Sony Q1 2017 earnings — Mobile
Q1 sales increase for the first time since 2013
After three years of consecutive Q1 sales declines, Sony Mobile is showing signs of life again by shipping 3.4 million smartphones, an uptick of 300,000 compared to Q1 2016. On top of higher sales, revenue saw a 15% year-on-year increase to 1,858 billion yen, with operating income of 158 billion yen.
Even though sales are (so far) up by 10% compared to 2016, Sony is keeping their full year guidance the same at 16.5 million units which isn’t a whole lot. Sony saw its smartphone sales peak in 2013 and 2014 when they shipped nearly 40 million Xperia phones. If Sony can reach their targeted sales quota, it will be their best year since 2016.
Despite the year-on-year increase, revenue for the quarter was down by 3% to 181.2 billion yen compared to 185.9 billion yen in Q1 2016. This is likely due to the late arrival of the Xperia XZ Premium which would help keep ASP higher. Without a true flagship phone shipping for much of Q1 2017, it’s likely that a majority of sales came from the XA1 and XA1 Ultra which carry lower pricetags.
In their earnings report, Sony themselves noted:
( — ) Change in product mix of smartphones
The good news for Sony Mobile is that the division remains profitible but without a hit product—as it remains to be seen if XZ Premium translates to that — full year sales will still be the third lowest since 2011. It’s unlikely at this rate that Sony Mobile will cross 20 million units sold in a year till 2019, assuming they ever get there.
The concern
Looking at the quarterly results, one can’t help be optimistic but the numbers, despite looking good, do show signs of problems at Sony Mobile. The good news is that operating income (profits) are up by 3.2 billion yen compared to a year ago, which are mainly attributed to lower operating costs and lower R&D.
High R&D is never a sign of innovation and Apple famously has a far lower R&D budget than many of its competitors, including Sony. However, I believe that Sony senses that they’re finally starting to run into the wall I’ve been talking about for years which is more seen in their revenue.
If Sony cannot increase their unit sales dramatically, they’ll simply run into a situation where component costs on top of R&D and operations will be higher than what they’re able to make. For Sony, who wields such low sales (which means less bartering power for component costs), any shift can wreak havoc on their numbers and they themselves point this out for the Q1 2017 quarter:
( — ) Increase in the price of key components
For that reason, I believe we’re seeing a reduction in R&D as Sony looks at other ways to cut costs. I’m also not convinced that Sony believes their mobile division will ever aspire to much beyond selling in the sub-20 million a year which means they’ll never have the revenue and profits to put out a phone that can compete with Apple and Samsung from a technical or marketing perspective.
No change in sales forecast
If Sony has a new flagship phone with a better product mix and they’ve seen sales for the quarter rise by 300K compared to a year ago, why aren’t they willing to change their initial sales forecast of 16.5 million units for the year? I believe the answer is tougher competition from Apple and Samsung.
Sony has been clear that they don’t wish to compete in the low-end market and so they keep pushing into the premium market with phones like the X Performance and now XZ Premium. The trouble for them is that the premium market is owned by two players who show no signs of slowing down and with much hype around the initial Galaxy S8 launch and rampant rumors of what the next iPhone (iPhone 8? iPhone Pro?) will be, Sony doesn’t have a lot of wind to sail on.
This also takes me back to R&D. It’s clear a bezel free form (little to no forehead and chin) is where the market and consumers are headed and I’m not convinced Sony is going to be able to match that design anytime soon because they simply can’t afford to make a phone like that. With their low volumes, Sony either has to sell such a phone at a substantially higher price (since they can’t get as good of a deal on components as Apple and Samsung who sell 20X more) or be willing to sell their phones at a loss (which they won’t). This leaves us with the XZ Premium, a beautiful and powerful phone — of yesterday.
The future
What further concerns me about Sony Mobile’s outlook is the future of mobile and what exactly that means. If Apple’s vision, which we’re in the midst of, plays out, the future of mobile will be connected wearable devices like the Watch, AirPods, and AR glasses that will all rely on the smartphone as Neil Cybart points out in the chart. One day, all of these devices will be able to run separate from the smartphone that acts as their information hub, but I don’t believe wireless technology nor battery is sufficient enough to make it happen in the near future.
If the future I laid out pans out, this becomes problematic for Sony. Previously, Kaz Hirai has stated (and I’m paraphrasing) that they plan to remain in mobile till the next thing comes because he also, and rightly so, believes that it will be tied to smartphones.
The problem this poses for Sony is that if the market of tomorrow is anything like today, each of these wearable devices will work best within a specific ecosystem. That means that in order for Sony to sell their version of Watch, AirPods, or AR glasses, they’ll need to have a smartphone audience to sell to and currently, they don’t possess that.
You could argue that Sony could become a 3rd party maker of these devices but so far, every wearable device maker outside of Apple is struggling. Android Wear seems all but dead with little traction from any player. Samsung for its part is busy in the field too, but utilizing Tizen, and it’s likely that a majority of their smartwatch owners use a Galaxy phone.
This leaves players like Jawbone (now dead), Pebble (also dead), and Fitbit (highly struggling) which should be in the sweet spot since they make wearables for iOS and Android. They are now prime examples of why being a 3rd party wearable maker comes with tremendous challenges.
When you control the hardware and software like Apple does, and, to an extent, Samsung does, you’re able to create some powerful new experiences. But as a 3rd party company, you’re always limited to what an API will allow you. Even then, it takes mastering of software to leverage the most out of wearables that must now work with countless devices and if there’s one thing Sony is incredibly weak at, it’s been software — and that’s a problem in the age of ML and AI.
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