Phillips drops 17% after it misses expectations, slashes guidance
2min read Koninklijke Philips NV (PHG) saw its shares plummet in premarket trading by over 15% after reporting weaker-than-expected Q3 results and significantly reducing its 2024 sales guidance due to deteriorating demand in China. The company reported Q3 revenue of €4.38 billion, missing consensus estimates of €4.54 billion and declining 2% year-over-year, which starkly contrasted with the market's expectation for 2.1% growth. Adjusted EPS came in at €0.32, narrowly beating the €0.31 consensus, but the overall revenue miss weighed heavily on investor sentiment. Furthermore, the company cut its full-year sales guidance to 0.5%-1.5% growth from the prior 3%-5%, largely attributed to ongoing challenges in the Chinese market.
Philips’ guidance cut highlights the impact of a 2% decline in comparable order intake during the quarter, contrasting sharply with 9% growth in Q2. CEO Roy Jakobs noted that “demand from hospitals and consumers in China further deteriorated,” necessitating the revised outlook. However, Philips saw solid growth in other regions, with Diagnosis & Treatment segments performing well, especially in the U.S., though they too saw a 1% decrease in comparable sales as Chinese demand weighed on the results. The company’s year-to-date order intake increased by 1% despite the struggles in China, underscoring solid demand in other markets.
In the Diagnosis & Treatment segment, Philips reported flat or moderate growth outside of China, with the U.S. remaining a strong market for medical device orders. However, China’s weak performance offset gains, dragging overall sales for the division down. The Connected Care segment saw flat comparable sales, balancing growth in Enterprise Informatics and Sleep & Respiratory Care with slight declines in Monitoring, which faced tough year-over-year comparisons after significant growth in the previous year. Personal Health was hit hardest, with a 5% decline in comparable sales largely driven by double-digit declines in China.
On the profitability side, Philips’ adjusted EBITA margin was reported at 11.8%, reflecting a modest increase and aligning with its full-year expectation of around 11.5%, at the high end of its prior range. Operating income slightly exceeded estimates at €337 million compared to €317 million forecasted, but this was not enough to offset the revenue and guidance disappointments in investors’ eyes. Free cash flow for Q3 was just €22 million, with the company now guiding towards the lower end of its projected range for the full year at €0.9 billion.
The broader context for Philips’ struggles in China mirrors challenges faced by other multinational companies relying on the Chinese market, where demand has been slow to recover following the end of COVID-19 lockdowns. Weakness in Chinese demand has notably impacted sectors from luxury goods to consumer electronics, with Philips now joining companies like Starbucks, Apple, and Marriott in experiencing the ripple effects of China’s tepid economic recovery.
Philips attempted to mitigate the negative news by emphasizing that growth remains strong in other markets, and management remains committed to its three-year plan aimed at capturing growth and margin expansion. The company pointed out that, excluding China, it expects sales growth in the range of 3%-5% and views the Chinese market as having strong long-term potential, albeit with current headwinds. Jakobs reiterated Philips’ focus on executing the three-year strategy despite the “challenging macro environment.”
Shares of PHG fell from $31 to $26. The 200-day MA sits below at $25.42. The weakness in China has weighed heavily on results but we would note that China has its annual legislative meeting next week. There are expectations that the leadership will announce stimulus packages that could improve sentiment around Chinese names and companies like PHG that have significant exposure to the country.
Overall, Philips’ Q3 results were a disappointment for investors, who reacted sharply to the combination of lowered sales guidance, weak China performance, and the muted outlook for free cash flow. The significant premarket drop in Philips’ shares reflects market concerns over the broader impact of China’s slowdown on global corporations, adding caution to the otherwise resilient healthcare technology demand across Europe and the U.S.
