Logitech International SA
/ (LOGI-NASDAQ)/ Equity Research / LOGI | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 03/27/2013
Current Price (04/03/13) / $6.89
Target Price / $7.25
SUMMARY
We recently have upgraded our recommendation on Logitech from Underperform to Neutral, with a target price of $7.25. Although the performance of the company was weak in the last reported quarter, Logitech is doing well in the tablet and gaming accessories market. Further, the company is expected to report improvements in next quarter and through fiscal 2013, as Logitech expects to reap the benefits of its restructuring and turnaround plans. Recently, the company has launched three new tablet covers. However, the continued decline in the global PC market is expected to impact sales for atleast a few upcoming quarters./ Equity Research / LOGI | Page 1
SUMMARY DATA
52-Week High / $11.2252-Week Low / $6.60
One-Year Return (%) / -10.52
Beta / 1.76
Average Daily Volume (sh) / 323,434
Shares Outstanding (mil) / 158
Market Capitalization ($mil) / $1,089
Short Interest Ratio (days) / 52.83
Institutional Ownership (%) / 23
Insider Ownership (%) / 8
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / 0.2
Earnings Per Share (%) / -17.5
Dividend (%) / N/A
P/E using TTM EPS / 23.0
P/E using 2014 Estimate / 68.9
P/E using 2015 Estimate / 12.8
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Mid-Value
Industry / Comp-Periph Eqp
Zacks Industry Rank * / 24 out of 267
OVERVIEW
Logitech International S.A. is a global leader in peripherals for personal computers and other digital platforms, developing and marketing innovative products in PC navigation, Internet communications, digital music, home-entertainment control, video security, interactive gaming and wireless devices. Founded in 1981 in Switzerland, Logitech International S.A., the parent holding company of Logitech, is a Swiss holding company with its registered office in Apples, Switzerland, which conducts its business through subsidiaries located throughout the world.
The company primarily operates through two business segments: peripherals and video conferencing.
Peripherals: (contributed 86% of the total revenue in fiscal 2012) The peripherals segment encompasses the design, manufacturing and marketing of peripherals for PCs (personal computers) and other digital platforms. For the PC (personal computer), the company’s products include mice, trackballs, keyboards, interactive gaming controllers, multimedia speakers, headsets, webcams, 3D control devices and lapdesks. Internet communications products include webcams, headsets, video communications services, and digital video security systems for a home or small business. Digital music products include speakers, earphones, and custom in-ear monitors. For home entertainment systems, Logitech offers the Harmony line of advanced remote controls, Squeezebox wireless music solutions. In early October 2010 the company launched a line of Logitech products for Google TV, including the Logitech Revue companion box, in the United States. Gaming consoles include a range of gaming controllers and microphones, as well as other accessories.
Video conferencing: (14%) This segment encompasses the design, manufacturing and marketing of LifeSize video conferencing products, infrastructure and services for the enterprise, public sector and other business markets. LifeSize products include scalable HD (high-definition) video communication endpoints, HD video conferencing systems with integrated monitors, video bridges and other infrastructure software and hardware to support large scale video deployments, and services to support these products. The LifeSize division maintains a separate
marketing and sales organization, which sells LifeSize products and services worldwide. LifeSize product development and product management organizations are separate, but coordinated with the peripherals business, particularly the webcam and video communications groups. LifeSize products and services are primarily sold to distributors, value-added resellers, OEMs and occasionally, direct enterprise customers.
REASONS TO BUY
The growing adoption of new mobile platforms, such as tablets and smartphones in both mature and emerging markets, are paving the way for increased demand of Logitech’s peripherals and accessories to augment the use of tablets and other connected computing devices. In addition, recently, the company launched a number of new and innovative products. The new tablet accessories and gaming accessories are expected to benefit the company. Given the current trend towards smart phones and tablets, Logitech intends to tap this high potential market through its range of accessories. In the last reported quarter, Tablet Accessories was the best-performing retail product category, with sales increasing a robust 119.2% year over year.
The company’s cost cutting initiatives is expected to benefit the company strongly. The company expects to save approximately $12 million to $14 million in the fourth quarter of fiscal 2013. These savings will mainly be generated from the workforce reduction. Logitech is required to lay off 140 employees, or 5% of its workforce as part of its cost cutting measure. Further, as a part of the restructuring process, the company started the procedure to divest its remote control and digital video security categories with further plans to discontinue other non- profitable products, such as speaker docks and console gaming peripherals, by the end of 2013.
Logitech also benefits from the increasing trend among businesses and institutions to use video conferencing because of high travel costs as well as the productivity gain that can be achieved by a high-quality face-to-face meeting that does not require travel away from the office. Despite strong competition from companies like Cisco and Hewlett-Packard, Logitech is well-positioned to compete with differentiated video and audio solutions that support the emerging UC platforms.
REASONS TO SELL
The rising trend of smaller, mobile computing devices such as tablets and smartphones with touch interfaces and the declining popularity of desktop PCs have rapidly changed the market and usage models for PC peripherals. This trend has been continuously affecting the profits and revenues of the company over the past four to five quarters.
The market where Logitech operates ishighly competitive and characterized by short product life cycles, constant new product introductions, rapidly changing technology, evolving customer demands, and aggressive promotional and pricing practices. Therefore, in a dynamic market as this, Logitech needs to bring in newer products matching the trend in order to survive the competition and will be crucial factor driving their revenue growth, moving forward.
The company’s performance in the last quarter was below expectations as there was low demand for Logitech products in the EMEA and also in the mature markets. The EMEA division witnessed lower sales due to poor demand and also due to poor execution of pricing in channel programs in the region. Furthermore, the gross and operating margins also declined due to weaker-than-expected demand.
RECENT NEWS
LOGI’s New Tablet Accessories – Mar 26, 2013
Recently, Logitech launched a bunch of new and advanced tablet accessories. The new lineup includes Logitech Keyboard Folio and Logitech Keyboard Folio mini. These products primarily aim at protecting the touch screen along with the tablet. Additionally, they give the tablet a stylish touch with multiple colors.
The Logitech Keyboard Folio solves the typing issues faced by iPad users with on screen keyboard. The device with the traditional full size keys along with the function of shortcuts connects the iPad through Bluetooth.
The product also provides advanced protection for tablets with an ultra thin cover, featuring instant On/Off functionality that switches on the tablet when the cover is open and puts it in the standby mode when closed. This in turn improves the durability. It also includes magnetic closures to further reduce the risk of damage to the tablet while in transit. In addition, hands-free flip stand offers two comfortable viewing angles. These products are the result of years of expertise and experience of Logitech in keyboard manufacturing.
Both the products will be available in a variety of colors and will initially be available in the U.S. and European markets. Logitech Keyboard Folio priced at $99.99 will be available from Apr 2013 while Logitech Keyboard Folio mini priced at $89.99 will be available from May 2013 for $99.99.
Given the current trend towards smart phones and tablets, Logitech intends to tap this high potential market through its innovative range of accessories. The launch of the ipad mini cover is one such step towards this strategic business decision by Logitech. In the last reported quarter (Q32013) Tablet Accessories was the best-performing retail product category, with sales increasing a robust 119.2% year over year to $39.4 million.
Recently, in Feb 2013, Logitech launched a slim protective keyboard cover specially designed for the ipad called the Logitech Ultrathin Keyboard mini. This cover is designed in such a way that it fully enhances the ipad experience. This product is currently available in the U.S. and Europe for $79.99.
Following this announcement, the company adopted a number of cost control measures which generated incremental savings of approximately $16 million – $18 million. Darrell is hopeful that these initiatives would result in improved operational efficiency and higher profitability along with speedier performance. In response to the news of the launch, Logitech shares moved up to $6.90 on Mar 20, 2013, compared with its previous day’s closing at $6.78 on Mar 19, 2013.
LOGI's New Gaming Accessories- Mar 22, 2013
Recently, Logitech launched a bunch of new and advanced PC gaming devices. The new lineup is an extension of Logitech’s already existing G series products, and will have the letter “S” (standing for Science) with their names. The bunch consists of six revamped mice and keyboard and two new headsets.
The new series targeted for PC gamers is based on scientific theories and aims at making a difference with improved speed, precision and reliability. Logitech carried out extensive research with the infrared technology, to study the interaction between hand and device during game play. The company then came up with the upgraded G line products, featuring increased durability and comfort.
The products have fingerprint resistant coating for heavy contact zones in addition to hydrophobic coating to prevent hands from sticking. The mice come with better control and comfortable soft or dry grip depending on the model. They also have low-friction polytetrafluoroethylene (PTFE) feet, which smoothens cursor movements with improved accuracy by minimizing drag for faster movements.
During Logitech’s third quarter 2013 earnings release, its newly appointed CEO Bracken P. Darrell announced plans to focus on product innovation for the fast growing markets and removing unnecessary costs and commitments to improve profitability. Following this announcement, the company adopted a number of cost control measures which generated incremental savings of approximately $16 million–$18 million. Darrell is hopeful that these initiatives would result in improved operational efficiency and higher profitability along with speedier performance. In response to the news of the launch, Logitech shares moved up to $6.90 on Mar 20, 2013, compared with its previous day’s closing price of $6.78.
LOGI's Cost-Cutting Initiatives – Feb 28, 2013
Logitech’s prolonged weak performance made it essential for management to take up cost cutting initiatives. As announced in the outlook for third quarter, the company started the procedure to divest its remote control and digital video security categories with further plans to discontinue other non-profitable products, such as speaker docks and console gaming peripherals, by the end of 2013.
Logitech believes that by adopting these cost control measures the company will not only become a more focused company but will also help Logitech reduce its costs. Through these initiatives Logitech intends to generate incremental savings amounting to approximately $16 to $18 million. This amount is incremental to the $80 million saving already proposed from reducing operating costs and cost of goods sold for fiscal 2014.
Following the restructuring operations, the company expects to save approximately $12 million to $14 million in the fourth quarter of fiscal 2013. These savings will mainly come in from the workforce reduction. Logitech is required to lay off 140 employees, or 5% of its workforce as part of its cost cutting measure.
Logitech Launches ipad Cover – Feb 06, 2013
Logitech launched a slim protective keyboard cover specially designed for the ipad called the Logitech Ultrathin Keyboard mini.This cover is designed in such a way that it fully enhances the ipad experience. This new product from Logitech enriches the experience of using the iPad from enjoying apps, movies and photos to giving a comfortable typing experience while maintaining the tablet’s thin, light and sleek style.
The Ultrathin Keyboard mini has a thin aluminum cover that perfectly matched the ipad mini and therefore ensures durable protection but with very minimal weight. Further, the powerful integrated magnets attach the cover securely offering full size keys for easy typing.
The Logitech® Ultrathin Keyboard mini will initially be available in the U.S. and Europe beginning Feb 2013 for $79.99. The new mini ipad cover also has an instant On/Off feature, enabling the iPad mini to automatically wake up when the user opens the cover and switches to standby when closed.
In addition, the cover can be flipped around and the built-in Bluetooth EasyType keyboard can be used.In the tablet market, Bluetooth keyboards that fold up into a case or tablet stand most sort after, since they let people travel with their tablet and get more work done with them, turning a tablet into more of a full-featured computer. Many people who don't want to use a case or stand are adding slim, lightweight Bluetooth keyboards to their tablet, making it easier and convenient to type.
Given the current trend towards smart phones and tablets, Logitech intends to tap this high potential market through its innovative range of accessories. The launch of the ipad mini cover is one such step towards this strategic business decision by Logitech. In the last reported quarter (Q32013) Tablet Accessories was the best-performing retail product category, with sales increasing a robust 119.2% year over year to $39.4 million.
Weak 3Q for Logitech – Jan 24, 2013
Logitech reported a loss of $1.24 per share in the first quarter of 2013, considerably below the Zacks Consensus Estimate of 34 cents earnings of 32 cents in prior-year quarter. Continued weakness in the global PC market is the primary factor behind the loss in the reported quarter.
Revenues
Net sales in the third quarter of 2013 stood at $615 million, down 14% year over year. The decline in revenues was primarily due to greater-than-expected weakening of the PC market. The general slowdown in the emerging markets also had a negative impact on the company’s top line.
Sales by Channel
During the quarter, Retailsales declined 14% year over year to $542.4 million. The reduction was due to lower sales from the EMEA region (down 20%), Americas (8%), Asia (11%), Lifesize (3.6%) and OEM (22.5%).
Sales by Product Division
Tablet Accessories was the best-performing retail product category in the reported quarter with sales increasing a robust 119.2% year over year to $39.4 million. However, this increase was fully offset by a 10.5% decline in pointing devices to $153.9 million, 5.8% decrease in Keyboards & Desktops revenue to $110.6 million and 18.7% drop in audio PC revenue to $47.4 million. Moreover, gaming revenues and other revenues were down by 19.7% and 77.8%, respectively.
Income and Expenses
Gross margin for the quarter was 33.7% compared with 32.7% in the year-ago quarter. This increase in gross margin was driven by tight management of channel-pricing programs and a variety of efficiency improvements in the global supply chain.
Operating loss for the quarter was $215 million, compared with an operating profit of $48.2 million in the same quarter last year. Operating expenses for the third quarter of 2013 were $765 million, up 43.2% year over year.
Balance Sheet & Cash Flow
As of Dec 31, 2012, cash and cash equivalents were $321.9 million and shareholder’s equity was $756.5 billion.
Net cash provided by operating activities was $95.1 million at the end of the quarter versus $152.3 million in the prior-year period. Capital expenditures incurred during the quarter were $9.2 million.
Moving Ahead
Given the current trend toward smart phones and tablets, Logitech intends to tap this high potential market, which is still under penetrated in terms of accessories. Further, the company has also taken certain strategic decisions to improve its profitability going forward. Logitech intends to sustain its leadership in the PC platform-related products where it has engineering, distribution and scale advantages.
Further, management has identified a number of product categories that no longer fit with the company’s strategic direction. As a result, Logitech has initiated the process to divest its remote controls and digital video security categories and also plans to discontinue other non-strategic products, such as speaker docks and console gaming peripherals, by the end of 2013.
Logitech believes that by doing so, the company will not become a more focused company but will also reduce costs significantly.The company expects to generate savings of approximately $80 million annuallythrough 2014.
VALUATION