Posted by: Kenji Hall on January 12, 2009
Just last month, Sony announced plans to lay off thousands of employees, delay spending on factories, and streamline its supply chain for semiconductor chips and flat TVs. The cutbacks, which came in the wake of a downward profit revision, were expected to help the company eke out a profit by lowering expenses to the tune of $1 billion over the next 15 months.
But now Sony faces the prospect of a sizable loss. That’s according to the Nikkei business daily, which reported today that Sony could suffer an annual operating loss of “around 100 billion yen” ($1.1 billion)—its first such loss in 14 years—and that a pile-up of unsold goods in the January-March quarter might worsen the pain. The Nikkei said it would only be the second time the company has posted an operating loss since it went public in 1958 (the first was in the year that ended March 1995). Investors reacted today by selling Sony’s shares, pushing them down nearly 9% at one point. The Nikkei index was down 4.6% in midafternoon trading. In a statement, Sony said that it had “made no announcement in this regard and at this time has no further comment.”
Sony is slated to release third-quarter earnings on Jan. 29. The announcement will be telling: The October-December quarter is a make-or-break period for the company’s electronics business. The division, which brings in 70% of Sony’s revenues, raked in about a third of its annual revenues and almost half of its operating earnings during the third quarter last year.
If the Nikkei’s predictions are true—the paper has a reputation for speculating about corporate earnings and spinning it as fact—they would be drastically lower than Sony’s current forecasts. In October, Sony predicted that annual operating profit would fall 58% to 200 billion yen ($2.2 billion), from 475.2 billion yen ($5.3 billion) in fiscal 2007.
The reasons Sony is hurting now are no different from what they were a few months ago: The strong yen is eating into profits and the economic downturn has made consumers less willing to buy the gizmos that Sony and other tech companies make.
The problem now is, the yen’s surge against the dollar hasn’t let up, as industry executives had hoped. Like many global companies, Sony hedges against the risk of big currency swings. But recently its officials admitted that they had been unprepared for the euro’s sudden weakness against the yen.
The yen is now hovering at 89 yen against the U.S. dollar and 119 yen against the euro. Sony had revised its currency predictions to 100 yen to the dollar and 140 yen to the euro. The difference could mean a significantly smaller sum when Sony converts its overseas earnings to yen and closes its books for the fiscal year because the company makes almost 80% of revenues overseas. What’s more, weakness in global equity markets could do damage to the investments held by Sony’s insurance and banking unit.
Bad news for Sony means others in the sector aren’t likely to get away unscathed. In a report today, Goldman warned that Toshiba’s PC unit may lose money in the fiscal second half (October-March), and predicted that the company’s overall operating loss would exceed 35 billion yen ($391 million). (Toshiba’s revised earnings call for 150 billion yen in profit, roughly $1.7 billion.) Last year, Toshiba’s digital products division accounted for more than a third of overall revenues and about 6% of operating profit. “Toshiba currently appears to have excess inventory, mostly in Europe, and looks likely to take measures to dispose of it,” Goldman analyst Ikuo Matsuhashi wrote in the report.