Monday, October 27, 2008

Sony Blames Profit Warning on Yen, Weak Demand

Sony Blames Profit Warning on Yen, Weak Demand

So much for the renaissance at Sony (SNE). On Oct. 23, the Tokyo electronics and entertainment company issued a profit warning for this year, blaming the yen's sudden surge and lower expectations for TV and digital camera sales. Sony officials now concede that it's unlikely the company will achieve some of the ambitious targets set by CEO Howard Stringerless than four months ago (, 6/26/08).

That's a painful admission. For the past three years, Stringer's management team has rebuilt a company that was falling behind more innovative rivals such as Apple (AAPL) and Nintendo. This year was supposed to be the first of a three-year move to recapture some of Sony's past glory (, 1/31/08).

Instead Sony officials are going back to the drawing board. For the year through March 2009, Sony predicted that operating profits would fall 58%, to $2.04 billion, from last year, despite a 1% uptick in sales, to $92 billion. The company also reset its net profit forecast at $18.5 billion, down 37.5% from what it had estimated in July. "We are considering an action plan that will go beyond the cost-cutting measures we have taken so far," Chief Financial Officer Nobuyuki Oneda told reporters in Tokyo. Though Oneda declined to offer details, he said everything—from research spending to factory investments to plans for new products—would get a second look.

Not Alone

Sony isn't likely to be the only blue chip Japanese firm to offer a gloomier earnings outlook. Next week, Panasonic (MC), Nintendo, and Sharp are slated to announce first-half earnings, as are automakers Nissan (NSANY), Honda (HMC), and Mazda. Prior to the announcement, Sony's shares finished the day 6% lower in Tokyo trading, compared with a 4% drop for the industry bellwether electrical machinery index.

The Sony revision wasn't completely unexpected. The company had based its earlier forecasts on the assumption that exchange rates would be 105 yen per dollar and 160-165 yen for every euro. Normally, Sony hedges against the risk of unfavorable currency swings. But the yen's unpredictably wrenching move appears to have caught the company off guard. As the financial crisis played out over the past few weeks, the dollar and euro have weakened against the yen. Late on Oct. 23, the dollar was trading at around 98 yen and the euro at 125 yen, down significantly from around 109 yen and 147 yen, respectively, in early September. The yen's gains create a problem for a company like Sony, which made nearly three-quarters of its revenues outside Japan. Those revenues get converted back to yen when the company closes its books at yearend.

And even after Sony tweaked its forecasts, officials didn't rule out the possibility of another downward revision. The new targets are only attainable if the yen weakens to around 100 yen per dollar and 140 yen per euro, Oneda said. "Keeping all other factors constant, if the currencies stay where they are, it could reduce operating profit by an additional 80 billion yen to 90 billion yen ($820 million to $920 million)," Oneda said.

Bleak Horizon

Faced with the prospect of a global slowdown, Sony is bracing for lower yearend holiday sales in Europe, the U.S., and China. It trimmed sales forecasts for some of its most popular products, by 9% for Handycam video cameras, 8% for Cyber-shot digital cameras, and 6% for Bravia flat-screen TVs from earlier projections. Competition is also driving down prices faster, Oneda said. Sony's electronics business accounts for 70% of overall sales, so the cuts will dent earnings. Plunging share prices will hurt Sony, too, because its insurance and banking unit invests heavily in stocks and bonds.

The only good news from the day's press conference, held at a hotel in downtown Tokyo, was that sales of the PlayStation 3 and PlayStation Portable video game consoles are likely to be as strong as—or possibly even better than—earlier projections (10 million PS3s and 16 million PSPs for the fiscal year), thanks to a redesigned PSP and an array of new online services aimed at the PS3.

Perhaps the toughest part for Sony's management came during the question-and-answer period. Asked whether the company could manage a turnaround of the money-losing TV and video game businesses this year, as Stringer had promised in late June, Oneda said: "It's looking doubtful." TVs have been hemorrhaging money since the fiscal year through March 2005, and games since March 2007. "In my personal opinion, next year could be another difficult one for us," Oneda added.

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