which we will continue to drive forward and as you can tell from our margin increases in the past few years, we have a pretty good track record of reducing costs, faster the natural product price decline. The second factor is better product mix. As we shift more into Video Collaboration, Gaming and PC peripherals which all January have better gross margin than the other categories. Finally, the third factor is our desire to transition the business model to more branding and marketing led activities for more promo let demand generation that we have mainly used in the past. In essence, we will be balancing how much we spent in gross to net promotions…

If you believe Vincent never gets emotional, you don't know him well enough. Fiscal year 2019 marks another great year for us. We're well positioned to drive continued growth in fiscal year 2020. As we continue down our path of being the largest cloud peripherals player. I'm energized by our plans, and I'm energized by our people. We just gave our outlook for fiscal year 2020 in March and today we're confirming that outlook sales of mid-to-high single-digits in constant currency and non-GAAP operating earning income of $375 million to $385 million. And with that, Vincent and I are ready to take your questions. James, why don't you queue them up?

[Operator Instructions] Your first question comes from the line of Ananda Baruah from Loop Capital. Go ahead, please. Your line is open.

Hi, Ananda.

Hey, good morning, guys. And hey Vincent, yes, so we'll miss working with and congrats on a job well done.

Thank you.

Look forward to seeing where you land and maybe with any luck, we can make it three for three. So we'd love to. Yes, so just with regards to the business and congrats on solid topline, solid results. So look this was a solid op margin beat. And so just sort of philosophically, are you guys starting fiscal year 2020 from perhaps a little bit of a higher, sort a higher floor, then you thought you might be at the Analyst Day how should we think about that cadence in the context of the fiscal year 2020 guide? And I have a couple follow-ups. Thanks.

Yes. Ananda, in term of guidance, at this point, it’s way too early to change our guidance. I think the business overall is performing well. And as we always said, we operate a little bit higher in our gross margin; we would like to have the capability to reinvest and going to invest for the future. So I would say it's all built-in. Going into fiscal 2020, we still have many variables like either tariffs or currency that we don't control. And so we like you have a lot of variability in our P&L to be able to always deliver on our commitments.

Okay. Great. And then Bracken on Gaming, can you - could you just point out, if there's any specific catalyst for the year Fortnite has been a really tremendous catalyst for a while now. So what do you see as being catalysts post Fortnite? And maybe that's not the right way to think about it, but whatever those dynamics are? Yes, and then secondarily, it's Fortnite to what extent, if any of you consider Fortnite is still be a catalyst? And then I have one more after that. Thanks.

Okay. Yes, Fortnite. Well, first of all, I think the primary catalyst is the – and catalyst is maybe an interesting word to use for it, but is the underlying secular trend that's just happening. The growth of eSports, the excitement around eSports, and then as you said, the launch of new games is always going to be a big deal. But remember, the underlying continued growth of the existing games is still continues to be really exciting. So I'm not sure you could point at this point in the year to a single catalyst that will drive the short-term. But the long-term secular trend is seems kind of almost inevitable to me. And so new games are coming out all the time. The game publishers don't sit on their hands, when Fortnite came out and created such a wave, the Activision Blizzard and Electronic Arts and so many others have been doubling down and creating new games and you're starting to see them come out. So I think we'll have all kinds of surprises in the Gaming business, but even if we don't, the secular term will just continue.

Okay, great. And as we see more Gaming services enter the market and some of them are also now sort of not surprisingly targeting increasingly sort of some of the larger phones from a couple different service providers. Is there an opportunity long-term or even in the medium-term for you guys to come out with product that might serve as an interesting alternative to just sort of the normal earbuds for folks for that market?

Well, we try not to comment about specific categories, we might have playing it. But what I would say is, you referenced something else that I do want to jump on, which is the creation of new services, like a cloud-based services that enable you to essentially have a mega PC experience without the PC on your desk or another growth enabler for us because you continue to need a headset, the keyboard and a mouse. So this is a super exciting thing for us and we've seen this coming, it started with some startups and now it's going to Microsoft and Apple and others. So I think that's going to be exciting. In terms of mobile gaming in general, mobile gaming continues to be a huge and growing and we certainly think there's an interesting places to play in there. And obviously, headsets are part of it. Some of our products are probably already used for some of the mobile gaming, but we haven't directly targeted that yet. And it is an interesting area.

Okay, great. That's helpful. And then last one from me. Video Collaboration, did I hear you accurately Bracken? You said you guys are targeting 25% to 30% growth for the year. And is this the first time you've disclosed that? If I heard that right, the fiscal year 2020? Or was that actually your target or was that actually from the – at the Analyst Day as well?

Yes, we disclosed at the Analyst Investor Day, so that's not a new number. But the real point I was making there was, it's really – at this point in the year, it's a little hard to get too specific on it, but we're excited about Video Collaboration. I think we're the only building I ever go into. This is video-enabled as the future will be in every building. By the way, Ananda, I went to this really cool company, whose average age is probably 28. It has a lot of employees. Not too long ago. I won't mention who it was. And it blew my mind that I walked through that building and there were so many enclosed spaces. I mean it looked like ours in that regard. It's an open office and so few, in fact I didn't see any video-enabled spaces except the boardroom. It's just – or maybe one or two other large rooms. So the opportunity is so big. Thanks Ananda.

And your next question comes from the line of Asiya Merchant from Citigroup. Go ahead please. Your line is open.

Hi. Good morning, everyone, and thank you. And Vincent, we’ll miss you as well. But good luck on your next venture.

Thank you.

Quick question. You know, now with the probably the CFO search under way, and I know you have an interim CFO here. How should we think about acquisitions? I mean, in the past couple of years, you guys have done smaller acquisitions and they’ve obviously contributed to the topline. So should we assume there's a little bit of a step back from these little acquisitions that you might have considered prior to Vincent departure?

Nope. I wouldn't assume that at all. We're always looking and we'll keep looking. I think it'd be crazy for us to stop doing what we do well. Vincent is leaving, but Vincent has left a great team behind them, and that is going to be terrific and we're not letting up on anything at all.

And if I can add, especially in acquisition, but it's actually true in every discipline. It's really a teamwork between the business development team, the strategic team, Bracken’s involvement, mine, the general managers. And so especially in M&A, it’s really a broad effort. The CFO is definitely part of that, but not the only player.

But I would say, what we've done acquisitions, they get more focused for all the right reasons. We're really an organic growth company and we were first and foremost on organic growth company. If you look at VC and Gaming and PC peripherals, really underneath all that is that an innovation engine that is the key to this business. But we're going to continue to do acquisitions.

Okay. And then just a couple of follow-up, intra quarter, there was some commentary in the prepared remarks that there was some linearity in the intra-quarter that suggest it was back-end-loaded. So what was your surprise there? And then as a follow-up to that at you Analysts Day, you talked about mid to high single-digit, keeping in mind, some of the macro factors that were out there perhaps before tonight, a factor as well. Has anything evolved from that time, anything that has surprised you to the upside or to the downside?

Hey, Asiya, just quickly on the linearity? No, it was not a surprise since we talked last. We just had at AID. If you remember back in the last calendar quarter, Q4 – Christmas quarter, there was a lot of volatility and in January, the business for the quarter started slow and then ramp up faster than last year and finish strongly in March and nothing that caused some of the AR and cash collection to be delayed into the next quarter. That's what we were referencing to.

Yes. In terms of is there anything we've seen since then, it's so early in the year. It's really hard – it's really too early for us to comment on it, the economic environment or any of that stuff. So it's just too early. We had 11 months to go.

Okay, great. And cash conversion cycle as we revert back to perhaps more linear quarters and should we expect that to revert back to what has been historic norm, ex the ASC 606 in pack?

Yes, absolutely. Yep.

Okay. All right. Thank you, gentlemen.

Thank you, Asiya.

Your next question comes from the line of Andreas Mueller from ZKB. Go ahead, please. You're line is open.

Hi, Andreas.

Hi, Andreas.

Hello. Thanks for taking my question and good luck. We miss - going to miss you. Question on the inventories, how do you see the progression of the inventories in the next quarter? So are we on the level now that is good enough to protect from the terrorists?

I think as we you know, we mentioned in our prepared remarks that we pulled in some inventories to protect against tariffs. It's not clear yet, what tariffs will be in the future. But on the current assumptions, I think we are a stabilized if you want and we'll burn all of that inventory that we're putting in advance. It was the right economic decision using a balance sheet as strength for that.

Okay, and then on the operating cash flow, can you give us the absolute size of the operating cash flow that was impacted by this backend loaded quarter?

Overall about $40 million impact and about half of it from inventory pull-in and the half from early narrative.

Then my last question, can you does sec to beat the gross marching up placed off this 160 basis points in the fact that currency, product mix, cost savings, China tariffs. And also could you indicate how these single factors are going to progress into Q1.

Yes. So no Andreas, I'm not going to go into my long very detailed spreadsheet analysis here on the call too to give all of the drivers, we always said we have multiple drivers on the gross margin. We've been training a both 37% for the full-year and Q4 is slightly above that. But in line with everything we set there and all three factors were favorable to gross margin, which was a cost reduction, overall and the reduction of promo and more marketing expenses. Those trends will continue going into fiscal year 2020. You should expect the gross margin in the first quarter here to be a little bit weaker considering that there was more currency impact at this point in time with the euro being at being at a round one 12, in exchange rate. So that's, but overall for the year we'll be on a solid footing and the three factors have mentioned we'll continue to drive gross margin up.

Okay, great. Thanks a lot. And good luck Vincent.

Yes. Thank you.

Thanks, Andreas.

Your next question comes from the line of Jürgen Wagner from MainFirst Bank. Go ahead please. Your line is open.

Hello, Jürgen. Jürgen Wagner: Yes, hi.

Hey, Jürgen. Jürgen Wagner: Thank you for taking my question. I'm actually, I've two sell-through weakness in Europe. Is that going to reverse? You had some volatility in the past, is it just normal fluctuation? And the second question would be, yes, you talked a lot about video in your prepared remarks and now that the market is evolving and you are broadening your footprint, we hear from others that they might see growth there. So how do you see your positioning and the competitive environment developing going forward? Also because it's a high gross margin business for you. Is it staying amongst the highest gross margin product for you? Thank you.

Yes. Let me take the last one first, and I’ll let Vincent take the first one last. So I think the video – as I mentioned I think the video opportunity is so big. It's really we're going to see strong growth in spite of what happens from a competitive standpoint and from a gross margin standpoint, I don't think there's any reason to think that the gross margin will be impacted by the competitive environment, I think from what I can see that the gross margin profiles of the competitors, we have look a lot like ours. So at least in the same vein. So I doubt it. I think the opportunity is really, really big for many companies and competition is great, competition drives growth. It will drive more awareness in the market. And I think you'll see those other 95% of rooms come into video faster.

So I will address the China inventory and thanks for your question because there's a few analysts writing about that based on the reports we had put on our website. So overall, the selling growth rate or the net sales growth rate as you know is 5% in U.S. dollars. The sell through that you mentioned on a global basis is 4% excluding Blue and 6% including Blue. Overall, the business China inventory is well positioned, slightly less than revenue growth. So we feel good and weeks on end slightly down. So well position going into the first quarter of the next fiscal year. As you have seen on the report, it's aligned in both America it's actually even more favorable in Asia Pacific. And then in Europe we have a little bit higher sales in than sell through. And the thing to consider is we need this reduction of promotions into marketing affects that's impacting the net sales in, but not reflecting in the sell through. On a constant currency basis sell through in Europe was around 6% to 7% growth and we feel pretty good about where we are in the channel there. Jürgen Wagner: Okay. Clear. Thank you.

Thanks Jürgen.

Your next question comes from the line of Paul Chung from J.P. Morgan. Go ahead please. Your line is open.

Hi, Paul.

Hey, Bracken. Thanks for taking my question. And thanks Vincent, you will be missed for sure. So first up on Video Collaboration. Are you starting to see more competition on the whole room side? And then secondly, how’s your progress been on kind of attacking the larger conference rooms? Are you gaining share there? And what's your and what's your kind of go-to-market strategy? And then any sense of revenue potential there would be great?

Okay. On the competition on the whole room side. Yes, absolutely we're definitely seeing it. It's been out there and we've got several really good competitors in the whole room space now. And as I said, as part of the earnings call,, I think competition, I don't want to sound too Pollyanna here, but competitions good. I mean, if you don't have competition, you don't have nearly the market growth potential because competition drives communication is the market of the opportunity and it will drive the market growth. So I think the more players in there as a good thing overall and it puts pressure on us to innovate and do – an innovate well and that's what we're up to. So yes, I'd say so far we continue to be excited about the potential there in line with what we were before. But I think the market will be interesting to watch over time. In terms of the larger rooms, it’s still too early. We just launched Rally. We've had something that you could use in a large room, but I'm sure it will do better than we have been in those larger rooms now that we have Rally out there. And I wouldn't try to quantify exactly what that is, I think there's just opportunity across the board.

Okay. And then on the Zone Wireless headset, it seems like a nice cross-sell opportunity in the enterprise space. So first, is this going to be classified in VC or Audio & Wearables? And then second, what's your strategy to gain market share there? And how do you potentially see this as well?

Yes. That’s going to be in Audio & Wearables. And it’s a first really attempt to get some experience into that marketplace. I don't want to overstate its potential. I think it's a terrific product, but it's a first and I would say really small step into exploring what it's like to be in that space. We're going to see how it feels like we do with video conferencing six years ago. We got in the front door, it's kind of warm inside and then we continued to walk inside and we're doing the same thing there.

Okay. And then lastly, I just want to get your sense on keyboards and pointing devices. It still remains $1 billion business itself. So you continue to exceed expectations in this segment pretty consistently. So it's pretty nice seeing a low mid-single digits there. Just can you expand on what's been driving your success there, whether it's ASPs, certain regions? And kind of your longer-term view of the segment will be very helpful. Thank you.

Yes, it's really a global thing, just like the underlying secular driver of that is a global thing. And then underlying secular driver is the fact that so many people are using their PC for more than they used to in the past and they're using it for content creation. So again, that might seem like a difficult path to explain how those two are connected. But if you just think about the way a lot of people were creating content, if they’re not doing it from their phones, they doing it on their desk, if they're doing it on their desk, they're doing it with the PC. And therefore it's an important part of their lives, and I think that's really what's happening as long as we innovate. And there are different innovation vectors that we can go after there, and we are. So the vertical mouse we launched two quarters ago or at the end of the quarter before last is another interesting one where people are using – continue to use their PC so much that they get competitive use injuries. And healthy computing is a big deal. And it's a really big deal in the Nordics. It's becoming a big deal in Europe and it's starting to pick up steam here. So we've got different things that can drive and we'll drive and are driving that growth. And I think we continue to see that as we said, I think we continue to see low single-digit growth for the foreseeable future.

Great. Thanks. And good luck Vincent.

Thanks, Paul.

Thanks, Paul.

[Operator Instructions] Your next question comes from the line of Joern Iffert from UBS. Go ahead please. Your line is open.

Yes. Hello, Bracken. Hello, Vincent.

Hey, Joern.

Vincent, we will for sure miss you. Hopefully, you’ll be at Logitech if I'm missing you at some point in time. Quickly following up on Gaming please. Your competitor, Turtle Beach, is guiding down their sales targets by around 20% because they think there is lower demand on the headset side. Are you also seeing similar trends? Or if not, what is explaining the difference? And Bracken, when you said Gaming can be sometimes a bit lumpy. Does that mean that's why at the end of Q4 with plus 30% is kind of lumpy or can you also mention at some point in time in the quarter Gaming is fall into [indiscernible] 5% growth in the next one or two years.

I think you can see that in a quarter. I think, lumpy in terms of different categories grow at different rates. Sometimes simulation will be down like it was this quarter and sometimes others will offset it. But yes, I think Gaming could be lumpy like that. I think you could see a dropdown to be flat or single-digits or low double-digits. But I think the – and what Turtle Beach, I think I didn't look closely at it, but I would guess, they're referencing, I think, the Fortnite effect. Remember, they are completely in the Fortnite business and in the headset business. So we're in a lot of other categories as well. So [indiscernible] 20%, will it be flat? Will it grow 10%? The headset business especially related, who knows? I mean, at the end of the day, I think we've got enough tools in our arsenal that we're going to be able to drive good solid growth in spite of whatever that is. But I think the reality is whatever that happens with the Fortnite, with the famous Fortnite effect, remember, there are new games coming on that look like they're on track to be as big as Fortnite. So there's a lot of stuff coming. I admired their conservatism, and I think they're – they probably were right to do it if they're only in the headset business, but we're in mice and keyboards and headsets and simulations, a lot of categories.

All right. Thanks. Would you say the Gaming guide of 15% to 20%, is this back-end-loaded in the fiscal year 2020?

No. It's particular through the year, and I just want to just add on Bracken's comment, right. So the diversification of our entire portfolio has been definitely strength for us, right. And we've been growing double-digit for three years at almost every quarter. We had the weakness in one specific category. Within Gaming now would you became as we discussed like a pretty substantial business by itself. We have its own set of diversification and any quarter, a subcategory of the Gaming business we have could be in a weaker position. And when Bracken mentioned, choppiness or some volatility, maybe we could see one quarter 5% as we talking about a quarterly basis. We’re not managing our quarterly basis. We are looking at long-term trends and in the guidance we give at the March AID, we definitely were cautious on the fortnight effect and post fortnight effect. I want exactly say what cautious means, but we were prudent going into the fiscal year 2020.

Yes. I just want to echo a comment you just made about our portfolio. I think one of the – it's really been such an event for us to be in so many different categories. I think by the way that I count them now. We're in either 26 or 27 different categories. Some of those are Gaming, some of those are Video. So it's a nice situation for us because, and if you combine that with the fact that we're super global company with lots of market participation too, it does buffer us from the short-terms ups and downs of a single category like that.

All right, many thanks.

Thank you.

Thank you.

Your next question comes from the line of Michael Foeth from Vontobel. Go ahead please. Your line is open.

Hi, Michael.

Hi, Michael.

Yes. Hi, thanks. Just one left for me actually. I was just wondering the sort of relative weakness in comparison to last quarters that you reported in Asia. And I think you pointed specifically to Australia. If you can explain again what's what that is related to if it's really general trend or is it related to some particular product category? And then I'm not for I understood exactly the difference between – in the media between the sell-through and the entity, the report that cell and growth, if you can just explain that that promotional driver that once again? Thank you.

Let me take the first one a little bit. You take second one again. In Asia Pacific, yes, we referenced that Australia and New Zealand had a strong slowdown in Q4 and I think that's, they tend to get it. They'll sort of a delayed effect on the rest of the world. And some of the categories we're in there also very, very large and music. So they’re a big music business for us. So I think the combination of being a very large music business and then the delay in the slowdown in the market of Bluetooth speakers. So they sort of saw it this quarter. So that was the biggest driver. But I do think Asia Pacific will be slower growth and it's been in the past. We have this portfolio of regions to where, we've been growing, 20%, 19%, 20%, 21% in Asia Pacific. I think you'll see that come down for this year. I will still I think be strong double digits, but it will – I think it'll come down and I think that's sort of what we would expect. And so the Asia thing was this quarter is issue, but – and I think that will kind of flow through. But I think Asia Pacific is will be lower as Europe comes up. And hopefully I have Arkansas.

Yes. Michael let me stay high level on sell-through and then we can always follow-up in a one on one. So when you look at sell-through report, we posted on our website versus net sale that three factors you need to keep in mind. The first one is the constant currency versus U.S. dollars, sell-through the way we report in – is report it to us in U.S. dollars. So you need to compare that to the right gross rate. The second one is that sell-through does not include Blue yet, as we have not fully integrated that business into that sell-through report if you want coming from third party. And then the third driver is this reduction of contra revenue or gross to net and sell-through is on a growth level, and net sales is all inclusive. And then I will be happy to follow on more technical answer when we have our one on one.

Sure. Thanks a lot.

Thank you. Thanks, Michael.

And there are no further questions at this time. I'd like to turn the call back over to our presenters.

Okay. Well I want to finish on two things. One is we just finished a great year and we're starting a new one and that's always really exciting and we're excited about the year. I want to congratulate Nate. I think he's going to be – he is being terrific and he happens to be sitting catty-corner to me right now. We didn't put them on the hook today, but we will next quarter. And I want to again thank Vincent. It's rare to find a partner who shares your ambition is completely as Vincent did with me. And the good news is there are others here who do as well. And I don't think he's leaving anything, but a company that's just so much stronger than when he arrived. And we continue and we will continue to double down on what we've already built into the future. So good luck, Vincent.

Thank you.

Thanks everyone for the call.

This concludes today's conference. You may now disconnect.