Android-powered Smartphones Propel Sony Ericsson's Strong Quarterly Results

While many manufacturers within the technology segment continue to struggle, handset manufacturer Sony Ericsson posted slightly improved financial and operational results for the fiscal quarter ended September 30, 2010. In fact, despite shipping fewer handsets and realizing a slight reduction in overall revenue, gross and operating margins greatly improved. Moreover, Sony's continued focus on higher-end products, including Android-powered smartphones, seemed to pay off, as the smart phone segment helped Sony maintain its high average sales prices (ASPs). Based on quarterly numbers, smart phones accounted for more than 50% of Sony Ericsson's total sales. Moreover, Sony's shift to the popular Android platform, as well as the launch of new Android-based Xperia devices in new markets – such as China and the US – helped Sony grow its overall sales, while also positioning the company for future sales growth (both units and dollars). While many are pleased with Sony's results, Sony's reliance on the smartphone market has continued to raise  important questions. Is this segment sustainable? How must risk does it carry? Is Sony over-committed to the smartphone segment? And finally, will Sony's focus on high ASP products increase its risk, particularly if customers price sensitivity increases or consumer confidence (and spending) decreases?

On the whole, it appears that Sony's confidence within this segment is reasonably placed. During the third quarter of 2010, Sony Ericsson shipped 10.4 million handsets in total. Based on percentage share, these numbers indicated that Sony's total Android shipments approached 6 million during the quarter. For Sony shareholders, this results are promising, particularly because industry estimates put total Android handset OS shipments at 10.6 million during the second quarter of 2010. Additionally, as Android is increasingly being adopted by other vendors such as Motorola, HTC, ZTE, Huawei and LG Electronics, as well as makers of tablet computers and related mobile internet devices, the demand and sales growth within this space is expected to increase. While future growth within the segment looks to benefit Sony, one concern is future competition and new entrants. Specifically, how will Sony's sales and market share be impacted when more technology manufacturers enter the segment? While the answer is uncertain, if Sony can simply maintain its sales unit growth, while also maintaining its high ASP, the company may have a winning combination that few competitors will be able to match. Moreover, even if competition increases within the low to moderate price bands, Sony's results may continue to be positive, assuming that it maintains its emphasis on high-end products with higher average sale prices (ASP's) (while also relying on steady consumer demand). Overall, the ASP for Sony's smartphone handsets was a little lower than the second quarter of 2010, but much improved from the end of the 2009 fiscal year. As a whole, Sony' Ericsson's operating margin improved from -12% during the 3rd quarter of 2009, to +4% during the 3rd quarter of 2010. in Q310. To continue maintaining this momentum, Sony Ericsson must remain focused, drive sales, while also increasing its brand recognition within the Android smartphone space.