After two straight profitable quarters, Sony’s chief executive officer shocked investors last week by reporting an unexpected second-quarter loss that derailed the company’s rebound from $8 billion in TV losses. Sony cut its forecasts for televisions, cameras and computers -- businesses that make up 22 percent of sales. Shares plunged 11 percent, and Moody’s Investors Service warned the credit rating may be cut to junk.
The results intensify the pressure on Hirai, who took over 19 months ago, to turn around the company. His plan faces a test this quarter with the release of a new PlayStation game console and a U.S. push for the Xperia Z smartphone and new Bravia models. If they don’t click, he may have to revisit more drastic ideas: a partial sale of Sony’s entertainment assets, or reassessing TV manufacturing.
“It seems like Hirai is standing on ice that’s melting right under his feet,” said Kazuyuki Terao, Tokyo-based chief investment officer at Allianz Global Investors Japan Co. “The market is changing a lot faster than anyone expected, and Sony hasn’t been able to keep up.”
The 19.3 billion-yen ($196 million) loss in the period ended Sept. 30 puts the spotlight on Hirai’s plan, focused on games, mobile phones and imaging. An accelerating shift by consumers to smartphones and tablets from Samsung Electronics Co. (005930) and Apple Inc. (AAPL)crimped sales, while big-budget Hollywood disappointments drained the movie studio.
The PlayStation 4, hitting U.S. shelves next week, will battle Microsoft Corp. (MSFT)’s Xbox One, while new Xperia smartphones, which Sony says will meet its estimates, reached the U.S. in October. TVs with curved screens and higher resolution will be on sale during the holidays.
“The Christmas season is the largest selling opportunity for Sony,” Mami Imada, a Tokyo-based spokeswoman, said by e-mail Nov. 6. She declined to elaborate on results this year.
Sony projects the PS4 will sell 5 million consoles by March 31, about 1.5 million more than the previous model in its first months, said Andrew House, head of game operations. The company is selling an annual $50 PlayStation Plus service with multi-player access to gain recurring revenue.
“How fast the PS4 comes off the blocks will be a closely watched indicator of Hirai’s performance,” said Damian Thong, a Tokyo-based analyst at Macquarie Group Ltd. who recommends buying the stock. “If they miss targets, there will be a lot of questions about whether they can turn things around.”
A successful PS4 would only be a start, said Yuuki Sakurai, chief executive officer at Fukoku Capital Management Inc. in Tokyo. Smartphones have taken over lower-end video-games, raising questions about the future of consoles.
Sony today replaced its chief strategy officer, naming Kenichiro Yoshida to succeed Tadashi Saito in the role. Saito was appointed by Hirai in April 2012 to help lead a turnaround.
Moody’s placed Sony’s Baa3 rating, the lowest investment grade, on review for a downgrade, citing “slow progress” in improving profitability.
Box-office flops “After Earth” and “White House Down” hurt the movie unit, which came under fire from billionaire shareholder Daniel Loebfor having a “bloated corporate structure.” Sony rejected his demand for a partial sale of entertainment assets.
Sony’s performance could rekindle talk of an entertainment spinoff, according to Daniel Ernst, an analyst with Hudson Square Research in New York. The company, while “uniquely positioned” to combine digital media with electronics, has failed to deliver, he said.
Recent films “Cloudy With a Chance of Meatballs 2” and “Captain Phillips” were well received. Coming this quarter is the crime drama “American Hustle,” starring Amy Adams and Christian Bale. The movie, based on the Federal Bureau of Investigation’s Abscam sting, is attracting awards buzz.
Profit from film and TV this quarter will probably shrink 9.9 percent to 22.8 billion yen from a year earlier, Ernst estimates. In music, he projects earnings will drop 28 percent to 11.8 billion yen, with releases from Miley Cyrus, Kelly Clarkson and One Direction.
Sony scheduled an investor day for Nov. 21 in Culver City, California, after Loeb, whose Third Point LLC holds a 6.5 percent stake, complained about a lack of transparency in the entertainment business.
The company will outline plans to increase revenue, cut costs and improve entertainment margins, said Jim Kennedy, a spokesman in New York.
Taking over from Howard Stringer in April 2012, Hirai vowed to return TVs to profitability in the year ending in March 2014 and unify Sony’s sprawling businesses. Rather than halt money-losing operations, as rival Panasonic Corp. (6752) did with consumer smartphones and plasma TVs, Hirai promised to reduce costs and streamline.
Sony aims to use the Xperia Z1 to reduce Samsung and Apple’s dominance of high-end smartphones. Sony ranked seventh with second-quarter shipments of 237 million units, according to data compiled by Bloomberg.
Chief Financial Officer Masaru Kato said last week Sony is maintaining its goal of making TVs profitable after nine consecutive years of losses -- even as it cut the sales outlook for its Bravia models by 6.7 percent.
“They’ve been talking about the deterioration of conventional digital-consumer products for a long time,” said Kota Ezawa, an analyst at Citigroup Inc. in Tokyo. “But Sony isn’t doing enough about it.”
Incumbent manufacturers are under attack from Chinese competitors selling inexpensive sets. A Sony 55-inch TV with ultra-high definition sells for $3,998 on Amazon.com, while China’s TCL Multimedia Technology Holdings Ltd. (1070) announced a similar 50-inch model for $999.
To entice buyers, Sony includes a media player with 100 films and TV shows, a free year of Netflix Inc. (NFLX) and Hulu Plus, and a free month of its streaming Music Unlimited. Hirai’s goal is to survive the shakeout, said Richard Doherty, an analyst with Envisioneering Group.
“He’s not out for bragging rights as much as being one of the companies that walks away after the shootout at the O.K. Corral,” Doherty said.