Olympus Financial Report Q1 FY2018 - Olympus Trip Up Again

Q1 FY2018 Headlines (Apr 1, 2016, to Jun 30, 2017)

  • Overall company Revenue up +2%
  • Overall company Operating Profit fell -5%
  • Imaging Business segment Revenue fell -1%
  • Imaging Business segment Operating Profit up ¥1.2B

Overall Company Results

Olympus released the first quarter results for the FY2018. The forecast for this year is to drive Revenues up by +3% and Operating Profit by +11% for the business overall. So how did they get on in the first quarter?

Overall Revenue was up +2% year-on-year to ¥171.8B whilst Operating Profit fell -5% to ¥12.7B and that is 7.4% of Revenue. The exchange rate had little effect on Revenue but did make the Operating Profit look better than it would have otherwise. This was due to the strengthening US Dollar, that has since deteriorated again in the second quarter.

Note: From Q1 FY2018 Olympus has chosen to voluntarily adopt International Financial Reporting Standards (IFRS). This report will use data for the previous years using the JGAAP standard as previously reported, except in the text where modified FY2017 comparison data is available. Either way, it is a relatively small change but it does reduce the Operating Profit/Operating Income for FY2017 by about -7%. Hence, we can conclude it is not done to make things look better.

So on an initial look, this has been a weak quarter and improvement will be required to meet the current full year forecast.

How the sales and profits are made.

  • Medical Business - MB
  • Scientific Solutions Business - SSB
  • Imaging Business - IB
  • Others - OB

The Medical Business segment was responsible for 78% of the overall company revenue and made the majority of the company Operating-Profit. The other 3 segments together made a loss and that is before the effects of 'eliminations and corporate'. So the Medical Business needs to be doing well if it is to support the rest of the company.

In this quarter the medical Business Revenue rose by 3%, good, but Operating Profit fell by -9%, not so good. This in a period where the exchange rate has been more favorable than recent quarters. The results will no doubt put extra cost-saving pressure on the other parts of the Olympus business.

Imaging Business Segment Results

For the Promuser website, the main interest is the Digital Camera business and how Olympus are bearing up in a prolonged downwards market trend. So just how are Olympus faring.

The Imaging Business has a small and shrinking part of the overall Revenue within Olympus, at just 8.8% this quarter, down from 9.1% for the same quarter the previous year.

Revenue for the Imaging Business fell by 1% this quarter against last year but last years loss of -¥0.3B was turned into a +¥0.9B Operating Profit. So an improvement but still hardly 'paying its way'. This improvement has been due to a rise in the Revenue from Mirrorless Cameras, up +14% year-on-year. However, the Compact cameras have seen a bigger fall of -37% in Revenue. Mirrorless cameras are a higher value and have better margins, hence lowering costs and improving profits.

The rest of the year will no doubt be a good indicator of whether the Imaging Business can be self-sufficient and consistently return a profit. Capital expenditure and R&D costs have risen significantly this quarter so it will be interesting to see what new products are in the pipeline.

Effects of Exchange Rates

The effects of the exchange rate on the Imaging Business had little effect this quarter. Revenues would have fallen by another -1% but Operating Profit would have improved by +¥0.1B.

The exchange rate for Q1 has been averaging ¥111 per U.S. Dollar and ¥122 per Euro. Forecast for the full year FY2018 is ¥110 per U.S. Dollar and ¥115 per Euro. If this bears out then it will have a significant negative effect on sales to Europe.

Total Camera Sales

Total unit sales for digital cameras were 190K units in the first quarter of FY2018. This is down -21% from the 240K units sold in the same period the previous year. Sales by value are up slightly from ¥13.8B in FY2017 to ¥13.9B for the same period.

Compact camera sales are down with 80K unit sold as compared with 140K the previous year, down -43%. The same by value has fallen from ¥3.6B to ¥2.3B, down -37% in the first quarter of the year compared year-on-year.

Mirrorless camera sales are up from 100K to 110K units, a rise of +10%. By value ¥10.2B to ¥11.6B, up +14%.

Forecasts

Second quarter forecast for the imaging segment is to improve camera unit sales up slightly to 210K units, up from 190K units the previous year. The value of cameras sales will improve to ¥14.7B, +24% above the ¥11.9B in Q1 FY2017.

Conclusions

Overall company results are weak. This does not help the struggling business segments as pressure to limit cost has a negative effect on company activity. As for the Imaging Business, there are signs of growth in the Mirrorless cameras due to some well received high-end units, especially the OM-D E-1 Mark II. However, the sales of Compact cameras have taken a hit. Bear in mind the Compact Camera Market is still about 28% of the total market by value and 55% by units. Whereas, Mirrorless is 29% of the market by value and 17% by units, leaving 43% of the market by value and 28% by units that Olympus does not have a product for.

Olympus has a strong following in the world of Digital Cameras with many people appreciating the image quality, build quality and compactness of the Mirrorless cameras. However, this Mirrorless segment already has strong competition in Sony, Canon, and Fuji, with Nikon waiting in the wings. Without some strong, lower cost alternatives to the high-priced OM-D E-1 Mark II coming to market quickly, I can't see Olympus either maintaining or growing their current market share.

Olympus stocks was down -7% the day after the results were released and the negative effects of the Korean Peninsular worries sent it a further -4% down before recovering slightly to be -8.6% down.

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