PS4 R&D costs, currency exchange rates, and cost of PSP Vita price cut are all to blame for decline, Sony says

After a lean profit in Q2, Sony Corp. (TYO:6758) saw its market momentum slow in Q3 (fiscal Q2 2013), despite some of its units performing strongly.

Overshadowing the entire earnings report was the ongoing struggles of Japan's currency -- the Yen.  Japan has actually seen deflation in recent years.  As its currency has strengthened, local firms like Sony have struggled to afford overseas expenses and to sustain profitability.  The Yen saw welcome mild deflation in Q3, but was still deflated enough to be a burden on Sony.

Sony, as whole earned [PDF] ¥1.7755T ($18.117B USD @ Sept. 30 exchange rates).  This is up 10 percent from ¥1.6047T ($16.374B USD).  On a constant-currency basis, revenue actually fell 9 percent on a year-to-year basis.

Sony's operating profit plunged 51 percent from ¥30.3B ($309.18M USD) to ¥14.8B ($151.02M USD).  Pre-tax income fell 69.6 percent and Sony posted a net loss (post-taxes) of ¥19.3B ($196.94M USD), up nearly a quarter from ¥15.5B ($158.16M USD) in the quarter a year ago.

Yen wideThe yen experienced welcome weakening, but overall is still too deflated. [Image Source: Daniels Trading]

TV unit struggles and a fading camera business were among the weakest spots on the earnings report.  Camera revenue dropped 6.9 percent and led to a $23M USD loss.  Sony managed to grow its TV business revenue 18.7 percent, but lost $123M USD, mostly related to a $95M USD restructuring expense for the LCD unit.

Cyber-shot RX100 II

Sony saw sales of its PlayStation 2 and 3 consoles decline to 2 million units (versus 3.5 million in Q3 2012). This is understandable as PS2 is nearing end of sales, and the PS3 will soon be relegated to a legacy spot.

Somewhat more troubling is a fall in sales of the PlayStation Portable (PSP) Vita handheld (and previous generation PSPs) from 800,000 to 1.6 million units.  That sales drop forced Sony to cut its handheld's price to $199.99 USD, a second cut from the handheld's original launch price of $299 USD.  Overall Sony is struggling to sell customers on its mobile gaming platform, as mobile gaming in general is increasingly cannibalized by smartphone gaming.  Sony refreshed the platform on Oct. 10, with a thinner lighter variant of the handheld, which it hopes will boost sales.

The game unit only lost $8M USD, despite the decline in sales as it saw relatively strong software sales (the primary point of profit making for console makers).  Sony writes that it's been spending a fair amount on research and development for the PlayStation 4, which cut earnings:

In the Game segment, operating loss significantly increased year-on-year primarily due to an increase in research and development expenses related to the upcoming introduction of the PlayStation 4 and the impact of a strategic price reduction for the PS Vita.

Sony is expected to post a small loss on every console, due to its $399 USD price.  By contrast Microsoft Corp.'s (MSFT) Xbox One is expected to be profitable from day one at $499 USD -- but may suffer sales-wise from its higher price point.

Sony's music label continues to be mildly profitable, but its "Pictures" movie and television languished with a $181M USD operating loss, a reversal of its profitable 2012.  A major source of this money loss was White House Down, which bombed hard at the box office.

White House Down
Sony couldn't diffuse the bomb that was White House Down. [Image Source: Sony]

Probably the best piece of news for Sony on its earning report comes from its Android smartphone unit, which trimmed losses to only $9M USD.  That's a remarkable turnaround from the unit's loss of $295M USD in Q3 2012, and comes in part thanks to a 4 percent year-to-year growth (on a constant currency basis, 39.3 percent on a floating currency basis) in sales.

Sony is finding a way to differentiate its Android smartphones above the pack.  While its recently released Xperia Z1 isn't the only Android smartphone to pack a Qualcomm Inc. (QCOM) Snapdragon 800, it sports arguably the best camera of any high-end Android with a 20.7 megapixel resolution and large, crisp optics.  Better still, the phone is very rugged, with Sony claiming it to exhibit enhanced "waterproof/dustproof/shatter resistant" performance over last year's Xperia Z.  

Xperia Z1
Xperia Z1 ultra
The Xperia Z1

The 6.4-inch, 1080p Xperia Z Ultra also drew some consumer interest.

Source: Sony [PDF]

"We don't know how to make a $500 computer that's not a piece of junk." -- Apple CEO Steve Jobs

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