Battery recall hits Sony’s bottom line

Sony, the Japanese consumer electronics giant, said Wednesday operating profit plunged 68 per cent to Y71.8bn ($596m) in the financial year to the end of March because of massive losses in the games division the cost of recalling 9.6m laptop PC batteries.

Sony admitted that the games division, its second-biggest revenue generator, would probably not make a profit until 2008-2009 because of the initial costs of investing in the PlayStation 3, its next-generation console. The big investment and lacklustre sales pulled Sony’s games division into the red, with an operating loss of Y232.3bn, compared with an operating profit of Y8.7bn last year.

Sony is still making a loss on every console sold, and analysts estimate that it will not make money on the product until next year at the earliest. Sony shipped 5.5m PS3s in the year just ended, missing its target of 6m shipments. It sold 3.6m units. The company said it aims to ship 11m consoles this year.

Sony's PS3 has struggled to gain a foothold in global markets despite a successful launch in Europe last month, while Nintendo's Wii games console continues to go from strength to strength.

But there were signs that the embattled company is turning its core divisions around. Sony’s consumer electronics division performed well, with operating income totalling Y156.7bn from Y6.9bn last year. Sony achieved an operating margin of 4.1 per cent for its electronics group, one year ahead of schedule.

The consumer electronics giant said its operating profit would grow six-fold in the current fiscal year to Y440bn, due to robust demand for its Bravia-brand liquid crystal display televisions and strong sales of its Vaio computers and digital cameras.

But Sir Howard Stringer’s widely-proclaimed pledge to achieve group-wide operating margins of 5 per cent by March 2008 was called into question, after analysts said Sony would only clear the hurdle if it included a one-off gain from land sales in its operating profit forecast.

“The [financial year] 2007 operating profit guidance in real terms excluding profits on the sale of headquarters land and restructuring costs (Y35 bn), is Y416 bn, which works out at a 4.8 per cent operating margin,” said Yuji Fujimori, analyst at Goldman Sachs.

Sony said last night that it always intended to include asset sales in the target. But analysts said they were surprised by the move. “One would expect a 5 per cent margin to come from real operations, rather than one-time gains,” said Hiroshi Kamide, analyst at KBC Securities.