Elecom 6750
エレコム
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Summary
A fabless manufacturer of peripheral devices for PCs, smartphones and tablets, and TV and AV equipment. Flexibly adapts its product portfolio to changing trends and times. Working to strengthen its B2B business.
Technology Hardware, Storage & Peripherals
Key dates
2011-12-01
Coverage initiation
Executive summary
Elecom Co., Ltd., is a fabless manufacturer of peripheral products for PCs, smartphones, tablets, and audio-visual equipment. In keeping with its “Lifestyle Innovation” motto, the company aims to develop and sell digital devices that enrich its customers’ lifestyles, both in business and at home. Elecom’s business infrastructure has allowed it to grow over the years by rapidly bringing to market products that match market trends and meet consumer needs. Elecom is known for its marketing prowess, which allows it to advise about in-store displays and control inventory levels at volume retailers, as well as its skill in entering new markets. In addition, the company stands out for its high agility as it outsources manufacture and thus has few tangible fixed assets. It also allows for efficient procurement and distribution. It currently sells about 17,000 items, which it expects to completely replace over the next 3–4 years. The expertise required to smoothly design/develop, procure, and market all these products can be considered a barrier to entry in this industry.
In FY03/21, sales composition by product group was 31.3% for PC-related Products (including computer peripheral equipment, and cables), 16.5% for Smartphone/Tablet-related Products (including cases, cables, and batteries), 19.9% for TV/AV-related (such as antennas, speakers, and cables), 24.2% for Peripheral Equipment (memory, storage, and network devices), and 8.1% for Other. By sales channel, electronics volume retailers made up 46.6% of sales, B2B 32.4%, and mail order and new channels 21.0%. The company wants to strengthen its B2B and mail order sales (including e-commerce) while keeping electronic volume retailers as its mainstay channel.
Elecom has expanded its business by launching consumer-focused products, but there remain many areas in which it has a low market share. The company positions B2C as a growth area, and plans to expand sales by boosting efforts toward electronics volume retailers, new sales channels (mainly e-commerce and variety stores), and e-commerce overseas. Meanwhile, B2B and B2I (for general industry) are relatively new areas for the company. Shared Research expects sales to grow in B2B and B2I as Elecom continues to build a solid foundation in these areas through M&A and other means.
Trends and outlook
In FY03/22, the company reported consolidated sales of JPY107.4bn (+0.1% YoY), operating profit of JPY13.9bn (-7.9% YoY), and net income of JPY10.4bn (-3.3% YoY). Exceeding JPY100bn for the fourth consecutive year, sales reached a new record high.
Sales growth was driven by a JPY4.3bn increase in Peripheral Equipment and a JPY1.6bn increase in Smartphone/Tablet-related Products. However, sales declined JPY2.5bn in PC-related Products, JPY2.1bn in TV/AV-related Products, and JPY1.1bn in Other products (healthcare products, such as for sterilization, and products related to the GIGA School Concept).The gross profit margin declined 1.0pp YoY to 37.0%.
The FY03/23 earnings forecast calls for sales of JPY111.6bn (+4.0% YoY), operating profit of JPY13.6bn (-2.5% YoY), recurring profit of JPY13.7bn (-4.8% YoY), and net income of JPY9.5bn (-9.1% YoY). In terms of the operating environment, the company indicated that its expects instability in procurement moving forward, particularly in network products, due to the semiconductor shortage. The company plans to maintain its gross profit margin by continuing to lift prices. Expecting a decrease in the number of products sold due to price hikes, the company looks for sales to increase only slightly. It expects operating profit to decline YoY in line with an increase in SG&A expenses due to investment and logistics center depreciation.
Strengths and weaknesses
Shared Research believes the company’s strengths are 1) responsive, 2) strong marketing, and 3) ability to develop new markets. Weaknesses include its 1) reliance on the president, 2) technology development, and 3) sales to corporations (see Strengths and weaknesses section for details).
Key financial data
Note: The company conducted a 2-for-1 stock split on September 30, effective October 1, 2015, and per share data take this into account.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
* Figures retroactively adjusted by applying the Accounting Standard for Revenue Recognition that the company adopted from Q1 FY03/22
Full-year FY03/22 results
Results summary
Key points of earnings
Sales rose JPY138mn YoY to reach a new record high. Sales growth was driven by a JPY4.3bn increase in Peripheral Equipment and a JPY1.6bn increase in Smartphone/Tablet-related Products. However, sales declined JPY2.5bn in PC-related Products, JPY2.1bn in TV/AV-related Products, and JPY1.1bn in Other products (healthcare products, such as for sterilization, and products related to the GIGA School Concept).
Gross profit margin declined 1.0pp YoY, from 38.0% to 37.0%, which still exceeded the company's November 2021 revised forecast of 36.1%. The company conducted a review of its selling prices, but was also able to control procurement costs and limit the impact from forex fluctuations.
Operating profit fell JPY1.2bn YoY. Gross profit was down JPY1.1bn YoY as SG&A expenses increased JPY116mn YoY. The increase in SG&A expenses breaks down into a JPY47mn increase in distribution expenses along with higher sales, a JPY100mn increase in selling expenses due to resumed exhibitions, a JPY47mn decrease in personnel expenses, and a JPY15mn increase in administrative expenses.
Breakdown of sales by product category
PC-related Products: Sales declined JPY2.5bn YoY to JPY31.0bn. Sales of web cameras and input devices were down in reaction to firm sales in FY03/21.
Smartphone/Tablet-related Products: Sales increased JPY1.6bn YoY to JPY19.3bn. Case sales improved in line with the increase in smartphone sales volume. Tablet peripheral equipment sales were down in reaction to firm sales in FY03/21.
TV/AV-related Products: Sales declined JPY2.1bn YoY to JPY19.3bn. Sales of TV peripheral equipment and headset microphones were down in reaction to firm sales in FY03/21.
Peripheral Equipment: Sales increased JPY4.3bn YoY to JPY30.3bn. External HDDs, SSDs, and USB memory-related products performed well. With Hagiwara performing well and Force Media now a consolidated subsidiary, sales benefitted from favorable group company contributions.
Other products: Sales declined JPY1.1bn YoY to JPY7.6bn. With the fading of specialized demand for depositories associated with the GIGA School Program, healthcare, and sterilization-related products, sales declined YoY.
Full-year company forecast
Forecast
* Figures retroactively adjusted by applying the Accounting Standard for Revenue Recognition that the company adopted from Q1 FY03/22
The FY03/23 earnings forecast calls for sales of JPY111.6bn (+4.0% YoY), operating profit of JPY13.6bn (-2.5% YoY), recurring profit of JPY13.7bn (-4.8% YoY), and net income of JPY9.5bn (-9.1% YoY). In terms of the operating environment, the company indicated that its expects instability in procurement moving forward, particularly in network products, due to the semiconductor shortage. The company plans to maintain its gross profit margin by continuing to lift prices. Expecting a decrease in the number of products sold due to price hikes, the company looks for sales to increase only slightly. It expects operating profit to decline YoY in line with an increase in SG&A expenses due to investment and logistics center depreciation.
Shared Research plans to provide an update on the strategies and ideas behind the company's FY03/23 forecast following interviews with the company.
Outlook
“Ambidextrous leadership” for ongoing growth
At the May 2018 earnings results briefing, Chairman Hada commented that he wants Elecom’s leadership to be “ambidextrous,” meaning that rather than exclusively relying on the development existing businesses (in pursuit of short-term profit), he wants to see Elecom continue to grow by continuously exploring and developing new businesses. The concept of “ambidextrous leadership” comes from the book Lead and Disrupt: How to Solve the Innovator’s Dilemma, by Stanford University’s Charles A. O’Reilly and Harvard University’s Michael L. Tushman. Many companies focus on dominance in their fields of expertise, but eventually face flagging growth. In contrast, Elecom has approximately doubled its sales over the past ten years, achieving its target of JPY100.0bn. Operating profit approximately quadrupled over the same period. The company is currently targeting sales of JPY100.0bn. Chairman Hada’s comment indicates his intention to achieve ongoing growth.
Still room for growth in B2C
Elecom considers B2B to be a new growth area, but B2C remains its core business area, and it believes there is still ample room for growth there.
Low-share product groups have room for growth
When Elecom first listed on JASDAQ, it primarily handled PC peripheral products. Thereafter, even as it increased its market share of computer mice, keyboards, LAN hubs, and other products, it also achieved growth through involvement in peripheral equipment for smartphones and tablets. Elecom says it already has more than 40% of the domestic markets for computer mice, keyboards, tablet accessories, and LAN hubs. Even as a newcomer, its flexible development, speed, adaptive procurement, and its strong sales capabilities, which primarily targeted electronics volume retailers, allowed it to continue expanding its share. The company considers the product groups for which it has already secured a large market share to be cash cows and aims to improve their competitiveness even further.
At the same time, it also handles product groups for which it has achieved only a low market share. For example, it has only a 20% or lower share for routers, generic remote controls, and headphones. Ordinarily, a low market share indicates poor competitiveness, but Elecom believes such low-share product groups still have ample room for growth and therefore plans to continue launching new products to expand those groups. In the antenna business Elecom acquired in 2017, the product lineup is adequately competitive, so it plans to further expand market share using its flexible procurement and strong sales capabilities.
Elecom-style smart home
Even within the B2C channel, there is still room to establish new markets. One area in which the company is enhancing its efforts is the Elecom-style smart home. Many electronics manufacturers are getting involved in the smart home field and are working to connect all home electronics products to the internet. Elecom aims to enter the smart home business by making it possible to control certain home electronics products via retrofitting. Initially, it wants to provide the means to control lighting, air conditioners, and TVs (including recording of programs) to access demand from customers wanting to turn their homes into smart homes. This approach is certainly worthy of attention.
Elecom has already produced a number of remote controls (including for TVs) that work with electronics from multiple manufacturers. The company also has its own line of routers that are essential for controlling electronics via smartphones and the internet and has accumulated significant knowledge and experience in this field. It aims to capture smart home demand by combining these routers and remote controls with other devices, and by focusing on home electronics that consumers want to be able to control with relative regularity when they are not at home. The company appears to be in a good position to develop the market, especially because it does not have its own lineup of lighting, air conditioners, and TVs. For example, Panasonic would likely be reluctant to offer products that could control home electronics products from Mitsubishi Electric, but Elecom has no such qualms. In addition, electronics manufacturers are less likely to work on retrofitted solutions because they are more interested in selling new products.
Strengthening new sales channels
Elecom’s primary sales channel is electronics volume retailers (46.6% of total sales in FY03/21), but lifestyle stores and other channels have ample room for expansion, so the company is enhancing efforts related to these channels. Even before, lifestyle retailers such as Tokyu Hands and Loft served as a sales channel, but only on a comparatively small scale. This may be because Elecom’s product development tended to focus on functionality, with not as much attention given to aesthetic design.
More recently, the company has changed its product design to suit the needs of consumers who enjoy shopping at lifestyle stores, creating a more unified aesthetic and appealing packaging. Some stores have even established sections dedicated to Elecom products. The company may be able to apply the method it has used to coordinate sales sections at electronics volume retailers to the lifestyle store channel. There is increasing need for electronics even in lifestyle accessories retail, and there appear to be plenty of business opportunities in this area for companies with diverse product lineups like Elecom.
Entering new business areas
Elecom plans to strengthen its sales efforts in areas to which it has traditionally paid little attention, but which are also compatible with its technologies, products, and other sales channels. One example is the healthcare field. The company has already commercialized body composition monitors, muscle training devices, low-frequency electronic pulse massagers, and other devices. Although the Elecom brand is not yet widely known when it comes to these products, they have strong potential because of their compatibility with smartphones and the possibility that they can be sold through the lifestyle store channel, so Elecom plans to keep an eye on demand as it launches more new products. For the time being, it is putting much of its attention toward developing cooking appliances, a category it had not previously addressed.
Enhancing e-commerce both in Japan and overseas
The company received 21.0% of FY03/21 sales via mail order and new channels. Of this, mail order, which includes e-commerce, accounted for about 10% of FY03/20 sales. Part of the reason for this relatively low figure is the company’s low prioritization of e-commerce as it sought to avoid competing with its mainstay sales channel, the electronics volume retailers. Although it does not intend to change its focus on electronics volume retailers going forward, it does intend to enhance efforts related to domestic e-commerce by, for example, conducting promotions using social media and content produced in-house. Furthermore, it aims to translate its content for Amazon Japan into English for use on Amazon websites in the US and Europe.
Elecom previously entered the US and Europe with brick-and-mortar stores, but ended up withdrawing. Now, it will take another crack at these markets, but this time using Amazon. Elecom has little brand recognition in the US and Europe, and with a number of major brands already operating there, it will not be easy to develop a significant presence. However, using e-commerce will lower the barriers to entry, and Elecom will be able to limit the investment of management resources in the reentry effort by simply translating its Japanese content, which already has a proven track record, into English. At the same time, the company now has a stronger development team and a solid product line. It believes that if it can develop the US and European markets, it will be able to accumulate consumer reviews more easily than it can in Japan, and it will be able to use those reviews when conducting further product development. It is still too early to judge whether this effort will prove successful, but we will be keeping an eye on the results of this new experiment.
Developing B2B and B2I
Elecom has built up a solid team of engineers by hiring new graduates and giving them further training in-house, by recruiting experienced engineers from electronics and semiconductor manufacturers, and by acquiring companies such as Logitec, Hagiwara Solutions, DX Antenna, and D-CLUE Technologies. Compared to B2C, B2B is more demanding (in terms of product functionality, quality, durability, technical design, and support), but Elecom believes it is in a position to adequately respond to such demand. It plans to strengthen efforts related to B2B and to B2I (business-to-industry) and will work to develop business areas that previously received little attention.
Results of acquisitions such as DX Antenna, aiming to strengthen B2B, are becoming apparent
Elecom’s acquisitions are clearly bearing fruit. The best example would be DX Antenna, which Elecom acquired in 2017. Before Elecom acquired it, DX Antenna had sales of about JPY12.0bn and was recording operating losses, but its FY03/21 sales were JPY13.9bn, with operating profit of JPY1.7bn and an OPM of 12%. Elecom says that using its own sales channels for DX Antenna products contributed to the increase in sales, while the use of Elecom’s supply network reduced certain external procurement costs and improved profitability.
However, it is difficult to say that synergies have reached their full potential. Making use of DX Antenna’s B2B network, and in particular its electric material and work routes, Elecom should be able to expand sales of 5G- and 4K/8K-related products that target office buildings and apartment or condominium buildings, as these are products for which demand is expected to increase. In addition, if the improved efficiency of some areas of procurement can be expanded, further cost reductions can be achieved. Costs can also be reduced by consolidating distribution centers. In the medium term, Elecom is targeting DX antenna sales of JPY20.0bn and an OPM of 10%, but with enhancement of the B2B channel, it is conceivable that an even great profit contribution could be achieved.
Enhancing product line of rugged tablets, surveillance cameras, and other devices in B2B
In the B2B channel, Elecom specifically wants to enhance its product line of rugged tablets and surveillance cameras. The company’s rugged tablets are meant to be used in business areas including construction and civil engineering, distribution and sales, manufacturing, and medical and welfare, so they are highly shock-, dust-, and water-resistant. After past large orders, the company was praised for its responsiveness (including refinement, repair, maintenance, and support), leading to repeat orders. The rugged tablet business has been operating at a loss, but the company now plans to focus on profitability as it expands its product line and enlarges the business.
Elecom expects the surveillance camera business to grow as security awareness increases. It can utilize its own technologies (edge processing of sensing data, data transmission, remote monitoring, and peripheral equipment) and DX Antenna’s electric material and work routes to achieve this growth. However, it is taking longer to get products to market than originally anticipated. With the cooperation of its Chinese suppliers, Elecom aims to launch products as soon as possible.
On June 16, 2021, Elecom made Force Media a consolidated subsidiary with an assumed acquisition date of April 1, 2021. It acquired shares in Force Media to expand its lineup of network storage and surveillance cameras and strengthen solutions for its B2B channel. Force Media sources network storage, surveillance cameras, and other products from overseas manufacturers, and in this sense operates like a trading company. It excels in the sale of services such as quality control, repair, and maintenance.
By making Force Media a subsidiary, Elecom can expect improved operations in its B2B channel from economies of scale in purchasing and distribution, which will contribute toward increasing corporate value in the longer term.
Leverage Elecom group technologies in B2I as well
In the B2I channel, Elecom is focusing on the use of IT solutions for factories, the medical field, and social infrastructure. In factories, IT can be used to monitor factory workers (position data tracking and fall detection) or manage machinery (IoT, detection of coolant and oil deterioration, detection of potential failure using vibration or sound). Other IT solutions could include auxiliary tools for improving work precision and LANs. These solutions can involve the utilization of Elecom and Logitec products, Hagiwara Solutions’ memory-related technologies, and technology from D-CLUE Technologies used to digitize and manage analog data. Such solutions would contribute to improved factory safety, operation, and productivity, with benefits exceeding costs. This would, in turn, drive growth at Elecom.
In the medical field, the company wants to develop patient monitoring functionality, cutting-edge ultrasonic probes, hospital LANs, and telemedicine systems. Telemedicine in particular is a growing field in light of the novel coronavirus outbreak impact, and Elecom expects the market to expand substantially. In social infrastructure, it wants to use its products and technologies in areas including agriculture (measuring humidity, sunlight, soil moisture, and pH), traffic monitoring, various public transport signage, and weather monitoring.
Business
Business description
Elecom Co. is a fabless manufacturer of peripheral products for personal computers, smartphones, tablets, and audio-visual equipment.
The company has grown over the years by rapidly bringing products to market that match current market trends and meet consumer needs. Elecom is known for marketing prowess, which allows it to provide advice on in-store displays and control inventory levels at volume retailers, and is also known for efficient procurement and distribution of high-quality goods. Elecom currently sells about 17,000 different items and expects to replace all of them over the next 3–4 years. The expertise required to smoothly design/develop, procure, and market all these products can be considered as a barrier to entry in this field.
Products
Note: Figures may differ from company materials due to differences in rounding methods.
Segment reporting
Elecom reports sales by product category (as indicated by the previous table): PC-related Products, Smartphone/Tablet-related Products, Peripheral Equipment, TV/AV-related, and Other. The sharp increase in TV/AV-related sales is attributable to the DX Antenna acquisition. The Other segment includes potential growth products/services such as industrial B2B-related sales, healthcare/medical equipment, and VR.
PC-related Products
This segment includes PC accessories, input devices such as mice and keyboard, network accessories, cables, and consumables such as paper and ink. While the company does not disclose the gross margin for these new segments, management has said the gross margin for the PC-related segment is relatively high.
The accompanying figure shows trends in domestic PC shipments (value basis) versus trends in PC-related sales by Elecom. In particular, with the exception of FY03/14, Elecom’s PC-related sales were generally flat. According to a Japan Electronics and Information Technology Industries Association (JEITA) survey, domestic PC shipments in FY03/21 were up 27.5% YoY in volume and down 0.7% in value. According to an MM Research Institute, Ltd. (MMRI) survey (conducted in FY2020), shipments were up 12.9% in volume and down 1.2% in value. In FY03/21, about 4.8mn PCs were shipped in connection with the GIGA School Concept (accounting for 27.8% of the total), roughly 4.0mn of which were Chromebooks supplied by NEC Lenovo, HP, and Dell. Consumer PC shipments expanded 11.3% YoY to 4.8mn, increasing for a second consecutive year. This reflected higher demand as remote work and online study during the COVID-19 pandemic drove PC replacement and additional purchases.
Smartphone/Tablet-related Products
Accessories for smartphones and tablets are centered on cases and screen protectors, and also include electronic devices such as cell phone batteries, cables, and wireless keyboards. Although they are not included in this product category, we would also note that Elecom has been expanding sales of headphones, earbuds, FM transistors, Bluetooth speakers, memory cards, and other products that could broadly be considered as related to smartphones and tablets.
Domestic smartphone shipment volumes peaked in FY03/14, so Elecom does not expect the market for smartphone-related products to expand greatly. Although it can expect a boost in demand for peripherals following the release of new models of the iPhone, which accounts for a high market share in Japan, the bulk of demand is for replacement smartphone cables and batteries. Sales dropped significantly in FY03/18 on a drop in OEM sales to major carriers, but the impact disappeared in FY03/19.
The company estimates that it is the largest seller of smartphone and tablet-related accessories through volume retailers, with a more than 30% share of smartphone-related accessory sales and over 50% share of sales of accessories for tablets as of FY03/18. The company said that smartphone products have very short product cycles, with demand peaking immediately after the release of a new smartphone model. As a result, companies need to be good at spotting trends, delivering timely products, and controlling inventory.
Domestic smartphone shipment volumes have trended flat. Given the high and stable market Elecom holds in this market, the company expects to growth in related sales to be an important factor underpinning overall growth in sales and earnings in the future.
Note: Elecom’s smartphone and tablet-related sales have been reclassified figures since FY03/14.
Peripheral Equipment
The Peripheral Equipment segment includes storage devices (such as external HDDs), memory products (such as USB memory sticks and SD cards), network equipment (such as wireless LAN routers, switching hubs, network-attached storage [NAS] products), and thus include the sales of Hagiwara Solutions’ memory for industrial equipment. We think profit margins on network equipment are high and there is considerable scope for expansion of market share and sales channels.
In network equipment, including wireless LAN routers, Elecom was often perceived as less in rank to Melco Holdings Inc. due to a lack of engineering staff, but the company bolstered its team of engineers from 2016, boosting product development. It began to pick up momentum at volume retailers after hitting bottom in 3Q FY03/17 (it ranks third as of FY03/18). The acquisition of DX Antenna also provided Elecom with access to its sales channels.
Note: Sales figures prior to FY03/11 include network accessories.
Supply chain
Elecom is a fabless manufacturer. It handles planning, design and development but does not own a manufacturing plant. Manufacturing is done by outside companies. OEM products are in turn sold under the Elecom brand. The company generally handles 10,000 items, and launches 2,000-plus items per year (FY03/13). Elecom currently sells about 17,000 different items and expects to replace all of them over the next 3–4 years. The expertise required to smoothly design/develop, procure, and market all these products can be considered as a barrier to entry in this field.
Procurement and manufacturing
Advantages of product procurement as fabless manufacturer
The company says 50% of goods sold come from overseas contract manufacturers in China and Taiwan. The remaining 50% of procurement comes via imports using Japanese trading companies. The profitability of fabless manufacturers such as Elecom naturally depends on skill on the purchasing front. In addition to collecting data in Japan and overseas, Elecom is constantly looking to increase its capacity to obtain data at the local market level that will allow it to procure the products that it has designed from affiliated manufacturers or outside vendors in a timely fashion, and beat competitors to the market. For fabless manufacturers (such as Elecom), product procurement is the key to flexibility and speed, which allows rapidly bringing to the market products that will sell immediately.
Outsourced procurement from overseas manufacturers uses dollar pricing, so the dollar-yen rate impacts earnings. A strong yen does not always equate to solid earnings; performance also depends on whether costs can be passed on.
Distribution and logistics
Elecom has two domestic distribution and logistics centers in Sagamihara, Kanagawa Prefecture (Kanagawa Distribution Center) and Nishi-Yodogawa-ku, Osaka (Osaka Distribution Center), and one facility for handling returns in Yashio, Saitama Prefecture (Saitama Center). The company has a system that enables additional orders from customers to be made automatically by Electronic Data Interchange (EDI), allowing next day delivery for each customer sorted by type, number of items and delivery date. As for overseas distribution and logistics, the company has a site in Shenzhen’s Yantian Port Bonded Logistics Park, which it may turn into its main international distribution site. From this site OEM products are distributed directly overseas. As a business continuity planning measure, and to expand capacity and improve productivity, Elecom plans to relocate the Osaka Distribution Center to Kawanishi, Hyogo Prefecture, near the end of 2021.
Kanagawa Distribution Center (in operation since April 2014)
Subsequent to the Tohoku Earthquake in 2011, the company approved construction of the Kanagawa Distribution Center as the East Japan Distribution Center 2, and ground was broken in February 2013 (capex cost: JPY1.1bn). It simultaneously accommodates JPY100bn in sales and reduces distribution costs. Compared to the former East Japan Distribution Center, the new distribution center adopted Toyota-style manufacturing processes that led to an increase in production efficiency, as well as a reduction in costs such as personnel expenses. Additional initiatives were implemented from 2015 to further reduce logistics costs, including investments to enhance efficiency, such as the introduction of automated packaging facilities and picking robots.