Facebook & Sony– Irrelevant variance

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Variances from expectations have little to do with fundamentals.

• Facebook reported results and Sony pre-announced results that differed from expectations but neither were very relevant to the underlying story of either company.

Facebook

• Facebook reported Q1 15A results that were weaker than expected but this looks to have been almost entirely due to the strong US$.
• Revenues / EPS were $3.54bn / $0.42 compared to consensus at $3.56bn / $0.40.
• Advertising revenues were 72% derived from mobile and grew by 46% YoY to $3.32bn.
• Given that Facebook is now a global company, a substantial portion of its revenues are no longer in US$ and the 6% strengthening of the US$ during Q1 15A did some damage.
• Removing the effect of the US$, advertising revenues would have grown by 55% rather than 46% which more than accounts for the weakness seen on the top line when compared to consensus.
• The impact of currency is expected to be greater in Q2 but Facebook has brought down its OPEX growth estimate slightly from 55%-70% for 2015E to 55%-65%.
• The net result is a set of figures that were hurt by currency but the fundamentals remained strong.
• Facebook still needs to cover more of Digital Life in order to secure long term growth but its excellent execution when it comes to mobile is buying it time to get its house in order.

Sony

• Sony effectively preannounced its fiscal 2015A (ended March) results (Due April 30^th) by updating its guidance.
• Revenues will now be JPY8,210bn compared to its previous estimate of JPY8,000bn (+2.6%) given in February and EBIT will now be JPY68bn compared to the previous guidance of JPY20bn.
• Although this represents a tripling of the operating profit forecast, profitability is currently still very low meaning that a little change goes a long way.
• The main reason for the upgrade in revenues is due to Financial Services, Imaging Products and Game and Network.
• Given that the strength in Imaging products and Game and Network is already fairly well known (see here), I suspect this upgrade is almost all due to Financial Services.
• Furthermore the improvement in profitability is almost all due to a write back of provisions taken at the Sony Life Insurance division due to good performance of its securities portfolio.
• Consequently, this pre-announcement has very little do to with the key issues that Sony needs to address to return itself to profitable growth.
• All eyes will be focused on the FY16E guidance given on April 30^th but the bigger issue remains the developments of its ecosystem.
• I expect Sony to continue with its strategy of developing its own ecosystem and hope these improving results will give doubters in the company a little more faith that it can be done.
• Sony remains the only Japanese company that I think has a real potential to have a future in consumer electronics although it will be a long hard road.