Logitech's Crummy Earnings: A Bad Omen

Need another indicator that the tech industry is in the midst of a severe and possibly extended slump? Look no further than the dismal earnings report from Logitech (LOGI) released Jan. 20.

The maker of PC mice and speakers and universal remote controls said sales in the fiscal first quarter, which ended Dec. 31, dropped 15%, to $627 million. Profit fared worse, plummeting 70%, to $40 million. President and CEO Gerald Quindlen blamed the "deepening global recession" and said the company expects more trouble. Quindlen said in a statement he expects "an even weaker retail environment" and announced plans to cut 550 to 600 salaried jobs at an annual cost savings of $50 million.

Logitech's woe likely portends weakness elsewhere in tech. "Logitech is a portfolio company with lots of lines of consumer business," says Richard Klugman, an analyst at Majestic Research in New York. "As Logitech goes, so goes the broader consumer electronics market."

Trading Down

When consumers buy new notebook PCs at retail outlets, they often leave with a Logitech mouse as well. Along with the hardware division of Microsoft (MSFT), Logitech is the brand of choice for replacing worn-out keyboards and mice. Mice account for nearly 24% of Logitech's sales, while keyboards account for 17%. But sales of both have dropped amid sliding demand for PCs. "Consumers are trading down where they used to trade up," says Yair Reiner, an analyst at Oppenheimer (OPY). "Last year, when they bought a notebook, they bought the best one they could and also the sleekest wireless mouse. This year they're not buying the notebook, and they're settling for any old wireless mouse, or even keeping the one they have."

Mouse sales dropped 20%, while sales of keyboards fell 28%. "It's usually a good business," says Jupitermedia (JUPM) analyst Michael Gartenberg. "The problem is that they're usually discretionary purchases, and there just aren't as many discretionary dollars out there as there used to be."

Bright Spot: Video

Even remote controls, which had shown promise in previous quarters, are suffering. In the recent past, demand for Logitech Harmony remotes had gained as consumers looked for a device that could help them manage a range of devices, including Tivo (TIVO) recorders, DVD players, and set-top boxes that play Netflix movies (NFLX). Yet in the most recent period, remote sales tumbled 41%, to $28.5 million.

A small bright spot came from Logitech's video business. Consisting mostly of video cameras for PCs and home security, the video business saw sales grow 7%, to $71 million. Sales of audio products also increased slightly.

Weakness in other sectors is already apparent. GPS maker TomTom (TOM2.AS) lowered its revenue guidance for the quarter and said that it would take an impairment charge on mapping software concern TeleAtlas, which it acquired in 2008. Logitech's news came a day before Apple (AAPL), another company with wide exposure to consumer spending, is due to report earnings for its fiscal first quarter, ended Dec. 30.

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