The most significant inhibitor to high sales is the product gap Logitech sees across all its categories. Particularly in the high-end product category that sells for more than $100, the gap is easily seen. Last year 24% of the sales were in this category and this quarter it was only 16%.
For example, we need many different remotes for different appliances at home — one for the TV, another for the DVD player, the music player and maybe more. Harmony One, which was launched four years ago by Logitech, had been quite successful. But Logitech has been quite late in bringing the next generation universal remote to the market. The biggest reason is that it was trying to bring the Logitech Revue (the Google TV box) to the market. As Logitech Revue is no longer on the cards, Logitech is making progress on the remote and expects to start shipping them in the fiscal 2013, which starts in three months.
Similar problems exist in the webcam and the digital music category. Most users find the embedded webcam in the laptop adequate and Logitech has not been able to shift them away to its own cameras. In a similar way, Logitech was targeting the PC speakers and the sound quality at the expense of mobility. The large and growing market on the other hand has shifted to mobile headphones and Logitech has re-targeted accordingly. We will see the results in fiscal year 2013.
Addressing product line gaps is a multiple-quarter process and Logitech expects to see substantial improvement in the second half of fiscal year 2013.
On the management side, Logitech had lowered their sales outlook four times during this year. The current revenue forecast is $2.3 billion. This revenue forecast comes when we are already one month in for the last quarter of the year.
On a geographical perspective, China has become very profitable for Logitech. The management expects to use the cash flow it generates to fund expansion in China. It has a new revolving credit facility worth $250 million and Logitech does not want to do any major acquisitions at the moment.
On a cash flow basis, Logitech has still been performing phenomenally. It has generated $150 million in OCF in third-quarter 2012 (ended Dec. 31, 2011) and has ended the quarter with $523 million in cash. They also have $177 million left in their existing share repurchase program and have all the regulatory approvals in place to begin repurchases on their second trading line. These shares will be cancelled.
I am long Logitech. I bought 150 shares at an average price $9.53. Logitech has been a very good cash flow generator and the balance sheet is fabulous with $500 million cash, $600 million tangible equity $786 million in total liabilities. At the current price of $8.5 a share (cap $1.5 billion), the EV is less than $1.8 billion. The FCF in 2010 was $325 million and in 2011 was $114 million. In short, it is a safe investment on a balance sheet level. On a valuation level I see a 50% upside from the current prices.