Sony FY 15A – Expectations management.

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Hirai gives himself some breathing space for FY16E.

• Sony reported FY 15A results that were in line with revised expectations but guided weakly as it is clear that there are still uncertainties with regards to the timing and extent of the recovery.
• FY 15A Revenues and EBIT were JPY8,215bn / JPY68.5bn which was in line with consensus given that Sony had already pre-announced its figures on 22^nd April 2015.
• As expected the imaging sensors, Sony Financial Services and PlayStation have underpinned the improvements that have been seen during the year.
• However, guidance for the coming year was softer than expected with FY 16E revenues and EBIT expected to come in at JPY7,900bn / JPY320bn which compares unfavourably to consensus at JPY8,236bn / JPY427bn.
• Part of the lower guidance is due to FX fluctuations but also Sony is giving itself room to breathe.
• PlayStation is expected to see no growth despite beating the Xbox hands down on unit shipments while TVs and cameras are expected to see declines.
• Sony has had 15 profit warnings in the last 7 years and it is looking to have its first trouble free year for a long time.
• Consequently, Sony is keen to set targets that it hopes can be beaten should things go well but also to have room left to deal with adversity.
• I am comfortable that Sony will have a reasonably trouble free year but there is far more at stake than just its FY16E goals.
• Sony has a very strong position in gaming which is the single most important Digital Life service.
• This position is under threat from Microsoft which has a vastly superior user experience and a whole ecosystem of Digital Life services to draw users in.
• Sony has the potential stave off this threat by building an ecosystem using its existing hardware and media assets and tying them all together.
• If this is successful, users will want to own a Sony device meaning that it can, once again, charge a premium and earn a decent return.
• However, this approach requires a strategy that looks at the assets as a portfolio rather than a group of separate businesses.
• Here, I worry that Sony is going backwards.
• It recently (see here) decided to make its units more autonomous so that they can react more quickly to execute their strategies, but this is fraught with peril.
• Profits from the ecosystem can come from anywhere and it is not impossible that a great user experience created by PlayStation could one day drive higher TV margins.
• With this new structure I can see PlayStation fighting with the TV division for a share of the profits and the whole strategy breaking down.
• Sony thinks that it can manage this problem but history is not on its side and there is a big risk of returning to the old silo mentality.
• This will be disastrous for any recovery and could lead to Sony failing to attain its lofty ambitions.
• I still think that Sony is the only Japanese consumer electronics maker in with a chance but in the meantime Microsoft and Google are better places to be in the ecosystem.