Canon Marketing Japan / 8060

Transcription

1 esearch eport by Shared esearch Inc. This PDF document is an updated note on the company. A comprehensive version of the report on the company, including this latest update, is available on our website and various professional platforms. On October 24, 218, Canon Marketing Japan Inc. (CMJ) announced earnings results for Q3. Quarterly performance chg (JPYmn) * Q2* Q3* Q4* Q2 Q3 Q4 Q2 Q3 Cml. Q3* Cml. Q3* Act. Est. Q3 chg Est. Q2 Vs. Est. Q2 Cml. Q3 Sales 155,996 15,24 147, ,66 152,817 15,84 152, ,944 15,82 149, ,4 456, , ,189 62, -12, , -5, -8,322 Consumer 32,667 37,964 38,698 57, 26,822 34,28 35,313 9,329 96, ,3 154,5-12,986 Enterprise 44,241 44,934 41,967 46,3 47,127 47,542 44, , , ,9 185, +7,972 Area 68,92 63,47 62,276 64,4 66,372 63,11 61,44 193,415 19,787 26,6 256,5-2,628 Professional 13,533 12,186 14,295 14,3 16,469 12,494 11,74 4,14 4,37 54,5 55,5 +23 Other, adjustments -5,718-7,292-4,646-6, -5,989-7,535-4,834-17,656-18,358-26, -26,5-72 Business Solutions 86,628 8,825 8,265 86,885 88,481 82,445 81,38 85, , ,145 - IT Solutions 33,813 32,315 31,459 31,211 33,69 32,438 32,856 36, , ,896 - Imaging Systems 31,791 36,287 35,35 56,93 29,496 34,997 35,74 52, , ,339 - Industrial and Medical,375 7,2 6,993 7,63 8,751 7,46 9,866 8, ,77-34,38 - Other, adjustments -6,612-6,398-6,282-6,211-6,982-6,51-6,514-7, ,51 - Company-wide IT solutions sales 46,5 43, , 47,9 - - Enterprise 27,4 27, ,6 29,9 - - Area 15,2 13, , 14,6 - - Other 3,9 3, - - 4,5 3,4 - - Company-wide IT solutions sales (old) 47, 43,5 42,5 43,9 46,9 44, 44,8 48, ,8-183,9 - IT solutions 33,8 32,3 31,5 31,2 33, 32,4 32,9 36, ,4-134,9 - Excluding IT solutions 19,8 17,6 17,3 18,9 2,8 18,2 18,4 19, ,4-76,5 - Eliminations -6,6-6,4-6,3-6,2-7, -6,5-6,5-7, , - -27, % -5.3% -5.1% -.5% -2.% +.4% +3.5% +.2% -1.3% -.7% -3.4% +.6% -1.8% +.5% -1.9% -1.1% Consumer % -9.9% -8.7% % % Enterprise % +5.8% +5.9% % % Area % -.1% -1.4% % % Professional % +2.5% -22.5% - +.1% % Business Solutions +2.1% +2.% +1.3% -1.1% % % - IT Solutions -2.2% +.4% +4.4% +17.1% % % - Imaging Systems -7.2% -3.6% +.1% -5.9% % % - Industrial and Medical -15.7% +3.5% +41.1% +7.9% % % - Company-wide IT solutions sales % +9% Enterprise % +% Area % +9% Other % +11% Company-wide IT Security +6% +9% +3% -3% +% -2% - +12% - Company-wide IT solutions sales (old) -.2% +1.4% +5.4% +9.6% % % - IT solutions -2.1% +.3% +4.4% +17.% % % - Excluding IT solutions +5.1% +3.4% +6.4% +.5% % % - Gross profit 54,869 55,74 53,771 62,293 53,682 54,78 54,82 61,191 51,983 53,8 52,43 162,58 157,34 223, , % -4.8% -6.3% -2.% -2.2% -1.8% +2.% -1.8% -3.2% -2.% -5.1% -.7% -3.4% -1.% - GPM 35.2% 36.7% 36.5% 35.5% 35.1% 35.9% 35.9% 34.8% 34.5% 35.4% 35.3% 35.6% 35.1% 35.4% - -.6pp SG&A expenses 49,672 49,956 48,236 5,467 48,21 48,777 47,372 49,195 48,267 47,59 45,88 144,17 141, , ,36-2.3% -5.3% -4.% -4.1% -3.3% -2.4% -1.8% -2.5% +.5% -3.5% -3.3% -2.5% -2.1% -2.5% - SG&A ratio 31.8% 33.3% 32.7% 28.7% 31.4% 32.3% 31.% 28.% 32.% 31.4% 31.1% 31.6% 31.5% 3.6% - -.1pp Operating profit 5,197 5,118 5,534 11,827 5,661 5,3 7,448 11,997 3,715 5,949 6,235 18,49 15,899 3,46 27, -3,46 28,5-1,5-2,5 Consumer 289 2,267 3,135 7, -2,149 1,42 1,484 5, ,7 9,4-5,314 Enterprise 1,955 1,625 1,898 2,3 2,494 2,353 1,912 5,478 6,759 7,9 8,5 +1,281 Area 3,461 1,994 2,552 3,3 2,946 3,68 3,221 8,7 9,235 11,2 11,8 +1,228 Professional , ,9-1, Other, adjustments Business Solutions 3,43 2,6 2,694 3,949 3,779 2,96 2,638 3, ,513-12,238 - IT Solutions 1,122 1, ,34 1,91 1,12 1,137 1, ,24-4,559 - Imaging Systems ,59 1,755 7, ,22 2,856 6, ,949-11,688 - Industrial and Medical ,416-1,543 - Other % +3.6% +34.6% +1.4% -34.4% +12.2% -16.3% +16.2% -13.6% +9.9% -11.2% -6.3% Consumer % -52.7% - -1 Enterprise +27.6% +44.8% +.7% - Area -14.9% +53.9% +26.2% - Professional Business Solutions +11.% +4.5% -2.1% -5.7% % % - - IT Solutions -2.8% -.4% +4.5% +27.6% % % - - Imaging Systems % +62.7% -8.9% % % - - OPM 3.3% 3.4% 3.8% 6.7% 3.7% 3.5% 4.9% 6.8% 2.5% 4.% 4.2% 4.% 3.5% 4.8% 4.4% -.5pp 4.6% -.2pp -.5pp Consumer % 6.% 8.1% 12.3% - 3.% 4.2% 5.2%.4% 7.6% - 6.1% Enterprise % 3.6% 4.5% 5.% 5.3% 4.9% 4.3% 4.2% 4.9% 4.5% - 4.6% +.7pp Area % 3.2% 4.1% 5.1% 4.4% 4.9% 5.2% 4.1% 4.8% 4.3% - 4.6% +.7pp Professional % % -1.6% -3.5% % Business Solutions 3.9% 2.5% 3.4% 4.5% 4.3% 2.5% 3.2% 4.3% - 3.4% - 3.6% - - IT Solutions 3.3% 3.1% 2.6% 3.3% 3.3% 3.1% 3.5% 3.6% - 3.3% - 3.4% - - Imaging Systems -1.% 5.7% 5.% 13.2%.2% 5.8% 8.1% 12.8% - 5.% - 7.7% - - Industrial and Medical 8.1% -1.4% 1.5% -8.7% 7.2% 1.% 7.2% 1.5% - 5.4% - 4.5% - - Non-operating income (expenses) ,47-1,85 1, , ecurring profit 5,372 5,849 5,648 11,848 5,738 6,91 7,55 12,157 4,1 6,895 6,3 19,334 17,36 31,491 28,5-2,991 3, -1,5-2, % +.3% -22.7% +6.3% +6.8% +4.1% +32.9% +2.6% -28.5% +13.2% -15.9% +14.6% -.5% +9.7% -9.5% -4.7% PM 3.4% 3.9% 3.8% 6.7% 3.8% 4.% 4.9% 6.9% 2.7% 4.6% 4.3% 4.2% 3.9% 5.% 4.6% -.4pp 4.8% -.2pp -.4pp Net income 2,976 3,665 3,353 8,167 3,991 4,384 4,14 8,164 2,529 4,97 4,115 19,6 17,65 2,679 19, -1,679 2,2-1,2-1,4 +61.% +13.6% -19.7% +27.3% +34.1% +19.6% +23.5% -.% -36.6% +11.9% -.6% +9.7% -7.4% +13.9% -8.1% -2.3% Net margin 1.9% 2.4% 2.3% 4.7% 2.6% 2.9% 2.7% 4.6% 1.7% 3.3% 2.8% 4.2% 3.9% 3.3% 3.1% -.2pp 3.2% -.2pp -.2pp Source: Shared esearch based on company data 1/12

2 esearch eport by Shared esearch Inc. Q3 results (out October 24, 218) Cumulative Q3 : Operating profit was down JPY2.5bn (-13.6% ). obust B2B results did not compensate for weakness in B2C. Enterprise (+JPY1.3bn), Area (+JPY1.2bn), and Professional (+JPY5mn) recorded increases in operating profit while operating profit in Consumer dropped JPY5.3bn, impacting overall operating profit negatively. Sales of digital single-lens reflex (SL) cameras and inkjet printers (IJPs) were sluggish in the Consumer segment. Full-year targets were revised in light of results, with operating profit set at JPY27.bn, down JPY1.5bn for the second time from the previous forecast and down JPY3.4bn evised forecast: CMJ has taken into account the greater than anticipated Consumer market stagnation and delays in Area and some parts of Professional. Dividend forecast remains unchanged Consumer: Sales of mirrorless cameras were upbeat. Sales of SL cameras, IJPs, and cartridges dropped, hitting performance Enterprise: Sales from services for financial, manufacturing, and distribution industries were all up in IT Solutions business. Increased MFP shipments to major distributors contributed to an increase in sales Area: IT solution and security services for SMEs saw stable growth, while sales of mainstay hardware such as for MFPs were weak and sales from maintenance service fell Operating margin secured by lower SG&A expenses and expansion in high-margin products, such as LBP cartridges Professional: Industrial equipment was a main driver of this segment. Sales in production printing (with flat sales of high-speed continuous paper printers) and healthcare businesses were down Operating profit by segment (top) gross profit and SG&A expenses (bottom) Business Solutions IT Solutions Imaging Systems Industrial and Medical Others Consumer Enterprise Area Professional Others Gross profit GPM (right axis) 37% 56 SG&A expenses SG&A-to-sales ratio (right axis) 36% 6 36% 52 34% 55 35% 48 32% 5 34% 44 3% 45 33% 4 28% 4 FY12/11 32% Source: Shared esearch based on company data Note: Figures may differ from company materials due to differences in rounding methods. Segment changes incorporated as appropriate (the same applies throughout) 36 FY12/11 26% Earnings overview Cumulative Q3 sales were JPY447.9bn (down JPY8.3bn, -1.8% ) and operating profit was JPY15.9bn (down JPY2.5bn, -13.6%). B2B business contributed to operating profit, primarily in Enterprise (JPY1.3bn growth in operating profit). However, B2C business (Consumer, down JPY5.3bn) saw weak results, with, SL cameras and IJPs performing poorly and below plan. Full-year targets were revised again in light of Q3 results, with operating profit set at JPY27.bn, down JPY1.5bn from the previous forecast and down JPY3.4bn. CMJ left the year-end dividend unchanged at JPY6. 2/12

3 esearch eport by Shared esearch Inc. The company made sweeping changes to its segment reporting from. It shifted its organizational structure to fit its customers and markets, moving away from the traditional product and service focus to a customer-oriented focus. At, CMJ unveiled segment operating profit forecasts for the first time. However, these did not incorporate actual results but were merely forecasts made at the start of the year. The company reviewed its full-year forecasts at the time of the Q2 results. Consumer Consumer chg (JPYmn) * Q2* Q3* Q4* Q2 Q3 Q4 Q2 Q3 Cml. Q3* Cml. Q3* Act. Est. Q3 chg Est. Q2 Vs. Est. Q2 Cml. Q3 Sales 32,667 37,964 38,698 57, 26,822 34,28 35,313 9,329 96, ,3-154,5-12, % -9.9% -8.7% % % Operating profit 289 2,267 3,135 7, -2,149 1,42 1,484 5, ,7-9,4-5, % -52.7% % % OPM.9% 6.% 8.1% 12.3% -8.% 3.% 4.2% 5.2%.4% 7.6% - 6.1% -4.8pp Interchangeable lens digital cameras % -3% -21% -7% -28% -15% - -12% - -% (units) Single-lens reflex % -34% % Mirrorless % +47% % Compact % -14% +39% +3% -44% +1% - +8% - -4% Inkjet printers % +2% -% -9% -12% -23% - -3% - -8% Inkjet printer cartridges (value) % -8% +7% -9% -9% -2% - -5% - -3% Dom. Interchangeable lens digital cameras ,219-1,6 market Single-lens reflex shipped Mirrorless units Compact ,743 2,33-1,77 (') Interchangeable lenses ,889 2,48 - Interchangeable lens digital cameras -26.8% -33.% -18.2% -4.8% +6.1% -8.% +3.2% -18.4% -15.4% -2.8% +.5% -5.% -13.% Single-lens reflex -24.5% -25.% -3.3% -14.% -9.3% -26.5% -14.4% -15.7% -3.5% -17.9% -16.7% -16.4% -3.3% Mirrorless -3.9% -44.8% -36.3% +.1% +36.% +29.4% +35.4% -21.9% +4.1% +14.6% +33.7% +14.3% +8.3% Compact -18.4% -36.6% -49.6% -2.2% -3.8% +2.3% +29.5% -7.5% -24.4% -25.% +6.8% +2.9% -23.1% Interchangeable lenses -19.1% -33.5% -19.% -11.1% +22.6% -7.7% -.4% -17.4% -33.% -1.7% +5.2% -1.3% Dom. Interchangeable lens digital cameras 14,284 15,69 14,346 16,88 15,586 15,841 16,776 17,415 15,216 13,658 48,23 65,618 - market Single-lens reflex 9,553,787 9,998 9,6 8,75 8,687,52,46 7,47 6,374 27,894 38,354 - shipped Mirrorless 4,731 4,282 4,349 7,874 6,881 7,154 6,274 6,955 8,371 7,284 2,39 27,264 - amount Compact 9,622 8,8 6,,226 9,612 8,938 8,828 9,35 7,89 6,852 27,378 36,728 - (JP Ymn) Interchangeable lenses 15,17 12,839 13,45 15,841 15,356 12,938 13,99 14,73 13,36 13,441 42,23 56,933 - Interchangeable lens digital cameras -27.% -27.7% -2.2% +2.9% +9.1% +5.1% +16.9% +3.2% -2.4% -13.8% +.3% +8.3% Single-lens reflex -28.6% -19.1% -2.8% -.6% -8.9% -19.5% +5.% +16.1% -14.9% -26.6% -8.1% -2.5% Mirrorless -23.3% -42.9% -43.4% +24.2% +45.5% +67.1% +44.3% -11.7% +21.6% +1.8% +52.% +28.4% Compact -2.3% -35.1% -49.2% -2.2% -.1% +11.6% +44.7% -8.6% -17.9% -23.3% +15.4% +8.2% Interchangeable lenses -17.6% -33.% -28.2% -13.6% +2.3% +.8% +6.6% -7.% -13.3% +3.9% +3.2% +.3% Source: Shared esearch based on company data For reference (as of Q2) Consumer: Sales of mirrorless cameras were upbeat. Amid excess inventories, sales of single-lens reflex (SL)cameras, IJPs, and cartridges dropped, hitting performance In Q4 the company launched an entry-level mirrorless camera, which helped propel its market share to No. 1 and drive sales volume growth. Still, this was not enough to offset the decline in SL cameras which suffered from a shrinking market and excess distributor inventories. Home-use inkjet printers and ink cartridges were also sluggish. The combined effect caused sales to fall by 13.6%. The segment posted an operating loss of JPY1.1bn (down JPY3.7bn ). The impact of excess distributor inventories on SL cameras and IJPs ended in, and the situation appears to have returned to normal in Q2. The following is the status of individual product categories and the outlook from Q2 onward. Mirrorless cameras In mirrorless cameras, the entry-level EOS M launched in October 217 (body was selling for JPY46,49 tax included on Yodobashi.com as of July 27, 218) has been doing well. It gained a top market share in Q4 (28% in terms of units) and maintained the top position in (25%). In Q2, with the help of the EOS Kiss M (JPY67,37), launched near the end of March 218, market share jumped to 35%, creating a pp lead on the second position. CMJ aims to maintain a share similar to the Q2 level for the full year (an ambitious target according to the company). In 1H, new entry-level products performed well because they responded to consumer demand, and by enhancing the lineup in 2H the company plans to capture even more of this demand. It will work aggressively as a challenger, since it was actually a latecomer to the mirrorless camera market. SL cameras and interchangeable lenses The SL market is likely to continue contracting for the time being. CMJ has revised down its market outlook for 218. The company s initial outlook for number of units sold was a 24% decrease, but it revised this down to a 32% decrease. CMJ s share of the SL market is above 5% and the number of competitors in this area is actually quite small, so rather than haphazardly chasing market share in terms of units sold, the company is focusing on earnings and plans to enhance sales efforts primarily for mid-level models and interchangeable lenses. In terms of the latter, for its best-selling telephoto zoom EF7-2 lenses, the company is updating its f/4. model (JPY179,82, on sale from late June) for the first time since November 26 and its f/2.8 model (JPY291,6, on sale from mid-september) for the first time since March 2. Due to the popularity of these lenses with consumers, the company says it has already received a large number of advance orders for the model set for release in September. CMJ appears to be aiming to expand earnings by effectively leveraging interest from past customers. IJPs CMJ is focusing on business IJPs because the home-use market is approaching saturation. In 1H, business IJPs continued their growth, but the number of units and cartridges being sold remains small, insufficient to absorb the decline in the home-use market. The company believes it unlikely that print volume (PV) for home-use IJPs will grow significantly hereafter, so it aims to increase unit sales and PV overall by shifting to high value-added models and focusing on business IJPs and large volume ink tank models. However, as with SL cameras, CMJ plans to give priority to capturing earnings instead of chasing market share in terms of units sold. 3/12

4 esearch eport by Shared esearch Inc. Compact cameras The compact camera market continues to contract, and major domestic digital camera manufacturer Casio Computer Co., Ltd. (TSE1: 6952) announced in May 218 that it is withdrawing from the compact digital camera business. CMJ believes the market will continue to stagnate and is therefore working to maintain earnings by focusing on sales promotions for higher-priced, high magnification models. The company appears to have secured profit in Q2 that was level with Q2. Casio Computer s digital camera business: Casio officially announced on May 9, 218, that it is withdrawing from the compact digital camera business. According to Nikkei, Casio s camera business had FY3/18 sales of JPY12.3bn (-34% ) and a final loss of JPY4.9bn (versus a loss of JPY5mn in FY3/17). Casio sold 55, cameras worldwide in FY3/18 (67, in FY3/17, 1.9mn in FY3/14). Domestic shipment volume for interchangeable lens cameras (excluding mirrorless, left), mirrorless (center), compact (right) +6% +5% +4% +3% +2% +% % -% -2% -3% -4% -5% Units shipped: single-lens reflex (Japan; right axis) 5 +3% +2% 4 +% 3 +4% % -% 2-2% -3% -4% -5% (') Units shipped: non-reflex (Japan; right axis) 45 +4% 4 +3% 35 +2% 3 +% 25 % 2 -% 15-2% 5 (') -3% -4% Units shipped: interchangeable lenses 1,6 (Japan; right axis) 1,4 1,2 1, (') Domestic sales amounts for interchangeable lens cameras (excluding mirrorless, left), mirrorless (center), compact (right) +6% +5% +4% +3% +2% +% % -% -2% -3% -4% Source: Shared esearch based on company data Enterprise Amount shipped: single-lens reflex (Japan; right axis) 25, +8% Source: Shared esearch based on company data New customer driven segment +6% 2, +4% 15, +2%, 5, % -2% -4% -6% (JPYmn) Amount shipped: non-reflex (Japan; right axis) 14, +6% +5% 12, +4%, +3% Enterprise is a customer driven segment targeting large corporations with at least 1, employees. The segment was created as its customers needs are different from the medium-sized corporations and SMEs that the Area segment targets. It is comprised of systems integration (SI) services provided by subsidiary Canon IT Solutions, and CMJ handles sales and maintenance of multifunction products and other business equipment, and IT solutions. Canon IT Solutions is the main operator of SI services, 8, 6, 4, 2, +2% +% % -% -2% -3% -4% (JPYmn) Amount shipped: interchangeable lenses (Japan; right axis) Enterprise chg (JPYmn) * Q2* Q3* Q4* Q2 Q3 Q4 Q2 Q3 Cml. Q3* Cml. Q3* Act. Est. Q3 chg Est. Q2 Vs. Est. Q2 Cml. Q3 Sales 44,241 44,934 41,967 46,3 47,127 47,542 44, , , ,9-185, +7,972 Canon IT Solutions 2,39 2, ,9 21, Other 23,851 24, ,227 25, Canon IT Solutions 27,4 27, ,6 29, Other 16,8 17, ,5 17, % +5.8% +5.9% % % Canon IT Solutions % +4.8% Other % +6.7% IT solutions +12% +% - Excluding IT solutions -2% - - Operating profit 1,955 1,625 1,898 2,3 2,494 2,353 1,912 5,478 6,759 7,9-8,5 +1,281 Canon IT Solutions 1,29 1, ,79 1, Other % +44.8% +.7% % % Canon IT Solutions % +41.4% Other % +57.4% OPM 4.4% 3.6% 4.5% 5.% 5.3% 4.9% 4.3% 4.2% 4.9% 4.5% - 4.6% +.7pp Canon IT Solutions 6.3% 6.2% % 8.4% Other 2.8% 1.4% % 2.1% Canon ITS sales by division SI services % +7% % IT infrastructure service (data centers) % +1% % Engineering (embedded software, CAD) % +7% % Orders -3% -9% +21% +24% +8% +8% - +6% - - Order backlog -11% -15% +7% +17% +21% +22% - +17% - - Sales -% +% -1% +% +7% +5% - +2% , 2, 15,, 5, (JPYmn) 4/12

5 esearch eport by Shared esearch Inc. with revenues supported by the recurring revenue data center business. A major factor in profits is engineering, which is centered on high-margin embedded software. Characteristics of individual quarters: In Enterprise, there is little seasonality related to IT Solutions, including Canon IT Solutions, but there is a tendency for cartridge sales to be concentrated in the quarter that includes the final month of companies financial years. Since includes February, in which sales from the distribution sector are concentrated, and March, which is the financial year-end for public bodies and many general companies, earnings tend to be higher in. In the preceding table, this refers to the Other portion of sales (total sales minus Canon IT Solutions portion). For reference (as of Q2) 1H results and 2H outlook Canon IT Solutions and CMJ both posted solid results. Sales of large-scale SI services for the financial sector were robust, and there was also sales growth in the manufacturing, distribution, and education sectors. There was progress in terms of shipment of office MFPs for a wide range of industries, with contributions from large orders for the distribution sector also making progress. LBPs continue to be focused in office-use, and orders have been largely flat, so sales declined. Improvement in both profit amount and margin at Canon IT Solutions is worth noting. As can be seen in the preceding table, operating profit at Canon IT Solutions was just under JPY1.3bn in and Q2, with an OPM of just above 6%, but this improved to around JPY1.8bn in and Q2, with an OPM of more than 8%. Specifically, there has been an increase in primary projects (development projects, which are more profitable than secondary projects under contract) for development directly with clients, and a favorable market environment has made it possible to capture projects that are worth more. Structurally speaking, it is likely this trend will continue from Q3 onward. The status of orders at Canon IT Solutions is as shown in the preceding table, but it is worth noting that orders and order backlog for the data center business are trending upward. Even excluding this impact, orders for most sectors steadily accumulated in 1H. By sector: Financial (sales up in 1H, expected to increase for full year): In 1H, large development projects related to credit cards moved from Phase I to Phase II, so the sector has yet to peak out and is likely to remain robust. The company has begun offering investment product sales support cloud services for credit unions nationwide, and development projects in insurance and securities look set to remain strong in 2H. Manufacturing (sales up in 1H, expected to increase for full year): In 1H, a system migration project for a construction material manufacturer and a demand forecasting solution for a beverage manufacturer contributed to earnings. In 2H, the company expects an increase in projects for system migration and production management and demand forecasting systems, bringing an increase in sales. Distribution (sales up in 1H): The number of development projects for retail sales support systems is increasing. Education (sales up in 1H): In 1H, the delivery of large IT infrastructure projects progressed, including of the in Campus IT infrastructure system for universities. The company expects a large system migration project in Kyoto (ordered in 1H) will contribute in 2H. In terms of business equipment, the company won multiple orders for office MFPs in 1H, so shipments increased, but it expects 2H sales to be down, resulting in little change for the full year. LBP sales are likely to continue their sluggishness due to the shift to MFPs, but the company expects some large orders in 2H (concentrated in Q3). In terms of recurring-revenue business, maintenance service sales increased in 1H, as did shipments of cartridges, primarily for the distribution sector. The former was the result of higher print volume (PV) accompanying an increase in the number of machines in field (MIF), while the latter was the result of specific sectors with high PV. The same basic trends are likely to continue in 2H. However, in regard to cartridges, it should be noted that after shipment of large renewal orders, related demand temporarily declines. Area Area chg (JPYmn) * Q2* Q3* Q4* Q2 Q3 Q4 Q2 Q3 Cml. Q3* Cml. Q3* Act. Est. Q3 chg Est. Q2 Vs. Est. Q2 Cml. Q3 Sales 68,92 63,47 62,276 64,4 66,372 63,11 61,44 193,415 19,787 26,6-256,5-2,628 Canon System & Support 32,14 28, ,57 29, Other 35,952 34, ,82 33, IT solutions 15,2 13, , 14, Excluding IT solutions 52,9 49, ,3 48, % -.1% -1.4% % % Canon System & Support % +1.% Other % -1.% IT solutions -% +9% Excluding IT solutions -3% -2% - - Operating profit 3,461 1,994 2,552 3,3 2,946 3,68 3,221-8,7 9,235-11,2-11,8 +1,228 Canon System & Support 1, Other 2,241 1, ,146 2, % +53.9% +26.2% % % Canon System & Support % % Other % +36.7% OPM 5.1% 3.2% 4.1% 5.1% 4.4% 4.9% 5.2% 4.1% 4.8% 4.3% - 4.6% +.7pp Canon System & Support 3.8% 1.5% % 3.2% Other 6.2% 4.6% % 6.3% Source: Shared esearch based on company data New customer driven segment Area is a customer driven segment targeting small and medium-sized corporations with up to 999 employees. Subsidiary Canon System & Support handles direct sales, while CMJ is in charge of partners (agents). Due to strong demand for IT solutions by SMEs, the company is rebuilding its business model to suit the scale of its customers. The idea is to gradually roll out the business 5/12

6 esearch eport by Shared esearch Inc. model developed by Canon System & Support to partner companies. Because direct sales and partner companies cover the same regions, CMJ aims to unify direct sales and partners to develop planning and execution of sales strategies by customer demographic when it reforms its medium-term plan. Characteristics of individual quarters: In Area, as with Enterprise, there is a tendency for sales to be concentrated around client companies financial year-ends, centering on consumables. For this reason, sales are typically more sluggish in Q2 than in. However, in, due to organizational changes and a shift in client base in toward companies with a large number of employees, a portion of MFP-related sales has shifted from to Q2. For reference (as of Q2) 1H results and 2H outlook In 1H, solutions for SMEs, security-related solutions, and LBP cartridges for specific sectors were robust, but mainstay hardware such as office MFPs were sluggish and maintenance service sales were down as maintenance prices fell. Operating profit declined in, but increased again in Q2 to achieve a increase for 1H as a whole, helped by increased sales of high-margin products and lower SG&A expenses. Behind the Q2 increase was the impact of organizational changes with changes in top management at business units (BUs) and key subsidiary Canon System & Support in with a shift to a new customer-centric framework and a focus on profit margin. Aiming to recover in Q2 from a drop in profit in, all BUs shifted their priority to profit and managed individual business negotiations with a focus on margin, centering on IT solutions and security services. In business machines, sales of office MFPs and LBPs fell. In recurring-revenue business, maintenance service sales fell slightly, but shipments of cartridges for certain sectors were robust, producing an increase in sales. For business machines, investment at SMEs takes into consideration work style reform, improvement in business efficiency, and cost reductions, so interest in replacing machines is low, and the response to conventional sales methods (proposal of replacement with new machines at the same cost as leasing) has not been favorable. However, in regard to the MIFs that are the basis of recurring-revenue business, there has been no decline because of clients high evaluation of the company s stable quality and service efficiency. Per-unit service fees have fallen, but this has not had much of an impact on total earnings. 2H outlook In 2H, SMEs desire to invest in IT is likely to remain high, so CMJ plans to work on promoting its IT solutions (including cloud services) and security services. In terms of business machines, it plans to strengthen negotiations that link into IT solutions in an effort to achieve a recovery in office MFPs (with an increase in sales for the full year). In its revised forecasts, CMJ lowered its sales and operating profit targets for Area by JPY4.5bn and JPY1.4bn respectively. The main negative impacts on sales were delayed progress on business machines and the focus on profit margin, while the main impact on operating profit was the increased expenses targeting enhanced sales as described earlier. Area business, business model restructuring Solutions provided Leverage solutions built for large enterprises General Business 999 Account Sales 3 99 Area Sales Less than 29 Document solutions Security solutions Sector/processspecific solutions solutions Mission-critical Find opportunities at existing customers and expand sales IT Concierge Expand sales centering on IT solutions Inside sales Increase sales efficiency Successively introduce business models built at Canon System & Support to partners Source: Shared esearch based on company data Note: General Business (GB) is the name for the sales team dedicated to medium-sized corporations in Canon System & Support. 6/12

7 esearch eport by Shared esearch Inc. Professional Professional chg (JPYmn) * Q2* Q3* Q4* Q2 Q3 Q4 Q2 Q3 Cml. Q3* Cml. Q3* Act. Est. Q3 chg Est. Q2 Vs. Est. Q2 Cml. Q3 Sales 13,533 12,186 14,295 14,3 16,469 12,494 11,74 4,14 4,37 54,5-55,5 +23 Canon Production Printing Systems 3,17 3,53 2,96 4,6 2,93 3, Canon Lifecare Solutions 3,93 2, ,4 2, Other 6,433 5, ,129 6, % +2.5% -22.5% - +.1% % Canon Production Printing Systems % -4.2% Canon Lifecare Solutions % -5.8% Other % +.9% Operating profit , ,9 - -1, Canon Production Printing Systems Canon Lifecare Solutions Other Canon Production Printing Systems Canon Lifecare Solutions Other OPM -1.7% -5.9% -1.4% -4.9% 1.8% -4.1% -3.7% -2.9% -1.6% -3.5% % +1.3pp Canon Production Printing Systems -7.3% -.6% -4.1% -1.7% -7.8% -1.2% Canon Lifecare Solutions 3.8% -4.8% % 1.1% Other -2.4% -9.8% % -7.9% Production printing sales % -4% % Industrial equipment % +2% % Healthcare % -8% % Video solutions % +12% % Source: Shared esearch based on company data New customer driven segment Professional is a segment targeting customers in specialist domains. This contains divisions that will drive growth in the future such as production printing and network cameras. The key subsidiaries are Canon Production Printing Systems, which handles production printing, and Canon Lifecare Solutions, which deals in medical equipment and systems and solutions overall. In the medical field, Canon ITS Medical is engaged in sales and operations maintenance of medical information systems such as electronic records and medical fee billing systems. The ranking of sales in order is production printing, industrial equipment, and healthcare, and it appears that industrial equipment generates most of the operating profit. For reference (as of Q2) 1H results and 2H outlook Performance in Professional, along with Consumer, was part of what led to the downward revisions of the forecasts. The revised forecasts lowered sales by JPY5.5bn from the previous forecasts (+JPY1.bn ) and improved the operating loss by JPYmn to JPY1.2bn (+JPY7mn ). In terms of sales, delays regarding high-speed continuous paper printers in the area of production printing and falling prices for network cameras and the pushing back of orders had a negative impact. CMJ sees the operating loss shrinking slightly despite a lower sales target than at the time of the previous forecast. This is in part due to companywide reductions in SG&A expenses. Production printing Sales were 7% lower in and 4% lower in Q2. Late inspection and shipping of high-speed continuous paper printers has caused ongoing delays, and products to be launched in the latter half of 218 were delayed until 219, which means consumables demand is likely to be delayed a year further. In light of this, CMJ lowered its full-year sales forecast from the initial +13% to -3%. It also lowered the sales forecast for commercial printing as a whole (including related products from other segments) from +8% to +%, but excluding the impact of high-speed continuous paper printers, other segments printers including light models for creative use seem to be performing favorably. Industrial equipment Sales were up 125% in and another 2% in Q2. Newly handled products contributed to the increase as the semiconductor-related market remained favorable. Outside the semiconductor sector, agency contracts with overseas business partners ended, but CMJ still expects an 8% increase in sales (initial forecast was +9% ). Healthcare Sales were 5% lower in and 8% lower in Q2 due to the impact of sluggishness in modalities for hospitals (regenerative medicine and biopharmaceuticals via base techniques including low molecular weight compounds and antibodies). However, there was growth in high-margin retinal cameras and medical IT solutions. CMJ expects a 2% increase in sales for the full year (initial forecast was +9%). Imaging solutions Sales were 9% lower in, but 12% higher in Q2. On the other hand, network cameras overall, including other segments, increased 8% in and declined 7% in Q2. CMJ revised down its full-year sales forecast from +25% to +3%. This is because it revised down the sales forecast for network cameras overall from +25% to +5%. The company projects just under % growth in the domestic network camera market considering that it is taking more time than expected to develop new customers and sales routes and the unit price for the cameras has fallen. The domestic network camera market can be roughly broken down into two submarkets: a) camera and recording equipment and b) camera and recording equipment with big data collection and image analysis. CMJ feels the former submarket is fairly large, but the latter has yet to expand significantly. Although market share itself has not changed, the company revised down the percentage by which it expects sales to rise because of falling prices and the increasing weight of existing sales channels and customers. 7/12

8 esearch eport by Shared esearch Inc. eference The following table shows the performance of business equipment under the previous product classifications (companywide basis, numbers across all segments) as reference material as of. Note that in MFP maintenance services, sales in Area are larger than those in Enterprise. Maintenance services in (average daily print volume (PV) x average price x operating days) declined by 3% in, but a lower number of operating days (down two days ) had a major impact, and PV growth was also slower than the previous year. There do not appear to have been any particular changes in status in and Q2. While the downtrend in average prices continues, it appears that they have reached a reasonable level. CMJ said that efforts to control price declines in combination with solutions are starting to show results. Business equipment Business equipment - chg (JPYmn) * Q2* Q3* Q4* Q2 Q3 Q4 Q2 1H Act. Est. Q2 Est. 1H Office MFP (incl. rental and sales) % +7% +2% +2% +2% -7% +2% +1% +2% -1pp Maintenance service sales % -% -1% -% -3% +% -% -1% -1% - LBP (units) % -3% -5% +2% -6% -12% -2% -1% +% -1pp LBP cartridge sales % +2% -2% +1% -2% +3% +1% +% +% - Commercial printing (sales) % +4% +1% -15% -6% -5% -3% +% +8% -8pp Network cameras (sales) % +13% +8% +33% +8% -7% +22% +5% +25% -2pp Source: Shared esearch based on company data SG&A expenses SG&A expenses Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 SG&A expenses Advertising Sales promotion Product warranties Other direct expenses Personnel Depreciation Other selling expenses change Advertising Sales promotion Product warranties Other direct expenses Personnel Depreciation Other selling expenses % 4.7% -2.3% -4.% -2.3% -5.3% -4.% -4.1% -3.3% -2.4% -1.8% -2.5%.5% -3.5% -3.3% % of sales 32.7% 33.2% 32.3% 29.8% 31.8% 33.3% 32.7% 28.7% 31.4% 32.3% 31.% 28.% 32.% 31.4% 31.1% Source: Shared esearch based on company data Note: Figures may differ from company materials due to differences in rounding methods. Market share by sales volume in (company estimation) Single-lens reflex market Interchangeable lens Mirrorless Single-lens reflex Entry model SL 55% 45% 41% 23% 61% 56% Mirrorless SL Canon Others Canon Others Canon Others Canon Others Source: Shared esearch based on company data 8/12

9 esearch eport by Shared esearch Inc. Domestic shipments of cameras with interchangeable lenses +8% +6% +4% +2% % -2% -4% 8.8-6% FY12/9 +8% +6% +4% +2% % -2% -4% -6% FY12/ 211 Amount shipped: interchangeable-lens (Japan; right axis) Average selling price FY12/ Source: Shared esearch, based on Camera & Imaging Products Association data Shipment value (right axis) Domestic shipments of single-lens reflex cameras +6% Amount shipped: single-lens reflex (Japan; right axis) Average selling price 25 +4% +2% % % 5-4% +% +8% +6% +4% +2% % -2% -4% -6% -8% Shipment value (right axis) 215 Source: Shared esearch, based on Camera & Imaging Products Association data /12

10 esearch eport by Shared esearch Inc. Domestic shipments of mirrorless cameras +8% Amount shipped: non-reflex (Japan; right axis) Average selling price 14 +6% % +2% % -2% % 2-6% +15% Shipment value (right axis) 5 +% 4 +5% 3 % 2-5% 1 -% Source: Shared esearch, based on Camera & Imaging Products Association data Domestic shipments of interchangeable lenses for single-lens reflex cameras +6% +4% +2% % -2% Shipment value (right axis) Average selling price % FY12/9 +% +8% +6% +4% +2% % -2% -4% FY12/ FY12/11 Source: Shared esearch, based on Camera & Imaging Products Association data Shipment value (right axis) FY12/ -6% , 7, 6, 5, 4, 3, 2, 1, - (JPYmn) /12

11 esearch eport by Shared esearch Inc. Domestic shipments of compact digital cameras +6% 42.8 Amount shipped: compact (Japan; right axis) Average selling price +4% +2% % -2% -4% % FY12/ FY12/ FY12/ % Shipment value (right axis) 14, +6% 12, +4%, +2% 8, % 6, -2% 4, -4% 2, -6% Source: Shared esearch, based on Camera & Imaging Products Association data (JPYmn) This note is the most recent addition to the full report. 11/12

12 About Shared esearch Inc. esearch eport by Shared esearch Inc. We offer corporate clients comprehensive report coverage, a service that allows them to better inform investors and other stakeholders by presenting a continuously updated third-party view of business fundamentals, independent of investment biases. Shared esearch can be found on the web at Disclaimer This document is provided for informational purposes only. No investment opinion or advice is provided, intended, or solicited. Shared esearch Inc. offers no warranty, either expressed or implied, regarding the veracity of data or interpretations of data included in this report. We shall not be held responsible for any damage caused by the use of this report. The copyright of this report and the rights regarding the creation and exploitation of the derivative work of this and other Shared esearch eports belong to Shared esearch. This report may be reproduced or modified for personal use; distribution, transfer, or other uses of this report are strictly prohibited and a violation of the copyright of this report. Our officers and employees may currently, or in the future, have a position in securities of the companies mentioned in this report, which may affect this report s objectivity. Japanese Financial Instruments and Exchange Law (FIEL) Disclaimer The report has been prepared by Shared esearch under a contract with the company described in this report ( the company ). Opinions and views presented are ours where so stated. Such opinions and views attributed to the company are interpretations made by Shared esearch. We represent that if this report is deemed to include an opinion by us that could influence investment decisions in the company, such opinion may be in exchange for consideration or promise of consideration from the company to Shared esearch. Contact Details Shared esearch Inc Sendagi Bunkyo-ku Tokyo, Japan Phone: +81 () info@sharedresearch.jp 12/12