CEO's Corner: Philips Sees Growth in Healthcare Services

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PhilipsRoyal Philips Electronics (PHG) has received plenty of attention this week. Shareholders on Thursday approved the appointment of Chief Operating Officer Frans van Houten as the company's new chief, three days after the company warned that its television business would post a first-quarter loss in April.

Houten takes the reins at a time when the company's business is shifting: TV sales have languished, but its health-care business has grown. Health-care sales grew 2% year over year to $3.7 billion in the fourth quarter of last year, accounting for approximately 35% of the company's $10.5 billion in quarterly revenues.

Greg Sebasky, CEO of Philips's North America operations (pictured), has played a role in the company's shift. He heads global customer services for the company's healthcare business, and he recently spoke with DailyFinance about the growth drivers for those services, as well as some of the challenges ahead.

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First, some background. Roughly a third of the company's health-care revenues come from its global customer services business, Sebasky says. These services, which support customers of Philips's medical devices, are a significant profit contributor because they often bring in higher profit margins than the devices themselves, he adds.

Healthcare Revenues on the Rise

Credit Suisse analysts expect Philips's healthcare business to generate nearly $12.7 billion in revenues this year, up 4% from last year, according to a report.

Part of the growth could come from emerging markets in China, India and other regions. The company's healthcare sales soared 8% in emerging markets, according to a Credit Suisse report. And Sebasky, who heads global customer services for Philips's health-care business, says those markets hold great potential for further growth.

"The emerging markets have less penetration for services, so this is an area we're working on," he says. "It's up to us to create meaningful service packages."

But the task of entering these markets comes with some challenges. In a number of emerging markets, for example, customers believe support should be included in the cost of buying the medical equipment.

Also, in countries like India, companies' budgets often don't differentiate between operating costs and capital costs, Sebasky says. As a result, it's difficult for these companies to distinguish the cost of buying an MRI machine from the thousands -- or potentially millions -- of dollars it will take to maintain it.

Customer Training

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To address this issue, the company has started offering to train customers' employees on how to maintain the equipment. Those employees become the first line of defense in solving any problems, with Philips serving as a backup crew and, when possible, offering support remotely.

This remote support, in which Philips can take control of the equipment to fix problems from afar, could boost Philip's profit margin by reducing the cost of sending staff to customers' work sites to tackle broken machines.

"From a profit margin perspective, we have been on a multiyear effort to improve the productivity of our employees so our workers don't have to drive to customer accounts," says Sebasky, adding that the company also uses an outsourcing company to further reduce travel costs. "This past year, many of those initiatives came to fruition."

Credit Suisse analysts expect Philips's health-care business to generate operating profit margins of 15.5% this year, compared to 13.8% last year. Overall, they expect the company to post an 11.1% margin this year.

Home Growth

In addition to emerging markets, Sebasky says that Philips also expects to see major growth in services related to home healthcare -- or medical equipment that patients use at home -- and ambient design, or designs that enable patients to control the themes, lighting and sounds in their examination rooms.

For one thing, hospitals are facing lower reimbursements from insurance companies, and they're having patients take on more of their own care in their own homes as a result. As this trend continues, Philips expects sales of home monitoring equipment, as well as other health-care devices intended for use in patients' homes, to grow, Sebasky says. Those home-health-care products also will need customer support.

Philips also stands benefit from another healthcare trend: Patients flying to foreign countries to save money on costly medical procedures. As various countries compete to attract these medical-care travelers, more facilities may decide to install its ambient designs to increase patient satisfaction, particularly in countries outside of the U.S., Sebasky says.

North American Market Remains Flat

While Philips's healthcare customer-service business appears to be humming along internationally, its North American operations have largely remained flat.

According to the company's annual report, "Sales in North America were slightly higher than in 2009, attributable to low single-digit growth in Lighting and Consumer Lifestyle. Healthcare sales in North America were on par with 2009 on a comparable basis. Sales in other mature markets, however, grew by double-digits in all sectors."

Nonetheless, Sebasky says he's "pretty bullish about the opportunity in North America," although he declined to discuss how North America will fare in the first quarter.

Much of his focus -- and the company's -- will be on bumping up Philips's revenue growth rate, rather than its earnings before interest and taxes, he says.

Aside from health care, the company's North American lighting business performed well as many homeowners decided to improve their homes instead of moving into new ones, he says. Portions of Philips's consumer lifestyle division, such as its Sonicare toothbrushes, also fared well, he adds.


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