Sony profit predictions plunge

Japanese electronics giant shows signs of susceptibility to weakening global economy as net income is revised downward a further 39 percent.

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Sony Computer Entertainment may have turned a corner with its PlayStation 3, but Sony Corporation on the whole is ailing. As part of its first-quarter financial performance results in July, the Japanese electronics powerhouse saw its games division post revenues 17 percent higher than a year prior, due in large part to surging PS3 sales. However, those figures weren't enough to offset its foundering electronics and film-making businesses, which saw respective 31 percent and 57 percent declines year over year.

On the whole, Sony Corporation saw flat revenues of ¥1.98 trillon ($20.4 billion) during the April-June quarter. Ominously, net profits were off a substantial 47.4 percent over a year prior, falling from ¥66.3 billion ($684 million) to ¥34.9 billion ($360 million).

It now appears as if Sony's fortunes will maintain their downward trajectory. Today, the Japanese electronics giant revised its annual forecast for fiscal year 2008, saying it now expects revenues to fall 2 percent compared to a year prior to ¥9 trillion ($92.6 billion). The publisher also now anticipates that net income--that is, profit--will nose-dive a further 39 percent from estimates made in July, or 59 percent compared to the same annual period a year ago. For the fiscal year ending March 31, 2009, Sony believes profits will now come in at ¥150 billion ($1.54 billion).

Sony attributed the grim earnings revision to a number of factors, not the least of which is the current global economic crisis. "We expect the results of certain businesses in the Electronics segment, such as the LCD television, compact digital camera, and video camera businesses, to be lower than the previous forecast due to a deterioration in the market environment brought on by the slowing global economy and an intensification of price competition," Sony said in a statement. Other contributing factors to Sony's revision include stock-market declines and price competition from rival electronics companies.

The strength of Japan's yen is also weighing heavily on Sony's gaming business, a segment heavily reliant on exported goods. Previous earnings estimates had been modeled on the belief that $1 would match up to ¥105, with €1 corresponding to ¥162. Sony now expects $1 to equate to ¥100, and €1 to buy ¥140.

Luckily the currency cloud had a bit of a silver lining. Sony now anticipates that it will sell 16 million PSPs during the year, up from previous estimates of 15 million. The handheld is selling especially well in Japan, thanks to the wild popularity of Monster Hunter Portable 2nd G. The game will be released in the US next spring under the title Monster Hunter Freedom Unite.

Sony's economic woes may be indicative of a more severe issue within the company. As noted by financial news service Forbes, CLSA analyst Atul Goyal said in a recent note to investors that the yen's softness compared to other currencies was masking weaknesses within Sony's core businesses.

Forbes also cites a Tokyo-based analyst speaking under conditions of anonymity as saying, "This is just the beginning of a big earnings collapse. Given the track record of this company, it will under-deliver all the way." The Japanese analyst further added that there is a "good chance" Sony will post a loss for the fiscal year.

In an investor note obtained by GameSpot titled "Another Victim of the Consumer Spending Slowdown," Pacific Crest Securities analyst Evan Wilson said, "Sony is in the precarious position of having high inventory and aggressive price competition as demand is dropping."

"Although Sony has revised its forecast downward, investors undoubtedly will question whether another cut is looming," observed Wilson. "Given the economic headwinds just a month young and the magnitude of the cuts we have seen from other consumer electronics companies compared with the 2 percent revenue reduction from Sony (4.5 percent, excluding Sony BMG), these concerns will likely continue to weigh on the stock."

Wilson also mentioned the rise in expected sales for the PSP, calling it the one bright spot in Sony's announcement today. Still, Wilson notes that the uptick will have only "a minor positive impact on results," and Sony is still expecting to post a ¥30 billion ($309 million) loss from its games business for the full year.

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