Sony Offers Lukewarm Fiscal 2016 Guidance, Stock Flat

Multinational conglomerate Sony Corporation (NYSE:SNE) recently issued its forecast for fiscal 2016, for the year ending Mar 31, 2017. The forecast release has been delayed by the Kumamoto earthquakes, the worst that has hit Japan in recent times. Despite Sony’s tepid guidance, shares of the company remained relatively flat as investors had been anticipating a downcast outlook since the release of the company’s fourth-quarter fiscal 2015 results.

Sony had earlier hinted at possibilities of the earthquake affecting the earnings results of its segments, namely, Mobile Communications (“MC”), Game & Network Services (“G&NS”), Imaging Products & Solutions (“IP&S”), Home Entertainment & Sound (“HE&S”) and Devices. However, the company has confirmed that as per the preliminary assessment, the forecast of the remaining segments – Pictures, Music and Financial Services – will remain unaltered.

Inside the Headlines

Sony forecasts a year-over-year decline in net earnings which is likely to irk investors. The bottom line may be affected by the absence of a ¥46.8 billion gain from the sale of Olympus Corporation shares in the previous-year quarter and a higher income tax.

The company foresees a year-over-year decline in consolidated sales, largely because of the dismal sales at the IP&S and Devices segments on account of the earthquake. Also, lower sales at the MC, IP&S, HE&S and Music segments are expected to offset the robust sales at G&NS, Pictures and Financial Services.

On a year-over-year basis, consolidated operating income is expected to improve marginally on the back of better operating results at the MC and G&NS segments. Meanwhile, the earthquake is expected to have had impacted sales by ¥45 billion and ¥60 billion at the IP&S and Devices segment, respectively.

Segmental Impact

Sony has been undergoing organizational restructuring since Apr 1, 2016, for positioning certain operations under the IP&S and Devices segments. The company has altered its business segments from the first quarter of the fiscal year ending Mar 31, 2017. Under the reshuffle, the IP&S segment’s automotive camera business and Corporate and Elimination’s Imaging Device Development Division have been absorbed in the Devices segment.

MC: Sony believes MC sales will take a hit owing to the ongoing shift in demand to value-added smartphones from the mid-range models. Also, waning smartphone sales in unprofitable geographical areas are expected to hurt the sales performance further.

G&NS: PlayStation4 software and hardware have acted as major sales driver and are expected to retain its strength even in the fiscal ending Mar 31, 2017.

IP&S: Plummeting sales of digital cameras and professional use products are expected to mar the revenue performance of this segment. Also, the Kumamoto earthquakes are expected to delay the supply of certain components at this segment, which is another dampener.

HE&S: Sales at this segment are expected to decline on a year-over-year basis, largely on account of adverse foreign exchange rates and tightening home audio and video markets.

Devices: This segment is expected to witness relatively flat sales on account of negative foreign exchange rates. This is also likely to offset the improvement arising from increased sales of image sensors for mobile products. Also, this segment was affected majorly by the earthquake as some of its operations were suspended translating into huge costs. In addition, the company decided to terminate the development and manufacturing of high-functionality camera modules as the production center of these devices – Kumamoto Technology Center – was hit by the earthquake as well. Expenses on account of this is likely to be around ¥30 billion.

The company reiterated the guidance for three of its segments. Sony expects Media Networks to ramp up sales at the Pictures segment. Music sales are likely to decline substantially due to currency fluctuations and lackluster sales at Recorded Music. Nevertheless, an increase in insurance premium revenues at Sony Life is expected to drive sales in fiscal 2016.

To Conclude

It appears that the Kumamoto earthquakes have significantly aggravated problems for this beleaguered company. Factors like intense rivalry in each of its product lines including television, game platform, smartphone and services, along with weakness in the cameras business and no immediate rebound in the image sensor segment add to Sony’s challenges. We believe that strong headwinds in the devices business and currency fluctations are likely to worsen matters for Sony.

Desite these negatives, strong service-related revenues from the G&NS segment and the administrative shakeup to attain a leaner organizational structure raise hope. Also, strategic acquisitions and joint ventures may supplement inorganic growth for this Zacks Rank #3 (Hold) company.

Better-ranked stocks in the industry include Dolby Laboratories, Inc. (NYSE:DLB) , AB Electrolux (publ) (OTC:ELUXY) and TiVo Inc. (NASDAQ:TIVO) . All the three stocks sport a Zacks Rank #1 (Strong Buy).