Please ensure Javascript is enabled for purposes of website accessibility

How Sony Profits From the Mobile Market Without Hit Smartphones

By Leo Sun - Updated Apr 12, 2019 at 4:25PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Sony’s Xperia phones are nearly obsolete, but it remains a top supply-chain player.

Sony's (SONY -0.11%) smartphone business is a money pit for the company. Its Xperia phones have about 1% of the global smartphone market, and it's losing money on each device sold. Last quarter, Sony's mobile communications unit's revenues -- which accounted for 5% of its top line -- tumbled 32% annually as its operating loss widened, making it the company's only unprofitable core business unit.

Many analysts speculated that Sony would exit the smartphone market to focus on the growth of its more promising video game business. Yet Sony repeatedly shot down those rumors, suggesting that selling its phones at a loss gave it a foothold in the growing market of connected devices across the Internet of Things. So for now, investors can only hope that the growth of Sony's other divisions offsets its mobile losses.

A woman uses a Sony Xperia XZ3 smartphone.

Image source: Sony.

One of those healthier businesses is Sony's oft-overlooked semiconductor unit, which generates most of its revenue from image sensors for mobile devices. Sony supplies image sensors for roughly half of all smartphones worldwide, and its top customers include Apple (NASDAQ: AAPL), Samsung (NASDAQOTH: SSNLF), Alphabet's Google, and Huawei. Sony's "best in breed" reputation in image sensors for cameras, a key selling point for most smartphones, enables it to generate consistent profits from the growing smartphone market without selling any hit smartphones.

A closer look at Sony's semiconductor business

Sony's semiconductor business generated 12% of its revenue and 20% of its operating profit last quarter. Its revenues rose 11% annually, supported by robust demand for its image sensors, but its operating profit slipped 3%, because of cyclically lower margins and higher capital expenditures.

Sony expects the unit's capex to remain elevated and its free cash flow to stay negative as it scales up its operations to address rising demand for its sensors through 2020 -- which should be fueled by the rise of multisensor cameras and 3D cameras for facial recognition, higher-quality photos, and augmented reality apps. Sony also provides software toolkits to help developers create a wide range of smartphone camera apps that are optimized for its image sensors.

Sony recently said it will boost the production of its next-gen 3D sensors for front- and rear-facing cameras for major customers like Apple, and will start the mass production of the chips in the late summer of 2019. Sony didn't provide any sales forecasts or production targets for the unit but noted that the 3D sensor business was profitable and that it would boost the unit's earnings in fiscal 2019, which starts in April.

An illustration of facial recognition technology being used on a woman. Her face is surrounded by green lines, while other lines outline the features of her face.

Image source: Getty Images.

Sony's announcement represented a rare bullish forecast for the smartphone market, which was weighed down by downbeat forecasts from major suppliers such as Lumentum (NASDAQ: LITE), which provides 3D sensing laser diodes for Apple. However, IDC still expects annual smartphone shipments to rise just 2.6% in 2019, compared with about 3% growth in 2018.

Content share gains and adjacent markets

During last quarter's conference call, Sony CFO Hiroki Totoki admitted that slower demand for smartphones was "impacting" the semiconductor unit but suggested that it could offset that slowdown with content share gains in multicamera devices and 3D cameras.

Totoki also said that the semiconductor unit would eventually produce more image sensors and chips for the IoT and automotive markets, which haven't been factored into its forward investment plans yet. This suggests that Sony's aforementioned investments in the unit will start to pay off in fiscal 2019 and 2020, and that it will probably reinvest those gains into its business to expand into those adjacent markets, which could ultimately reduce its dependence on smartphones.

A better supplier than a smartphone maker

Sony failed to follow Samsung's impressive evolution from a smartphone component supplier into a leading smartphone maker.

However, Sony's semiconductor business makes it a major smartphone components supplier and gives it an alternative way to profit from the growth of the mobile market without clashing with other original equipment manufacturers in the saturated smartphone market.

Check out the latest Sony earnings call transcript.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Sony Corporation Stock Quote
Sony Corporation
$81.68 (-0.11%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.