Another Myth Busted: Sony is Having A Good Financial Year! (1 Viewer)

[Lee Scoggins]

Well folks, looks like we under-estimated Sony's ability to do well.


The article goes on to say Sony has raised its forecast 88 billion yen ($811 million!) from 55 billion yen. Actual earnings will be out on April 27th. Revenue forecast was raised a 100 billion yen to $7.5 trillion yen.

Sorry Rachael, these guys are going to be fine. This recovery should help provide a more stable footing for all of Sony's businesses.

 

[Phil A]

Lee it may be that Sony electronics is doing well and Sony music not too well. Before I would make blanket statements, I'd check Forms filed with the SEC which should be available at the SEC site or at Sony's investor relations online. If one goes to Form 20F at the Sony site (March 31 is their fiscal yr. and they have March 31, 2003 for now) it will show you lots of stuff by reporting entity. Some of the info is broken down by business segments (I apologize if the cut and paste below does not line up):

"New Business Segment Configuration




Electronics
Electronics business composed of “Audio,” “Video,” “Televisions,” “Information and Communications,” “Semiconductors,” “Components,” and “Other” categories

Game
Home entertainment system business run by Sony Computer Entertainment, Inc.

Music
Music business run by Sony Music Entertainment Inc., based in the U.S. and Sony Music Entertainment (Japan) Inc.

Pictures
Motion picture and television business, as well as digital entertainment business including digital production, online distribution, and broadband services, run by Sony Pictures Entertainment

Financial Services
Life insurance business run by Sony Life Insurance Co., Ltd., non-life insurance business run by Sony Assurance Inc., leasing and credit financing business run by Sony Finance International, Inc., and banking business run by Sony Bank Inc.

Other
Internet-related services business run by Sony Communication Network Corporation and advertising agency business in Japan



48



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Table of Contents
New Product Categories Configuration in the Electronics Segment




Audio
Home audio, portable audio, car audio, car navigation systems, and home telephones

Video
Video cameras, digital still cameras, video decks, and DVD-Video players/recorders

Televisions
CRT-based televisions, projection televisions, and set-top boxes such as digital broadcasting reception systems and Internet terminals

Information and Communications
PCs, computer displays, computer projectors, printer systems, personal assistants, and broadcast- and professional-use audio/video/monitors and other professional-use equipment (sales of mobile phone handsets made prior to October 2001 are also contained here)

Semiconductors
LCDs, CCDs, and other semiconductors

Components
Optical pickups, batteries, CRTs, audio/video/data recording media, and data recording systems

Other
Sony Trading International Corporation (now Sony Supply Chain Solutions), Aiwa brand products, and products and services which are not included in the above categories (sales of mobile phone handsets to SEMC from October 2001 onward are also contained here) "

 

[Lee Scoggins]

I'm not really sure it matters. The Japanese often take a long term view on investments so as long as profits are robust then we are fine. In other words, Sony consumer electronics has probably been subsidizing the music business like it was common with Warner film business subsidizing the Warner music labels. Warner Music Group is a different story but they are fortunately slashing costs to be in line with revenues.

The good news is that Sony is a well-diversified company. I also heard that Sony's pro audio business has been doing well, partly due to DSD interest...

 

[Michael St. Clair]

They should quit while they are ahead and kill Hi-MD immediately.

 

[John Kotches]

OTOH... not everyone agrees that Sony's current directions are the best for the corporation in the long term.

Like this link

Cheers,

 

[Michael St. Clair]

Maybe Sony buying MGM is about trying to "build" studio support for Blu-Ray.

 

[Phil A]

Lee - I would not place a whole lot of value on what corporate executives have to say at the release of their annual earnings. They are addressing shareholders and stock market analysts and I would not expect them to say that their music business earnings suck or that the competition to Hi-MD is doing much better. Their compensation is typically tied to stock options. The higher the stock price, the more money they make. The more stock options they cash in, the bigger the corporate payroll deduction is and the less income they show and the less taxes they pay. It is just reality.

Sony as most people know has been involved in developing the best formats (and products) but not necessarily marketing them to the fullest or realizing when to drop things that are doomed. The 'L' cassette was a wonderful sounding format for its day. Beta was a great quality format compared to its competition as well. Like many other businesses, they are separated into different legal entities which don't always compliment each other as best as possible.

 

[Lee Scoggins]

Sony has learned a lot from the Beta experience. They have secured Matsushita for one: many analysts say was not having them as a partner was the biggest reason for Betas failure. They have secured some big PC firms like HP and Dell. They seem to be doing a reasonable job for BluRay IMHO and Columbia is stepping up with a big title commitment for 2005.

 

[Marc Colella]

So Lee, what's it like working for Sony?

Good pay and opportunities for advancement?
How about benefits, are they generous in that area?

 

[Phil A]

Lee at the very extreme of the so-called pep talk of executives are stuff like Enron and MCI. Go look at transcripts of what those guys said. They had bright futures too. If you don't toot your own horn no one will. It is just routine corporate cheerleading. The investment banks are exactly the reason they do what they do. They want the value of the stock to go up. It is looking at the world thru rose colored glasses. Go look at other things - e.g. what was said about the bright furture of the AOL/Time Warner marriage. It is reality. That's not to say that they are doing bad. They're just emphasizing the good and shoving the dirt under the rug. Time will tell.

 

[Chu Gai]

Maybe Sony will have James Taylor sing "Shower the people you love with love..." like WorldCom...err, MCI does.

 

[Lee Scoggins]

Phil,

This was not a pep talk; it was a discussion on earnings which people take sseriously. I don't see where Sony benefits from over-stating their case. In most cases where a company is too optimistic on earnings gets slammed on the stock price.

 

[Phil A]

Lee, every single co. in the world emphasizes the good and buries the bad at these things. Of course it is serious vs. stand-up comedy. The goal is to get investment house support and drive up the stock price. It is 50% fact and 50% pep talk in most cases. I was directly involved and had many co-workers and colleagues at other cos. directly involved in the process of preparing and flavoring the books for these things my entire career. It is simply totally naive to believe that these things are what you think they are. Another two steps down the rung of reality is that Santa Claus is real and three steps would be that you saw Elvis at the supermarket. I know many people over the years who were asked by top management multiple times to close the same books and records to show a profit. In one this was accomplished by having a subsidiary buy a whole bunch of stuff at year end. There are gray areas of accounting policy like anything else. That is why many cos. will have a high level person in charge of technical acctg. issues to be able to manipulate things where loopholes exist to portray them in their most optimistic light vs. what they really are.

 

[Lee Scoggins]

Phil,

I guess we must disagree. I think Sony is telling the truth as best they know it (it is a forecast after all). It would serve absolutely no purpose to estimate earnings for the street and the miss the estimates. They would get clobbered.

I'm sure the music division is suffering like all the majors, but what matters to the Japanese is different. I have worked in Tokyo on investment banking deals and the Japanese will consider music a long-term investment if it supports another area. I suspect Sony does not care to stop DSD as long as Super Audio is profitable once you add up pro sales, consumer electronic sales, royaltees and record sales.

 

[Phil A]

Lee - the reason many cos. don't miss estimates is that they put money aside all the time for different things - e.g. reserves. The reserve could be for product liability or taxes and could be for a legitimate issue but may be very hard to estimate. Most cos. acctg. staff is made-up of alumni from their outside acctg. firm that certifies their books. So it is not a really impartial representation they are certifying. If they are short of earnings by a bit for a particular quarter they come to a hand shake agreement and take back some of them into income. If they make too much they come up with a good story to store more in the reserve until it is needed. They create this expectation and then juggle things as best they can to make them appear to come true. In the very extreme there is MCI or Worldcom. Sony or any other co. (I'm not picking on them at all) never tells the truth 100%of the time (if they did they would not be propping up their stock price vs. other cos.) nor does the tooth fairy leave $1 under your pillow but you are free to believe so. Hope you have lots of $1 under your to buy SACDs.

 

[Rachael B]

Sony has lost money for quite a few quarters in a row. Maybe they're poised to lose less?

 

[Phil A]

Actually - here is what Sony reported:

"3:00 P.M. JST, April 20, 2004

Sony Announces Revision of Consolidated Forecast for the Fiscal Year Ended March 31, 2004. The 88 billion (Yen) is the revised and the 55 billion is what they previously estimated.


Tokyo, April 20, 2004 -- Sony Corporation announced today a revision to its consolidated forecast for the fiscal year ended March 31, 2004

Consolidated Results Forecast

Revised Forecast Previous Forecast
Sales and operating revenue ¥7,500 billion ¥7,400 billion
Operating income 99 billion 100 billion
Income before income taxes 144 billion 130 billion
Net income 88 billion 55 billion

The revised forecast takes into account the following:

- Operating income: improved operating performance of the Pictures and Financial Services segments. However, additional expenses were incurred due to acceleration of restructuring activities.

- Income before income taxes: a net foreign exchange gain was recorded.

- Net income: income tax expense was lower than previously forecasted because US earnings increased without a corresponding increase in taxes due to utilization of tax loss and foreign tax credit carryforwards; in addition, certain foreign tax liabilities were reduced. Increased equity in net profit of affiliated companies also had a favorable impact. "

 

[Lee Scoggins]

Phil,

This is exactly what the WSJ reported and I quoted at the top.

I think we will have complete results tomorrow when they release earnings...



They have not lost that many quarters if they are reporting decent annual profits for the fiscal year just ended. I think we will have quarterly numbers to look at tomorrow...

Most companies have a seasonal business cycle. In retail for example it is not uncommon to have losses or minimal profits until the selling season.

 

[Phil A]

Lee, it should be interesting once they release the annual report to the SEC and if they show enough detail to see what is happening to their music business (or their equipment sales to studios). They have undoubtedly let employees go and likely closed locations and sold equipment. Often these reports are just good for the big picture of the whole co. and poor when it comes to ascertaining what individual segments are doing. Also note that the earnings are book income, not taxable income. There are very often cases where due to rules and treatments of items cos. show book income and have losses for tax purposes. Often, one of the differences is that stock options I talked about which have different treatments for book and tax purposes. It would help greatly if cos. released their tax returns incl. their Sch. M adjustments (book to tax differences) so one can get a more complete picture of what is going on but they are not required to do that. These things are general good for a handful of snapshots (vs. having a video).

 

[Lee Scoggins]

When I worked on Wall Street as an analyst, I found it very frustrating when companies did not release a lot of so-called "segment reporting" detail. Often we would get sales and assets by segment but not operating profit. This is common for all companies and a flaw in our FASB accounting rules IMHO, and it can obscure how things are going.

Even if we do get Sony stand-alone music sales, the pro equipment sales might be in another division (and royaltees from hardware pehaps in another) so acertaining how Super Audio as a whole is doing might be tricky or impossible.