Nikon Financial Report Q2 FY2018 - Not a Clear Picture

Nikon Corp. Q2 FY2018 Headlines (July 1, 2017, to Sept 30, 2017)

  • Overall company Revenue down -9.4%
  • Overall company Operating Profit up +16.5%
  • Imaging Products segment Revenue up +0.5%
  • Imaging Products segment Operating Profit up +66%
  • Restructuring plan improves profitability

Overall Company Results

NIKON Corp. released their Q2 FY2018 results with some significant success in improving profits from shrinking revenues. Restructuring has certainly improved the balance of Revenues to Profit. However, there is little in the reports to acknowledge the major bonus that an improvement in foreign exchange has given to these figures. Without the weakening of the ¥en these figures would not look half as positive.

Shares rallied as the Interim dividend was increased from 12 to 14 ¥en. Whereas, Nikon Corp (NASDAQ:NINOY) was downgraded by Zacks Investment Research from a “hold” rating to a “sell” rating.(Source)

Looking at the overall business of Nikon we see a company with sinking Revenue by -9.4% from ¥174.5B to ¥158.1B. This fall was entirely due to the fall in Revenue of the Precision Equipment business. All other business segments saw a rise in revenue, year-on-year.

Operating Profit has risen, year-on-year, by +16.5% from ¥9.1B to ¥10.6B and this rise is mainly due to the Imaging Products segment.

So no sign yet of the Q2-Q3 recovery that we saw last year. Let’s take a look at the overall business structure to see the losses and gains in each sector.

How the sales and profits are made.

This quarter has seen the restructuring of segments to the following:

  • Imaging Products - IP
  • Precision Equipment - PE
  • Healthcare - H
  • Industrial Metrology & Others - IMO

The Imaging Segment has 53.3% of the total Revenue, up from 48.1% for the same quarter the previous year. Imaging accounted for 47% of the Operating Profits before Corporate or other segment losses are factored in.

Other than Imaging, only the Precision Equipment sector is providing a significant size to the business. Given Imaging is still shrinking with little hope of expanding and Precision Equipment has had a bad quarter, that leaves a big question about future business growth. For the rest of the year, Revenue forecast has improved slightly from the previous estimate and Operating Profits forecast continues as before.

Imaging Products Segment Results

The Imaging Products segment that includes all Digital Cameras has increased in Revenue from ¥83.9B to ¥84.3B year-on-year. Whilst Operating Profit rose from ¥4.7B to ¥7.8B. So some positive news about profits due to restructuring and cost savings.

Whilst improving profits is good news in the short term, what will reducing R&D investment by 19% year-on-year do to address the following issues?

  • Lack of a Premium Compact Camera
  • Lack of a viable Mirrorless Camera
  • Strong competition from a technology partner - Sony

The other issues such as the strength of the ¥en, the Kumamoto Earthquakes, and falling markets are no longer excuses. Nikon Imaging segment needs to deliver, otherwise, a viable plan for diversification needs to be produced.

Nikon Market Share in Digital Cameras

In FY2017 Nikon had approximately 26.3% of the estimated 11.77 million Interchangeable Lens cameras sold. The market size is forecast to shrink to 11.0 million units and of that, Nikon is now forecast to drop to approximately 23.6% for FY2018. A loss of 2.7% is better than previous estimates but still not good.

In the Compact Camera market, Nikon had 25.3% of the estimated 12.6 million market in FY2017. With the market expected to contract to 11.4 million units in FY2018, Nikon is forecasting a drop to approximately 22.8% by units.

Note: the figures of market scale above are Nikon's own. Other reports have the scale of the Compact camera market around 14.5M in FY2017 and 13M in FY2018.

Forecasts

Full year forecast for the Imaging segment is for camera unit sales to fall to 5.2M units, down from 6.29M units the previous year.

The whole Imaging segment will reduce Revenue by value to ¥355B, down from ¥383B in FY2017. Operating Profit will rise to ¥25B, a little less than previously forecast.

Foreign exchange

The second quarter of the year saw a big bonus in the exchange rates with the ¥en moving from $102 to $111 and from €114 to €130. These were worth an extra +¥9.5B in Revenue and +¥1.3B in Operating Profit. This continues to improve as we go into the 3rd quarter.

R & D Expenditure

Spending on R & D must be maintained at a high level in order to compete in the modern camera market. Competitors are bring new product to market on a much bigger scale then Nikon are. So hardly the time to cut R & D by 19% from ¥12.2B to ¥9.9B in the first half of this financial year.

Conclusions

Whilst overall Business Revenues are well down year-on-year, especially when the positive effects of foreign exchange rates are taken into account, Operating Profit has improved. This is largely due to cost-savings and restructuring.

The Imaging segment continues to be the largest part of the business and given the still falling market and strength of competition, Nikon needs to be bringing more new products to market. The largest growth is in Mirrorless and currently, Nikon doesn't really have a competitive product.

Premium Compact cameras are doing better this year and with Canons new G1x mkiii setting a new standard in pocketable cameras, Nikon DSLRs will feel the effects.

The launch of the new D850 premium DSLR will help Revenues in the second half as this range has a loyal following. However, competition is strong with the Sony A9, A7r III and Canon 5D mkiv. Growth will be hard to come by.

The second half of this year will be crucial if Nikon wants to remain a force in the Camera Market. They have to get their Mirrorless strategy right or find something different to do.

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