Logitech's Bruised Earnings Power
According to the CEO, Logitech’s date with Google (NASDAQ:GOOG) and GoogleTV-based revue cost the company about $100 million of operating earnings over the last five quarters. Furthermore, the company appears to be pigeon-holed into the "death of the PC" trade, in which the market has sold off anything seemingly PC related. But are things really so bad for Logitech?
If we take the CEO at his word, GoogleTV cost Logitech about $15 million per quarter after tax. If we add that back to the most recent four quarters, the trailing-12 month net income goes from $55.6 million or $0.47 per share to about $115 million or almost $1 per share of potential earnings power. With the stock languishing at $7.50 that creates a pro-forma P/E of only 7.5 based on earnings power. But what is Logitech’s plan for restoring its earnings power and growth?
Meet the New Boss, Same as the Old Boss
The new CEO, Guerrino De Luca, is the same CEO who ran the company from 1998 to 2007. During that time, Logitech consistently grew revenues and earnings at a double-digit rate. And while one could make the argument that the peripherals maker was riding the tail wind of PC adoption, it is unfair to argue that PC adoption is over and that Logitech is tied down to the PC. According to Garnter, the installed base of PCs will grow from 1.4 billion units in 2010 to 2.2 billion by 2015. Eighty percent of that growth will come from the developing world, and mainly from BRIC nations. Logitech is positioning itself well in the BRIC nations, particularly in China, their third-largest country by revenues.
In low-margin items like keyboards and mice, Logitech's largest competitors is, surprise, Microsoft (NASDAQ:MSFT). While the world won’t love Logitech for its exposure to the PC, we have to keep in mind that only about half of their business comes from PC-centric products such as keyboards, mice, webcams and speakers. The rest of their sales come from hot things such as iPod docks, earphone buds, universal remotes, digital music streaming devices, and video conferencing products.
But peripherals is a very tough market, marked by short product life cycles, little barriers to entry and tight margins. Product missteps sting, and Logitech has felt their fair share. So what is management’s plan to right the product line?
Logitech has a highly diversified product line, with no product accounting for more than 3% of projected fiscal 2012 sales. And the top 20 products only amount to 31% of revenue. Logitech’s products are engineered worldwide, and sold on a market-by-market basis. The manufacturing model remains highly flexible, with a roughly 50/50 split between contract and in-house manufacturing. In-house manufacturing is based in low cost regions such as China and south east Asia. Their large scale manufacturing, combined with their category leading products give them durable economies of scale when dealing with suppliers and contract manufacturers.
In rethinking Logitech’s product strategy, the company will focus on three market segments, across four different types of screens. Thee markets are: Consumer Developed, Consumer Emerging and Business. The four types of screens are: PC, Video Conferencing, Mobile Devices and Digital Home.
Strategies for the Developed World
For the PC, in developed countries, Logitech is looking to improve the upsell, particularly in mice. An example of this can be found in keyboards, with their new maintenance-free, solar-powered wireless keyboard. They plan to develop premium products for the Mac, and if successful bring them to the PC. For speakers and webcams they will be more cautious. Even though management still sees some growth in PC audio, they will focus on margins when contemplating products. For webcams, most consumers are satisfied with embedded cams that come included on most laptops. Again, Logitech will approach webcams with caution. They’ve developed new products for the tablet market such as foldaway keyboards and tablet stands. The focus for digital music is a focus on mobile music accessories, which is a large (over $4 billion) fast-growing (more than 20%) market.
Growth in Emerging Markets
According to Gartner, 80% of the project PC shipment growth between 2010 and 2015 will happen in emerging markets, which are rapidly adopting the PC. By 2015, BRIC countries will take four of the top five slots. China is on track to become the largest PC sales market in the world in 2012. In recent years, Chinese PC demand has been growing at more than 25%, and is further projected to keep growing over 16% per year for the foreseeable future. Logitech has formed a group to focus specifically on China, and it has been scoring great results. The China unit has seen six consecutive quarters of over 55% revenue growth, becoming Logitech’s No. 3 country market, as well as the highest percent margin producer of all countries.
Logitech has a lot to prove before the market will credit them with a better valuation. The history of tech companies coming back from bad product missteps is a checkered one. In the past, De Luca had the magic hands that consistently kept the company’s product portfolio cooking with award-winning designs. It remains to be seen when De Luca is able to bring back the magic for Logitech shareholders, if at all.
Disclosure: Authors currently have no position in Logitech (NASDAQ:LOGI).
By Damien Augustin and Brian Zen