Monday, January 27, 2014

Acer Founder Shih Returns to Lead Laptop Maker Hit by Tablet Era- 11/26/2013


  1. Company overview:
    (all in NT$) Nov 26, 2013, NT$/US$= 29.652
    Current NT$16.25, Q 3, 2013, Revenue NT$92.2B, Q3, 2012 NT$89.4B, up 3.1%.
    Operating income -2.6B, down from -.61B 2Q,
    EPS: -4.82 down from -.13 2Q,
    5 consecutive quarters revenue decline
    Operating income: plunged from 5.3B, the peak at 3Q10 to 2.6B in 3Q2013, 4Q11 1Q13, average OI 189M, in 2010, 2011, 2013,NI margin 2.9%, -1.63%, -.81%, ROE: 16.24%, -7.79%, -3.96%

    Product revenue breakdown:
    Notebook: 61%, 69%; Desktop: 16%. 15%; Display: 10%, 9%; Tablet: 6%, 2%; Others: &%, 5%.
    - Large 9.9B write-off from past purchase
    Past growth was fueled by acquisition, Gateway+Packward+Bell and Acer was once the largest computer maker. NT$ 10 per share in intangible assets
    - Intangibles: 28.7B 3Q13, 14.8% of TA, down from 43.2B in 3Q12, still has room to adjust intangibles to real value
    - Excess inventory: write-downs 4.45B in 2013, 2.58B in 2012, 3.55B in 2011
    - Prioritize product differentiation not shipment growth
    - Strengthen the tablet, ultrabook& touch devices and expand smart-phone operations

    - Transformation is hard: management shuffle only has short term effects, 4.4B restructuring costs
    - Poor growth potential: declining notebook market, management forecasted the NB and tablet to decrease 10% qoq in 4Q13 , strong competitors in tablet and smart phone industries: monopolistic structure, Samsung and Apple, whole industry margins are declining with few winners

    Underweight, sell

  2. Business Segments-

    1, Notebooks and netbooks (69% of revenue): Notebooks are Acer's most profitable product
    2, Desktop (18% of revenue)
    3, Display (9% of revenue): Acer manufactures LCD monitors, HDTVs, and projectors
    4, Others(4% of revenue): information security management, software systems development, data center services, and other IT support services


    Q3 (Sep '13) 2012
    Net profit margin -14.24% -0.68%
    Operating margin -13.58% -0.58%
    Return on average assets -24.65% -1.23%
    Return on average equity -75.39% -3.86%

    Company problems, for example-

    1, Inter-company transformation: change of leadership

    2, Surface line of Windows 8 tablets Impact on Acer

    Acer blames Microsoft. Truth is, Acer's strategy was wrong

    The growing momentum for the future comes from tablets, Ultrabooks, and touch notebooks. Smartphone market, step by step.

    Spin-off business list:

    Highlights channel business model:

  3. Acer Inc.(Acer) is an information and communication technology company.The Company provides its products under the brands named Acer, Gateway, Packard Bell and eMachines, including Personal computer, LCD monitor, server, projector, tablet PC, smartphone, and ICT devices. The company is also developing AcerCloud application and services.

    Business segment 2013:

    Notebook 60.3% increase .5% since Q1,2013
    Desktop PC 15.6% increase 1.2%
    Display (CRT + LCD) 8.9% increase .2%
    Consumer Elections (Server, PDA) 5.6%, drop.1%
    Tablet 5.6% drop 2.1%
    Others 3.9% increase .1%

    In the past five years earning, steady increase from 2008 to 2010, peaking at 2010 profit of 15,118. Big drop from 2010 to 2012. Negative earnings on 2011 and 2012 which are -6602 and -2910.
    Strategy is wrong.

    1. Acer did follow the IT trends and satisfy the customers’ needs.
    For example: Consumer interest in tablet computers, sparked by Apple’s introduction of the iPad, hurt demand for Acer’s own laptops and spurred it to its first loss in a decade in 2011.
    2. Acer did not make the correction decision over the past two years. Windows 8 and Ultrabooks, neither of which could help combat declining PC sales.
    3. Impairment loss of NT $ 9.9 bn on goodwill, trademark and customer relationship.

    Positive news:
    Acer Founder Stan Shih returned to run the company he started in 1976. It is sounds like the Steven Jobs return to the apple and then help apple success through lauching iphone, ipod and touch products. I really doubt it.
    2 reasons:
    1. Situation is different, after Steven Jobs were fired by Apple; Apple was not as bad as Acer right now.
    2. Market is different. Today’s PC market is much competitive than 10 years ago.
    3. Acer is not Apple.

    1. Although founder Stan Shih returned the company, the company should focus more on strategies on branding, product, and market.
    2. Restructuring the company, cut the PC parts, focus more on tablets, and could

  4. Total revenues in 2012 declined 9.6% yoy
    PC remains the core of Acer’s business.
    -Notebook PCs: 66% of the total revenues
    -Desktops: 16%,
    -Displays: 8%.
    AcerCloud applications and services

    Total revenue from regions
    -EMEA(Europe, Middle East, Africa) 38% of Acer’s total revenue
    -Pan America: 28%
    -Asia-Pacific: 18%
    -Greater China: 16%.
    In 2012, foreign sales accounts for 97% of computer sales, 89% of peripherals sales and 96% of total sales.

    Worldwide Rankings:
    -No.4: Total PCs, 10.8% market share
    -No.3: Notebooks, 12.8% market share
    -No.2: Total PCs and notebooks in both EMEA and Asia Pacific:

    Global computer revenue dropped 6.4% last year after slowing to 0.7% growth in 2011. Global PC shipments are expected to fall 3.2% in 2H, 2013

    Competitors market share in Q2 2013:
    -Lenovo: 16.7%
    -HP: 16.4%
    -DELL: 12.2%
    -Acer: 10.8%
    -Asus: 6.8%

    -Inventory: accounts for 28% of current assets and 22% of total assets at the end of Q3 2013, compared to 20% and 16% at the beginning of 2012
    -Operating revenue declined over 30% from 2010 to 2012.
    -Operating income declined from NT $18 billion in 2010 to negative NT $6 billion in 2011 and NT $1 billion in 2012.
    -EPS declined from 5.71 in 2010 to negative 1.07 in 2012.
    -ROE declined from 16.17% in 2010 to negative 3.86% in 2012.

    R&D expense
    In 2012, Acer spent NT$1.5 billion on R&D, which accounted for 0.42% of total revenue. Lenovo: 1.5%, HP: 2.8%, DELL:1.9%, ASUS: 2%, Apple 2.6%.

  5. Acer Incorporated

    Investment Thesis - Negative

    Business structure
    • Device Business Group 96.69% (PCs, IT products, smart hand held and tablet products);
    o Notebook PCs 66% in 2012
    o Desktops 16% in 2012
    o Displays 8% in 2012

    • Other Business Group 3.31% (E-commerce, distribution, AcerCloud services)
    • PC remains the core of Acer’s business

    Geographic structure
    • Europe, Middle East and Africa 38.13%; market share drop to 14.6% in 2Q13 from 21.4% in 2Q12 (Western Europe)
    • Asia with 32.43%,
    • America with 24.03%,
    • Taiwan with 5.41%.

    Financial performance
    • Net losses NT$ -2,910m (2012); NT$ -13,120m (Q3 2013)
    • Negative sales growth; 18.22(2008); -24.45(2011); -9.63(2012)
    • Decreasing gross margin; 10.49%(2008); 8.11%(2011); 10.06% (2012); 8.52% (Q1 2013); 6.8% (Q3 2013)
    • Decreasing inventory turnover; 12.22(2008); 10.92(2011); 8.91(2012)
    • Increasing R&D to sales; 0.10(2008); 0.25(2011); 0.67(2012)
    • Declining liquidity;
    o current ratio 1.19(2012); 1.34(2011)
    o quick ratio 1.07(2012); 0.89(2011)
    o decrease in cash -13%; cash from operating activity is only 0.41% (2012) of its current liability, decreased from 4% (2011); 8.1% (2010)

    • Fierce competition due to tablet innovation
    • Acer need to redefine its niche
    • Don’t have the resources to develop well-designed tablet

  6. Acer has two fairly simple product lines. The company generates over 80% of the revenue from Personal Computers, and less than 20% from Computer Peripherals and Others. Just like any other industry competitors, Acer’s PC product line includes notebooks, desktops, tablets, and all-in-ones. It also sells monitors and projectors in the Peripherals business, and AcerCloud service as well.

    After Acer’s revenue peaked in 2010, it declined 22% in 2011, and 11% in 2012. Strategy-wide, Acer failed to make sufficient investment in developing its tablet and smartphone portfolio. According to Bloomberg Industries data, Global computer revenue dropped 6.4 percent in 2012, and is projected to further decline this year. It’s just not possible for any company in the computer hardware business to sustain its growth by simply relying on selling personal computers. Hewlett-Packard has essentially switched to sell solutions to enterprise in 2011. IBM has done so decades ago, and completed discontinued its PC line in 2010 after selling off ThinkPad to Lenovo. Dell was just taken private, with a plan to move from offering computers only to delivering complete solutions for enterprise customers. Lenovo has seen rapid growth in the PC market in recent years, but not only it is the largest PC vendors, it is also the third largest “Smart Connected Device” maker, covering PCs, smartphones and tablets. Lenovo is executing an effective PC Plus strategy, which calls for expanding the portfolio in smartphones and tablets. Apple and Samsung both have a strong portfolio in smart phones and tablets.

    In the developed markets, which is Europe and North America, Acer has an image problem. Just like Lenovo’s purchase of ThinkPad, Acer acquired Gateway in 2007 to enter developed markets and expand globally. But unlike ThinkPad, Gateway had a low-end, cost-effective image. Gateway started on a farm outside Sioux City, Iowa, essentially used a direct sales model copied from Dell, and playing up its Iowa roots by shipping computers in spotted boxes patterned after cow markings. It didn’t help build a positive, high-end image for Acer. When a company coming from an emerging market tries to enter a developed market by acquiring a brand in a developed market, it’s best to target a brand with high-end image. Lenovo has recently partner with Ashton Kutcher, a rising star in Hollywood. Acer has done exactly the opposite. It definitely has hurt Acer’s competitive image, positioning, and pricing power.

    In the emerging markets, Acer failed to sell its products through resellers. As a comparison, Lenovo has partnered very well with local resellers, penetrating the market with multi-layers of channels with multi-levels of markets, including the second-tier, third-tier cities, and rural towns.

    As a brief summary, Acer failed to diversify its product portfolio, does not have a strong tablet and smartphone product lines, didn’t bother to raise its image in developed markets, and failed to cooperate with local resellers in emerging markets. I won’t touch Acer’s stock.

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