Logitech International SA

March 18, 2015

Logitech International SA (LOGI-NASDAQ)

Current Recommendation NEUTRAl OVERVIEW Prior Recommendation Outperform Date of Last Change 03/18/2015 Founded in 1981 in Switzerland, Logitech Current Price (03/17/15) $12.50 International S.A. is the parent holding company Target Price $13.00 of Logitech, a Swiss holding company. Logitech International S.A. is a global leader in peripherals for personal computers and other digital platforms, which develops and markets innovative products in PC navigation, Internet communications, digital music, home- entertainment control, video security, interactive gaming and wireless devices. The company conducts its business through subsidiaries located throughout the world. SUMMARY

SUMMARY DATA Logitech again reported strong quarterly results, with third-quarter fiscal 2015 earnings soaring past the 52-WeekRisk HighLevel * $16.42 Below Avg.,Zacks Consensus Estimate and year-ago quarter 52-WeekType Low of Stock $11.51 Mid-Blendfigure. Strong performances for PC Gaming and Mobile One-YearIndustry Return (%) -22.51Comp-Periph EqpSpeakers again remained the growth drivers. Beta Zacks Industry Rank * 1.14 114 out of 267Encouraged by another quarter of strong results, the Average Daily Volume (sh) 280,753 company raised its fiscal 2015 operating income ZACKSguidance CONSENSUS for the secondESTIMATES time. It remains focused on Shares Outstanding (mil) 164 driving growth by offering new and innovative products Market Capitalization ($mil) $2,050 Revenue Estimates (In millionsand of $) cost-streamlining initiatives. In addition, Logitech Short Interest Ratio (days) 38.58 recentlyQ1 disclosedQ2 a three-yearQ3 capitalQ4 allocationYear plan. Institutional Ownership (%) 32 However,(Jun) rising(Sep) operating(Dec) expenses(Mar) and(Mar) stiff Insider Ownership (%) 8 2013competition469 A remain548 A matters615 ofA concern.469 A Also, 2,101currency A fluctuation risks remain an overhang. Annual Cash Dividend $0.17 2014 478 A 532 A 628 A 485 A 2,123 A Dividend Yield (%) 1.36 2015 The484 A company530 A primarily634 A operates468 E through2,116 twoE 2016 business474 E 525 segments: E 639 E peripherals486 E and2,124 video E 5-Yr. Historical Growth Rates conferencing. Sales (%) -1.2 Earnings Per Share Estimates Earnings Per Share (%) -3.5 (EPS is operatingPeripherals earnings before: The non-recurring peripherals items, segmentbut including consistsemployee Dividend (%) N/A stock options expenses) ofQ1 the design,Q2 manufacturingQ3 andQ4 marketingYear of (Jun)peripherals(Sep) for PCs(Dec) (personal(Mar) computers)(Mar) and P/E using TTM EPS 12.9 2013 -$0.11other A digital$0.14 A platforms.$0.10 A For-$0.09 the A PC,$0.04 A the P/E using 2015 Estimate 13.7 2014 $0.02company’s A $0.17 products A $0.32 include A $0.10 mice, A trackballs,$0.61 A P/E using 2016 Estimate 19.8 2015 $0.19keyboards, A $0.28 interactiveA $0.40 A gaming$0.04 E controllers,$0.91 E 2016 $0.09multimedia E $0.13 speakers, E $0.37 headsets, E $0.04 Ewebcams, $0.63 E3D Zacks Rank *: Short Term control devices and lapdesks. Tablet & Other ©1 2015 – 3 monthsZacks Investment outlook Research, All Rights reserved.3 - Hold Projectedwww.Zacks.com EPS Growth - Next10 S. 5 Riverside Years % Plaza, Chicago IL 60606 N/A * Definition / Disclosure on last page Accessories products include keyboard and fastest performing mouse and keyboard covers. Internet communications products switches, wireless mouse with longest battery comprise webcams, headsets, video among others. Riding high on product communications services and digital video innovations, in recent times, Logitech launched security systems for a home or small business. a portable videoconferencing solution and Mobile Speakers products include wireless Logitech G series gaming mouse. Going speakers, earphones and custom in-ear forward, the company is aiming at broadening monitors. For home entertainment systems, its in-store presence in key regions, to cater to Logitech offers the Harmony line of advanced the trending demand across the globe. This remote controls and Squeezebox wireless promises strong growth prospects and will pave music solutions. the way for strengthening its top line.

Video conferencing: This segment includes  Logitech is dedicatedly following its three-year the design, manufacturing and marketing of turnaround plan, implemented earlier, to reduce LifeSize video conferencing products, its costs while driving up profits and margins infrastructure and services for the enterprise, significantly. As per the plan, Logitech has been public sector and other business markets. working on its core business structure including LifeSize products include expandable HD (high- its designing, manufacturing and distribution definition) video communication endpoints, HD system to improve the operational efficiency video conferencing systems with integrated significantly. Also, the company has been monitors, video bridges and other infrastructure divesting non-profit assets to reduce costs. software and hardware to support large scale Logitech has also been dedicated to cutting video deployments, and services to support down on non-GAAP operating expenses for the these products. last few quarters. Most importantly, Logitech expects to focus on making selective investments to ensure disciplined cost REASONS TO BUY management in quarters ahead. Such cost- cutting and restructuring initiatives are expected to significantly benefit the company, going  Growing adoption of new mobile platforms, forward. such as tablets and smartphones in both mature and emerging markets are fueling the  Logitech’s strong cash and balance sheet demand for Logitech’s peripherals and position allow it to pursue strategic mergers and accessories. The rising demand has led to acquisitions for further expansion of its strong retail sales growth for the company. In business. As of Dec 31, 2014 Logitech’s cash particular, Logitech’s mobile speaker business and cash equivalents of $516.6 million has been going strong for the past one year, increased from $379.9 million at the end of Dec driven by strength in the UE BOOM. Prompted 31, 2013. Apart from this, the company has by this success, earlier in January, the made efforts to increase returns to its investors company announced UE MEGABOOM – a through share repurchases and dividend hikes. sequel to UE BOOM. Further to enhance the Most recently, Logitech disclosed a three-year user experience, Logitech introduced a new capital allocation plan through which it expects feature which will facilitate its existing and new to return up to $500 million in cash to its users to connect over 10 of its UE BOOM and stockholders via dividends and share UE MEGABOOM speakers at the same time. repurchases. Moreover, the company is Moreover, the company’s video collaboration planning to propose for a Swiss franc and PC gaming offerings are gaining strong equivalent of an $85 million dividend for 2015. momentum. Rising sales of Logitech’s product Logitech aims on continuously raising dividends line bodes well for the future. and paying higher returns, to win investors’ loyalty. We believe such initiatives boost  Logitech is intending to tap the high potential shareholders’ confidence in the stock. market for accessories by pursuing innovation and expanding its product lines. The company has manufactured innovative offerings like

Equity Research LOGI | Page 2 Prior to a debriefing with financial analysts and investors today, Logitech surprised investors REASONS TO SELL with a great news. This involved a long-term capital allocation plan via dividend and share buybacks. Along with this, the company  The rising trend of smaller, mobile computing disclosed the reiteration of its 2015 guidance devices with touch interfaces and the declining and provided its 2016 outlook. popularity of desktop PCs have rapidly changed the market and usage models for PC peripherals and webcams. Declining demand in the company’s most profit-maximizing products like desktops and diverse porting tools can be a headwind for the company. Moreover, the Investors’ Delight company’s sales are impacted by end-user consumer demand and therefore, the business Logitech stated its intention of returning up to can be negatively impacted by unanticipated $500 million in cash to its stockholders in a shifts in consumer buying patterns. span of three years. This comprises a $250 million dividend payout plan, which will  The market where Logitech operates is highly complement the company’s existing $250 competitive and characterized by short product million share repurchase program for the life cycles, constant new product introductions, specified time frame. rapidly changing technology, evolving customer demands and aggressive promotional and Further, at its next annual general meeting, pricing practices. Therefore, in a dynamic Logitech is planning to propose for a Swiss market as this, Logitech needs to bring in newer franc equivalent of an $85 million dividend for products matching the trend in order to survive the year 2015, to its board of directors. Notably, the competition which will be a crucial factor in as per Logitech’s current conversion rate and driving the company’s revenue growth, moving shares outstanding count, this signifies around forward. Although such innovations fuel CHF 0.52 per share – double compared to 2014 Logitech’s growth momentum in long term, they dividend rate of CHF 0.26 per share. tend to increase the company’s operating expenses. This remains a matter of concern for Guidance in Focus Logitech. Talking about the guidance, Logitech continues  Logitech’s business is prone to be affected by to expect its 2015 sales to be around $2.11 the negative impact of currency translation as billion and non-GAAP operating income to be the company derives highest portion of its approximately $185 million. On the other hand, revenues from outside Americas. In third Logitech anticipates its 2016 sales to be about quarter fiscal 2015, international businesses $2.15 billion and non-GAAP operating income contributed about 55.7% of the company’s total to be around $150 million. net sales. Hence, fluctuations in currency exchange rates, weaknesses in political and Going forward, Logitech expects its sales to be macroeconomic conditions of Logitech’s benefited by improving operations. However, operating markets may hurt its quarterly results the company projects the strengthening U.S and thus remains a matter of concern. dollar to significantly affect its financials. Nevertheless, Logitech is working towards neutralizing the impact of the appreciating U.S. RECENT NEWS dollar through pricing adjustments and global cost structure reductions. Logitech Woos Investors via Dividend Plan, Guides for 2016 – Mar 11, 2015 Logitech Woos Gamers with G-Series Mouse Launch – Mar 5, 2015

Equity Research LOGI | Page 3 Logitech recently introduced a new Logitech G Logitech declared third-quarter fiscal 2015 non- series product – Logitech G303 Daedalus Apex GAAP earnings of $0.41 per share, surpassing Performance Edition Gaming Mouse. The the Zacks Consensus Estimate of $0.30 by company’s latest innovation signifies Logitech’s 36.7% and the year-ago quarter figure of $0.35 dedication towards producing a technologically by 17.1%. advanced device for boosting users’ gaming experience. The company declared the The strong quarterly results are attributable to availability of Logitech G303 Daedalus Apex improved performance across all its segments, Performance Edition Gaming Mouse in the U.S. primarily led by PC Gaming and Mobile and Europe, from this month at a retail price of Speakers. Also, Logitech experienced a $69.99. significant increase in its operating income. Prompted by another quarter of strong results, Logitech has designed the product based on the company raised its fiscal 2015 operating feedback from gaming enthusiasts and the income guidance for the second time. eSports community. The Logitech G303 boasts the Logitech G exclusive Delta Zero optical Behind the Headlines sensor technology – one of the highly advanced optical sensors in the gaming universe – for Net sales increased 0.9% year over year to maximum tracking accuracy. In addition, the $634.2 million and exceeded the Zacks device has full-color RGB lighting that can be Consensus Estimate of $631 million. personalized from a palette of about 16.8 million colors, for enhanced visual experience. Based on channels, Logitech’s Retail sales Apart from these, the gaming mouse’s increased 1.7% year over year to $574.0 lightweight, compact and durable design adds million. On the other hand, OEM sales declined to its accuracy and performance level. 12.3% year over year to $30.3 million and Video Conferencing sales slipped 0.2% to $29.9 million. Logitech Launches Advanced Videoconferencing Device – Jan 26, 2015 On the basis of Retail category Product Division, PC Gaming posted a 20.7% year- Logitech launched a portable videoconferencing over-year increase in revenues, while Tablet & solution – Logitech ConferenceCam Connect – Other Accessories revenues were weak, to enhance the experience of mobile audio and reflecting a 28.4% year-over-year decline. video collaboration for small groups in a Nevertheless, Mobile Speakers demonstrated workplace. This breakthrough device, which is remarkable growth with a robust 82.1% said to bring transformation in communication increase in revenues over the prior-year field, works with any computing device having quarter. an USB connection and any videoconferencing software. Adjusted gross margin improved to 36.6% compared with 34.5% a year ago. Conversely, The ConferenceCam Connect provides a highly adjusted operating expenses rose 3.8% year sharp resolution, 4x digital Full HD zoom, a 90- over year to $156.0 million. Consequently, degree field of view, ZEISS optics with adjusted operating income increased 14.3% autofocus and a mechanical tilt control. year over year to $76.4 million. Moreover, the speaker has both USB audio and mobile calling facility and has features like Liquidity Bluetooth wireless technology, near field communication and a USB port. As of Dec 31, 2014, Logitech’s cash and cash equivalents stood at $516.6 million, as compared to $379.9 million as of Dec 31, 2013. Logitech Beats Q3 Earnings Again, Guides Higher Profit – Jan 21, 2015

Equity Research LOGI | Page 4 Also, the company’s operating cash flow stood at $232 million as of Dec 31, 2014 – an 86% rise on a year-over-year basis.

Guidance

For fiscal 2015, Logitech raised its adjusted operating income guidance to approximately $185 million from around $170 million.

However, the company lowered its sales outlook for fiscal 2015 to about $2.11 billion from $2.16 billion guided earlier. The revised guidance reflects the negative effect of the strengthening U.S. dollar.

VALUATION

Logitech’s current trailing 12-month earnings multiple is 12.9X, compared to the 28.2X average for the peer group and 18.2X for the S&P 500. Over the last 5 years, shares have traded in a range of 13.7X to 174.2X trailing 12- month earnings.

We changed our long-term recommendation on the stock to Neutral as we expect it to perform in line with the broader market. Our target price is $13.00 or 14.3x 2015 EPS, which is within the historical range. Key Indicators

P/E P/E 5-Yr 5-Yr P/E P/E Est. 5-Yr P/CF P/E High Low F1 F2 EPS Gr% (TTM) (TTM) (TTM) (TTM) Logitech International SA (LOGI) 13.7 19.8 N/A 12.3 12.9 174.2 13.7

Industry Average 37.0 19.1 16.0 18.4 28.2 155.4 15.8 S&P 500 16.6 15.4 10.7 14.5 18.2 18.4 12.0

LG Display Co., Ltd. (LPL) 8.8 8.6 9.4 2.5 11.4 49.9 5.3 NUKO INFORMATION SYS (NUKO) N/A N/A N/A N/A N/A N/A N/A Synaptics Inc. (SYNA) 16.9 13.4 18.3 18.8 19.8 28.5 13.2 Electronics for Imaging, Inc. (EFII) 47.4 N/A 11.2 20.0 32.0 72.1 14.6 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow

P/B Last P/B P/B ROE D/E Div Yield EV/EBITDA Qtr. 5-Yr High 5-Yr Low (TTM) Last Qtr. Last Qtr. (TTM) Logitech International SA (LOGI) 2.7 3.3 1.1 18.9 0.0 1.36 11.1

Industry Average 2.6 2.6 2.6 2.3 0.2 0.3 5.4 S&P 500 6.2 9.8 3.2 25.4 2.0

Equity Research LOGI | Page 5 Earnings Surprise and Estimate Revision History DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of LOGI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1130 companies covered: Outperform - 15.1%, Neutral - 75.0%, Underperform – 9.0%. Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

Equity Research LOGI | Page 6