4 Things Investors Need To Know About Sony's Recovery

By Markets Fool.com

Sony has taken some hits in recent years.

Continue Reading Below

The company's position as a technology leader eroded as its television division faced increasing competition and its smartphones struggled to gain any market traction. Sony was also forced to exit the PC business and "phase out" most of its retail stores, according to TWICE,even asrivalsApple andMicrosoft are growing their retail footprints.

Add in the email hacking scandal and the disastrous release ofThe Interview,where the company for a time backed down from a dictator's threats, and this has not been a great run for Sony. Still, despite the company's financial, public relations, and operational failures, its turnaround is well under way and there are some encouraging signs.

The company's yen-denominated sales in its recently ended fiscal year grew by 5.8% year over year, according to its earnings release. While Sony still recorded an $815 million operating loss for the fiscal fourth quarter, it appears much of the bleeding has stopped and some segments are poised to grow.

PlayStation 4 is a bright spot
Sales for the company's gaming and network services division increased 33% year over year, powered largely by "an increase in PS4 hardware unit sales, a significant increase in network services revenue, the impact of foreign exchange rates and an increase in PS4 software sales," according to the company. These gains were partially offset by a decrease in PlayStation 3 hardware and PS3 software sales, which is to be expected nearly two years into the life cycle of the newer console.

These figures are encouraging because PS4 has faced increased competition from Microsoft's Xbox One, which now has a lower base price at $349 (bundled with a game) than Sony's console at $399. Sony believes it will be able to maintain this strong sales pace during the coming year,, which would be impressive, as Microsoft is only likely to increase the pricing pressure.

Continue Reading Below

PlayStation 4 has sold well despite Microsoft cutting the price of its rival console. Source: Sony.

Currency values are a problem
Sony is making allowances in the current fiscal year to reflect the ongoing depreciation of the Japanese yen against the U.S. dollar.

"The change in impact of the U.S. dollar in particular has had a large impact on our forecast," said Sony investor relations executive Casey Keister on the quarterlyearnings call. He explained that Sony's proportion of dollar-based costs has increased in recent years.

"We calculated an approximate 85 billion yen impact due to the change in rates from fiscal year 2014 to those used to formulate the business plan for our coming year," Keister said. He added that "rates continue to fluctuate," since the plan was created so now the company predicts an additional 65 billion yen negative impact due to the change in rates.

He said all divisions were evaluating ways to mitigate the negative impact, "including raising prices."

The company has big hopes for movies
After a troubling year featuring the bizarre canceled release forThe Interview -- which eventually received a limited release -- and the underperformance ofThe Amazing Spider-Man2, Sony believes its movie division is set for a comeback.

The company forecasts a 16.1% increase in yen-denominated revenue for the current fiscal year, driven by aslatethat includes the animatedPixelsandHotel Transylvania 2, as well as the live action adaptation of the popular children's book seriesGoosebumps.

It's not all good news for the division, however, as the timing of its movies will cause problems early in the year. "We expect to record a loss in the first half of the fiscal year mainly due to the release timing of the Motion Pictures film slate," Keister said during the call.

The pain is almost done
Sony CFO Kenichiro Yoshida took the mic from Keister before the question and answer session. He noted that CEOKazuo Hirai had called for fiscal 2014 to be the year in which the company finished its restructuring efforts.

"As of today, we have largely accomplished ourrestructuringgoals with the exception of mobile," the CFO said. "We have reduced our sales costs by 20% and our corporate costs by 30% and we have stopped the bleeding in electronics, except for mobile."

Yoshida said he sees 2015 as a year of investment, with money being spent to capitalize on opportunities in semiconductors, image sensors, and gaming: "This investment includes an expansion of the installed base of PS 4 and PSsubscribers." He expects to invest money in content and the company's virtual reality hardware, Project Morpheus.

"These investments are part of our plan to transform Sony into a company that can generate a high level of [return] on a consistent and sustainable basis," Yoshida said.

The article 4 Things Investors Need To Know About Sony's Recovery originally appeared on Fool.com.

Daniel Kline owns shares of Apple and Microsoft. He once owned a Walkman (actually, more than once). The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.