Good day, and welcome to the Logitech Third Quarter Financial Results Conference Call. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session, and instructions will follow at that time. This call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech.
I’d like to introduce your host for today’s call, Mr. Joe Greenhalgh, Vice President of Investor Relations and Corporate Treasurer at Logitech.
Welcome to the Logitech conference call to discuss the company’s results for the third quarter ended December 31, 2012. The press release, our prepared remarks and slides and the live webcast of this call are available online at logitech.com.
As noted in our press release, we have published our prepared remarks on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments, and we will not repeat them on this call.
During the course of this call, we may make forward-looking statements, including forward-looking statements with respect to future operating results that are being made under the Safe Harbor of the Securities Litigation Reform Act of 1995. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated in the statements.
Factors that could cause actual results to differ materially include those set forth in Logitech’s Annual Report on Form 10-K dated May 30, 2012 and subsequent filings, which are available online on the SEC EDGAR database, and in the final paragraphs of the press release and prepared remarks reporting third quarter results available at logitech.com.
The forward-looking statements made during this call represent management’s outlook only as of today, and the company undertakes no obligation to update or revise any forward-looking statements as a result of new developments or otherwise. This call is being recorded and will be available for replay on the Logitech website.
Joining us today are Bracken Darrell, Chief Executive Officer; and Erik Bardman, Senior Vice President of Finance and Chief Financial Officer.
I’d now like to turn the call over to Bracken.
Thanks Joe and thanks to all of you for joining us. Our Q3 results were unacceptable. As we discussed in our Q2 earnings call the main factor in our weak performance was a significant weakness in the global market for new PCs. This weakness which had a negative impact on sales in all our PC related categories reflects the combination of the slow transition to Windows 8 and the growing popularity of tablets and smartphones as mobile computing devices.
Sales in our Americas and Asia-Pacific regions were largely in line with our dampened expectations, but our results in EMEA fell well short of plan. The vast majority of our sales in EMEA go through distribution. During the quarter the majority of our distribution partners adopted a more cautious decision on the amount of PC related inventory they carry. This directly impacted our sales into the channel of EMEA.
The PC market has changed dramatically in the last two years and in my assessment we haven’t evolved as quickly as we need to. With that in mind I am now focused on transitioning Logitech to become a faster and more profitable company. Let me share with you an overview of what we need to accomplish going forward.
We need to be faster in bringing new products to market, faster reacting to market trends, faster changing direction in quickly moving markets and faster aligning the company’s resources with our highest potential opportunities.
We need to significantly improve our profitability as quickly as possible and we are willing to sacrifice size to do so. We will reduce our cost base to fit the smaller Logitech and we will quickly exit categories that don’t meet our profit expectations or objectives.
To create the faster more profitable Logitech, we are looking at our business in four separate strategic groupings. These are the PC platform, Mobility, Non-strategic and LifeSize. Here is our thinking about each of them.
Products for the PC platform including pointing devices, keyboards, webcams, PC speakers, PC headsets and PC gaming. These categories represent the majority of our sales and profit today. Our PC platform sales have been negatively impacted particularly in the last two quarters by the weakness in the global market for new PCs. The growing popularity in smartphones and tablets which is clearly playing a part in the weak global PC market is also hurting our sales of PC peripherals. Despite these headwinds, we continue to see attractive opportunities for our PC peripherals in emerging markets in PC gaming and in unified communications.
We also believe that our PC related products stand a benefit when there is an acceleration of the adoption of Windows 8 PCs. Our top priority in managing our PC platform products is to maximize profit. We will free resources to make selective investments to drive growth but we will do so within the overall framework of profit maximization for our PC portfolio.
We’re keenly aware of the trends impacting our PC platform performance should we fail to see an improvement in business conditions and particularly in the state of the market for new PCs in the next one or two quarters we’ll decisively scale back our spending around this platform to support our stated profit maximization goal.
The next strategic grouping is mobility products which includes tablet keyboard covers and our Logitech UE wireless speakers and wearables. I recently read a comment from another company proclaimed that they would be the Logitech of mobility. Let me be clear, we will be the Logitech of mobility. We believe that the tablet accessory category represents our most attractive growth opportunity and this is the top priority for future investment.
While we've been participating in the tablet keyboard space for almost two years, it’s been less than one year since we launched our first true Logitech product for the space, the Ultrathin Keyboard Cover. This product quickly became our best seller across all our product categories and confirms the early stage success of our strategic focus on the tablet space. We plan to build on our momentum by significantly expanding our tablet related portfolio in the very near future.
One of my findings in reviewing our approach to the tablet accessory market is that we've been far too slow in bringing products to market and too slow within the space in general. With that in mind, we have established a tablet accessory team based in China with a charter to build relationships with suppliers anticipate market directions and significantly improve our time to market. The team is now fully operational and you should expect to see benefits from this approach during fiscal 2014.
Music is the other strategic component of our mobility offerings today and includes wireless speakers and wearables such as earphones and headphones. We expect strong continued market growth for these categories and we plan to participate in this growth by leveraging the strong music legacy of our Logitech Ultimate Ears products.
We've been pleased with the early success of our wireless speakers for smartphones and tablets and particularly with the strong sales of the Logitech UE Mobile Boombox. The market for wireless speakers is still in its early stages and we believe we will grow significantly in the coming quarters and years. While the market is crowded, we’re both well-positioned and committed to build on our initial success.
Our late Q2 launch of the Logitech UE branded music line up included a total of four products in the wearables category, one earphone and three headphones. One thing we learned from that launch is that we would have benefited from a narrower focus in wearables rather than trying to cover several key price points. We believe our strongest opportunity in the wearables space is at the high-end of the category with products such as the UE900 earphones and UE9000 wireless headphones. We've been very pleased with the initial feedback on these products from both consumers as well as the audio trade press. We will be selective about where and how we compete in wearables and we will continue to evolve the positioning of the Logitech UE brand accordingly.
Given the importance of mobility products to our future starting with our Q3 results we are reporting the revenue for tablet accessories and audio wireless and wearables as two separate retail product categories.
That brings me to our non-strategic grouping. The common denominator among the product categories that we placed in this group, which includes remote controls, speaker docks for smartphones and tablets, digital video security, streaming media systems and console gaming is that I did not believe they can make a meaningful contribution to improving our growth or our profitability. These categories are not critical to our plans for improved future performance and in some cases they are no longer even relevant in today’s markets.
We will manage these categories with the goal of transitioning out of them in the most timely and efficient manner. For example, in the case of remote controls and digital video security, we are already seeking active buyers.
Specific to remote controls, I believe the decision to divest is an example of the speed with which we need to move in the future. At the end of the September quarter, we launched our new flagship remote the Harmony Touch. This is our first new high-end remote in over four years. Again, sales in the peak quarter of the year fell well-short of what this category should deliver. I conclude that we do not have the luxury of waiting a few more quarters to see its sales improve. We simply can no longer justify the ongoing investment in this category given the current state of our business and the dynamics of that niche market.
Looking at our non-strategic categories in total, they represent roughly $115 million in sales for the first three quarters of fiscal 2013. Our goals to transition out of these categories by the end of the calendar year eliminating the vast majority of the associated expenses in the process.
LifeSize is the fourth of our strategic groupings. LifeSize hasn’t performed to our expectations and the impairment charge which also reflects a video conferencing industry that has experienced a slowdown in recent quarters is a clear indicator of that.
I’m taking a hard look at whether we are the best owners of LifeSize given the evolving dynamics in the video conferencing space as well as the other challenges we face in improving Logitech’s performance. There are number of considerations in charting our go-forward strategy with LifeSize. And I plan to update you on our thinking within the next 90 days.
I want to summarize the points I like you to take away today. My top priority is to make Logitech a faster and more profitable company. To do that we will manage our PC platform categories with the goal of profit maximization, while still bringing up resources to invest selectively in PC related growth opportunities.
We see strong growth potential in the mobility category. And we are prioritizing our resources in supportive products such as tablet accessories and wireless speakers. We are going to transition out our non-strategic categories to improve our profitability remove unnecessary cost and eliminate management distractions.
In addition to these expected cost savings in fiscal year ‘14 and beyond related to our non-strategic categories, I can confirm that we are on track to achieve the $80 million in cost savings in fiscal 2014 that we committed to you when we announced our restructuring in April of 2012.
You should expect to begin to see the benefits of our new strategic direction in fiscal year ‘14. To help you see those benefits, we will identify ways to help you track our progress when I talk to you in April about my priorities for the new fiscal year.
Before opening the call to your questions, I want you to let you know that we’ve scheduled our Analyst and Investor Day for May 23rd in Zurich. So put that on your calendars. Eric and I are available now to take your questions. Please follow the instructions of the operator.
(Operator Instructions) Your first question comes from the line of John Bright with Avondale Partners. Please proceed.
John Bright - Avondale Partners
If I can - the mobile segment of your four pronged strategy the tablet accessory category, talk about the additional products that you might introduce there in the profitability there because it seems to be a more competitive segment in these historically competed in?
Let me, first we are not announcing specific products today although I may let one go here at some point of the question gets in the right territory. But, our game plan in the tablet space is to launch a broad array of products. So we are going to be coming very soon with those and we will be prepared to announce them. In terms of overall profitability our expectation overtime is that the profitability of our - of the products in the segment should start to move in the direction of our core business.
John Bright - Avondale Partners
On the PC platform you mentioned that you might wait a couple of quarters and see if you see some stabilization and I might be putting words in your mouth, stabilization or turnaround on the core PC business, what gives you the confidence that that’s going to take plunge?
Well, there are a couple of things, first there is - I think there are two things that are affecting the overall PC market, one is the transition that’s happening to windows 8, which we’ve talked about enough on these calls, but I am happy to go through and talk about some more. I think it certainly has stopped up or bottled up their retail market as new products are coming in they are not quite right yet, the forms are getting there, the prices are too high, there is a big transition happening as we all know in PC around Windows 8 and Touch. The other obvious impact is cannibalization of the PC by tablets and dividing that up and saying how much of each of those is happening it’s hard to say, what I would say though is that our expectation is that the overall PC market will start to stabilize at some level and as we get through Windows 8, it would be a lot clear where that is.
John Bright - Avondale Partners
Final question from me is on the decision to divest the remote business, should we read that it being that you see the remote moving to the tablet, moving to the smartphone and that’s part of the reason behind this decision?
No it’s not. I think, - by the way I should say, I think the remote business could be a very attractive business, I mean it’s a - there is a consumer need there that we all know because we all user of our controls. The bottom line is we need to focus and at the end of the day I think there is a role for a dedicated remote control like Harmony, but we need to focus on where we feel like we can drive strong profitability and strong growth and right now this is a niche category.
Your next question comes from the line of Michael Studer with Bellevue. Please proceed.
Michael Studer - Bellevue
Yes thank you for taking my question. And regarding your divestment announcement, could you give us little idea how we should mould that into our model, so if I do the math I get to sales levels of above 130 million all together that would kind of vanish by the end of fiscal 2013, is that the right way of looking at it and also how we should think - how that’s going to evolve while you do kind of a sell out in the next quarter and therefore we should expect gross margins to come down?
Hi Michael this is Erik. Yeah let me answer your question. Using the number of around 130 million of revenue, is an approximate number I think you should use on a full year basis for what we are talking about here. It’s a little premature though for me to be able to say that I know exactly when these things are going to transpire with Harmony and DBS [ph] those are divestitures, some of the other things we are doing in the non-strategic category are actually places where we will start making a product, but it’s not something we are going to start overnight, we are going to be very smart about managing the channel and where we’ve got good demand still for some of these products. So I think from a modeling perspective you’ve got the revenue line of that right.
On the cost side what we are going to do is we are going to keep you updated as we are making progress. So if we get to a point let’s say in a future quarter where we’ve made a divestiture we are going to make it clear not only what - how that impacts revenue, but what associated cost leaves the P&L as of that point in time. And so I think the last part of your question about gross margins, right now today I would say that we are exiting these categories in many cases because they are not positioned correctly for us. So over the long term we would envision that it’s actually going to be beneficial to neutral on a gross margin at the total company level, but that’s something again where as we go through it and specifically as those transactions take place we will give you updates.
Michael Studer - Bellevue
But I understand it correctly that we could - should think of ceasing this preparation not kind of being able to sell them except for the remotes business?
Yeah, I will answer that yeah I think there are two businesses that we will try to sell for sure, the remote business and the video security business. Right now we may sell some other piece of this too, but we are going to exit them one way or the other.
Your next question comes from the line of Paul Coster with JP Morgan. Please proceed.
Paul Coster - JPMorgan
Clearly, this is going to get pretty competitive, but how do we as analysts try to understand the operating expense allocations moving forward, can you give us some sense of the degrees which operating expense tied to products versus generically allocated across the business side, is it tied to, is it allocated on a per-relative basis for instance?
Yeah, you would guess that it’s a, there is a mix -- there is a mix bag but I going to let Erik respond more specifically to that.
Yeah, so Paul to your point is that, there is some obviously very direct cost that you can see that would make sense in terms of material for a particular product line and those types of things but these are not standalone business units from our perspective, they share elements such as manufacturing, supply chain, regional sales, G&A and those are allocated on a basis in terms of their size relative in, if there is anything unique about those products.
So, what we’re going to do like I said, from a modeling perspective I think the appropriate approach would be to model us right now today carrying those costs going forward and the revenue but like you said we’re going to and Bracken even talked about it when we talked to you April, we’re going to trying to be very specific about the things that we know we can update you on as this transaction take place whether it would be that we’re stopping a product line and what timeline we think that’s going to happen on versus an actual divestiture.
So I know it doesn’t give you the full answer today but part of it is because it’s premature for us to give you a specific timeline on when each of these things will happen.
So one thing, I think you -- you’re asking a modeling question, I am going to give you a higher level answer to that. But the one thing that that’s inherent in this is we’re exiting these categories because we’re going to improve company profitability.
Paul Coster - JPMorgan
Right. So I mean the follow-up question obviously do you have in mind the target gross margin or operating margin model that this company will be focused on longer term?
Yeah so Paul the way that we’re thinking about it today and I know we've talked to folks in the last couple of quarters about this. We’re not in a position we’d like to be right now to be able to give you a full long-term model but that’s pretty much our intent when we talk to you at our Analyst Day in May, I think is the right platform for us to lay out how we’re thinking about the business model, its also too, is this that each of the strategic changes we’re laying out today will have - going to last a little bit more we bring that together and that’s when we’re going to talk about that more.
Paul Coster - JPMorgan
Right fair enough. My last question is you’re moving some of the - in order to get faster to market, you’re moving the innovation hub a little bit further towards Asia, and it betting it close to the supply chain and close to some of the innovators out there. How are you going to retain your proximity to the innovation that’s happening state side, can you - or in Europe for that matter. Can you just sort of give us some sense of what the balancing axis there?
Yeah, we have a very unique operating structure that we've made. I think we've made a really good move here. So our operating structure we have a significant operation in Europe a significant operation here in Silicon Valley where the heat of the action is for a lot of the computing platforms. And now we have a significant group sitting in China very close to suppliers and so that we can actually codesign and codevelop.
So we've been managing a little bit this way for many years and so we have the basic structure or skeleton is there now we’re extending it into more deeply into Asia. And I think we’re going to like what we see. The early results are very good and in fact we’re going announce new tablet products coming out soon and if there - as we see more and more tablet products, I think you’re going to see us get faster and faster and faster to introduce things that correspond to the computing platform that comes with it.
Paul Coster - JPMorgan
And Bracken will that be under the Logitech brand or you going to create a sub-brand that allows you to move faster and maybe compromise a bit on quality just to say if you can capture a consumer taste quickly and then kind of fold it back into the sort of main brand?
It will be under the Logitech brand and we absolutely won’t be compromising on quality. We've got to be able to deliver and I think you’re going to see we will very good quality products at a very accelerated pace. That will be our competitive advantage.
Your next question comes from the line of Andrew Humphrey with Morgan Stanley. Please proceed.
Andrew Humphrey - Morgan Stanley
Maybe just one thing on LifeSize. You’ve indicated that you’re taking a kind of hard look at whether Logitech is the right owner of that. Could you elaborate a little more and what factors are playing in that decision and are you waiting for some kind of market related developments in the next couple of quarters or any particular turnaround that’s been targeted internally there or is it seem to be a matter of kind of doing one bit of due diligence on the portfolio of products at the time and LifeSize is next up?
Yeah, it’s really a more the latter, it’s a deeper understanding of really what drives the LifeSize business in the future. And so I’m really trying to make sure that I understand this business at a level where I can make a definitive decision on it. I feel very comfortable with the decisions we are talking about today. To be honest the LifeSize business is quite different from the rest of the business, it fits very independently from the rest of the business and so my understanding of it, its coming up the curve quickly but its not where it needs to be out from here to make the kind of call that I described in the opening remarks.
So I’ll come back to you I will give you an update within the next 90 days, I’m sorry I don’t have a more definitive answer for you today.
Your next question comes from the line of Chris (inaudible). Please proceed.
Just quickly one question on the restructuring. So you mentioned so for the second round of restructuring, if you can give an update on the time there. And maybe you can probably sort of quantify the amount that is targeted for the second round. And some - this isn’t due to a further reduction in the (inaudible). Thanks.
Yeah, we actually, to be clear we haven’t announced the second round of restructuring and we did - we are saying very clearly that we are going to be removing cost related to categories and businesses that we exit. So that certain. We are going to keep look very closely of what’s happening in the PC market over the next several quarters and if we need to remove further cost we are going to do it to deliver this improved profitability objective because we are going to improve our profitability short-term.
(Operator Instructions) Your next question comes from the line of Corey Barrett with Pacific Crest Securities. Please proceed.
Corey Barrett - Pacific Crest Securities
First, I was hoping you could provide in sort of explicit details on sort of the benchmark you are setting in determining how you scale in the PC business over the next several quarters?
Scale of the PC business, can you be a little more explicit?
Corey Barrett - Pacific Crest Securities
I’m sorry relative to your commentary in the opening remarks you are talking about potentially scaling down investments in the PC business, should things not pan out as well as you would hope. Can you discuss sort of benchmarks you are setting there?
Yeah, I will talk to them in general. So, my comment was really - we see a really weak - if we were to see a really weak and sustained PC market over time we would adjust our cost base accordingly. So in other words we’re not going to, we’re certainly, if we’re our, if our objective is profit maximization in our PC peripheral platform businesses and it is, if the PC platform really, really soft over the next several quarters we’re going to adjust our overall cost base we’re profitable and we’re maximizing profit. So I can’t be more specific from that except that that you can rely on that.
Corey Barrett - Pacific Crest Securities
Okay thanks. And then have you think about or having tend to address smaller format tablets and how does that differ from your strategy that’s far in addressing the larger format tablets?
The small or large tablets are taking on more and more functions for all of us and I don’t know about all of you on the phone but I carry both the large and a small iPad now. I also carry other tablets that I am experimenting with. So I am into everything and I am finding increasingly that all of them are actually pretty useful. So we’re going to be in a position where we offer products for different sizes of tablets and expecting that consumers are going to use them for different functions even productivity functions in smaller tablets which we expect is coming.
Corey Barrett - Pacific Crest Securities
Okay, thanks. And then lastly can you provide any commentary on whether you’re continuing to see sort of the inventory rationalization inventory headwinds among channel partners and the Americas or EMEA or how long do you see that planning out?
It’s a little hard to say because that’s not in our - directly in our control. What I would say is the inventory rationalization or inventory hesitance we saw this quarter - really in retrospect from what’s happened in the PC market this quarter is not a surprise. So hopefully going forward there wont be too much conservatism.
If there is we will deal with it, but I think there is no reason to expect we are going to see a big reduction, big hesitation going forward unless the PC market really get sick or sicker and then we will have to deal with that.
Your next question comes from the line of Alex Peterc with Exane. Please proceed.
Alexander Peterc - Exane
Hi thanks for taking my question. Just a quick clarification on the restructuring here, you mentioned that you were on track to achieve more than the $80 million that you guided for initially, does it come at within the boundaries of the restructuring charges you already mentioned or will you need to do well to go through another round of restructuring in associated charges? Thank you.
Yeah Alex this is Erik. Just to answer your question there. The way to think about it is the restructuring that we announced back in April, we announced two things, we announced our intention to achieve $80 million of savings in FY 14 when compared to an FY 12 basis, that was the appropriate baseline you have to use and we were absolutely committed to that and to Bracken’s points earlier we are on track to achieve that.
Now I think the other part of your question is and bracken had mentioned it is our commitment absolutely goes, we are going to continue to find ways to reduce operating expenses as necessary in the business particularly if the PC market gets weaker or we see performance trends in the next couple of quarters, but to be really clear we are not announcing a new restructuring today. So the charges that we took back in April we expect to see about another $1 to $2 million of charges related here in Q4, those are actions that we decided long back in April, but actually take place during the quarter. So that restructuring is still the same, the commitment is still the same about achieving the $80 million in FY 14 and then if we get to the point where we need to take additional cost out in some cases it will just be spending that we can reduce, in some cases that maybe things that would require a charge, we would obviously communicate that very clearly at that time. But we are still committed to both the 80 and what we talked to you about earlier this year.
Alexander Peterc - Exane
Okay thank you very much. And maybe just a separate question on channel inventory, how should we be thinking about it in terms of the gross margin impact, but it seems there is still quite a lot to - well ahead of those or have we seen the worst in your sense in the EMEA in particular?
Yeah I think when you look at channel and also sort of specifically talked about EMEA, so channel was down about 12% year-over-year and was down about 15% sequentially. So to Bracken’s point earlier we did see our channel partners contract in terms of all their PC related inventory they would want to carry related to the market. Now that does have a bit of an impact on our gross margin because we create a more of a promotional environment that you see in the quarter and we felt that a little bit in this quarter.
I sense it here today and say that I see that necessarily exactly how that’s going to play out going forward. A lot of its dependent on how well the PC market does, right, we do lots of channel inventory very closely because we want to make sure that we are aligned well with our partners. We do feel good about the aging that we’ve had in the channel, that’s relatively fresh inventory from that perspective, so beyond that those are the things that we are focused on and we are going to watch the market pretty closely.
(Operator Instructions) At this time there are no additional questions in the queue. That concludes our conference call for today. You may now all disconnect. Thank you.
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