Today Sony released its full year FY 2008 results,which leaves little doubt that Sony, under the leadership of Sir Howard Stringer, spent 2007 wisely to focus on profitability, and streamlining of businesses. For the financial year, which ended 31 March 2008, sales were up 6.9%, reaching ¥8,871.4 bn. The main focus though for the year has been on the bottom line, and operating income has jumped 421.9%, up to ¥374.5 bn, while net income surged to ¥369.4 bn, up 192.4% in the year.
There is little doubt that FY 2008 was a healthy year for Sony, however the most recent quarter do show some worrying signs; mainly due to economic downturns in the US. Firstly, for the first time in the financial year, Sony dips into the negative operating income numbers again, with ¥-4.7 bn. This is of course vastly better than in the last years quarter where operating income ¥-113.3 bn. However, it would have been reassuring to see nice, healthy black operating income figures as in the rest of FY 2007 (¥99.3 bn, 90.5 bn, 189.4 bn, respectively). A little disappointing as well, is negative figures now coming out of the Game division. After a brief moment back in black in the previous quarter, Game now reports an operating loss of ¥11.5 bn. This is likely to derive from pricing pressure on the Playstation 3 (PS3) platform, new products, services and applications for the PSP, while there is a decline in software sales for the very successful Playstation 2 platform. A dip back into the reds for the Game division could be acceptable, given the nature of this business, and the pipeline that Sony has for the PS3. However, more worrying is the outlooks that Sony provides; From April 2008-March 2009 Sony has a target of 10 mln PS3 sales, which is actually lower than the target that Sony set for last years period (11 mln, but reached 9.24 bn). This means that Sony expects to sell fewer PS3 units for the current period, than what it expected to sell a year ago. Even with the looming economic recession, Premonvision expects Sony to outperform this target. Surely the Game division needs more aggressive targets if it aims to outperform the overall market.
In stark contrast, the Bravia TV group expects sales to jump 70% in units for the coming year. Meanwhile, Sony expects the US dollar to further depreciate, down from an average of ¥113 to ¥100 per dollar. How Sony Electronics expects to improve its bottom line contribution, with very aggressive TV targets (and the TV business is not profitable at the moment), under worsening economic tides, remains unclear, even if Sony will increase the usage of sourced TV panels, or as Sony puts it 'standard panels,' to reduce costs of low-end and mid-range Bravia TVs. Sony Bravia TVs perform well in the US market, however if the credit crunch continues, and the US economy does not improve, it is very difficult to see how Sony can achieve these targets; either the bottom line suffers, or the sales numbers will suffer in our opinion. Hitachi has just reported slow-down in its plasma TV business, because of slow US sales.
2008 will likely be a struggling, but manageable year for Sony
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Sony has a high dependency on Europe, which represents 27% of its revenues, far greater than the US or Japan (22%, 17%, respectively). Europe has so far weathered the economic troubles better than the US, however this could changing in the coming year.
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To defend the top line, and maintain scale for the bottom line, we expect Sony to more aggressively develop the BRIC (Brazil, Russia, India, and China) markets, as well as new, or fast growing markets such as the Middle East and Eastern Europe.
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Even though HD DVD lost its HD movie war early this year, it is surprising to see no further outlooks on the Blu-ray market. Sony has been very bullish in the market on Blu-ray in the past 12 months, it would have been natural to provide further details on Blu-ray for the quarter. Premonvision does not expect Blu-ray to be main driver for Sony in the coming 12 months, mainly due to the economic downturns where it is less like that consumers will go down the upgrade path to Blu-ray players and Blu-ray movies.
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We question how the Bravia TV group will manage a 70% unit growth in the year. The intention is to focus more on low cost TVs, using off the shelf market components. While this may be a viable option, we urge Sony to introduce a new brand for these TVs, to avoid dilution of the Bravia brand, which it should maintain for its higher end models.
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2007 was a struggling year for the Game division, primarily due to the Playstation 3. However, we are more optimistic for the outlooks in 2008, and expect profitability as well as higher unit shipments than Sony's projections.
