Chipping away

Thanks for the Toshiba Memory. Eventually

Losing its best-performing unit seems to hurt. Look again.
Tomohiro Ohsumi/Bloomberg
TOSHIBA CORP
+1.00
At Closing, February 23rd
308.00 JPY

Toshiba Corp. shareholders are about to see exactly what their company looks like without a chip division.

Starting from the fiscal third quarter, the Japanese company will label its memory business a non-continuing operation. The result is that operating profit for the fiscal year will be near zero, instead of 440 billion yen ($4.1 billion) had the chip unit not been separated. Its revenue outlook was sliced by 21.5 percent to 3.9 trillion yen.

So, 1 trillion yen in sales and 440 billion yen in operating profit is about what Toshiba is giving up by selling its memory unit. 1  In the first nine months of the fiscal year alone, the reduction amounted to 828.5 billion yen of sales and 319.1 billion yen in operating profit. Significantly, the operating margin for the storage and electronic devices solutions unit, or SED, drops by more than 17 percentage points.

Thinner

Spinning out its memory chip unit has sliced off more than half the sales and most of the profit from Toshiba's Storage & Electronic Devices unit

Source: Toshiba

What the company has gained is a new CEO and chairman in career banker Nobuaki Kurumatani. Less than a year ago, he was named president for Japan at private equity firm CVC Capital Partners Ltd. And keep in mind, it's another private equity outfit, Bain Capital, that won a beauty contest to buy out a large, albeit minority, stake in Toshiba Memory Corp.

Fellow Gadly Nisha Gopalan and I theorized back in November that other fundraising, coupled with slow progress in getting the deal past various regulators, could result in the company simply giving up on the sale altogether.

Our thesis may be undone by a Wednesday statement from Toshiba noting "an increased certainty that the transaction for the sale of the memory business will be completed within a year." I'll take that at face value, while reserving the right to be skeptical.

With a 20 percent sales increase for the first nine months, Toshiba's SED business was by far the standout unit and the only one producing double-digit growth. It's also the largest single contributor to improved operating profit.

Getting Better

Toshiba's SED unit has been on the up for the past two years

Source: Toshiba

Unfortunately -- or perhaps fortunately for Toshiba -- this is a highly cyclical industry, and the market just had one of its biggest years in recent, er, memory.

The Cycle

Global sales of flash memory just hit the fastest growth in eight years. That's not necessarily a good sign for coming years

Source: Bloomberg Intelligence, IDC

So while at first glance it does appear that the company is losing its best-performing unit, Toshiba's renewed confidence that it can win approvals to sell the business may yet give investors an even bigger reason to celebrate.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Toshiba cut the sales outlook, but didn't clearly ascribe that whole change to the chip unit.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net

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