The first of an ongoing series of articles looking at the financial results of Olympus Corporation and how it is performing in the Digital Camera Market. In the first part, I will look at the company up to the end of FY2015.
It's a matter of record that Olympus is a troubled company with a recent history of financial irregularities that have been well documented so I won't dwell on that here. Rather, I will be looking specifically at its Imaging Business but also how healthy the overall business is in supporting that aspect.
In terms of the digital camera market, it is worth noting that Olympus is partly owned by Sony and Mitsubishi (who own Nikon) who both have about 5% shareholding. Sony is a major image sensor supplier but Olympus use other manufacturers as well.
Back in 2012, a new 5-year plan was drawn up with 'Back to Basics' as a slogan. In the Imaging Business the stated aim was to:
"focus on mirrorless interchangeable-lens cameras and high-end compact cameras while improving profitability...we will strive to achieve profitability in fiscal year ending March 2013 and establish a revenue structure that will enable us to continue generating a steady income stream in the following years...reduction of SG&A expenses"
Therefore, we expected to see advancements in unit sales of mirrorless interchangeable-lens cameras (MILCs) and higher unit values in both MILCs and high-end compact cameras (HECCs). A reduction in the cost of sales (SG&A) and a return to profitability.
The Olympus business structure is made up of 3 main segments, Medical, Scientific Solutions, and Imaging. Imaging accounts for about 11% of the total company net sales in FY2105 of which 83% is due to Digital Camera Sales and the remainder mainly Voice Recorders. Over the last few years, total net sales have declined until a reversal to overall growth in FY2015. Operating income has also begun to rise along with operating margin.
This has not happened in the Imaging Business segment where net sales have continued to decline. Net sales had declined by 35% since FY2012 and operating income had remained in the red with margin sinking again to -16.7% in FY2015.
Looking at the overall camera sales by type we can see that as expected the main loss in sales is due to the dramatic fall in Compact Cameras. Mirrorless Cameras have made gains in value to offset most but not all of the shortfall in FY2015.
In terms of Camera units sold, we can see a huge drop in Compact Camera numbers between FY2014 and FY2015 while Mirrorless Cameras numbers remained the same year-on-year. The policy of concentrating on high-value products has certainly helped keep sales value up whilst unit numbers are down.
Overall we can see a strategy that is working in a very challenging market but can it be sustained when several other brands are adopting the same policy and with much greater market share?
From a regional perspective, Japan has been the most resilient market whilst Europe remains the largest market but only just. North America has not been as good for Olympus Cameras and Asia/Oceania has dropped by 48% since FY2012. Sales outside the 4 main regions have almost collapsed to nothing. Sad when you consider this would be Africa and South America.
In order to fulfill the target of returning to profit there needed to be an increase in revenue an improvement in margins or a reduction in other expenses. An increase in revenue just did not happen in FY2015 so it was left to reducing expenses.
Gross Margin decreased from 44% to 39% of Net Sales. Not a good indicator of a return to profit.
SG&A (sales, general and administrative) expenses reduced from ¥51.3B in FY2014 to ¥46.5B in FY2015 for the Imaging segment.
R&D (research and development) reduced from 8¥.7B in FY2014 to ¥8.2B in FY2015 for the Imaging segment.
All of this still only led to an increased operating loss from ¥9.2B in FY2014 to ¥13.6B in FY2015.
During this time, realignment of products, changes in manufacturing and reduction in expenses have better positioned the Imaging Segment to move forward into FY2016.
The overall business of Olympus is more focused on the Medical and Scientific Segments but there was a need to turn Imaging around and stem the losses. So what were the predictions for the year to March 2016?
The camera industry was predicting further falls in camera shipments with implications in monetary terms of a reduction in Mirrorless Cameras by -2.6% and Compact Cameras by -6.6%. To offset this the plan was to reduce SG&A costs further, reduce expenditure in R&D, reduce manufacturing costs and inventory to improve margins. This was against the background of diminishing unit sales and fewer products in the lineup. Would 2016 see an upturn in that segment?
Forecast was for Net Sales to fall to ¥70B a drop of 16.5%, Gross Margin to increase by 3% to 42% while SG&A are slashed by 9.2%. A tough year ahead!
My personal view is that this may be the wrong strategy. Why?, well Olympus are a small player in the Digital Camera Market with sales that represent just 7% of the overall market in value terms. They are up against some much bigger players. The biggest players are just waiting for the optimum moment to push into the Mirrorless Market. When they do, with their larger brand recognition and superior marketing structure they will swamp smaller brands that have limited marketing.
Many people have fond memories of Olympus cameras and that will continue, but they are a dwindling minority. Staying in the mainstream digital camera market will be a difficult sell to shareholders if losses keep mounting up. Let's see how FY2016 develops and if there is real progress. FY2016 Q3 results are in so let’s take a closer look.