Fuzzy Picture for Sony's TV Business
To get an idea of why analysts are nervous about Sony's (SNE) first-quarter earnings, you should look at the results of another Japanese tech maker. On July 19, Hoya (HOCPY) surprised investors with weaker-than-expected growth, and blamed slow equipment sales on liquid-crystal display TV makers. Following similar reports from TV panel and parts makers, worrywarts in Tokyo took Hoya's disclosure as yet another sign that the $25 billion global TV market is encountering some major static.
On July 27, Sony's April-to-June earnings announcement will put any speculation to rest. Analysts say they'll look first at the TV biz data, which they expect to show an operating loss of somewhere between $65 million and $115 million for the quarter. That would mark an improvement over last year's $337 million loss. (Sony's overall quarterly operating profit is forecast to reach $220 million on sales of $14 billion, from last year's $130 million loss on $13.4 billion in sales.)
The fact that Sony's TVs still don't make money comes as no big shock. The Japanese electronics and entertainment giant was a latecomer to the fast-growing LCD TV segment, and has spent billions mounting an aggressive attack on market leaders Sharp (SHCAY), Samsung, and Philips. Since introducing the high-end Bravia LCD TV lineup last September, CEO Howard Stringer has shuttered factories for the old picture-tube TVs to focus on svelte high-definition TVs for the digital era.
What's got analysts and investors jittery is that the TV market as a whole has been losing its sizzle. If that continues, it could complicate things for Sony, says Standard & Poor's tech analyst John Yang. "I just don't see how Sony can be immune to what's happening to others," he says.
Hints of the market's softening emerged several weeks ago when two major TV-panel makers, LG.Philips LCD of Korea and AU Optronics (AUO) of Taiwan, said their shipments would fall short of forecasts. LG.Philips has since said it would curtail spending and freeze plans for a new factory, while others in the industry have reported similar disappointing results. For instance, Minnesota-based 3M, which makes a special coating for LCD TV panels, missed analysts' earnings targets earlier in July.
The market's cool-down resulted from a combination of factors. For one, the pace of TV buying usually tapers off in the months after the yearend shopping holiday. But that didn't stop heavyweights Samsung, LG, and others from boosting their panel-making capacity with new plants. That led to a glut of panels and a sharp decline in prices in recent months.
Add to that a surprising letdown in sales leading up to this summer's World Cup soccer tournament—the planet's most-watched sporting event—and you begin to see why people are fretting about Sony (see BusinessWeek.com, 6/8/06, "LCDs Display Their Flaws").
Sony's Stringer can't afford to see the TVs business wither now. The Welshman hopes to make TVs profitable by the second half of this fiscal year as part of a grand plan to fix the core consumer-electronics division. TVs are a big deal for Sony because they account for nearly a fifth of electronics revenues. They're also important to Sony's strategy of selling consumers other electronics, such as digital cameras, DVD players, and home servers.
One reason Sony is in such a hurry to get its TV arm in order: The company has already begun shifting resources to the PlayStation 3 video game console. Startup costs for the console, slated to go on sale in November, will put the games unit about $1 billion in the red this year.
Some analysts think there's nothing to worry about. Strong first-quarter earnings this week from top Japanese makers Sharp and Matsushita (MATSF) also suggest Sony might do well, too. Sharp, the world's No. 1 LCD TV maker, reported a 13.7% rise in operating income for the quarter, while Matsushita, whose Panasonic brand ranks as the top plasma TV maker, posted a 41% jump.
"The trend this year shows brand-name TV makers grabbing market share, while non-brand makers are losing theirs," says Hisakazu Torii, a Tokyo-based analyst at DisplaySearch. Torii says Sony's sales of 40-inch sets were strong in the January-March period, giving it 10.9% of the global market, based on shipment volumes—fourth among LCD TV makers.
Merrill Lynch has predicted that the company's electronics unit will rake in operating profits of $860 million this fiscal year through March, 2007—a reversal from the $260-million loss last year—with roughly $43 million of the gain coming from TVs. (Last year, the TV unit lost $776 million.)
But the gloomy industry news of late has given investors pause: Sony's 18% stock price drop over the past three months has outstripped the Nikkei Stock Average's roughly 11% slide.
What's more, TV manufacturers have reported rising stockpiles of the specialized glass panels that go into LCD sets. That usually signals the need for an adjustment period to curb production and chip away at the surplus. In the latest quarter, Sony probably bought panels from S-LCD—its joint venture with Samsung—faster than it shipped out TVs, says Goldman Sachs (GS) analyst Yuji Fujimori.
"I'm guessing that Sony's LCD panel inventories rose at the end of June," he says. (Confirming the TV unit's inventories is tricky because the company traditionally doesn't disclose such figures.) First quarter earnings might not be enough to settle the debate. It will take another few months before the fuzzy picture for Sony's TV biz clears up.