Although it has received much international media attention since its introduction of low-priced netbook computers to the market a year ago, Asustek Computer Inc’s (華碩電腦) disappointing fourth-quarter guidance downgrade sent shock waves through the investor community.
On Jan. 8, the company issued an emergency statement, saying it would revise downward its fourth-quarter shipment forecasts across all product lines because of lower market demand. It also cut its gross and operating margin outlooks in the three months ending Dec. 31.
Asustek said at the time that excess components and finished goods inventories for liquid-crystal-display (LCD) monitors and notebooks, an inaccurate pricing strategy and unfavorable exchange rate fluctuations were behind the revisions, but failed to elaborate further.
While the market was difficult and volatile in the fourth quarter, Macquarie Group said it was still shocked by Asustek’s announcement of a lower profit forecast for the fourth quarter.
A Macquarie client note issued on Jan. 8 said the mishandling of foreign exchange and inventory, “Will raise concerns among long-term investors about management capability for long-term growth.”
Tony Tseng (曾省吾), a Merrill Lynch analyst based in Taipei, said Asustek faced crucial challenges other than the technical issues of foreign exchange and inventory controls.
“Asustek needs to solve issues in its organizational transitions and product/channel strategy,” Tseng said in his investment note on Jan. 9.
The company’s aggressive entry into the US market is another issue that deserves further review, he said.
In response, Asustek hosted a conference call on Wednesday to try to allay analysts’ concerns about its management capability. It offered its revision reasons in detail and its contingency plans to tackle its problems, but is leaving its guidance for first quarter and detailed fourth-quarter financial results until an investor’s conference on Feb. 12.
The effects of inventory value loss, which the company targets to resolve by the end of first quarter, led to a 3 to 4 percentage points decline in its fourth-quarter operating margin guidance, an Asustek statement issued on Thursday said.
The company said on Jan. 8 it expected the fourth-quarter operating margin for products sold under its brand name to fall to between negative 5 percent and negative 8 percent, from 6.9 percent in the previous quarter.
To ensure its inventory management capability, Asustek said on Wednesday it would implement aggressive inventory and procurement controls and aim to reach a more reasonable inventory level of between NT$30 billion to NT$35 billion (US$890 million to US$1.08 billion) by the end of March.
That is compared with its fourth-quarter inventory level of NT$40 billion to NT$45 billion and a third-quarter level of between NT$50 billion and NT$55 billion, company data showed.
In the fourth quarter, the inventory breakdown across product categories was comprised of 30 percent to 35 percent notebooks, 25 percent motherboards, 20 percent EeePCs and 10 percent to 15 percent each for LCD monitors and other products, data showed.
Asustek said that inventory on LCD monitors remained its biggest challenge in the fourth quarter, representing NT$6 billion in value alone.
With component prices on displays dropping precipitously since the second half of last year, the company expects a write down of 20 percent in this single product category and expects continued write-downs in the first quarter as well, Asustek said in the statement.
While the company tackles its inventory problem, consumers will not see new models of notebook computers, netbooks or EeePC-series products until the second quarter. Consumers should also expect a more streamlined Asus-brand product lineup going forward, the company said.
Apart from inventory concerns, foreign exchange loss caused a reduction of 2 to 2.5 percentage points in its fourth-quarter operating margins. To combat this problem, Asustek said it will lock-in exchange rate quotes to improve its foreign currency position.
Weak demand and price competition contributed a decline of 4 to 4.5 percentage points in its fourth-quarter operating margin, while marketing and R&D expenses dragged the company’s operating margin down by another 3 to 4 percentage points, Asustek’s operating margin breakdown revealed.
The computer maker hopes to bring down operating costs by 10 percent through zero-based budgeting and additional outsourcing to contract manufacturers, Asustek said in the statement.
Despite the proposed courses of action, pundits remained skeptical as the first quarter is traditionally a weak season and compounding the situation will be new product releases by competitors encroaching on already weak consumer demand.
As Asustek still has 2-3 months of Eee PC inventories on hand, Citigroup analyst Eve Jung (戎宜蘋) expects Asustek’s gross margin of Eee PC to be weak in the first quarter, given model transition to the 10-inch segment from 8.9-inch models.
“We are concerned about increasing pricing pressure in the 10-inch netbook segment starting in the second quarter as Acer (宏碁) and Hewlett-Packard will be aggressive in their pursuit of market share gains,” Jung wrote in a client note on Wednesday.
The company also faces other challenges in execution effectiveness, product differentiation and cost-saving management, she said.
additional reporting by Kevin Chen
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