Logitech International S.A. (LOGI) Q3 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Logitech Third Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session and instructions will follow at that time. [Operator Instructions] This call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech. I would like to introduce your host for today's call Mr. Benjamin Lu, Head of Investor Relations.

Thanks, Erin. Welcome to the Logitech conference call to discuss the company's financial results for the third quarter of fiscal year 2020. The press release, our prepared remarks and slides as well as the 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 calls 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 are Bracken Darrell, President and Chief Executive Officer; and Nate Olmstead Chief Financial Officer. I'll now turn the call over to Bracken.

Thanks for that stimulating opening, Ben. First of all, thanks to all of you for joining us. We delivered a strong quarter in Q3 despite the macroeconomic issues facing the world. China tariffs, Brexit, and volatile currencies have become the new normal. But as the macro environment keeps churning out news, we keep churning out strong quarters behind secular trends that have nothing to do with the macro events in the world and everything to do with our performance. The rise of video conferencing to every room, the expansion of computer gaming to the largest set of sports in the world, and perhaps the biggest trend of all which we haven't talked about too much yet the unstoppable phenomenon of content creation by virtually every person on the planet. These will deliver our growth for a long, long time to come regardless of the macro environment. We execute well, we're driven by powerhouse secular trends, and we have a portfolio of existing product categories and new ones in creation. The combination of our execution and our portfolio breadth creates sturdy growth. What is that portfolio? It comprises three major growth areas, each a collection of product categories: Video Collaboration, Gaming, and Creativity & Productivity. And it also contains other categories that are either under construction as future strategic growth areas or optimized for profit contribution to enable us to invest more in the growth engines we have. We've got a good thing going here. Regionally, you can see a different story occurring in each of the three regions of the world. Just as each of our reported categories is made up of a group of product categories, each of our regions is made up of a group of clusters of countries. In EMEA, we are revamping our go-to-market engine to shift from a pull approach – or from a push approach to a pull, invested more in marketing and less in pricing. The net effect is the fifth strong quarter in a row. Every cluster is performing well, virtually every country. In Asia-Pacific, we grew only 3% as local issues in Hong Kong with protests, a continued slower China than we've seen in the past few years, and a few markets with execution issues continue to hold back our growth from the double-digit growth we've come to expect from that part of the world. The majority of our clusters had solid growth. Finally, the slight decline in the AMR region is driven by a couple of factors. First, let me say, we had growth in all the places you'd expect: PC, Gaming, and C&P. But we constrained ourselves in several categories as we reduced the depth and breadth of promotions during the holiday quarter to try to steer clear of over-promotion. And as you know, we offset tariffs with price increases in the Americas. This combination of price increases and reduced promotions helped protect the impressive gross margin progress we've made over the past few years. In fact, our overall company gross margin was down minimally despite the tariff impacts. We probably could have delivered a higher sales number for the Americas. Did we go too far with our pricing discipline in the quarter? You know, I am a long-term person, so I believe the answer is no. We're here to build long-term sustainable franchises not just quarters. By category Mobile Speakers and Audio & Wearables really accounted for all of our decline. Mobile Speakers remained a tough market over the holidays. Not too different from recent trends in the Americas for that category. And the Americas performance for Audio & Wearables was the primary reason why our Audio & Wearables globally were down 16% in Q3. Blue Microphones was down as we made the decision to discontinue several special edition Yeti mics that were sold during the holidays last year. This comp challenge was exacerbated by supply constraints as we’ve made final steps to move our supply base to a new set of companies. This is behind us now, but we feel good that we can return Blue Microphones to product category growth as we capitalize on the long-terms of stream – of the long-term big streaming opportunities. I want to take a moment to talk about something we’ve been quietly focused on inside Logitech for many years. We've not talked about sustainability, that's the topic. Except in our annual sustainability report, as I didn't want to come forward publicly until we were ready to – until we were really leading our peer group and even among the leading companies in the world in our actions. This quarter, we stepped out to talk. Sustainability really has been a focus for Logitech for many years. This quarter, we committed to leadership in the battle to avert dangerous climate change. For the first time, Logitech publicly committed to ambitious sustainability goals for the entire company. Specifically, we unveiled our support for the Paris Agreement and to go beyond the level of commitment made there. We pledged to limit our carbon footprint to support the aggressive 1.5°C increase goal and to be powered exclusively by renewable electricity by 2030. We also announced that we are carbon-neutral certified in all Logitech Gaming products. And on the same quarter, a third-party validated our strong results and steps in sustainability. We were pleasantly surprised two weeks ago to be named one of the 37 companies in the world honored by World Finance magazine for our sustainability efforts. This is the first year of these awards and we were the only consumer tech company to win. And despite all this news on sustainability, I promise you we have much more exciting work underway. You're going to hear from us regularly on this topic. Now, let me discuss how we did more specifically in our categories. Momentum in our Video Collaboration category continues to be strong with sales up 25% in Q3. Sell-through was much stronger than that too. Of course, this came on the heels of last quarter's unusually strong 60% net sales growth, so the two quarters combined are more normal I would say. In the first nine months of the fiscal year, our Video Collaboration sales grew 37%. On top of this, all three regions achieved double-digit growth. Logitech's goal has always been to be a humble, capable and neutral partner for other companies. We are Swiss after all and VC is no different. We're not only working with the major U.S. cloud providers like Zoom, Microsoft, Google, and others, we're also closely partnering with the leading platforms in China like Alibaba. Since we announced the general availability of our Sync device management software a couple of months ago, over 600 companies have installed and are trying the platform. It's still early days, but we're excited to see what more we can do to support company's expansion of video to a larger share of their rooms. Slowly but surely, we're building out B2B capability too and it's exciting. Now on to Gaming. We returned to double-digit growth in Gaming this quarter, as we predicted. As we managed before -- as we mentioned before, we're beginning to see easier Fortnite comps as we head into the end of the fiscal year. Q3 sales were up 16% with PC Gaming sales growth excluding headsets remaining well in the double-digit range, while the decline in the gaming headset sales moderated significantly. I would expect to see more normalized gaming headset compares as we exit the fiscal year. And during the quarter, we also benefited from the expanded distribution outside of the U.S. of the ASTRO PlayStation 4 controller as well as strong performance in our Gaming simulation products. In fact, we held the Logitech G Challenge grand finals in Las Vegas about two months ago. We had over 11,000 drivers racing through a mix of online qualifiers and in-person wildcard competitions. We're just beginning to see the world of virtual racing and real racing converge. Very exciting times if you love fast cars and driving them from a -- especially from a safe spot behind one of our steering wheels. We closed the Streamlabs acquisition. I'm more excited than ever about having this team, this business and this brand in our portfolio. Stay tuned on that one. Mobile Speakers sales were essentially flattish this quarter as we had anticipated. But underlying market conditions remain soft. We'll continue to closely assess this situation. And as we do with all categories in our portfolio, we'll adjust our investment accordingly. Our PC Peripherals business delivered another solid quarter of 6% sales growth. This is one of our strongest quarters and years and indicative of how I feel about this business. Pointing Device sales grew 5% this quarter. Last quarter, we announced the release of our newest flagship mouse the MX Master 3, which has been my mouse for the last three or four months. Sales more than doubled sequentially and the MX Master 3 is now our best-selling mouse. I'm also proud to say that it was named one of our CES 2020 Innovation award on honorees. While we're executing well with our premium MX line of pointing devices, where MX Master sells for $100, we're doing just as well in the mass market category, where several of our products retail for as little as $13. So our strong performance in Pointing Devices ranges from the high-end to the low-end an unusual dynamic for any consumer product company or product brand and a testament to our continued innovation and cost management. Keyboards & Combos sales increased 10% in Q3 representing the eighth consecutive quarter of growth. As with mice, our premium MX product, our newest slim profile MX Keys, my news keyboard as of three months ago is now our number one wireless keyboard just a few months after its launch. That speaks to the innovation excitement that we can drive into what some might have viewed as a sleepy category and it's clearly resonating with consumers. But our innovation engine didn't stop there, we continued to build out a line of products for the segment consumers who have pain work. Last week, we just announced our latest addition to our ergonomic portfolio the Logitech ERGO K860 and I've replaced my MX Keys with that keyboard and I'm looking at it on my desk through the glass window on our conference room. This is our first wireless keyboard that addresses consumers' literal pain points. It improves risk support by over 50% and reduces risk spending by 25%. Well all of which greatly improves typing comfort and reduces muscle strength. PCWorld said that Logitech's K860 has done the unprecedented. It's made me adopt a split keyboard as my daily keyboard. We now have a complete ergonomic portfolio with ERGO K860 keyboard complementing them nicely -- only not -- complementing nicely our MX ERGO trackball and our MX Vertical mouse and I've switched to the MX Vertical mouse too and I'm getting hooked. I'm personally using that the keyboard and as I said the mouse and I'm excited about what -- about the effect I'm having. I actually have a little bit of arthritis in my thumb thanks to a lot of too much basketball. Tablet and Other Accessories sales declined 12% this quarter, partly because we were supply-constrained in our seventh-generation iPad keyboards and partly because Apple entered with their own keyboard and price points where they hadn't been before. This category always has had its ups and downs, but it's super strategic. By the way, we have resolved the supply constraint it should be fully distributed in Q4. Now let me turn the call over to Nate to walk you through some financial metrics.

Okay. Thanks, Bracken. We delivered a strong P&L for our holiday quarter with sales up 5% to $903 million. The first time our quarterly sales have ever exceeded $900 million. At the same time, we delivered operating leverage with non-GAAP operating profits up 6% to $152 million also a record high. As Bracken said, despite currency headwinds, incremental China tariffs and price increases across a wide range of our products, we delivered a strong performance. As expected and forecasted in our last earnings call, our Q3 non-GAAP gross margin declined both year-over-year and sequentially due to unfavorable currency exchange rates and the full quarter impact of List 4A China tariffs. In spite of all these factors, our non-GAAP gross margin of 37.6% came in only 0.5 point below last year. Margins were supported by cost reductions and as Bracken highlighted earlier, we made choices to limit the depth of our promotions and protect the long-term value of our brands and innovations. I'm pleased with the margin results and the discipline we exhibited during the holiday quarter. One thing I would like to point out is that while we are glad that the China tariffs did not escalate further with List 4B, the decrease of List 4A tariff rates from 15% to 7.5% will not have a material impact on our Q4 gross margin. That's because the actual date of implementation for this reduced tariff rate is not until mid-February and much of our U.S. inventory for this quarter will be brought into the country before the tariffs are decreased. In addition, I want to remind you that the List 4B tariffs were never included in our full year guidance, and therefore, their cancellation does not impact our outlook. In Q3, we prudently managed our spending with non-GAAP operating expenses up 1% to $188 million. We essentially kept sales and marketing spend flattish, while we increased R&D spend by 6% and reduced our G&A costs. Of course, we invested strongly again in building out our Video Collaboration sales team. We actually accelerated investments versus last quarter, but we offset these increases with the lower G&A and a shift of spending toward our faster-growing categories. This is the discipline that you've come to expect from us. So, despite the product cost headwinds and gross margin pressures in the quarter, we still delivered operating profit growth of 6%, which was faster than our U.S. dollar sales growth of 4% and we remain on track to our full year operating profit outlook. Keep in mind that since issuing these targets last March, we've absorbed not only the tariff increases, but also well over one point of margin headwind from currency. And at the same time we've maintained or even increased our strategic investments in the business. Now let me talk briefly about our cash flow. Cash flow from operations was $181 million in Q3, up from $176 million in the same quarter last year. Cash flow benefited from a 10% reduction in our inventory and a nice improvement in our inventory turns, which ended at 7.4 times. Excluding the impact of tariffs, our inventory turns would have matched our prior record high. And in fact, we achieved record inventory turns in EMEA and AP. Our global operations and supply chain teams continue to do a nice job supporting business growth, while delivering cost savings and working capital efficiencies. I would point out, however, that as is typical with our business seasonality, our fiscal Q3 is the single largest quarter for cash flow. So you should expect to see the normal lower levels next quarter. For the full year, we continue to expect our cash flow to approximately equal our full year non-GAAP operating profit. And with that, I will turn it back to Bracken.

Thank you, Nate. We just finished a good holiday quarter with record sales and profits, we're reiterating our sales growth of mid to high single-digits in constant currency and non-GAAP operating income of $375 million to $385 million, despite the tariff impacts and currency that we've seen. With underlying secular growth trends across the vast majority of our business content creation, video in all rooms, Gaming we are really excited about how we're positioned to capture these opportunities. We'll provide our fiscal year 2021 outlook at our upcoming Analyst and Investor Day, which I'm sure you will all join in New York City on Tuesday, March 3. And we look forward to sharing more of our plans and strategies then. And with that, Nate and I are ready for questions.

[Operator Instructions] Your first question comes from Asiya Merchant with Citigroup. Please go ahead.

Hi, Asiya.

Hey, good morning everyone.

Good morning, Asiya.

And thank you for pronouncing my name correctly. Great quarter.

Thank you.

Great quarter. Quick question on Gaming.

Sure.

It seems like those underlying trends that you talked about Bracken with the double-digit growth seems to be coming back, the Fortnite comps are getting easier. As we look into calendar 2020 with console, new console hardwares planned as well as just the underlying trend, should we now expect Gaming to sort of come back to kind of the growth rates that you typically talk about at your investor events which are I think roughly in the 15% to 20% range just given these underlying drivers? And then I have a question for Nate as well.

Okay. Great. Yeah, we'll give our guidance through next year by category in March. So March 3, as I just mentioned is our next Analyst Investor Day. I think the underlying secular trends in Gaming, at least the way I look at, the underlying secular trend in Gaming really didn't change. We just have that big Fortnite effect and a similar effect in China, so you had some things going on there. And I will come back and reiterate the guidance for -- I'll reiterate, we'll give the guidance -- the long-term guidance. But I think at least we expect long-term good solid growth in our Gaming business across the board. I'm hesitating to give a number out now, because we just haven't put together our materials for next year -- for the March event. But I think Asiya, somewhere in that direction makes sense.

Okay. That's great. And then Nate, you briefly alluded to gross margins for the fourth quarter not really benefiting from the tariff rollout -- from the tariff rollback on List 4A, but typically I think in the March quarter, do you guys see a little bit of a dip here? So is that something we should expect given how you guys performed in the December quarter with your -- just with the discipline that you talked about?

I wouldn't say there's a really consistent trend Q3 to Q4. Some years it's up. Some years it's down sequentially. Obviously, a lot of it depends on product mix. We -- like I said, I was pleased with the margins in Q3. And the teams worked very hard to find some efficiencies to help offset some of those new pressures and we'll have to continue to do those things in Q4. Where we sit right now with currency, it doesn't look like we're going to get any benefit from that. So I think we're just going to have to battle a bunch of different things and continue to do a good job of executing on our offsets. So like I said, no real consistent trend that I can point to historically, some years it’s up and some years it's down.

Okay. All right. And then just the cash -- I mean, I know you guys did acquisitions -- consummated an acquisition this quarter, but you're still sitting on a lot of cash. There was no share buyback during the quarter, any particular reason for that?

We were -- we had the Streamlabs acquisition which impacted our ability to do any share repurchases. That was really the only reason why, I think we'll be in the market as we normally are and look for opportunities. The cash we had, strong cash flow again this quarter, it's up $51 million year-to-date. So it's good to see that. Obviously, a sign of a healthy business and it gives us continued opportunities to do the things we talked about before around M&A, dividends, and share repurchases.

Okay. All right. Thank you.

Next question comes from Ananda Baruah with Loop Capital.

Hey Ananda.

Congratulations on the solid quarter.

Thank you.

Yes, you're welcome. So just a couple for me, Bracken understanding you want to kind of hold off on giving new forecast until the Analyst Day. But could you -- in the Gaming category, could you talk about some of the catalysts aside from the secular trends that might be forthcoming this year? There's the console refreshes, although I think you said there's backward compatibility there that may not have the impact be as strong as this time around. Are there any other sort of upcoming catalysts that you can point to at least in a general sense? And then I have a couple of follow ups.

Okay. Yes. No. Actually historically -- the console refresh cycle has slowed down the console headset business because there wasn't forward compatibility. So, you couldn't buy an existing headset you had to kind of wait until the new one came out. There was a little bit of confusion in the market. I can’t use one of the old ones, and the new one I might buy might not work on the new one. We're hopeful that we're going to have and it looks like, we'll probably have forward compatibility but it's not confirmed yet on both the console refreshes, but we're hopeful and I think that would be a really good thing. Beyond that, I don't -- I couldn't point to a specific thing that will have an impact or a catalyst on the Gaming business, but I will go back to the secular trend. I think it's super strong, it's gone on unabated. And I don't see anything that suggests that's going to change.

Okay. Great. And then on Video collaboration, for the fiscal 2020 guidance you guys had -- 25% to 30%. And over the last five quarters and you referenced this, you've sort of bounced in between mid-20s and high-50s, and you used the term trending in the prepared remarks when sort of talking about blending together in the last couple of quarters -- it's really been five quarters and I think just my quick calculation even pre-call. So you're sort of at 40% over the last five quarters. The -- I know you're not going to give the forecast until we get to the Analyst Day, but does it feel like you've been kind of catching a little bit more momentum there and can we think about the potential that the momentum could have some sustainability to it since you've sort of been at 40% over the last five quarters?

Your math is good because our sell-in and sell-through have been about 37%. So it's around target. Obviously I'm not -- as you said today, we're not going to give a forecast to the next year. It's hard to say, we're getting bigger and bigger numbers so will we see that sustained or not I don't know. I'm always hesitant to stretch out too far on a number like that. The bottom line is, it is remarkable. What a big opportunity this video business is. And I mean I'm kind of amazed, I think there's something like 90 million rooms out there that are supposed to be video enableable and only about 4% of those were as of a year ago, it's I think Frost & Sullivan or somebody but Gartner has similar numbers. And a lot of people are predicting that will triple over the next five years. So you can do your own math that's somewhere between 20% and 35%. I don't know where it is, but I'm super excited about the business. And I know you need to -- I know there are a lot of people building models out there and we are too, but if I step back I just think Video is one of our single biggest opportunities in the company.

And let me sneak one more in here while, I have you Bracken just on content creation. Anything you can tell us at a higher level about what the long-term content creation ecosystem could feel like aesthetically? And to what degree might software content become part of the product portfolio in that creation?

Well there's hardware and software to content creation. The -- I said this in the opening I think one of the quietly most amazing things to me is that so many of us are talking about STEM field size technology engineering and math especially in the U.S. we need to improve our education there because that's where all the jobs are. While the truth is, there are more people doing content creation, which is a creative exercise and there are STEM fields by far and that's going to grow probably as much or more than the STEM field. So this -- and they need equipment. And the equipment they need is hardware and software. So it's product and services. And our goal is to play right in the middle of that. We've been pulled into it with the mouse and the keyboard, which is part of that ecosystem now. And then we've stepped further into it with of course webcams and with microphones and now with -- most recently with the Streamlabs acquisition. So I think I don't want to preempt anything we might say at the Analyst Investor Day, but I'm super excited about the overall space. I just think it's a great place for us to play, and the users themselves have pulled us into the category and it's up to us to find new places to play beyond that that can expand the opportunity well beyond where we are. So I don't want to go any further than that except it's -- boy it's obliviously a great space for us and you're going to hear more about it from us in the future.

Okay. I appreciate it. Thanks a lot.

Thanks, Ananda.

Next question comes from Paul Chung with JPMorgan.

Hey, Paul.

Hi, Paul

Hey, guys. Thanks for taking my question. So first off, can you just expand on the strength you're seeing in Europe? What's driving that outperformance there, or any kind of channel expansion, particular products or some market share gains you want to highlight?

What I would say is first of all the key driver of that change is we're just taking a different approach there. So I'm sitting next to our leader who -- of Asia Pacific who took over EMEA about a year and a half ago. So -- and he brought a lot of the things we were doing at the time in China and the rest of Asia Pacific into Europe, which was really about being more focused on trying to generate demand and push demand. So pull versus push. And I also think he and the team over there have really led an effort to try to improve our market shares over there. We have higher market shares in the U.S. in most of our categories than we do in Europe in many of our categories. And I think that's a gap and it's an opportunity for us to close and we still have room there. So I would say those are probably the two biggest dynamics. I wouldn't point to a specific category one or the other. I mean across the board, obviously, you have to be doing pretty well everywhere if you're going to grow 16% and we -- and to grow double digits for four or five quarters in a row is pretty impressive. But I think we have an opportunity to continue to improve our demand creation, our pull capability. And it's -- that doesn't happen overnight. And I think that's going to happen. We're going to keep bringing that around the world over the next three to five years.

Okay, great. And then on the keyboard side, you had a tough comp from last year but still pretty impressive growth. So where are you seeing pockets of strengths across regions and product lines? It sounds like your premium lines are raising your overall ASPs if you could expand on that? And then I have a follow-up.

Sure. Yeah, keyboards have always been a good category for us. I think when -- whatever -- when I came here in eight years ago, a lot of people thought people will stop using keyboards, they'll just use their voice. Well, they didn't and they're not. And nobody has created yet something that's better than a keyboard when you're sitting at a desk and especially in an increasingly -- in a world with an increasing number of open offices where you really don't want to hear people talking next to you, so keyboard is here to stay. Our performance this quarter reflects I think how strong we are really at being able to innovate. I think the MX -- our MX Keys, which is the high end of the line, which we really never had a high-end of the line. I think I could be wrong here, but I think we've never had a high end of the line that's operated quite as strongly as we do with this one right now. And then we just announced that we're coming out with an ergonomic keyboard, which is -- I mentioned in the opening, which is also really cool and a very different segment of people. So there's just lots of opportunity to innovate despite what everybody would think because these categories are so mature. There's lots of opportunities to innovate in these categories and we're getting them and we're going to bring more.

That's great. And then last one is on VC. So are you starting to see some seasonal patterns? Or is it still in growth mode so it's still making this kind of difficult? And then given the nice momentum in this segment, are you starting to see more competition ramping? You mentioned some software upgrades there and sales force investments, but how else are you kind of protecting or even expanding your market share? Thank you.

Sure. The -- it's probably the least seasonal of our businesses, the Video Collaboration because it is a -- it's much more -- obviously it is a B2B enterprise business. If there's a seasonality to it maybe, maybe you would expect some heavier buying at the end of a fiscal year or something, but I wouldn't even say we've really noted that too much so far, although I keep expecting that to happen. And is the competition coming? Absolutely. They're definitely coming. And as I -- I really grew up playing competitive sports and competition just makes you better. So I -- we've expected competition they're here, they're out there and we're doubling, tripling down on everything we're doing, because we need to raise our game all the time. And as you said, we introduced Sync last quarter, as I said in the opening, and it's really cool. What are we doing to keep our competitive edge? We need to keep building our sales force for sure. We need to keep building our product portfolio and innovating very shrewdly and, I think, we're doing that. We have a great portfolio right now. And we are relentless. So we just don't give up and we're going to keep bringing new stuff up.

Hey, Paul, it's Nate. Also on the VC, I mean, you saw that our R&D investments increased 6%. A lot of that is going into VC, to kind of support what Bracken was saying around the product development to continue to be a focus. And then, also Bracken mentioned, the partnerships that we have with people like Microsoft and Zoom and Google and others. It's very similar to our strategy elsewhere is that we're trying to be that great complementary partner with these very large players to support their business growth and business strategies as well. So we're making investments to be good partners with them and make sure that we're doing the right things to grow the overall VC ecosystem.

It's awesome. Thanks, guys.

Thanks, Paul.

Next question comes from Andreas Müller with ZKB. Please go ahead.

Hey, Andreas. Andreas Müller: Yes. Hi. Hello and hello everybody. Good afternoon. I've got two questions. One is the release, actually on the tariff you mentioned in Q4, there won't be any relief to be seen. But kind of talk about next year, what the current phase one is providing you on the gross margin basis?

Yes. I think, you're right. So in Q4, nothing material -- no material benefit to us from the reduction in the tariff rate on List 4A, just due to the timing of when that's implemented and the timing of when we bring in inventory. Next year, something again we'll cover in more detail when we get to the Analyst Day in March. The 4A is still going to be with us at a reduced rate. And, of course, List 3 is still with us at 25%. So we still have a few quarters ahead of us until we annualize all of those tariffs in the next year. So it's still a bit of a headwind for us, especially in the first half of next year Andreas. Andreas Müller: Okay. And then, the growth in marketing and sales 1%. I mean, I understand the mechanics behind that. But still, I mean, is that enough to keep driving the growth on the top line? Or do we see there to some -- some sort of a reacceleration on that line, again?

Yes. It'll move around. I think, it probably will increase again. Again, as I mentioned in my comments though, we actually accelerated our investments in VC. I mean, since the beginning of fiscal year 2019, we've more than doubled the number of dedicated VC headcount that we have and we're continuing to invest, like I said, very aggressively there. Really it was around realigning some of our investments in that category. We did pull back in some businesses that have not been growing and we redirected those investments into other areas. So just think about that as portfolio management, no concern, I think, needs to be raised around that level of investment. But the number will move around from quarter-to-quarter.

Yes. I wouldn't count on a 1% growth for the next year or anything like that. No.

No. Yes. Andreas Müller: Okay. Thank you.

Thank you. Thanks, Andreas.

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

Hi. Thomas.

Great. Thank you for taking my question. So I had three questions that I thought were important. So congrats on getting the recognition on the sustainability.

Thank you.

How should we think about the margin impact of your efforts on sustainability to the extent that it may help you increase prices or affect your sourcing? And then, second, having just been at the Consumer Electronics Show, 5G was kind of the story of the show, how should we think about that as potentially serving as a catalyst for your video collaboration efforts? And then, lastly, as we start to gain distance on Fortnite, do you have any thoughts on the refresh rates? Fortnite brought new gamers into this space, are they buying that second headset at the same rate as the existing gamers were?

Okay. On the margin impact of sustainability -- and I've had questions in both directions, is it going to make our products more expensive, or is it going to give us the chance to increase our pricing or get higher margins, because we're going to try to step out ahead of other people? The answer is, we're not counting on any of that. I think the truth is it's kind of built into the fabric of how we're working now and you're going to hear more about what we're doing in the future. I'm really optimistic that being a good global citizen from a sustainability standpoint is going to help -- is going to be a catalyst to our business long term. I wouldn't -- I couldn't put a -- possibly put a number on that, as you probably wouldn't either, but it's -- I'm excited about it. We do it anyway. It's the right thing to do, but I believe that companies that are really leading will be rewarded in the long term for this. And we're going to be leading. On the 5G, too early to say on VC. And I think there's a long way to go, for 5G is really available broadly enough to have an impact on any of our businesses including VC, but it's like any of these other new technologies that come in and make things faster and better. I think, it's going to be a catalyst for the consumer and business tech world and it can't come soon enough. Finally on the console refresh rates or the refresh rates in general for C&P. I think it's hard for me to say how fast those are going to be. I mean, I think, it's probably a headset business has about a two-year refresh rate from what we can see. And that's kind of what we're hearing in the marketplace. We started launching very premium headsets with that in mind and they've done very well. Our premium headset with the Blue Mic in it. It has done really, really well this year. So, we'll see. But I think at the end of the day, there's no doubt that Fortnite brought in a lot of new young gamers. And I'm sure, there's going to be a continuous inflow of that age group into the category. So, I don't know whether they'll come in quite as lumpy as it did with Fortnite, but I think you can expect a long-term trend where people are going to come in and then trade up over time. Two years seems like the right time frame.

Thank you, Bracken.

Thank you, very much.

[Operator Instructions] We have a question from Michael Foeth with Vontobel. Please go ahead.

Hey Michael.

Hey Michael.

Yes, hi, good afternoon. Two questions from my side. I was wondering, if you've seen any sort of early pull-in effect in the quarter already due to the fact that Chinese New Year is quite early. And my question is also, in addition to that, whether that could be a reason why you're being a little bit sort of conservative I would say on your guidance for the last quarter. And the second question would be -- and again, I know it's early, but if you can make any additional comments on Streamlabs? How it's doing? How you're integrating that? And any thoughts you can or want to share on how it's going to affect your business model?

On the -- on Streamlabs, it's too early to say. I mean, I'm super excited about the team, the business, the brand and I have to say it's really great when you bring in a new business like that especially an entrepreneurial lead-driven business. And I thought we were fast until I saw Streamlabs in action and I have to say, it's a real kick in the tail to move faster. Those guys are appropriately moving faster in a software service-driven world and they can move faster and they do. And it's a good -- it's exciting. It's something we learned from. On the -- so stay tuned. I think, Streamlabs is really cool. We've got a lot of exciting things happening there. On the Chinese New Year timing, whether it's having -- we obviously aren't going to talk about this quarter yet on how we think its going or whatever. But I would say, the only pull-in effect that I can kind of point out from Chinese New Year is the fact that I had -- I needed to go over early this year because, we go celebrate Chinese New Year with all our sites. And so, I had to pull in my calendar and it was -- it's really, really fun because, we go to all our sites in China. This year was super, super fun and exciting. And it's the year of the mouse, so get ready. It's going to be a good year for mice -- for the rat, but close enough.

Okay. Thanks a lot. Thank you.

We have a question from Andreas Müller with ZKB. Please go ahead.

Hey Andreas. Andreas Müller: Hey back again. Just one question on the growth in the Americas. Was that -- I mean, you explained it by product lines, but was there also an effect of the late Thanksgiving and how much was this effect?

That is really hard to say. It's so hard to pin that. Yes probably, there was an effect. Yes, we were kind of hoping that there wouldn't be one. There might have been one. It was the shortest period you could possibly have I think between Thanksgiving and Christmas, so -- or Thanksgiving and New Year. So, yes there's probably some effect. But I think the bigger effect is really the fact that we took some price increases and that we didn't go as deep on promotions this year. And then we had the Blue Mic effect and the ongoing challenge of the speakers. So, I think when you roll all that together is really what drove it. I doubt if a lot of it was Thanksgiving to Christmas distance.

Yes. I mean, I think as Bracken -- I think what Bracken called out were really the drivers. It was really those specific categories and those decisions we made.

I feel good about the decision to -- on the pricing in general. I just think you -- by the time we get to this call, I'm kind of always -- this call is kind of very anticlimactic for me because, we're so focused on what's coming and you're so focused on what happened to try to learn from it which is great. And so, one of the things that I think we learned this quarter as well you know what, there was more room on the pricing than we realized. And there was more room on cost than we realized. And if it weren't for tariffs, we wouldn't have gotten there. So, shame on us for not getting more out of that sooner. It's a good thing. Andreas Müller: Okay. That’s clear. Thanks a lot.

Thanks, Andreas.

And at this time, I'll turn the call over to the presenters.

Great. Well you know what, another good quarter, another good holiday. As I said, we're way, way, way into Q4 and we're already thinking hard and building plans for next year and the year beyond. And it's been super exciting. And we've got these three big secular trends that are driving our biggest growth engines. But there's a whole other set that we're working on too. And who knows, maybe we'll bring one of those out soon. But thanks a lot for being on the call. I hope that many of you will make it to New York on March 3, we'll be there. We'll be there with a white board talking about what's next. Thank you very much.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.