Toshiba loses luster

Not long ago, Toshiba Corp. was basking in the sun, thanks in part to exploding sales in NAND flash, computers and even power plants.

Now, the company's prospects are somewhat dim. It recently scrapped its efforts in the HD DVD arena. In fact, Sony Corp.'s Blu-ray won the next-generation DVD war against Toshiba's HD DVD technology.

In addition, the NAND flash market is in a major downturn. Toshiba's digital products, including disk drives, cellphones and TVs, are low margin or in the red. And even its nuclear power business is failing to fuel anticipated growth.

Challenging environment
"Given the strong headwinds facing the consumer in North America and other western geographies, we believe it will be a challenging environment over the next year for Toshiba's NAND business, as well as other consumer electronics areas such as notebook PCs, small LCDs, HDDs and cellphones," said David Motozo Rubenstein, an analyst with Jefferies Japan Ltd.

"In its nuclear power business, we project pedestrian growth in profits over the next eight years even in our bull case scenario," he said in a new report. The analyst has initiated coverage of Toshiba with an "underperform" rating.

Hit by falling product prices, Toshiba's electronic devices unit recently posted sales of 414.6 billion yen ($3.97 billion) in Q4, down 13 percent from the like period a year ago.

In the same segment, Toshiba's operating income hit 5.2 billlion yen ($49.8 million) in the quarter. That was a decrease of 35.1 billion yen ($336.2 million) in the like period a year ago. The electronic devices segment includes the company's semiconductor and LCD products.

An ongoing concern for the company is the NAND flash market. Hynix, Intel, Micron and others are struggling in the arena. The two leaders—Samsung and Toshiba—are involved in a capacity and process-technology race in NAND.

Toshiba itself has announced several new fabs, but a question remains: Will the company delay those projects?

Others have delayed or pushed out their NAND fab projects. "Recently, IM Flash (Intel and Micron flash JV) indicated that it will delay production of its Singapore fab to mid-calendar 2009," said Edwin Mok, an analyst with Needham & Co. LLC. "Additionally, Hynix recently confirmed the $1 billion capex cut, and we believe its M11 fab will see very limited order/shipments for the reminder of calendar 2008."

NAND woes
On a positive note, NAND spot prices have stabilized in recent times. But the signs are still bad in the arena.

"Impacted by the subprime mortgage loan (crisis) and the slow season, oversupply of NAND flash worsened in Q1 08," according to the DRAMeXchange, a memory clearinghouse. "NAND flash ASPs fell about 35 percent compared to Q4 07. Although, overall bit shipment grew about 30 percent compared to Q4 07, aggregate Q1 08 sales of branded NAND flash makers fell 15.8 percent quarter-over-quarter to $3.24 billion."

"We project an increase in (NAND) overcapacity this year, given the slowdown in demand growth and continued capex plans at leading manufacturers," Rubenstein said. "In 2007, supply overtook demand and this trend continued in 2008. We believe overcapacity will persist in 2008-2009 owing to high bit growth in supply as chipmakers add new factories and shrink geometries."

Signs of weakness
Meanwhile, other parts of Toshiba are showing signs of weakness. "In notebooks, sales growth tapered to a -9 percent year-over-year growth rate in Q4 and operating profit growth slowed as well, owing to weakness in the domestic market," Rubenstein said.

"Notebook sales should rise about 4 percent year-over-year in FY3/09 as the company focuses on overseas markets," he said. "But operating profit should decline for the first time since FY3/06, as operating profit margin falls from 4 percent to 3 precent this year. Other digital products including HDDs, cellphones and TVs are low margin or in the red."

Another important area, nuclear power plants, is not fueling the company's growth, as previously thought. "We find it difficult to justify Toshiba's purchase of Westinghouse given the low impact on earnings and weaker balance sheet," he said. In 2006, Toshiba purchase of a majority stake in Westinghouse for $4.2 billion.

- Mark LaPedus
EE Times