Archos Profits Hit By Taxes, Apple Effect

France-based tablet and digital media device manufacturer Archos has posted a dramatic net loss for H112, despite a modest increase in revenues. Besides increased operating costs associated with the launch of new tablets, plus one-off tax charges, the company appears to be suffering from cooling interest for its mid- to low-end products in the US as consumers increasingly expect higher technological specifications, as per those found on the popular Apple iPad. We expect this to continue to be a problem for the company, particularly for its share price, despite the fact that its tablets continue to sell well in Europe.

Revenues grew by 3.5% y-o-y to EUR74.2mn in H112, with Asian sales growing by 6% to 11.8mn and European and non-US markets generating sales of EUR52.6mn (up by 11%). However, US sales were down by 25% y-o-y to EUR9.9mn, partially due to competition from the iPad, a new version of which went on sale in early 2012, but also due to weakening demand for mid-range tablet and consumer electronics devices in general. Consumers are either taking the budget route and buying sub-US$150 devices that can be easily replaced or upgraded or are targeting higher-cost, higher-spec products that should last longer. Mid-range products, on which Archos is focused, have lost their appeal.

Apple Effect Felt In US, Europe
Archos Revenues By Geography, H112

Archos' own slowing sales data, combined with financial analysts' growing concerns that the market for consumer electronics devices in general is softening, served to weigh on Archos' valuation on the stock market. The company allocated EUR6mn to deal with devalued stock values in H112 and this caused its gross margins to contract by 71% to EUR4.9mn. A 9% increase in operating costs - partially linked to research and development expenses as well as the marketing of newly launched products - was accompanied by a EUR14.5mn one-off tax charge, resulting in a net loss of EUR21.9mn, versus a profit of EUR1.7mn a year earlier.

The news is likely to cause further depreciation of Archos' share price and put more pressure on the company to improve its performance in the second half of the year. That it did not offer any guidance relating to H212 turnover or margin growth is indicative of the highly volatile conditions under which it operates. The tablet PC market continues to grow, but is increasingly polarised between low-cost devices with basic features and high-end 'smart' devices, leaving Archos greatly exposed.

That said, according to GfK research, Archos accounted for 16% for the sub-EUR400 tablet market in seven key European countries (France, Germany, UK, Spain, Italy, Netherlands and Belgium) in the January-April 2012 period, leaving it the third-largest vendor behind Apple and Samsung and well ahead of Asus and Acer. However, with Amazon reportedly preparing to launch a new version of its Kindle Fire tablet later in 2012, following on from the launch of a new low-cost tablet from Google and a higher-end offering from Microsoft, Archos' market share in its European heartland could well suffer significant erosion.

Its short-term strategy does not promise much in the way of a significant improvement. Archos plans to launch its Generation 10 products at the end of August, which appear to be most relevant to its core sub-EUR400 market. It will also strive to win new white-label clients and develop business-to-business (B2B) sales through the development of customised user interfaces and applications. We expect to see further strong sales by Apple and Samsung in the second half of 2012 while the new Google Nexus 7 tablet could dethrone Archos as the third most popular brand.

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