Tag Archive for 'Financial results'

LG Q4 08: handset profits slide but are still the bright spot

Published on January 23, 2009 in Vendors. 3 Comments Tags: , , , , , , , , .

LG Electronics results yesterday showed rising sales but posted its worst ever loss, with the handset division still the brightest part of the business.

The company posted sales of KRW 6.59 tn, growth of almost 12% over the year but 4% down on Q3. However net profit for the group fell from KRW 621bn a year earlier to KRW -671bn.

The sales growth came from its digital display and handset divisions, which both had seasonal rises.The handset division shipped 25.7m phones, growth of 12% sequentially and 8% year on year. Its net sales rose 32% over the year to KRW 3.21 tn, a sequential rise of 4%, suppressed by price pressure.

The main slide in profits came from the digital appliance (air conditioning, fridges etc) division and mobile handsets, which fell around KRW 200bn and KRW 300bn respectively on Q3. Nonetheless the handsets division’s operating profit was positive at KRW 75bn (2.3% operating margin).

For the full year LGs sales were up over 17% to KRW 27.6 tn, while net profit fell by 60% to KRW 483 bn. A large part of this fall was a nearly $400m fine imposed on the company for price fixing in the displays market. Operating profit more than doubled over the year to KRW 1.23 tn.

In its outlook LG said it expected its overall sales and profitability to decline, though it would be continuing its investments in brand and R&D. In particular it said it expects negative growth in the handset market for 2009 but re-iterated its strategy to push into lower-tier markets, raise volumes and build market share.

Analysis: LG achieved its publicly announced target of handset shipments over 100m for the year, posting 100.7m. This is good growth on 2007′s 80.5m and means it has now overtaken Sony Ericsson again for the #3 spot by volume. However it is still in 6th place by (euro) revenues, behind Apple and RIM, in spite of 32% revenue growth in KRW – this mostly reflects the change in currency rates rather than LG’s performance.

The growth came thanks to some good success with key models such as the Renoir 8 MPixel cameraphone follow-up to the Viewty, and the KS360 with a slide-out Qwerty keyboard aimed at the teen texting market. LG also had success in shipping lower end models into India. However, sales went backwards in the North and Latin America and Korea.

The average sale price (ASP) sank over the year from $111 to $91 and, thanks to currency movements, is now the lowest of the big vendors in € terms at €69. This reflects the change in mix towards the lower end of the market.

This shows how LG had to fight very hard for this success, with considerable sacrifice in pricing and profits as it “increased marketing” in order to prevent inventory building up. The average profit per phone collapsed from €10.4 to €1.6, although there is 13% € to KRW currency swing in this.

This leaves LG in a difficult position. The handset division has been the darling of the company, generating the vast bulk of the group’s profits for the last 18 months. With this quarter’s numbers it has moved from having some of the healthier margins in the mobile phone industry’s into the danger zone that Sony Ericsson entered early in 2008, with a painful combination of rising volumes, almost zero profit and the need to continue investing heavily to scale the business up.

LG’s management said it would be strengthening its market-responding capability, rationalising and improving flexibility in its business management. Not clear what that means in detail, but the task ahead is to produce more than a few hit models while scaling up its supply chain and channel position so as to improve economies of scale.

LG said that it would continue with its target of driving volume growth in the low end, and would also aim to capture the “feature” market – i.e. build a stronger mid-range portfolio. It’s good to hear one of the vendors recognising that there are still strong opportunities in the mid-range, instead of over-focusing on smartphones.

Apple’s Q4 08: little sign of recession

Published on January 23, 2009 in Vendors. 3 Comments Tags: , , , , , , , , , .

Apple yesterday astonished the markets by turning in a recession-busting set of results for its fiscal first quarter.

Overall net sales cleared $10bn for the first time ever, growing 6% year on year to $10.17bn. Gross margin rose slightly, while operating income was flat at $2.13bn giving a better than expected operating margin of 20.9%.

Mac unit sales were 2.5m, down a little on the previous quarter but up 9% over the year. iPods set a new record with 22.7m shipped, growth of 3% for the year. iTunes and the App Store also set new records for visits and downloads, with the App Store especially impressive having clocked up 15,000 applications and over 500m downloads.

Apple shipped 4.4m iPhones, lower than the large spike of the previous quarter when the iPhone 3G started shipping in volumes. The sales value of these was $2.6bn, down from Q3′s $4.6bn but Apple takes this revenue over an assumed 24 month life so it booked only $1.25bn of iPhone revenue this quarter (note: this includes a small amount of Apple TV which was not broken out).

The company also set new records with its cash balance rising from $24.5bn to $28.1bn.

The outlook was mixed. Visibility remains poor but the company is confident of the business, saying that it is shipping the best products it has ever had. CFO Peter Oppenheimer gave guidance on revenues in the range of $7.6-8bn for Q1, seasonally down – and below market expectations – but healthy.

Analysis: Well done to Apple for such a strong quarter.

The results are not completely recession-proof.  Earlier in 2008 Mac sales were growing at a higher rate. However Apple achieved some growth with Macs although the PC industry declined overall in the quarter according to IDC. The industry, and Apple, are also experiencing a significant shift in the mix between desktops and laptops, with the desktop market shrinking quickly.

Although the iPhone was down, Q3 was known to be an exception, serving high levels of pent-up demand for the iPhone 3G. No-one knew exactly what to expect for Q4. Apple had said that visibility was very poor going into the quarter, and there were rumours of a large scaling back of component orders.

As it was the volumes fell 37% and the current level is a more realistic basis for forecasting than any we have seen before.

The sell-out volume was higher than the reported 4.4m by about 0.25m as inventories were reduced in sales channels.

During the quarter the average sale price (ASP) fell 10% from $660 to $596. This is partly because of competition, partly because older iPhone 2Gs were being more aggressively priced and partly because phone prices decay over time anyway. With large currency movements the ASP in euros rose 3%.

With the smaller iPhone volumes Apple lost its loudly-proclaimed 3rd place by revenue in the handset market and (keep it quiet) even slipped back behind RIM, on both volumes and revenue.

So the iPhone has had its honeymoon period and this is where the fun starts.

With its Q3 08 results I said that Q4 should be good for iPhones but that things would get much tougher from then on.  I stand by that.

Apple maintains that it is in a very strong competitive position because of its brand, its product design and – above all – its lead in software. On the software side it says “we don’t see anything close to it” and “Apple is years ahead of the competition”.

The iPhone software platform does have clear advantages in some areas but things are moving quickly in  smartphones. Significant competition is building from Android and possibly Palm at this level. RIM and Nokia are both strong players using older platforms, and Windows Mobile 7 is lurking in the shadows of 2009.

Apple rightly points to the App Store as part of its software advantage and here it has a big point.  The App Store has caught the whole handset industry napping (as did the iPhone) and there is a scramble under way to copy it. The App Store has delivered great ease of use for consumers and has succeeded in attracting developers – far more than you would expect given the iPhone’s share of the market. Sucking away developer talent like this is a big danger for the other players.

One aspect of the App Store’s success, claims Apple, is that developers like writing for a single device / form factor / screen size.  That’s true but Apple should not over-play this: it may yet launch variants of the iPhone (e.g. nano) and will start to experience some of the issues faced by other vendors.

Also, it’s not just about software, of course – many people were disappointed with Apple at MacWorld this month when it didn’t release any new iPhone products.

The world is waiting for range extensions to broaden the appeal out to a wider set of segments. Much of the growth potential for the iPhone is in country markets where there is much less subsidisation of phones, so the existing iPhone 3G will have lower appeal.  Meantime other players are carefully pushing their touch screen products down the range to serve the same people – Nokia for example is gearing up for large volumes on its 5800 Xpress Music and will release more touch screen phones across a variety of segments.

Apple will also need iterations of the existing iPhone. For example it has a 2Mpixel camera that doesn’t shoot video. Sony Ericsson, by contrast, is setting the standard with its C905 Cybershot 8MPixel cameraphone.

This is not just specmanship – people who live a connected lifestyle are prolific content creators, uploaders and sharers.  They need good tools for photos and video and can find them at lower price points on competitors’ devices.

This is a real threat. There is evidence already in this recession of people deliberately selecting a product on price, even though they perceive that another product is either better or cooler.  When they find a competitors’ product is both cheaper and actually outperforms the iPhone on key aspects …

On the investors’ call CEO Tim Cook hinted that some of these issues would be addressed soon by saying “we fear that the recession will slow the adoption rate of smartphones, but we feel good about our product pipeline”.

Still it’s not clear how Apple can match what’s becoming available at lower price points, without pulling the rug from under the current iPhone 3G. Unless maybe it launches 2 new products.

Interestingly on the new product front. Apple was clear that it currently has no plans to launch a netbook any time soon, even though netbooks are the current hottest product. This is because netbook hardware is “not what people want” and the software is “not good”.

I’m holding onto my view that the next 6-9 months will be tougher for the iPhone. Apple is showing signs of arrogance on its competitive position and I believe its vulnerabilities in the phone market will start to be exposed in H1 unless it releases some new devices quickly.

We have recent history with Motorola of how brutal and unforgiving the mobile phone market is for a company that has not got its portfolio right. The current economic climate will not make it more benign.

Nokia’s Q4 08: hoisted by recession, currencies and its own petard

Published on January 22, 2009 in Vendors. 1 Comment Tags: , , , , , , .

Nokia reported its year-end results for 2008 today and it’s clear they have had to make a number of delicate judgements in coming through a truly difficult quarter.

The company turned in revenues of €12.7bn, down 19%, with operating profits down 80% after one-time items to €492m. Before exceptional charges the picture is healthier, though profits are still down 53%.

Device shipments for the quarter were 113.1m, down 15% over the year and down 4% on Q3.

The average sales price (ASP) slid from €72 in Q3 to €71. This took revenues for the Devices and Services division to €8.14bn, down 27% over the year and 5% lower sequentially. Within that the new Services area grew revenues by 37% to €158m.

However, operating profits for the division slid by 61% over the year to €1.24bn, which is an operating margin of 9.4% compared to 16.7% in Q4 07.

For the full year the company had revenues of €50.7bn, down just 0.7%, while operating profit was €4.97bn – a fall of 38% (excluding one-time items this was down 8.6% at a much healthier €7.03bn).

For the Devices and Services division the full-year shipments were 468.4m, a new record and 7% up on 2007. Operating profit, though, sank 23% to €5.82bn (-16% before one-time items).

CEO Olli-Pekka Kallasvuo said that the macro-economic environment had deteriorated rapidly in recent weeks but pointed out that Nokia had done well to achieve operating free cash flow of €1.4bn (before a settlement payment to Qualcomm of €1.7bn).  He said that Nokia would take further cost-saving measures that would lead to 1,000 redundancies, but that the strategy would remain intact

CFO Rick Simonson was clear that the company’s top priority for now would be preserving a strong capital structure, while investing appropriately to pursue its strategy.

Nokia said that the overall market had grown 6% in 2008 to just over 1.2bn units, but also said it expects the market to shrink in 2009 by10%. This is a lower estimate than the 5% estimate it gave in the last update.

Analysis: The two biggest issues for Nokia in these results were that the seasonal spike for Q4 did not materialise for them, and that currency swings were large and unfavourable for a euro-based company.

Nokia recently briefed analysts about how it has the ability to flex its supply chain better than others and has used this deliberately over the last 5 years to fuel a seasonal spike in Q4, so that it can win market share.

This is really good quality, aggressive competition and the effect is beautifully clear in its shipments history, compared to Samsung the number two vendor.In the Q3 earnings call Rick Simonson said he expected a muted seasonal spike this time around of only 10-15% uplift, and Nokia planned on this basis.

But that spike didn’t happen for Nokia in Q4 08, so volumes were off plan by 17-20m – that’s roughly what Motorola shipped in total. Nokia was unable to ramp its costs back down fast enough to protect its margins.

Why didn’t the spike happen? A combination of factors:

  • Consumer demand was weaker
  • Currency swings were large and worked against Nokia in 3 ways – its products were more expensive in emerging markets; Samsung and LG had favourable currency swings and were able to price more aggressively both in smartphones and in the mid-range; and some component costs rose
  • Some competitors were pricing to clear excess inventory
  • It missed out on a large order from a China Mobile tender
  • Nokia smartphones were not as successful as hoped in what was a very crowded market
  • The mid-range portfolio was not strong enough, in common with most vendors

So it’s clear that this quarter saw Nokia having to make a large number of tactical decisions on pricing for market share vs. protecting profit, depending on where different competitors were strong.

The effect on profits was large, with average operating profit per phone dropping by 50% in one quarter from just under €14 in Q3 to €6.8 in Q4.

Given that Nokia Siemens Networks is coming out of a large and difficult corporate merger ahead of plan, together with the integration of Navteq and Nokia’s sizeable investment in services, it’s clear that the company did an impressive job in hanging on to competitive profitability and delivering healthy cash-flow.

Services revenue grew strongly in the quarter, although it’s still small. Nokia was not specific on which services drove the growth. We know that one of the big hopes was Comes With Music – the unlimited music bundle.  Nokia sank a lot of effort and money (£10m ad budget) into the UK market launch and OPK described it as having had “a good start”.

That view is not shared by people you talk to in the UK market, who think it has flopped. They cite the recent £50 price reduction as evidence that it’s just not working with the current devices.

Nokia hopes that Comes With Music will be given a large boost by the 5800 Xpress Music phone (launches here tomorrow), which is being well received and is set to become Nokia’s top revenue and gross margin device soon. It is rolling Comes With Music out across 13 more geographies shortly and will have 7 phones bundled with music.

Looking forwards Nokia gave these pointers for 2009:

  • It is not changing its services strategy, although it will invest more slowly and “appropriately for the conditions”
  • It is strengthening its smartphone portfolio – the N97 is a key device here
  • It does not see smartphones only as a high-end phenomenon: this is really interesting and means that it will continue to push Symbian / S60 further down the range
  • It is still in a very strong position in the mid- and lower tiers: its S40 software is positioned to deliver good internet experiences and integration with Nokia’s services at much lower price points
  • It will save costs where necessary and do what it takes to protect its financial strength until market conditions are more stable
  • It sees big opportunities during 2009 as other competitors struggle in various areas and it aims to emerge in stronger position from this downturn