Swiss computer equipment producer Logitech (NASDAQ:LOGI) reports its fiscal Q1 2007 earnings after close of market tomorrow afternoon. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? A dozen analysts follow Logitech. Five of them rate the stock a buy, six more a hold, and one a sell.
  • Revenues. Analyst estimates of Logitech's fiscal Q1 sales call for an increase of 15% versus last year's numbers, to $385.6 million total.
  • Earnings. Profits are predicted to rise nearly as fast. The consensus is that Logitech will post a 13% increase to $0.26.

What management says:
In its end-of-fiscal year earnings report released back in April, Logitech boasted its "eighth consecutive year of record sales and profits," helped along by 21% growth in both sales and net profits. Sales growth in the fiscal fourth quarter showed the trend continuing through year-end, with double-digit growth achieved in each of its key sales regions: Europe/Middle East/Africa, the Americas, and Asia, with the strongest growth being in EMEA and the weakest (relatively) in Asia.

CEO Guerrino De Luca also noted that the firm was improving its management of working capital, resulting in a "record high in a single quarter for cash flow from operations of $137 million." He also highlighted improvements in the firm's operational efficiency.

What management does:
According to De Luca, greater sales of lower-margin audio products have squeezed gross margins, as reflected below. But thanks to better operating efficiency (e.g., selling, general, and administrative costs rising just 6% versus 17% sales growth over the last six months), Logitech has been able to minimize the erosion of operating and net margins.

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Gross

33.9

34

33.5

33.1

32.3

32

Op.

11.9

11.6

11.3

11.2

11

11.1

Net

10.3

10.1

9.9

9.9

9.8

10.1
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
However, I do see a flaw in De Luca's assertion that the company's working capital management is improved. It is, but only to an extent. If you'll look back to where Logitech was six months ago, sales were growing at 27% per annum, while inventories and accounts receivable galloped ahead at rates in the mid-to-upper 30s. (This, by the way, is an issue that Foolish colleague Nathan Parmelee has highlighted in the past.)

Over the last six-month period, that disparity continued; it's just that the numbers are a bit smaller now -- on both sides of the equation. Sales grew 17% during this period, while inventories and A/R were both up 26%. Long story short, Logitech still has an inventory problem, is still producing more goods than it can sell, and still lacks the power to demand that its customers pay in a timely fashion. Although shares have fallen 20-odd percent in price since we last looked at them in January, the risk that they could fall further is still there.

Competitors

  • Mad Catz Interactive (AMEX:MCZ)
  • Microsoft (NASDAQ:MSFT)
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  • Plantronics (NYSE:PLT)
  • Sony (NYSE:SNE)
  • Universal Electronics (NASDAQ:UEIC)

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Fool contributor Rich Smith does not own shares of any company named above.