Sony Q3 2019 earnings overview: revenue ๐ 3%, profits ๐ 20%
Image sensors ๐ฅณ, Sony Pictures ๐, PlayStation ๐, cameras ๐คซ, Xperia ๐ฐ, TV ๐
Sony continues to be a company in transition that cannot build sustained momentum out of its various divisions like its entertainment arm that houses its film studio and music label. Their electronics business, on the other hand, also continues to shrink with sales across cameras, smartphones, and TV down. PlayStation, their darling and typical money maker is also experiencing a slowdown in software and hardware sales as the console enters its seventh year on the market while PS5 looms with a late 2020 release. Fortunately, their image sensors, found in not just Alpha cameras, but inside of various cars, as well as smartphones from Apple and Huawei has once again helped the company remain financially healthy.
A decade ago, Sony quarterly earnings results brought with them a topic of โhow much loss.โ Now that discussion has turned towards how much profits, a sign of how far the company has come. For Q3 FY19, Sony reported profits of $2.10 billion (JPY220 billion), down 20% compared to Q3 FY18 profits of $3.83 billion. Revenue, however, was up 3% to $22.5 billion (JPY2.46 trillion) compared with $21.4 billion (JPY2.40 trillion).
Despite slowdowns in many divisions, Sony raised its FY19 profits forecast by 5% to $8.1 billion (JPY880 billion)
- (+) Expected increase in operating income in the I&SS segment
- (+) Expected decrease in operating loss in All Other, Corporate and elimination, primarily due to the impact of remeasurement and realized gains recorded as a result of the public listing and sale of a portion of shares of SRE Holdings Corporation
- ( โ ) Expected decreases in operating income of the Financial Services and G&NS segments
and revenue by 1% to $77.46 billion (JYP8500 trillion).
- (+) Higher-than-expected sales in the Financial Services and I&SS segments
- ( โ ) Lower-than-expected sales in the G&NS and EP&S segments
For comparison, on January 28th, Apple reported its most recent earnings report, where for the three months, Wearables, the division that includes Apple Watch and AirPods, was responsible for $10 billion in revenue. The company as a whole? $91.8 billion. Again, for those three months. I point this out because Apple too is a company thatโs focused on the premium market, but unlikely Sony, they have an uncanny ability to convey that message to consumers, and the numbers show it.
Image sensors
Falling under Imaging & Sensing Solutions Segment, Sonyโs semiconductor business, which provides image sensors to their own Alpha cameras, as well as to half the worldโs smartphones, including those from Apple and Huawei, was the real star of Q3 FY19. Revenue for the quarter came in at (JYP298 billion), up from (JYP230 billion) in Q3 FY18. That increased revenue also translated to an increase in profits, which came in at (JYP75.2 billion), up from (JYP46.5 billion) in Q3 FY18.
From Sony:
- Demand for our image sensors in Q4 continues to be strong.
- Although production capacity is expanding according to plan and we continue to operate at full production capacity utilization, sales are increasing due to strong near- term demand, and that is preventing us from stockpiling strategic inventory as originally planned.
- In addition, partly due to the introduction of a highly competitive new product this fiscal year, we have been able to maintain our overall margin, all of which has enabled us to operate this business extremely well.
Sony Pictures and Music
The Pictures Segment posted mainly negative numbers with lower profits and revenue do to a period that lacked blockbuster films. For the quarter, the division reported a revenue of $2.1 billion (JYP236 billion), down from $2.52 billion (JYP276.7 billion), and $49 million (JYP5.4 billion) profit, again down from $106 million (JYP11.6 billion).
From Sony:
- The decrease in profit was primarily due to a significant decrease in Motion Pictures revenue, partially offset by an improvement in profitability due to the benefit of a channel portfolio review in Media Networks.
- In the same quarter of the previous fiscal year, the major hit Venom was released at the beginning of October, significantly contributing to profitability throughout that quarter.
- This fiscal year, the hit Jumanji: The Next Level, was released in mid-December, so the majority of its contribution to profitability will come in Q4 and beyond.
Music Segment was slightly more mixed with revenues up, but profits down. That resulted in Sony reporting ( revenues of $1.99 billion (JYP216.9 billion), up from $1.92 billion (JYP209.4 billion) and profits of $332 million (JYP36.6 billion), dropping sharply from $1.34 billion (JYP147.1 billion) in Q3 FY18.
From Sony:
- This decrease was primarily due to the absence of a remeasurement gain resulting from the consolidation of EMI Music Publishing recorded in the same quarter of the previous fiscal year, and a decrease in sales of mobile games in Japan.
- Excluding these items, our music business is steadily growing primarily due to the growth of the streaming market.
- Streaming revenue in our Recorded Music business continued to grow at a high rate, increasing 16% year-on-year and 20% year-on-year excluding the impact of the conversion to the yen.
PlayStation
Game & Network Services Segment has been the backbone of Sony ever since PS4 launched, serving up revenue, profits, and a positive image for the company. Much like Sony as a whole, the division remains profitable, just not as much as previous quarters and years. Revenue for Q3 FY19 came in at $5.80 billion (JPY632 billion), down from $7.25 billion (JPY791 billion), which saw profits slip to $489 million (JPY53.4 billion), down from $671 million (JPY73.1 billion).
2020 will likely remain challenging for Sony with many AAA and exclusive games like The Last of Us: Part II and Final Fantasy 7: Remake being delayed by a few months. Other nonexclusive games like Doom: Eternal and Cyberpunk 77 were also delayed.
Hereโs an article worth revisiting regarding game delays and how they can affect the company.
From Sony:
- PS4 hardware is in its seventh year since launch and, partly because we announced the PlayStationยฎ5 (โPS5TMโ) next generation console, unit sales decreased year-on- year.
- Excluding the significant decrease in free to play titles and the impact of exchange rates, software sales were essentially flat year-on-year.
- On the other hand, when you look at our results over the mid- to long-term, you can see that our game business is steadily growing, as is evidenced by the growth of network services like PS Plus, and we expect that growth to continue going forward.
- The proportion of network services revenue continues to increase primarily due to the increase in PS Plus subscribers.
- We aim to leverage this large community and network services revenue stream to affect a smooth transition from the current console generation to the next, unlike in the past when profitability deteriorated significantly due to development and marketing costs.
Cameras, Xperia, and TV
Once upon a time, these products each had their own segments, but as each division weakened, Sony saw it fit to lump them all under Electronics Products & Solutions Segment. The good news is that profits were up for the quarter to $731 million (JPY80.3 billion), up from $603 million(JPY66.2 billion). Revenue, however, took a slip, down to $5.9 billion (JPY650.4 billion) from $6.4 billion (JPY713.1 billion). As for that increase in profits, itโs primarily due to:
reductions in operating costs mainly within Mobile Communications
In an ideal world, profits would be up due to increased sales, but as you can see from the charts below, each product category has experienced dramatic declines in the past decade.
Despite a downward trend in sales, cameras, namely Alpha is a healthy and well-managed division. The problem is that consumers dramatically favor smartphones over dedicated cameras, a tide that Sony cannot overcome, no matter how advanced their products are. Alas, instead of having a robust smartphone division to shift those consumers to Xperia, under Sony Mobile is fast approaching zero sales. At its current pace, Sony will sell around 3 million phones during FY19. I cannot express how disastrous this is. TVs at this point are simply there as well, slowly declining, and Iโve seen no signs out of Sony that they understand how to gain back any meaningful market share from what they showcased at CES.
Sony expects no reversal of their declining hardware trend in the upcoming quarter and nor do I for this entire year for that matter.
From Sony:
- In order to reflect the deterioration of market conditions, we have reduced our sales forecast for the fiscal year 40 billion yen to 2 trillion 70 billion yen.
- The competitive environment during the 2019 year-end selling season was particularly intense in the key product areas of TVs and mirrorless cameras, but, overall, we were able to control price, supply and inventory.
- Although competition in mirrorless cameras has increased as other companies have entered the market in earnest, we maintained our share in major markets and produced results for overall digital cameras that were higher year-on-year.
- The intensely competitive environment in the TV market continued due to a deterioration in panel prices, but we maintained a higher average selling price year- on-year by focusing on high valued-added and large screen models, and we have maintained inventory at an appropriate level.
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