NIKON Corp. released their Q3 FY2017 results after giving notice of ‘extraordinary loss’ and voluntary redundancy for 1000 older workers. Restructuring the business as outlined in the previous results has come at a cost and the pain is not over yet.
Restructuring is fine if there is a clear plan as to the future direction of the business. With the digital camera market still in free-fall, investors will want to know how the company will maintain its market. The complete abandoning of a segment of cameras that is thought to be one of the more profitable, premium compacts, with the scrapping of the ill-fated DL range will leave people ‘scratching their heads’.
Investors were not impressed and shares fell 15% losing most of the gains made in the last 3 months due to an improving ¥en exchange rate.
Looking at the overall business of Nikon we see a company with rising Net Sales by +2% and improving Operating Income by +83%. This income represents 8.5% of Net Sales and that is a big improvement on the previous year where it was just 4.7%.
Let’s take a look at the overall business structure to see the losses and gains in each sector.
The fall in sales of the Imaging Segment has reduced that sector to just 55% of Net Sales down from 73% for the same quarter the previous year. Imaging accounted for about half of the Operating Income.
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 that leaves a big question about future business growth. For the rest of the year, Net Sales forecasts are negative.
The current restructuring plan will have cost ¥53b by the end of this financial year. It will see over 1000 staff offered voluntary retirement. So far, 1143 employees have decided to accept, worrying.
It’s all well and good shrinking the company to save money and improve profitability but a clear plan is required as to how business can be stabilized and future growth generated. Until we see a credible plan, in light of the severe challenges in their traditional market and given that much of what has been produced over the last year has failed or disappointed. It doesn’t look good.
The overall results have been propped up by a good quarter in the Precision Equipment Segment where sales of FPD Lithography Systems have been exceptionally strong. These systems are large capital expenditure items and providing a useful back-up but they could fluctuate up and down in any given quarter. Forecasts are not bad but probably not enough to replace the fall in the imaging segment sales and profits over the longer term.
In the Imaging segment Net Sales are well down from ¥159.4b in Q3 FY2016 to ¥122.5b for Q3 FY2017, a drop of -23%. Operating Income has gone down in the same period from ¥18.4b to ¥9.0b.
What has been the problem? Again the blame is put on the strength of the ¥en, the Kumamoto Earthquakes in April 2016 and falling markets. The competitiveness of other brands in the DSLR market and new high-performance Mirrorless cameras has undoubtedly had an impact.
The effects of the exchange rate on both the cameras and lens market is also important. The exchange rate for the second half of FY2017 had been forecast at ¥105 per $ and ¥115 per €. This turned out a little better at ¥109 per $ and ¥118 per €. Signs are the final quarter will improve again giving a little breathing space.
In FY2016 Nikon had 31% of the Interchangeable Lens camera market by units. This is now forecast to drop to 27% for FY2017. The market has shrunk by -12% year-on-year.
In the Compact Camera market, Nikon has dropped from 30% of the market in FY2016 to 24% in the latest FY2017 forecast. The market is down by -37% year-on-year taking Nikon’s own figures.
Full year forecast for the imaging segment is for camera unit sales to fall to 6.25M units, down from 10.27M units the previous year. The whole Imaging segment will reduce sales by value to ¥380b, down from ¥520.4b in FY2016.
Where do Nikon go from here? To consolidate current business to make it more streamlined, profitable and focuses never comes amiss. However, they have chosen to develop cameras in a very competitive and ‘faddish’ sector, the action camera. That hasn’t worked out well as it is already over-subscribed with models to choose from.
The core camera strength is DSLRs and Nikon still has some good models. They are losing ground to Canon and with Canon about to release some new mid-range models with the ‘full-works’ added, they will continue to struggle to keep market share.
Nikon has foregone the Premium Compact camera section with the abandonment of their DL range.
The high-end Mirrorless section is growing fastest but even that is about stationary. Nikon needs to get a new Interchangeable Lens Range out sooner than later if it is to maintain even a depleted market share.
Lenses are another large market for Nikon. However, it’s obvious you will only continue to sell lenses if you can sell the camera body first.