Sony Ericsson's Losses Continue in Q4; Outlook Improves

Sony Ericsson has released its results for the final quarter and full year of 2009. The year has been full of woe for the handset vendor as the market for high-end feature phones shrank while competition strengthened from both within the segment, where LG and Samsung gained sales, and from smartphones such as Apple's iPhone and the Android-based handsets, most notably from HTC (see World: 4 August 2009: Handset Market Sees Q2 Bounce and 16 October 2009: Sony Ericsson Narrows Q3 Loss as Cost Cutting Takes Effect).

Quarterly sales rose marginally from the previous quarter, up 3.5% from the low of 14.1 million to 14.6 million, but this was down by 39.7% year-on-year (y/y), with 24.2 million handsets sold in the same period a year earlier. Unit sales for the full year totalled 57.1 million from 96.6 million in 2008. This was attributed to a global downturn in handset sales, which cut total sales by around 8% to 1.1 billion units, although the fourth quarter was flat y/y. Sony Ericsson also recognises that it failed to meet the shift in demand to touchscreen handsets in the mid-price segment. The average selling price also picked up marginally, pulling back from the prior quarter's low of 114 euro to reach 120 euro; this again remained 1 euro lower than the previous year.

As a result of the rising sales and higher prices, revenues were up by 8.1% on the previous quarter to 1.75 billion euro, (down 39.9% y/y), although operating income remained at -181 million euro, a slight improvement on the -193 million euro lost in the previous quarter and the -262 million euro lost in the fourth quarter of 2008. That loss could largely be attributed to restructuring charges of 150 million euro, compared with 2 million euro in the prior quarter and 129 million euro in the prior year. Net income was a reported loss of 167 million euro, down from 164 million euro in the previous quarter and 187 million euro a year earlier.

For the full year, Sony Ericsson reported revenues of 6.79 billion euro (down 39.6% y/y), operating losses of 1.02 billion euro, which had accelerated from a loss of 113 million euro in 2008, while net losses of 836 million euro were up from a loss of 73 million euro in 2008.

Sony Ericsson noted that it had received 455 million euro in cash to improve the balance sheet and liquidity, of which 255 million euro had been drawn by the end of the year, with 200 million euro not utilised and kept as a committed back-up facility (see World: 27 July 2009: Ericsson Pledges Continued Support for Sony Ericsson JV—Report). Cash stood at 389 million euro, with other short-term and cash investments of 489 million euro; net cash after interest bearing liabilities totalled 620 million euro. Cost-cutting has been implemented across the board with the aim of reducing operating expenses by 880 million euro. This has incurred restructuring expenses since mid-2008 of 164 million euro in 2009 against 175 million euro in 2008, and a further 161 million euro may be required to complete the restructuring programme, but it should have a positive impact in the second half of 2010. One of the main elements of this programme has been the cut to the global workforce by some 2,500 employees, with it now numbering 9,100 (see World: 16 December 2009: Sony Ericsson Cuts a Further 450 Jobs in Sweden).

Outlook and Implications

Despite the continuing losses, Bert Nordberg, the relatively new president of Sony Ericsson, noted that the company is expecting to see a comeback over the next six months: “The refreshed portfolio, coupled with the business transformation programme, has started to positively impact our financial results. Continued cost saving activities and resource realignment are necessary in order to build a leaner, more efficient organisation capable of meeting the demands of the changing competitive landscape. We will continue to focus on returning the company to profitability by establishing Sony Ericsson as the communication entertainment brand based on an exciting portfolio of mid- and high-end products, such as our recently announced Android-based phone, the XPERIA™ X10. 2010 will still be challenging as the full benefit of cost improvements will not impact results until the second half of the year; however, we are confident that our business is on the right track” (see Sweden: 18 August 2009: All Change at the Top as New Sony Ericsson CEO Targets Return to Profit).

Sony Ericsson had a twin-track strategy for producing imaging and music-centric handsets using the Cybershot and Walkman brands. That briefly appeared to be working, but with many feature phone users demanding the optimum functionality for both functions, this was not a long-term strategy for success. High-end handsets need to integrate the value of both brands. Sony Ericsson has been reported to desire access to the valuable Sony Playstation brand. It has adopted some of the Sony marketing (the "make believe" concept), and the Aino handset allows users to access and control their PS3 media content remotely, but there is no news on a Playstation handset, with resistance reported from parent from Sony (see World: 4 September 2009: Further Reinvention as Sony Ericsson Adopts Sony Entertainment Brand).

Sony Ericsson has started to make some moves to recover its lacklustre performance, with several attempts to crack the top end of the market where the iPhone has been garnering all the attention, such as the Aino, Satio and Xperia handsets. The Satio and Aino have impressive specifications, but were hit by software faults, which briefly saw them withdrawn from some markets (see United Kingdom: 26 November 2009: U.K. Retailers Withdraw Sony Ericsson's Flagship Satio Smartphone over Software Problems and 9 December 2009: Sony Ericsson Smartphones Back on the Shelves After Software Glitch). Sony has also revealed its first attempt at an Android-based device, though this is not due until some time this year, and uses the 1.6 version of the operating system, now superseded by version 2.0 used in both Motorola's Droid and the Nexus One, which has been launched with the additional weight of Google's marketing machine (see World: 4 November 2009: Sony Ericsson Takes on Smartphone Market with Android Handset Launch).

Sony Ericsson has long produced high-quality handsets pitched at the higher end of the market. While this is growing as the iPhone Halo effect impacts, it faces pressure from Samsung and LG at the mid-range end and from Apple, RIM, Palm, HTC and the growing range of Android-based handsets at the top end where Smartphones have rapidly increased their share of the market, particularly in the key U.S. market. Sony has also consolidated operations and shifted its U.S. headquarters to be closer to AT&T, a key carrier in the country, in an attempt to match customer demand (see United States: 19 November 2009: Sony Ericsson Moves U.S. Headquarters to Atlanta). They will also shortly jump onto the Android ride, but 2010 will be critical in re-invigorating the Sony Ericsson brand.