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WIKI ANALYSIS
Headquartered in Amsterdam, the Netherlands, Koninklijke Philips Electronics, N.V. (NYSE: PHG) is a global leader in electronics, earning revenues of €27 billion in 2006. With over 120,000 employees in roughly 150 countries, the firm operates in four business segments: Consumer Electronics, Medical Systems, Lighting, and Domestic Appliances and Personal Care. Consumer Electronics is the largest segment. The company sells its products to customers primarily in Europe and Africa, North America, Latin America, and the Asia Pacific.
In 2006, Philips streamlined its operations by selling its bulky semiconductors unit. The goal since has been to invest in high growth areas and in doing so, redefine the firm as a medical device, technology, and personal-care company. The company's hit products include the Sonicare toothbrush and the Senseo coffee maker, its electric razor, Philips light bulbs, the FlatTV, and its medical imaging systems (ie MRIs and more). Philips is #1 in both lighting products, lamps, luminaires, lighting electronics and male electric shaving. #2 in medical imaging systems It competes with Siemens and GE in many product lines. These 3 companys are the electrical, electronics industry.
A variety of factors impact Philips's earnings, ranging from research & development and outsourcing to exchange rates, aging populations and rising worldwide demand for energy. The company conducts business in over 50 currencies and outsources the majority of its production, making the company sensitive to activities far beyond headquarters in Amsterdam.
History
Headquartered in Amsterdam, Netherlands, Philips was founded in 1891 in Eindhoven, Netherlands, as a light bulb manufacturer. Today, Philips is one of the largest electronics companies in the world, conducting business in 4 segments: Lighting #1, Consumer Electronics #3, Domestic Appliances & Personal Care#1 or #2, and Medical Systems#2.
In order to stream line the company and lower operating costs, Philips exited the high maintenance semiconductor industry in October of 2006 by selling 80% of its stake in Philips Semiconductors. Despite being among the worldwide top 20 semiconductor sales leaders as a chip maker, the company deemed the sale difficult but necessary in order to free up resources for higher growth areas like Medical Systems.
In 2006, Philips generated €27 billion in revenue, a 4.7% increase from 2005. This came after a short history of decreasing revenues, possibly due to the bulky semiconductor unit. The company had approximately 130 production sites in 26 countries, sales and service outlets in approximately 150 countries, and some 121,700 employees in 2006.
| Revenue (mm) | Operating Income 2006 (mm) | Operating Margin | |
| 2006 | €26,976 | €1,183 | 4.38% |
| 2005 | €25,775 | €1,472 | 5.71% |
| 2004 | €24,855 | €1,156 | 4.65% |
Business Segments
Consumer Electronics
Consumer Electronics generated €10.6 billion in sales in 2006, or 40% of total sales. This was a 1.5% increase from 2005 and a 6.6% increase from 2004. In 2006, Consumer Electronics (CE) was made up of five businesses: Connected Displays, Entertainment Solutions, Peripherals & Accessories, Home Networks and Mobile Phones. The division employs approximately 14,500 people worldwide, with sales and service organizations in more than 50 countries and manufacturing operations in France, Belgium, Hungary, Mexico, Argentina and Brazil. CE sells heavily to Wal-Mart Stores (WMT) and has won a number of awards from the store, such as the Wal-Mart USA and Sam’s USA ‘Supplier of the Year’ Award.
CE's product line includes:
- HD-ready FlatTV with Ambilight
- Home Theater in a Box (HTiB) systems, DVD, DVD+RW and hard-disc recording systems
- VoIP (Voice over Internet Protocol) cordless digital phones
- peripherals and accessories such as headphones
- integrated solutions that combine its products with content and services, such as its VoIP phone together with Skype™ and MSN™
Growth prospects for Philips CE include the world’s first Skype™ DECT (digital enhanced cordless telecommunications) phone that works without a PC to place phone calls via the internet, the build-up of its Peripherals business following the acquisition of Power Sentry in 2007 and Gemini in 2006, and the renegotiations of its outsourcing employee contracts. In 2006, the outsourcing level was around 70%.
On the negative side, licensing income is eroding as a result of a number of expiring patents that aren't being replaced by new revenue streams. Furthermore, a harsh pricing environment following an industry-wide excess inventory buildup ahead of the FIFA World Cup has dampened earnings.
Medical Systems
Medical Systems generated €6.7 billion in sales in 2006, or 25% of total sales. This was a 6.3% increase from 2005 and a 14.6% increase from 2004. Expanding the Medical Systems division has been an integral part of streamlining the company's business along higher growth potential areas and selling its semiconductor unit. The firm is betting that aging populations in the developed world will spur demand for health care. The segment has approximately 33,000 employees in over 100 countries around the globe.
Medical Systems's product line features
- imaging - X-ray, magnetic resonance (MR), computed tomography (CT) and nuclear medicine
- ultrasound and monitoring - patient monitoring, ultrasound systems, defibrillators and other cardiac care technologies
- healthcare informatics - picture archiving and communications systems (PACS) and other information systems
- medical transcription services (MedQuist,), which sold in 2008
- customer services: supporting the optimization of workflow and maintenance in all markets served
The United States is the largest healthcare market, currently representing 50% of the global market, with Japan and Germany representing the second and third largest markets respectively. Philips is also positioning itself in the Chinese market, anticipating that a rapidly growing Chinese healthcare market will be the second-largest market by the end of the decade. The first exports from the Philips-Neusoft venture in China – established in 2004 for the development and worldwide supply of economically priced imaging equipment – took place in 2006 with the release and shipment of dual- and single-slice CT scanners, radiology systems, and remote-control fluoroscopy systems.
Philips has invested heavily in growing its Medical Systems segment. In an effort expand its vertically integrated MRI business, Philips acquired a manufacturer of superconducting magnets used in magnetic resonance imaging systems. The company has also focused on the promising market for home monitoring equipment , such as heart monitoring devices, because of the growing migration of medical treatment from hospitals to homes. Philips also entered the attractive health-care IT segment with the acquisition of Stentor, a technology provider for managing digital radiology images. The new system enables doctors to store, retrieve, and send patients' X-rays electronically, thus eliminating the need for film-based equipment. With more and more hospitals going paperless (i.e. digital), the health care IT segment should continue to grow.
Lighting
Lighting generated €5.5 billion in sales in 2006, or 20% of overall revenue. This was a 14.5% increase from 2005 and 20.8% increase from 2004. Philips Lighting is the global market leader, with recognized expertise in the development, manufacturing and application of innovative lighting solutions. Lighting consists of the following businesses: Lamps, Luminaires, Lighting Electronics, Automotive Lighting, Special Lighting Applications, Solid-State Lighting Modules and Lumileds. The product line includes incandescent and halogen lamps, compact and normal fluorescent lamps, high-intensity gas-discharge, and special lamps. Advance Transformer, world's biggest lighting ballast electronics company has been part of Philips lighting for decades. The division has manufacturing facilities in 25 countries, and sales organizations in more than 60.
In 2006, Philips Lighting expanded its presence in the home lighting market by acquiring The Bodine Company, a US-based lighting emergency lighting ballast manufacturer, and Partners in Lighting International (PLI), the leading European manufacturer of home luminaires., Genlyte, which has over 30 well known commercial brands of luminaires and light products, making Philips Lighting #1 in even North America now, putting GE at number 2. Many new LED based luminaires are offered through the luminaire business for commercial industrial and roadway. With growing environmental concerns related to the burning of fossil fuels, Phillips is working to develop energy efficient systems, like Xenon car lights, more efficient street lighting systems, and the recently developed Philips Actilume lighting control system that has the potential to save up to 75% of the energy consumed by older fluorescent lighting installations.
The key to growth in Philips Lighting has been tapping into the fast-growing emerging markets such as Brazil, Russia, India, China, and the ASEAN countries (Association of Southeast Asian Nations), with 31% of 2006 sales coming from emerging countries. Lighting is expanding its reach into the second-tier cities and rural areas of countries like India and China through new dedicated distribution activities and collaboration with local suppliers. On the product axis, Lamps remained the largest business, accounting for approximately 46% of sales, while the fast-growing Lumileds business accounted for 6%. The remaining businesses each generated between 10 and 20% of sales.
Some notable Philips lighting projects include the lighting for eight of the twelve stadiums used for the 2006 FIFA World Cup™ in Germany and the illumination of the Bosphorus Bridge and Buckingham Palace. Philips has more lights in more places in the world than any company. The lighting div has always been one of it's most successful operations, in developing and pioneering new concepts and inovative products.
Domestic Appliances & Personal Care
Domestic Appliances & Personal Care (DAP) generated €2.6 billion in sales in 2006, or 10% of total sales. This was a 20.6% increase from 2005 and a 29.4% increase from 2004. DAP's product line offers DAP offers a wide range of products that help people prepare food and beverages, take care of their homes and garments, and enhance their appearance and sense of well-being. Its 4 main business areas are Shaving & Beauty, Domestic Appliances, Health & Wellness and Consumer Healthcare Solutions. The division employs over 10,000 people worldwide and has sales organizations in more than 60 countries.
Although DAP is the smallest contributor to overall revenue, it and Medical Systems are the focus of Philips's growth strategy. A constant focus on powerfully branded, easy-to-experience innovations that are designed around the consumer is expected to yield premium prices and drive growth. The Sonicare toothbrush and the Senseo coffee maker are blockbuster hits. The acquisitions of Avent, a leading provider of baby and infant feeding products in the United Kingdom and the United States, and Lifeline Systems, a US-based firm that is a leading provider of personal emergency response services in the U.S. and Canada, contributed significantly to the robust annual growth. The Shaving and Beauty segment strengthened its worldwide No. 1 position in male electric shaving. The SmartTouch/Speed-XL shavers sold well worldwide; and the new Bodygroom products took off in Europe and North America. Geographically, the largest growth in this sector has taken place in China and Eastern Europe.
Trends & Forces
Anticipating needs of an aging population
With the American baby boomers growing old and the populations of Europe, Japan, and China doing the same, Philips has decided to invest heavily in its Medical Systems branch. As the people of nations with massive and/or growing consumption power age, the demand for health care and medical systems increases. Old people need more medical attention and get sick more often than young people, sparking this increase in global demand. As the population ages, Philips Medical Systems will have more opportunities for growth.
Promising product pipeline and trials
In 2006, Philips spent roughly €1.8 billion on developing and improving products and services. In 2005, research and development (R&D) expenditures totaled €1.6 billion, or 6.2% of sales, compared to 6.5% in 2004. In 2005, Medical Systems saw an increased research and development spending in the areas of molecular medicine and new sensor technologies, Lighting in LCD backlighting and DAP in Consumer Health & Wellness. A higher R&D budget can signal an improving product line, an investment in more expensive industries or products, or money lost to futile causes. The depth and success of products in development are an excellent indicator of the firm's future success and not to mention, the company generates millions in royalties from patents developed in R&D.
Heavy outsourcing
In 2006, Philips outsourced roughly 70% of its business to a second or third party. In 2004, the company's outsourcing level was just 50%. The firm continues to increase its outsourcing percentage to third world and developing nations in order to take advantage of cheaper labor. Funai has become main producer and distributor of Philips, Magnavox branded tv's and other CE products in N.A., under Philips specs and design parameters. In other parts of the world Philips makes and distributes their own branded CE products still.
Because so much of its business is outsourced, the company relies heavily on outsourcing contracts. At the start of 2008, Philips will renegotiate its Consumer Electronics (CE) outsourcing contract with Jabil Circuit, a global electronics manufacturer. The renegotiation is expected to save the CE division a significant amount of money; the initial deal was not priced well given it was tied to the sale of part of Philips's manufacturing operations.
To ensure the development of more strategic relationships, the number of preferred Electronic Manufacturing Services suppliers has been reduced from 61 in 2004 to 8 in 2006. As Philips grows its outsourcing contracts and better negotiates its contracts, operating costs will decrease and earnings will increase. Any fluctuation in outsourcing prices and contract negotiations will impact earnings significantly. The CE segment, Philips's largest segment, relies most heavily on outsourcing.
Exposure to many currencies
Philips earns its revenue in more than 50 different currencies. Fluctuations in currency exchange rates impact every aspect of the company's business, including the price and competitive appeal of its products, as well as contract negotiations for labor, production, and more. Additionally, all earnings are reported in euros; as such, fluctuations in the exchange rates between the euro and other currencies can substantially impact earnings. Below are tables of the euro vs. the USD and the impact the USD-euro exchange rate has had on Philip's earnings over the last few years.
Euros per 1 USD
| Year | Average | High | Low |
| 2006 | 0.79 | 0.84 | 0.75 |
| 2005 | 0.80 | 0.86 | 0.74 |
| 2004 | 0.80 | 0.85 | 0.73 |
| 2003 | 0.88 | 0.97 | 0.79 |
| 2002 | 1.06 | 1.16 | 0.95 |
| 2001 | 1.12 | 1.19 | 1.05 |
Effect of Changes in Exchange Rates on Cash and Cash Equivalents
| Year | Change (in millions of €) |
| 2006 | (-197) |
| 2005 | 159 |
| 2004 | (-45) |
Focus on fast-growing economies abroad
As the demand for energy rises across the globe due to industrialization, rising incomes in emerging markets (like China and India), and globalization, so does the demand for Philips's products. Philips is especially working to increase sales to China and other emerging nations. In 2006, DAP achieved high single-digit percentage sales growth to China. With respect to Philips Medical Systems, the first exports from the Philips-Neusoft venture in China – established in 2004 for the development and worldwide supply of economically priced imaging equipment – took place in 2006. Additionally, the key to growth in Philips Lighting has been tapping into the fast-growing emerging economies such as Brazil, Russia, India, China and the ASEAN countries, with 31% of 2006 sales coming from emerging countries.
Competition
Philips's competitors include General Electric Company (GE), Sony (SNE), Siemens AG (SI), and Matsushita Electric Industrial Company (MC). Philips is #1 in both light bulbs and male electric shaving. The firm's two largest competitors (annual revenues of over $100 billion), GE and Siemens, compete primarily in Medical Systems and Lighting. Sony is a force to be reckoned with in Consumer Electronics. Matsushita Electric Industrial Company is probably the company's most direct competitor, challenging Philips in nearly every segment except Medical Systems.
As Philips reshapes itself into a medical device, technology, and personal-care company, it will have to overcome dominant market presence by Siemens and GE. Additionally, the firm will have to maintain its position in Consumer Electronics against Sony and Matsushita Electric Industrial Company. In lighting, Philips will have to fend off nearly all of its competitors to maintain the #1 position.
| 2006 | 2006 | 2005 | 2005 | |
| Revenue (bn) | Profit (bn) | Revenue (bn) | Profit (bn) | |
| General Electric Company (GE) | $163 | $21 | $148 | $17 |
| Siemens AG (SI) | $120 | $4 | $104 | $3 |
| Matsushita Electric Industrial Company (MC) | $74 | $2 | $73 | $1 |
| Sony (SNE) | $68 | $1 | $61 | $1 |
| Philips | $37 | $7 | $36 | $4 |
Note: Figures based on July 20th, 2007, exchange rates.
References
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