Another earnings report, another profits warning for giant of old, Sony

Another disastrous announcement from consumer electronics giant Sony with the company’s ADS’s listed on the NYSE down 6% pre market open.

Since the heyday of the 1970’s/1980’s its been downhill all the way. For a company once synonymous with innovation in portable music (Sony Walkman), video gaming (PlayStation) and TV’s Sony has seriously blundered. Now chief executive, Kazuo Hirai, has plenty of worries which aren’t getting any easier, which have dogged his predecessors for years.

Sony has shocked investors yet again with another profit warning, forecasting it will have a net loss of Y110bn ($1bn) for the year to March 31 2014 instead of the Y30bn profit forecast three months ago. Net profits came in Y43bn for the previous year with net earnings of Y27bn in the third quarter  of 2013. At its second quarter 2013 earnings in October, the company had a net loss of Y19.3bn ($197m) against expectations of a Y14.8bn profit.

The company said overall sales in its mobile products and communications division were down to a fall in the unit sales forecast of smartphones.

The company announced a huge restructuring plan this week costing Y90 billion in 2014/15 with a plan to sell its Vaio computer unit to Japan Industrial Partners (JIP) and spin off its TV division. JIP is a private equity venture backed by Bain Capital and Mizuho Securities.

Moody’s cut its credit rating to Junk, at Ba1, one level below investment grade, from Baa3. Moody’s said the majority of the group’s consumer electronics businesses, such as televisions, digital cameras and personal computers, faced loss of technology leadership and increasing competition. Fitch Ratings downgraded the credit rating of Sony to junk in 2012. Standard & Poor’s rates Sony’s credit at BBB, or two notches above junk.

Sony’s focus on entertainment devices means that the success of one of its divisions often comes at the expense of the other as smartphones become more sophisticated. With competition from Apple and Samsung intense, unit volumes of Sony phones are under pressure meaning that it’s a double whammy for the company.

Though PlayStation 4 has produced solid sales against Microsoft’s Xbox One, Sony has much to do to reestablish its pre-eminence in the consumer electronics space. Innovation is largely lacking and the infighting between the companies divisions which allowed Apple to dominate the smart phone market has not disappeared. Despite an enormous catalogue of music and movies in its entertainment division, Sony was not able to capitalize on this content in Smartphones because of fears of piracy or damaging its music business.

The ultimate turn around story? Maybe, but Kazuo Hirai has his work cut out and would you bet against Samsung and Apple?

Contrarian Investor UK

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