Yesterday Sony (NYSE:SNE) saw a significant share price increase of 7.67%, or $3.58, taking the company to a share price of $50.24. This is on the back of the company revealing its best year ever in terms of profit. Over the current fiscal year, Sony brought in ¥8.66 billion in sales & operating revenue, with net income hitting ¥916 billion.
It’s the breakdown of revenue and profit by segment that becomes more notable, as over the year there have been more calls for Sony to drop failing divisions. In particular, and the primary division which people are calling for Sony to drop is Mobile. This will be covered a little later. We’ll be starting with the areas that have given the company the year they’ve had as presented in their earnings announcement.
Sony’s Entertainment: Games, Music & Films are Going Strong
Without any shadow of a doubt, the strongest area for the company is their Games & Network Services. Driven by the success of the PlayStation 4, which by December 31st, 2018 had sold through 91.6 million consoles, the video game section is going strong. During the 2018-19 financial year, 17.8m PlayStation 4 consoles were sold, a fall from the previous year’s 19m. This is to be expected as the current console generation reaches its sixth year.
Alongside the number of consoles sold comes software sales. As of December 31st, 2018, a total of 876m units of full console software have been sold. This does not include add-on content, which also generates revenue for the company. During the current year, 257.6m units of full software were sold, helping to propel the division to the heights it has reached. This can be attributed to a number of very successful titles like Red Dead Redemption 2, FIFA 19 and Call of Duty: Black Ops 4. Not to mention exclusives like Marvel’s Spider-Man and God of War, the latter of which was developed internally by Sony.
Also benefitted by the increased sales of consoles and games comes the subscription-based PlayStation Plus. As of the end of the financial year, there were 36.4m subscribers to the service, a 2.2m increase on last years 34.2m and 10m above the 26.4m two years ago. There are no figures given for the PlayStation Now subscription service. Total sales for games came in at ¥2.31tn with an income of ¥311.1bn.
Outside of games, the company has shown considerable success in its Music division. Here, the company has seen sales of ¥807.5bn but with a significant income of ¥232.5bn, making it the strongest division for the company behind games. Artists like George Ezra, Travis Scott, Backstreet Boys and more localised but popular artists like Utada Hikaru of Japan (a personal favourite of mine).
Not only does Sony hold a variety of music labels, but they also own 50% of SYCO Entertainment, the operator of the X Factor and Got Talent series of reality TV shows, with the company also releasing albums for artists found within these shows, such as Little Mix and One Direction. The primary cause of the income increase is as a result of extraordinary items related to the acquisition of EMI as well as the sale of real estate.
Pictures, bringing up the trio of entertainment areas, hasn’t fared as well as the other two divisions. Sales did lower YoY from ¥1.01tn to ¥986bn, though income did rise from ¥41.1bn to ¥54.6bn. Sony has a wealth of TV shows and Films that the segment draws upon, as well as a number of media networks, channels that show products as well as bring in advertisement revenue. Notable TV series Sony currently produce are such as The Good Doctor, The Crown, The Blacklist, Better Call Saul and Outlander, to name just five from a list of over thirty.
In terms of films, Sony saw significant box office success with titles like Venom, Hotel Transylvania 3 and Spider-Man: Into the Spider-Verse, other strong titles were The Equalizer 2 and Escape Room. All of these titles have also performed well in home entertainment form, rounding up what has been a successful and strong year in general for Sony’s entertainment divisions.
The Failing of Mobile and Stagnation of Non-Entertainment
Mobile is a division of Sony that has been struggling for a long time now. It was only a month ago that our very own Shaun Williams covered how Sony, against all calls, are sticking to their Xperia mobile division. Over the financial year ending March 31st, the mobile division saw revenues of ¥498bn, a ¥225.7bn YoY fall. Worse, this marks another year of losses, which have mounted from ¥27.6bn to ¥97.1bn. It’s understandable why there are those who are calling for the division to be dropped.
Sony has covered their plans to attempt to recover the division, which is as follows:
- Our plan to reduce operating expenses by approximately 50% compared with the fiscal year ended March 31, 2018 in an effort to turn a profit in the fiscal year ending March 31, 2021 (“FY20”) is progressing according to plan.
- We have accelerated our plan to cease production at our Beijing factory and we have exited several regions such as the Middle East and Central and South America
Home Entertainment & Sound, covering TV’s, speakers and other audio systems have seemingly stagnated, showing a ¥67.3bn fall in sales but an increase in income of ¥3.8bn. Sony have attributed the fall in sales and only a small increase in profit as a result of a strategic decision “not to pursue scale in order to focus on profitability”.
Another hardware element is Imaging Products & Solutions, the area covering the camera range produced by Sony. This is one area where the company has seen both a boost in sales and income, though only on a smaller scale. Sales increased YoY by ¥14.6bn with a YoY increase in income of ¥9.1bn. This has been attributed to “an increase in sales of high value-added products including mirrorless single-lens cameras and interchangeable lenses” as well as a reduction in operating costs.
Rounding up is the Semiconductors division and Financial Services areas. Semiconductors saw an increase in sales of 29.3bn but a fall in 20.1bn. Sony state that this fall in income is as a result of “Absence of the gain resulting from the sale of the entire equity interest in a manufacturing subsidiary in the camera module business in FY17” as well as increased research and development. As for Financial Services, Sony operate a number of insurance companies, either solely or as joint ventures. Sales saw an increase of ¥54.2bn due to higher insurance premiums. Income fell by ¥17.5bn as a result of decreases in gains on investments as well as a loss on the valuation of securities at Sony Bank.
Looking Forward: Conservative Estimates with Games Expected to Slow
From the end of the previous financial year Home Entertainment & Sound, Imaging Products & Solutions, as well as Mobile Communications, will cease to exist as separate divisions. All three are to be merged under one division, called Electronic Products & Solutions. This will help to hide some of the losses brought about by the Mobile Communications segment, though may have a resulting drag on Home Entertainment and Imaging Products. The three of these divisions combined are predicted to generate sales of ¥2.24tn with an income of ¥121bn, one of the more generous estimations should the company fail to cut costs in mobile.
Other areas are seemingly more realistic. There are expectations for a further drop in sales of the PlayStation 4, down to 16 million units. This would see the company surpass the 100 million sales of the original PlayStation, though still lagging behind the massive success that was 150+ million units sold for the PlayStation 2. Revenue for the division is predicted to hit ¥2.3tn, a slight slowdown as well as income falling to ¥280bn.
Sony is well aware that as the console generation extends, hardware sales will lower. Particularly so following the reveal of the PlayStation 5, though this is not to be expected within the current financial year. Despite the lowering of hardware sales, the company is confident in only a slight lowering of revenue and income as a result of software sales and the consistent popularity of the PlayStation Plus subscription service. Sony could also potentially improve the uptake of the PlayStation Now subscription service by increasing what is offered.
Outside of games, the company is looking to increase revenue in Pictures and likely stick with the business, despite the fact that there are those who would like Sony to sell off parts of its Pictures segment. Sony believes revenue for the current year in Pictures should hit ¥1.08tn with increased income, reaching ¥65bn.
Major films like Men in Black: International, Spider-Man: Far From Home (In conjunction with Marvel), Angry Birds 2, the Jumanji sequel and Bad Boys for Life are all scheduled for release in the current financial year. All have potential to be major box office successes like the titles they follow. In addition to this is the aforementioned number of TV shows that are produced by the company.
Music, which saw a huge increase in profits is expected to fall over the current year, returning to just above that of the 2017-18 financial year. Sales are expected to increase in turn as a result of consolidating the EMI acquisition and an increase in streaming revenues. This increase in streaming revenue is expected to be offset by a reduction in physical sales.
On Semiconductors and Financial Services, both are expected to see an increase in sales and income. Semiconductors, however, could see a large increase in income further afield as a result of increased R&D expenses. Sony is also planning to invest ¥600bn between 2020 to 2022 financial years. Financial Services are expected to increase in both as a result of higher insurance premiums.
Despite the failing Mobile section of Sony, the company is performing strong and has a high potential for the current year. While expectations should be tempered, with a likely reduction in the games section helping to prop the company up, things are bright. The PlayStation 5 has been confirmed, though will not launch in the current year. What should help with this is a lineup of strong films coming to the box office, helping to rejuvenate the Pictures area further, with other areas remaining steady.
The current financial year isn’t expected to be the strongest, showing a reduction in income, but further afield there is a lot to look forward to.