The struggling optical and medical equipment manufacturer, Japan-based Olympus (OCPNY.PK) finally posted a half-yearly profit of $101 million for the period ending in September after a gap of two years on the back of an asset sale and profit from the specialized medical equipment segment. Its annual forecast has also been raised, which caused its shares to increase by more than 5% in response to the news. High quality camera-equipped smartphones and a strong yen are the main reasons behind Olympus's losses.
The average person simply does not need a camera more powerful than the one in their smartphone for most picture taking. And with camera technology in phones becoming more of a focus for manufacturers and a differentiator with buyers, traditional DSLR (Digital Single Lens Reflex) producers are going to find their wares a harder sell. Just ask what is left of Eastman Kodak. Nokia (NOK) just released a smartphone, the Lumia 920, which is capable of very impressive optical performance due to hardware optical stabilization normally reserved for a single-purpose camera and was designed to challenge stand-alone DSLRs as a person's carry camera. With the results of its optical image stabilization and the initial sales, it would seem Nokia is onto something. The smartphone will become the only piece of electronic gadgetry most people take with them when traveling, reducing DSLRs to professional usage for the most part.
Olympus's reputation was tarnished last year when a massive $1.7 billion accounting fraud, which enabled the firm to hide 13 years of losses, came to light. Consequently, the company and three of its former executives were charged by prosecutors, and the aftershocks of the scandal are still not over as Olympus's shareholders, including foreign institutional investors, have now filed a $240 million suit for damages in Tokyo District Court. This lawsuit will add to the 14 already in progress related to the accounting fraud.
Olympus is moving forward with its restructuring plan that involves laying off of 7% of its total workforce in the next two years and closing 12 out of 30 manufacturing plants by 2015. Despite the new lawsuit, Olympus has confidently raised its annual income forecast from $86.2 million (¥7 billion) to $98.6 million (¥8 billion). The company has accounted for future lawsuits in its estimates. The accounting fraud had caused the company's shares to fall in Tokyo by ~60% last year, but in 2012, they have gained some of their lost value as they have increased by 32% since the beginning of 2012.
This has taken the overall fall from January 2011 until mid-November 2012 to 45.4%. Some of the improvement was attributed to Sony's (SNE) announcement of a $616 million (¥50 billion) investment plan in Olympus. The two former Japanese technology leaders are looking for synergies between respective technologies. The climb for them will be high. For Sony to incorporate Olympus's optical technology into its consumer electronics will take time they don't have given the speed at which this market is evolving. Nokia's PureView technology married to its location services built off of its NavTeq acquisition are proving strong selling points for the Lumia 920, which has the company blind-sided by the demand, while Sony tacitly admits its current Xperia flagship Android phone is not competitive.
Last month, Olympus's rival and the world's biggest camera manufacturer Canon (CAJ) had also reduced its annual forecast due to the European debt crisis and competition from smartphones. The company now expects to sell 19 million compact cameras and 8.8 million interchangeable lens cameras as opposed to the earlier announcement of 21 million compact and 9.2 million professional cameras.
Although Olympus, Canon and Sony have challenging futures ahead, their condition is not nearly as bad as that of their local peer Sharp Corp. (SHCAY.PK) that has nearly gone bankrupt and is now hoping that Intel (INTC) or Qualcomm (QCOM) would come forward to save the drowning firm. The company itself believes that there is "material doubt" whether Sharp will remain in operation, but Intel's rumored $377 million investment plan could put the struggling firm on track.
Olympus's future now relies on effective cost cutting strategies, asset sales and the ongoing restructuring. As far as the digital camera unit goes, which used to be the company's primary operation a few years ago, Olympus has scaled down its unrealistic annual profit forecast of a profit of $12.3 million (¥1 billion) to a loss of $98.6 million (¥8 billion) and is precipitating a shift into more specialized optical technologies and away from the commodity-level consumer electronics space. Its focus in Olympus is in the company's profit-generating medical equipment segment.
However, the worst was still yet to come for Sony's shareholders. By the middle of November, Sony announced that it will issue $1.9 billion of bonds to finance debt repayment and expansion after which its shares slumped to 30-year lows. In its most recent filings, Sony reported a seventh consecutive quarterly loss of $191 million (¥15.5 billion) as it reduced its annual revenue forecast from $83 billion (¥6.8 trillion) to $81 billion (¥6.6 trillion).
In the end, consumer electronics as a market segment is consolidating at the device level, and that is driving tectonic upheaval in last generation's market leaders. Such is the price of innovation and competition. The big winner is the consumer while investors have to handicap a future that is nearly unknowable. For these former Japanese titans, however, the medium term is bleak.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.