Shares of computer accessory manufacturer Logitech (LOGI: Charts, News, Offers) slumped at the beginning of April as it lowered its guidance for fiscal 2011 due to weakening demand for its products in European, Middle Eastern and African markets. The company, which produces navigation, Internet, music, multimedia and gaming peripherals for Wintel PCs, now expects its sales to range between $2.35 to $2.37 billion, lower than its previous guidance of $2.4 to $2.42 billion. It also forecasts lower operating income between $140 to $150 million, a reduction from its previous guidance between $170 to $180 billion. Investors were not impressed by Logitech’s pessimism, and the company’s shares plunged nearly 19% on April 1st. Logitech is a member of an increasingly fragmented market of computer accessories with low barriers to entry. Will Logitech get swept away as desktop sales – on which the company is reliant – continue to decline and tablet and netbook sales continue to increase?
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Romanel-sur-Morges, Switzerland-based Logitech is a familiar site to American shoppers who frequent large electronics superstores such as Best Buy (BBY: Charts, News, Offers) or Fry’s Electronics. The company sells products under its own labels, as well as through OEMs, through which its products are re-branded. 19 of the top 20 PC manufacturers offer self-branded Logitech products in their hardware combinations. The company’s primary weakness is its fragmentation – its controllers, keyboards, mice and webcams are often spread out in different departments in brick and mortar superstores. Logitech has been attempting to convince these retailers to group their different products together in an easy-to-find location, in the same manner as Apple (AAPL: Charts, News, Offers) or Microsoft (MSFT: Charts, News, Offers) products. The company’s secondary weakness is the rise of notebooks, netbooks, tablets and smartphones – all of which do not require Logitech’s peripherals to function. The inevitable decline of desktops will also shrink the company’s margins and decrease sales volume and price competitiveness. The company has tried to stay competitive by producing lapdesks, cooling pads and notebook risers for notebook computers, none of which are particularly profitable.
The majority of Logitech’s revenue comes from its primary business of keyboards and mice, followed closely by its computer speaker business. Notably, all three of these are directly threatened by the paradigm shift in personal computing with the declining popularity of desktop computers. Notebooks, netbooks and tablets all have built in speakers and input devices, and have no need for Logitech’s primary products. The same applies to its webcam business, which is being marginalized by changing technologies. While VoIP technologies such as Skype are increasing the demand for webcams, the declining popularity of external webcams is hurting the company. Even in the desktop market, all-in-one computers similar to Apple’s current generation iMac, such as the Asus ET2700 are equipped with webcams and internal speakers, and in some cases, replacing mice with touch screens. All-in-one computers are gaining popularity in both corporate and home consumers.
Logitech is also overly dependent on the European market, which comprises half of its revenue, followed by its North American market (35%) and Asia/Pacific market (15%). This is troublesome due to its poor guidance for the European market for fiscal 2011 and the overall economic uncertainty lingering over multiple markets in the European Union. The company has also failed to capitalize on BRIC markets, where the personal computer market is expanding rapidly. While the company has made vague comments about expanding into China, the Chinese market is saturated with cheap personal computer peripherals – after all, that’s where most of them were produced originally – which makes it extremely hard for an American competitor to enter. Best Buy learned this the hard way when it was forced out by local Chinese competitors in the mainland.
It’s not too late, however, for Logitech to stage a turnaround. Companies such as ZAGG (ZAGG: Charts, News, Offers), the producer of iPad and iPod covers, rose from relative obscurity to high margins and sales volume by following the changing trend. Logitech certainly has an established brand and it may be able to capture the market again by following the trend of peripherals for portable electronics. However, if it misses the boat then shareholders could be punished as the company gets left behind by the changing tides of technology. Shares of LOGI current trade 12 times forward earnings.
Other News About LOGI
Logitech International SA Downgraded by Credit Suisse to “Neutral”
Logitech gets a major downgrade.
Logitech lowers fiscal 2011 outlook
Logitech sees lower desktop demand hurting its existing business model.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
