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Summary

  • Sony has forecast another massive loss in the current fiscal year.
  • Sony’s American depository receipts continue to underperform.
  • Its loss-making television unit could report a rare profit, but its long-term outlook is uncertain.
  • However, long-term oriented investors might still want to stick around.

The Japanese technology behemoth Sony (NYSE:SNE) has forecast another massive loss of ¥50 billion ($489 million) for the current fiscal year ending March 2015, a second annual loss in a row following last year's ¥128.4 billion ($1.25 billion). As a result, over the last three months, the company's American depository receipts have dropped by more than 8%, closing at $16.76 on Friday.

Over the last 52-weeks, Sony has fallen by more than 20%.

Unlike its rival Panasonic (OTCPK:PCRFY), which has successfully turned itself around by focusing on the business customers, Sony is still in a mess. This, however, does not mean that inventors should give up on Sony, especially since the light at the end of this tunnel is already in sight.

Television Programming

This, however, hasn't stopped Sony from making acquisitions that could push its margins higher. On Thursday, Sony announced that it is buying U.K.'s CSC Media Group and its 16 channels for $180 million. Through this acquisition, Sony will significantly grow its portfolio of channels to 25 as it increases its focus towards the lucrative television programming industry, as opposed to movies.

While Sony generates significantly higher revenues from movies than the television network, it reported a 5.4% drop in revenues from the movie division to $4.1 billion in the last fiscal year. By contrast, Sony's television network business witnessed 26% increase in sales to $1.4 billion in the corresponding period.

The current acquisition can give an additional boost to the growth of Sony's television network business as the CSC Media, formed in 2007, has been one of the fastest-growing media companies in the U.K. over the last five years (2009-13). Although CSC primarily operates in the U.K, the company is expanding in Ireland, South Africa and Sub-Saharan Africa.

Ongoing Restructuring

Sony has implemented an aggressive restructuring program which involves elimination of tens of thousands of jobs. Earlier this year, the company announced 5,000 job eliminations around the world. This is in addition to nearly 18,000 jobs which the company has already cut over the last two years.

Earlier this year, Moody's downgraded Sony's credit rating due to concerns regarding its struggling personal computer and television units.

Consequently, Sony decided to exit from the personal computer business by selling its loss-making VAIO brand for reportedly $490 million. The deal is expected to close by the beginning of July.

Loss-Making Television Manufacturing Unit

As for the television production unit, Sony has decided that it is not going to sell this loss-making business, although the management did indicate that it is open to equity partnership offers. Rather, the company is splitting television operations into a separate entity called Sony Visual Products Inc, in order to increase the unit's transparency.

By separating its television manufacturing from electronic business, the former is expected to earn an operating profit of ¥125 billion ($1.23 billion).

Sony has projected sales of 16 million LCDs this year, 18.5% more than last year. The television sales this year have risen on the back of two major sporting events: the ongoing FIFA world cup and the Winter Olympics. Consequently, Sony's TV sales for the first quarter are up 30% to $2.15 billion in the first quarter of 2014, as per Bloomberg's estimates.

The company has increased its focus on selling high-end televisions that offer better margins. As a result, the company's CEO Kazuo Hirai has announced that the television unit may make a profit this year, for the first time in 11 years, even if it misses its sales target by up to 16%.

PS4's Winning Streak

Sony and Microsoft (NASDAQ:MSFT) are two of the biggest players in the $27 billion global console industry, with more than 60% market share.

Last year, in November, Sony and Microsoft launched the latest versions of their flagship consoles. Since then, Sony's PS4 has largely outperformed Microsoft's Xbox One. In the first five months of its launch, PS4 consistently outsold Xbox One.

The figures released by both companies in April show that Sony sold 7 million PS4 units as compared to the 5 million Xbox One sales.

Pricing is one of the factors that goes in PS4's favor. Sony's console is nearly $100 cheaper than the Xbox One. Moreover, although PS4 comes with a 1.6GHz processor, as compared to Xbox One's 1.75GHz AMD 8-core CPU, the PS4 trumps Xbox One in terms of the graphics processor. The PS4 features a 1.84 teraflop GPU, better than Xbox One's 1.31 teraflops.

PS4 also comes with a faster GDDR5 RAM as compared to Xbox One which is equipped with DDR3 RAM. Furthermore, although PS4 gives 0.5 GB less memory to developers than Xbox One, that doesn't include the availability of 1GB of additional "flexible" memory with the former. Including the non-guaranteed additional memory, the PS4 has the ability to give 0.5GB of more memory to developers than Xbox One.

The end result is that PS4 can deliver a superior gaming experience than Xbox One, and that too by saving $100. (Click here to see how Metal Gear Solid V runs on PS4 vs. Xbox One)

Overall, Sony has predicted 17 million console sales for this fiscal year, an increase from 14.6 million last year. This means that the company's gaming unit, which saw 38.5% growth in the previous fiscal year, will continue growing at a robust pace.

Imaging Sensors and Smartphones

Sony is already an industry leader in the imaging sensors market. The biggest players in the smartphone industry, Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) are using the company's chips in their latest flagship phones. The increasing demand for higher-quality selfies could also work well for this unit. The company believes that the sales of imaging sensors can climb by 16% this year $3.52 billion. That is great news for the company's bottom line as imaging sensors is a profitable business.

Meanwhile, the company is going strong in the smartphone space. Sony has forecast 50 million smartphone sales in the current year, up from 39 million units last year. Moreover, the company is eyeing accelerated growth from 18.2% last year to 28.2% this year.

Last year, in China, Sony's phones could only capture 0.5% of the market. That is because the company's priority has been to sell its products outside China and the U.S.

There are plenty of other markets out there in Asia and Europe that can drive Sony's growth in smartphones. For instance, in India, another major market, Sony has largely focused on selling cheaper phones priced below $350. Armed with a marketing budget of nearly $50 million, Sony has successfully replaced Apple as the second leading smartphone brand in the country.

Besides India, Sony has focused on selling its smartphones in Japan and Europe. According to IDC's estimates, Sony is the seventh biggest player in the global smartphone market with 3.8% market share.

Conclusion:

Despite reporting five annual losses over the last six years, and the new guidance, the company's long term outlook looks better. The company's CFO has said that the restructuring program will likely conclude in the ongoing fiscal year. In other words, this could be the last year when the company records the hefty restructuring charges.

Sony has planned to spend around ¥135 billion ($1.32 billion) this year on restructuring, a 24% drop from last year. This is the one of the primary factors that is pushing Sony into an annual loss.

Meanwhile, the company's push into television programming can have a positive impact on its profitability. Unlike with PS3, which initially lost out to the Xbox One, the PS4 has outperformed Xbox One right from the start.

With television, on the other hand, there is still a big wait-and-see factor when it comes to its long term future, particularly since there aren't any big sporting events coming in the next fiscal year. For now, however, the company is reporting strong sales of its higher margin high-end television units. Without any major restructuring charges and support from gaming, television programming, imaging sensors and smartphones, Sony will be in a better position to post annual profits for the fiscal year ending March 2016.

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Ali Ilahi, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Ali Ilahi have any positions in the stock(s) mentioned in this article.

Source: Sony: Is There Any Light At The End Of This Tunnel?