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Logitech: On Right Track; Low PC Sales May Slow Progress

NEWARK, CALIF. — Logitech International reported another down quarter, but it expressed confidence in the progress of its three-year turnaround plan, and analysts remained optimistic the accessory maker was on the correct course going forward.

Revenue for Logitech’s second quarter of fiscal 2014 was $532 million, down 3 percent compared with the prior-year period.

Second-quarter GAAP operating income was $17 million, while non-GAAP operating income was $37 million. Year-to-date GAAP operating income was $17 million, while non-GAAP year-to-date operating income was $49 million.

Bracken Darrell, Logitech president and CEO, said in an investors’ call that the company is on the right path for its turnaround. Noting that sales have declined just 1 percent year to date, Darrell said, “We’re ahead of our own expectations, but it’s still early in our first turnaround year.”

Prior to the release of its financial results, JP Morgan said in a research note that it appreciated Logitech’s decision to focus on fewer products. “We believe [Darrell], after a posting a strong F1Q, has demonstrated willingness to make tough decisions to refocus this company, and map out a path back to profitable growth, without compromising on commitment to design excellence.”

It did, however, temper its optimism with a caveat in a note released after the second-quarter results: “We are getting more constructive but risks remain, largely relating to decline in PCs, concentrated exposure to Apple’s iPad product-cycle, [and] retention of product categories that appear to be in decline.”

Tablet accessories did show 3 percent sales growth for the quarter, while wearable and wireless audio rose 34 percent for year-over-year sales. Darrell said the latter category’s “star performer” had been the UE Boom, a portable Bluetooth speaker. The company released a scaled-down version of the speaker earlier this month, known as the Mini Boom.

The pointing device and keyboard and desktop categories also showed growth — 7 percent and 8 percent year over year, respectively — but Darrell noted Logitech isn’t “planning on sustained momentum in coming quarters given our expectations for a declining PC market.”

It is the moribund PC market that has analysts taking a wait-and-see approach with Logitech. Stephen Baker, industry analysis VP at The NPD Group, told TWICE that although Logitech is doing well in moving its strengths toward better opportunities — namely, tablet accessories — those new areas might not be as robust as the pastures left behind.

“It’s pretty what clear what they need to do, and it’s clear there are lots of opportunities that are adjacent to where their strengths were in the past,” Baker said. “They are doing very well in skating toward those opportunities. I think the challenge at this point is those opportunities for tablet accessories aren’t as big as PC accessories. They’ve got to find some ways to retool and restructure so they can manage going after markets that they may not be as big in as the markets they are in today.”

Sales for its gaming category dropped 11 percent, primarily because of poor sales execution in Germany, Logitech said. U.S. and Asia Pacific gaming sales both increased by approximately 15 percent.

Video sales fell 17 percent, which “reflects our systematic shift away from the low end of the consumer webcam category,” the company said. Its digital video security category, which Logitech is in the process of exiting, saw sales plummet 25 percent.

Remote-control sales declined 19 percent, and the company said it continues “to exit the unprofitable low-end of the category, in line with our strategy.” It noted that the average selling price for the category increased by 67 percent, propelled by the introduction of the Harmony Ultimate in April.

Logitech had announced at the beginning of the year that it would sell off both its remote control and video security categories, but it reversed its decision about the former category in April. Noted Baker about Logitech’s decision to stick with remotes: “They’re mostly focusing on high end, and there’s a lot of things you can do there that you may not have been able to do in low-cost way … I think in the long run, the idea of staying in remote controls would be to have some opportunity in home automation or remote home management. There’s a logical extension from understanding how to build home remotes to entertainment remotes to understanding how to expand into other segments.”

A Logitech spokeswoman told TWICE last week that there was no update on the video security divestment at this time.

Newly hired chief financial officer Vincent Pilette said during the investors call that the company has taken the right steps to lower its cost structure across all functions. “We’re making good progress, but more work lies ahead as we’re still in the early stages of our three-year turnaround plan.”

While Logitech may have trouble capturing a piece of the tablet accessory profit pie that can rival its former PC accessory profits, Baker said its experience in multiple categories may prove to be a boon to the company.

“As we see more phone and tablet accessories, and we see growth of the ‘appcessory’ piece, the third-party companies that have experience and expertise in multiple accessory companies — and have software knowledge and a broad view of the market — are going to be the ones that have the best opportunities because accessories are pretty tightly connected to the device that own them,” he said.