Sony Q2 16A – Glorious isolation

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Short-term progress at the expense of the long-term. .

• Sony reported Q2 15A results that beat expectations but I think that it is returning to a silo mentality that will damage the long term opportunity.
• Q1 15A revenues / net income were JPY1,901bn / JPY33.6bn ahead of consensus at JPY1,879 / JPY27.5bn.
• Revenue declines from the reductions at Mobile Communications and falling investment returns at the Financial Services segment were more than offset by improvements in PlayStation software sales.
• Margin improvement was driven by cost cutting as well as high margin PlayStation software, image sensors and digital cameras.
• Guidance for the full year ending March 2016 remained unchanged with the company expecting FY 16E revenues / EBIT at JPY7,900bn / JPY320bn which remains more cautious than consensus at JPY8,140bn / JPY432m.
• Sony is making good progress on its plan to return to profitability but I remain concerned that it is doing so at the expense of its long term potential.
• Sony has a lot of assets that could be the initial building blocks of a digital ecosystem.
• First and foremost is PlayStation but mobile, pictures, music televisions and other consumer devices all have something to contribute.
• What users are after these days is a seamless, easy and fun to use place where they can live their digital lives.
• This is what drives consumer purchase decisions and decides what they are willing to pay for.
• Hence, I have long believed that it is the single largest factor underlying long term profitability.
• Today, Digital Life is almost entirely lived on smartphones and tablets but with time, consoles, TVs, cars etc will also have an important part to play.
• To get this to work in a seamless, fun and easy to use way means having hardware platforms using common software and services that are shared across every possible device.
• This means that the different parts of Sony all need to pull together if they are to have any chance of making this become a reality.
• This is where the problems begin because early in 2015 Sony announced that all of its divisions would become separate legal entities to give them more flexibility, speed and independence.
• While this is good for making sure that every business performs to the best of its ability, it comes at the expense of any incentive to work together.
• Effectively this reorganisation has dis-incentivised the businesses to work together and I think it will prevent any real joined up thinking.
• Sony has gone back to its roots as a conglomerate and while the short-term benefits are being reaped, shareholders will be happy but in the long-run Sony will underperform its competitors.
• This is because almost all of the profits in consumer electronics will be made in the ecosystem and without the benefit of integrated and cool services backed up by gaming or media, most of its products will be commodities.
• The market’s hopes are rising for Sony but I am increasingly concerned that it has missed the long-term importance of the ecosystem to its ability to make money.
• Hence, I would look to be out of the shares before the market turns its attention from the short term recovery towards long term growth.
• Microsoft, Samsung and Facebook look like better options.