Consumer electronics
Tablet computing will continue double-digit growth in 2013. Unit sales of tablets are projected to reach 116 million this year, up 45% from 2012, when 80 million tablets were sold. Industry revenues for tablets are expected to surpass US$37bn this year, up from US$31bn in 2012. Smartphones continue to be a key revenue driver for the industry with growth projected to continue in 2013. Unit sales of smartphones are projected to reach 130mn this year, up from 111 million in 2012. Smartphone shipment revenues are expected to surpass US$37bn in 2013, up from US$33bn in 2012. Laptop/notebook computer sales will continue to rise as 26 million units are projected to be sold in 2013 accounting for US$17bn in revenue.1
Consumer confidence in the overall economy and technology both fell in 4Q2012, according to the Consumer Electronics Association. The CEA Index of Consumer Expectations, which measures consumer expectations about the broader economy, fell 3.0 points from December and is down 9.3 points, YoY. The CEA Index of Consumer Technology Expectations (ICTE), which measures consumer expectations about technology spending, fell 14.3 points in January to 83.0. The ICTE is down 5.0 points from this time last year. These declines are consistent with seasonality of the post-holiday season.1
Apple’s iPhone and iPad deliver 60% of Apple’s revenue. These two products maintained double-digit growth momentum with units up 35% and 62% respectively. iPhone growth has slowed to some extent, but iPad and Mac growth is expected to accelerate as supply improves. This was compounded by the weaker outlook leading to less channel inventory on a forward-looking basis than expected.
Canon is expected to show signs of recovery going forward in printers after inventory adjustment, a positive effect from the launch of new copiers, and continued growth in SLR cameras. Canon aggressively launched new models of office equipment last year that should positively impact sales. However, the business environment in Europe is still tough. Another point to watch is whether Hewlett-Packard, its prime competitor, can strengthen its sales power in printers. Also, Canon launched mirror-less cameras last year, and is sure to lead the market in this category.2
Sony’s sales for the third quarter increased YoY, primarily due to the favorable impact of the depreciation of the yen and the impact of fully consolidating Sony Mobile Communications AB (“Sony Mobile”) in February 2012. Sony places particular importance on making steady progress in the mobile businesses, which are growth drivers, and the television business, which is working to return to profitability.
Philips' new management team has taken steps to cut its cost structure. While this should provide improvement in margins, there is still an existing concern about the industry fundamentals facing the lighting business, particularly as LEDs become more prominent. Philips also announced that it has effectively exited its small mid-single-digit margin Audio Video Multimedia & Accessories business through a license agreement with Japan’s Funai. The agreement marks Philips’ effective exit from consumer electronics.
Analysts believe that Toshiba’s upside potential is limited because of the surprisingly large TV loss offsetting the better memory profit growth. Toshiba’s only chance of improved profits would be the favorable Forex rates as Yen depreciates; a strong NAND flash margins and a curbing of the large LCD-TV loss.3
- Consumer Electronics Association, Jan 2013
- Deutsche Bank, Feb 2012
- Morgan Stanley Bank, Jan 2012
Revenue and gross margin
Consumer Electronics companies in the analysis recorded a positive sequential growth in revenue this quarter, except Toshiba Corp. Apple registered a 51.6% increase in revenue QoQ to US$54.5bn led by higher sale of iPhones and iPads. Philips registered a revenue growth of 22.4% QoQ to US$9.4bn led by growth in healthcare, lighting and consumer lifestyle. Sony Corp and Canon reported a quarterly revenues of US$22.4bn and US$10.9bn respectively, a growth of 8.8% and 6.6% QoQ. Sony’s increase in revenue was primarily due to a significant increase in sales in the MP&C segment, the Pictures segment and the Financial Services segment. Toshiba Corp reported a revenue of US$15.6bn, a decrease of 14.1% QoQ led by lower sale in digital products and electronic devices. The transfer of the LCD business also impacted the sales.
Gross margins decreased sequentially for all the companies in this sector. Canon’s GM dipped by 290bps to 45.5%, the highest in this sub-sector. Apple Inc’s gross margin decreased by 141bps to 38.6%, led by higher R&D expenses. Toshiba Corp’s GM decreased by 116bps to 24%. Philips and Sony Corps gross margins were relatively flat sequentially at 37.7% and 34.2% respectively.
R&D expenditure
R&D expenses increased significantly for Philips and Apple, as the company registered a sequential growth of 16.1% and 11.5% respectively. Apple’s growth in R&D expenses was primarily due to an increase in headcount and related expenses to support expanded R&D activities. Philips’ increase in R&D was led by investment in product innovation in healthcare segment. Canon’s R&D expenditure decreased by 7.7% sequentially.
R&D as a percentage (%) of revenue decreased for all the companies sequentially. This was due to a higher than expected year end holiday sales. Canon’s R&D as a % of sale decreased from 9.06% to 7.8% QoQ. It was followed by Apple Inc with a decrease from 2.5% to 1.9%. Philips R&D as % of revenue was relatively flat QoQ.
Net income
Net income increased sequentially for Apple and Canon. Sony continued to report negative profit but registered an improvement in net income to US$(124mn). Toshiba’s net income decreased from US$478mn in 3Q12 to US$337mn in the current quarter.
Apple’s net income grew by 59% QoQ led by higher sale of iPhone 5 and iPad and also increased end of year demand for electronic goods.
Net income for Sony was negative, but still improved from US$(198mn) in 3Q12 to US$(124mn) in 4Q12. This was primarily due to higher revenues this quarter and restructuring benefits.
Canon’s revenue increased QoQ by 9.4% but decreased by 10.8% YoY. The gain on a sequential basis was led by decrease in operating expenses and improvements in foreign exchange gains.
Philips’ net income dropped significantly to US$(469mn) from a positive of US$211mn last quarter. This was due to additional restructuring and acquisition related expenses.
Toshiba’s net income decreased by 29.5% QoQ. This was due to loss on disposal assets and restructuring expenses.
Inventory and receivables
Days inventory on hand (DOI) decreased sequentially for Consumer Electronics companies except for Apple and Toshiba. Apple’s inventory days increased from 3 days to 4 days QoQ, due to a marginal slow down in sales in the 4Q12 compared to Apple’s expectations. Toshiba’s days inventory increased by 15 days QoQ led by slower pick up in sales in television segment. Canon, Philips and Sony Corp maintained the industry trend of increased sales and lower inventory build-up in the December quarter, led by the holiday season sales. The Days inventory on hand decreased by 33, 26 and 18 days respectively to 96, 70 and 54 days.
Days sales in receivables (DSO) showed a mixed trend this quarter as it increased sequentially for Canon , Sony and Toshiba while it declined for Apple and Philips. Apple had the highest decrease of 8 days and Toshiba had the highest increase of 12 days.
EPS
Apple reported a positive QoQ growth in EPS of 59.3%,while Canon and Toshiba registered a decline of 14.5% and 27.3% respectively. The EPS movement for these companies was directly related to their revenue movement. EPS for Philips decreased sequentially to US$(0.39) in spite of a 72% completion of its Euro 2 billion buyback program. Sony continued to report negative EPS though it improved from US$(0.20) in 3Q12 to US$(0.12) this quarter. EPS for Toshiba increased YoY from US$(0.03) to US$0.08.
P/E for Consumer Electronics companies declined this quarter, except for Canon and Philips, as investors continue to be skeptical about the macroeconomic stability of Europe and a slow recovery in US. P/E for Apple decreased this quarter from 15.1× to 12.0× as revenue growth has slowed and no new product launches have been announced. Philips, Canon and Toshiba were trading at a P/E of 63.1×, 15.8× and 17.9× respectively. The overall decrease in P/E was due to a prolonged decrease in demand for consumer electronics and increased competition, which is leading to lower margins.
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