Billionaire investor Daniel Loeb’s latest criticism of Sony Corp. (6758)’s film and TV studio may be borne out this week as first-quarter profit evaporates following big-budget flops at the box office.
The maker of Xperia smartphones and PlayStation consoles may break even when it announces results Aug. 1, according to the average estimate of three analysts surveyed by Bloomberg News. Sony, the world’s box-office leader last year, generated $425.8 million in ticket sales during the quarter, less than half of a year earlier, according to data compiled by Bloomberg.
Since Loeb’s Third Point LLC recommended selling off part of the entertainment unit in an initial public offering, the movies “After Earth” and “White House Down” failed to recoup production costs from U.S. sales. Chief Executive Officer Kazuo Hirai is focused on unprofitable electronics while entertainment needs closer supervision amid a lack of franchises and bloated costs, the hedge fund said in its quarterly investor letter.
“Given entertainment’s perpetual underperformance, perhaps Sony’s reluctance to discuss it candidly stems from (understandable) embarrassment,” Loeb wrote. “We are also surprised that Sony’s CEO does not worry that entertainment continues to generate profitability levels far below those of its competitors.”
Sony posted net income of 93.9 billion yen ($956 million) in the March quarter, compared with a loss of 24.6 billion yen a year earlier.
Full-year net income is projected to total 55.3 billion yen for the 12 months ending March 2014, according to the average of 17 analyst estimates compiled by Bloomberg. That’s in line with the company’s May projection of 50 billion yen.
The film unit didn’t have a movie in the top 5 in the June half, according to data from Box Office Mojo and Morgan Stanley.
Sony Pictures Entertainment “is characterized by a complete lack of accountability and poor financial controls” under U.S. Chief Executive Officer Michael Lynton and studio co-Chairman Amy Pascal, Third Point LLC said.
Sony’s board has agreed to consider Loeb’s proposal to sell part of the entertainment unit in an IPO. Hirai has stressed the importance of ties between electronics and the entertainment business.
“Sony is focused on creating shareholder value by executing on our plan to revitalize and grow the electronics business, while further strengthening the entertainment and financial services businesses, which generate stable profit,” Jim Kennedy, a New York-based spokesman for Sony, said in an e-mailed statement.
After topping U.S. movie sales last year, Sony has fallen to sixth this year, according to researcher Box Office Mojo.
Third Point, based in New York, said in May that it held a Sony stake valued at $1.1 billion, and since then it has been pushing Loeb’s plan. An independent board and shareholders would lead to more disciplined and accountable management at Sony’s Culver City, California-based movie and television studio, Loeb has said.
Third Point owned 70 million shares through direct ownership and cash-settled swaps as of mid-June, and is interested in representation on Sony’s board, it said in a June 17 letter to Hirai. The holding represents about 6.9 percent of outstanding shares, up from 64 million shares in May.
Sony shares rose as much as 4 percent to 2,140 yen in Tokyo and have more than doubled this year.
“Entertainment business in general is often about luck,” said Keita Wakabayashi, an analyst at Mito Securities Co. in Tokyo. “Sony talks about what movies in progress but it’s hard to make a precise estimate out of information given.”
Music and film-studio earnings before taxes, interest, depreciation and amortization at Sony trail industry peers, according to Loeb. In yesterday’s letter, he compared “White House Down” and “After Earth” to two epic Hollywood busts, “Waterworld” and “Ishtar.” In light of the results, he said Third Point was surprised that Hirai told reporters entertainment was “doing just fine.”
“White House Down,” an action movie with Channing Tatum and Jamie Foxx, was made for $150 million and garnered $70.7 million in U.S. ticket sales, according to Box Office Mojo. “After Earth,” with a production budget of $130 million, has generated $60 million in U.S. sales. Production budgets don’t include marketing spending. Studios typically split box-office receipts with theaters.
Loeb was kinder to Hirai’s effort to revive Sony hardware divisions making smartphones, game consoles and other consumer gear. Strong momentum in the smartphone business has been accompanied by a perfectly executed introduction of the PlayStation 4, Third Point’s letter said.
“Sony has made notable efforts and operation has improved but the speed of migration of consumers to mobile products is even faster,” said Yasuo Nakane, an analyst at Deutsche Bank Group. “It’s tough for the company as its cameras, camcorders, games, smartphones, TVs, personal computers and tablets are cannibalizing each other.”
The game and mobile-products divisions are now poised to join the devices business as meaningful profit contributors, according to the hedge fund.