Free Market Research Methods Part 1 – Analyzing Public Filings

Last week I attended a Market Research workshop presented by Dr. Dean Chang, Director of Mtech Ventures and Education. Instead of the general advice given at many market research presentations, Dr. Chang put himself in the shoes of a founder and walked us through some motions. This article will cover his take on analyzing public SEC filings.

Why should you bother doing market research?

  • It is expensive to develop products, but it is cheap/free to obtain research.
  • Since your product will most likely change, it is vital that you know your market so that you can successfully guide its evolution.
  • Investors and anyone with whom you may develop a business relationship will probably not take you seriously if you don’t know your market.

What is a 10-K SEC Filing?

Every publicly traded company is required to file an annual 10-K report. This document may have information on a company’s biggest competitors, distribution channels, sales figures, supply chain, and more. Some companies have their 10-K on their company website but we’ll just go to the SEC website and search for it. I use the search option “Company or fund name, ticker symbol, CIK (Central Index Key), file number, state, country, or SIC (Standard Industrial Classification)”.

*Note: While “Annual Reports” may seem to have the information we are looking for, they usually contain lots of marketing fluff and less of the data we are interested in analyzing. Make sure you see something like the following at the top of the report:
10-k_header

Three questions we should answer

  1. Who are your competitors and what are their competing products?
    (Financials, Product Differentiation, Market Strategy, Sales Channel, Resources, Investors)
  2. How big is the potential market? (1M,10M,100M,1B+)
  3. Who are your first customers and how many are there?

The Mock Company

Dr. Chang’s mock company was interested in the video game controller (peripheral) industry. We will answer some of the questions/sub-questions listed above by analyzing a competitor, Logitech’s, 10-K filing. If you search for “Logitech”, a number of filings come up but we are only interested in the 10-K.

Enough introduction, let’s get started.

What does the video game peripheral industry look like?

The 10-K has some information that helps us feel out the industry. We see the following paragraph in the “Industry Overview” section (page 6):

“We also believe that similar industry dynamics and personal peripheral device opportunities exist for non-PC platforms, such as video game consoles, digital music players and home-entertainment systems. As these additional platforms deliver new functionality, increased processing power and growing communications capabilities, we expect demand to increase for add-on, complementary devices connected to these platforms. The product expertise Logitech has developed around the PC extends to these other platforms as well and provides further opportunity for growth and leverage.”

Logitech believes that video game platforms will continue to improve, increasing the size of the video game peripheral market. This may not be ground breaking news but certainly good to hear from a market leader. Continuing to the “Digital Home Environment” section on page 7, we see this sentence:

“Logitech also offers a broad spectrum of products for gamers. We are leveraging our investments in the desktop PC to enhance gaming consoles with our expertise in force and vibration feedback, cordless connectivity, voice input and video input.”

Again, not groundbreaking given the peripherals already out on the market, but it does say that Logitech thinks highly interactive peripherals with feedback are the future.

What competing products and companies should we be aware of?

Skipping ahead to page 12 of Logitech’s 10-K, we can see that Logitech lists their major video game peripheral offerings. We should probably glance over these to make sure we are aware of what they have produced.

While we may already be aware of Logitech’s product offerings, we may not be aware of Logitech’s largest competitors in the Gaming market. On page 16, we find the following:

Competitors for our interactive entertainment products include Intec, Pelican Accessories, Mad Catz and its Saitek subsidiary. Our controllers for PlayStation also compete against controllers offered by Sony.

Obviously we will need to look at those companies if we haven’t already.

How big is our market?

Going back to the “Marketing, Sales and Distribution” section on page 13, we see that Logitech’s 2009 revenue was around $2.2 billion ( $2,208,832 in thousands ). This is great information but we need to find out what portion of that is gaming. Note that the revenue is also broken down by geographic region which is important for marketing purposes.

If we probe around for more financial figures in the 10-K, we find a very useful statement on page 42. We are given Logitech’s net sales broken down by product family. We see that for Retail – Gaming, the net sales is about $127 million. Now we know that we have at least a $100 million dollar market but probably much more since the industry was described as highly competitive and we already noted multiple competitors.

You have probably noticed that Logitech’s 2009 gaming sales decreased from their 2008 sales figure, $146 million. Continuing in this section, we see the following explanation for this decrease on page 43:

Retail sales of our gaming peripherals decreased 13% while units decreased 22% in fiscal year 2009. PC gaming sales decreased 13% with an 18% decrease in units, primarily due to lower sales of our G15 gaming keyboard and our MOMO Racing Force Feedback steering wheel, partially offset by sales of our G25 Racing Wheel. Console gaming sales decreased 12% with a 28% decline in units. The growth in sales of our GT Driving Force steering wheel were more than offset by declines in the sale of PlayStation gamepads and the Driving Force Pro steering wheel.

One piece of information we can grab from this section is that units decreased almost double the amount of sales which probably means customers are willing to pay a high premium for highly interactive peripherals.

What does our sales channel look like?

Skipping back to the “Sales and Distribution” section on page 14, we see:

“Logitech sells through many distribution channels, including distributors, OEMs and regional and national retail chains, including online retailers.” It goes on to list their third party distributors in the USA and from the “Principal Markets” section, we know that “In fiscal years 2009, 2008 and 2007, Ingram Micro Inc. and its affiliated entities together accounted for 14% of our net sales in each year. No other customers individually accounted for more than 10% of our net sales during fiscal years 2009, 2008 and 2007.”

From this information we know how they reach consumers and who their leading distributor is.

Supply Chain

Although not vital to our market research, there is good information about manufacturing in the 10-K which is important to our business strategy. On page 15, we see the following:

“To effectively respond to rapidly changing demand and to leverage economies of scale, we intend to continue our hybrid model of in-house manufacturing and third-party contract manufacturers to supply our products. Through our high-volume manufacturing operations located in Suzhou, China, we believe we have been able to maintain strong quality process controls and have realized significant cost efficiencies. Our Suzhou operation provides for increased production capacity and greater flexibility in responding to product demand. Further, by outsourcing the manufacturing of certain products, we seek to reduce volatility in production volumes as well as improve time to market.”

Here we are creating a gaming company and probably need to understand a production strategy. We may need the aforementioned hybrid model of in-house manufacturing and third-party contract manufacturers to supply our products. The above information should also raise a few questions. Is Suzhou, China the best place in the world to develop video game peripherals? If so, why is Suzhou the best? Maybe Suzhou is just really cheap, or maybe manufacturers in Suzhou specialize in these devices. I’m not sure the reason but it’s worth looking into.

Acquisitions

Another thing to look for in a SEC filing is acquisitions. Getting your technology bought out by the market leader for a large sum of money is obviously a nice exit strategy. Access to an exhaustive list of acquisitions conveniently starts on page 83 of the 10-K. You may want to read a little about the companies to understand what types of companies Logitech is interested in acquiring.

Conclusion

The purpose of this blog post was to demonstrate that 10-K’s can provide a good starting point for your market research. Much of the information is basic, but it is all free information and held to a high standard with regards to accuracy.

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2 Comments

  1. Posted November 25, 2009 at 6:50 am | Permalink

    Great post. Not many posts that cover SEC filings.
    Kenneth

  2. Posted December 10, 2009 at 10:51 pm | Permalink

    Thanks, Kenneth. I haven’t come across one and I think the information is very good.