Sony’s lowball forecasts are oddly reassuring

May 25, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Sony’s lowball forecasts are oddly reassuring. Shares in the Japanese group rallied, despite a profit outlook that fell below expectations. Setting roughly $1 billion of quake damage aside, Sony is faring well, with consoles humming along, and handsets stabilising.

The electronics group now expects an operating profit of 300 billion yen ($2.7 billion) for the year to March 2017 – far lower than the 409 billion yen which analysts had pencilled in. And yet, by early afternoon in Tokyo on May 25, Sony stock was up more than 6 percent.

Some of this may just be relief. Investors may have been maybe bracing for even worse after last month’s earthquakes in southern Japan forced Sony to delay forecasts. Analysts might have also been waiting for more information before formally downgrading their estimates.

The wider point is that the long-term case for Sony looks intact. The quake will lop 105 billion yen off operating profit, net of 10 billion yen of expected insurance payouts. Sony is also taking a 30 billion yen charge for scrapping a move into making high-end camera modules for smartphones. Strip out these one-offs, and operating profit this year would be 435 billion yen – a decent 18 percent increase on last year’s underlying figure. That means Sony’s medium-term goals, which call for 500 billion yen of operating profit by March 2018, remain within reach.

A lot of the detail was reassuring too. Nixing camera modules shows admirable decisiveness. Meanwhile, the PlayStation 4 is going great guns. Sony reckons it can shift 20 million units this year, and make 135 billion yen in overall operating profit from gaming, which is ahead of Macquarie’s 122 billion yen estimate, for example. And the bleeding finally seems to be stopping in the stripped-back handset unit after years of operating losses.

Since Chief Executive Kazuo Hirai took over in 2012, Sony has cut jobs, got out of computers, set clear return targets, and given business units more freedom. This year may be less profitable than some hoped, but Hirai’s turnaround nevertheless looks nearly complete.

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