TOKYO (Reuters) - Sony Corp said its electronics division faces hard times ahead even after a weak yen helped pull it into profit for the first time in two years, ratcheting up pressure on the board to respond to activist shareholder Daniel Loeb's proposal to split the company in two.
Thursday's better-than-expected earnings are unlikely to placate billionaire investor Loeb, whose New York-based Third Point hedge fund wants Sony to spin off as much as a fifth of its money-making entertainment arm - movies, TV and music - in order to make it more transparent and accountable.
"The results are largely in line with the market consensus but it's not enough of a recovery to fend off Third Point's arguments," said Tomoichiro Kubota, senior market analyst for Matsui Securities. "Excluding the impact of the weak yen, it still looks tough for the electronics division."
Sony logged an operating profit of 36.4 billion yen ($369.68 million) in the April-June quarter, topping the 25.3 billion yen profit expected by four analysts surveyed by Thomson Reuters I/B/E/S.
Its Xperia smartphones have sold well and the company lowered its yen exchange rate assumptions - which will boost its earnings from sales overseas - while cutting costs.
But it acknowledged harsh market conditions for consumer electronics, cutting full-year sales targets for products from PCs to TVs to video cameras, and left its full-year profit forecasts unchanged even as it lifted its revenue forecast more than 5 percent.
"We were able to achieve adequate (first-quarter) results but I'm not necessarily optimistic about the future," Chief Financial Officer Masaru Kato told reporters.
In a letter to investors on Monday, Loeb praised CEO Kazuo Hirai's efforts to stem the red ink in Sony's electronics business by cutting overheads and streamlining its range of products. At the same time, however, he reiterated his call for deeper changes.
"Putting these encouraging gains into perspective, they are modest in light of the longer-term challenges facing Sony and the Japanese electronics industry. Drastic - rather than incremental - action is required," the letter said.
Sony's board is expected to reject Loeb's proposals, the Nikkei newspaper said on Thursday, with directors arguing that the electronics company could compete better by maintaining ties with the entertainment arm of the business.
Sony's Hirai told shareholders last month the company's board would carefully consider Third Point's suggestions.
Kato on Thursday said the board was continuing to discuss the fund's suggestions, including input from outside financial advisers.
Loeb, who owns around 7 percent of Sony through shares and cash-settled swaps, called the entertainment division poorly managed and repeated his earlier calls for Sony to bring more scrutiny to those divisions.
Loeb is credited with forcing change at Yahoo Inc, where he waged an aggressive campaign to upend its previous management in 2011 and 2012, accusing then-CEO Scott Thompson of padding his resume with a non-existent computer science degree. Thompson was out within weeks.
Sony's TV business showed the greatest progress from streamlining with a 5.2 billion yen operating profit for the quarter, its first time in the black in 12 quarters.
Sony said it expected its game division to fall into the red this fiscal year, however, due to development costs related to its new PlayStation 4 console. It did not announce sale targets for the PS4.
Sony's shares have more than doubled so far this year, buoyed by Third Point's suggestions as well as Prime Minister Shinzo Abe's potent mix of monetary and fiscal stimulus, which has fuelled a 33 percent rise on Tokyo's benchmark Nikkei.
The earnings announcement came after the end of share trade on Thursday. Sony ended up 1.7 percent at 2,104 yen, compared with a 2.5 percent rise in the Nikkei.
(Additional reporting by Maki Shiraki and Daiki Iga; Editing by Edmund Klamann and Stephen Coates)