LOGI

Logitech International S.A. (LOGI)

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Logitech International SA (USA) (LOGI)

Morgan Stanley Technology, Media & Telecom Conference Call

February 27, 2012 7:15 pm ET

Executives

Erik K. Bardman – Senior Vice President, Finance & Chief Financial Officer

Analysts

Francois Meunier – Morgan Stanley

Presentation

Francois Meunier – Morgan Stanley

Okay. So, maybe we shall get started. I'm Francois. I'm covering European Hardware in London and we have Erik Bardman, CFO of Logitech today with us. So, maybe Erik, we had you with us not that long ago. Maybe the results were not as good as what could have been expected. So, maybe we could just come back to that and what happened to – with the earnings in the latest results?

Erik Bardman

Yes. So, there'd be a couple things I'd say. When you look at, so, we're three quarters into our fiscal year. We end our fiscal year on March 31. So, three quarters in there's a couple things I would point out in terms of not being exactly where we wanted to be.

In the first quarter, we had a large charge, non-cash charge that we took related to Google TV, a Logitech Revue product that we built. And unfortunately, it did not work out the way that we wanted. We also talked about, over the course of the beginning of the year, we had some channel issues that we needed to work through in our European region in terms of some channel and pricing programs that we rolled out that were not clear, not executed well, right, from that perspective. It took us a couple of quarters to work through that.

Those two items together, when you take a sort of a broader 12 month view on it, that's close to $100 [million] of operating income with the Revue charge, and the costs of Revue more broadly being a little more than half of that, the rest of it being related to the channel problems in Europe.

So, those are the things that, fundamentally that we have had as challenges over the near term. The key thing I would say in terms of how we look at it, is that we know what we need to do different from an execution standpoint. We have made very good progress in working through those channel issues in Europe. And we even reported in this last quarter, our Q3 results, our channel inventory in Europe was down 22% year-over-year, so we had made good progress. I think we’ve worked through the bulk of those issues.

Logitech Revue is completely behind us. We've sold through all of our existing inventory. So we have no further financial exposure to it from that standpoint. And when we look forward, we're focused on, first and foremost, what we have to do with our product portfolio, where we need to focus it, how we need to have a really clean value proposition for the consumer. That’s a little bit of some of the recent challenges and I'm sure we'll talk more about what we're looking at when we look forward.

Francois Meunier – Morgan Stanley

Okay. So before I forget, I need to read this about the disclosures. And obviously you can refer to morganstanley.com research disclosures on my site. Sorry about that. Now, in terms of what you've been describing, obviously Google TV is something we need to forget about. In terms of what's going on in the channels, how have things been improving in the past few weeks since you've been talking to us in the market?

Erik Bardman

Yeah. So, I mean, we have a stated approach and it's not changing now. So we don't provide in-quarter guidance. What I can refer to a little bit is what we talked about when we reported our earnings back at the end of January. What we fundamentally saw is, like I said, is we have made good progress in terms of getting the channel to the right level of channel inventory for demand in Europe.

In the Americas, what we're seeing is we're still seeing retailers that are nervous in general. It's hard to pinpoint exactly why. I mean, part of that, as we saw in the quarter, was related to the fact that PC sales have continued to be weak. And a lot of your consumer electronics retailers are generally looking at how much inventory do I have? How do I manage that well? That has not changed and we don’t see that changing in terms of as we look forward a little bit.

More broadly for us, the places where we saw really nice growth in the quarter, we saw very nice growth in the emerging markets in China. It's interesting for those of you that don't know us as well as a Company, a little over two years ago, we talked about the fact that we wanted to invest and we wanted to grow faster in the Chinese market. And we set ourselves a goal of trying to become, making it our third largest market over a period of time.

The good news is that we actually achieved that goal faster than we set out. And we're in a situation now where it's actually on track, in the not too distant future. That should be our second largest market behind the US worldwide from that perspective and it continues to grow nicely.

In terms of the rest of how we look at the quarter, we've made it really clear that the number one thing in front of us is changes and improvements we need to make in our product portfolio. It's one of the things that Guerrino, our CEO, is very, very focused on and very, very passionate about.

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