Nikon Q2 net profit tumbles, outlook maintained

TOKYO (Reuters) - Japan's Nikon Corp posted a sharp drop in quarterly net profit on Monday due to appraisal losses in its inventory and a patent-related special loss and kept its full-year forecast for net profit to fall 38 percent.

However, on an operating basis, which shows a company's core earnings strength, its quarterly profit jumped nearly threefold and it projected a 47 percent gain for the year to March 2006, helped by healthy sales of digital cameras and improved profitability in liquid crystal display-making equipment.

Nikon's earnings have been on an upward track due to robust sales of digital single lens reflex (SLR) cameras, and measures to cut production costs for steppers, which are multi-million dollar machines used to make semiconductors and LCDs.

Nikon is one of the few success stories left in the cut-throat digital camera industry, generating relatively healthy profit margins while rivals such as Olympus Corp and Fuji Photo Film continue to lose money on the business.

Group net profit fell 73 percent from a year earlier to 1.6 billion yen (US$13.55 million) in July-September, according to Reuters calculations, as it marked down the value of some of its inventory and posted a special loss for a patent settlement in the camera division.

Quarterly operating profit at Nikon, the world's second-largest maker of digital SLR cameras after Canon Inc, came to 14.4 billion yen, up sharply from 5.0 billion yen a year earlier, while sales rose 6.6 percent to 185.5 billion yen.

"High-end SLRs are selling better than we expected. As for compact cameras, which are susceptible to price erosion, ours suffered smaller price falls than the overall market," Nikon chief financial officer Ichiro Terato told a news conference.

Much of Nikon's success in the digital camera market has come from its focus on digital SLR models, which are pricier and yield fatter profit margins than simple point-and-shoot compact cameras that can be easily produced by low-cost electronics makers.

Nikon has also bolstered profitability on its compact models, helped by strong sales of the slim-type Coolpix S1.

Nikon raised its digital camera shipment target for the year to March to 8 million units from 7.6 million. It shipped 6.61 million units in 2004/05.

The results and latest outlook came as no surprise because Nikon revised up its estimates for the first half and full year last week, citing firm demand for digital cameras and liquid crystal display (LCD) steppers, cost cuts and a softer yen.

Nikon reiterated its forecast for group net profit to reach 15 billion yen in 2005/06, down 38 percent from 24.14 billion yen last year when payments from ASML and German lens maker Carl Zeiss to settle a patent dispute inflated its results.

On an operating profit basis, Nikon expects profit to surge 47 percent to 45 billion yen in the full year to March.

The full-year target is above the consensus of an operating profit of 40.4 billion yen in a poll of 18 analysts by Reuters Estimates.

Although Nikon saw smaller unit sales of its steppers in the April-September first half, shift of focus to large-sized machines helped boost its sales and profits.

Canon is Nikon's only rival in the LCD stepper market but the chip stepper market is a three-horse race between Nikon, Canon and Dutch-based ASML, which reported higher profits for the July-September quarter due to cost cuts.

Shares of Nikon rose 14 percent in July-September, roughly in-line with Japan's precision machinery index, which gained 13.7 percent.

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