Harman Professional Solutions Declines in FY2016. Growth Expected in FY2017

Posted by Josh Stinehour
Aug 15 2016

Harman announced fiscal fourth quarter and full year fiscal 2016 results for the period ending June 30, 2016. harmanlogo

Harman’s Professional Solution division contains the operations of several established audio, lighting, and automation solution brands, including AKG, AMX, JBL, Martin, Soundcraft, and Studer.  These solutions are used in the broadcast sector along with several related verticals such as Installed Sound and Touring.

During Harman’s investor day, management provided a revenue split by vertical for fiscal 2015 in the Professional Solutions division.  Broadcast contributed less than 5% of the division’s revenue, with the Touring and Installed Sound markets responsible for approximately two-thirds of the division.

Fiscal Year 2016 Results:

The Professional Solution division had revenue of $1,014 for fiscal year 2016, a decrease of 3.3% versus fiscal year 2015. On a constant currency basis, revenue decreased 1.0% on a year-over-year basis.  For the full year, Professional Solutions contributed 15.0% of Harman’s total revenue, compared to 17.0% during 2015.

The decrease in sales for the Professional Solutions division was attributed to the combination of unfavorable currency impacts, Harman’s continued channel reorganization toward solution sales, and lower demand in both Brazil and certain European geographies.

Gross margins for the division were 38.1% for 2016, a decrease of 269 basis points compared to 2015.

Selling, General, and Administrative (“SG&A”) expense were $317 million for the Professional Solutions division, a decrease of 2.8% versus the year prior.

The Professional Solutions division had operating income of $70 million for the year, a decrease of 31.4% compared to 2015.  This equates to operating margin of 6.9% during 2016 and 9.7% in 2015.

EBITDA (Earnings before interest taxes depreciation and amortization) was $105 million for 2016, a decrease of 22.8% against 2015.  EBITDA margin was 10.3%, which compares to 13.0% during 2015.  Both EBITDA and Operating Income exclude restructuring, non-recurring, and acquisition-related costs of $22 million and $19 million recorded during 2016 and 2015, respectively.

Fourth Quarter of Fiscal Year 2016 Results:

Revenue in the fiscal fourth quarter of 2016 for the Professional Solution division was $286 million, an increase of 0.4% versus the fiscal fourth quarter of 2015, and an increase of 23.3% compared to FY Q3 2016. For FY Q4 2016, Professional Solutions contributed 15.0% of Harman’s total revenue, compared to 17.0% during FY Q4 2015, and 14.5% in FY Q3 2016.

During FY Q4 2016, gross margins for the division were 36.0%, a decrease of 360 basis points compared to FY Q4 2015, and an increase of 249 basis points against FY Q3 2016.

SG&A was $86 million for the Professional Solutions division, flat versus FY Q4 2015, and an increase of 14.7% versus the preceding quarter, FY Q3 2016.

Operating income for the division during the quarter was $17 million, a decrease of 37.0% compared to FY Q4 2015, and a substantial increase over the $3 million of operating income in FY Q3 2016.  Operating margin for FY Q4 2016 was 6.1%, compared to 9.4% in FY Q4 2015 and 1.1% in FY Q3 2016.

EBITDA was $26 million for FY Q4 2016, a decrease of 27.8% against FY Q4 2015, and an increase of 116.7% over the preceding quarter.  EBITDA margin was 9.1% for the quarter.  This represents a decrease of 370 basis points and an increase of 409 basis points versus FY Q4 2015 and FY Q3 2016, respectively.

Management Commentary on Professional Solutions Division:

In discussing the fiscal year results, Harman’s Chairman and CEO Dinesh Paliwal highlighted the new solution-based go-to-market strategy and cost reduction actions in its European operation – both enacted during the 2016 fiscal year.  Commenting on expectations for Fiscal 2017 for the Professional Solutions division, Mr. Paliwal stated, “we are focused on taking additional steps to improve cost structure in North America. We are already seeing encouraging signs of momentum in the Enterprise segment. Not only have we booked several significant awards in corporate, government and education markets, we will also launch a number of integrated solutions to support these focused verticals. We expect these actions will help restore Professional to historic levels of growth and profitability” (Sourced from Seeking Alpha transcript).

The below slide from Harman’s earnings presentation highlights some of the notable developments for the Professional Solutions division during the 2016 fiscal year.

harman-slide

In addition to the above, the Professional Solutions division announced a new President, Mohit Parasher, in May 2016.

 

Business Outlook:

Management’s guidance for the Professional Solutions division in FY2017 is revenue of $1,045 million and EBITDA of $140 million.  This expectation translates to year-over-year revenue growth of 3% and EBITDA margin improvement of 309 basis points.

Responding to a question about Professional Solutions on Harman’s conference call with analysts, Mr. Paliwal elaborated on expectations for the division as follows,

“We have built a robust portfolio of audio, video, lighting and automation. And we have expanded our customer segment to corporate, government and education beyond traditional recording studios and touring sound. This business has a four-pronged turnaround strategy, which I feel very comfortable with. The number one starts with leadership, sense of urgency. We have fixed that. Number two, we are addressing our channels, channels we are going some market direct, some we are going indirect. But we are training the channels to sell the solutions to enterprise and entertainment segment.

And the third is cost leadership. You know us in HARMAN, we are really paranoid about cost every year and automotive is a good training ground. So, we already took some very strong actions last year. We shut down two factories in Europe in high cost and we moved into a brand-new factory in Hungary and that we already set over 100 basis point of bottom-line improvement, which is already starting to happen. So, we will have that this year to improve.

And then of course we have whole slew of new integrated products being launched this year which absolutely are going to fit the segment strategy for corporate, government, education and entertainment and enterprise” (Sourced from SeekingAlpha transcript).

 

Related Content:

Press Release: Harman FYQ4 2016 Results

Presentation: Harman FYQ4 2016 Results

Earnings Transcript: Harman FYQ4 2016 Results (SeekingAlpha)

 

 

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