Editor's note: This Breakout Stocks Alert was originally sent to subscribers Oct. 19 at 9:41 a.m. EDT. It's being republished as a bonus for TheStreet.com and RealMoney.com readers.
reported second-quarter earnings last night, and we want to update readers. We are not taking any action on this Alert. The stock was recently trading sharply higher at $24.95.
For the quarter, the company earned 26 cents a share on revenue of $502 million, which surpassed analysts' expectations calling for a profit of 21 cents a share on revenue of $494 million. We have had Logitech rated a Two because of our concerns about its second-quarter gross margins, but we could not have been more wrong. Gross margins came in at 34.5%, a whopping 360 basis-point increase from last quarter, aided by new-product introductions. Operating margins were 10.4%, up from 6% last quarter.
Taking a look at sales by segment, cordless products were up 22% year over year to $134 million and accounted for 27% of sales. Corded products rose 13% to $84 million, comprising 17% of sales. These two segments were the main drivers of the gross-margin improvement. Video products grew a whopping 43% to $88 million, or 18% of sales. Audio product sales jumped 21% to $90 million, or 18% of sales. Gaming sales were weak with a 3% drop, which was not a surprise.
Meanwhile, the company's "other" category, which contains Logitech's remote-control business, rose 21% to $21 million. And finally, the original equipment manufacturing, or OEM, business, in which Logitech makes products like keyboards and mice for personal-computer makers, rose 3% to $55 million, or 11% of sales.
Logitech also offered fairly bullish guidance. It now expects fiscal 2007 (ending in March) revenue growth of 17%, up from 15% previously, and expects operating income to grow by 20% to 25%, up from a prior target of 15%. Gross margins are now expected to be above 33%, an improvement of prior expectations of 32% to 33%. The company also expects a slightly lower tax rate of 13%.
Management also noted that in the first two weeks of the third quarter, order activity has been stronger than last year, which is encouraging for results in the vital holiday season, especially since revenue growth was an impressive 19% in the third quarter of last year.
In addition, Logitech announced the acquisition of Slim Devices, a company that specializes in network-based audio systems for digital music, for $20 million in cash. We view this as positive, given Logitech's history of making very savvy acquisitions at cheap prices. For example, the company acquired Intrigue Technologies in 2004 for just $21.3 million, which gave Logitech a foothold in the home-theater remote-control business, an investment that by now has likely paid for itself several times over.
We are also impressed with Logitech's recent product rollouts, particularly in the cordless mouse category with the recently released MX and VX Revolution models, which retail for about $100 and $80, respectively. In addition, Logitech recently released the Wireless DJ Music System, which allows consumers to listen to music from a PC anywhere in their home. The company has also recently released attractive products in the remote control, audio, PC gaming and Internet protocol communications areas.
Given Logitech's clear improvement in margins, we are considering moving the stock back to a One rating. While the margin improvement is highly encouraging, the valuation is a bit stretched here, so we would like to do more research before making a decision.
In keeping with TSC's editorial policy, Michael Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Comeau is a research analyst at TheStreet.com. In this role he performs stock analysis for
, and is also a regular contributor to RealMoney.com. Prior to his arrival at TSC in June 2004, Comeau worked as a Consultant to Toyota Motor North America, performing in-depth research on automotive industry issues, primarily in the areas of alternative engine technologies, competitive analysis and macroeconomics. His primary market interests include consumer technology, specialty retail, and small-caps. Comeau received a bachelor's degree in Finance from Brooklyn College, and has completed Level 1 of the CFA program.. He appreciates your feedback;
to send him an email.