Leica Camera - Sales and Profit Fiscal Year 2008

Leica, always very conservative in its design approach, was very late to the digital camera market. Leica even resisted incorporating a light meter into its film cameras until the M6 was introduced in 1986, over a decade behind its Japanese competitors. Despite this, the quality and feel of its cameras has created a devoted and fanatical following. Leica introduced its first digital rangefinder, the M8, in 2006. Its price was high compared to other digital cameras, $4500 then, $5400 now for the M8. The M8's successor, the M8.2 was announced in September 2008 at $6500. The main new features were resized finder lines for more accurate framing, a "point and shoot" mode, and a quieter shutter. These mean something to some rangefinder aficionados, but on the whole are a disappointment after a nearly two year wait for the successor to the M8.

There is always alot of speculation on Internet photography forums on Leica's finances, which are hard to come by because the company was taken private by Mr. Andreas Kaufman, the current acting CEO, in 2005. However, Mr. Kaufman owns just 96.5% of Leica Camera. The remainder is thinly traded on the Frankfurt Exchange. In today's WSJ an article reported on Leica's finances, something worth keeping for future reference on Leica's business.

The annual revenue for its last fiscal year was 150 million euros, or $213 million dollars. Sales for its first fiscal quarter, ended June 30, were 26.999 million euros, less than half of the previous year's first quarter. The company had a loss of 3.85 million euros for FY 2008, ended March 2008. It anticipates a loss approaching 10 million euros for the fiscal year ending March 2009. Mr. Kaufman estimates that sales have to grow by about 66 percent to 250 million euros to finance the R&D spending Leica needs to stay competitive in digital markets.

It is hard to see this happening based on the new products and prices Leica has announced. Without the money to finance R&D not enough new products can be introduced to reverse Leica's death spiral. This is why I believe we see such a disappointing set of features in the M8.2: not enough money to invest in anything more spectacular. And the fall in Leica's quarterly revenue shows that it is not immune to weakening retail markets around the world, nor that its cachet is enough to carry it through lean times.

Because of the short back-focus distance of the rangefinder camera design, Leica needs a custom digital sensor for its digital rangefinder camera. This must be quite a large R&D expense for a camera maker as small as Leica with its small unit volume. The current sensor has a 1.33x crop factor, as it is referred to in digital circles, meaning the focal length of a lens made for a standard 35mm camera is 1.33x longer than it would otherwise be. This upsets alot of photographers, especially the film-loving Leica aficionados. But to create a new "full frame" sensor, as it is called, with a 1.0x crop factor, is a tall order for Leica, both because of the technical challenge, it might not be possible yet, and the high cost of R&D to create such a beast that would sell in small volumes. The resulting camera price might be prohibitive even for Leica collectors who are used to nose-bleed prices.

There may also be a business case for Leica not to make a full-frame sensor. The 1.33x crop factor sensor requires new, shorter focal length lenses to give the same field of view as the older lenses designed for 35mm film. Leica is introducing a whole slew of these new lenses at astonishingly high prices. They are also designs that have never been seen before, such as very fast and very wide lenses, 21mm @f1.4. One of Leica's big problems is the cannibalization of its sales by its own older equipment, some of it 50+ years old that is still perfectly usable on its cameras. But there are no such older lenses that can be used on the digital M8. Hence, if buyers want them they have to get them new from Leica - they can't turn to the used market to buy them cheaper there. For this reason alone, I believe that it will be a long time before Leica introduces a full frame M8 successor. It servers its business interests better to have the 1.33x crop factor M8 and make more money selling lenses than the one time charge for a full frame camera body that would rekindle the cannibalization of its new lenses by old.

Leica Camera Quarterly Sales in Millions of Euros