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September 21, 2005 1:59 pm

Seiko Epson warns on lower demand

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Seiko Epson, the world’s second largest maker of inkjet printers, warned on Wednesday that net profits this year would be half of previous estimates due to low prices and weaker than expected demand for its core products.

Epson said group profits in the year to March, 2006 would be Y22bn, rather than Y44bn and sales would be Y1,618bn rather than Y1,639bn as a result of fierce price competition in the inkjet printer market, slower demand for devices used in projectors, projection TVs and mobile phones and a drop in sales of printer consumables, particularly in Europe.

“The situation is very difficult, particulary in terms of prices and particularly in Europe,” where suggish markets had led to demand for inkjet printers shifting to low-priced models, Epson said.

At the same time, Epson was suffering slower-than-expected demand for its high temperature polysilicon (HTPS) panels used in projectors and projection televisions, which were losing their low cost advantage against liquid crystal display TVs and plasma display TVs.

The sharp downward revision came as a surprise primarily because of the factors behind the disappointing performance.

“It was a negative surprise,” said Hisashi Moriyama, senior analyst at JP Morgan in Tokyo. “Most analysts expected printers to be the main factor behind a downward revision and devices were supposed to be the strong point.”

But in the end, weak demand for devices and a sharp fall in prices were a major factor behind the fall, he said.

The decline in demand for HTPS panels is particularly damaging, since Epson’s operating profit margins for this product are over 20 per cent, “so the fact that a product with a huge profit margin fell sharply had a big impact,” Mr Moriyama said.

Although projection TVs, in particular, have been popular among consumers seeking very large screen TVs due to their relatively low cost, the sharp price falls of LCD and PDP TVs has meant that the cost advantage of projection TVs is no longer that obvious.

“Consumers have more choice,” Mr Moriyama said.

Epson is also believed to have suffered a sharp price cut for its amorphous TFT LCD panels supplied to Motorola for use in its mobile phones. Epson received a very large order from Motorola but in order to secure further orders it had to agree to sharp price reductions, Mr Moriyama said.

Mr Moriyama noted that Epson still makes reasonable profits on inkjet printers but warns that “competition will increase rather than decrease so it is difficult to imagine that this is the bottom and there will be a rebound next year.”

The market for inkjet printers is characterized by fierce competition between formidable rivals, with Hewlett Packard leading with about 42 per cent market share, followed by Epson and Canon at about 25 per cent each, Mr Moriyama estimated.

Epson’s cost base remains higher than its main rivals, with gross margins at 26.9 per cent before the revision compared with 51 per cent for Canon, Mr Moriyama said.

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