UPDATE 2-Sony warns smartphone weakness will brake profit progress after Q1 surge

Thu Jul 31, 2014 5:04am EDT

* Q1 operating profit doubles on games, asset sale

* Sony warns will just break even on smartphones this FY

* Leaves fiscal year financial forecasts unchanged (Adds smartphone industry context, earnings details)

By Sophie Knight

TOKYO, July 31 (Reuters) - Japan's Sony Corp warned it doesn't now expect to make money on smartphones this year, citing weak demand, as the consumer electronics maker said restructuring will still help it turn a profit on its TVs after 10 years of losses.

As it said April-June operating profit doubled, boosted by its videogames business and a one-off asset sale, Sony on Thursday cut its smartphone sales target this fiscal year by 14 percent. Sony now expects to just break even in the business this year, down from a previous operating forecast of 26 billion yen ($253 million), and is reviewing its mid-term strategy.

Analysts had said the initial smartphone sales target was too ambitious amid stiff competition from Apple Inc and Samsung Electronics Co Ltd at the top end of the market, and cheaper Asian electronics firms at the bottom. Samsung Electronics also flagged its own uncertain handset earnings prospects on Thursday, undercut by Chinese rivals like Xiaomi, while Sony said progress by Chinese smartphone makers was a factor in its own sales shortfall.

"It is possible the (smartphone strategy) review might result in an impairment charge against various assets in the mobile communications segment," said Sony's newly installed chief financial officer Kenichiro Yoshida. Despite the first-quarter surge, he said Sony would stick to fiscal year forecasts of a 140 billion yen operating profit and a 50 billion yen net loss - the company's second straight year in the red.

"We are also discussing whether to change the number of phones in our line-up and adjust their lifecycle," Yoshida said, speaking at a news conference after the company released its results on Thursday.

Sony now expects to sell 43 million smartphones this year, down from 50 million - a previous target corporate planning director Hiroki Totoki described on Thursday as "a little aggressive".

With Yoshida helming restructuring plans, Sony has vowed to turn a profit on its flagship electronics division this year, come what may. The firm is cutting 5,000 jobs and spinning off its TV division into a separate company, a move chief executive Kazuo Hirai has said will increase accountability at the business.

For the fiscal year, Sony on Thursday shaved 3 percent off its TV sales target, cutting it to 15.5 million from 16 million previously. That was despite quarterly sales growing 10.5 percent as Sony sold a higher proportion of premium models, including high resolution 4K sets.

GAMES GROWTH

In the fiscal first quarter ended June, Sony's operating profit climbed to 69.8 billion yen ($679 million) from 35.5 billion yen a year earlier. That easily beat the 16.6 billion yen average of six analysts' estimates according to Thomson Reuters Starmine.

Across the company as a whole, net profit surged to 26.8 billion yen in the first quarter from a meagre 3.13 billion a year earlier. Revenue rose 5.8 percent to 1.81 trillion yen.

Sony said a 14.8 billion gain from the sale of a technology centre in Japan inflated first-quarter operating profit, while its financial services business again delivered the lion's share of earnings.

Lifted by the success of its PlayStation 4 videogame console, Sony's games and networks division - the focus of much of the company's strategy going forward - also turned in a strong performance, doubling revenue and reversing into profit after losses a year earlier.

Sony raised its operating profit forecast for the games and networks division by a quarter to 25 billion yen - equal to two and a half times the profit it expects in the division housing its TV business.

CFO Yoshida, with a reputation for plain speaking, warned the strong first quarter didn't yet mean the company could afford to aim for higher earnings this year.

"We have topped our targets (in the first quarter), but if you look at our past, we have made our targets in most first quarters but then haven't been able to meet our full-year targets," CFO Yoshida said. "I want to see how the rest of the year goes."

Separately Sony also said it would set up a joint venture with Panasonic Corp and Japan Display Inc to develop organic light-emitting diode (OLED) displays, with the government-backed Innovation Network Corp of Japan taking a majority stake. ($1 = 102.8400 Japanese Yen) (Reporting by Sophie Knight; Editing by Kenneth Maxwell)

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