Finance

Sat Nav A Satellite Navigation Business Plan for Logitech

Corporate Background

Logitech is a global consumer electronics company founded in 1981 in Apples, Switzerland with offices in Freemont, California   They are looking to expand their business and are aiming to develop Sat Nav, a satellite navigation device for the United Kingdom consumer market.

A world leader in personal computer peripherals, computer navigation in driving innovations, Internet communications, digital music, controls in home entertainment system, wireless and gaming devices. Logitech is known the world over for its core technologies in continuing research, development and innovations, cutting-edge industrial designs and quality and value in its products and processes.  The company adopts the name Logitech International and is a registered Swiss public company traded on the Swiss exchange and on the Nasdaq Global under the symbols LOGN and LOGI respectively.  

Logitechs core business
Logitech started in the OEM sector, which is a component part of the business representing about 15 percent of the companys revenue total for the year 2009. For many years it has been one of the worlds largest PC manufacturers. Logitech is in high-volume manufacturing, focused on quality assurance, worldwide distribution and logistics, and the ability to equate its production and infrastructure under constantly changing conditions.

In 2009, Logitechs retail business revenues accounted for 85 percent of the total. The companys prominence and growth in the PC retail sector is driven by its core business of consumer peripherals addressing the functionality along wireless technology. The expanding array of computer peripherals have further expanded the reach of Logitech along gaming, digital music, multimedia, audio and visual communication, Internet and computer-based video security. Another more recent trend is Logitechs growth potentials in computer peripherals as sales of notebook PCs surpassed sales of desktop computers. The market for Logitech is a growing number of users turning to make their computing a different experience, convenient and trouble-free. Aside from notebook and desktop PCs, IT enthusiasts are provided with distinctively designed computer peripherals, such as mouse, keyboards, speakers, webcams, headsets, microphones and notebook stands.

Other technologies at Logitech
Through the years, Logitechs productive innovations in technology spawned one of the most diversified forms of operations in computer peripherals and support systems. The development and extensive utilization of the Internet and the world wide web added impetus to the global business prospects of the firm and geometrically increased the overall opportunities for the forward and the vertical integration of corporate processes. Thus, Logitech took technological initiatives succeeded in bringing the array of products and services into the market   (1) affordable and reliable wireless connectivity which started with the mouse and streamed into gaming controllers to music systems (2) applications and other resources built on broadband Internet connectivity which further expanded the use of the IT such as free voice and video communications, video security, video sharing on popular Web sites, Web-based music and radio, 3D exploration of the Earth. These virtually widened and intensified the demand for the multimedia, Web and Internet further into the deep recesses of society practically influencing the lives of everyone adding more excitement and even risks in the use of innovations.

(3) The growing popularity of digital music which rode on the widespread use of the iPodMP3 players enabled people to enjoy their music anywhere and anytime with enhanced speaker delivery (4) the emergence and realization of the digital home through flat-panel TVs, digital-video recorders, digital audio systems, PC-based media systems and game consoles enjoy gaming, music, radio broadcasts, movies, TV and photo sharing, universal remote controls.

Business Review of Logitech (www.logitech.com)
As of the third quarter of the fiscal year 2010, Logitechs financial results showed that the company returned to the double-digit profit growth. Revenues for the period were 617 million, a 2 percent decrease compared to 627 million in the same period last year. This included a 5 per cent favorable impact of changes in the exchange rate hence sales decreasing by 7 percent. Operating results during the period showed operating income growing by 37 percent to 58 million from 43 million during the same period last year. This included the effect of the 5.8 million single transaction costs on the takeover of LifeSize Communications at the end of 2009. This brought the quarterly net income at 57 million at 0.32 per share compared to net income of 40 million at 0.22 per share in Q3 FY 2009. Third quarter gross margin was 33.9 percent compared to 29.9 percent during the same period in 2009.

Retail sales went up an average of 3 per cent combined in all areas of operations.  OEM sales however, dropped 38 per cent.   Performance during the third quarter was considered a turning point as this is the likely worst time prevailing in the environment as a result of the global economic crisis.  Logitechs new products across different categories provided the main sales and profitability growth drivers on a year-over-year resulting in significant progress made in the gross margin and working capital management areas. As a result, cash flow improved substantially generating 166 million worth from operations.    

During the last three (3) years, Logitech increased its market take in the electronics industry taking off from a 744K level to 1.7m in 2009 and perspectively to 1.8m at the end of 2009. However, the cost ratio increased from 63 per cent in 2007 to 65 per cent in 2008 to 71 per cent in 2009. Apparently, the need to be competitive puts pressure on the cost-price relationship.  In addition, selling and administrative expenses plus the cost of research and development are equally increasing the cost ratio.

Here, the decision to enter into the Sat Nav product can likely be a risky undertaking if the cost ratio cannot be initially addressed. The thinning gross margin on electronic products is indicative of stiff competition in terms of price, cost effectiveness and technological sustainability. The business outlook for Logitech is likely to be impacted by the entry into the satellite navigation area without first addressing the key cost processes that brought the cost-ratio to a high 71 per cent.        

Outlook Drivers for Logitech
Thus, for the fourth quarter of fiscal year 2010, the company expects revenues between 500 million to 515 million, about a 34-per cent gross margin, and operating income between 15 million and 20 million, including the effects of the periodic amortization of the LifeSize Communications intangible assets recurring in future periods. However, with the addition of the Sat Nav and the realization of the forecast 10 per cent return on sales (ROS) projected and the forecast cost-ratio of 55 per cent, can become a course of hope for the burgeoning cost structure of the company.  Thus, if operations come predictably as determined, the entry into the Sat Nav, reinforced by a strong marketing and promotions efforts may likely improve Logitechs bottom line as well as the entire financial structure of the company.
   
The projected financial statements during the next four years as stated in the plan involve prospects, risks and uncertainties that could cause divergence in Logitechs actual results thus might vary materially from projections. Among these factors that could drive actual results to differ materially from projections include (1) the capability or inability of the company to validly assess and anticipate the timing, magnitude and strength of the planned and unplanned improvements in the core  business processes, operating and non-operating results and financial conditions (2) the shifting demands of the companys customers for the various IT products and the firms capability to project and respond to them (3) the array of customer behavior and responses to new products and services as well as innovations.

In addition, (4) the varying effects of cost management, pricing, product value, (5) the initiatives made by partners as well as the competitors (6) the companys response system to manage revenues, cost margins and profitability have all profound effects on the risks and prospects of meeting corporate targets and bottom lines.

Thus, if the company fails to take heed and focus on the prospects promised by a planned long-term investment in the consumer electronics and personal computers industries, the efforts will somehow redirect the company from aligning its objectives to it efforts. Similarly, there is a need to take initiatives and successfully innovate in current, emerging and convergence of products creating new value-added features or product character opportunities that will likewise increase the item value.

Clearly, the need to manage the sales mix among the high and low margin products as well as the sales area or the geographic sales mix is needed to maximize and optimize the opportunities provided by the market. Along this line, strategies are likely to include the retention and integration of LifeSize employees. Here, Logitech is being challenged in its ability to successfully tap, integrate and penetrate LifeSizes market prospects, opportunities, strengths, technological knowhow, people and processes and to attain goals, objectives and results.

Logitech is similarly in competition with companies in the video conferencing and communications industry, including those firms endowed with better resources, base installed and name recognition. Included as well are those factors required by the Securities and Exchange Commission, such as Annual Reports on Form 10-K and periodic reports for the fiscal year ended March 31 of each year.

Prospects for Logitech Sat Nav
Satellite Navigation is an instrument utilized in mobile transport system used to keep track of specific location through the Global Positioning System (GPS) satellite system. The use of the instrument keeps drivers informed of their whereabouts at anytime. Satellite navigation instruments, with the guide of satellite mapping information, allow car drivers and owners to locate or navigate their way through traffic or directions in unfamiliar places and thus able to orient themselves with their destinations.

Clearly, the use of a wide variety of satellite-based navigation systems as electronic aids for travel and guides currently provides highly reliable and accurate directional position and location capability on a global perspective. An example of this kind is the Navy Navigation Satellite System (NNSS) used extensively by the U.S. Navy since the early 1960s. This was released for commercial production and manufacture in 1967.  As a result, commercial use of the satellite navigation system prospered globally fast. Among the more benefitted sectors include the offshore oil and gas exploration and other geological and geophysical survey processes.

Presently, satellite navigation systems are manufactured by ITT-Aerospace. Since then a number of developments in the industry are being provided impetus specifically in the area of travel and offshore exploration applications. Part of the system description and operation of the satellite navigation system is that it provides the user a highly accurate position on a global, all-weather operating environment. Traditional earth-based radio aids navigation simply along accurate coverage with the signal attenuation and dispersion association along the surface of the globe.  

The prospects of producing the Sat Nav are supported by the fact that travel and mobility are necessary aspects of mans current business and personal needs. Here, all business-related justifications to pursue the production of the navigation instrument are based on the novelty as well as the convenience of exploring the uncharted and unknown terrains of discovery without getting lost. Mans limited and finite capacity for knowledge is somewhat assisted by a process that supplements the process of inquiry when needed.

Analyzing Logitechs Capacity for Sat Nav Sustainability    
From the point of view of Logitechs financial capability to pursue production and marketing of Sat Nav is initially based on the market presence of the competition such as Garman Nuvi, TomTom, NavMan, MyGuide, F  H, among others. Retail prices ranged from 80 to 239 per unit depending on the value-added features such as Bluetooth, MP3, traffic, lane guides, mapping, photo navigation, and a host of other electronic add-on value.

Logitech is in the best position to enter the market considering the present production capability the company is into  the consumer electronics sector. Here, Logitech can consider itself an owner of the electronic products sector with a strong presence on a global scale. Financial forecasts for the segment are illustrated in Table

Table 1
Four- year Projected Income Statement
Sat Nav Division

1234TotalSales (units)4,6565,8207,2759,09326,843100.0Sales ()931,1521,163,9401,454,9251,818,6565,368,673Cost sales512,134640,167800,2091,000,2612,952770Gross profitExpenses

Y E A R1234TotalsUnits of sales4656582072759093           26,843
1.001Revenues          931,152          1,163,940   1,454,925  1,818,656       5,368,673
1.002Cost of production          512,134             640,167      800,209  1,000,261       2,952,770 0.55  
Materials (30)          153,640             192,050      240,063     300,078          885,831    
Labor (35)          179,247             224,058      280,073     350,091       1,033,470    
Overhead (35)          179,247             224,058      280,073     350,091       1,033,470
3Gross profit          419,018             523,773      654,716     818,395       2,415,903    0.45
4Selling and Administrative             93,115             116,394      145,493     181,866          536,867    0.10 5Compensation  Fringes           139,673             174,591      218,239     272,798          805,301    0.15 6Other operating expenses            93,115             116,394      145,493     181,866          536,867    0.10 7Total Expenses          325,903             407,379      509,224     636,530       1,879,036    0.35
8NET INCOME            93,115             116,394      145,493     181,866          536,867    0.10

Financial Analysis

(TO BE CONTINUED)
LOGITECHSat Nav Business Plan
Financial ProjectionsY E A R1234
TotalsUnits of sales4656582072759093        26,843 1.001
Revenues       931,152   1,163,940   1,454,925  1,818,656    5,368,673 1.002
Cost of production       512,134      640,167      800,209  1,000,261    2,952,770 0.553
Gross profit       419,018      523,773      654,716     818,395    2,415,903 0.45
4Selling and Administrative          93,115      116,394      145,493     181,866       536,867  0.10 5Compensation  Fringes        139,673      174,591      218,239     272,798       805,301   0.15
6Other operating expenses         93,115      116,394      145,493     181,866       536,867   0.10
7Total Expenses       325,903      407,379      509,224     636,530    1,879,036   0.35
8NET INCOME         93,115      116,394      145,493     181,866       536,867    0.10

(DRAFT GUIDE FOR PART 2, 3  4)
Part 3) Xgage Financial Analysis.

Xgage is a (fictitious) UK based medium sized engineering company manufacturing handheld consumer electronics devices. Logitech approach Xgage and ask them to carry out the manufacturing of the Sat Navs for a portion of the forecasted sales volumes (to be clearly specified). The last two monthly Income Statements of Xgage Ltd are given in Table 1. The sales volumes in both statements are within Xgages relevant range.

Prepare the annual Income Statements for Xgage for the first year of the Logitech contract in the typical format used for a) financial accounting and b) management accounting. This is to be based on the costing data for Xgage given in Table 1. Allow for floorspace expansion.

Sales     160,000

Less costs    ()
 Materials      48,000
 Machining costs  16,000
 Variable Selling    4,800
 Production labour  32,000
 Packaging    2,400
 Rent    5,000
 Marketing    2,000
 Property rates    1,600
 Total costs         111,800
Profit income       48,200

Sales     180,000

Less costs    ()
   Materials      54,000
   Machining costs  18,000
   Variable Selling    5,400
   Production labour  36,000
   Packaging    2,700
   Rent    5,000
   Marketing    2,000
   Property rates    1,600
   Total costs         124,700
Profit income       55,300Table 1. Last two monthly Income Statements for Xgage Ltd

Part 4) Logitech Business Case.

Logitech have decided to outsource the manufacture of all the Sat Navs to Xgage. Conduct a financial appraisal (in  Sterling), for Logitech as follows

Prepare profit and loss projections for Years 1 through 4 for Logitech in the typical format used for financial accounting based on revised cost estimations given that manufacturing of the Sat Navs is now outsourced to Xgage.

Note The easiest way is to copy your spreadsheet from Part 2 and greatly simplify the cost section as now Logitech is not doing the manufacturing of the Sat Nav devices.

Conduct a capital investment appraisal of the Sat Nav product. Use the Net Present Value (NPV) method to assess this capital investment showing the full development cost in Year 0 vs the net cash flows from Years 1 through 4 (from the profit and loss projections just prepared). The full development cost (typically over 2 Million) may need to be adjusted to obtain sensible results. Estimate the IRR (Internal Rate of Return).

Conduct a capital investment appraisal for an additional 400,000 investment cost should Logitech decide to pay a specialist software development firm to produce a bespoke software solution for the proposed Sat Nav product (which contains additional functions and features over and above the minimum Sat Nav software). Re-calculate the NPV and IRR and discuss whether or not to proceed.