Logitech International S.A. (LOGI) Q1 2018 Earnings Report, Transcript and Summary

Good morning, my name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Logitech First Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-session. [Operator Instructions] Thank you. Ben Lu, you may begin your conference.

Thank you, Chris. Welcome to the Logitech conference call to discuss the company’s financial results for the first quarter of fiscal year 2018. The press release, our prepared remarks and slides, as well as their live webcast of this call are available online at the Investor Relations page of our website, logitech.com. As noted in our press release, we published our prepared remarks on our website in advance of this call. During the course of this call, we may make forward-looking statements, including forward-looking statements with respect to future operating results that are being 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 obligations 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 both a GAAP and a non-GAAP basis. 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 and should be used only in conjunction with Logitech’s consolidated financial statements prepared in accordance with GAAP. Our press release and slide provide a reconciliation between GAAP and non-GAAP numbers and are posted on our Investor Relations website. We encourage listeners to review these items. Unless noted otherwise, comparison between periods are year-over-year and in constant currency and all reported results and updated outlook are focused on continuing operations. This call is being recorded and will be available for replay on the Investor Relations page of the Logitech website. Joining us today from Lausanne are Bracken Darrell, President and Chief Executive Officer; and Vincent Palette, Chief Financial Officer. I’ll turn the call over to Bracken.

Thanks Ben. And thanks to all of you for joining us. We started the year strong. Net sales grew 13% and profit grew 14%. All three regions grew double-digits for the second consecutive quarter in the second time since I have been at Logitech in five years. We expanded gross margins by 1.4 points and invested that back into growing the capabilities that will enable long-term growth. By now, I think all of you know, our underlying vision is to create a multi-category, multi-brand company. So, investing and excelling in those five capabilities, operations, design, engineering, go-to-market, and marketing are absolutely key realizing this vision. For a product launch perspective, it was a really exciting quarter. Let’s start with gaming. Here’s an insight about competitive gamers. Even though, productivity users with mice, preferred wireless mice. Gamers preferred wired mice for two reasons. First, the battery in the wired mouse could die in the middle of the game. Our wireless mouse could die in the middle of the game, while our wired mouse obviously is always plugged in. Second, the wireless mouse has greater latency than a wired mouse. Latency in this case is that delay you see, when you move the mouse and there’s a slight lag between your hand movement and the movement on the screen, especially a high speed. These two problems are enormous for competitive gamers. The possibility of a dead battery is a potential catastrophic issue mid game. And the latency problems, in some ways are even worse, because there are an ongoing drag on competitiveness. And it’s not just an insight applicable to eSports athletes, who make their money gaming. This is Nike’s best basket ball shoes are worn by casual players. Competitive equipment is not just amended by the pros, but also by serious gamers and even casual gamers. We’ve been working for a few years to solve both problems. We’ve made progress. With that, it’s an understatement. We’ve solve both problems. And actually made wireless gaming mice to superior game to wired gaming mice. And E3 in Los Angeles last month, we announced a breakthrough, continuous charging wirelessly, that’s never been done before by anyone. Now you have a mouse pad, which most gamers use anyway that wirelessly charges your gaming mouse as you play. So you have the untethered freedom of wireless mouse with infinite battery life. As for the latency, we also fixed out with superb engineering creativity. We unlock that with our light speed technology. And now our light speed wireless gaming mice are faster in latency than many of our competitors most popular wired gaming mice. So there is no reason, not to go wireless in gaming. For the next innovation, we told you we were working on enhancing our software capability and we’re doing it broadly. As an example, we’re even bringing that to the mouse. Logitech flow is the new free download that allows you to unknownly, seamlessly control up to three computers with a single mouse, which have been even cut and paste text, images and documents among those three computers. You know longer have to mail into yourself or go reopen them into cloud program. As you can drop and drag across computers. Imagine simply, copying a file for a PC and then pasting it into a Mac on to fly instantly, but only with the cursor moving from screen to screen seamlessly. This is another first of its guidance. In video collaboration, we launched a special new conference cam, Logitech MeetUp. Logitech MeetUp is design specifically for small conference rooms and huddle rooms. Huddle rooms are the fastest growing segment of the video collaboration market. For additional conference cam was a terrible for huddle rooms. The screen and the camera are so close, and if you have two or three people in room with normal cameras with their limited viewing range, we actually lose one or two people or their leaning in to appear on the screen. MeetUp has a really wide field of view, which captures everybody in the room. It’s all in one design also put super high quality video and super high quality audio in one unit eliminating annoying cables from the table. At a small fraction of the cost of normal video conference camera in a system, it’s an amazing way to expand video anywhere. I’m not going to stop talking about products that mentioning the latest version of our security camera, Circle 2. We took our original Circle camera and made it tremendously better and even more versatile. Not only the Circle 2 now after the widest field of view, a stunning 180 degrees, but we’re also offering amounts in accessories that make it multi-purpose. They can take the same camera, the exact same camera and now you can go indoors or outdoors in the rain wired, battery powered, all plugged directly into the socket, attached to a window and even more. It’s simply awesome. And we just started to selling this past weekend. These are just a few of the products we announced in the past few weeks and trust me we have a lot more to come. I’m super excited about our pipeline. Now let’s take a look at the progress in each category. Let me start with gaming again. Sales in our gaming category grew very strong 40%. All three regions posted healthy double-digits momentum in the quarter. And of course the latest news is the recent announcement that we’ve agreed to acquire ASTRO Gaming. We’ve demonstrated our ability to execute a leadership position in the PC game and peripherals industry and we still have so much more opportunity there. Now with the acquisition of ASTRO, expected to close in early August, we’re excited to be able to expand our leadership into an adjacent category Console Gaming, the Console Gaming Headsets in particular. ASTRO leads the high end of the Console Headset market and it’s a powerful brand built by powerful team. I’m excited to have them join Logitech. We see significant opportunities to leverage our global go-to-market and operations capabilities with ASTRO’s award winning headsets to further deep in our presence in the PC and Console Gaining markets. Video collaboration sales increased 51%. The opportunities in this nascent but growing market are simply tremendous. As we partnered with leading cloud based video collaboration solutions providers with our low cost hardware products to video enables 1000 of huddle rooms and conference rooms. Our mobile speaker sales grew 10% with particularly strength from Asia Pacific. The newest edition to our Ultimate Ears family the $99 WONDERBOOM with a powerful contributor to the growth. Audio PC and wearable sales fell 10% in the quarter. We’re in the early days, the wireless earphone market and we are crafting the right distribution product portfolio for the years ahead. You’ll see some very interesting thing soon as we make changes to play in one of our hardest market today, stay tuned. We continue to have renewed growth from our Smart Home business with sales up 49%. The interest in the Harmony Hub has been strong as it’s really the premiere way to use voice to control the full range of devices in an entertainment room. Our decade long track record of connecting new and old devices by a scroll – source database of almost 300,000 devices making it – makes using a personal voice assistant in the TV room easy. Our PC peripheral category continue to grow with sales up 3% this quarter. Our stable PC installed base with our strong – along with our strong innovation has enabled this category remain healthy. Pointing devices grew 6%, while Keyboards & Combos were flat. And our new baby spotlight presentation remote had a strong performance in the quarter, but our mice products were also up. PC Webcams grew 3% in Q1, the sixth consecutive quarter growth. You’ll recall that Webcams have been driven by the growth of personal broadcasting from gaming to social media to video blogging. Sales in our tablet and other accessories category rose a powerful 71%. Even though, so we compare the business fell 26% last year, this was a strong performance. It’s too early to call that a growth of trend, but I do think you can see that our approach to innovation and talent which is working. Our newest Slim Combo for the iPad Pro is after a great start, and we’re also seeing strong sales educational institutions for the first time with our new Rugged Combo case and keyboard for the 9.7-inch iPad. Looking ahead, we continue to expect sales in this category to attract the overall performance to the broader tablet market. Now I’ll pass the call over to Vincent for some financial performance and detail.

Thanks, Bracken. We sales up 13%, all regions growing double-digit a few get takeaways being well ahead of our expectations, and operating profit up by 14%, we delivered another strong quarter. As I said our team, a strong start is very important, but it is only the first quarter of the year. So we’ll stay very focused on execution ahead of a heavy investment quarter, so that’s we can deliver a great holiday season and another great year. Our Q1 non-GAAP gross margin increased 140 basis points to 37%. We continue to be very diligent in managing our cost structure and the contribution margin of every product line, so that’s we can reinvest our gross profit dollars into targeted investments both for their short-term and for the long-term. And as you can see, we’re investing sales and marketing and R&D, which increased 22% and 8% respectively. As examples of our investment, we are adding sales capacity in video collaboration around the world, we’re expanding our online marketing capabilities and we are increasing funds for more seat project. G&A spending has remains flat in dollars, absorbing our growth through productivity gains. Overall, our non-GAAP operating expense rose 15% to $153 million in the quarter. Our cash flow from operations was roughly breakeven in the quarter, as working capital increases ahead of the holidays. This is similar to the seasonal patterns we saw in fiscal year 2016, when working capital was consumed in the first half to support our growth and the product roadmap with cash flows from operations queue towards the second half. Similar to prior year, we still continue to expect our full year cash flow from operations to be approximately one time our non-GAAP operating income. And with that, I will turn it back to Bracken.

Thank you, Vincent. Our momentum from fiscal year 2017 continues in the fiscal year 2018. We launched the strong tranche of new product in the first quarter and we have even more exciting products to come throughout the year across our product categories. Our strong first quarter and the pending acquisition of ASTRO put us in the position to raise our fiscal year 2018 guidance. The sales growth up 10% to 12% in constant currency, and a non-GAAP operating income of $260 million and $270 million. Vincent and I are now ready to take your questions. Operator, please queue up the questions.

[Operator Instructions] And your first question comes from Ananda Baruah with Loop Capital. Please go ahead.

Hi, Ananda.

Hey, Bracken. Hey guys. Vincent...

Hey…

Hey, congrats and thanks for taking the question. Just a quick one – quick one for me, in the raised guidance for 2018, can you confirm that ASTRO is still expected to be about 200 basis points of contribution to that. And then if that’s accurate, it sort of suggests I think your prior guidance just high single-digit. So it sort of suggests there, I don’t know order of magnitude the 100 basis points to 200 basis points of incremental raise and that guidance raise. And you spoke broadly to the momentum Bracken, but is there anything I guess on a more specific level you could speak to that having you raise the sort of the non-ASTRO portion of the portfolio. And then it’s pretty early in the year for you guys to be raising guidance relative to how you typically like to provide this visibility. So is it a stretch to think that that the momentum that you’re seeing that’s giving you sort of satisfaction to do that, feels greater at this point than it has in prior fiscal years. Thanks a lot that’s it for me.

Let me take the second two and I’ll let Vincent take first question on ASTRO. Yes, in terms of the momentum, what specifically. I would say we – it’s been a while since we’ve seen such strong growth from some of our most profitable categories and really across the board Gaming, Video Collaboration, Harmony, we just across the board had very strong growth rates. I don’t necessarily expect all those to continue quarter-after-quarter, but between that and the strong gross margin that gave us lot of confidence to go ahead and rise at this point. In terms of the – the timing of the raise, you asked, how would I compare this with past years, I would say yes, I mean it’s a little hard to remember back to how we felt a year ago and the year before that and year before that, but I would say I feel really, really good about where we are at this point after the first quarter. We came into the year spending, if we have a good strong start it usually dictates the strong finish. And I think we have a good strong start, so it’s up to us the finish.

This is Vincent. So yes, ASTRO is include and its about two points on the top line slightly dilutive on the bottom line as we invest to build up that business internationally. Normally after Q1, we wouldn’t raise, but as you know our guidance dated from AID March and then we fully digested Q4 look at the momentum in Q1 got Baird Conference in our Walmart moving forward. And since we integrated ASTRO with to began a full look at the bottom up and felt that’s we were in a position to raise where we are. I wouldn’t expect every Q1, every year to be a raise of course, but that’s where we stand today much more confident to the year than we were four or five months ago.

That’s great. And then just one quick follow-up for me in that regard. You remind me Vincent, so ASTRO is dilutive near next 12 months, you raised the op profit guidance and as well despite dilution. So Bracken, your point about gross margins, it can just what specific about it – about the portfolio is having sort of the gross margin number one beat for the June Q, but the number two having enough momentum such that you feel like you can raise the up profit guide, even though you’re observing dilution from ASTRO.

Well, I just – I don’t think there’s really a specific. I mean, we’ve made really strong cost savings that we started last year that is carrying over into this year and we’re executing our cost savings programs this year, and we expect to do that throughout the year. And then on top of that, we’re having really strong growth in a lot of categories and we do have a mixture of gross margins across those and that shouldn’t hurt from a mix standpoint, let’s just say that. So overall, we look at Q1, we felt like we’re just really in a strong position to go ahead and rise.

That’s great. Thanks a lot guys. Congrats.

Thanks, Ananda.

Your next question comes from Asiya Merchant of Citigroup. Your line is open.

Hi everyone. And again congratulations on the quarter, strong result.

Thank you.

Just want to talk a little bit about your Audio PC & Wearables that you’re talking about realigning your portfolio, Jaybird underwhelmed little bit. So can you maybe you can provide some more insight into that and how we should be looking at this category and overall just along with your music speakers any competitive dynamics you can talk about in that category. And what’s your expectations are expects little bit – aligned with what you had at your Analyst Day for the music category growing this year.

Sure. Let me take both also. Let me start with the category for Bluetooth earphones. The credit category for Bluetooth earphones is really strong, I mean it’s really taken off and we expect that to be the beginning of a very long-term trend. So now we got in this category, because we’re excited about being able to carve out a niche within that and have a really strong performance in it. Now we would love to be able to just bringing in turn that on immediately have the same kind of growth rates or better growth rates in the category, but realistically as we gotten into this like every category, we’ve got to learn it. And we are learning that – we need to really adjust our portfolio to be in the right position within the category for long-term sustainable growth and we’ve got to do the same thing in our go-to-market. We’ve been – I’ve been done this in over five years and Vincent and I have [indiscernible] and every time we enter new category, we have to learn it, we have iterated it and then we have to execute. And I’d say we’ve been iterating our way through the first year of the business and I think you’re going to see some really cool things come out from us over the next year quarter two and three. I’m really optimistic about where we are. In terms of Bluetooth speakers, I think it’s very much inline with – the category itself very much inline with what we expected. It’s a great category, it’s a big category super global and we’re playing it all over the world, I mean we still have opportunities everywhere. It’s always can be competitive it’s one of most competitive category as we’re in and we’ve really competed well there from pure innovation standpoint. And we’re leverage a global go-to-market. And that’s the way we’re playing going forward and I’m optimistic we can continue to do well. That’s very competitive market.

Okay. And then one about your sales and marketing investments that we have going up. I mean, is there something that you can point out there different distribution format, storefront that’s you going into? Is there anything there that we can look forward and see how that materializes and improving your operating income at the year progresses?

Yes, I’ll give you a couple of examples and then Vincent you can jump into. There’s a series of things within that. As we expand into more categories we have different kind of plays we need to make. One example that I think Vincent mentioned in the opening we just add was, and Video Collaboration for example, one of the thing – just like in Jaybird, we’re iterating to find the right mix we have the form that correct for sustainable growth. One of the pieces of the formula that we discovered we needed and we discovered this couple of years ago was direct enterprise sales in some cases. And so we are adding direct enterprise sales people to support our – the rest of the distribution chain. And that is highly effective. And so that’s one of the places we’re obviously adding. There it’s not the only place, we are adding another places too, but that’s one of the key one. And in terms of looking at that how sustains our profitability, these – all these marketing investments – marketing sales investments are really one of our principles is I’m – and I have said this, you know, probably on every call since I have been here. I’m not here for the short-term, so I’m not interested in the stuff of going to drive a quarter or two or a year. So everything we’re doing is really sort of those up for a long-term sustainable growth path and that’s exactly what we’re doing in each piece of what we’re investing here.

Okay. Thank you.

Thank you.

Your next question comes from Joern Iffert of UBS. Your line is open.

Hi, Joren.

Hi, Joren.

Thanks for taking my question. The first one would be, for Bracken please. And Bracken you state that the couple of times in the last conference calls and last – I guess just at the beginning. Can you please give us some more clarity here and what is really happening maybe then the next 12 months? How many new designers you’re hiring? How many direct sales guys you’re hiring in Video Collaboration? And what are the new areas you’re working on the product portfolio? What is the new product introduced right in 2018 versus 2017 [indiscernible] would be appreciated. Second question and then please to Vincent, also the third one. And on the FX hedging, can you please provide us with some clarity on what rates you’re roughly hedged right now and when the Euro benefits should comes through to the P&L? And then the third question on gross profit margin, if you split the improvement on the 140 basis points into designed cost mix and scale? This would be appreciated. And the last question stuff to double check, the momentum running into Q2, is it similar to Q1 or are you observing any minor changes in the end markets? Thanks very much.

Okay. Let me take first and I’ll let Vincent too. So my reference to just the beginning – our reference just at the beginning is a very long-term reference. I really think about this is being in a position to be a company. One of the companies that creates multi-category, multi-brand format that leveraging today’s technology. And so I think there will probably be more than us. But we’re very fixated on doing that and there are lots and lots of opportunities to do that. You mentioned a couple of categories that we’re in the – or the tools that go into a couple of the categories we are in people in one case, so Video Collaboration. But it’s a much, much longer point than that. I mean we’re constantly looking at we have a whole portfolio of what are new category you should be entering at what time frame should we do we your point on designers or building small teams to do strength and then teams to figure out how to enter them and where to enter them and some times we are showing those down and keeping always going. So it’s a very dynamic process. In terms of specificity on exactly how many people are adding over the next year are we adding? We don’t disclose that. What I would say is and you asked about number of products we might be selling this year versus next. This is the whole principle here on is really we’re building a long-term growth platform of multi-brand, multi-category. So it’s not about any quarter or 12 month period. And so you’ll see us building this capability and systematically entering new categories. And I hope we’re generally being successful in each category we enter. So that’s really our game plan. As we do that, we’ll unfold what those categories are and how we’re supporting them just as we are in Video Collaboration.

So I will take the currency hedging question. Just let me focus for illustration on the Euro USD exchange rate, which is the major driver in our P&L. In the last quarter that rates move from 106 in April to an average 108 in May and 112 in June, the average for the quarter is 110 and FY2017 average rate is also 110. As you know from a hedging perspective, we hedged three months on the four month rolling forecast kind of view. So even though there is a little bit of an uptick, we would be hedge around at 110 average for the next quarter. And our guidance also assume average rate of FY2017 within a few points. So those are the assumptions queues and how we drive the business from a currency perspective. Gross margin improvement your third question 140 basis point, 37% somewhat, the 37% is somewhat in line to how we moved into the high end of the gross margin target as you know through last year as you explain last year, most of that improvement is coming from cost savings, very little impact of mix and then partially offset by increased our promotion as we see, the reinvest the portion of the gross profit generated into short-term demand. From a cost saving perspective it comes from both design form cost and scale both of them playing to the over bucket of cost savings. Momentum we don’t guide by quarter but I would say, if you’re modeling by quarter, Q3 is definitely our big quarter and what we are shooting for is as I mentioned in my script Q2 is an investment quarter where we really prepare for a great holiday season.

Okay. Thanks very much. And maybe the last question from me to follow-up on the financials, I mean with market and selling expense going up 22%. Was this all already exciting cash outflow? Or is that something built provisions and cash outflow and marketing campaign with only happened in Q2 to Q3?

Yes, most of these somewhat on the cash outflow would happen in June maybe outflow in July but it seems part of the cash flow of the quarter generally speaking.

Yes there is nothing extraordinary.

No, there was no [indiscernible] that two question beyond.

Thanks very much.

Thanks, Joern.

Your next question comes from Chris Gretler of Credit Suisse. Your line is open.

Hello, Chris.

Hey, Chris.

Hi. Thank you. Hi Bracken, hi Vincent. I have two questions, the first relates to in order the bonus effect on your cash flow could you speak about how substantial that impact was? And the second relates to your gross margin I mean you are now tracking already the top end of your longer-term guidance in Q1, which is seasonally typically a smaller quarter. What actually would trigger you to review this longer-term guidance and kind of note given some – maybe some structural change in your product portfolio?

Yes. Let me answer the first question quickly. So on the bonus side we put in our prepared remarks is that the Q1 cash flow from operations was impacted by a change in our bonus structure up to FY2017 we were paying our bonus semiannually. So the first half of the year bonus was baked within the year. Last year we changed that and make it annual bonus, so in FY2017 there was no mid-year payment and all of the payment on a full year basis happen here in Q1, 2018. That affect those compounded by the fact that FY2017, as all of you remember, was an extraordinary year in terms of beating of own expectation and our plan. So we paid above the 100% level of bonus. If you go into the current liabilities of the balance sheet you could see that that decreased by over $20 million the impact on the cash flow is over $20 million on a year-over-year basis for [indiscernible] compare. On the gross margin side Bracken will also answer, we are definitely trying to drive gross margin as high as possible structurally both by creating great value and so price premium and the great value for the consumer but also by carrying above operation and that goes from efficiency of our promotion all the way to product cost savings as you know. And the reason we’re doing that is because we definitely want to invest in all of our capabilities and create the capacity to invest in our five key capabilities.

Yes, what would trigger us to re-look at that top end or the range on the gross margin I would say if we didn’t think we had that kind of growth opportunities that have that we do today we would re-think it. But I think our job is to make sure that we have so many opportunities ahead of us that that investors would think we are crazy to try to get more profit at the expense of stronger growth. And so our whole mission here is to have strong profitable growth options ahead of us.There’s substantial and we just keep going even if we did have our gross margin rise above 37%.

Okay, thanks enough. Keep it up, great results.

Thanks, Chris.

Thank you.

Your next question comes from Andrew Humphrey of Morgan Stanley. Your line is open.

Hi, Andrew.

Hi. Hi, there. Thanks for taking my questions. Firstly maybe on Jabber…

Sure…

Understand – how much do you think there is down to you learning the business because you’re saying getting some of the channels and maybe specific channel partners and how much is I guess a kind of conscious decision to move around the product portfolio? And I guess how long do you expect that transition to take? And Vincent you mentioned in the comment that the coming quarter is going to be an investment quarter ahead of stronger performance in Q3 as you would normally expect from a seasonal point of view. Would you expect profitability this year to be more heavily weighted to Q3 than usual or is that what we should read into that remark or am I reading too much into it?

Okay, I will jump into first part. I would say it’s hard for me to parse out which is which, but I would say we’ve always – everything we’ve entered into new category, we’ve had things to learn and we’ve adjusted both the go-to market, the distribution emphasis and product portfolio for that. And it’s really hard for me to say how much of this is us learning and how much of this is us adjusting because we’re doing at the same time. In terms of how long it would take to us like really where we need to be. I think it’s probably a few quarters. I feel very good about where we are and I am super excited about the portfolio that we’re developing. So I just say stay tuned. I think you’ll see some good things.

And with regard to the seasonality as you know as we drive growth, right, we always have investment in inventory, in OpEx to prepare in the field and marketing front end. And then of course in margin as we transition products from old to new, I would say that this year like other years but not like FY 2017 we are lot more front loaded from an investment perspective and of course it will become more apparent as you know and see the years unfold and we’ll continue to launch new products. But, yes, it will be – investment will be more front loading in Q2 than FY 2017.

Yeah.

Okay, very helpful. Thank you.

Thanks, Andrew.

Your next question comes from Paul Coster of JPMorgan. Your line is open.

Hello.

Hi, this is – hey, hey, Bracken. Hi. This is Paul Chung on for Coster. Thanks for taking my question.

Great, it’s pretty consistent. We can always say Paul and we know it will be one of the other.

Yeah, it will be one of us, right. So on gaming, its may now become your most important category and may even become your biggest segment by fiscal year 2019 ASTRO. Do you see other opportunistic acquisitions or new product introductions possibly of your headset? And then on ASTRO, can you give us an insight into the thinking behind the buy versus make decision? And then finally, Vincent, how does the margin profile in gaming stands relative to keyboards and desktops and does that change every time? Thank you.

Great. In terms of opportunistic acquisitions, actually I am probably getting – missing words a little bit, but I would say that we would never do an opportunistic acquisition. It would always be a strategic one. And this was very strategic for us because we felt like we really had an opportunity to play in the bigger side – bigger part of the headset business for gaming and we really didn’t have any real play in at all. And that leads right into your question make versus buy and ASTRO. And obviously, we could have taken our existing brand and brought it over. What we saw was a wonderful opportunity to buy the top premium brand in the category. You had 80% of top of category and that just doesn’t come around very often. And they have always established a very strong brand in the console eSports space, which is important to us because we’re really dedicated to being a key player in the eSports peripheral space. So just you know really super opportunity. I mean this acquisition we worked on for quite a while because we were really dedicated to getting it done. In terms of other spaces within gaming that we think there might be VR and AR and other thing, we absolutely think they are out there. There’s been no secret that we’ve been working on – we have a seat called – that we call VR and AR, it’s not just gaming, but I don’t know exactly when that will come. You will have to wait and see and in the meantime we have so much opportunity in the places we’re in now in gaming that we’re super excited about where we are.

And then your last question on gross margin as you know as we share that idea, gaming is sitting at around the corporate average gross margin and ASTRO is fairly inline to that over business – the nano business structure.

By the way I will back and just…

Okay, thank you.

Paul I would reply or respond to one thing is that I am not taking and issue it today. I think gaming is really important business to us. It has been – almost from the beginning it’s been a great growth driver and it will be a great growth driver for us. Well, we have so many of that. I wouldn’t say that it’s going to be the most or one of even – I think we’ve got a very distributed portfolio of growth opportunities now. One of the level of companies really never had before and I suspect that will get richer and richer over time. So we’re super excited about gaming, but we have lots of other opportunities out there to and we’re excited about the business as well.

Thank you very much.

Thank you, Paul. Say hi to Paul.

Your next question comes from Tavis McCourt of Raymond James. Your line is open.

Hey, Tavis.

Hey, Tavis.

Hey, thanks for squeezing me in. A couple of details here and then nice start of the year. So I had in my notes previously that the minimal circle revenues previously have been in video, but I am imagining from your commentary those are going to be in the home segment. Is that right?

Yeah, that’s correct. It was very minimum and material as we had shared and we relaunched now or launch the Circle 2, we’ll ship in July. We will put in business Smart Home category.

Yeah, exactly, just started shipping in July.

Just started shipping in July.

Yeah, okay.

Got it. And then as I look through your slide show, on your slides on gross margin, it has a footnote that in Q4 there was a $14 million benefit or so from a change to a breakage model in EMEA. I don’t recall that from last quarter. Can you remind us what that was and is that non-recurring?

Yeah, I would invite you to go and readout 10-K that was filed at the end of May and there we will develop the implementation from an accounting perspective of a breakage model on our promotion in Europe, which, you know, first time implementation of that breakage created a $14 million adjustment.

Got it. And then, Vincent, you mentioned kind of Q2 being an investment quarter a couple of times. If I look at kind of the full-year guidance at this point from an operating margin basis, it looks like it’s recently flattish. Would you expect year-over-year operating margins in Q2 to be slightly down and then some operating leverage for the back half of the year? Is that how we should think about the how you expect the year to play out at this point?

Yeah, correct. As said every year is unique and last year was a lot more smoother through the year. FY 2016 was the reverse first half, investment second half a return operating leverage. We would be closer to 16 although every year is unique of course.

But I will say, I mean, I think our ideal year would be to be a little more and front loaded in our new product launches in our investment activities because that’s just suffer Q3.

Yeah.

You’re just right, better model than we’ve had in the past, but we’ve now got to deliver it.

Okay, got it. And then one product question for you Bracken on up the video conferencing segment, the meet up launch. So I think that’s a higher price point than the ConferenceCam was. There may be some kind of bundled offering in the conference – ConferenceCams. But, I guess, what is your sense on – what’s the right price point for that category? When do you get kind of too much into the higher-end Cisco, Polycom competitive dynamic first versus really designing specifically for the whole rooms?

Well, you know, it’s interesting. We already have a pretty wide range of price points. This one actually – we have – our price points run well over $1000 up into $1500 range where you can buy a whole array of things for almost a board room sized room now, I would say a board room sized room. This one is actually targeted about 899 in the U.S. or 799 in the U.S. So it really is for a whole room. I think this is completely reasonable price. So we always say it’s a cost of two or three chairs in your office and you can video enable a room and you can save that in one slide or one of your teams’ slides somewhere they didn’t have to go to. So it’s absolutely a good value. And I think from a competitive standpoint it’s in a really, really good slot. So I don’t know, yes, I think, we’ve got a lot of room on the portfolio for ConferenceCams, I don’t think we really build it out completely. But this is one is a terrific product, it’s an all-in-one product and it really is – you can attach it to the wall, attach it to a TV and you don’t need to have the core drawing of the table. I’m using it in the whole room right behind me now and it’s in the acoustic term amazing.

Yes looks very well conceived. To follow-up on that on the distribution model there, can you remind us, so historically have you sold through traditional enterprise channels, and distributors, and resellers or is this kind of the growing of an enterprise sales force the beginnings of that, kind of how far along that journey are you?

Well, we have always sold through that since we started this business up three-and-a-half years ago and we still are. We’re just augmenting it with direct selling to some of the larger enterprises so that we can get the story right directly to them, because a lot these distributors we’re working with are carrying big bags, you know they’ve got of other things for themselves. So this a way for us to supplement. And I don’t want to preempt anything, I would say this is a very smart compliment to the way we’re going to market in this category and it seems to really work.

Great thanks and great start to the year.

Thanks a lot. Thanks, Tavis.

Your next question comes from Michael Foale of Bank of Vontobel. Your line is open.

Hi Michael.

Michael hi.

Yes hi Bracken and hi Vincent. I would like to come back to the FX situation. At the time when FX went in the other direction obviously it was a big topic and it put a drag on your margins. Now my question is what – can you update us on the sensitivity of your operating margin to the FX rate. And if you’re guiding or if you basically are planning with one ten and we’re now I think one sixteen or so that alone should be enough to get your operating profit up by $10 million. So is that part of the confidence you mentioned when increasing your guidance earlier in the year, I mean that’s basically already achieved just with FX. That would be my first question if you can elaborate on that? And then the second question would be regarding China if you can explain the dynamics you’re seeing in China and what sort of specifically is driving the strong growth there, I think, was a record quarter again if you can go into more detail there? Thank you.

Yes Michael I will quickly do FX Bracken will take China. So on FX if you remember FY’15 right, when the euro USD depreciated 15%, 20% we lost about three points of margin we see it would take about 18 months to recover through price actions, and pricing, et cetera. And with this recover as you know. When we plan the year, we initially assume average currency rate to be on average equal to FY’17, right. We don’t try to forecast currency, we plan at that level and within a few points we know how to manage the different levers in our P&L. It goes your thing it started one zero six, three months later we are at one twelfth in June one sixteen today. It does give us a confidence that FY’17 average is still at play I would say. We’re not counting per se on currency just to raise the guidance, I think, it’s a true operational strength but of course it’s back in our mind that currency has not collapsed and therefore our company. If we see upside from currency, frankly, we have plenty of investment plan as well and we’ll always balance profit growth with investment for the long-term.

Yes and the answer for your China question, we have – this is – we’ve had a string of quarters now where China has had very strong growth and it’s driven – it’s actually very broad-based, broad in almost every conceivable way in China. Including the fact that a lot of this growth, we’re seeing very strong growth in gaming, very strong growth in video collaboration, good start even in Jaybird and some of that. So really it’s a very broad based story. We’ve got a good team, executing very well in China and I’m super optimistic. In fact we’re now building – we’re building a group to do products in China for China. We started this back a year-and-a-half ago we continue down that path. So we’re big optimist about China. We’re definitely not one of the companies that where we think we’ll pull out if it’s not worth it. We’re pouring in and we’re going after a lot more, we think there’s more opportunity there than probably anywhere else in the world.

Excellent thank you.

Thank you.

Thanks Michael.

[Operator Instructions] Your next question comes from Andreas Mueller of ZKB. Your line is open.

Hi Andreas.

Hi Andreas.

Hello. Hello everybody thanks for taking my question. I’ve got a question on also ASTRO Gaming and the cross-selling of cheap products into the console market and of course vice versa auto gaming products into the PC market. I mean is that a real difference in terms of go-to-market channels, and so forth? And what do you need to do to do that to cross-sell here effectively between the two kind of categories or end markets in a way.

Okay. Yes I wouldn’t – no I don’t think the go-to-market is quite similar. I mean, I think the ASTRO had a stronger direct-selling operation we did mostly online, role online. But besides that, I would say, the go-to-markets are very similar. This is really about the brand and the portfolio. And they have a very strong brand, very strong brand in console gaming. They started years ago with really in the eSports of console gaming they were console-gaming-related and they were the first ones in and gaining quite a reputation there. And then they built a portfolio, at very, very top end of that category. They established price points that didn’t exist before. They positioned themselves as the premium player in the console market. And so it’s really not as much about cross-selling into one channel or another, this is that kind of synergy. This is about really taking advantage of the fact that we’re a global player, we can take those products very efficiently into markets all over the world and we can continue to build that brand in the place that it makes sense. And we also have a lot of technology in earphones and headphones to complement theirs. So it’s really a great marriage of just two companies whose strengths that are quite complimentary.

Okay, got that. Then on the sustainability of tablets and accessories and also the real locked keyboard for this educational purposes, I mean, can you elaborate there a bit is that the one timer, for example, the educational market for – after the holidays, or would you see there really kind of another kind of market popping up? And also on the tablet side what currently, I mean of course you mentioned that the year before it was pretty low, so it was easy to have to this growth, but going forward what you kind of think?

Well, you probably know me well on that. I’m a little bit conservative on the way I think about things. So my general view is the great the American Express and one robin, which is the bird that comes out once in the spring, one robin doesn’t make a spring. So I’d say this strong quarter in tablet keyboard doesn’t make me think that we might be having some of the resurgence in our tablet keyboard business. But I do think it’s a very strategic category for us. As you point out our path into the education market has not been available thus before, this is new. It’s early days, we love the potential there, we’re selling there now and it looks really good so far. But I’m too conservative to tell you that I think you can expect that for the long-term. I’m hopeful that you’ll see a good story there. But I certainly wouldn’t want to touch the expectation that you could expect anything like we saw this quarter, in the next quarter and the quarter after that. What I can guarantee you is that we’ll keep innovating very effectively there and we’ll get everything there is to get there. And if there is a big market there, we’ll get it.

Okay, thank you very much.

Alright, thank you Andreas.

Your next question is from Joern Iffert of UBS. Your line is open.

Hi Joern.

Yes hi again and sorry for a follow-up question. And I apologize my ignorance, it’s on Jaybird. I’m not getting this one hundred percent. Is Jaybird at the moment declining in revenues year-over-year? And is this something which can take, or which can happen over the next couple of quarters? And this would be the first one. Second one also on Jaybird, I mean, what is the update on the expansion into Europe and Asia? I mean where do we stand here, when do you expect that you have penetrated your classic distribution channels and distributions? Thanks very much.

Yes to be clear, Jaybird is a small business, but it declined this quarter year-over-year. And could go on the in the next quarter too? Maybe, but I mean, it’s a little hard for us to say because we’re now, as you point out, we’re now – we’re also in the early phases of expanding this into distribution all over the world. So I think you’ll see – as I said, I don’t want to say anything about next quarter or quarters we’re going to guide to quarters. But what I can say is I feel really good about the plan we have and both from a go-to-market standpoint and from a portfolio standpoint. And I think you’ll see really cool things coming. And I don’t want to go too much further than that, except to say, it’s a cool category. And I think we’ve created a strategy that goes after a part of it where we can really sustain good strong growth.

But what is the incremental challenge? I mean, I remember when you acquired Jaybird, I think, you were quite positive on growth which can materialize immediately. What is the incremental challenge here? What is something where you said okay look this was really something we have not foreseen, in Jaybird?

I think the key here is that as we got into pre-decide we don’t want to be playing a broad game where we’re just selling an earphone to anybody for anything. And we bought a great brand that’s positioned in sports. So without being too specific I don’t want to kind of unleash our entire strategy that we haven’t let out the bag yet. We’re trying to narrow this much more so we can create a really sustainable play here and become the leader of one segment as opposed to number three or four of a very large segment. You know me, by now you know that I’m not a believer in being 2% of a really big category, it’s not nearly as good as being 50% of a smaller one. And that’s the game we’re really after. And I think after we – by the time we bought the business we really integrated. We saw that – we continued to see the category unfold and develop. And now we can see this opportunity much better for what it is. And I think it’s a great opportunity we just got to make sure we’re at the right portfolio, the right focus on the channels and then execute. And that’s our game plan.

Okay thanks.

Thank you. Please feel free jump back on if you have another question anyone.

There are no further questions at this time. I return the call to our presenters.

Okay well thank you very much. It was a strong start to the year, we’re super optimistic, we’re going to raise and we can’t wait to see you guys in about three months.

Thank you.

Thank you.

This concludes today’s conference call you may now disconnect.