Logitech is based in APPLES, Switzerland (couldn’t make that up), Revue aftermath; Sears and Kmart enter the video streaming business. Yes, you read that right.
My short position in Logitech amounts to 8 percent of capital. This is a draft of what I will develop into a more thorough thesis:
Sales of PC keyboards and mice will decline severely over the next decade, regardless of what happens to the general economy. Laptop computers and tablets have gotten both cheaper and more capable. Even in emerging economies such as India and China, PC makers are focused on making and marketing cheap laptop computers. It isn’t hard to imagine that 10 years from now Logitech’s main customers will be enterprises, because they will be the last ones buying desktops. The table below breaks down Logitech’s recent sales figures. I am sure the numbers will not miraculously bounce back… they will trend lower, not revert to the mean.
| Change % | |||||||||||||||
| Year Ended March 31, | 2010vs | 2009vs | |||||||||||||
| 2010 | 2009 | 2008 | 2009 | 2008 | |||||||||||
| Net retail sales by product family: | |||||||||||||||
| Retail — Pointing Devices | $ | 528,236 | $ | 579,775 | $ | 615,524 | (9 | )% | (6 | )% | |||||
| Retail — Keyboards & Desktops |
329,038 | 384,809 | 464,984 | (14 | )% | (17 | )% | ||||||||
| Retail — Audio | 454,957 | 445,362 | 478,455 | 2 | % | (7 | )% | ||||||||
| Retail — Video | 228,344 | 248,339 | 238,728 | (8 | )% | 4 | % | ||||||||
| Retail — Gaming | 107,595 | 127,052 | 146,016 | (15 | )% | (13 | )% | ||||||||
| Retail — Remotes | 96,982 | 102,006 | 123,581 | (5 | )% | (17 | )% | ||||||||
| Total net retail sales |
$ | 1,745,152 | $ | 1,887,343 | $ | 2,067,288 | (8 | )% | (9 | )% | |||||
| Change % | |||||||||||||||||||
| Year Ended March 31, | 2010 vs | 2009 vs | |||||||||||||||||
| 2010 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||
| Net sales by channel: | |||||||||||||||||||
| Retail | $ | 1,745,152 | $ | 1,887,343 | $ | 2,067,288 | (8 | )% | (9 | )% | |||||||||
| OEM | 198,364 | 321,489 | 303,208 | (38 | )% | 6 | % | ||||||||||||
| LifeSize | 23,232 | — | — | 0 | % | 0 | % | ||||||||||||
| Total net sales | $ | 1,966,748 | $ | 2,208,832 | $ | 2,370,496 | (11 | )% | (7 | )% | |||||||||
This year cash continues to go down, accounts receivables are up $100 million (Logitech may be trying to push sales on retailers), inventory is up $120 million and accounts payable are up $110 million. Share-based compensation is up $5 million even though the business is in decline.
Goodwill of $553 million amounts to half of book value. Logitech senior executives know the core business is in decline, and they are diversifying via acquisition. The largest acquisition was a video-conferencing company called LifeSize, for which Logitech paid $380 million (over 10x book value) which accounts for most of the goodwill. Management says that LifeSize is too small to report its performance figures, but we can deduce these from company filings. From December 2009 to March 2010 LifeSize had sales of $23,232,000, so yearly sales are approximately $90 million. This compares with total Logitech sales of over $2 billion in fiscal year 2010. The corporate video-conferencing business is very competitive, although LifeSize claims that it occupies a middle-range niche–with cheaper solutions than Cisco’s and more capable solutions than smaller competitors. In any case, I don’t believe LifeSize will be successful enough to offset the impending decline in Logitech’s core business (at least not for a few years).
Logitech bought back shares at higher prices in 2006 and 2007, then stopped the buyback program ostensibly because senior executives realized the tough industry conditions ahead.
Fiscal year 2010 results came out before Apple’s iPad was announced. According to Best Buy, iPad sales have “cannibalized” sales of PCs–and this was before the Christmas season. As this continues, fewer keyboards and mice will be sold.
Further instances of “diworsification” include the Revue Google TV that I predicted would flop and a small earphone manufacturer purchased a few years ago. Logitech is a dying one trick pony trying to do other tricks–unsuccessfully.
Logitech trades at 10x tangible book value and an above-market earnings multiple, even though it will become a below-average company in the coming years.
Logitech was deleted from the Nasdaq 100 on December 20, so its trading pattern should be less correlated with the index and more likely to reflect underlying value.
There are two major risks of being short: (1) Logitech could announce further restructurings to lower operating expenses and (2) its GoogleTV product could eventually succeed.
Sears entering the streaming business.
Netflix longs have been emboldened by the failure of such giants as Walmart and Amazon to create a truly competitive service. So they shouldn’t be afraid that Sears is now entering the space. Or should they?
Several of my friends and I have been Netflix subscribers for quite a while. We know the DVD-by-mail business is impossible to beat. But the streaming library is terrible. Very few people who get the $8 monthly streaming-only subscription will stay for long… a few months at the maximum in my opinion. I do acknowledge that Netflix might be able to pass increasing costs along to customers for other subscription plans. We’ll have to see.
It’s interesting to note that Netflix has a market capitalization of $10 billion and total assets of only $600 million (book value of $200 million!). If you gave a capable manager $1 billion I am confident he could destroy Netflix’s streaming business. I have a plan written up in my previous post about a Blockbuster venture capital recapitalization. Forget Hulu. Forget Vongo. Blockbuster has what no other streaming venture had–share of mind. Maybe I should elaborate on this and send my ideas to Eddie Lampert, Carl Icahn and various executives at the content owners. A quick summary:
Content owners buy Blockbuster senior debt and gain control of company. Avoid Chapter 7 fate of Movie Gallery. Sell DVD library, cancel all store leases.
Give creditors different proportions of new equity/warrants. Retain Blockbuster brand name (valuable for its share of mind after tens of millions of dollars spent on advertising over the decades).
Content owners and consortium of hedge funds, venture capital firms and private equity firms (Providence Equity Partners?) recapitalize holding company with $2 billion.
Design a Blockbuster app for iPhone, iPad. Design a program for Playstation 3, Xbox 360 and Nintendo Wii. Work with Akamai or Level 3 to stream content.
Advertise the new streaming Blockbuster virally and heavily.
Use net operating losses to keep money earned tax-free.
I love your Blockbuster idea, and Eddie seems like the guy with the best chances of pulling it off.
Interesting thesis. What do you make of the big jump in revenues in the last 2 quarters- 22% up? Do you think this is channel stuffing based on the large jump in A/R?
There has to be at least a little channel stuffing. Where is this happening? Not on the OEM side. Dell, HP and Lenovo order from Logitech just-in-time. Therefore I think retailers are getting stuffed with keyboards and mice that will take much longer to sell. I would like to ask retailers what’s going on here. And we should watch for bad debt expense to be revised upward in coming quarters.
great blog and great post. this one has all the ingredients for some horrific earnings misses in 2011