The Financial Season Ends

Pretty much everyone has reported their fiscal year (or in the case of Canon, first quarter) results now, and it's interesting to look at how the various camera companies positioned those. 

Panasonic had their second biggest loss, and such a big one that cameras really didn't come up much in their presentations and discussions, as the camera business isn't all that large compared to the rest of the company and its problems. Hidden away in some of the comments to the business press were indications that Panasonic might want to back away from low-end consumer cameras, plus they re-iterated their commitment to higher end products, but other than that they didn't say much that was useful in understanding how imaging is currently performing or will perform in the future.

Sony's financial presentation had a bit of good news: now that they've re-aligned divisions so that all the pro video and consumer still cameras are in the same imaging division, that division is (barely) profitable. Some of the rumors you're hearing about changes in Sony's future camera lineup plans are surely due to the reorganization and a renewed effort to bring the profit margins of that group up. What those mean in terms of actual products is still unknown though. Still, it's nice that Sony can now say that the group is profitable, as it takes a little of the pressure off and it makes Sony one of only three camera groups in Japan to show a profit for the year (Canon and Nikon are the other two). 

Of course, the big news on Sony is that they now have a major Western investor asking them to spin out their media and insurance businesses. The idea is that the cash raised by doing so would make for a good investor payout (;~) and provide much needed cash to reinvigorate the consumer products businesses. My take is that this isn't going to happen, but it certainly has shook up the Japanese investment community as they consider the implications of what will happen as more Western money continues to pour in and starts trying to shake things up. 

I've dealt with the Canon results earlier, and the Nikon's results are on the site. Nikon, in particular, seems to be defying gravity, as it had the lowest readjustment downward of camera unit sales that I've seen so far. They missed their estimates, as did everyone else, but not by much. For the mirrorless crowd, the one nugget in Nikon's presentation was their goal by 2016 to have 25-35% of the mirrorless market and 45% of the DSLR market.

Olympus Full-Year Results

Which brings us to this week's main presenter: Olympus. 

Olympus blamed an "unexpected degree of compact camera market contraction" on missing their goals, but remember, Nikon made their numbers in compacts and gained market share during that same period. But even mirrorless wasn't exactly hitting it out of the park for Olympus: their original estimate for the year was 42.5b yen in sales, and they ended with 37.8b yen in sales. That's an 11% miss. Olympus' original goal was a 1b yen profit, and instead they lost 23.1b yen, or about 21% of sales. True, reducing expenses and trimming staff and resources were part of what contributed to that loss, but remember, they thought they would make a profit, and they didn't. It isn't because they trimmed more than expected, it's straight out that they sold less than expected.

I should also point out that several analysts mentioned to me the same thing: the Olympus comments on the imaging group seemed like deja vu: it wasn't us, it was the market, and we'll just cut expenses and be okay. That's been a common theme in Olympus' reporting on their imaging business for three years now.

Olympus' (mostly old ;~) goals in imaging are simple: 

  1. Minimize risks in the compact camera operations (hmm, sounds like Panasonic)
  2. Focus resources on high-margin mirrorless cameras (hmm, sounds like Panasonic)
  3. Improve responsiveness to market changes (hmm, sounds like last year)

The problem I see with what Olympus presented is that doing these things seems to still keep them in the red. They're cutting in half their compact camera sales, mostly by dropping the V line, which reduces their net income. It's unclear how much that lowers their expenses. Back-of-the-envelope calculations tell me that even if they could increase mirrorless sales 20%, the 50% expected drop in compact sales still means they'd probably have to figure out how to reduce their SG&A expenses by over half. Curiously, they are only listing a 21% reduction. How they achieve that 21%: close three of their five plants, cut R&D expenses by reducing models, reduce the imaging group staff by 30%, and consolidate overseas sales groups. At least two (and probably three) of those four will likely cause further write downs in the current year and produce a loss, though Olympus is predicting no profit and no loss for the coming six months and for the coming year, basically a 0 on the profit line. Long-term, a leaner organization they say will produce a small profit with no gain in sales. 

There's also the "achieve strong growth in conjunction with mirrorless market trends." Uh, the mirrorless market isn't really growing at the moment and it actually shrunk for Olympus last year. The only way to grow at the moment is by gaining market share, but in the last quarter it appeared Olympus lost share again. Even more curious is that Olympus seems to be planning flat sales for all four of the next years (stuck at 100b yen). How that lines up with the term "strong growth" I don't understand. The "Medium- to Long-Term Direction" they reported looks mostly like a wish on the candle's of a kid's birthday cake: "we wish for flat sales but also that we figure out how to sell a mix of compacts and mirrorless that makes a small profit."

The bottom line on Olympus is simple: they're doubling down on mirrorless (which is good news to this site's visitors), though they don't think that's going to bring them any growth in overall imaging sales revenue over four years. They do think it will return them to some form of weak profitability. But we've got a new claim to remember: Olympus says they won't lose money on cameras in the first half of this fiscal year (April through September). So we've got a very near point at which we can measure whether they're managing what they say they will.   

Coupled with the recently announced E-P5 and Olympus' stated upscale goals, my guess is that the OM-D E-M6 will be more expensive than the current E-M5. At least that's what I'm reading between the lines.

Overall, the medical sales continue to drive Olympus. It's their main business, it's profitable, it drives their cash flow, and it is the future of the company. Whereas Nikon has become more and more a camera company (now 75% of their sales), Olympus is going the other way: cameras are becoming less of their sales (currently 14.5%, and projected at 11% in 2017). One analyst put it this way: a healthy medical supply company with a small, unprofitable camera venture that creates financial drag. Even under Olympus' optimistic 2017 forecast, the camera group wouldn't provide real ROI or profit growth for them.  

Update: After sitting through the whole recording of both the presentation session and the Q&A session and having some more time to look over the large amount of information Olympus presented, a few more bits and pieces came to light.

Consider the final quarter of their fiscal year (January through March 2013). According to Olympus, net sales were 20.7b yen in cameras, and in the Q&A session we learned that mirrorless was close to break-even. This produces an astonishing result if considered together: Olympus sold 13.7b yen worth of compact cameras and might have lost 14.3b yen on cameras during that period. For the full year, the numbers are 69.8b yen in sales and a 23.1b yen loss for compacts, still a very stunning loss. 

Coupled with Olympus' estimate of flat overall camera sales through 2017, something has to change for them to achieve that. They have about a 15% market share in mirrorless cameras (590,000 were sold into distribution in their fiscal year versus 3.82m for all makers). The good news is that their average selling cost appears to be reasonably high, in the low DSLR range. The bad news is that they are highly dependent upon mirrorless sales in Japan itself. That means that the yen devaluation probably doesn't benefit them as much as it does some of their competitors.

Finally, one comment: a lot of people are placing stock in Olympus' noting that a 25% growth in mirrorless cameras during their fourth quarter that was mostly due to the OM-D. Let's be clear: this could be channel stuffing to produce a desired result. It seems a bit odd to me that OM-D sales would go up that much after Christmas. More likely is that Olympus made a last manufacturing push on OM-D before moving the factory to E-P5 and the eventual OM-D E-M5 replacement. Single quarter momentum moves by a single maker always have to be looked at with caution, as the way sales are tracked and booked by the Japanese can be misleading to what's actually happening at the consumer level.

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