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Sony's (NYSE: SNE) 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.
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.