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Edited Transcript of LOGN.S earnings conference call or presentation 23-Jul-19 12:30pm GMT

Q1 2020 Logitech International SA Earnings Call

LAUSANNE Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Logitech International SA earnings conference call or presentation Tuesday, July 23, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ben Lu

Logitech International S.A. - VP of IR

* Bracken P. Darrell

Logitech International S.A. - President, CEO & Executive Director

* Nathan Olmstead

Logitech International S.A. - CFO & Principal Accounting Officer

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Conference Call Participants

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* Ananda Prosad Baruah

Loop Capital Markets LLC, Research Division - MD

* Andreas Müller

Zürcher Kantonalbank, Research Division - Research Analyst

* Asiya Merchant

Citigroup Inc, Research Division - Research Analyst

* Jeangul Chung

JP Morgan Chase & Co, Research Division - Analyst

* Jörn Iffert

UBS Investment Bank, Research Division - Director and Analyst

* Jürgen Wagner

MainFirst Bank AG, Research Division - Director

* Michael Foeth

Bank Vontobel AG, Research Division - Head of Industrials Team

* Nehal Sushil Chokshi

Maxim Group LLC, Research Division - MD

* Reto Huber

Research Partners AG - Senior Analyst

* Thomas Ferris Forte

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Logitech First Quarter Fiscal 2020 Financial Results Conference Call. (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 would like to introduce your host for today's call, Mr. Ben Lu, Head of Investor Relations.

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Ben Lu, Logitech International S.A. - VP of IR [2]

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Thank you, Sharon. Welcome to the Logitech conference call to discuss the company's financial results for the first quarter of fiscal year 2020. The press release, the 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 the SEC. The company undertakes no obligation to update or revise any forward-looking statements as a result of new developments or otherwise.

Please note that today's call will include results reported on a non-GAAP basis. Non-GAAP financial results have inherent limitations and are not meant to be considered in isolation from or as a substitute for or superior to GAAP results. 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 Logitech website. Joining us today from California are Bracken Darrell, President and Chief Executive Officer; and Nate Olmstead, Chief Financial Officer.

I'll now turn the call over to Bracken.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [3]

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Thanks, Ben, and thanks to all of you for joining us. We had a good Q1 and a strong start to the year. We delivered total sales growth of 9% in constant currency, at the high end of our full year sales guidance of mid to high single-digit growth.

All of you deal in investment portfolios in one way or another, and investment portfolio with only one stock is usually more volatile than one that's more diversified. Narrowly focused consumer hardware businesses are the same. They suffer the ups and downs of their single category with no offsets. Quarter in and quarter out, some categories will do better while others will do worse.

Logitech differs from many other hardware companies because of our portfolio diversity. This diversity has tended to smooth short-term category-specific fluctuations and provides stable funding for our investment priorities. That consistent funding approach is critical to our objective of long-term, sustainable growth. But the key aim of our multi-brand, multi-category company is to deliver amazing customer experiences in many categories, a growing number where we can lead long term.

We deliver category leadership across our broad-based portfolio through our strong capabilities in design, engineering, go-to-market, marketing and operations. That is the recipe. That is a recipe that's allowed us to consistently deliver ahead of our peers on both the top and the bottom line, and Q1 is no different.

You've heard us talk about the secular trends driving our business: the growth of video communication, the rise of e-gaming as a sport and the democratization of content creation. Those 3 major global trends continue to drive our business now and will drive it long term. We're excited about being the world's leading peripherals player, bringing video to everybody, equipping and supporting gamers and enabling content creators.

Now let's dig into the performance of our different categories. Video Collaboration sales grew 28% from Q1 with all 3 of our regions delivering double-digit growth. Our MeetUp huddle room product continued to see strong traction with customers, and sales were again very strong this quarter. Sales of our recently introduced Rally camera system for larger conference rooms climbed to new highs. That could very well become our second best-selling SKU at Video Collaboration after MeetUp despite being released less than a year ago. And our Tap touch controller that's embedded with great software giving users single-touch access to their video solution just started shipping to great customer feedback.

And now you're beginning to see how we've been investing in software capabilities that go beyond the software that brings products to life like MeetUp and Tap. Logitech Sync is a perfect example. Sync, which is in beta now, is our new videoconferencing device management platform that gives our customers seamless, cloud-based device administration insights and control. It automatically flags issues in real-time and offers in-depth diagnostics so that problems can be addressed quickly. And we won't just stop there. Whether that's Logitech Sync for Video Collaboration or Logitech Capture for our webcams to help capture the fast-growing streaming opportunities, we'll continue to double down on building out our software capabilities to deliver amazing customer experiences.

Now let me talk about our PC Peripherals business. The PC Peripherals business generally has bounced around quarter-to-quarter from slightly negative to mid-single digits or even better. Sales were roughly flat this quarter, yet the category remains consistent and stable. And as we stated in our March Analyst and Investor Day, we should be able to drive low single-digit growth for the foreseeable future here.

As usual, you can count on us to bring out some really cool innovation throughout the year. So stay tuned.

In Gaming, while sales grew just 2%, nothing's changed regarding the long-term structural growth trajectory of the category. So why the flattish growth in Q1? The bottom line are really tough compare in headsets. Most of you are aware of the unprecedented impact of Fortnite last year on young gamers and then how it brought in millions of them. In the U.S., for example, where Fortnite has had the biggest impact, we saw the console and PC gaming headset market double almost overnight.

Excluding headsets, our Gaming business was actually up over 20% and even accelerated versus last quarter. We don't see a change to the structural growth in Gaming overall. Gaming is here to stay, and we'll continue to bring out innovative new products that will elevate every gamer's potential and delight them.

You might have noticed the release of our newest and latest PRO X Gaming headset with a mic that was developed with none other than our Blue Microphone technology and team. Blue VO! CE gives everyone the ability to customize and tune how they sound in a game, and it's unique to Logitech. No distortion, no noise, no outside feedback, just the clear and crisp sound of your voice that everyone hears that can really change the game for -- in multiplayer social games. Wired Magazine called it quite possibly the best headphone Logitech's ever made.

We also introduced a new version of our flagship ASTRO A50 headset. It has a new design, a new base station for even better wireless connection and better sound. It will be available later this summer.

You'll notice that these 2 products are just some of our premium-priced innovations. With the broadening of the base of new gamers as a result of Fortnite, we aim to capitalize on the tremendous upgrade potential such a big base of first-timers provide. Of course, we have more exciting gaming innovations coming throughout the year.

Tablet & Other Accessories sales grew 21% this quarter as we rolled out the new Slim Folio for the latest-generation iPad Pro. We had a robust double-digit growth in both our traditional retail channel as well as in our educational channel -- education channel. This demonstrates our continued strength in both enabling and supporting the Apple ecosystem both for consumers and education.

Mobile Speakers were up 51% in Q1 probably due to the successful launch of our new WONDERBOOM 2. As we've said before, don't expect this type of growth to persist because growth rates are often driven by the timing of our new product introductions. Last year in Q2, for example, is especially strong because of the launches of our newest versions of BOOM and MEGABOOM, so that will impact our Mobile Speaker comps this coming quarter. While the overall Mobile Speaker market remains soft, we're attacking various opportunities here to deliver great music experiences for consumers whether that's through new channels or new product.

Audio & Wearables sales were up 15% this quarter with Blue Microphones contributing roughly 2 points to our overall company growth. While we didn't have Blue in our Q1 figures last year, if we look at their year-over-year sales, Blue delivered another quarter of double-digit growth on the back of the continued trend toward podcast creation.

Next week, our Jaybird team will introduce another exciting product that I've been using whenever I go running. It takes everything you love about our existing Jaybird products and experience and then bring it to the next level.

Now before I turn the call over to Nate, I'd like to be the first on this call to congratulate him on being named our new CFO. He is no longer interim. He's already become a great operating and financial partner for me and my team, and I look forward to working together. So Nate, you're in charge.

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [4]

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All right. Thanks, Bracken. Q1 results were strong with balanced performance across all our financial metrics, thanks to solid execution and strong financial discipline. We grew sales at the high end of our full year guidance, gained share in our key categories, invested wisely in our strategic priorities and expanded both gross and operating margins despite tariff and currency headwinds.

Sales grew 9% in constant currency to $644 million, and non-GAAP operating profits grew 11% to $67 million. Our Q1 non-GAAP gross margin increased 40 basis points to 37.8%, in the middle of our recently revised target margin range of 36% to 40%. We continue to see the benefit from mix shifts in our portfolio, and our teams did a nice job taking operational actions to mitigate cost headwinds from China tariffs and unfavorable currency exchange rates. We continue to proactively and aggressively take steps to reduce the impact of tariffs, including further diversifying our manufacturing locations and recently informing our U.S. partners of price increases for select products.

We have implemented price increases many times over the past 7 or 8 years, and price sensitivity is never completely predictable. But we feel good about our approach for the year and are confident in our full year guidance.

Our non-GAAP operating expenses increased 6% to $176 million or up 3% excluding Blue. Our sales and marketing and R&D spend were both up 7% as we continue to invest in our portfolio, brand, demand generation and coverage. At the same time, we continue to keep our G&A spending flattish at around $20 million per quarter. So with a disciplined approach to managing and balancing costs, we delivered another strong profit quarter.

Now let me talk briefly about our cash flows. Cash flow from operations was $37 million in Q1, a nice increase from $12 million in Q1 last year. Our full year cash flows tend to be heavily skewed toward the second half, and we are still targeting full year operating cash flow to roughly equal our full year non-GAAP operating profit.

In summary, Q1 was another quarter where we demonstrated the resilience of our diversified product portfolio. As Bracken said earlier, this is a key strength of our business model. We will continue to invest in adding new categories and capabilities so that we can consistently deliver top and bottom line growth over the long term.

Now I'll turn it back to Bracken.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [5]

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Thanks a lot, Nate. We just wrapped up Q1 and delivered a strong start to the year as we said. So today, we're confirming sales growth of mid to high single digits in constant currency and non-GAAP operating income of $375 million to $385 million.

And with that, Nate and I are ready for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Asiya Merchant with Citigroup.

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Asiya Merchant, Citigroup Inc, Research Division - Research Analyst [2]

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Congratulations, everyone, strong quarter given the backdrop that we've been hearing about throughout the quarter. I have a couple of questions. One, Gaming. I know you addressed that head-on, Bracken, about Gaming headset versus Gaming keyboards and other peripherals within Gaming, but how should we think about the rest of the year unfolding? I know first quarter was tough comps. But as we see the comps easing in the back half, September, December quarter, relative to the expectations sort of like mid to high-teens growth, how should we think about the Gaming category unfolding for the rest of the year?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [3]

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Well, I think as I said in my opening, the growth outside of the headset business was actually stronger than it was last quarter, so quite strong. That included our new controller in ASTRO and, of course, all of our existing businesses, strong mice -- mouse performance. We're going to wait and see how the headset category develops over the rest of the year, but I feel really good about the Gaming business overall. And I think our expectations, we'll deliver somewhere in the range we gave earlier.

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Asiya Merchant, Citigroup Inc, Research Division - Research Analyst [4]

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Okay. That's good to know. And then the 4% year-on-year sell-through, that seemed -- relative to the sell-in that you guys reported, it seemed a little weaker. Maybe you can talk a little bit about the divergence between the sell-through versus the sell-in.

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [5]

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Yes. Sure. This is Nate. I'll take that one. So I think if you look at it on a dollar-to-dollar basis, the gap really wasn't quite as large. Our U.S. dollar revenue growth was 6%, and we reported the sell-through of 4%. So pretty close on those 2. The widest gap you probably saw was in EMEA where similar to prior quarters, as we mentioned, we've made some strategic decisions about how we think about demand generation investments and shifting some of those investments from -- really from gross margin down into OpEx to build the brand and strengthen the brand over the long term. So that really explains the majority of the spread between our U.S. dollar sell-in growth at 12% and the sell-through growth at 5%.

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Operator [6]

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Your next question comes from Jörn Iffert with UBS.

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Jörn Iffert, UBS Investment Bank, Research Division - Director and Analyst [7]

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The first one would be please on the video communication or collaboration. I thought Polycom is entering already with a product below $1,000. Do you see tighter competition here already? And also to this product category, can you give us some more clarity what is your current head count on direct sales force and what you are planning here for the next 12 months?

And second question would be please going into Q2. I mean we have a couple of companies reporting softer consumer environments, et cetera. I'm not seeing anything, for example, in China.

And the last question on Gaming. After Google and Apple launched their streaming services, do you see potential for cooperation here on the hardware side or if it's independent? Or do you see Apple, Google going into the peripheral space in Gaming?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [8]

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Okay. So you asked a lot of questions really fast. Let me -- we'll go through them one at a time. So competitive entries into videoconferencing. Yes, we expected them, we're getting them, there will be more. And that's -- competition makes you better. So we will be better. We're already better than we were 6 months ago. And so far, I don't think it's had any impact on our business, but we're going to rise to the occasion.

And the other good thing about that is I think when you -- as Guerrino De Luca, our current Chairman said to me a long time ago, "Man, oh, man, you don't want to be in a category with no competition because then there's no growth." So I think that really growth in this category will accelerate as you get more people out there talking about the benefits and the cost savings opportunities and more of Video Collaboration. So I love good competition, and we've got good competitors.

Direct sales numbers. I don't think we've quoted externally our direct sales numbers. Probably I'm not going to do it now. But what I can tell you is that we're accelerating rapidly the number we have around the world. We're -- each region in the world is hiring, and we're trying to hire wisely. We've all been through the hiring surges that end up happening -- a surge and then you lose half the people because they were the wrong ones. So we're -- but we're hiring very aggressively around the world.

Q2, your comment about is there a story over in China on the weaker markets. I think China has had such a period of long, strong growth; for us too, by the way. If you look at last couple of years, we've been up 20% in China, I think you can say 19% or 20%, 21%, 22%, 23%. And no, I don't expect to stay like that, and we didn't see that this quarter or even last quarter. It was lower. But I don't see anything in our categories that suggest China is in for a big slowdown. It seems pretty stable to me. I think our China business won't have the 20-plus percent growth this year that it might have had last year or the year before, but I do think it's going to continue to be solid.

And then finally, Google, Apple entering the streaming business and others. No, I don't see that as a downside at all. I see it as a pure upside. A lot of this streaming entry really is going to enable people to get into the gaming experience at a much lower cost for the PC, et cetera, and I think that's a great thing for us because they still need peripherals. And I can't imagine those people will ever see peripherals in gaming as a strategic category. So this is our place. We love it.

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Jörn Iffert, UBS Investment Bank, Research Division - Director and Analyst [9]

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But coming back to the streaming services, I think you have a cooperation with Apple on the tablet -- keyboard or tablet peripherals. Do you also see room for cooperation here with Google, with Apple? Or will this remain independent?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [10]

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We never share anything we're doing with anyone -- any new partner on the outside before we do it. And what I would just say is I think we've always been a harmless, capable partner for these big players, trying to enable their experiences, and that's what we're going to continue to be. And if I sound too modest there, I do feel like we're really capable, but we're not a threat to anybody like that. We're just trying to help them realize their goals, just like we're trying to realize our own.

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Operator [11]

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Next question comes from Paul Chung with JPMorgan.

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Jeangul Chung, JP Morgan Chase & Co, Research Division - Analyst [12]

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So first off, on VC, how good is your visibility into the full year? Does your enterprise channel kind of provide you better visibility into demand relative to, I think, some of your more consumer-oriented products? And then on seasonality, have you kind of been able to determine any patterns for this business? Or are we kind of still early days? I did notice that F 1Q has been typical low point for the year. So do you see enterprise volume patterns kind of accelerate more so in the second half of the fiscal year.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [13]

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Well, first of all, on visibility, I would say yes and no. I think anything -- the sales cycles are longer in Video Collaboration than they are in our consumer business. So we use Salesforce.com, et cetera, like everybody else does. So we do probably have better visibility of the customer base on potential sales.

On the other hand, it doesn't mean we have -- we can't tell you exactly what the sales are going to be next quarter or this quarter. This isn't quite like some B2B businesses where you really have very clear picture of exactly what's going to sell next quarter and the quarter after that and then you work them through. So it's a little -- I would say it's in between there, but it certainly is better. We're going to have growth all year long, and we're excited about it.

From a seasonality standpoint, so far, I would say there hasn't been a lot of seasonality in our VC business. It's different from our consumer business where you have a really strong, of course, calendar Q4. You do see some improvement through the year, and it's probably seasonal, but I think a lot of it is just the momentum of the business that's continued to get stronger quarter-over-quarter. And while every quarter is not bigger than the last quarter, it's pretty close. So there's a little bit of seasonality, but I wouldn't overstate. You can kind of see them in the numbers if you eyeball them.

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [14]

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Yes. I think just to add a little to that. Obviously, as we do get more exposure to those enterprise accounts, seasonality -- sometimes you get a large deal on one quarter, and you don't have one the next quarter. So you can move around a little bit for that reason. And then as Bracken mentioned, we don't really have the holiday sale -- the same sort of holiday sales push that you might have more on the consumer side, but you do have that enterprise strength in calendar Q4 that I would expect to see just as companies and corporations close out their fiscal years. As Bracken said, I think right now, we just see a lot of opportunity to continue growth. We're investing in that space to increase our coverage, and we'll go from there.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [15]

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Yes. I would just add one other thing about that, thinking about what you just said, Nate. We also have large deals that get agreed to upfront, and then they're deployed over a year or even 2. So it does make it a little more predictable than the rest.

Our DCS, by the way, is -- underneath this 28% sell-in, our DCS is more stable this quarter. I mean it looked a lot like last quarter. So it's very stable. But to Nate's point, it does sell-in...

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Jeangul Chung, JP Morgan Chase & Co, Research Division - Analyst [16]

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Okay. And then the next question is on Pointing Devices and keyboards. So you've mentioned the benefits of kind of addressing a large aging kind of PC installed base, and you continue to post growth in these more mature categories. But now, PC shipments are actually squeezing out some growth near term, right? So we did notice some positive correlation with your mice and keyboards sales relative to kind of PC shipments over the years. So should we see some incremental benefit in these segments near term? If so, why didn't we see any benefit this quarter in particular, particularly in the Pointing Devices?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [17]

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Yes. I think, first of all, the installed base is so much bigger than the PC shipments that I'm not sure that going forward, you're going to see a lot of correlation between PC shipments and our business or even our -- or our categories because the truth is we've sort of disconnected our selling from a PC shipment sale.

So one of the reasons why it used to be more highly correlated was, first of all, the installed base was lower. And then also, we had programs where we're really aggressively trying to upgrade. If somebody bought a new PC, we would on the spot, if we were lucky, have one of the retailers or even e-tailers trying to upgrade the mouse that they bought because we'd say, "Well, that mouse is pretty low end. But if you buy a higher, you'd have a better experience when you get home with a PC." But that's a much smaller story now. So I don't think you see a high correlation.

On the other hand, I think the opportunity we have -- the thing that really drives our business now is our NPIs, our new product introductions. And I think if -- our new product introduction cycles, if they hit this quarter, we tend to have a better quarter if they hit the next quarter. So I think that's probably a lot more of a driver for us going long term than PC shipments are. And I think as we go through the rest of the year, you'll see us do some cool things. We've got good innovation coming.

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Operator [18]

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Next question comes from Andreas Müller with ZKB.

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Andreas Müller, Zürcher Kantonalbank, Research Division - Research Analyst [19]

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I had 2 question also in Pointing Devices. I mean can you explain the declining sales outside of the cordless mice category? And I assume cordless mice still or -- is still growing. But then you mentioned I think trackballs and pointers. I mean is that such -- are these such large categories to move the needle? And what's happening there? That's the first question.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [20]

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Oh, sure. Yes. No. I don't think there's a big story to be told on mice. We've had negative quarters off and on for as long as I've been here on the mouse business. And I do think it's much more a function, as I said earlier, of what have we launched, what's the traction on the latest thing we've launched, what's coming up next, are we selling in. A lot of that's what's happening there.

And no, I don't think -- by the way, I think you're right -- I know you're right. Our cordless mice continue to be strong. The kind of let's call them more niche products in the mouse category could be very attractive, and I think we're going to continue to do those things. Like the vertical mouse we launched last year has done very, very well. We upgraded -- you mentioned trackball. We upgraded our trackball about a year ago. So the growth curve on that has probably faded out a little bit, but we've got more stuff coming. So I don't think -- I wouldn't overthink this quarter on mice. I think it's just part of the wobble that's happened in that business for as long as we've had it. And if you added up -- look at all of our PC Peripherals business, looks fine, up 2%. If we're up single digit, low single digit, that's good.

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Andreas Müller, Zürcher Kantonalbank, Research Division - Research Analyst [21]

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I agree. The second question on cash conversion. I mean the cash conversion cycle of these 50 days, what would be kind of cash conversion? I mean if we hadn't had Blue Mic or the tariffs, sort of the normalized basis. Of course, it's then fluctuating between -- with seasonality. But I mean how many days we would have been lower with the -- without the exceptionals there?

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [22]

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Yes. I'll take that one. So I think there's a few days of cash conversion cycle tied up in those items you mentioned, I think, primarily on the tariffs side. Obviously, we did pull in some inventories. We've done -- in past quarters when the tariff increases were announced, tried to take proactive action there to help out on the cost side. So we did do that again this quarter.

The other thing in cash conversion cycle, obviously, it's just the linearity of the business. Sequentially, cash conversion cycle improved 7 days as the business had a little better linearity to it than it did in Q4, and then year-over-year was up. So it's going to still move around. There's some headwind in that number from Blue as they had a little bit longer cash conversion cycle. And as we continue to integrate that business and bring them into our operations, we could see some improvement in that in the future.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [23]

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By the way, they had a higher cash conversion cycle than we have. So we can definitely do better with Blue than that.

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [24]

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Yes.

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Operator [25]

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The next question comes from Thomas Forte with D.A. Davidson.

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Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [26]

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Great. First off, I want to congratulate Nate for being named CFO. And then want to talk about 2 things, first on gross margin and then second on Gaming. On the gross margin front, I think it's remarkable that you had a 40 basis point increase year-over-year despite the tariffs. So wanted to know if you can give some more information on what you're doing to mitigate the tariffs. And then on Gaming in particular, I want to talk about new products and how you thought about your new premium console controller from ASTRO.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [27]

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Great. Let me -- I'll take the second one first, and then I'll hand it off to Nate, although I do want to make a comment on the gross margin front before I jump over to the Gaming question. I also am very impressed that we had such a strong quarter in gross margin because we had 170 basis points of impact from currency. So we managed to offset that, which is great, and still deliver kind of in the middle of the range, which -- of our long-term range. So I feel good about that.

On the Gaming side, the C40 is our first foray into controllers since we bought ASTRO, and it's been a good, strong performer. And it's still very early days for us in that new category, but it's a big category. There's a lot of potential there, and we're going to -- we're optimistic about the long term. Do you want to go back to the...

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [28]

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Yes. And then I think on gross margin Bracken mentioned there were really 2 significant headwinds this year. Currency actually, the larger of the 2, was actually about 120 basis points, [exceeding out] our hedging. And then tariffs added a little bit on top of that as well.

I think in terms of tariffs, obviously, we've taken actions for some quarters now to diversify manufacturing locations. That's probably the most important one as well as, as I mentioned pulling in some inventory ahead of the tariff increases to get you sort of a onetime benefit. So both of those were significant helps this quarter. Also on gross margin, just keep in mind, we're continuing to see some benefits from the portfolio mix shifts. Things like VC, which grew faster than the overall company, again, have relatively higher margins, and so that helps as well.

Looking forward, obviously, we only had a half of -- so the tariffs increased kind of in the middle of the quarter. So we'll have some additional tariff cost increases next quarter that we're taking steps to mitigate. I mentioned we did notify some of our U.S. partners of -- or all of our U.S. partners for some selected price increases, so that's an additional new step that we're taking in Q2. But that gives you a flavor of some of the things that we're doing. Again, I give a lot of credit to the operations team for moving quickly and doing a really good job mitigating those costs.

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Operator [29]

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Your next question comes from Jürgen Wagner with MainFirst Bank.

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Jürgen Wagner, MainFirst Bank AG, Research Division - Director [30]

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Actually, a follow-up on the gross margin. Can you quantify the product mix impact on the gross margin? You mentioned Video Collaboration. So how much benefit it was? And on M&A, last time, I think -- or end of last year, we discussed potential Plantronics addition. What can we expect this year with the new CFO?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [31]

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Okay. Well, our new CFO is really a wet blanket on all acquisitions, so expect us to do nothing. I'm kidding. No. Nate's all in on our current approach. We're an organic growth company that uses acquisitions to accelerate or differentiate what we're doing. And Nate, I'll speak for you, Nate, because we've talked about it a lot. He's totally bought into that, and we're always looking at new stuff and potential M&A. And stars have to line up to make them happen. But yes, I think you can expect more M&A. You want to go ahead?

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [32]

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Yes. I think on the product mix, I think I'll refrain from probably getting into too much detail on that. But I would say there's always puts and takes, but that is one where I would expect some continued benefit for us just because, again, I think with some predictability, we expect VC to grow faster.

Another thing this quarter, which was nice to see, obviously, we had good growth in Mobile Speakers and the products that did ship this quarter were higher margin than the same period in the prior year. So that was also a factor, sort of a mix benefit within that category itself.

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Jürgen Wagner, MainFirst Bank AG, Research Division - Director [33]

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And I thought Mobile Speaker would be rather lower gross margin product.

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [34]

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Overall it is. But like I said, just on a year-over-year basis, the products that were strong this quarter were higher margin. So it's still, overall as a category, below the company average, but the products that shipped this quarter and provided some of that growth were on the higher end.

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Jürgen Wagner, MainFirst Bank AG, Research Division - Director [35]

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Okay. And then on M&A, Bracken, did you say smaller acquisitions or you -- did you just say acquisitions are part of your strategy now?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [36]

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Yes. Yes. No. Acquisitions are a part of our strategy. So you can expect us to continue to be pursuing them as we've been in the past, small, medium. And it's not impossible we can do something large. We've talked about before the large stuff is really -- the stars all have to align to make that happen. So -- but small and medium is certainly in the strike zone.

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Operator [37]

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The next question comes from Ananda Baruah with Loop Capital.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [38]

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Congrats on a solid quarter, and yes, Nate, congrats on the appointment. I look forward to working with you. So just to start at a higher level, do you still feel the same for this fiscal year, Bracken, about the key revenue segments? And if you don't one way or another, could you just sort of highlight what we should know about the differences? And then I have a couple of follow-ups. Appreciate it.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [39]

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Okay. Yes. Look, we've got 3 businesses that are big for us. It's Video Collaboration, it's Gaming and it's C&P. And then we've got a growing number of other businesses that are contributors, including the M&A that we've done in the past. So I feel about the same about all of them that I did as we started the year. I think the one that was the most uncertain for us was Gaming because we really didn't know how big the Fortnite effect was. It was really hard to say.

And so now that we've seen a quarter of that, which is probably the strongest year-over-year quarter in terms of a compare, and now we have a better visibility to it. So I would say generally speaking, we feel good about our guidance that we started the year with based on that. When we do the back of the envelope or the spreadsheet exercise, we feel good about that and pretty much the same geography of growth.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [40]

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And would you say -- do you feel that Fortnite is about as you had expected kind of at the start of the year? Or is it different from what you expected one way or another?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [41]

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I'd say it was stronger than expected. I think the Fortnite effect was -- it looked and felt strong at the time. But I think after looking at it over a quarter, it looks and feels very strong there.

The good thing about that is that strength also is probably a pretty good indicator of how many new people came into the Gaming business because of Fortnite and mainly came into headsets. And since we have a big headset business now by virtue of the fact of having both ASTRO and Logitech G in the Gaming business, we made a bet that we were going to emphasize trade-up opportunities off the low end as we did some of our new products. So our Pro headset is a perfect example of that. It's got the Blue VO! CE microphone built in. It's a very -- it's a beautiful design. And so I hope that is going to pay off and we're going to be able to drive some trade-up through the year and into next year.

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [42]

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Ananda, one comment on the headset growth. I went back and looked at the market data, so this is not Logitech specific, but for the market back in the calendar Q4 a year ago. Typically, that market showed a decline of about 40% calendar Q4 to calendar Q1. And a year ago, it actually grew 1% calendar Q4 to calendar Q1. Just to highlight -- so a 41 point swing in typical seasonality in the market in headsets a year ago, just to kind of augment Bracken's comments about the tough compare and really how powerful that headset growth was a year ago in the market.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [43]

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All the context is really helpful. I appreciate it. So just to make sure that I'm accurately understanding what you guys are saying. Bracken, the Fortnite headwind as you start this year was perhaps a bit more pronounced than you originally envisioned it would be, but you're still putting up solid numbers in the non-headset business. And you guys also feel that based on the amount of headsets that were purchased about 12 months ago, there's sort of a proof point there as to the attractiveness of the headset market and sort of the key segments of your Gaming. Is that all accurate?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [44]

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Yes. I think that's a pretty good summary. I think on your last comment, I think we know the headset market is a great market. And so we're bringing out new things into that market. And the really interesting thing is going to be to see if we can upgrade some of those people who came in, that big kind of wave of people who came in, if we can upgrade them to higher-end headsets because a lot of them bought the medium and low end.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [45]

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That's great context. Okay. Okay. Cool. And then a follow-up if I could. Could you just sort of connect some of the dots for us on the interplay between what can be your ongoing OpEx investments and sort of the driving of incremental revenue growth and which -- kind of how that plays into the key segments, just so we can kind of mental math that out for ourselves? And then...

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [46]

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It's a great question, Ananda. Probably not going to be able to go deep enough to satisfy a spreadsheet exercise or a model that would suggest it. But what I would say is if you look, for example, at this quarter, we grew kind of equally, not in absolute value, but in percentage terms, both in R&D and sales and marketing costs. And if you really dug underneath that on the sales and marketing expenses, we're really trying to increase the amount of real marketing spending we're doing at the expense of promotion, as Nate said earlier. And I think that's been a strategy of ours for a while. We're going to keep it up. We sort of started this over in Asia Pacific, and now we're moving it into EMEA and beginning to move it into AMR. So that path feels like the right long-term path for a company that's trying to build sustainable brands and a sustainable business.

On the R&D side, we have really good choices right now and good opportunities to invest in R&D. So we're going to keep doing that. That's more broad-based. But I would say we're certainly doing it in Gaming, we're certainly doing it in PC and in other categories as well. And of course, some of that is we also -- when we do an acquisition, that's an add-on, too.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [47]

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Okay. Got it. And so yes -- no, you've been talking for the last year or so about sort of real marketing versus promotion. So on the SG&A side, it's really that -- is it really that moving globally kind of [with ease]? And then in addition to that, well, it seemed that you guys also are doing sort of some Video Collaboration enterprise hiring. Would those be the big buckets?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [48]

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Yes. Yes. You described it perfectly. That's exactly right.

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Operator [49]

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Your next question comes from Nehal Chokshi with Maxim Group.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [50]

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Congratulations on continuing to deliver on the benefits of the diversification of the business. That's really great.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [51]

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Thank you.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [52]

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On the Gaming side, did I hear you correct that the -- excluding headsets, Gaming was up 20% year-over-year?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [53]

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Yes. Over 20% and had an acceleration versus Q4.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [54]

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Okay. Okay, exactly. And so what percent does the ASTRO and PC Gaming represent overall Gaming in the June quarter?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [55]

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What percentage is ASTRO and PC Gaming? We don't actually break that out. So we -- but a majority is -- I mean the vast majority of it is obviously our PC Gaming business. And ASTRO had a great year for us last year. And now we've added the controller, so it's growing there, too.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [56]

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Right. I guess what I'm trying to get at is that is the installed base of headsets -- active headsets greater than before the Fortnite phenomenon took over?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [57]

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It almost has to be. I mean -- well, it does -- mathematically, it has to be. So yes, it is definitely bigger.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [58]

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Any chance you can give a little bit of quantification how much bigger it might be?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [59]

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No, I'm not even sure we have that. That's a tricky number to get because you actually have to know real user number involved. But you can kind of figure that it has to be because so many new gamers came into it. And that's why, as I mentioned earlier, we see upgrade potential now. Whether that upgrade potential happens this year or next year, it will happen, I think, because as you get into your first headset -- I have experienced this game with one of our Pro headsets with somebody yesterday. And the difference in the Blue VO! CE, for example, is just the design is significant. So I think we will see upgrades, but I don't -- we don't have the exact number of installed base.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [60]

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Understood. Understood. And then this slide in the presentation deck that shows the sell-through versus the U.S. dollar as is, can you just walk me through again why there was such a big differential between the EMEA year-over-year of 12% and 5% sell-through?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [61]

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Yes.

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [62]

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Yes. Sure. Let me try again. So the U.S. dollar sell-in growth of 12% versus the sell-through growth of 5%, those are both U.S. dollar. And the majority of that spread is caused by again this strategy of moving from transactional promotional spend down into OpEx. And the sell-through numbers are reported really on a gross basis versus the revenue sell-in numbers are on a net basis. And so the reduction in that promo spend means that the gross revenue or the sell-through translates into a higher net revenue number just because there's really less discounting, which is the difference -- the primary difference between the gross and the net.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [63]

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Did you follow that?

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [64]

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Does that make sense?

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [65]

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I guess the headlines I see here...

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [66]

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Those are drivers actually for the last couple of quarters, yes.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [67]

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Yes. The headline I see here is channel inventory build. But you're telling me no, that is not the case because the differential is no discounting actually. Is that correct, no promotional activity?

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [68]

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That's right. That's right.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [69]

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You got it. We're reducing promotional activity, which is coming off the top line, so it's not a channel inventory build. The channel inventory is relatively stable quarter-over-quarter -- or year-over-year.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [70]

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Understood. Okay. And then that reduced promotional activities, is that across all product sets? Or is it focused on certain product sets?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [71]

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It's focused on certain product sets, but it's fairly broad. It's mostly our consumer business. The B2B part of it would look stable, but all the consumer part, which is most of our businesses generally. And we're doing -- and that is more in Europe than elsewhere.

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Operator [72]

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Your next question comes from Michael Foeth with Vontobel.

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Michael Foeth, Bank Vontobel AG, Research Division - Head of Industrials Team [73]

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So 2 questions from my side. And the first one is you talked about the mitigation measures against the China tariffs and production shifts. My question would be what specifically have you shifted in terms of production or changed in terms of production? And are there more plans to do so? And what sort of costs and investments are attached to that, that will impact financials in the next quarters?

And the second question would be the -- in Video Collaboration. You mentioned the growth supported by product for larger conference rooms. My question would be if there is any change in the dynamics for small rooms that you are seeing. And -- because to me, the small room opportunity seems to be larger market. And my question is if there are any changes in those dynamics.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [74]

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Okay. Yes, I'll start with that one, and then I'll come back to the other one, and then Nate can jump in anywhere he likes. From -- no, we don't see any difference in the huddle room versus medium and large conference rooms. We just weren't in the medium and large conference rooms very much so we've talked about that more. But the huddle rooms is obviously our sweet spot, it's where we started, and we don't see a change in that. It's a great opportunity for us worldwide. There'll be -- the growth of small huddle rooms will be much bigger than the growth of large conference rooms. So it's still super key for us in that we don't see a big change.

In terms of shifts in manufacturing, without getting really specific on individual categories, et cetera, we've got -- we now have manufacturing in more countries in Asia than we ever have since Logitech started. So we're in Malaysia, in Vietnam, in Thailand, and we're even looking at a few other countries. But I don't want to exaggerate it either. I mean our factory is still quite busy. The factory in China has a great -- is superefficient. And obviously, the U.S. is just -- it's the only effective country here. So we have a lot of manufacturing still happening in China. We will have a lot of manufacturing happening in China. We love that factory. And so we're just spreading out a little bit.

By the way, you asked about cost. Actually, relatively low cost to move these. We're used to doing this. So we don't -- there aren't usually huge tooling costs or anything. So you aren't going to see a massive lift in our fixed asset investments or costs for the move. They're going to -- they're really feathered in pretty well into our gross margin.

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Operator [75]

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(Operator Instructions) And we have a question from Reto Huber with Research Partners.

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Reto Huber, Research Partners AG - Senior Analyst [76]

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I have 2. The first one was wondering what was the contribution of Blue Mic in Q1. And then the second one, do you expect the Mobile Speaker business in Asia Pacific to flatten out in Q2 already? Or will it happen rather later?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [77]

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You want to take the Blue Microphone, what's the contribution?

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Nathan Olmstead, Logitech International S.A. - CFO & Principal Accounting Officer [78]

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What was the contribution? So it was about 2 points at the company level to our overall growth. So Blue was about 2 points of total company growth.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [79]

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Yes. And then the difference within it, over 20%, over 20%. In mobile, you asked when is -- the Mobile Speaker business was up 51% this quarter. When do we expect that to start to moderate? Next quarter. It will absolutely not be anything like that because last year, in Q2, we launched the latest versions of BOOM and MEGABOOM, which when we launch later versions, usually, there's a big sell-in activity that happens. So I would expect it absolutely to be nothing like that number and probably pretty strongly negative.

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Reto Huber, Research Partners AG - Senior Analyst [80]

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I was actually under the impression that in Asia Pacific, your Mobile Speakers are declining, right?

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [81]

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Yes. Mobile Speakers are declining kind of modestly everywhere, not every country but sort of -- I'll say I think the category is probably down about 5 -- between 5% and 10%. Asia Pacific is, for us, too. We have a bigger business in Asia Pacific relative to the size. It's mostly Australia and New Zealand, but it's also a good business. So I think the Mobile Speaker business in Australia and New Zealand will continue to be pretty good. It may have wobbles, but I think it's such an outdoor culture down there. And it's pretty seasonal, but it's a great business. We have a very large market share. I think we have 40% market share down there.

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Operator [82]

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(Operator Instructions) And there appears to be no further questions at this time. I will turn the call back over to Mr. Darrell for closing remarks.

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Bracken P. Darrell, Logitech International S.A. - President, CEO & Executive Director [83]

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Well, as I always say to our team, the key to a good year is a good first quarter, and we just had a good first quarter. So now we need to turn it into a good year.

So thanks a lot for such an engaged call. I want to again congratulate my partner in crime, Nate, and all of the rest of our team who I think did a good job this quarter. And we'll see you guys next quarter.

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Operator [84]

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