LOGITECH
It goes without saying that Wall Street loves well-managed companies. Well-managed companies provide consistent results, navigate through challenging periods like unforeseen supply chain disruptions, have balanced business portfolios, and, perhaps most importantly, operate paranoid (to paraphrase the late CEO Andy Grove) even when the overall business appears to be firing on all cylinders. Logitech is one of those companies.
In a highly transparent and candid three hour call with analysts earlier in the week, Bracken Darrell, Logitech’s president and CEO, reconfirmed the company’s Fiscal Year 2020 sales outlook of mid-to-high single-digit sales growth. The company provided a marginally reduced profit outlook due to coronavirus ($365-$375 million in non-GAPP operating income, down from its previous guidance of $375-$385 million). However, the company also announced its Fiscal Year 2021 outlook of mid-single-digit sales growth in constant currency and $380-$400 million in non-GAAP operating income. Perhaps even more important than its revenue growth guidance, Darrell expressed confidence in Logitech’s long-term business model—he expects non-GAAP margins to remain in the 36 to 40 percent span, with operating margin targets staying in the 11 to 14 percent array.
Given the well-documented supply chain disruptions from coronavirus occurring across the industry, Logitech’s guidance is quite remarkable. However, I do not believe Logitech’s consistency in business performance is a result of happenstance. I want to drill down on the three core reasons why I believe the company should be able to navigate through the current short-term supply dynamics better than other tech companies.
Reason #1: Demand for video and gaming products remains robust
Logitech just exited a record quarter in both sales and profit, in which sales blew past $900 million for the first time in the organization’s history. The company’s three largest business categories are its legacy PC peripherals segment (solutions that include keyboards and mice), gaming, and video collaboration. Not only did the company see strong growth across all three businesses, but gross margins have been firm—a considerable achievement given the impact of those pesky Chinese import tariffs. Logitech has an enviable reputation for consistently delivering great product designs, with over 250 design awards under its belt since Darrell joined the company as president in 2012. Even in stodgy product categories like keyboards and mice, revenue has grown at a respectable level. This is in large part thanks to paradigm-changing products like MX Master 3 and MX Keys that explicitly target creative professionals and coders.
Late 2020 and 2021 should also be a big year for Logitech in the gaming segment, since new Microsoft Xbox and Sony PlayStation consoles will be released this holiday season. Lastly, the company’s video collaboration business is in a good position. It was already on a hot streak, growing from $127 million in 2017 to $260 million in 2019, and now the coronavirus situation may drive up the desire for work-from-home set-ups. Apple also plans to significant refresh its iPad lineup in the spring, which could provide a nice tailwind for Logitech’s keyboard cover business.
LOGITECH
Reason #2: Logitech knows how to say no to “bright, shiny object” categories
Many legacy companies, even successful ones, struggle to resist the temptation of dabbling in multiple product areas or segments. These companies often spread themselves too thin from a company resources standpoint (at various levels), and end up taking their eye off the ball of the main business categories that are delivering the bulk of the revenue and profit. This affliction does not appear to be part of Logitech’s management DNA, and that’s a very good thing.
LOGITECH
Case in point: during Tuesday’s analyst meeting, Darrell explicitly said Logitech would not continue to invest in its popular Harmony remote control business. It’s difficult to challenge that decision, as smart TVs and smart digital assistants continue to decrease the value proposition of smart remotes. To be clear, Darrell did not signal that Logitech was exiting the remote control category altogether; the company will continue to support the existing Harmony line of universal remotes. Still, Darrell and his management team should be applauded for their discipline in making this decision. The temptation to dabble must be difficult to resist, considering Logitech’s innovation gene and considerable product engineering capabilities.
Reason #3: There is only one Logitech
While Logitech is an undeniable leader in the area, the peripherals category is crowded with many competitors. All of these other companies are surely envious of the premium brand equity Logitech has built for itself since its founding in 1981. Not only does Logitech often enjoy market share leadership in the product categories it participates in, but the brand commands a price premium that is crucial to generating the company’s healthy gross margins. Razer has tried to replicate Logitech’s formula in the keyboard, mouse, audio and accessories space for gamers with some success, though with a smaller revenue base.
It’s fair to say that many consumers view Logitech as a trusted brand, and many of its solutions are recognized as industry standards. The company’s solutions offer a sophisticated mixture of engineering, design, innovation, and usability, which most of its competitors simply cannot match. Darrell and his executive team know this, and it’s unlikely that you’ll see the company deviate from its winning formula.
Some closing thoughts
On Tuesday’s analyst call, Darrell and his executive team exuded a healthy dose of confidence as they laid out their macro strategies for the remainder of 2020 and 2021. To a certain degree, it felt a little “rinse and repeat”—no bold new projects or initiatives were unveiled during the call. At the end of the day, Logitech used this call to look past the coronavirus situation and re-emphasize its strategic business fundamentals. Supply chain hiccups aside, Logitech is well-positioned throughout Fiscal Year 2021 to drive material growth across all of its business segments, giving continued stability to its bottom line. In these uncertain times, it’s hard to ask for more.