Where Is Philips Electronics Headed?

These last few months, many OEMs, including Nokia and Research in Motion, have been smacked with lower-than-expected income and revenues as consumer and government spending slowed and end-users gravitated towards a limited set of innovative device platforms. If recent news coming out of Amsterdam carries any weight, we soon may be adding Koninklijke Philips Electronics N.V. to this list.

A couple of weeks ago, the company reported that weak market demand, mainly in Western Europe's construction and consumer segments, will result in lower quarterly earnings. Philips's Lighting division, a major player on the global stage, is expected to have low single-digit comparable sales growth in the second quarter of 2011.

Besides tempered sales growth and margin pressure, "incremental investments in innovation and marketing will adversely impact EBITA," the company said.

The bad news will also touch Philips's Consumer Lifestyle group, the company's traditional consumer electronics channel. Soft demand and declining license revenues, among other factors, "will more than offset double-digit growth in Personal Care and Health & Wellness, resulting in an expected low-single digit sales decline."

How far the bruises have spread will be a main talking point during the company's earnings call with analysts on July 18. And, guess what else we can expect to hear about? "Further decisive actions... including a company-wide cost reduction program" tied to the already-launched Accelerate performance improvement program. There's even talk of Philips pulling out of the television market, another struggling segment.

I'm not surprised to hear about the anticipated top- and bottom-line dips. Although manufacturing, purchasing, and IT spending indices are tipping back into positive territory, there's always a lag time in how and when all the numbers synch up. But, perhaps more disconcertingly, I'm confused by Philips's long-term business model.

Once a heavyweight in the electronics supply chain, during this last decade Philips has been redefining its niche expertise, dumping its semiconductor business and its stakes in TSMC, LG Display, and music giant PolyGram, in favor of focusing on consumer lifestyle products, lighting, and medical equipment. While shedding non-core businesses that stall overall innovation and drag attention away from more valuable projects is (usually) a good idea, I never quite understood the major shift into the lighting industry.

Success in this sector largely depends on new housing construction and municipal or regional government spending in infrastructure improvement. Those segments consistently have large spikes and valleys over time and, as we've seen this time around, can come to a screeching halt when bubbles burst and stimulus measures run out of funding.

Then again, Philips is absorbing some other changes, too, and maybe things need to shake out. For instance, senior management changes are underway: Frans Van Houten stepped into the president, CEO, and board chairman posts this past April; chief design officer Stefano Marzano will retire Nov. 1; Sean Carney, currently chief design officer of Philips Consumer Lifestyle (CL), will pick up Marzano's role in addition to his CL title.

Philips will also have to manage its recently announced acquisition of Indal, a Spanish company mainly focused on outdoor lighting solutions. Financial details were not disclosed, but the acquisition is intended to fuel Philips's growth in professional lighting solutions while strengthening its European market position.

The picture will become clearer when the company announces its first-half results on July 18.