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Koninklijke Philips' (PHG) Q3 Earnings & Sales Rise Y/Y

Zacks Equity Research

Koninklijke Philips N.V. PHG reported third-quarter 2019 adjusted earnings of 51 cents per share and revenues of $5.23 billion.

The company reported earnings of €0.46, up 9.5% from the year-ago quarter. Sales increased 9.2% on a year-over-year basis to €4.70 billion.

Shares declined 1.1% to close at $42.88 on Oct 29, following the release of third-quarter 2019 results.

Comparable sales (includes adjustments for consolidation charges & currency effects) grew 6% year over year, driven by high-single-digit growth in the Diagnosis & Treatment business and mid-single-digit growth in the Personal Health and Connected Care businesses.

However, the company’s comparable order intake was flat year over year, reflecting softness in North America.

Sales rose 9% on a comparable basis in growth geographies, driven by double-digit growth in China and India. Comparable order intake grew high-single digit, reflecting double-digit growth in China and mid-single-digit rise in Latin America.
 

Koninklijke Philips N.V. Price, Consensus and EPS Surprise

Koninklijke Philips N.V. Price, Consensus and EPS Surprise

Koninklijke Philips N.V. price-consensus-eps-surprise-chart | Koninklijke Philips N.V. Quote

 

Sales in mature geographies increased 5% on a comparable basis, due to double-digit growth in China and mid-single-digit rise in Western Europe and North America. Comparable order intake declined mid-single digit, reflecting mid-single-digit growth in other mature geographies, low-single-digit growth in Western Europe and a double-digit decline in North America.

Segment Details

Diagnosis & Treatment revenues increased 13.3% from the year-ago quarter to €2.12 billion. Comparable sales grew 9%, driven by double-digit growth in Ultrasound and high-single-digit rise in Image-Guided Therapy and Diagnostic Imaging.

On a geographic basis, China and Latin America witnessed double-digit growth. Mature geographies grew at a high-single-digit rate, reflecting double-digit growth in other mature geographies, mid-single-digit rise in North America and low-single-digit improvement in Western Europe.

During the quarter, Philips launched the highly successful Azurion platform in China, following clearance from the National Medical Products Administration.

Moreover, in the United States, the company launched the longer 150 mm and 200 mm versions of its Stellarex low-dose drug-coated balloons.

Additionally, Philips’ app-based, mobile Lumify ultrasound solution delivered double-digit comparable sales and order intake growth in the reported quarter.

Connected Care business revenues improved 9% to €1.15 billion. Comparable sales climbed 6%, driven by mid-single-digit growth in Monitoring & Analytics and Sleep & Respiratory Care.

Mature geographies grew mid-single digits, primarily due to double-digit rise in other mature geographies, mid-single-digit growth in North America and low-single-digit improvement in Western Europe. Growth geographies rose at low-single-digit rates, reflecting double-digit growth in China.

The company launched the next-generation IntelliVue MX750 and MX850 bedside patient monitor platforms in Europe during the quarter.

Personal Health sales improved 7.4% year over year to €1.36 billion. Comparable sales grew 6%, driven by double-digit growth in Oral Healthcare, high-single-digit rise in Domestic Appliances and low-single-digit increase in Personal Care.

Growth geographies grew high-single digit, driven by double-digit growth in China. Mature geographies posted low-single-digit growth.

The company rolled out its connected Philips Sonicare ExpertClean power toothbrush globally in the reported quarter.

Other segment sales slumped 33.9% to €82 million primarily due to higher IP royalty income.

Important Partnerships

During the quarter, Philips signed multi-year enterprise patient monitoring agreements with Kantonsspital Frauenfeld (Switzerland) and the University Clinic of Bonn (Germany) to improve workflow and clinical outcomes in these hospitals.

The company also collaborated with Walgreens to integrate the clinically-validated Philips SmartSleep Analyzer with the Walgreens Find Care platform.

Operating Details

Gross margin contracted 230 basis points (bps) on a year-over-year basis to 45.8% in the reported quarter.

Selling and general & administrative expenses contracted 20 bps and 10 bps, respectively. Research & development expenses expanded 10 bps.

In the reported quarter, cost savings totaled €96 million, reflecting procurement savings of €41 million. Savings from overhead and other productivity programs were €55 million.

Philips’ adjusted earnings before interest, taxes and amortization (EBITA) — the company’s preferred measure of operational performance — were €583 million, up 2.6% from the year-ago quarter.
 
Adjusted EBITA margin contracted 80 bps on a year-over-year basis to 12.4%, primarily due to the negative impact of tariffs, reduced Connected Care business profits and lower royalty income.

While Connected Care EBITA margin contracted 450 bps, Diagnosis & Treatment and Personal Health EBITA margins expanded 210 and 30 bps, respectively.

Balance Sheet & Other Details

As of Sep 30, 2019, Philips’ cash and cash equivalents were €1.10 billion and total debt was €5.77 billion. This compares with cash and cash equivalents of €1.08 billion and total debt of €5.82 billion as of Jun 30.

Meanwhile, net cash flow generated from operating activities came in at €356 million. Free cash flow was €126 million.

Philips completed 32.9% of its share buyback program that was announced on Jan 29.

In the reported quarter, the company sold all of its remaining shares in Signify (14.3%) for total proceeds of €477 million.

Guidance

Philips expects adjusted EBITA margin to improve 10-20 bps in 2019.

Tariffs, as a result of the U.S.-China trade war, are expected to have a negative impact of €70 million in 2019.

Philips reiterated its overall target of 4-6% comparable sales growth and an adjusted EBITA margin improvement of 100 bps per year on average for the 2017-2020 period. The company expects the Connected Care business to deliver an adjusted EBITA margin of 13-15% next year.

Free cash flow is expected to be more than €1.5 billion in 2020.

Zacks Rank and Stocks to Consider

Currently, Phillips has a Zacks Rank #3 (Hold).

Alteryx AYX, Digital Turbine APPS and Brooks Automation BRKS are some better-ranked stocks in the broader computer and technology sector. All three stocks have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While Alteryx is set to report quarterly results on Oct 31, Digital Turbine and Brooks Automation are scheduled to report on Nov 4 and 6, respectively.

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