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Sony CEO Demonstrates How to Manage a Shrinking Technology Icon

Pavel Alpeyev and Sheryl Tian Tong Lee
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Sony CEO Demonstrates How to Manage a Shrinking Technology Icon

(Bloomberg) -- Chief Executive Officer Kenichiro Yoshida is showing he knows how to manage a shrinking Sony Corp.

The Tokyo-based company’s shares rose after it reported first-quarter profit that beat estimates on strong demand for its image sensors and improved profitability in its smartphone business. The stock climbed as much as 6.6%, the biggest intraday gain in more than two months.

Investors showed optimism despite Sony reducing its revenue forecast on declining sales of PlayStation 4 games console and televisions. The electronics maker lowered its target for the year ending March 2020 to 8.6 trillion yen ($79 billion), or 200 billion yen less than a forecast in April. Yoshida, who played a key role as finance chief in the company’s turnaround over the past half-decade, kept the profit outlook for the year unchanged.

“Overall, Sony first-quarter performance was solid,” Pelham Smithers, whose London-based firm offers equity research on Asian technology companies, wrote in a note to clients. “For the time being, though, the market should be reasonably happy.”

Profit in the image and sensing business, which includes CMOS sensors used in smartphone cameras, jumped 70% in the quarter, despite sluggish global demand for handsets and U.S. restrictions on Sony customer Huawei Technologies Co. The CEO is boosting capital spending to 1.2 trillion yen through March 2021, fueled by investments in sensors.

“It surprised us that the image sensor business was really strong,” said Masahiro Wakasugi, an analyst with Bloomberg Intelligence. “We thought there might be a risk that Huawei could be cutting some orders. We think going forward the image sensor business will be one of the key contributors to positive sales and earnings results for Sony.”

Sony’s mobile communications business, which includes its flagship Xperia smartphone brand, reported a 1 billion yen profit in the quarter, compared with a 10.8 billion yen loss a year earlier. The company slashed its annual handset sales forecast to 4 million units from 5 million, although it still expects annual loss to narrow to 47 billion yen.

In games, its most important unit, Sony trimmed its revenue outlook by 4.3% to 2.2 trillion yen after sales fell 3% in the first quarter. The PS4 sales target was cut by 1 million units to 15 million. The company kept the forecast for the segment’s operating profit to fall 10% to 280 billion yen because of rising costs in research and development related to the PS5.

The games division faces a big challenge in topping last year’s performance, when blockbusters such as God of War drove record earnings. This year’s lineup consists of lesser-known titles and the PS5 won’t go on sale this year, giving competitors a chance to win consumers over with new hardware.

In electronics products, a segment that includes smartphones and TVs, Sony cut its annual revenue outlook by 3.6% to 2.16 trillion yen. The TV target was cut by half a million to 10.5 million units.

Sony left its full-year profit outlook unchanged, forecasting a 9.4% drop to 810 billion yen. Analysts on average expect a profit of 821.5 billion yen. Operating income in the first quarter was 231 billion yen, more than the 176 billion yen average of analysts’ projections. Sales fell about 1% to 1.93 trillion yen, slightly lower than analysts’ average prediction for 1.94 trillion yen.

Sony’s shares had climbed 10% this year before Wednesday. They closed at 5,859 yen before the earnings announcement on Tuesday, up 14% from the start of April last year, when Yoshida took the helm.

Sony has come under fire from activist investor Daniel Loeb. Loeb’s Third Point revealed a $1.5 billion stake in the company and advocated for a spin-off of the chip business to finance a deeper expansion into entertainment, including games and movies. That’s the opposite of what he championed in 2013, when he called on executives to sell a part of their film division.

Yoshida has responded by saying that management is constantly studying how to increase long-term shareholder value. He has also carried out two record stock buybacks this year, pleasing investors and pre-empting calls for more drastic change.

“The buybacks have obviously had a positive impact, but another one isn’t likely,” Jefferies Group senior analyst Atul Goyal said ahead of the earnings release. “It’s difficult to get excited about Sony this year, because there is no growth story to be told.”

To contact the reporters on this story: Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net;Sheryl Tian Tong Lee in Hong Kong at slee1905@bloomberg.net

To contact the editors responsible for this story: Edwin Chan at echan273@bloomberg.net, Peter Elstrom, Reed Stevenson

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