On April 23 Canon released its financial results for the first quarter of 2020. That they are underwhelming should come as no surprise, and they will likely be just the first in a series of less-than-stellar reports.
The “key message” in the earnings presentation included the following statements:
- External environment:
- Spread of COVID-19 completely changes global economic landscape
- Global economy faces worst recession since the Great Depression
- Business performance
- Factory shutdowns and decline in capacity utilization rates
- Some products in short supply
- Stagnant economic activity impacting sales of Canon products as well.
We’ll likely be seeing a lot of this as earnings season kicks off.
Canon notes that, when announcing its projection for the year in January, the global economic environment was expected to improve, and while understanding the potential downside risks it made its projections with that in mind. Those projections, of course, have been substantially revised.
Until mid-February, Canon notes, performance was in line with its plan, but at that point on things went downward.
Net sales declined by 9.5% to 782.3 billion yen, operating profit declined 18.7% and net income declined 30%. Canon estimates about 60% of the decline in net sales was due to COVID-19, and without that impact operating profit would have been up 30%
For its Office business unit, in addition to a decline in unit sales due to an insufficient supply of hardware and limited sales and marketing activity, service revenue also declined as demand for print decreased, stemming from stagnant business activity. However, reports Canon, even under these conditions, an increase in profit was achieved by thoroughly controlling expenses.
Specifically regarding its MFD segment, Canon notes that although it had expected the market to remain solid, it is now expected to decline, and with factories in China shut down since February, there was a significant drop in hardware unit sales. Service revenue also declined as office print volumes were down due to remote work. Similar impacts were reported in the laser printer segment.
In “others” segment within Office, which includes wide format and production print products previously included in the “Industry and Others” segment, Canon reports first-quarter impact from COVID-19 was limited as a larger portion of its sales are in Europe and the U.S. vs. Asia. That will change going into next quarter as the impact in those regions hit in March.
Canon’s Imaging System unit combines consumer products, so it includes inkjet printers and cameras. Canon reports a spike in demand for inkjet printers due to remote working and learning; in spite of that, sales and profit declined due to a drop in camera unit sales.
Unit sales of inkjet printers were up 4.6% in the first quarter as Canon reports not only a stimulated demand for home printing, but retailers concerned about instability in product supply accelerating their purchasing. The overall market, however, is expected to shrink in 2020, reflecting not only the expected market contraction in developed countries, but a slowdown in emerging markets that were expected to recover but are now impacted by COVID-19.
As one might expect, sales of equipment related to the testing of pneumonia and other infections increased. However, overall sales and profit declined as little progress was made in installing large systems due to limited access to medical institutions.
Industry and Others
This overall segment includes lithography equipment, OLED vacuum deposition equipment and network cameras. The latter two are combined into an “others” subcategory, which saw a slight increase in sales of 1.7 percent, although that was primarily due to the OLED segment and driven by smartphone demand, and not network cameras – perhaps surprisingly. “Even for us, measures such as city lockdowns and restrictions toward going out is putting a drag on business negotiations with customers and causing the installation of cameras to be pushed out. In the first quarter, we won big business deals with government agencies etc. and as a result secured sales growth. As for the second quarter on, however, we expect business activity to be severely limited. Although it is impossible to measure the scale of these effects, because network cameras are one part of the social infrastructure that support people’s safety and security, we will support the needs of customers, strengthening our lineup in line with our plan, for when the pandemic fades,” notes Canon.
Canon did not release actual forecast numbers, although the outlook is probably not great and Canon certainly won’t be the only one to report this. Canon predicts its second quarter will be worse than the first quarter, but as it is unable to predict when the COVID-19 pandemic will fade, providing a performance outlook is difficult, and when it becomes possible to come up with a reasonable estimate, it will restart disclosure. “Canon decided to revise its consolidated financial results forecast for the fiscal year ending December 31, 2020, to undetermined,” says the company’s statement. “Going forward, once it becomes possible to provide a consolidated results forecast, Canon will make prompt manner.”
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