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Sony Gaming Back in Black, Future Earnings Hazy

sony earnsThanks to time zone differences, Sony was one of the first companies to report earnings on what is an extremely busy earnings calendar (Electronic Arts, New York Times Co.  Google, and Getty Images all report today as well).   As has been the case with many technology and consumer facing companies already to report, their results for the past quarter were moderate to positive but the gray cloud of overall economic conditions led to a cautious and hazy future forecast for the coming months (and year).

Overall, Sony reported a 25% rise in quarterly earnings.   Net income was 200.2billion yen versus 159.9b yen for the same period last year. Consolidated sales across all segments were up 9.6% to 2.9 trillion yen. 

Looking ahead, for the quarter and fiscal year ended March 31st, Sony was cautious in projections. 85% of Sony’s electronics revenue comes from outside of Japan and the electronics business accounts for more than 70% of Sony’s overall sales.  That global dependency makes the company particularly susceptible to any negative shifts in consumer/corporate spending patterns triggered by macro economic conditions.

Consequence of those concerns, as well as some related currency conversion risks, Sony cut their consolidated operating income forecast by 9% to 410b Yen ($3.85b) from the 450b yen forecast in October.  This adjustment could make the likelihood of Sony reaching their targeted 5% annual operating margin goal, which is part of their 3 year turnaround plan, less likely.

Division by division results paint a more complete picture of Sony’s performance:

After two years of losses, buoyed by enormous global gaming demand, and the benefit of PS3 price adjustments (both in manufacturing costs and at retail), the gaming division finally returned to the black and delivered some other than bad news.  Operating profit was 12.9b yen versus a loss of 54.2b yen for the same period last year.

Nearly three quarters of gaming sales came from hardware.  PS3 sales were up by a factor of three over the prior quarter.  In total, 4.9m consoles and 26 games were sold.  At the register, that helped yield a quarterly sales gain of 31% to $581.2b yen. 

With production costs decreasing, Sony EVP and CFO Nobuyuki Oneda is hopeful each PS3 console will not be sold at a loss later this year.   He projected a probable breakeven point late in fiscal 2008.  Specifically, he said: “the cost [now] is higher than the price but toward the second half of fiscal year ’08 we could catch up.”

Somewhat surprisingly, and not necessarily a positive indicator for the PS3, sales of the previous generation PS2 platform are still solid and are exceeding demand.  Sony upped their projection for units of the older console sold to 13m units.   Originally Sony had forecast 10m. That had already been upgraded to 12m.

In the negative news column, the increased pace in sales through the holiday period and this past quarter haven’t been enough to offset slow PS3 sales in the first half of the year.  Total unit sales forecasts for the year were adjusted downward from 11m PS3’s to 9.5m.

Wider market adoption for Blu Ray DVD players, along with new titles that expand the audience appeal of the platform, may help expand the platform appeals.  So far, Sony’s particularly excelled at selling the consoles to a core audience of 20 to 30 year old men.  They’ve been less successful than competitors Microsoft and Nintendo at reaching customers outside that demographic.

The combined electronics business accounts for more than 70% of Sony’s gross sales.  Overall, the group set a new company record for quarterly sales results.  Electronics related sales were up 10%.  Operating income was the second highest in company history but off 7 percent from last quarter.

Within the TV subset of the division: sales were up 20% year over year to 508b yen.  Operating income was down more than 50% from 9billion Yen last year to 4billion; blamed largely on poor demand for rear projection TVs which Sony is discontinuing in March.

The movie industry, often cyclical and heavily dependent on production pipeline, turned in an off- quarter due to fewer releases and the absence of high profile films.  Sales year over year were down 25% to 223.8b yen (approximately $1.95b) but are on track to meet projections for the year.

Looking forward, Sony is confident the pipeline for 2008 is strong.  Headlining titles include 21, a movie based on the true story of how MIT blackjack teams gamed Vegas.   Other titles include Adam Sandler’s You Don’t Mess with the Zohan, their summer “tent pole” film Hancock with Will Smith, and the 22nd installment of James Bond (newly named Quantum of Solace) which is due in November.  The Da Vinci Code sequel Angels and Demon’s was rescheduled for May 2009.

The Home Entertainment sub division of the film group did well on the strength of existing titles. The group also looks poised to grow thanks to increased support from Blu Ray; (that courtesy of Warner Brother’s recent decision to exclusively support the format). 

During the conference call Robert Weisenthal, EVP and CFO of Sony Corp. of America noted that Warner Brother’s decision “gave [Sony] a lot of momentum on the software side.”  For the week ended January 20th, 19 out of the top 20 next-gen disc sales were Blu Ray (according to Nielsen data).  If that trend, and resultant HD DVD demise, continues, the film division will surely benefit.


[Full detail and complete results can be found in Sony's Earnings Release and Slide show which are linked in the Related Articles section below.]


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