One Chinese giant waxes as a Japanese giant wanes

Two of the Asian electronics market's biggest players -- Japan's Sony Corp. (TYO:6758) and China's Lenovo Group Ltd. (HKG:0992) -- reported their earnings on Wednesday, and for one it was good news and for the other the news was pretty bad.

As you could probably guess Sony got the short end of the stick.  The company's earning breakdown is as follows.

Sony Corp. (fiscal Q2 2012, calendar Q3 2011)
(NOTE: Calendar quarter is used for all comparisons to avoid confusion.)

Sony TV
[Image Source: Stuart Ramsom]

Business segment:
LCD TVs, PlayStation consoles, movies, television programs, merchandising, LCD TVs, music, smartphones, and personal computer OEM; components (batteries, CMOS sensors) ODM
¥1.575T ($20.454B USD)
(down 9.1 percent from ¥1.733T in calendar Q3 2010)
3.75 percent worse than ¥1.634T analyst consensus, notably, worse than even than lowest estimate
¥26.88B ($350M USD) loss
down from ¥31B ($396M USD) profit in calendar Q3 2010
Units Shipped:
5 million LCD TVs (virtually no change)
3.7 million PS3s (highest since launch)
25 million CMOS sensors (+25%)
¥90B ($1.1B USD) estimated annual loss, worse than original estimate of a ¥60B ($733M USD) profit

Sony is facing challenges on multiple fronts.  The biggest two problems facing the company are a strong yen, which is devaluing its earnings, and TV sales which appear stuck in the mire in unit shipments as prices (and revenue) decline.  Sony had hoped to achieve a sales volume of 40 million LCD TV units annually by the end of fiscal 2012 (calendar Q1 2012).  

In its earnings call it essentially gave up on this goal, revising:

In the profitability improvement plan, we have developed that this time, we are determined to do everything we can do during this fiscal year, setting a goal of 20 million units for the year and implementing various measures, including impairment of machinery and equipment and disposal of unnecessary parts resulting from a reduction in number of models. The result will be a large loss for this fiscal year, but we believe these actions are necessary to turn a profit.

The TV unit lost a total of ¥34.6B ($449M USD) in calendar Q3 2011 and is expected to lose ¥180B ($2.2B USD) over Sony's fiscal 2012.

The brightest spot on Sony's earnings report was strong revenues from Sony Pictures, which is now profitable, thanks in part to strong television revenue and merchandising revenue from Spider-Man products, which are in high demand in anticipation of the upcoming reboot The Amazing Spider-Man (July 2012).

Sony Music stayed in the black, but saw earnings fall almost 22 percent, so that was hardly the place to look for good news.  Likewise console sales in units were strong, but a $50 price cut on the PlayStation 3 (from $300 to $250 USD on the 160 GB model), led to a net revenue decline.

Sony also had to contend with more attacks from hackers [1][2][3][4][5][6][7].  On this front the company appears to be making some progress at least, mostly repelling their most recent attack.  Sony's security appears to be solidifying after the addition of a tough ex-government cybersecurity executive.

Shorting Sony looks promising, as the company looks to finish 2011 on a downward slide.  On the other hand buying depressed Sony stock and holding it long-term also seems promising.  While Sony may continue to lose deeply in the short term, its efforts to revamp its TV business and increase its PS3 console footprint at the cost of losses should payoff in fiscal 2013.

Lenovo Group, Ltd. (fiscal Q2 2012, calendar Q3 2011)
(NOTE: Calendar quarter is used for all comparisons to avoid confusion.)

Lenovo smartphones
[Image Source: Lenovo]

Business segment:
laptop, netbook, tablet, and smartphone OEM
$7.786B USD
(up 35 percent from $5.760B USD in calendar Q3 2010)
7.23 percent higher that $7.244B USD analyst consensus
$948M USD
(up 60 percent from $593M USD in calendar Q3 2010)
7.96 percent lower that $1.03B USD analyst consensus
Units Shipped:
Shipments of computers rose 35.8 percent
Shipments of handsets rose 39 percent (primarily sold in China)
(not given)

Lenovo is the fastest growing PC company in the world, in terms of sales, and it recently overtook Dell, Inc. (DELL) to reach second place [source] in global sales so it's hard to fault its performance.  However, lower than expected growth in profitability should be a bit of a concern for long term investors.  The stock rose in trading following the earnings, so it appears that investors took the better-than-expected revenue and large growth to heart, more so than the lower-than-expected profitability.

The company appears well positioned, entering the tablet and smartphone market.  Nonetheless, it remains to be seen if it can duplicate its budget-centric success that it saw in the PC market in the more image-driven smartphone/tablet market.

Lenovo does have its work cut out for it achieving deeper business server market penetration.  Lenovo is reportedly hoping to increase its ThinkServer sales as part of an expanded partnership with Japan's NEC Corp. (TYO:6701).  If this partnership gets official it could offer a nice boost to the company's stock.

Sources: Lenovo, Sony

"Spreading the rumors, it's very easy because the people who write about Apple want that story, and you can claim its credible because you spoke to someone at Apple." -- Investment guru Jim Cramer

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