Hitt og þetta 18. apríl 2006

=DJ THE SKEPTIC: Innovating Philips

PARIS (Dow Jones)--Turning in its best first-quarter operating performance since 2000, Philips (PHG) is offering investors another tantalizing glimpse of a more rewarding future.

But if a rerating of Philips shares is to really to take hold, the Dutch company has more restructuring to complete.

We're several months away from clarity on exactly what the future holds for its semiconductor unit, which Philips will have to dispose off entirely - as a whole or in pieces - if it's at last to shed its image as a cyclical tech stock.

It will also take time, thanks to lockup agreements among other issues, for Philips to sell its remaining equity stakes - principally its holdings in TSMC and LG.Philips LCD - while it retains more than a billion euros worth of other listed and non-listed non-core assets.

They help make up the near EUR20-billion war chest Philips has at its disposal, if its cash and undergeared balance sheet are added in, offering risks and opportunities of their own.

Philips management will have to come good on meeting its strict acquisition criteria that suggest only modest bolt-on buys are in the offing, leaving plenty of cash to return to shareholders, perhaps most easily through a special dividend as well as routine share buybacks.

Until all that falls into place, it's reassuring Philips notched up such strong sales growth across its main business units and improved profitability, while order books are lengthening.

The exception was a slight deterioration at its medical-systems division, though that relatively disappointing performance can be explained away: lingering difficulties at MedQuist, the costs of building up Philips' international presence particularly in Asia and price competition need to be set against the robust long-term growth outlook for the sector, which Philips dominates with GE and Siemens.

CFO Pierre-Jean Sivignon puts the strong first-quarter performance down to innovation, but the story's more complicated than that. Having fewer, less cyclical businesses helps the cause of consistency.

And Philips' problem in the past hasn't just been a lack of innovation, but an inability to translate what new ideas it has had into sales by identifying gaps in the market and exploiting them.

The turnaround at its consumer electronics division, and buoyant lighting and home-products units, suggest Philips is getting better at doing just that. But as Sony and more recently Samsung have found, it's a devil of a job keeping it up.

(Matthew Curtin has been a financial news reporter since 1990, and has reported on international finance and business for Dow Jones Newswires - from South Africa, Singapore and now Paris - since 1994. He can be reached at +331 4017 1740 or by e-mail: matthew.curtin@dowjones.com)