Harmonic Drive Earnings: Expect Slower Operating Profit Recovery in 2024, but Midterm Outlook Intact

Harmonic Drive Systems’ June-quarter orders declined 5% sequentially, which was a negative surprise, as channel inventory adjustments of healthcare equipment in North America and industrial robot makers in Japan are progressing slower than expected. Due to weak demand/capacity utilization, quarterly operating margin of negative 1.8% was below our estimate, making it the fourth consecutive quarter of unprofitability. Although we expect the company to return to profitability in the September quarter, we expect a slower recovery in utilization levels in fiscal 2024, ending March 2025. Therefore, we cut our fiscal 2024 operating income estimate by 18% to JPY 3 billion and lower our fair value estimate to JPY 5,100 per share from JPY 5,500. Despite the downward revision, we project operating income to increase to JPY 10 billion in fiscal 2025, driven by top-line growth of 17% year on year (after 5% growth in 2024) and operating margin expansion of 9.3 percentage points to 14.5%.