Logitech Downgraded to Underperform (CSCO) (GOOG) (HPQ) (LOGI)

We currently downgrade our recommendation on Logitech International SA (LOGI) to Underperform. In the recently concluded quarter, the company witnessed lower than expected sales, especially in the EMEA region. The weakness in EMEA was the result of lower-than-expected demand late in the fourth quarter and poor execution of pricing in channel programs in the region.

Further, the gross and operating margins also declined due to weaker-than-expected demand and the charge related to re-pricing of Logitech Revue. In addition, for fiscal 2012, the company expects a decline in sales of its PC peripherals, primarily in the mature markets.

Logitech’s business depends in part on access to third-party platforms or technologies. Its business and operating results could be adversely affected if access is withdrawn, denied, not available on acceptable terms, or if the platforms or technologies change suddenly.

In 2010, the company had introduced Logitech Revue and related peripherals for the Google (GOOG) TV platform in the U.S. However, Google TV platform has not received widespread consumer acceptance, as a result of which sales of Logitech Revue and related products have been declining, despite lowering the price to $249 during the first quarter of 2012.

The retail price of Logitech Revue is expected to be further reduced from $249 to $99 in the second fiscal quarter, which resulted in a $34.1 million valuation adjustment to cost of goods sold during the first quarter.

However, the growing adoption of new mobile platforms, such as tablets and smartphones in both mature and emerging markets, are paving way for increased demand of Logitech’s peripherals and accessories to augment the use of tablets and other connected computing devices.

For example, consumers are optimizing their tablet listening experiences with premium earphones and speaker docks. Logitech is also leveraging the use of tablets and other connected computing devices to extend the convenience and flexibility of some existing product lines.

Logitech also benefits from the increasing trend among businesses and institutions to use video conferencing because of high travel costs as well as the productivity gain that can be achieved by a high-quality face-to-face meeting that does not require travel away from the office.

Despite strong competition from companies like Cisco Systems Inc. (CSCO) and Hewlett-Packard Company (HPQ), Logitech is well-positioned to compete with differentiated video and audio solutions that support the emerging UC platforms.

Logitech currently holds Zacks #5 rank which implies a strong sell.

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