How Good Was Sony’s Stellar Quarter?

cenerpAt Sony (SNE), a bona fide recovery always seems just beyond reach.
On July 26, the company strongly exceeded analysts’ April-June quarterly
forecasts, by tripling operating profits, to $824 million, from the same period
last year, on a sales gain of just 13%, to $16.4 billion. Net income gains were
nearly as impressive, doubling, to $552 million. Given that many analysts had
expected a ho-hum first quarter, it’s tempting for Chief Executive Officer Howard
Stringer & Co. to flash the victory sign and declare success.
But Sony’s management isn’t that sanguine justs yet. That’s because while the
PlayStation 3 video game console gave overall sales a boost, a lot of the profit
gains weren’t really due to big product launches. A favorable swing in the yen
played a far larger role in driving up the electronics division’s profits an
astonishing 77%.
The yen’s weakening against the major currencies helped Sony’s overseas
earnings from gadgets, films, music, and services look better than they would
have if the currency had stayed steady. And the two biggest blights on the
company’s financial report remain its TV and games divisions. You can’t blame
investors for keeping Sony’s stock price trailing the gains of the Japanese
electronics industry’s bellwether, the electric machinery index, which rose 8%
in the quarter, vs. Sony’s 6%.
Movie Business on Fire
Still, the fact is that Sony is doing better. Video cameras, digital still
cameras, and chips for PS3s are bringing in a steady income. "It’s my feeling
that the electronics division—with the exception of TVs—is holding its own,"
Chief Financial Officer Nobuyuki
Oneda told reporters.
What’s more, Sony’s movie and financial businesses are positively on fire. So
is its cell-phone joint venture with Swedish tech company Ericsson (ERIC). (Because Sony only owns half, its results only show up in
net income.) The duo increased their share of the global handset market in the
latest quarter to 9%, from 6% previously, thanks to a full offering of sleek,
new Walkman phones.
And while tumbling television prices present a challenge for Sony’s TV
business and put a crimp into profits, the company is taking steps to raise its
game. Oneda said Sony’s joint venture with Samsung
Electronics, which makes liquid-crystal-display panels for flat-screen TVs,
is a moneymaker, and that a so-called eighth-generation plant in Korea will be
minting new state-of-the-art panels for TVs by August.
Closing the High-Def TV Gap
That’s key because the plant makes bigger sheets of glass than older fabs,
allowing Sony to more efficiently churn out the big-screen TVs in the 50-inch
range that Americans and Europeans are itching to buy. Lowering costs is also a
good way for the company to insulate itself from the 20% to 30% annual price
drops that make it so hard to turn a profit in this business.
Oneda said Sony fell behind competitors in refreshing its lineup of
high-definition TV models but would soon close the gap. "Besides TVs, it’s my
impression that the rest of the electronics division is holding its own," he
added.
The burning question for Sony now is the same one that’s been dogging the
company for months: How quickly can Stringer’s new PlayStation chief, Kazuo
Hirai, turn around the gaming division? The PS3, packed with the superfast Cell
microprocessor, a high-definition Blu-ray disc player, and other cutting-edge
amenities, hasn’t proved nearly as popular as Nintendo’s
Wii, which went on sale around the same time last November and is being marketed
to consumers who wouldn’t normally consider themselves gamers.
Look for an Even Higher-End PS3
Sony said it shipped 710,000 consoles in the April-June quarter, less than a
fourth of the 3.43 million Wii machines Nintendo produced in the same period.
That’s even more disappointing because Sony sold about 1.66 million units at the
end of 2006 and 1.91 million from January to March. Oneda acknowledged that the
tally fell short of the company’s own forecasts but didn’t offer any specific
numbers. "This is an all-time low since launch," Ovum senior analyst Carl
Gressum wrote after the results were posted. That, and the fact that Sony still
loses money off of every PS3 it sells, were the reasons the gaming division
racked up a $242 million first-quarter operating loss, wider than the previous
year’s, despite a 60% leap in sales.
Obviously, the prospects still don’t look good. But Hirai, who formally took
over the PlayStation unit in June, is springing into action. He’s promised 200
new titles and 180 download-only titles in the coming months, from about 100
now. The company is also planning a new, high-end PS3 that will sport an
80-gigabyte hard disk drive and a $599 price tag. It announced a $100 price cut
to the 60GB version at the July E3 show in Santa Monica, Calif., and will soon
roll out its PlayStation-branded online world, dubbed Home.
Meanwhile, engineers in Sony’s semiconductor business will soon switch to
more advanced chipmaking technology that should shrink the PS3’s Cell chip, and
help cut the cost per chip, said Oneda. Stringer and Hirai are hoping the
masses—not just hard-core gaming fans—come flocking.

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