Canon Reports Lower Q3 Sales and Operating Profit, Sales and Profit Growth in the Office Business

On Oct. 25, Canon reported its third-quarter 2018 financial results. Total third-quarter revenue of $8.13 billion* was down 6.8 percent compared to 2017, while operating profit of $599 million decreased by 12.4 percent compared to the third-quarter of 2017. Canon attributed this to factors impacting the Imaging System and Industry & Others business units, with both sales and profit growth in the Office business partially offsetting these declines. For the nine months ending Sept. 30, 2018, Canon’s overall revenue of $25.38 billion was 2.2 percent lower than the same period last year, and operating profit of $2.13 billion was 0.07 percent lower.

Regionally, the Americas experienced a revenue decline of 5.4 percent, Europe showed a drop of 6.2 percent, and Asia and Oceania had a 15.5 percent decrease. Japan was the only region that showed revenue growth, at 2.3 percent for the quarter. Revenue results for the nine months ending Sept. 30, 2018, show all regions underperforming 2017, with Japan off 1.3 percent, Americas down 4.1 percent, Europe down 0.5 percent and Asia and Oceania off 2.6 percent compared to the same period last year.

With these results, Canon revised its outlook for fiscal year 2018. Canon now projects 2018 net sales revenue to be $35.09 billion, a decline of 2 percent versus 2017, with an operating profit of $2.94 billion, which is an increase of 4.3 percent. Net income is expected to increase by 3.1 percent to $2.20 billion. Toshizo Tanaka, executive vice president & CFO, said, “Although we expect a decline in revenue, we will work to realize our aim of second consecutive year of profit growth, exceeding all of the profit margins of last year.” That work will be centered around lowering manufacturing costs, improving product mix and expense management.

Office

The Office business unit,  which includes office MFPs, laser printers, digital sheetfed and continuous feed presses, wide format printers, and document solutions was the bright spot for the third quarter. With third-quarter revenue of $3.78 billion, the business unit delivered a slight growth of 0.2 percent over the third quarter of 2017. For the nine months ended Sept. 30, the business unit revenue was at $11.72 billion, 0.06 percent growth over the same period as last year. Canon noted the growth was due to demand in emerging markets, the shift to color models and the solid performance of new products such as the imageRUNNER ADVANCE II models. Unit sales of MFPs and laser printers exceeded last year’s results, and consumable sales are on plan. Commercial printing revenue was solid due to expanding sales of products like the new ProStream 1000 and VarioPrint i300. Third-quarter operating profit for Office was $440 million, which was significantly up by 15.2 percent over 2017.

Canon expects the MFD and laser printer markets to remain solid, with emerging markets driving demand, a continued shift to color models and reaction to newly introduced models such as the A4 monochrome imageRUNNER ADVANCE models introduced in October. Due to the change in model mix toward more affordably priced low and medium speed MFPs, Canon adjusted its 2018 fiscal year Office revenue projections to $15.83 billion, but that still maintained the expectation of a slight increase of 0.7 percent over 2017.

Imaging Systems

Canon’s Imaging System business unit, which includes cameras, inkjet printers, and image scanners, was significantly impacted by the continued decline in the camera market and inkjet market contraction in developed countries. While Canon reported inkjet unit sales above those of last year, the continued decline in MIF in developed countries negatively impacted consumable sales. Revenue in the third quarter for this business unit was $2.0 billion, down 15.6 percent from third-quarter 2017 results. For the nine months ending Sept. 30, YTD revenue of $6.23 billion was 10.6 percent lower than the same period of 2017. Third-quarter operating profit for this business unit was $190 million, down 45.3 percent from 2017.

The projection from Canon is that this business unit will continue to experience decreases in both sales and operating profit through the rest of FY 2018, with FY 2018 revenue expected to be $9.12 billion ­— a decline of 8.5 percent from 2017. Anticipation of growing demand for inkjet product in emerging markets, expanding sales of refillable ink models and the introduction of new A3 stationary print head business inkjet MFPs sets expectations for achieving unit growth over last year.

Our Take

While the camera business struggles and continues to be a drain on overall Canon revenue and profit, the MFP and laser printer business are selling more units and experiencing slight growth. Through lower product costs, improved reliability and disciplined group expense management, the Office group is showing that it can generate cash for Canon by providing significant profit growth. The new imageRUNNER ADVANCE II products with the addition of the new A4 monochrome models create a very strong portfolio of reliable and solution-oriented products. They round out Canon’s laser MFP and printer business and provide a robust selection of A3 and A4 office solution-oriented products that will contribute to extending Canon’s position in the market and its pursuit of profit growth.

Seventy-four percent of Canon’s revenue is derived from business units struggling in mature and declining markets (Office is 46 percent of total revenue and the Imaging System group, of which 62 percent is cameras, contributes 28 percent to total revenue). While trying to cast an upbeat message on increased unit sales of MFDs and printers and market share growth in cameras, the reality is that increasing that share in declining markets is not generating real revenue growth. Without revenue growth, cost-cutting, and expense reduction become ever more important to generate profit and this was a clear statement from Canon of what they will do in all their business units.

CanonEarnings

The cutback in R&D spend in the Office group makes sense as the technology in this area is mature, and it frees up R&D dollars for investment in other growing markets. The increase in 2018 R&D spending as a percentage of revenue in the Image System group is curious, but most likely due to the new introductions of Canon’s mirrorless camera series and the new A3 stationary head business inkjets due to become available early next year (look for an upcoming Analyst Corner piece on these devices). Increasing R&D spend in the Medical System group seems logical, as leveraging the Toshiba Medical Systems integration and the overall market growth in healthcare would pay significant dividends to Canon. Network cameras fall within the Industry & Others group, and investing in the growth in the network camera market would deliver good results as well. The question will be whether these areas can contribute enough revenue and growth to offset the revenue declines in the Office and Image System groups.

*Conversion as of Sept. 28, $114 yen = $1.

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