Nikon Fiscal 2015 Results

(news & analysis)

Nikon today (May 14, 2015) announced their full fiscal year results for the period of April 2014 through March 2015. As expected, the news was basically one of decline. Overall sales were down 13% and operating income down 31% year-to-year. In the Imaging Products business, sales were down 15% and operating income down 12%.

Nikon followed the pattern of other Japanese companies in blaming camera sales sluggishness on outside factors. In particular “delayed market recovery in China and Europe.” 

Some of the key aspects of the Imaging Products group:

  • Interchangeable lens camera (ILC) unit volume down nearly 20%, although market share increased to 34%.
  • Lens unit volume down 19%, and now 29.5% market share.
  • Compact camera unit volume down 31%, with a 27% market share.

All of the above fell short of Nikon’s last revised forecast, made only a couple of months ago. Yet Nikon pointed to a better gross operating income in Imaging, now 9.7% of sales as opposed to last year’s 9.4%. In other words, Nikon kept their own costs under control despite significantly declining product volumes. 

Indeed, overall Nikon kept a very tight reign on a variety of things, including inventories in the Imaging Products group (though one wonders how much of that went into gray market dumps). Cash rose, debt fell. Total net assets rose, while total liabilities dropped. For a company with its two main businesses in crisis, Nikon did a remarkably good job of keeping tight control to retain an overall profit.

Nikon did take a significant write-down against the Precision Equipment business, which is still undergoing its own drastic shrinkage. And for the first time I can remember lately, their small  Instruments business actually reported a real and reasonable profit. The recently acquired Medical business is already proving to not be what Nikon promised it would be: in the coming year when it is first consolidated into Nikon, it expects a loss of over one-third its sales.

Like Canon and the others that reported before them, Nikon tries to put a positive spin on a negative story: “Although market conditions continue to be sluggish, expenditure spending will continue to ensure sustainable growth in the future.” That growth? A 10% reduction in sales and 33% reduction in operating income for the coming year. Some growth that is. 

For the next fiscal year, the key aspects are:

  • An 8% decline in ILC volume, with a slight increase in market share
  • A 9% decline in lens volume
  • A 25% decline in compact camera volume, with a significant increase in market share

Nikon also presented their Medium Term Management Plan, entitled Next 100—Transform to Grow. A few key things mentioned there:

  • “Imaging Products Business suffered from larger-than-expected DSC market contraction.” I’ve written this for several years now: Nikon had its foot on the accelerator as an obvious hairpin turn loomed ahead. I saw a severe contraction, other analysts saw the same contraction, statistical analysis revealed a likely big contraction, yet Nikon didn’t see it? 
  • “Updated Medium Term Management Plan is unchanged for 3 years.” It’s the same old story: fix the Semiconductor Lithography equipment weaknesses, maintain the stable income from the Imaging group, and pivot to medical (even in the existing Instruments business). 
  • “6-business portfolio for sustainable growth.” Yet three of those aren’t exactly growth businesses and aren’t being managed that way. One is being milked (Imaging), one is being propped up (FTP Lithography), one is trying to be revived (Semiconductor Lithography). Cameras and lenses are 68% of this years sale’s. They’re 130% of this year’s operating income. Imaging is being managed to “ensure stabilized income,” not growth. 
  • Operating income: there’s essentially no growth until the 2018 fiscal year under Nikon’s plan. There’s actually no growth at all in the Imaging Products business in the medium term plan. Again, I’ll use the words “being milked.” Virtually all the growth Nikon points to are a slight recovery in Precision Equipment, and growth in the Instruments and Medical businesses, both mostly pointed at medical.
  • “Strengthen profitability by improving value and product mix of medium/high end SLR cameras and interchangeable lenses.” Expect more focus on FX and higher priced DX cameras, less on CX and lower price DX cameras. If Nikon is going to keep the ILC business fueling the company’s needs, they need more revenue per unit. 
  • “Market forecast for” ILC cameras: Nikon claims that ILC unit volume will bottom out in the 2nd half of 2015, be flat in 2016, and start growing again in 2017. However, their actual sales/operating estimates through that period don’t seem to incorporate that optimism. They show a bottom happening in 2016.
  • “Network connectivity; future camera.” Wow, a whole slide devoted to what I’ve been writing about for years now. Indeed, Nikon even is now saying what I’ve been writing about since 2009: “co-existence with smart devices...novel capture devices and applications, turning the business back to growing path.” However, having just written a section for upcoming books about Nikon’s current connectivity, they’ve got a long, long way to go.

So what’s this all mean? 

First, I’ve always admired Nikon’s tight financial controls. For a company that relies on two unhealthy businesses to provide all their cash inflow, they do a marvelous job managing the bad news from the accounting standpoint. On the accounting side, they’re micromanagers extraordinaire. (Note: I personally don’t like micro management. It generally misses the bigger picture.) That Nikon is still managing a fairly healthy profit and improving key financial ratios when their primary business is severely contracting is something to be commended. 

I’d argue, however, that management missed many key signals along the way that would have kept them from hitting these deep contractions. Moreover, there’s an enormous focus on micromanaging what’s happening within Nikon, but virtually nothing said about the customer. Go ahead, look through all their presentation materials of late. How often is the customer mentioned? 

Nikon is inwardly focused at the moment, and it shows in everything they’re doing. That one thing that I pointed to above (“network connectivity; future camera”) is all about serving the customer. Nikon has a lot of current customers it needs to re-ignite, too, as much of its business is ongoing updating and replacement. Yet none of this is talked about in the Medium Term Management plan. 

So if I may be so bold: Nikon needs to add a third bullet to it’s Transform to Grow Basic Policy: re-connect with customers. 

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