French broadcast and set-top box equipment giant Thomson has announced the departure of chairman Frank Dangeard. Thomson has reported a drop of over 30 per cent in operating profits for its core businesses in 2007. The announcement follows months of unease about tumbling stock prices, dropping from almost $18 six months ago to the current price under $8.
Thomson has a long history in the broadcast and electronics industry, including legacy CRT TV manufacturer RCA. In 2001, Thomson acquired US broadcast equipment vendor Grass Valley, broadcast service provider Technicolor and Philips' professional broadcast group. Amongst their other major STB and broadcast deals were the 2002 acquisitions of Grundig's STB division and Canal+ Technologies, DirecTV's in-house STB manufacturer Hughes Electronics in 2004, and French broadcast infrastructure group Thales in 2005.
The most recent report shows that their Systems division, including set-top box and broadcast infrastructure and with revenue around þ2.7bn in 2007 (48 per cent of total) has seen operating profits slashed to þ28m (þ132m in 2006). Broadcast equipment sales look flat on previous years with no significant orders for end-to-end infrastructure or services. STB sales have flattened since last year at around 13m units, of which over three quarters are satellite units. Without having picked up any significant new deals and with a high dependency on DirecTV (who have recently show significant per unit price cuts across all their STB range) it is likely that Thomson's STB business is being eroded by falling prices without significant high-value deployments.
The service segment, dealing with DVD and film printing, and broadcast managed services, has also seen flat growth at around þ2.4bn revenue. Of this, profits have fallen 28 per cent to þ115m in 2007. By contrast, the substantially smaller Technology division has reported margins of over 50 per cent, primarily driven by licenses such as MPEG, and silicon. Although about four to five times smaller than the other divisions at þ535m, Technology provides over twice the profits than the other two divisions combined at þ277m in 2007.
All of Thomson's main businesses are heavily dependent on the US market and they are likely to have taken a hit from recent exchange rate fluctuations. Given the high dependency on commodity DVD printing and falling demand in film replication, the Services division looks like a particularly weak part of the þ5bn business. The Systems division is also struggling with increased competition in end-to-end infrastructure and a lapse in HD equipment demand in the US following several years of conversion.
Thomson's STB business has been under scrutiny for several years. The business relies heavily on satellite box shipments, with an estimated 4-5m units each year being shipped to DirecTV. DirecTV have reported their average cost per box has fallen by up to 40 per cent in 2007. The DirecTV relationship is a legacy from the Hughes purchase in 2004 and guarantees half of DirecTV's volume to Thomson if they can supply it. This deal expires in June 2009 and is likely to result in DirecTV diversifying away from Thomson.
