Seeking Alpha
Long only, deep value, growth at reasonable price, carmakers
Profile| Send Message|
( followers)  

After suffering huge losses for many years, Sony (NYSE:SNE) is finally getting rid of its PC business, splitting the TV business off and reducing its headcount by 5,000 in order to improve its chances of survival. The company also reduced its expected net profit for the full-year from a positive $300 million to a negative $1.1 billion. Sony also announced that it is currently in the later stages of the restructuring program and the company may be introducing new products that are geared towards growth as the company moves from survival mode to growth mode. The current restructuring project will cost the company $690 million and this will make up most of the loss incurred by the company this year.

Sony has many different business segments and while some are highly successful and profitable, others are not doing so well. The company's TV and PC businesses haven't been performing up to expectations in the last few years. Sony's TV business suffers from competition that is able to offer much cheaper alternatives than itself (partly due to the historically strong Yen) and the company's PC business suffers from a decline in the overall market and razor thin margins. Some of the more successful business units of Sony include financial services, music, cameras, films and video games (the business unit that produces and sells the PlayStation gaming console series).

Since the PC and TV businesses did not have a hope of returning to profitability anytime soon due to both challenging environment and execution issues, it made sense for Sony to take a different route with these businesses. This way, the company could reserve some cash since it needs to hold onto every penny it can at the moment in order to survive and it would make little sense to hold onto money-losing businesses and risk the survival of the entire company for the sake of a couple business units. For a long time, Sony insisted on keeping its TV and PC businesses intact, but this has proved to be very costly for the company, both in terms of profits and market value, as the company's market value shrank from $55 billion to $17 billion between 2007 and now.

The Japanese fund that specializes in buying companies in trouble and turning them around, Japan Industrial Partners Inc. will be buying Sony's Vaio brand. Sony's TV business will continue to be a part of Sony, as it will become a subsidiary of the company, but it will enjoy a separate management team in order to become more agile and make faster decisions in the face of rapidly changing market conditions. This year will be the 10th year in a row that Sony's TV business has posted a loss and the investors are losing patience with how the company has been handling this failing business unit until now. About two years ago, Sony promised that its TV business would return to profitability within two years. While the company successfully cut costs and losses in its TV business during time, profitability was not achieved and it may not be achieved for another couple years. This is why the company decided to take the drastic steps it is taking with its TV business unit.

Furthermore, even though Sony's TV business itself was not profitable, the company sold a lot of content to the TV owners, such as movies, gaming consoles and other products that go with a TV. Perhaps, the company will be combining the remains of its TV business with its other core businesses in order to achieve its own ecosystem and generate profits in a different way. Of course, this is just a speculation but the company acknowledges this to a degree. During the conference call, the CEO Kazuo Hirai said:

"The PlayStation business, is an ecosystem where we're not just selling a device, but we're also selling content, as well as related network services."

Sony will not be designing, producing or marketing any PC products anymore as a part of an agreement with Japan Industrial Partners inc; however, the company will continue to offer certain customer services and honor its warranties for the PC products it already sold to the customers (in addition to any PC product it will be selling between now and until the transfer of business is complete).

Recently, Sony announced its results for the third quarter. Year-on-year, the company saw its revenues increase by 24%, which was greatly helped by the successful launch of the PlayStation 4, strong sales of the company's smart phone models and the recent weakness of the Japanese currency. Surprisingly enough, the company's digital imaging business continued to improve its performance and actually posted an operating profit at a time when many camera producers are going out of business; due to the fact that many mobile phones now come with nice cameras and people don't buy separate cameras after buying their smart phones.

For the full-year, Sony did not change its revenue forecast from last time; however, the company reduced its profit forecast. Sony has been cutting costs across the board, but the company's restructuring charges and write-off expenses turned out to be bigger than the cost-reduction benefits, at least in the short term. If we exclude the one-time charges, expenses and write-off items, the company's operating income and profit will be roughly in-line with the numbers it projected last quarter.

Currently Sony has more than enough cash to complete its turnaround and see the results of it. In fact, the company has nearly $14 billion in cash and its book value is $21 billion, which means that there might be a lot of upside to the company's current market value of $17 billion if things work out.

Source: Sony Finally Comes To Its Senses