羅技 (LOGI) 2013 Q3 法說會逐字稿

Good day, and welcome to the Logitech Third Quarter Financial Results Conference Call.

(Operator Instructions).

This call is being recorded for replay purposes and may not be reproduced in whole or in part without written authorization from Logitech.

I would 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 a 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 the 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 the 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 position on the amount of PC-related inventory they'd carry.

This directly impacted our sales into the channel in 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'm now focused on transitioning Logitech to become a faster and more profitable company.

Let me share with you in 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 directions 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're 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's how we're 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 of 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 to benefit when there's 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 proclaiming 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 it is a 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 ultra-thin 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 the 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 boom box.

The market for wireless speakers is still in its early stages, and we believe it will grow significantly in the coming quarters and years.

While the market is crowded, we are both well positioned and committed to build on our initial success.

Our late Q2 launch of the Logitech UE branded music lineup 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 wearable space is at the high end of the category with products such as the UE 900 earphones and the UE 9000 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've 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 do 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.

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 was our first new, high-end remote in over four years.

Yet sales in the peak quarter of the year fell well short of what this category should deliver.

I concluded that we do not have the luxury of waiting a few more quarters to see if 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 fiscal 2013.

Our goal is 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 videoconferencing 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 videoconferencing space, as well as the other challenges we face in improving Logitech's performance.

There are a 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'd 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 freeing 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 support of products such as tablet accessories and wireless speakers.

We're going to transition out of our non-strategic categories to improve our profitability, remove unnecessary cost, and eliminate management distractions.

In addition to the expected cost savings in fiscal year 2014 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 2012.

You should expect to begin to see the benefits of our new strategic direction in fiscal year 2014.

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 to let you know that we've scheduled our analyst and investor day for May 23 in Zurich, so put that on your calendars.

Erik and I are available now to take your questions.

Please follow the instructions of the operator.

(Operator Instructions).

John Bright, Avondale Partners

Bracken, in the mobile segment of your four-pronged strategy, the tablet accessory category, talk about the additional products that you might introduce there and the profitability there, because it seems to be a more competitive segment than you historically competed in.

First, we're not announcing specific products today, although I may let one go here at some point if the question gets in the right territory.

But our game plan in the tablet space is to launch a broader array of products.

So we're going to be coming very soon with those, and we'll be prepared to announce them.

In terms of overall profitability, our expectation over time is that the profitability of the products in this segment should start to move in the direction of our core business.

On the PC platform, you mentioned that you might wait a couple of quarters and see if you see some stabilization -- and I may 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 place?

Well, there are a couple of things.

First, 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'm happy to go through and talk about it some more.

I think it certainly has stopped up or bottled up the retail market.

As new products are coming in, they're not quite right yet.

The forms are getting there.

The prices are too high.

There's 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 is 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, after we get through Windows 8, it will be a lot clearer where that is.

A final question from me is on your decision to divest the remote business.

Should we read that as meaning that you see the remote moving to the tablets, moving to the smartphone, and that's part of the reason behind this decision?

No, it's not.

By the way, I should say I think the remote business could be a very attractive business.

There's a consumer need there that we all know because we all use remote 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.

Thank you.

Michael Studer, Bellevue.

Regarding your divestment announcement, could you give us a little idea how we should mold that into our models?

So, if I do the math, I get to sales levels of about $130 million altogether 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?

Will you do kind of a sellout in the next quarter, and, therefore, we should expect the gross margins to come down?

Using a number of around $130 million of revenue is an approximate number I think you should use on a full-year basis for what we're 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 DVS, those are divestitures.

Some of the other things we're doing in the non-strategic category are actually places where we'll stop making a product, but it's not something we're going to stop overnight.

We're going to be very smart about managing that in 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 about right.

But, on the cost side, what we're going to do is we're going to keep you updated as we're making progress.

So, if we get to a point, let's say, in a future quarter where we've made a divestiture, we're going to make it clear not only how that impacts revenue but what associated costs leave the P&L as at that point in time.

And to, I think, the last part of your question about gross margins, right now, today, I would say that we're exiting these categories in many cases because they're not positioned correctly for us.

So, over the long term, we would envision that this is actually going to be beneficial to neutral on our 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'll give you updates.

If I understand that correctly, we should think of ceasing these categories and not kind of being able to sell them except for the remote business.

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're going to exit them one way or the other.

Okay.

Paul Coster, JPMorgan.

Clearly, this is going to get pretty complicated.

But how do we as analysts try to understand the operating expense allocations moving forward?

Can you give us some sense of the degree to which operating expense is tied to products versus generically allocated across the business?

Is it tied to--?

Is it allocated on a pro rata basis for instance?

You would guess that it's a mixed bag.

But I'm going to let Erik respond more specifically to that.

Paul, to your point, there are some, obviously, very direct costs 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 that 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, and if there's 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 I said, we're going to, and Bracken even talked about it when we talked to you in April -- we're going to try and be very specific about the things that we know we can update you on as those transactions take place, whether it 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.

One thing I think -- I realize you're asking a modeling question.

I'm going to give you a higher-level answer then that.

But the one thing that's inherent in this is we're exiting these categories because we're going to improve company profitability.

Right.

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?

Paul, the way that we're thinking about it today, and I know we talked to folks in the last couple of quarters about this -- we're not in the 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 it's the right platform for us to lay out how we're thinking about the business model.

It's also, too -- it's that each of these strategic changes we're laying out today will have coalesced a little bit more.

We bring that together, and that's when we're going to talk about that more.

Fine.

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, embedding it close to the supply chain and close to some of the innovators out there.

How are you, though, going to retain your proximity to the innovation that's happening Stateside or in Europe for that matter?

Can you just sort of give us some sense of what the balancing act is there?

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 and 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 so that we can actually co-design and co-develop.

So, we've been managing a little bit this way for many years, so we have-- so the basic skeleton is there.

Now we're extending a more deeply into Asia.

And I think we're going to like what we see.

Early results are very good.

In fact, we're going to announce new tablet products coming out soon.

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.

Bracken, will that be under the Logitech brand?

Or are you going to create a sub-brand that allows you to move faster and maybe compromise a bit on quality just to see if you can capture 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.

Thank you.

Andrew Humphrey, Morgan Stanley.

Maybe just one thing on LifeSize.

You've indicated that you're taking a hard look at whether Logitech is the right owner of that.

Could you elaborate a little more on what factors are playing in that decision?

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 simply a matter of kind of doing one bit of due diligence on the portfolio of products at a time, and LifeSize is next up?

It's really more of 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're talking about today.

To be honest with you, the LifeSize business is quite different from the rest of the business.

It sits very independently from the rest of the business.

And so my understanding of it is coming up the curve very quickly, but it's not where it needs to be yet for me to make the kind of call that I described in the opening remarks.

So I'll come back to you.

I'll give you an update within the next 90 days.

I'm sorry I don't have a more definitive answer for you today.

Okay.

Thank you.

Christoph Wirtz, Cheuvreux.

Just quickly, one question on the restructuring.

You mentioned that you've taken a round of restructuring.

If you can, give an update on the timeline there.

And maybe you can probably sort of quantify the amount that is targeted for the second round.

And does this include further reduction of the workforce?

Thanks.

To be clear, we haven't announced a second round of restructuring.

We are saying very clearly that we're going to be removing costs related to categories and businesses that we exit.

So that's certain.

We are going to keep -- look very closely at what's happening in the PC market over the next several quarters.

And, if we need to remove further costs, we're going to do it to deliver this improved profitability objective because we are going to improve our profitability short term.

Okay.

Thanks.

Very clear.

(Operator Instructions).

Corey Barrett, Pacific Crest Securities.

First, I was hoping you could provide any sort of explicit details on sort of the benchmarks you're setting in determining how you scale in the PC business over the next several quarters.

Scale in the PC business?

Can you be a little more explicit?

I'm sorry.

Relative to your commentary in the opening remarks, you were 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 the benchmarks you're setting there?

I'll talk in general.

My comment was really -- if 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-- certainly, if our objective is profit maximization in our PC peripheral platform business is, and it is, if the PC platform is really, really soft over the next several quarters, we're going to adjust our overall cost base so that we're profitable and we're maximizing profit.

I can't be more specific than that, except to say you can rely on that.

Okay.

Thanks.

And, then, how do you think about -- ? How do you intend to address smaller-format tablets?

And how does that differ from your strategy thus far in addressing the larger-format tablets?

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 the small iPad now.

I also carry other tablets that I'm experimenting with.

So I'm into everything, and I'm 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.

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 in the Americas and EMEA?

How long do you see that playing out?

It's a little hard to say because that's not 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.

Hopefully, going forward, there won't be too much conservatism.

If there is, we'll deal with it.

But I think there's no reason to expect we're going to see a big reduction -- big hesitation going forward, unless the PC market really gets sick or sicker, and then we'll have to deal with that.

Okay.

Thanks again for taking my questions.

Alex Peterc, Exane.

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 within the boundaries of the restructuring charges you already mentioned, or will you need to do -- to go through another round of restructuring and associated charges?

Thank you.

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 2014 when compared to an FY 2012 base because that was the appropriate baseline year to use.

And we're absolutely committed to that.

And, to Bracken's points earlier, we're on track to achieve that.

Now, I think the other part of your question is, and Bracken had mentioned it, our commitment absolutely, though, is we're 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 quarters.

But, to be really clear, we're not announcing a new restructuring today.

So the charges we took back in April -- we expect to see about another $1 million to $2 million of charges related here in Q4.

Those are actions that we decided on back in April but actually take place here in the quarter.

So that restructuring is still the same.

The commitment is still the same about achieving the $80 million in FY 2014.

And then, if we get to the point where we need to take additional costs out, in some cases, it will just be spending that we can reduce.

In some cases, it may be things that would require a charge.

We'd obviously communicate that very clearly at that time.

But we're still committed to both the $80 million and what we talked to you about earlier this year.

Okay.

Thank you very much.

And maybe just a separate question on channel inventory.

How should we be thinking about it in terms of a gross margin impact?

Do you think there's still quite a lot ahead of us?

Or have we seen the worst, in your sense, in EMEA in particular?

I think, when you look at the channel, and I'll specifically talk about EMEA, 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 wanted to carry related to the market.

Now, that does have a bit of an impact on our gross margin because it creates a more promotional environment that you see in the quarter, and we felt that a little bit in this quarter.

I can't sit here today and say that I see that necessarily -- exactly how that's going to play out going forward.

A lot of it's dependent on how well the PC market does.

Right?

We do watch our channel inventory very closely because we want to make sure that we're aligned well with our partners.

We do feel good about the aging that we've got in the channel.

It's relatively fresh inventory from that perspective.

So, beyond that, those are the things that were focused on, and we're going to watch the market pretty closely.

Thank you very much.

(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.