From: Reuters
Published April 14, 2008 08:11 AM

TV hurts Philips profit, weak economy looms

By Niclas Mika

AMSTERDAM (Reuters) - Philips Electronics reported a bigger-than-expected 28 percent drop in quarterly core profit on Monday, as its television business sank deeper into the red, and warned of slowing economic growth in mature markets.

The Dutch maker of lightbulbs, x-ray machines and electric toothbrushes saw its shares <PHG.AS> <PHG.N> fall as much as 3.7 percent, extending losses on Friday sparked by an unexpected profit drop at U.S. rival General Electric <GE.N>.

First-quarter earnings before interest, tax and amortization (EBITA) fell to 265 million euros ($419 million) -- down from 370 million the year before and compared with an average of 306 million euros in a Reuters poll of 14 analysts.


"Our results are clouded, more than we like, by the adverse situation in our TV business, significantly lower incidental license income and some acquisition-related charges," Philips Chief Executive Gerard Kleisterlee said in a statement.

The company's TV business is suffering from tough competition, especially in the United States, from low-cost rivals such as Taiwanese Amtran's <2489.TW> Vizio brand, but it was also loss-making in Europe in the quarter.

Philips said it expected "some mature economies" to soften in the wake of a global credit crisis.

"It is a situation we are watching, the economy, and if there are things to be done we would do them without wasting time," Chief Financial Officer Pierre-Jean Sivignon said.

Philips may scale back its branding campaign or trim some research and development spending, he said.

Philips shares were down 3.3 percent at 23.11 euros by 6:16 a.m. EDT after earlier touching a low of 23.02 euros, underperforming the DJ Stoxx 50 index , which was down 0.8 percent.


First-quarter revenue was nearly flat, at 5.963 billion euros, compared with 5.93 billion a year earlier and in line with analysts' average forecasts for 5.997 billion euros.

The Amsterdam-based firm confirmed its target for annual comparable sales growth of at least 6 percent from 2008 to 2010 and raised its 2010 EBITA margin target to 10 to 11 percent. It had previously forecast more than 10 percent.

Philips did not give an exact 2008 forecast, but Sivignon said he expected the EBITA margin excluding one-offs to be better than in 2007.

Lehman Brothers analysts said Philips' healthcare division had posted strong results, with comparable sales growth of 5 percent and a steady profit margin, considering the 17 percent quarterly profit decline posted by GE's healthcare unit.

Both Philips and GE have been hit by a weak U.S. imaging market due a law change, and Sivignon said by the second half of the year it will become clear if the market recovers. Philips' imaging systems orders already grew in a double-digit percentage range in North America in the first quarter.

The consumer lifestyle division -- which makes TVs, electric toothbrushes, music players and coffee machines -- will continue to feel margin pressure in its TV business, Philips said. The operating loss of the television activities widened to 95 million euros in the first quarter from 51 million a year ago.

Sivignon said he expected Philips to lose money on televisions this year but return to a profit in 2009 after the decision to stop making TVs for the North American market and transfer those activities to Japan's Funai Electric <6839.OS>.

The Funai deal, together with other steps to improve the largely outsourced business, would "go a long way" towards fixing the problems in the television business, Sivignon said.

Philips has no plans to exit the European TV business as well, Sivignon said, but added: "Longer-term...we will continue to look at it with all options open."

Group net profit fell to 219 million euros from 875 million a year ago, when it was boosted by a sale of shares in Taiwanese chipmaker TSMC <2330.TW>.

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