Sony Seen Cutting Forecast Again on Sluggish PC, TV Sales

Jan 24, 2014 2:00 am ET

(Updates with closing share price in fifth paragraph.)

Jan. 24 (Bloomberg) -- Japan’s Nintendo Co. shocked investors last week by lowering its profit forecast for the year. Analysts are concerned Sony Corp. could be next.

At least nine analysts cut profit estimates for Sony over the past two months after slow holiday sales of televisions, personal computers and cameras. Net income will be 23.1 billion yen ($221 million) for the year ending March, more than 20 percent less than Sony’s latest forecast, the average of 20 brokerage estimates compiled by Bloomberg showed.

Shrinking demand for TVs and PCs is increasing pressure on Chief Executive Officer Kazuo Hirai as he tries to wring benefits out of the company’s holdings, from consumer electronics to mobile phones to entertainment. After a surprise quarterly loss, a further miss may force Hirai to revisit more drastic ideas, including reassessing TV and PC manufacturing.

“There will likely be a downward revision,” said Takashi Watanabe, a Tokyo-based analyst at Goldman Sachs Group Inc. who forecasts Sony will post an annual net loss of 33.2 billion yen. “Sony’s core operation continues to erode.”

The company dropped 0.1 percent to close at 1,763 yen in Tokyo trading. The shares have declined 3.5 percent this year compared with the Topix index which has lost 2.9 percent over the same period.

Lower Estimates

George Boyd, a Tokyo-based spokesman for Sony, declined to comment. The company is scheduled to report quarterly earnings on Feb. 6. Nintendo, which competes with Sony in game consoles, this month forecast a 35 billion-yen operating loss, compared with its previous projection of a 100 billion-yen profit.

Yasuo Nakane, an analyst at Deutsche Bank AG, cut his full- year estimate to 5.12 billion yen on Dec. 24 from 29 billion yen and said he expected Sony to announce further structural reforms next month. Atul Goyal of Jefferies LLC almost halved his projection to 18 billion yen from 35 billion yen on Jan. 15. Both analysts rate the stock hold.

Hideki Yasuda of Ace Research Institute reduced his profit forecast to 30 billion yen from 50 billion yen on Jan. 8.

Daniel Ernst, an analyst with New York-based Hudson Square Research Inc., downgraded Sony to hold in August after the company rejected activist investor Daniel Loeb’s push for a partial listing of its entertainment unit. He estimates the company will report 27.5 billion yen in profit.

Weak Holiday

“Our holiday research showed weak TV, camera, and notebook sales,” Ernst said in an e-mail. “It will be very hard for Sony to show growth this year.”

The value of global TV shipments dropped 11 percent to $98.4 billion last year, the third consecutive annual decline, according to an estimate from Bank of America Merrill Lynch.

Sony, Japan’s biggest TV maker, in October cut its sales outlook for Bravia models by 6.7 percent and said it expected to sell 14 million liquid-crystal display sets instead of its previous projection for 15 million.

“Sony continues to struggle without an exit strategy from electronics,” Goyal wrote in a Jan. 21 note. “Electronics remains a bleeding Achilles’ heel.”

Sony may scrap its target to make the TV unit profitable this fiscal year after nine straight losses, said Watanabe. The analyst cut earnings estimates after lowering global demand assumptions for high-end electronic devices, he said.

Declining Share

Sony’s share of global TV sales fell to 7.5 percent in the third quarter last year from 8.1 percent the previous quarter, according to NPD DisplaySearch. Sony trails Samsung Electronics Co. and LG Electronics Inc.

“Sales won’t likely meet its target, and operating profit won’t likely meet its target,” said Koki Shiraishi, an analyst at SMBC Nikko Securities Inc. “The root of Sony’s trouble is growing deeper.”

Sony may cut its annual operating profit projection to 120 billion yen from its earlier projection of 170 billion yen, Shiraishi said. A lower forecast will probably be announced together with a reform plan that may include job cuts, the analyst said.

Analysts have avoided putting a sell recommendation on the stock. Of the 24 that follow the company, 10 recommend buying shares while 14 rate them a hold, according to data compiled by Bloomberg.

The company has already started selling assets to try to avoid a loss, said Shiraishi, citing Sony’s agreement last month to sell its Gracenote audio-recognition software business to Tribune Co. for $170 million. The analyst expects Sony to post a full year net profit close to zero.

PC Slump

Personal-computer shipments fell 10 percent in 2013, marking the worst-ever decline after lackluster holiday sales underscored how consumers and businesses are switching to tablets and smartphones, researchers Gartner Inc. and IDC said this month.

Sony in October cut its annual sales forecast for Vaio computers to 5.8 million units from 6.2 million and said the business needed fundamental reform.

Billionaire Daniel Loeb’s Third Point LLC, which pushed for a spinoff of a portion of Sony’s entertainment unit last year, said in a Jan. 21 letter to investors that Sony needs to restructure its TV and PC businesses.

“The Japan portfolio disappointed later in the year as Sony underperformed the broader market,” Loeb said. “Japanese investors reacted favorably to management teams who took bold restructuring action in 2013, and the market is looking for Sony to pursue a similar path.”

Final Cuts?

Sony’s Hollywood film studio began cutting jobs, including its head of technology, as the unit moves forward with $250 million in expense reductions pledged by Hirai, the company said in a statement Jan. 22.

Reform for the PC unit may cause an additional loss and lower-than-anticipated results, said Eiichi Katayama at Bank of America Corp.’s Merrill Lynch. The investment bank projects worldwide shipment value of laptop computers to decline 3 percent in 2014, a third consecutive annual decline.

“Sony hasn’t made decisions to withdraw from any businesses,” Katayama said. “It’s going to be tough for Sony for the upcoming earnings season.”

Hirai has committed to making TVs, and Sony is introducing ultra high definition sets that cost up to $25,000. Hirai also is focusing on the new PlayStation 4 game console and Xperia smartphone shipments.

Peer Pressure

The approach differs from that of Panasonic Corp., Sony’s closest domestic peer. The Osaka-based company last year suspended consumer smartphone operations, stopped making plasma TVs and sold a majority stake in its health-care business as President Kazuhiro Tsuga accelerates reform.

While the PS4 has posted record sales Japan’s biggest electronics exporter is being hit in its camera and camcorder businesses, as mobile devices from Samsung and Apple Inc. with more sophisticated lenses and sensors eat into demand.

The value of worldwide camera shipments dropped 22 percent in the January to November period from a year earlier, according to the Camera & Imaging Products Association in Tokyo.

“We see no sign of change in the company’s failure to adjust its organizational structure and business strategy rapidly enough to deal with the current business climate,” Deutsche Bank’s Nakane said.

--With assistance from Cliff Edwards in San Francisco and Grace Huang in Tokyo. Editors: Aaron Clark, Robert Fenner