Sony expected to miss operating profit forecast on global financial market woes

TOKYO (Thomson Financial) - Japan's Sony Corp., the world's second-largest consumer electronics maker, is expected to report on Wednesday that its operating profit rose sharply in the fiscal year ended March but short of its forecast after the global financial market turmoil hurt its financial services unit.

Three analysts polled by Thomson Financial have forecast an average operating profit of 392 billion yen ($3.8 billion), up sharply from 71.8 billion yen a year earlier

'Sony (nyse: SNE - news - people )'s earnings likely fell short of its own guidance due largely to steep declines in share prices in the January-March quarter, making it necessary for the company to book a hefty paper loss on securities held by its Sony Life Insurance unit,' Tokai Tokyo Research Center analyst Osamu Hirose said.

Hirose had forecast full-year operating profit of around 380 billion yen for Sony.

In January, the maker of Vaio PCs, Bravia LCD TVs and Cybershot digital cameras forecast a net profit of 340 billion yen, operating profit of 410 billion yen and revenue of 8.98 trillion yen.

Analysts say Sony may also see earnings slump in the current fiscal year due to the strong yen and slowing demand in the United States.

However, Sony is likely to have seen a sharp rise in operating profit at its mainstay electronics division for the past fiscal year thanks to brisk sales of its high-margin Cyber-shot digital cameras.

Sony also benefited from the transfer of production lines for high-performance Cell microprocessor chips to its partner Toshiba Corp. (other-otc: TOSBF.PK - news - people ) in a move that will allow the company to focus on its mainstay consumer electronics business.

Analysts will be watching closely to see if the TV segment records any meaningful improvement in profitability, as brisk sales of Bravia brand LCD TVs have been driving up overall sales.

In the October-December quarter, Sony made an operating profit of just 4 billion yen at its TV business, down from 13 billion yen a year earlier.

'We expect the average price of large flat TVs to decline by an annualised 25-30 percent, while the price of small- and mid-sized flat TVs will drop by 20-25 percent,' Sony chief financial officer Nobuyuki Oneda said in January.

Game on

Many analysts are expecting a major reduction in losses at Sony's game business thanks to a price reduction and structural reform.

Last autumn Sony slashed prices of the original version of its PlayStation3 (PS3) consoles, and introduced the low-cost version of the PS3 that is not embedded with the expensive PS2 software-compatible chip, to keep up with rivals such as Nintendo Co Ltd. (other-otc: NTDOY.PK - news - people )'s Wii.

Sony had previously sold the PS3 at far below production cost since its November 2006 launch.

The price cut and the introduction of the low-cost version come as Sony struggles to recover its once-mighty position in the global video game market, where competition has heated up since Microsoft Corp. (nasdaq: MSFT - news - people ) launched the Xbox 360 in 2005 and Nintendo introduced its Wii in November 2006.

Sony's game division posted an operating profit of 12.9 billion yen in the October-December quarter, the first time the division had posted an operating profit since October-December 2005.

In the full year to March 2007, Sony incurred an operating loss of 232.3 billion in its game division, a former cash-cow, as it sold its PS3 consoles at far below production cost in a bid to kick-start the advanced game console.

While Sony appeared to have registered strong earnings growth last fiscal year, it is poised to suffer a profit fall in fiscal 2009.

'Declines in sales of digital cameras in the U.S., falls in capital gains from asset sales and the appreciation of the yen are likely to offset an improvement in profitability at the game division and a decline in paper losses at the financial services unit,' Goldman Sachs (nyse: GS - news - people ) analyst Yuji Fujimori said.

Fujimori has forecast a 2 percent fall in operating profit to 363 billion yen in the year to March 2009.

'In addition to the appreciation of the yen, declines in sales in the U.S. will strike a bigger blow to Sony,' said Nomura Securities analyst Eiichi Katayama.

'We had previously forecast a 2 percent rise in electronics sales in the U.S. in the year to March 2009, but we now expect a 19 percent drop,' he said.

Katayama has forecast a year to March 2009 operating profit of 370 billion yen for Sony.