Sony in transition: a new CEO drives the storied company back into profit

Sony has just revised its annual earnings forecast with the addition of a major 180 billion yen (roughly $1.7 billion) "goodwill impairment charge." This relates to Sony's Mobile Communications (MC) business, where the company says it had overestimated revenues from smartphones and tablets and has now decided to alter its strategy and accept the loss. As a result, Sony now anticipates overall losses for the fiscal year ending next March to be over $2.1 billion.

Sony has been in rebuilding mode for a number of years now, looking to narrow down its focus around Kaz Hirai's One Sony strategy and become a more cohesive and agile company. Central to these efforts has been Sony's emphasis on mobile devices: the Xperia range of Android smartphones has kept the company's revenues going even as it was divesting itself of iconic manufacturing divisions like the VAIO laptop line.

Sony is back to losing ways after recording a ¥128.4 billion ($1.25 billion) net loss in its 2013 fiscal year. The Japanese tech giant's operating income was ¥26.5 billion ($257 million) off ¥7.77 trillion ($75.4 billion) in sales. Twelve months ago Sony reported a ¥43 billion net profit for 2012, its first in five years, but after these 2013 results Sony is now forecasting a second consecutive loss for the current financial year: it expects to lose ¥50 billion ($489 million) by the end of next March.

Sony has reversed its prediction of a full-year profit, now expecting to make a net loss of ¥110 billion ($1.1 billion) in the year ending March 2014. It's the second quarter in a row that Sony has cut its guidance; the company slashed expectations to ¥30 billion from ¥50 billion in October. Sony hasn't changed its revenue forecast, however — the swing to loss is down to depreciation and amortization along with restructuring costs incurred by selling off the VAIO PC business and spinning off TVs into a separate unit. Operating income for Q3 was ¥90 billion yen ($860 million) and net profit was ¥27 billion ($257 million) off sales of ¥2.41 trillion ($23 billion).

Sony has announced that it will make 5,000 layoffs by the end of the next financial year, of which 1,500 will be in Japan, as a result of the drastic measures taken with the TV and PC divisions. The cost-cutting is in line with CEO and president Kaz Hirai's outlined plan to streamline Sony's offerings, and other parts of the company had better news to report.

Under Kaz Hirai's leadership, Sony has seen its mobile business turn into a profit driver and its mirrorless cameras competing with professional-class DSLRs. While Sony's hardware manufacturing credentials have been restored, however, other parts of the company remain in a troubled state. Chief among them is the entertainment division, which Sony is announcing plans to restructure and downsize in the wake of some outspoken criticism and mounting losses.

Still, Sony recognizes that something about its entertainment division has to change. It was deep in the red when the company last reported its quarterly earnings, which was the result of a poor run at the box office. White House Down was supposed to be the big summer blockbuster but disappointed, while The Smurfs 2 was so traumatizingly bad that even its hugely popular subject matter couldn't draw in the expected audience.

Sony made an operating profit of ¥14.8 billion ($151 million) in the second quarter of its fiscal year, as strong smartphone sales and a weak yen partially offset poor performance in the entertainment division. The company's mobile division brought in ¥418.6 billion yen ($4.27 billion), a 39 percent year-on-year increase, but Sony's net loss overall was 19.3 billion ($197 million).

The pictures division made an operating loss of ¥17.8 billion yen ($181 million) despite slightly increased revenues; Sony notes the poor performance of White House Down compared with The Amazing Spider-Man, its equivalent blockbuster from this time last year. Sony's entertainment business is under increased scrutiny following CEO Kaz Hirai's high-profile decision to reject a spinoff proposal by investor Daniel Loeb.

Sony CEO Kaz Hirai has been speaking to the press over in Japan today, where he's outlined his company's priorities for the near term. Pivotal to Sony's improving fortunes is the company's mobile division, whose success in the last quarter helped offset other losses in driving Sony to a moderate profit. Kaz underlines that importance, but argues that Sony must build on its current strengths first before looking to expand elsewhere.

Japan and Europe, according to Reuters, account for 60 percent of Sony's smartphone sales, and Kaz is intent on maintaining that advantage. To the regret of many, that means we're unlikely to soon see a change in approach in the critical US market — the Xperia Z took months to reach its sole US carrier, T-Mobile, while its successor Xperia Z1 is showing little sign of making it with any of the big networks.

Sony slammed the door in the face of a major shareholder last week when it rejected billionaire investor Daniel Loeb's proposal to spin off part of the company's entertainment business. Loeb, whose Third Point LLC hedge fund owns nearly 7 percent of Sony, had suggested selling between 15 to 20 percent of the music and film divisions in order to raise capital, sharpen the company's focus, and boost its long-suffering stock price. But CEO and president Kazuo Hirai, in an open letter to Loeb, says the company's board unanimously voted against the proposal and called 100 percent ownership of the divisions "fundamental to Sony's success."

Hirai and Loeb are expressing very different takes on the same fundamental fact: while Sony is best known as a maker of consumer electronics, for the past few years its music and movie divisions have been the only consistently, meaningfully profitable part of the company besides its financial services arm, which most people outside of Japan have never heard of. Its mobile and TV divisions, by contrast, have been losing money, while the game and camera businesses are barely breaking even. For an American like Loeb, this represents a perfect opportunity to unlock value by spinning out the healthy part of the business. For Hirai, the proposal is the opposite of the "One Sony" plan to unite the company he unveiled after taking the reins.

Sony CEO Kazuo Hirai has written an open letter rejecting billionaire investor Daniel Loeb's proposal that the company sell part of its entertainment business. Loeb, whose Third Point LLC owns about 7 percent of Sony, had pressed the Japanese giant to offer between 15 and 20 percent of Sony Entertainment to shareholders; the investor believed this could boost stock price by up to 60 percent.

In a letter today, however, Hirai says that he and Sony's board "strongly believe that continuing to own 100% of our entertainment business is fundamental to Sony's success and that neither a subscription rights offering nor a public
offering is consistent with our strategy for many reasons."

It may not be quite the windfall profit we're used to seeing from Apple or Samsung, but Sony has kept its financials on the positive side of the ledger over the last financial quarter — owing primarily to "strong" smartphone sales and a favorable shift in currency exchange rates. In the three months between April and June of this year, Sony saw both a "significant increase in unit sales" of its Android smartphones and an improved average selling price per handset. That's at the heart of the company's improved profitability.

The company's camera division didn't do quite as well, with sales down 10 percent relative to the same period in 2012. Still, the imaging team brought in $82 million of Sony's operating income during the present quarter, so the segment remains an overall positive for the company's bottom line. Sony says it's shifting away from the rapidly diminishing point-and-shoot market and will introduce more models in its high-end RX range in search of greater profit margins in the future.

With Sony under increasing pressure to get out of the entertainment business and get back to making great gadgets, company managers have begun to evaluate whether to sell off part of the unit that oversees movies, TV and music, according to a report today from Nikkei, a Japan-based newspaper.

Powered by hit films such as Men in Black 3 and Skyfall, Sony Pictures generated $4.4 billion in worldwide ticket sales last year and came into this year tops in market share, The New York Times reported. But the paper also noted that Sony Pictures has thin profit margins, and it's not clear how any of the studios will make up the falling DVD sales. CEO Kazuo Hirai is scheduled to discuss his turnaround strategy, and possibly Loeb's proposal, tomorrow.

A prominent Wall Street hedge fund manager is calling for Sony to spin off some of its holdings in order to focus on its core electronics business. Daniel S. Loeb, whose Third Point fund owns one of the largest stakes in the company at 6.5 percent, is pushing for Sony to sell off part of Sony Entertainment, the company’s movie and music business, as well as Sony’s 60 percent stake in Sony Financial, including its profitable insurance business. Loeb personally delivered the advice to Sony CEO Kazuo Hirai in the form of a letter, reports The New York Times.

Loeb is known for making waves, blowing the whistle on former Yahoo CEO Scott Thompson’s false claims to having earned a computer science degree, and luring Yahoo CEO Marissa Mayer away from her role at Google.

Sony is back in the black after posting its first full-year net profit in five years. The company made a net profit of ¥43 billion ($458 million) in the 2012 financial year — an increase on its forecast of ¥40 billion ($404 million) — following a loss of ¥457 billion ($5.7 billion) in 2011. Operating profit was ¥230.1 billion ($2.45 billion), up from a ¥67.3 billion ($820 million) loss last year.

The return to profit came despite lower revenues for its camera, game, and home entertainment divisions; Sony acknowledged decreased demand for compact digital cameras, LCD TVs, and its PlayStation games consoles. The game and camera divisions reported small operating profits of ¥1.7 billion ($18 million) and ¥1.4 billion yen ($15 million) respectively, while the TV and audio division recorded a loss of ¥84.3 billion ($897 million). The most profitable divisions were the financial services arm, with an operating profit of ¥145.8 billion ($1.55 billion), and the movie business, which made a ¥47.8 billion ($509 million) profit.

Kaz Hirai's vision for turning Sony around — a plan called "One Sony" — revolved around strengthening the company's three core businesses: digital imaging, gaming, and mobile. Hirai first announced that plan a year ago, and now the company is making some promises. Kunimasa Suzuki, CEO of Sony Mobile, told reporters that it plans to sell over 34 million smartphones and tablets in the fiscal year beginning April 1st, according to Bloomberg. With the boost in sales, the unit expects to be profitable over the fiscal year as well, and it plans to take third place in global smartphone marketshare from Huawei. Sony was 1 million in shipments behind the Chinese manufacturer, with a 0.4 percent smaller marketshare in the latest IDC quarterly report from this January.

Sony first forecasted 34 million in smartphone shipments for its 2012 fiscal year, which ends on March 31st, during its latest quarterly earnings report. The company now looks like it is pushing that estimate back. In its third fiscal quarter of 2012, which ended on December 31st, Sony shipped a total of 8.7 million handsets.

Sony will sell its US headquarters building to investors for $1.1 billion, according to Bloomberg. The sale is expected to generate net cash of around $770 million for Sony, which is working to cut losses across the board. The company will continue occupying the 37-story building at 550 Madison Avenue for up to three years, leasing from new owners the Chetrit Group, which also co-owns Willis Tower in Chicago. The building was previously owned by AT&T, which sold it to Sony in 2002 for $236 million.

Sony hopes to complete the sale in March — perhaps not coincidentally the end of its fiscal year, by which it has predicted a return to profit. The company is said to be currently re-evaluating its predictions based on the sale, however, so we may well see more positive results for the year than previously expected. Following Nokia's similar sale of its Espoo headquarters, it seems cash-strapped companies have hit on a new way to raise funds.

I just had a chance to sit down with Sony president and CEO Kaz Hirai for an enlightening chat about the electronics-maker's past, present, and future. Topics up for discussion include the company's new line of 4K televisions (including that new prototype OLED model), the Xperia line of Android phones and potential expansion to other platforms, and what the road ahead looks like for Sony. Kaz offers a glimpse into the mind of the Japanese monolith, with a surprisingly candid take on the rough times its experienced over the past few years. Check out the video below for the full chat, and stay tuned for more from Sony at CES 2013.

Sony is turning to the open market to raise money for a new expansion, the company announced yesterday. The plan is to raise 150 billion yen (about $1.9 billion) by selling 5-year convertible bonds, its first such sale since 2003, reports Bloomberg. Of the cash, 60 billion will be used to invest in CMOS image sensor production (separate from its investment in June), another 60 billion will repay debts from its Gaikai and Olympus share acquisitions, and 30 billion will repay other bonds that are coming due next year.

Last week, Moody’s cut Sony’s credit rating to near-junk status and an analyst at Fisco Ltd. postulated to Bloomberg that the company didn’t have much of a choice about how to raise capital. "Its credit ratings have been cut and an equity finance would lead the shares to decline because of the dilution," he said. Nikkei reports that Sony also considered ordinary bonds but was constrained by its poor credit rating. It's also telling that the cash injection isn’t coming from the Sumitomo Mitsui Financial Group, Sony’s largest individual shareholder.

Sony announced its second-quarter financial results today, and things are beginning to turn around following last year’s $5.7 billion loss and a disappointing first quarter. While the company lost $198 million on $20.5 billion in revenue, it was a significant improvement over both last quarter's $312 million loss and a $350 million loss at the time last year. But the improvement comes despite lackluster sales in many of Sony's biggest businesses and troubles in China that cost the company some $375 million, according to Reuters. Nevertheless, Sony managed to stick to its forecast of a $160 million net profit for the year ending March 31st, 2013.

Before taxes, Sony made an operating profit of $388 million, compared to a $20 million operating loss at the same time last year. Contributing to this turnaround was a sixty percent drop in restructuring charges compared to last year's Q2, during which time Sony racked up a lot of expenses related to the sale of its small- and medium-sized display business. The company also benefited from $170 million in insurance proceeds related to last year's floods in Thailand and a $105 million gain from the sale of its chemical business.

When Kaz Hirai announced his "One Sony" strategy to get the company back on its feet, the new CEO explained that the initiative would include a workforce reduction of up to 10,000 employees by the end of its 2012 fiscal year. Since that announcement, Sony has slowly released details on exactly where those cuts will be made — roughly 1,000 jobs were cut as Sony Mobile moves its headquarters back from Sweden to Tokyo, and now the company has just announced information on a further 2,840 layoffs.

As part of the latest round of restructuring, production of interchangeable lenses for DSLRs, lens blocks, and mobile phones at Sony's Minokamo Site will be absorbed by the company's Kohda Site. As a result, the Minokamo Site, which accounts for around 840 direct employees, will close at the end of March 2013. Considering Sony's camera group is one of the strongest parts of the company, with the company making sensors for a wide range of customers and offering its own compelling lineup, the closure of this factory feels like a surprising place to cut back on.

Sony is reportedly planning to close Sony Optiarc, a wholly-owned subsidiary responsible for the production of optical disc drives. Optiarc, originally a joint venture with NEC before Sony bought the company out in 2008, will cease operations by March 2013, according to Japanese newspapers The Asahi Shimbun and The Japan Times. Despite a robust 15-percent marketshare, Optiarc has been running at a loss due to "fierce competition" from overseas driving the price of optical drives down to unsustainable (for Sony, at least) levels.

In the face of huge losses, Sony has been restructuring under the leadership of recently-appointed CEO Kazuo Hirai, and plans to shed around 10,000 jobs. The closure of Optiarc will result in around 400 employees being let go, many through an early retirement program.

Sony Mobile, the entity that resulted from Sony's buyout of Ericsson from the famed Sony Ericsson partnership, is starting to make the operational changes it hopes will help it become a more profitable operation. The first step is to move its headquarters from Lund, Sweden, back home to Tokyo, Japan, which will be happening this October, and the second, more painful one, will be to "reduce global headcount" by some 15 percent, equivalent to roughly 1,000 jobs.

Sony may be describing this downsizing as a global effort, however it also reveals that 650 of the job losses will affect its present Swedish operations, with the remainder being primarily Sweden-based consultants. The staff redundancies will be rolled out gradually over the next year and a half, to be concluded by March 2014. In discussing the planned changes, Kunimasa Suzuki, the President and CEO of Sony Mobile, had this to say:

What kind of guy is Sony’s new CEO Kazuo Hirai, really? Four months since his appointment, Hirai sits down with Businessweek to talk about how things have been going, his plans to turn the company around, and the devices he uses in his own life, including a Sony flip phone.

On the company's troubled TV business, the CEO notes how dissolving its joint ventures with Samsung and Sharp gives Sony the freedom to shop around for the best prices on panels. He also mentions that the company is shifting a lot of its engineering resources to Malaysia as another way to cut costs, and touches on how the acquisition of Gaikai will "propel the movement of the video game business into the cloud space very quickly." But the key to Sony regaining its cachet in the marketplace, says Hirai, is creating products that move people emotionally.

Sony has announced its financial results for the first quarter of its fiscal year, and as expected for a company in transition they don't make for pleasant reading — it managed to lose $312 million off sales of $19.2 billion. Sony actually increased its sales year-on-year by 1.4 percent, attributed to the consolidation of Sony Mobile, but $143 million in restructuring costs caused operating income to slide from $270 million to $79 million. Together with the high yen and unstable situation in Europe, the company has downgraded its operating profit forecast for the year from $2.29 billion to $1.66 billion.

The company's few profitable areas right now are its imaging, components, and music businesses, while the gaming, home entertainment, and mobile divisions are all making losses. The games division in particular was disappointing, with sales falling 14.5 percent and the PS Vita not doing much to stop the business slip into the red. However, despite a decline in sales the TV business is actually bleeding less money than this time last year, possibly due to efforts Sony is making to streamline the category. The imaging division, too, is one of the company's recent success stories with high-end cameras contributing to profits of $160 million. The company claims it is "proceeding steadily with efforts to transform our business structure," but shareholders will no doubt have to be patient.

With Sony's traditional businesses such as TV making heavy losses, new CEO Kaz Hirai has said that the company will prioritize stronger areas such as digital imaging in order to return to profitability. We're seeing the first fruits of that promise today, as Sony has announced plans to invest ¥80 billion (about $997 million) in its CMOS sensors. The move will increase production capacity of the new "stacked" sensors at the company's Nagasaki plant to around 60,000 wafers a month.

The stacked sensors are mostly intended for smartphones, and use a new manufacturing technique to reduce size and power consumption. Sony is a major supplier of CMOS sensors for smartphone makers such as Apple as well as the likes of Nikon in the DSLR field, so it makes sense that the company would want to focus on areas where it remains a market leader.

Sony announced its consolidated financial results for its fiscal year today, reporting a record annual loss of 457 billion yen ($5.7 billion). The company's final quarter of the year saw it report a loss of 255 billion yen ($3.2 billion), a fifth straight quarterly net loss. Sony had previously estimated it would record a $6.4 billion loss for the 2011 financial year, based on a large tax charge (about $3.6b) that the company had to pay in the US.

Sony cites "unfavourable" foreign exchange rates, the impact of a Japanese earthquake and the floods in Thailand as reasons for its decreased year-on-year consolidated sales, but the company is hopeful for 2012 — predicting a profit amid restructuring. Sony plans to return to profitability with a consolidated income that should be ¥180 billion ($2.2b) in the black for 2012.