Archos: The Company That Could Have Been The 'French Apple'

| About: Archos ACT.Nom (ACOSF)

Archos (OTC:ACOSF) is a French consumer electronics company. Archos employs around 200 people and offers a variety of products, including digital audio players, portable video players, digital video recorders, a personal digital assistant, netbooks, and tablet computers using Google Android and Microsoft Windows. Archos' major competitors are Apple (AAPL), Samsung Electronics (OTC:SSNLF), Asus (OTC:AKCPF), Acer (OTC:ASIYF), HP (HPQ), Motorola (MMI), Research in Motion (RIMM) and HTC (OTC:HTCXF).

Founded in 1988, Archos started by selling memory cards and moved to MP3 players in 2000. The company launched the concept of the portable media player with the Jukebox Multimedia, a player that not only plays music but also displays pictures, plays and records videos. It was a kind of iPod Touch ahead of its time! However, Archos' player remains in obscurity because at the same time Apple released the iPod, which of course became the symbol of the portable media player. While the iPod has dramatically increased the growth of Apple, Archos has remained a small company.

Actually, Archos has reflected for a long time the archetype of the company incorporating a large number of functions, and often innovative features in its products. Without necessarily worrying about their interactions and ease of use, all of which have made Apple's success.

Between 2006 and 2009, the revenues have fallen from 124 million euros to 57 million euros and the company realized important losses (around -17 million euros each year over the period).

In 2009/2010, Archos diversified with the first ever Android-based tablet and implemented a new strategy to return to profitability. Indeed, Henri Crohas (CEO) decided to outsource part of the product development to reduce investments, and to attack the low-cost segment. He understood that it was useless to compete with Apple's iPad, and that is why he focused on entry-level tablets.

Since then, the business model is based on a geographical segmentation. In France, engineers and designers are responsible of the development of the products sold under the brand Archos. In Hong-Kong, the staff works for the subsidiary Arnova Technology to design entry-level products under the brand Arnova, created in 2011. This brand already generates more than a third of sales. The products are made ​​in China and the materials used are low quality. Archos is banking on its Arnova brand to target emerging markets. Moreover, Archos is also an Original Equipment Manufacturer (OEM), and tablets sold under the brand of leading French retailers or tablets for the U.S. education are originally Archos products.

This strategy had a beneficial impact on the company's accounts and the revenues went back in the right direction in 2010 (+21%). Thanks to its tablets Archos has doubled its sales in 2011. The sales have grown from 83 million euros to 171 million euros, the best performance for the company since its foundation. In 2011, Archos realized 69% of its sales in Europe, 17% in USA and 14% in Asia.

The company's operating profit reached 8.6 million euros (operating profit margin of 5.2%). After four years of losses, Archos has returned to profitability in 2011 with a net profit of 5.7 million euros.

The innovation capacity allows the company to compete with the powerhouses of the tablet market that is growing rapidly with sales prices increasingly compressed. Archos has developed a new architecture for its tablets that could become the thinnest tablets in the world at only 7.6 mm thick (versus 12 mm for the current generation and 9.4 mm for the iPad).

According to GfK, a German market research institute, in 2011 Archos was neck-and-neck with Samsung for the second position on the European Android tablet market. The company even dominates the segment of tablets under 400 euros with nearly a quarter of the market shares. With 1.6 million tablets sold in 2011, Archos is ranked number 4 worldwide (excluding Amazon Kindle), far behind Apple (35 million tablets) or Samsung (5 million) but close to Asus (2.5 million) and just before Acer (1.5 million).

In 2012, Archos expects to increase sales by more than half, driven by the launch of new entry-level tablet computers. Indeed, the French company will offer the first tablet at 50 euros, a mid-range at 200 euros and an upmarket model at 300 euros. These tablets would be compatible with the new OS Windows 8. Archos' focus on cheaper tablets will help the company to continue to grab market shares in Asia. If sales reach 260 million euros this year, the company's operating profit will be 20 million, up from 8.6 million in 2011.

However, I think Archos will have to face two main challenges in the next years:

  • Archos is focused on entry-level tablets with its brand Arnova, and wants to compete with Chinese and Taiwanese manufacturers, but the competition on the low cost is deepening. Archos has been a precursor on the entry-level market, and now a lot of manufacturers are targeting this market by reducing prices and offering tablets under 400 euros.
  • Archos know-how is innovation and the current strategy might jeopardize it on the long term. The company would have to shrink its margins in order to face the competition. The innovation capacity could be limited compared to Samsung Electronics, Asus, Acer, HP, Motorola, Research in Motion or HTC.

Despite these challenges, I am long on Archos because the firm and Henri Crohas have a capacity to overcome challenges. Furthermore, Archos nearly went to bankrupt in 2009 but ultimately survived - does that remind you of anything?

As of the time of writing, Archos was trading at $12.18 and at 7.34 euros on Nyse Euronext (JXR).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.