Today the consumer electronics giants Samsung and Sony published new financial information. Samsung released its Q3 2008 results, while Sony provided revised consolidated forecasts for its financial year. The markets sent Samsung into a free fall, and ended down 13.8%. Sony fared hardly any better, and was down 12%. Expect similar free falls as other vendors release more financial information and the market understands the gloomy situation the consumer electronics industry is facing in the run up for Christmas.......
The top line is healthy at Samsung, which was up 15% (19.26 trillion won) in the year for Q3 2008. The worrying signs is profitability. Operating profits for Samsung were down 50%, while net profits dropped 44% to 1.22 trillion won.
Having said that, Samsung is a very financially sound company. It improved its cash holdings in the quarter by significantly reducing working capital. Companies do not go bankrupt from poor performing P&Ls, but by lack of cash. Samsung has cash, and is improving its cash position. In this day and age cash is king, just ask any bank or financial institution. Debt levels are also low at Samsung, about 23%. So Samsung is more than financially sound, however its latest quarterly release pin points the tough market situation.
Our market feedback is that the global TV market is struggling. Retailers are cutting inventories and many markets in Europe still have too high inventory levels due to the lacklustre sales during the football championship in Germany earlier this year. It is still surprising to see the industry expecting large sales increases from major sporting events. Premonvision cautions against these expectations. We also expect a weak Christmas with lots of rebates and fierce price competition in retail. Consequently, industry profitability is likely to be low or in the red. TV set profitability was the theme for my presentation at the HDTV Across Europe conference in Berlin just a few weeks ago. Vendors still struggle with very poor marketing and no clear market positioning, no wonder profitability is no where to be found. If this market situation continues where companies make no money in the TV business, 2009 could be the year for Chinese companies to acquire traditional consumer electronics vendors.
At the same time Sony revised its consolidated forecasts for the financial year ending March 31, 2009 from its July 2008 forecast. More details should emerge in its Q3 C2008 results coming out on October 29th. The revised forecast show slightly weaker top line expectations (sales down 2%), where the main changes are expected on profitability. Expected operating income is down 57% for the year, while net income is down 38%. Bear in mind that Sony is now half way through its financial year, so these revisions are significant.
There are two main reasons for this drop in profitability. Firstly is the currency exchange rate situation against the US$. The Yen has appreciated due to the financial turmoil started in the US, which has eroded the price competitiveness of the Japanese export industry. The second issue for Sony is its Electronics industry. Electronics has made steady progress towards the 5% profitability target, however this seems now to be slipping away. The business struggles due to the worsening of the global economic situation and subsequent softening of consumer spending, and secondly due to the price competition in the market as vendors rush to clear channels and reduce inventories.
Sony has been very bullish on its expectations for Bravia TVs. In the last financial year it shipped roughly 10m TVs, and set at target of 17m, an increase of 70% for the coming 12 months. This is something I cautioned against from the beginning. This target is now revised down to 16m, which may still be too high as we expect a very weak Christmas period, especially for sales into the channel. Sony makes no mentions of PS3 in its revision, which implies that it is on track for the year. We expect on October 29th that sales have been robust enough, however we are slightly sceptical to how well the PS3 will fare in the Christmas quarter. The platform has a strong line up of titles which will help, however while the Xbox 360 has undergone several price reductions, Sony has focused on short term profitability instead of unit sales. In a market with weak consumer spending and financial worries, it may not be wise to carry a significant price premium over its main competitors Microsoft and Nintendo.
The question everyone now has is how will the Christmas quarter be, and our expectations are that it will be weak and soft, particularly for TVs and Blu-ray products.
