Thursday, January 22, 2009

Sony Revises Earnings Forecast

Sony revised its annual earnings projection today:
Sony Corp. has revised its projected annual operating loss from a previously expected figure of ¥100 billion ($1.1bn) to as much as ¥260 billion ($2.9bn).

The strong yen and declining demand for its products in the current global economic environment were again blamed for the results. Previously, Sony had expected a ¥200 billion profit for the year.

...The company expects losses for its games division to rise up to ¥30 billion ($338 million) for the fiscal year, with half of that attributed to lower than expected sales.

What's happened here?

I took a look at the last few quarterly earnings reports in an attempt to find out, and poking around revealed a few interesting bits of data.

First, let's look at their original earnings projection for FY08, which was issued on May 14 of last year (all Sony earnings releases here). Highlights:
Projected net income: ¥290 billion ($2.9B, based on their foreign exchange rate projection)
Projected unit growth for key products:
PS3 8.1% (10 million)
PSP 7.9% (15 million)
PS2 -34.5% (9 million)
Console/handheld software (not broken out) -6.5% (250 million units)

However, after those projections, there was this statement:
Despite an expected decrease in Game segment sales in connection with a decrease in sales for the PS2 business, the Game segment as a whole is expected to have positive operating income for FY08 as a result of hardware cost reductions and an enhanced lineup of software titles in the PS3 business.

If you look at the significant decline expected in the PS2 business (which was still higher volume, at that time, than the PS3 business), along with modest increases for the PSP and PS3, and factor in their expectations of selling 17 million units less software, it's hard to understand how they expected the Game segment to improve its results over FY07 (when the segment lost ¥124.5 billion), let alone turn a profit.

Magical thinking, perhaps.

They also originally projected huge growth in a few products from the electronics division:
Walkman digital music player 20.6% (7 million)
Bravia LCD TV's 60.3% (17 million)
Vaio PC's 30.7% (6.8 million)

Clearly, Sony pushed all their chips in on the Bravia and Vaio lines. Projecting sixty percent growth for the Bravia segment?

Now, let's look at their revised forecast issued today.

Quite remarkably, their original projection estimated a ¥290 billion profit, which has now swung to an expected ¥260 billion loss. That's a swing of over $5 billion dollars (at current exchange rates) in just eight months.

It's even more extreme a swing than it seems, because when they issued their first set of revised projections in late October, they were still anticipating a ¥150 billion profit.

If you look at their revised projections, it's easy to find the explosions.

There was no announced revision to the forecasted PS3 sales of 10 million units for the fiscal year (ending March 31), but that wasn't exactly a stretch goal to begin with, given that they sold 9.24 PS3's in FY07. Projected PSP sales were still 15 million, but PS2 sales were revised downward from 9 million to 8 million. And software sales projections were unchanged.

So this segment was supposed to produce a profit this year, and the only change in projections were a million PS2 units, yet their current projection is now that the Game segment is going to post a ¥30 billion loss?

Really, I can't see how they're limiting it to ¥30 billion, so it won't be surprising if the final results are worse than that. Still, though, the gaming segment held up reasonably well.

In the Electronics segment, though, the revisions are huge (unit sale growth projections below):
Handycam video cameras................0.%.......................-19%
Cybershot digital cameras.............+10.6%....................-8.5%
Bravia LCD TV's...........................+60.3%..................+41.5%
Vaio PC's.......................................30.7%...................+11.5%

The Bravia revision was 2 million units, and when you consider that the Vaio unit reduction was 1 million units, and that they probably represent Sony's most expensive product categories, it's easy to see how they've gotten hammered. The Electronics segment alone is expected to post a loss that's 10X the Game segment loss.

Sony's also getting hit by the exchange rate (projected to be an impact of -¥55 billion compared to their original forecast), as well as a ¥65 billion loss "caused by the decline in the stock market."

So what are they going to do? Well, there's the obligatory "restructuring" and cost cutting, but I think this note is provocative:
With the anticipated growth of emerging markets and the resulting demand for more entry-level models, Sony will pursue further OEM/ODM deployment and a far-reaching asset light strategy.

In other words, it appears that Sony is beginning to chase the low end, at least in some markets.

Oh, and it's going to be Sony's first operating loss in fourteen years.

Presumably, Kaz Hirai is planning a round of triumphant interviews and a parade. At the chocolate palace.

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