Sony Q1 2020 earnings overview: revenue 👆 2%, profits 👇 1%
Image sensors 😨, Sony Pictures 😀, PlayStation 🤑, cameras ❓, Xperia 🤔, TV 😐
From a macro level, the Sony Q1 FY20 earnings numbers look pretty muted and unremarkable. For the three month period, the company reported a revenue of ¥1.97 trillion ($18.6 billion) up from ¥1.92 trillion (roughly $18.1 billion) in Q1 FY19 and a profit of ¥228 billion ($2.15 billion) compared to ¥230 billion ( $2.18 billion) in the previous year. This translates to a 2% revenue increase and a 1% profit decrease. Like I said, pretty unremarkable — until you dig into the micro level.
In a period where many companies are reporting losses due to COVID-19 disrupting consumer spending and supply chains, the fact that Sony was able to post a profit is noteworthy, but when you break things down by each division, the bulk of that can be attributed to PlayStation. Had it not been for Sony’s gaming arm, the company would have likely reported massive losses for Q1 FY20 with sales in just about every division down.
Products & Solutions Segment
That primarily starts with the Electronics Products & Solutions Segment, which houses cameras, mobile, TV, and other consumer electronic sales. In fact, for the first time in over a decade, Sony didn’t even provide Alpha sales, leaving us only with direct metrics for Xperia and Bravia.
Even then, the situation is more nuanced, but when the division reports a revenue of ¥331.8 billion ($3.1 billion) in Q1 FY20, down from ¥483.9 billion in the year-ago quarter and a loss of ¥9.1 billion (-$86 million), versus a profit of ¥25.1 billion in Q1 FY19, it’s pretty telling how things are, nuance or not.
From Sony:
- FY20 Q1 sales decreased 31% year-on-year to 331.8 billion yen primarily due to a decrease in unit sales of digital cameras and TVs.
- The EP&S segment was the segment which was impacted by the spread of COVID- 19 earlier and more significantly than any other segment, but the supply chain has almost fully recovered and, although progress varies depending on product category and region, customer demand is beginning to recover as well.
- We are preparing for potential second and third waves of COVID-19 by transforming the structure of this business into a more resilient one through an overhaul of our operations and further streamlining, as well as enhancement of our ecommerce distribution channels.
- This segment, which will inherit the Sony Corporation trade name on April 1, 2021, is further accelerating its efforts to unify the management of the businesses under its umbrella and is promoting the evolution of the businesses by deploying products and services that enable reality, real-time, and remote activity through our audio, video and communications technologies.
Q1 FY2020 (year-on-year)
Sales: 152.1 bln yen (31%) significant decrease (FX Impact: -9.3 bln yen) ꞏ
- ( — ) Decrease in unit sales of digital cameras, televisions and Audio and Video resulting from the impact of COVID-19
OI: 34.2 bln yen significant deterioration (FX Impact: -3.0 bln yen)
- ( — ) Decrease in sales
- (+) Reductions in operating costs in each of the businesses
FY2020 Forecast (year-on-year)
Sales: 121.3 bln yen (6%) decrease
- ( — ) Decrease in sales in the first quarter resulting from the impact of COVID-19
- ( — ) Impact of foreign exchange rates
OI: 27.3 bln yen significant decrease
- ( — ) Decrease in salesꞏ
- ( — ) Negative impact of foreign exchange rates
- (+) Significant reductions in operating costs, including cost reductions
resulting from restructuring initiatives undertaken prior to FY2020 for Mobile Communications
Imaging & Sensing Solutions Segment
While electronic sales have been declining at Sony for a decade, image sensors (Imaging & Sensing Solutions Segment) has typically been a bright spot for them. Sony may have missed the shift to mobile but when their sensors account for over 50% of the market, the better competitors do, the better Sony does. COVID-19 laid waste to consumer outings and spending and dramatically decreased worldwide smartphone shipments, resulting in a poor Q1 FY20 for the division.
For the quarter, revenue came in at ¥206.2 billion ($195 million), down from ¥230.7 billion in the year ago quarter and profits dipped to ¥25.4 billion ($24 million), again down from ¥49.5 billion. According to additional statements from Sony, they don’t foresee the mobile industry recovering in the near future, therefore they don’t expect image sensors to recover anytime soon.
- FY20 sales of image sensors for mobile products are expected to decrease compared to FY19 primarily due to a decrease in end-user product sales by one of our major customers, a deceleration of the smartphone market and a shift to mid- range and moderately priced models in that market resulting from the impact of the spread of COVID-19, and a significant reduction in component and finished goods inventory by a Chinese customer.
- Profitability is expected to be impacted by a decrease in gross margins and an increase in depreciation and manufacturing-related costs associated with production equipment we purchased in the previous fiscal year when we expected growth, as well as higher research and development costs.
- We do not expect to grow sales of mobile sensing products compared to FY19 because adoption by smartphone makers has been slow and sales of flagship models which already use our products have decreased due to the shift in market conditions.
- Sales of image sensors to AV have also decreased due to the contraction of the sensor market for digital cameras resulting from the impact of the spread of COVID- 19. We expect the market to contract in one year as much as we had previously expected it would contract over the next approximately three years.
Q1 FY2020 (year-on-year)
Sales: 24.5 bln yen (11%) significant decrease (FX Impact: -4.1 bln yen)
- ( — ) Decrease in sales of image sensors resulting primarily from the impact of COVID-19
- ( — ) Decrease in unit sales of image sensors for digital cameras
- ( — ) Decrease in unit sales of image sensors for mobile products
- ( — ) Significant decrease in sales in businesses other than image sensors such as analog LSIs and display devices resulting from the impact of COVID-19
OI: 24.1 bln yen significant decrease (FX Impact: -1.8 bln yen)
- ( — ) Increase in depreciation and amortization expenses as well as research and development expenses
- ( — ) Impact of decrease in sales
FY2020 Forecast (year-on-year)
Sales: 70.6 bln yen (7%) decrease
- ( — ) Decrease in sales of image sensors resulting primarily from the impact of COVID-19
- ( — ) Deterioration of the product mix of image sensors for mobile products
- ( — ) Decrease in unit sales of image sensors for digital cameras
OI: 105.6 bln yen significant decrease
- ( — ) Impact of decrease in sales
- ( — ) Increase in research and development expenses as well as depreciation and amortization expenses
Pictures Segment
The division responsible for Sony Pictures and Sony Pictures Television, as you’d expect, was hit pretty hard due to COVID-19. Not only has production on films and TV shows been shutdown for months with no end in sight, Sony was also unable to followthrough with any of their theatrical plans which are all now in limbo. In many ways, 2020 will be a lost year for their theatrical division with their only notable film release being Bad Boys For Life which arrived in theaters prior to the pandemic. As a result theatrical revenue fell by 96% to $6 million compared to $164 million from a year ago..
But it wasn’t entirely doom and gloom for the division, thanks to higher licensing revenue. Put another way, for the films and TV shows Sony did produce, they were able to charge more for them, like the Tom Hanks WWII film, Greyhound, which was bought by Apple and offered on Apple TV+.
For the quarter, Sony Pictures reported a revenue of ¥175.1 billion ($166 million), down from ¥186.1 billion and a profit of ¥24.7 billion ($234 million), up from ¥0.4 billion.
From Sony:
- Although we have resumed filming in some countries, the severe environment in Motion Pictures and Television Productions is continuing.
- If we can restart production, we think we can recover our position in the Television Productions area relatively quickly because demand for content from digital distribution services is extremely high and we think we can leverage our advantage as a major independent studio.
- As for theatrical, theaters are either closed or admittance is limited, and we expect the release calendar to be crowded when they do reopen. Since motion pictures generate profit over multiple years, starting with theatrical release, the impact on our financial results of not being able to release them is expected to last 2 to 3 years.
- On the other hand, digital sales of product we released theatrically in the past are strong.
- For Sony, the importance of theatrical releases is not expected to change going forward, but in order to maximize the long-term value of our product, we will select the optimal distribution channel for our product based on the nature, scale and timing of the product.
Q1 FY2020 (year-on-year)
The following analysis is on a U.S. dollar basis
Sales: 11.0 bln yen (6%) decrease (U.S. dollar basis: -69 mil USD / -4%)
- ( — ) Decrease in theatrical revenues due to the impact of theater closures resulting from the impact of COVID-19
- ( — ) Lower advertising revenues for Media Networks resulting from the impact of COVID-19
- (+) Higher licensing revenues for US television product
OI: 24.4 bln yen significant increase
- (+) Lower marketing costs from the absence of theatrical releases
- ( — ) Decrease in sales
FY2020 Forecast (year-on-year)
Sales: 251.9 bln yen (25%) significant decrease
- ( — ) Decrease in the number of theatrical releases resulting from the impact of theater closures as a result of the impact of COVID-19
- ( — ) Prior fiscal year benefitted from several major theatrical releases
OI: 27.2 bln yen significant decrease
- ( — ) Decrease in sales
- (+) Expected decrease in marketing costs from the decrease in the number of theatrical releases
Game & Network Services Segment
The tldr of how PlayStation did during Q1 FY20 is that the division did blockbuster numbers despite PS4 sales dipping as PS5 approaches later this year. The raw numbers boil down to this, revenue for Q1 quarter came in at ¥606 billion ($5.7 billion), and profits were ¥124 billion ($1.17 billion) compared to ¥457 billion ($4.3 billion) and ¥73.8 billion ($698 million) respectively in Q1 FY19.
So how did the division do so well when PS4 sales are softening? These three charts tell that story.
For a far more nuanced look at the health of PlayStation, you’ll want to read this more in depth analysis 👇
From Sony:
Q1 FY2020 (year-on-year)
Sales: 148.6 bln yen (32%) significant increase (FX Impact: -14.8 bln yen)
- (+) Significant increase in game software sales
- (+) Significant increase in sales for PlayStation®Plus (PS Plus)
- ( — ) Decrease in PlayStation®4 hardware sales
OI: 50.2 bln yen significant increase (FX Impact: -2.8 bln yen)
- (+) Significant increase in game software sales
- (+) Significant increase in PS Plus sales
- ( — ) Increase in costs
FY2020 Forecast (year-on-year)
Sales: 522.4 bln yen (26%) significant increase
- (+) Significant increase in game software sales
- (+) Significant increase in hardware sales due to PlayStation®5 (PS5TM) launch
OI: Essentially flat year-on-year
- (+) Significant increase in game software sales
- (+) Significant increase in PS Plus sales
- ( — ) Increase in SG&A expenses related to introduction of PS5
- ( — ) Increase in the costs of sales ratio for hardware
Music Segment
As you’d suspect, Sony Music was also affected negatively by COVID-19, but not by that much mainly due to the reality that most music is consumed digitally. So while lower physical media sales is noted as a negative for the quarter, I doubt it ever accounted for much. For that reason, while revenue and profits were lower, they didn’t dip by all that much.
In Q1 FY20, Sony Music reported a revenue of ¥177.1 billion ($1.7 billion) which was slightly down from ¥202.3 billion in Q1 FY19 and a profit of ¥34.9 billion ($330 million) which again was slightly down from ¥38.3 billion from the prior year.
From Sony:
- Paid subscription streaming services continue to grow
- Revenue in most categories is being negatively impacted by the spread
of COVID-19 - Launched the new service Stagecrowd
- New mobile game application Disney Twisted-Wonderland trending well
Q1 FY2020 (year-on-year)
Sales: 25.1 bln yen (12%) significant decrease (FX Impact: -2.3 bln yen)
- ( — ) Lower sales for Recorded Music and Music Publishing resulting from the impact of COVID-19
- ( — ) Lower sales of physical media
- ( — ) Decrease in advertising-supported streaming services revenues
- ( — ) Decrease in music licensing revenues
- ( — ) Lower sales for Visual Media and Platform in Japan resulting from the impact of COVID-19
- ( — ) Lower sales for production of physical media
- ( — ) Impact of postponement and cancellation of live events
- (+) Increase in paid subscription streaming revenues
OI: 3.4 bln yen decrease
- ( — ) Impact of decrease in sales
- (+) Gain recorded on the sale of a portion of shares of Pledis (6.5 bln yen)
FY2020 Forecast (year-on-year)
Sales: 59.9 bln yen (7%) decrease
- ( — ) Impact of COVID-19
- ( — ) Decrease in sales of physical media for Recorded Music
- ( — ) Postponement and cancellation of live events for Visual Media and Platform
- ( — ) Decrease in music licensing revenues for Music Publishing
- (+) Increase in paid subscription streaming revenues
OI: 12.3 bln yen decrease
- ( — ) Impact of decrease in sales
- (+) Gain recorded on the sale of a portion of shares of Pledis (6.5 bln yen)
Financial Services Segment
Lastly, there is the lesser known division of Sony that mainly operates in Japan and provides services like Life Insurance. Revenue for the division came in at ¥446.8 billion ($4.2 billion), up from ¥336.9 in Q1 FY20 and profits were also slightly up at ¥47.2 billion ($447 million), compared to ¥46.1 billion.
From Sony:
Q1 FY2020 (year-on-year)
Revenue: 109.8 bln yen (33%) significant increase
- (+) Significant increase in revenue at Sony Life (89.6 bln yen increase, revenue: 389.0 bln yen)
- (+) Increase in net gains on investments in the separate account
- (+) Improvement in valuation gains and losses on securities at Sony Bank
OI: 1.1 bln yen increase
- (+) Improvement in valuation gains and losses on securities at Sony Bank
- (+) Decline in the loss ratio for automobile insurance at Sony Assurance
- ( — ) Significant decrease in OI at Sony Life (14.1 bln yen decrease, OI: 25.3 bln yen)
- ( — ) Deterioration in net gains and losses related to market fluctuations and other factors for variable life insurance*
- ( — ) Expenses recorded for various provisions related to COVID-19
FY2020 Forecast (year-on-year)
Revenue: 92.3 bln yen (7%) increase
- (+) Increase in revenue at Sony Life
- (+) Improvement in investment performance in the separate accounts
- ( — ) Decrease in premiums from single premium insurance
- (+) Improvement in valuation gains and losses on securities at Sony Bank
OI: 12.4 bln yen increase
- (+) Improvement in valuation gains and losses on securities at Sony Bank
- ( — ) Recording of expenses for various provisions related to COVID-19 at Sony Life
* Overall deterioration in the provision of policy reserves for minimum guarantees for variable life insurance resulting from market fluctuations and other factors, and net gains and losses on derivative transactions to hedge market risks
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