The following discussion will accentuate the recent stock performance of Sony Corporation (NYSE:SNE) and will discuss if the company's restructuring efforts are expected to bring about some positive news for the company in the future.
Brief Company History
The company's revenue is distributed among various segments. The following graph indicates the sales derived from each segment and compares them to each segment's 2012results.
Source: Annual Report
In percentage terms, the contribution to the revenue base from the Home Entertainment and Sound segment declined from approximately 17% in 2012 to 14.6% in 2013.This segment is largely responsible for the recent reported losses of the company and led to a dismal stock price performance. The price of the stock slumped in Novemberas the company announced a drop in its earnings forecast by 40% for the quarter that ended in December as a result of weakening demand for the company's televisions, camcorders, cameras, and related products. Sony had previously announced an expected profit of ¥5.2 billion($53 million) which turned out to be an overly optimistic forecast on the part of the company as it encountered a net loss of ¥9.3 billion ($94 million)for the quarter.
Over the past three quarters, the operating profit margin of the company declined tremendously even though its sales showed a slight increase from the previous level. The trend of operating profit margin over the recent quarters is shown in the table below.
Source: Quarterly Reports
The declining operating profit margin was a red flag which instigated the struggle to restructure the various businesses that fall under the brand name. The restructuring initiative mainly targeted the Home Entertainment and Sound segment that is majorly responsible for the faltering profit margins of the company.
PlayStation 4 Beats Xbox One
Sony's PlayStation 4 and Microsoft's Xbox One were both introduced to the market in mid-November of last year. As of the latest data collected, PS4's sales surpassed Xbox sales by approximately 1.2 million units. Two factors strongly impacted the PS4's success. Firstly, PS4 gaming consoles were priced lower than Xbox One's units by about a hundred dollars. Secondly, Sony is spread across 53 countries whereas Xbox only was distributed in 13 countries. The company expects a sales figure of 5 million units in fiscal year 2014 which was rightly estimated as the demand for PS4 exceeds Xbox consoles by about 3.3 times.
Upcoming Product Launch
At CES 2014, Sony announced the launch of its PlayStation Now in the near future. The cloud gaming technology is expected to be a turnaround launch for Sony's entertainment segment. PlayStation Now will allow users to stream future games on PS4, PS3, PlayStation Vita, televisions, and even smartphones and tablets. The ability to access games"whenever and wherever" is exciting for most players in the market. If the product launch turns out to be successful it will come at the cost of some cannibalization of its PS4 consoles since games would also be accessible through televisions and hand held devices as well.
Besides the innovative product launches to improve the revenues of the entertainment segment Sony's management is involved in restructuring its businesses and operations to assure improved performance in the future. In this regard, the company has announced a partnership with Netflix and a split of its SMT technology and related business with Juki Automation Systems Corporation.
The partnership with Netflix is expected to boost the future profitability of the company. Presently, Sony is incurring enormous losses due to its faltering performance in the entertainment segment. Sony and Netflix will jointly produce a new range of Ultra HD televisions (UHDTV) that promise to deliver a 4,000 pixel (4K) picture quality. Although Sony already facilitates a 4K download service, the company previously lacked content. Netflix is expected to bridge that gap and help Sony to boost future segment sales. Although it is too early to determine the exact demand figure of this technology since the market for UHDTV has not yet been developed, UHDTV technology is expected to gradually pick up pace in the market. As video providers start delivering 4K video content to their subscribers the demand for the technology will rise. However, the impact of the technology will take time to materialize into the financials of the company after its release into the market.
To bring further improvement to the entertainment segment Sony announced an absorption type company split with Juki Automation Systems Corporation through which Juki will receive access to Sony's surface-mount technology equipment "SMT". The split is expected to integrate the related business of the two companies and is expected to improve the product portfolios and client base of both companies. This in turn will improve the revenue bases of both Sony and Juki. Moreover, splitting the business with Juki is a strategic move by Sony as it also opens gates for the company to penetrate larger markets like the US where Sony's penetration has historically been unsuccessful. Juki is one of the leading sellers in the US and has also penetrated the Asian market. The joint partnership business will also grant the companies a better competitive position by enhancing their market shares and making them leaders in this industry since Juki and Sony are already the largest market shareholders.
The company's future profit margins are expected to rise from its current levels as a result of new and exciting product launches, smart restructuring moves and partnerships. The magnitude of the increased margins is unknown as of now although it can be stated with reasonable certainty that the company's financial statements will become stronger in the future. The stock price of the company is expected to shoot up due to the impact of the restructuring initiatives and successful product launches. Therefore, it is recommended that investors take a long position in the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.