The biggest highlight of Sony Corporation’s (NYSE: SNE) The profit report for the fiscal year and the fourth quarter of 2019 was a trend that was generally overshadowed by other companies. Sony refrained from making profit estimates for the first quarter of fiscal year 2020 (Q1 FY2020) because it was unsure about the true nature of the economic disturbances that heralded the corona virus. Following the fiscal year results in March, Sony is back today with a critical earnings report for the first quarter of 2020.
Of Sony’s seven operating segments, those primarily focused on entertainment through music or film have experienced a decline in sales. On the other hand, Sony’s Gaming & Network Services (G&NS) segment has come back to life through sales the company made through the PlayStation Plus (PS Plus) premium network subscription service that has maintained its recent growth trajectory.
Sony Corporation’s revenue growth remains unchanged in Q1 2020 as only two out of five operating segments grow revenue
At the end of the quarter ending in June, Sony Corporation earned ¥ 1.968 billion in revenue, representing two percent year-over-year growth in a critical quarter. However, 2% year-over-year revenue growth was marred by a 1 percent decline in Sony operating profit as it struggled to keep pace with costs as it prepares to renew a major product line at a time when economies are moving worldwide are struggling with unprecedented declines in productivity and output.
Crucial for Sony, however, was that sales in G&NS that declined in the previous quarter grew consecutively as the Play Station 4 maintained its trend of sequential growth, despite Sony’s confirmation that an upgrade was on its way to the consumer. On an annual basis, however, hardware sales in the segment declined by ¥ 46 million, but the segment continued nonetheless and Sony grew revenue by 32%.
This was fueled by a staggering 121% change in Sony’s revenue from Digital Sales, the segment that represents sales made through full video game downloads on PlayStation Store. Digital sales were helped by 65% revenue growth through in-game items, currencies and upgrade options.
Both heavy earners had their earnings cut year-over-year in Sony’s Q1 FY19, and their growth comes at a time when the company says recently launched titles like The Last of Us Part II and Ghosts of Tsushima are doing well.
According to Sony’s own data released in late June, Ghost of Tsushima sold over 2.4 million copies worldwide in just three days of launch. The Last of Us Part II, on the other hand, sold four million copies in the three days after launch
Ahead of G&NS, Sony’s earnings in both Pictures and Music fell year on year. For Pictures, the decline was expected because no films were released in North America in the past quarter. Subsequently, this silence, coupled with lower media outlets, resulted in Pictures revenue falling six percent year over year. At the same time, however, Sony’s operating expenses also declined in the segment, and after a drop in marketing expenses, the company was able to gain more (approximately ¥ 24 billion annually) from operating income.
Revenue in Music was hurt by a drop in the number of pedestrians to outlets that ultimately affected physical record sales, a slowdown in music publishing, and cancellation of live music events. The only benefit in the music industry was some growth in subscriptions and ad-supported streaming revenue. For the quarter, Harry Styles’ Fine Line topped the charts and replaced Khalid’s Free Spirit which took the top spot at Sony’s fiscal year 2019. In Japan, Nogizaka46 was dethroned by JUJU, whose YOUR STORY was the best-selling recorded music project. .
For fiscal year 2020, Sony expects music revenues to fall 7% year over year and operating income to fall by ¥ 12.3 billion. This decline will be fueled by the same reasons why revenues declined in the previous quarter, as the company does not expect the current post-pandemic environment to stabilize significantly in the coming months. Similar is Sony’s forecast for the Pictures segment, which according to the company will experience a 25% drop in sales by the end of March 2021. In an awkward revelation, Sony also admitted that blocking the release of Motion Pictures will have an impact on the company’s financial statements over the next two to three years.
Financial services help G&NE increase Sony for its sales growth in Q1 FY2020
Sony’s first quarter star was undoubtedly the Financial Services division. The division reported year-on-year revenue growth in the same quarter of the previous fiscal year, and by the end of Sony’s first quarter, this was reversed to show a 33% increase in sales, bringing net sales to ¥ 447 billion came. About 82% of this division’s 110 billion sales growth was driven by Sony’s insurance company Sony Life – with Life’s revenues accounting for 87% of the segment’s total revenues. As Sony Corporation’s total revenue grew by ¥ 43 billion in Q1, it is clear that if Sony Life had not performed this way, the Corporation would have reported an annualized decline in sales in the quarter.
Despite the sales increase, however, financial services struggled during the quarter as new policy acquisitions declined compared to the previous fiscal year and Sony struggled to keep pace with costs.
The crystal ball from Sony or the guideline for the current financial year is the most important aspect of the current profit report. The company, like everyone else, has been hit hard by the coronavirus and its expectations for the future will set the bar for what’s to come. At the end of the current fiscal year (FY2020), Sony expects flat annual revenue growth, a 26.7% decrease in operating profit and a 12.4% decrease in net profit. The forecast comes at a time when management remains undecided about an updated dividend payout policy to address investor concerns in times of global crisis.
The forecast for FY2020 shows that the 26% G & NS growth expected by Sony due to the launch of the Play Station 5 will not be translated into the operating income of the segment after launch. Sony’s launch date for the PS 5 is planned for the holiday season and the company expects the first quarter after launch to lead to a decline in the aforementioned sales growth due to hardware and marketing costs.
In line with today’s earnings, Financial Services is the only segment other than G&NS that Sony expects to grow at the end of this fiscal year. Aside from this, all segments are expected to decline in sales with Pictures falling victim to the impact.
Today’s forecast also confirms that Sony has in fact extended its estimates of when the economic recovery could start after the corona virus. It looks clear that the company has extended its timeline for when the current economic disruption could ease. In its 2019 fiscal year (FY2019) earnings, Sony had stated that it expected the corona virus impact to “significantly decrease” by the end of Q2 FY2020 (the current quarter ending in September).
If this estimate had persisted in the company’s boardrooms in the past quarter, forecasts for Sony FY20 would have been very different. But as evidenced by the company’s serious pessimism for the near future of the Pictures division, management now believes the virus may not clear as quickly as initially expected.