Sony Q2 – Big Black Shiner

One black eye does not make a knock-out.

• Sony is paying the price for its ambition with an awful set of results.
• Sony reported Q2 13 results that were far worse than expectations and also cut its full year profit (March 14) forecast by 40%.
• Q2 13 revenues and net income were JPY 1,775bn / LOSS JPY19.6bn compared to forecasts of JPY 1,779bn / JPY 12.2bn.
• This was particularly worrying as the Yen was a major tailwind in the last quarter.
• Without it revenues would have fallen by 9%.
• Operating margins fell from 1% in Q2 12 to just 0.3% in Q3 13.
• The biggest culprit was Sony Pictures Entertainment which has struggled with a number of recent flops as well as Sony’s insistence on holding onto its TV, camera and PC businesses.
• As a result, forecasts were slashed and full year net profit (March 14) is now expected to be JPY30bn compared to previous forecasts of JPY50bn.
• Consensus was expecting JPY45.6bn in net profit.
• This will add a lot of weight behind activist shareholder calls for the company to be broken-up and if enough fervour can be whipped up, it just might happen.
• Kazuo Hirai’s vision is to turn Sony from a lumbering conglomerate into an integrated ecosystem play with both hardware and software.
• This is the right vision but it is incredibly difficult to execute and it will take a long time in the best instance.
• This quarter, he has been undermined by bad luck at the movies and weak demand for PCs, TVs and cameras.
• The real question is how long does he have to realise that vision or will impatient shareholders sell the company out from underneath him?
• With its assets from electronics to media, Sony is the only Japanese company that has a chance being relevant in the digital ecosystem world.
• Sony must break down the silos it has cherished for 40 years and make all of its assets pull together.
• To give Hirai-san credit, he gets it.
• His executives have both horizontal and vertical responsibility which forces the disparate parts of the crumbling empire to work together.
• If any Japanese company is going to emerge from the wreckage that is Japanese electronics, it will be Sony.
• Everyone is praising Panasonic this morning for its improvements, but this is a company that is cost cutting its way into obscurity.
• Panasonic is finished in the technology sector and while it may be profitable it will never see greatness again.
• This will give some short-term share price performance but in the longer run the company will drift sideways.
• Sony on the other hand has the potential to perform well for many years to come because there is so much that could be done with its assets.
• I want to love Sony because it is now trying to fix all the things that I have hated about it for years.
• Hirai’s strategy is absolutely bang-on, but just like Microsoft, I don’t yet know whether he can execute it.