Sony Q3 14A– Selfie saviour

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Selfie craze and PS4 underpin first signs of progress.

• Sony reported much better Q3 14A results than expected, driven by camera modules, PS4 as well as better results from smartphones.
• Q3 14A Revenues / EBIT were JPY2,557.8bn / JPY178.3bn compared to forecasts of JPY2,340bn / JPY96.3bn.
• The biggest surprise was the Imaging Products and Solutions group which saw 1.5% revenue growth but margins jumped to 11.4% from 6.1% just one year ago.
• Sony has been the main beneficiary of the selfie craze which has seen demand for higher quality front facing cameras increase significantly.
• Users tend to use the front facing camera for selfies as the screen provides a good viewfinder in which to line up the shot especially when using a selfie stick.
• As the supplier to the iPhone 6 and various Xiaomi products among others, Sony has been a big beneficiary of this trend.
• The high resolution front facing camera is a high margin product which explains the sudden jump in profitability even as demand for lower margin products was soft.
• PS4 also had a great quarter with 6.4m units shipped which helped drive margins of this business to 5.2% from 2.7% a year ago.
• It is also worth mentioning that smartphones managed to gain share to 3.2% from 3.0% in Q2 14A.
• This is significant because the recent troubles at Sony have caused a renewed focus at the high end at the expense of the low end.
• This typically results in a loss of market share even if margins go up.
• In this case, the Xperia Z3 has been pretty well received but margins have remained challenged at 2.2%.
• To shore up profitability and to reflect its more modest ambitions, Sony is cutting another 1,000 positions at its handset business which should bring an annual OPEX saving of around JPY12bn.
• Sony’s fortunes are expected to continue improving in early 2015E as Sony now expects the group to post an operating profit of JPY20bn for the year to March 2015E compared to previous forecasts of LOSS JPY40bn.
• Sony is embarking on an ecosystem strategy to bring all of the pieces of this sprawling empire together.
• The lynch pin of this strategy is the smartphone as it is the smartphone where the user spends most of his Digital Life.
• Consequently, I think that the decision regarding which ecosystem to live with will be taken on this basis which is why the smartphone business is so important.
• These results have given Sony a little breathing space but the selfie craze and the PS4 replacement cycle are not going to last forever.
• That being said, I think Sony understands what it needs to achieve which is half the battle when I look at how some of its competitors view the world of consumer electronics.
• Consequently, I expect Sony to continue with its strategy of developing its own ecosystem and I hope that these 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.