Sony Q2 2019 earnings overview
Image sensors 💰, Sony Pictures 💸, PlayStation 😐, TV 👎, cameras 👎, Xperia 💩
If we can put electronics aside for a minute — ironic, I know — then Sony is doing pretty good for itself. Despite sales being down in gaming, TV, cameras, and mobile, the company has reported a 16% increase in the quarter’s operating profits, due to their image sensors which find their way inside of smartphones, autonomous cars, and automated factories. Just yesterday I wrote about Sony’s plans to build another image sensor plant in Japan that will allow them to increase production, news that was confirmed in their Q2 2019 earnings report.
- We expect demand for our image sensors to continue to increase from next fiscal year as well due to the adoption of multi-sensor cameras and larger- sized sensors by smartphone makers.
- In order to respond to this strong demand, we have further improved the efficiency of space utilization in our existing factories and have raised our production capacity target for the end of March 2021 from 130,000 wafers per month to 138,000 wafers per month.
- Moreover, we have decided to move forward in stages with the investment we had been considering to build new fabs at our Nagasaki facility to accommodate demand from the fiscal year beginning April 1, 2021.
- Through this action, we are working to continue growing the I&SS business so as to achieve the mid-range targets we established at the IR Day this year: 60% revenue share of the image sensor market and 20–25% ROIC in the fiscal year ending March 31, 2026.
Strong demand, which can be seen in the chart above, is the single reason Sony was able to report a better-than-expected quarter, when most other divisions saw sales decline. For Q2 FY19, the company reported an operating income of 278.96 billion yen ($2.56 billion), up from 239.5 billion yen in Q2 FY18. The strong earnings from the Imaging & Sensing Solutions Segment has ramifications beyond the quarter, raising their FY19 annual profit forecast by 30 billion yen to 840 billion yen.
Full story: cameras
Full story: mobile
Full story: TV
Unfortunately when it comes to electronics, Sony is finding it harder than ever to grow their divisions in meaningful ways. With a strategy to shift towards more premium models (read: expensive), it comes as no surprise that TV sales have slipped, down by 300K compared to Q2 FY18.
- Sales for the quarter decreased 11% year-on-year to 493.5 billion yen primarily due to a decrease in unit sales of smartphones and TVs and the negative impact of exchange rates.
- Primarily due to a reduction in the unit sales forecast for TVs reflecting a deterioration in market conditions, our sales forecast has decreased 50 billion yen to 2 trillion 110 billion yen and our operating income forecast has decreased 10 billion yen to 111 billion yen.
- Due to a deterioration in the market for panels, the intensely competitive environment in the TV market continued in Q2. Although our unit sales have decreased year-on-year, we are working to maintain our average selling price by focusing on large screen and high valued-added models as well as by tightly controlling channel inventory.
- Since we expect this operating environment to continue through the fiscal year ending March 31, 2021, we plan to prioritize profitability throughout our supply chain and tightly manage costs.
While TV sales are nowhere near the same trajectory as Mobile, it’s worth noting that Sony utilized the same tactic with Xperia — focus on premium models with higher ASP, which typically brings with them higher profits. But without meaningful volume, that equation begins to fall apart. For now, TV sales are sufficient to keep this strategy from working from a financial standpoint, but Sony risks driving their TV business into obscurity like they’ve done with their smartphones. Sony will likely finish FY19 with TV sales around or below 10 million units, their lowest in over a decade.
Now remind me again why Daniel Loeb thinks it’s a good idea to spin off their image sensor division?
Typically a reliable division, the Game & Network Services Segment reported a decrease in PS4 hardware and software sales as a result of no new AAA titles. That, along with the console’s seventh year on the market and continued talk about next-gen consoles like PS5, saw PS4 sales decrease by 1.1 million units, down to 2.8 million during Q2 FY19. With weakening demand for the console, Sony now expects to ship 13.5 million units in FY19, down from their earlier 15 million forecast.
With hardware and software sales down, the division reported sales of 95.7 billion yen ($878.5 million) and an operating income of 25.6 billion yen ($235 million). There are however some bright spots for the PlayStation maker, with PlayStation Plus subscribers up in Q2 FY19 by 2.6 million to 36.9 million users when compared to Q2 FY18.
PS4 is also now the world’s second best selling console of all time, having shipped 102.8 million units worldwide. The crown for the number one spot goes to PS2 with total sales of 155 million units. It’s unlikely PS4 will match that unless Sony keeps it around for another few years and allows its price to eventually dip as low as $99.
- Sales for the quarter decreased 17% to 454.4 billion yen due to a decrease in PlayStation®4 (“PS4”) game software sales and hardware sales, as well as the negative impact of exchange rates.
- Game software sales decreased primarily due to the absence of the major first-party hit title Marvel’s Spider-Man, which was released in the same quarter of the previous fiscal year, and a significant year-on-year decrease in the contribution from free to play games.
- Operating income decreased 25.6 billion yen year-on-year to 65.0 billion yen, primarily due to the impact of the decrease in sales.
- We revised downward our FY19 sales forecast 200 billion yen to 2 trillion yen and our operating income forecast 40 billion yen to 240 billion yen.
- As we announced last week, we have postponed the sale of the first-party title The Last of Us Part II from February 2020 to May 2020. As a result, this title will not contribute to the financial results of this fiscal year; that is the primary reason why we have revised downward our operating income forecast.
- The three most significant reasons for the decrease in expected profit year-on-year are a decrease in first-party software sales resulting from the postponement of The Last of Us Part II that I just explained, a decrease in third-party software sales resulting from a deceleration of free to play titles and the negative impact of exchange rates.
- PS4 hardware profit is expected to increase slightly as a decrease in unit sales is offset by hardware cost reductions. Profit from network services, primarily PlayStation Plus (“PS Plus”), is expected to increase significantly due to a steady increase in subscribers.
On the film front, Sony Pictures had a good quarter, mainly due to Spider-Man: Far From Home, making the saga of wanting to pull Spidey from the MCU even more absurd. Sony clearly believes they can replicate the magic of Kevin Feige and Marvel which have produced the last two films in the franchise, something they’ll have to prove, seeing how after his third solo film and one more crossover, the famed web crawler will be leaving the Marvel Cinematic Universe.
With a box office haul of $1.1 billion, Spider-Man: Far From Home has become Sony Pictures’ highest grossing film of all time. Along with Once Upon a Time in Hollywood, the Pictures Segment reported profits of $366 million from Q2 FY19. In the same quarter last year, Sony Pictures reported profits of $211 million.
- FY19 Q2 sales increased 8% year-on-year to 260.6 billion yen and operating income increased a significant 67% year-on-year to 39.3 billion yen.
- The increase in profit was primarily due to the contribution of Spider-Man: Far From Home, which, having exceeded 1.1 billion U.S. dollars in global box office revenue, is the highest grossing film of all time for Sony Pictures Entertainment, and an improvement in the profitability of Media Networks due to the benefit of the portfolio review and improved profitability in India.
- Our FY19 sales forecast has decreased 50 billion yen to 1 trillion 30 billion yen primarily due to a decrease in the number of titles slated for release this fiscal year due to a change in the release timing of certain titles.
- On the other hand, we have revised upward our operating income forecast 5 billion yen to 70 billion yen due to an increase in the profitability of Motion Pictures and Media Networks, and the benefit of overhead cost reductions, partially offset by the impact of the lower sales.
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