Sony shows disappointing quarterly results in its Q2 report. Or, how the LCD TV turned from a solid cash cow into a dog, due to declining margins.

Today, Sony Corporation presented its quarterly results for Q2 (ending September 30, 2011) and to be frank: the data didn’t look any good.

Here are the pertinent snips of Sony’s Q2 quarterly report:

·     Consolidated sales declined year-on-year primarily due to unfavorable foreign exchange rates and lower LCD television sales.

·     Consolidated operating loss was recorded, compared to income in the same quarter of the previous fiscal year, primarily due to lower sales, asset impairment associated with the anticipated sale of the small- and medium-sized display business and impairment of LCD television assets.

·     Forecasted consolidated sales and income for the fiscal year were both revised downward, primarily due to the impact of Sony’s updated foreign exchange rate assumptions to account for the further appreciation of the yen, the impact of the floods in Thailand, and the impact of lower sales expected primarily in the Consumer Products & Services and Professional, Device & Solutions segments, mainly in Europe and the U.S.

 Q2 results for Sony Corporation (figures converted to $ mln; originally in ¥ bln)

Consolidated Results for the Second Quarter Ended September 30, 2011

Sales were 1,575.0 billion yen (20,454 million U.S. dollars), a decrease of 9.1% compared to the same quarter of the previous fiscal year (“year-on-year”) primarily due to unfavorable foreign exchange rates and a decrease in sales in the CPS segment, which was mainly affected by a decrease in sales of LCD televisions. On a local currency basis, sales decreased 4% year-on-year.

Operating loss of 1.6 billion yen (21 million U.S. dollars) was recorded, compared to operating income of 68.7 billion yen in the same quarter of the previous fiscal year. This was mainly due to a decrease in gross profit due to lower sales, an asset impairment associated with the anticipated sale of the small- and medium-sized display business, and the impairment of LCD television assets.

Restructuring charges, net, increased 12.3 billion yen year-on-year to 28.8 billion yen (374 million U.S. dollars). Excluding equity in net income of affiliated companies, restructuring charges and the LCD television asset impairment, operating income on an as adjusted basis decreased by 45.4 billion yen year-on-year to 34.7 billion yen (450 million U.S. dollars).

and an increase in net foreign exchange gains.

Sales decreased 12.3% year-on-year (a 7% decrease on a local currency basis) to 779.7 billion yen (10,126 million U.S. dollars). Sales to outside customers decreased 12.4% year-on-year. This was primarily due to a decrease in LCD television sales, reflecting price declines due mainly to deterioration in market conditions in the U.S. and Europe and unfavorable foreign exchange rates, lower PC sales reflecting price competition, a decline in sales of the game business, reflecting a strategic price reduction of PlayStation®3 hardware in advance of the year-end holiday season, as well as a decrease in sales of compact digital cameras resulting from lower unit sales due to a slowdown in market growth and unfavorable foreign exchange rates.

These figures are absolutely not good and the expected sales and profit for the whole year 2011 have been substantially downgraded.

Sony pointed to some of the ‘usual suspects’ for the disappointing figures:

·     The very strong yen, compared to the dollar and euro.

·     Natural disasters:

o  The disaster in Fukushima;

o  The flooding in Thailand;

Both causes were hardly surprising and both are (in their own right) often used by companies as (poor) excuses to cover up disappointing sales and marketing results.

However, Sony mentioned one other cause: the much lower sales and declining margins on LCD TV’s and small/medium displays, causing the brand to execute an asset impairment on both asset categories.

And this points to a very interesting and broader problem: the TV had always been a steady cash cow for ‘old’ brands like Philips, Panasonic, JVC and Sony, but it is not anymore, nowadays.

Old and strong brands like Philips, Sony and to a lesser degree Grundig (Germany), Panasonic and JVC have litterally sold hundreds of millions of television sets over the last five decades, especially after they wiped out the American competition (RCA and others). Although the margins on television sets have been steadily declining since the sixties – a color tv in the seventies was about 10-15 times as expensive (in purchasing power) as a current tv – it was a fact that the TV divisions of these brands always generated enough cash flow to maintain production. Especially when production in the eighties and nineties moved from the high labor cost areas in Europe, America and Japan to low labor cost countries, like the Philippines, Thailand and eventually China.

At the beginning of this century, TV sales got an enormous boost from the new HD Flat Panel displays that were for sale. While the old CRT technique limited the diameter of a TV to about 35 inches, the new LCD TV’s had almost unlimited sizes and a truly stunning picture quality that made these applicable as TV and Multimedia platform.

Flat panel production started  with incredibly high, but rapidly declining margins, as the fierce competition in the LCD TV industry moved the attention from the ‘old’ (Dutch and Japanese) brands Philips, Sharp, Panasonic and Sony towards the ‘new’ Korean brands Samsung and LG.

And I suspect that this will not be the end of this development; in a few years the Korean brands will also lose momentum in favor of new Chinese brands that will try to ultimately decide the ‘race to the bottom’ for the lowest priced flat panel TV.

In the meantime, the Eindhoven, The Netherlands based company Philips NV put its LCD Flat panel display division already for sale and I expect Sony and Panasonic to follow in Philips’ footsteps very soon, as the vaporized margins prevent a healthy and sustainable production of TV-sets.

As far as I’m concerned, the production of TV-sets will be a China-only party in about ten years of time, as even new techniques like LED-tv, HD-tv and 3D-tv have not been enough to create healthy margins for the Japanese and Korean brands that produce television sets nowadays.

The only chance that these brands have remaining, is looking for an Apple approach: take the TV-set as a hub for all different kinds of closed source / open source multimedia that you have control of and offer it as an integral system with ‘TV apps’. Make sure that these multimedia are connected to the hub in a ‘no wires / no frills’ kind of way that people from 6 to 96 can understand and install. ‘Plug-it-in and crank-it-up’ will be the approach for the television of the future.

But if this television of the future will wear the names Philips, Sony or Panasonic is something I seriously doubt.

More and more higher/double income households are drowning in debt

Steady readers of this blog know that the Dutch housing market and the build-up of debt in Dutch households are two of my key interest points.

Last week, in my SMS from Ernst, I already wrote on the deteriorating financial situation of house-owners in The Netherlands, as this was reported by the Dutch Bureau for Credit Registration (BKR). Here is a snippet of this article:

The number of people that suffers from problems with the mortgage payments is soaring. In Q3 2011, more than 40,000 households had an arrears of at least three months. This is disclosed in data from the BKR.

Last weekend (29-30 October 2011), the financial newspaper Het Financieele Dagblad (http://www.fd.nl/), wrote an interesting article on the deteriorating financial situation of the higher and double incomes in The Netherlands. Although The Netherlands seemed like a beacon of stability, low unemployment and prosperity until now, something is definitely brewing beneath the waterline. And that something is the unsustainable debt burden that many households have created to maintain their house and their lifestyle.

As this article is in my opinion a must-read, but is unfortunately printed in Dutch, I write an extensive summary of it here :

More and more higher/double income households are drowning in debt (link in Dutch)

Becoming unemployed and subsequently getting endebted deeply, being forced to sell the house and to go to a specialized bureau for help with debt problems. It is a haunting image that many people have in their heads every now and then. Especially with the current news messages on bankruptcies in the building and construction industry and the reorganizations that are taking place at large construction companies. And this haunting image is becoming reality more and more often, also for modal and above-modal incomes. Unemployment is already increasing for three months in a row. September 2011 added 17,000 unemployed in The Netherlands, setting the total to 438,000.

The ‘high profiles’; this is the name that unemployed, formerly double income families with a jumbo mortgage receive at the Communal Finance Company of The Hague, ‘This group is growing visibly’, according to a spokeswoman. ‘And the mortgage debt has an increasingly important role in this. People are forced to sell their house and sometimes remain with a residual debt of €100,000+’.

The same is true for the community Zaanstad and region West-Brabant. ‘Where initially excess spending was the cause, the issues are now caused by more complex cases like excessive single-premium assurance policies and mortgage debt, because houses can’t be sold’, according to the community Zaanstad. ‘The crisis changed the profile of the persons who are asking for help’, according to a spokeswoman of the region West-Brabant in Breda. ‘The locked-up housing market causes residual debts of tens of thousands of Euro’s, in case of a forced house sale, due to divorce or unemployment’. 

The image that is sketched by The Hague, Zaanstad and West-Brabant is equal to the country-wide image, according to Joke de Kock, chairman of the Association for Indebtedness Relief and Social Banking (NVVK). More than 85% of the communities is member of this association. De Kock, who is also Head of Indebtedness Relief in Tilburg:’Also modal and above-modal incomes start registering with us, that is very clear. They have problems with their financial products, with their mortgage, with all kinds of financial obligations, or become unemployed. People must accept a lower-wage job, that yields them €500 per month less income. Also the child care subsidy disappears when people become unemployed; this subsidy is for three children about €1000 per month’.

Another factor are credit card problems: ‘people spend with several credit cards until their limit is gone, settle for a pay-back arrangement and subsequently violate this arrangement. After this happened, the credit card company demands the whole debt to be paid back in full. People then don’t have this money available’, according to De Kock.

"People find it very hard ‘to cut their coat according to their cloth'", is De Kock’s experience. ‘When it takes people four months to do so, there are already holes in their budget. And people let expenses increase with their behavior. Not paying one month of mortgage or rent of only €600, costs after only four months already €1400, due to collection fees, verdicts and third party-seizures’.

In 2010, there were 711,000 households with problematic debt, 10% of all households in The Netherlands. More recent data was not available, but signals come from different sides that these data are much higher now, due to the increasing economic malaise.

For instance, in October 2011 the number of households in arrears with their mortgage obligations soared to 45,000 from 37,000 YoY, according to the BKR last Tuesday. These arrears are at least three months. In 2005, this figure was 66% less.

Also the Guarantee fund Owned Houses (WEW) that supplies a guarantee for houseowners that can’t pay their house anymore, signals a doubling of the number of mortgage payments in arrears to 5000, compared to 2010. ‘A substantial increase’, according to managing director Karel Schiffer. These are arrears of at least four months. ‘However, 60% of these cases can be solved by the people themselves, without our help’. The number of forced house sales is stable at 2000 per year, 40 to 45 per week.

Dirk Hanke, Managing Director at collection agency Vesting Finance Services, initially tries to prevent auctioning of houses, acting upon instruction from the banks. ‘First we try a private sale. This yields much more money than auctioning. In a private sale, the sales value of a house is about 20% below market value, while auctioning often only yields 65-70% of market value’.

An important office for indebtedness relief is the community. Also the number of households that registers there is increasing. ‘To 80,000 last year from 53,000 in 2009’, according to De Kock. More recent data is not available. ‘It is totally unclear what the effects of government cutbacks will be for the number of households drowning in debt’. What is clear, however, is the average amount of debt: €30,000, spread over 16 different creditors.

Lennart Ruig of research center Panteia and author of the book ‘Households in debt’ states that the data of the NVVK is only the tip of the iceberg. ‘There is a large group of people that doesn’t register. Only a small part visits the Communal Indebtedness Relief’.

This was an excellent article. And a very important one. Important, because printing it in a national, well-respected newspaper puts it in the center of attention of the national decision makers.

The article adds to my opinion that the current average Dutch mortgage debt is much too high for many people to bear and that ‘kicking the can down the road’ is not a viable strategy for solving the problems on the Dutch housing, mortgage and debt markets.

Politics must act and they must act now: by abolishing the Mortgage Interest Deduction law and by introducing a temporary subsidy to help overindebted people to lower their mortgage amount to levels that can be borne, even by people that become unemployed.

This will take some extremely painful measures and it will alienate people and banks that still dream of the Dutch housing market totally recovering within three years.

But the financial stability of The Netherlands is more and more in jeopardy by the extremely and unsustainably high mortgage debt and by the growing number of people that can’t afford their mortgage anymore.

I’m not the only one that states this; a warning shot was fired by the IMF in their yearly report on The Netherlands of 2011:

However, household debt has grown substantially in relation to disposable income, to over 270 percent in 2010, among the highest in advanced economies. In addition, the loan-to-value (LTV) ratio of new mortgages has continued to rise from its already unusually elevated levels, and exceeded 120 percent in 2010 according to some measures. Liberal mortgage interest tax deductibility (MID) has inflated mortgage size, and also led to the proliferation of interest-only non-amortizing mortgages since the mid-1990s.

I summarized this report in my March 29-article: IMF Report Article IV consultation.

And to supply you with some hands-on experience with the Dutch problem of extremely high housing prices and excess indebtedness, I will print a comment I received last week from a reader, called ‘Alexis’:

Happy to have recently found your blog and finding it quite interesting. I spent 20 years in the real estate industry in the US and abroad and have never seen a more dysfunctional or dangerous system. With the highest mortgage debt to gdp ratio in the developing world, the housing market has the potential to totally destroy the seemingly solid Dutch economy. My husband and I are in the exact situation you've described - in a house with a mortgage that exceeds market value by almost 20%. To make matters worse, I have to leave the country for medical reasons and he is of course coming with me and there's no way we can sell our house in time or at the price we'd need to pay off the mortgage. We can't even get into a debt-recovery plan because we're leaving the country and we're not Dutch citizens so we're never planning to come back. We're trying to find a way to settle this before we have to leave but there doesn't seem to be any alternative to just abandoning our property and the on House prices in The Netherlands keep dropping: A broader look at the Dutch Residential Real Estate market during the last 16 years.

I have nothing to add to this letter. So, please politics; do something about this unsustainable situation in The Netherlands.

A horse called ‘Greece’ states: ‘we don’t want to drink from the European water well… yet’. A parable on the situation in The Euro-zone.

You can bring a horse to a water well

But you can’t force it to drink…

This beautiful proverb, that was initially not known to me in The Netherlands (and believe me, I know my share of proverbs), tells exactly how the situation in Euro-land is today. This proverb is so beautiful that it makes me want to tell the story of Greece as a parable.

Once there was a horse called ‘Greece’. The animal had a glorious past behind it in which it won all the races, but that was a long, long time ago. Over a long period, its life had been one of misery, exploitation and slavery to evil bosses, called the Colonel’s. With its neighbour horse, called ‘Turkey’, the horse had an enduring fight on their foal, called ‘Cyprus’. It was depressing.

But 15 years ago, the life of the horse changed drastically. Although it still didn’t trust its new bosses, called Simitis, Karamanlis and Papandréou, the bosses left it to wander in freedom and let it after a couple of years into a new terrain, called Euro-land.

The horse suddenly felt totally free and happy and started to eat from a special plant at the grassy pastures of Euro-land, called ‘low-interest grass’. The grass made the horse feel stronger than ever and it worked very hard to make its new bosses rich. The animal didn’t realize that its bosses profited the most from this miracle grass.

The grass had one disadvantage: it made the animal extremely thirsty for this special water called ‘debt booze’ and every day it drank and drank and drank to remain as forceful and free as it had felt in the years before. Life went on for six years and the horse, although getting fatter and fatter from low interest grass and debt booze, felt on top of the world.

But suddenly, in 2008, a forest fire broke out in the world and burnt away all low-interest grass, until there was nothing left. The only grass now available was another kind, called ‘high interest-grass’. This kind didn’t taste just as good and it made the horse even more thirsty for debt booze.

At one time, a few years ago, the horse couldn’t get up anymore: it ate so much high-interest grass and it drank so much debt booze that its legs didn’t want to walk anymore. Its boss Papandréou, who was alarmed by the other horses, brought it to the water well and then Greece drank its share of debt booze again and it was fed with portions of low and high-interest grass. But the animal felt sicker and sicker with every drink of debt booze and its legs and intestines started to protest against this food and drink. And this went on for a couple of years.

The other horses, together called ‘European Union’ and two very special horses, called ‘IMF’ and ‘ECB’ warned Greece’s boss Papandréou. ‘If Greece doesn’t start to drink its debt booze again, but in much smaller portions and starts to eat smaller portions of low-interest grass, with some high-interest grass mixed through it, the horse can’t work anymore for you and will eventually drop dead.

And even if it doesn’t drop dead, it has to disappear out of Euro-land and has to find new pastures for itself somewhere else.  Otherwise the other horses might also become sick, as they must work even harder now for their bosses, to compensate the workload of boss Papandréou’.

Especially the strongest horses called ‘Germany’ and ‘The Netherlands’ complained about this. ‘That stupid, lazy horse Greece didn’t tell us that it can’t handle low-interest grass and debt booze and we don’t want to keep on rescuing it every time. But if we do nothing, it might die immediately’.

So the horses argued and almost fought on the horse called Greece, but decided to give it one last chance. They brought Greece to the water well where the debt booze poured. They said that they wanted to help Greece to get rid of its overweight in low and high-interest grass. But before they did it, the horses said to boss Papandréou: ‘only if Greece drinks from the well, we can help it and bring it to the pastures with low-interest grass again, where it soon will feel better’.

Boss Papandréou was initially enthousiastic: ‘it will be hard for my horse to drink the debt booze and to be led to greener pastures with more low-interest grass, but when it’s finally there, it will work again hard for me’.

But suddenly, on October 31, boss Papandréou realized that his horse Greece was too sick to drink from the well again and that the horse could even kill him in a last outburst of energy, when he forced it to drink from the well.

And boss Papandréou, who still wasn’t trusted by its horse Greece, gave it a long thought and said: ‘I will ask my horse two questions:

·    Do you want to drink your debt-booze again and let the other horses help you lose your weight, before leading you to greener pastures with lots of low-interest grass?

·    Or do you want to stay here and don’t eat and drink at all for a certain time, hoping to feel better after a radical weight loss?’

The other horses were shocked when they heard this plan from boss Papandréou. Especially the horse, called France, a small and short-tempered, but normally very powerful horse, was outraged:

‘How could boss Papandréou do this to Greece and to us. We wanted to save Greece desperately, but now we almost have no other choice than to leave Greece to its own and kick it out of Euro-land’.

And that’s the situation that we’re in right now: in Euro-land with one very sick horse that doesn’t want to drink from the well anymore. Will the horse start to drink again? Or will it refuse, making the other horses to drop dead too?!

To be continued…