Nikon's First Half Financials

Nikon's first half of their fiscal year results are in. They're not what I'd call good, though Nikon, as usual, puts a positive spin on almost everything. And someone pointed out to me that Nikon doesn't actually mention customers any more in their presentations. Instead, they take time to talk about "management DNA" and shareholder returns, but they just don't mention customers.  

Overall, Nikon is still shrinking. Revenue for the same period compared to the year earlier was down 4.5%, profits down 15.1%. The Imaging business did better, down 1.7% in revenue but up in profit to 4.1% (due to "strategy to focus on high value-add products"). Nikon hid the true extent of their recent medical business losses by creating a new Healthcare business unit that incorporates the former (and profitable) microscope business (and I think a few other bits). 

Curiously, Nikon seems to be leading with the Imaging business unit numbers now. It used to be that they always started with the Precision business (semiconductor unit). I take that to be a long-overdue recognition that the actual health of the company is more due to cameras and lenses than semiconductor equipment, which must be embarrassing for the CEO, who came from the semiconductor side. 

In terms of those cameras, while the overall numbers don't seem all that terrible (again -1.7% in revenue, +4.1% in profit), there's clear weakness in the actual unit volume: 8% decline in ILC, 1.5% decline in lenses, 3% decline in compacts. So much so that Nikon didn't share their usual market share numbers in the main presentation for the first half (they did for the full forecast year, which I'll get to). 

Elsewhere we see evidence of a great deal of micromanagement of big things. Deferred sales, deferred R&D expenses, differed expenses, and upcoming but as not yet taken cost reductions (e.g. the closing of the Wuxi factory in China and the tax consequences of doing so). More so than any other time I can remember, there's a lot of fairly unambiguous number juggling going on in Nikon's balance sheet. That's on top of the direct mentions. Headcount for just the Imaging business unit alone is down 3350 people, though it's not clear when that reduction was done. 

Nikon also keeps mentioning "market shrinkage" in their presentation. Hmm. So I pulled up the CIPA numbers for the last 12 months versus the previous year 12 months (e.g. 12 month trailing sales):

  • Compacts: value up to 227b yen from 200b
  • Lenses: value up to 412b yen from 387b
  • ILC cameras: value up from 587b yen from 504b

Unit volume shows Nikon's problem: DSLRs down 2.9%, mirrorless up 36.6%. 

Since they didn't report it, what market shares did Nikon have for the period from April 1st to September 30th?

  • Compacts: 20.2%
  • ILC: 21.6%
  • Lenses: 20.3%

Now you know why they didn't report it. ILC unit volume is only about two-thirds what it used to be. That "market shrinkage" Nikon keeps mentioning? It's mostly "Nikon shrinkage." 

For the full year Nikon forecasts market shares of  22%, 24%, and 22% respectively. I'm unsure where Nikon got their full market numbers from, though. It appears that they're using some outdated CIPA values. They cite, for example, a total market of 11m units for ILC, but the current trailing twelve month number is 12.3m and rising. At 11m units, it's a 24% market share. At 12.3m, it's a 21% market share. Hmm, just a bit under where they are now. So Nikon's financials are now essentially trying to tell a story that probably won't happen. Nikon is in a market share slide that's unprecedented in modern camera manufacturing history. 

Maybe there's significant new product coming? Doesn't seem to be. The second half of their year (Oct-Mar) has lower volume numbers in every segment of imaging than the first half (Apr-Sept). 

Nikon's forecast for the full year now includes significant restructuring costs in the Imaging business unit. If I'm reading their numbers correctly, the impending restructuring costs will basically be more than the increase in revenue from higher priced camera sales (e.g. D850). And oh, there's been a modest build-up of inventory in the Imaging business unit. That's going to need to be dealt with, too.

And yet, if we're to believe Nikon's overall numbers, they're increasing cash and equity without having much in the way of corresponding debt increase. They've increased their dividend payout, too. All of which goes back to Nikon's focus on shareholder returns. It appears now that Nikon has come to the conclusion that "if we shrink, we shrink." But they'll do just about anything to protect that profit margin as they do.

Customers will have something to say about all this. Nikon's next product announcements are going to have to reverse the significant slide they've seen. But they've cut sales and marketing costs substantially, so how are they going to do that?

Nikon's putting a lot of pressure on their top DSLRs to produce. The good news is that the D850 is a great camera, and so are the D5 and D500. Nikon knows how to make good products. What they don't seem to know how to do is find true consumer relevance in most of their lower-level products. That's just driving this crazy chicken-egg problem where they cut sales, marketing, and customer support costs, which means that they aren't seen as visibly by customers, which drives volume down, which causes Nikon to cut costs, which...yeah, it's a vicious cycle they're in. Let's hope that there's something in the works that breaks it. 

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