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Earnings: Dark Clouds Hang Over Europe’s Bellwethers

There are a few resounding themes coming out of Europe's high-tech bellwethers this week: Tough economic conditions prevail around the eurozone, and the picture for the rest of the year looks fuzzy.

Three of the region's biggest companies — Royal Philips Electronics, Siemens, and STMicroelectronics — reported mixed sales and earnings results and provided cautious guidance on what likely lies ahead.

Crediting its ongoing restructure efforts, Dutch-based {complink 4269|Koninklijke Philips Electronics N.V.} beat estimates for the June-ending second quarter, reporting a 5 percent year-over-year sales increase to $7.3 billion (€5.9 billion) while net income rose to €167 million. Sales in the healthcare and lighting segments were the main drivers, as was an 11 percent jump in “growth geographies,” which accounts for 35 percent of the company's total revenue.

Even though the last quarter was a bright spot, uncertainty is still the talk of the day. During a call with analysts, Philips CEO Frans van Houten said:

    There is no denying that the global economy is weaker now than it was just three months ago, especially in Europe which, by the way, accounts for approximately 25 percent of our revenue. We continue to take actions to mitigate the risks from the increased economic headwinds globally, and as we are a case of self-help, we remain confident in our ability to further improve our performance towards our mid-term targets in 2013 and beyond.

Over in Germany, {complink 4929|Siemens AG} had even less rosy news. The company's fiscal third-quarter order intake was sharply below analysts' estimates, as was its net profit of €832 million, which consensus anticipated to come in at about €1.3 billion, according to a Wall Street Journal news report. In a statement, Siemens said orders were about €17.8 billion, 23 percent below the prior-year period. On the plus side, quarterly revenue was up 10 percent year-over-year, to €19.5 billion, but favorable currency translation effects accounted for five percentage points of that growth.

Peter Löscher, Siemens' president and CEO, offered this bleak picture in the statement:

    The deceleration of the world economy has increased in the past few months. We see growing reluctance among our customers regarding capital expenditures and stronger economic headwinds, especially in our industrial short-cycle businesses. Therefore our focus above all is on increasing our productivity and efficiency. Given the deteriorating environment it becomes more difficult to achieve our guidance for the fiscal year.

And lastly, {complink 5218|STMicroelectronics NV} posted second quarter revenue of $2.15 billion, down from $2.57 billion a year ago, but up sequentially 6.5 percent and generally in-line with what most analysts were expecting. The company noted that ST's wholly-owned businesses saw a sequential increase of 4.4 percent while the wireless product segment grew about 19 percent. On the earnings side, the chipmaker posted a net loss of $75 million compared with net income of $420 million last year.

The chipmaker is forecasting only 2.5 percent revenue growth for the current third quarter, blaming weaker demand. In a conference call, CEO Carlo Bozotti noted that the company had weaker bookings in the last part of the second quarters and that the global macroeconomic climate is softening.

ST, which also said it plans to cut capital expenditure by 25 percent this year, has been impacted by Nokia's poor performance. One of ST's biggest customers, Nokia's weakened market position has cut ST's sales by about $1 billion a year, Bozotti said.

None of this was what any of us wanted to hear, but we all knew it was coming. The economic doldrums in Europe are hanging around, we know, but for how much longer?

24 comments on “Earnings: Dark Clouds Hang Over Europe’s Bellwethers

  1. kilamna
    July 26, 2012

    It is a simple situation: we have all spent forward, and must now spend less. This may mean a period of slow growth, or even declines as things come back into alignment. An example is real estate prices, just about everywhere, that went up in anticipation of high inflation. Historically real estate prices (on average) go up about 0.5-1% inflation adjusted; between about 1985 and 2000 they went up about 9%. We have to payback that aberraant gain. Growth in China has been spurred by building etc essentially funded by the G8 nations via offshoring and related transfers. That too will slow down. 

    Deflation is indeed a scary situation, but seems to me that we may be in for just such a period. Reserve banks and governemts should focus on managing the imminent deflation, rather than worry about excessive inflation. If they try to 'create' inflation it will only 'kick the can' a few more year out. Shift the pain even more so to the new generation. The baby boomers 'caused' this situation. We must address it. 

  2. bolaji ojo
    July 26, 2012

    AzmatMalik, You put it simply but with a touch of reality that seems to be lacking in discussion of economic growth these days. We expect companies to grow at a rate of 20 percent or more per year and if they don't we take them to task over it. We look for stock prices to keep going higher and higher on a daily basis and we expect wages to rise too at a fast clip.

    We've spent and borrowed ourselves into a box but we want to complain ourselves out of it rather than accept moderation and slower growth until we clean out the mess.

  3. elctrnx_lyf
    July 26, 2012

    I really liked your perspective about the slow down. I do agree it's better happen sooner than later. Slowing down is good because it will definitely rise and flourish later on.

  4. Daryl
    July 26, 2012

    AzmatMalik,

    Interesting observation which I also happen to agree with.  I would add that all of the G8 countries are carrying to much dept.  These countries (USA etc..) need to reduce debt to below 10% of GDP.  This target is absolutely critical for a stable world economy to emerge.   Debt is the big elephant in the room and MUST be eliminated even though the process will be extremely painful.

  5. Jennifer Baljko
    July 27, 2012

    AzmatMalik – Your observations are spot on, and like Bolaji mentioned these are the kinds of conversations we all should having – how can we add a dose of reality back to expectations.

  6. Jennifer Baljko
    July 27, 2012

    elctrnx_lyf – Yes, it's all part of a cycle. The unfornatuate part is that we keep creating these more extreme cycles of extended feast and extended famine, coupled with unsustainable spending and then severe belt-tightening. Have to believe there is not a more moderate middle ground that would create greater stability and economic predictability.

  7. Jennifer Baljko
    July 27, 2012

    Daryl – Good point. Big question is how to eliminate this debt? Countries keep trimming budgets in the name of austerity, but a serious dilemma emerges: When are you trimming fat and when are you trimming bone? Trimming fat is ok, but if you trim too much bone, countries won't be able to stand and hold their weight.

  8. FLYINGSCOT
    July 27, 2012

    The outlook is not super rosy but neither does it look disastrous.  I imaging the big players will be able to manage their way through the abyss and hopefully come out stronger.

  9. Taimoor Zubar
    July 27, 2012

    I think what matters more is where you cut spending on rather than how much you cut. If you cut down on the investments, you're aiming for a further decline in your economy. So you need to be careful about where the cut is taking place. Often this is the hardest decisions for governments to take.

  10. proent
    July 27, 2012

    I just wonder, in electronics, there are many experts more than capable to regulate power source, signal feedback, etc. Why not our economists worldwide could find a way to regulate our economy cycles ? I am very sure it is possible to stabilize our economy cycles, one way or another way.

  11. Jennifer Baljko
    July 27, 2012

    FlyingScot – Right… the news is somewhere in the middle of the road and it's not much different than the news we've been hearing all along. The odd thing is that Wall Street seems to react as if the earnings news is a surprise and forgot that executives  keep providing cautious outlooks.

  12. Himanshugupta
    July 27, 2012

    @Flyingscot, i think Jennifer has used the right adjective “fuzzy” for the rest of the year picture. I like fuzzy picture than a clear rosy or damp scanrio as fuzzy signify hope. 

  13. Ariella
    July 27, 2012

    Today's Business Insider  begins as follows:

    Goldman Sachs Chief European Economist Huw Pill exposes a terrible irony about the eurozone in a video filmed this month: at the signing of the Maastricht Treaty, both those who loved and hated the prospect of a European Monetary Union actually thought that the euro would see a crisis that would test its structural basis eventually.
    The key difference between their viewpoints consisted of their approval or rejection of the progress that would need to happen to make the euro area sustainable, and whether the populace would actually consent to go through with such reforms.

    Read more: http://www.businessinsider.com/goldman-huw-pill-euro-crisis-maastricht-treaty-2012-7#ixzz21qSpvTap

     

  14. bolaji ojo
    July 27, 2012

    Exactly Flyingscot. This is not 2001 when the economy sank deep into a pit. This is a measured slowdown. Perhaps all of us should take a deep breath and calm down.

  15. Houngbo_Hospice
    July 27, 2012

    @FLINGSCOT,

    Good thinking. Analysts may be blowing things out of proportion. We know that they are doing their job, but they are too must “alarmist” sometimes.

  16. Houngbo_Hospice
    July 27, 2012

    “Over in Germany, Siemens AG (NYSE: SI; Frankfurt: SIE) had even less rosy news.”

    German economy has been in good shape compared to other european countries. Will that Siemens revenue loss have a significant impact on the country's economy?  

  17. syedzunair
    July 28, 2012

    Taimoorz, you are correct. The cost cutting measures should be applied to divisions or functions where the cut will not have an impact that will bring the entire structure down. For example, if you cut down the budget on education than in the future the country will face problems in getting technical resources for work. And, above all the upcoming generation will have lesser avenues of getting educated. Hence, the entire economy will suffer. 

  18. Himanshugupta
    July 28, 2012

    I think overall economic situation for Germany is much better than other countries. Siemens AG might have problems due to the electronics industry having problems in general. I donot think Germany is going anywhere in red, its situation is very strong.

  19. elctrnx_lyf
    July 28, 2012

    All the executives in the world talk about the times of uncertainty and difficulties in economic predictability. the only way organisations becomes successful would be ready to accept some loss, some negative growth but still work hard with right investment going on.

  20. ITempire
    July 29, 2012

    @ electrnx_lyf

    True. Its now more about comparatives. If two companies are sustaining losses, question now is, what to do to sustain the lesser loss. However, what should be of more concern to the analysts is the companies that are not giving breakeven results even. 

  21. ITempire
    July 29, 2012

    @ Bolaji

    Agreed. Its the frequent gossips that causes us to believe in the hype. Its just a slowdown and not a completely negative scenario. However, for European economists, its time to analyze that what factors can affect their long term competitiveness. 

  22. ITempire
    July 29, 2012

    Nokia is a such a huge giant with so many dependant companies that bad news on its part badly reflects on others as well. Its partners, such as STM, might be thinking that their association with Nokia might get them label of partner of a weak company unable to find good alternates.

  23. Barbara Jorgensen
    July 31, 2012

    I've been listening to earnings conference calls for several quarters now and this nagging pessimism just isn't going away. Until this quarter, execs were generally philosophical about the market: not a double dip, etc.; btb on the upswing…but the results are pretty ugly. I might have just crossed over from skeptic to believer: just because you are pessimistic doesn't mean the market isn't in the pits…

  24. Daniel
    August 1, 2012

    Jennifer, you are right, there is a global economic slowdown, especially in EU countries. This financial outcome shows that such slow down has effect the turnover and profit of companies. I think from 2000 onwards, there are many twist and turns in economic conditions and companies are struggling hard for their business.

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