Switzerland-headquartered Logitech International (LOGI, Financial) made itself a household name in many parts of the world by selling computer peripherals, most notably mice for desktop PCs. But with the advent of laptops and now, smartphones and tablets, the PC industry itself is seeing a decline, and consequently, so are sales and profitability of mice. Realizing this, the company seems to be changing under the leadership of CEO Bracken Darrell who is shifting focus from PC input devices to other gadgets like wireless speakers, video game controllers and videoconferencing devices, while still manufacturing high-end mice for PC gamers. How is this strategy working for Logitech and what does it mean for investors?
Focus on new product lines
Logitech has decided to exit its low margin business of OEM PC mice, a segment that saw a 26% decline in sales last quarter. According to the CEO, there are “limited opportunities for profitable growth” in this segment and the company plans to quit it in the coming months. Instead of giving PC mice to other companies to brand as their own, Logitech will focus instead on retailing mice under its own brand name, where the margins are higher.
Logitech’s focus on other areas seems to be working well. Sales of wireless speakers for mobiles increased by over 98% in the last quarter, those of videoconferencing devices went up by 140% and accessories for tablets and other devices saw sales going up by over 17%. Even the PC gaming segment increased revenues by 4.5%. The company is hoping that continued growth in these segments will offset the drag in revenue caused by exiting the OEM PC mice business.
Focus on design
The company is also focusing on product design in a big way, having assembled an in-house design team after relying on external agencies all this time. The R&D budget, of which PC mice had the lion’s share, was split up two years ago, leaving only 25% for mice, and the rest was given evenly to speakers, teleconferencing systems and accessories for tablets. This seems to have worked well for the company, with those three segments creating new business worth over $400 million by the end of 2014. Now, the company is making sleekly designed products such as an ultra-thin spill-resistant keyboards that work across platforms, including Apple Inc.’s (AAPL, Financial) iOS, Google Inc.’s (GOOG, Financial) Android and Microsoft Corporation’s (MSFT, Financial) Windows and futuristic mice with eleven customisable keys and even customisable weight, aimed at gamers.
Times to come
Logitech has posted its best results in seven years for the fiscal just ended. Given how most of the company’s manufacturing expenses are in dollars or dollar-linked currencies, that is a pretty good performance. According to the CEO, the company will start raising product prices and cutting costs to tackle currency headwinds. Logitech is also going to continue its focus on non-PC peripherals which are growth sectors for the company. According to Chairman Guerrino De Luca, the company expects currency headwinds to continue, or even get worse. Nonetheless, its guidance for the current fiscal has been reiterated and the company expects retail strategic sales growth of 7%.
Conclusion
The focus on new products and design has seen the company tackle the falling demand for its earlier staple of PC peripherals and mice. Currency headwinds remain and it is yet to be seen if the planned price increases will be digested by customers. The company has a strong balance sheet with no debt and $537 million in cash. The stock currently trades near its 52-week high mark, and I recommend a BUY on this stock when the price dips.
