Sony Q2 14A – Tough times

The journey to ecosystem remains very hard.

• Sony reported a difficult set of results but there were no real surprises.
• Q2 14A Revenues / operating profits were slightly better than forecast at JPY 1,902bn / LOSS JPY 85.6bn compared to consensus at JPY 1,812bn / LOSS JPY 62.7bn.
• The main reason for the better than expected performance was the strength of the PS4 which has continues to substantially outsell XBox one.
• Mobile devices marginally increased its share shipping 9.9m units which is equivalent to smartphone market share of 3.1% compared to 3.0% last quarter.
• However the division recorded operating losses of JPY172bn as a goodwill write down of JPY176bn was taken during the quarter.
• The write down was previously announced (see here) and excluding that the business made margins of just 1.3%.
• The write-down reflects a much more cautious view on the outlook for the handset business and I suspect a reduction of long term margins from 10% to 3-4%.
• This more cautious outlook is achievable as a shipper of commoditised devices, but I still think that more is achievable.
• This is because Sony has the assets with which to create a proper ecosystem that appeals to users.
• If it can improve the user experience on the PlayStation and migrate that across to its other consumer electronics products it will have a far more compelling proposition.
• Furthermore, it also has media assets which it can put together with good Digital Life services to make users want to spend their time with Sony.
• If this can be achieved then users will want to buy Sony devices meaning that Sony can once again charge a premium for its products and make some proper money.
• Unfortunately, this remains very far from the today’s reality and a huge mountain is still to be climbed to reach this lofty ambition.
• Furthermore it is going to be a painful road as it is clear that the investor base remains blissfully ignorant of what the company is trying to achieve.
• Calls for the shutdown of the handset business and comparisons to Panasonic (which is now focusing solely on the enterprise) are good examples of how investors continue to misunderstand Sony.
• With the exception of the Pictures segment, the other division of Sony have seen some progress with three of them returning to the black.
• The outlook remains unchanged and I still see potential for Sony but a future driven by software and services requires huge change.
• History shows that change can be especially difficult for Japanese companies I suspect that this will take longer than I am hoping.