Sony 2019-20 Financial Year Results – Virus Blues Evident, PlayStation 5 Potential Crucial

May 13, 2020
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Shares of Sony Corporation (NYSE:SNE) are currently down by more than 4% on the New York Stock Exchange, following the company's earnings release at the end of business hours in Japan earlier today. Like its peers, Sony too has been hit hard by the coronavirus, with all major metrics of the company's income statement dropping year-over-year.

In its previous fiscal year (FY19) Sony Corporation earned ¥8.25 trillion in revenue, marking for a 5% year-over-year drop in revenue over FY18. Top-line revenue drop of 5% for the company translated into another 5% drop in operating income and a staggering 36% drop in net income, as Sony struggled to navigate costs at a time when it gears up for the launch of the PlayStation 5.

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Consolidated financial results for Sony Corporation for the Fiscal Year 2019 ending on March 31st, 2020.

Sony's Music & Pictures Help It In Crucial Fiscal Year Marred By PlayStation and Virus Woes

Heading into Sony's earnings results for its previous fiscal year it was clear that the end of the current console cycle would have been of little help to the Japanese entertainment giant. Looking at Sony's five operating segments and the revenue brought in by each during the fiscal year, it's clear that while the coronavirus epidemic has indeed hurt the company, it's also proven to be a boon in two areas.

Sales and Operating Revenue (Sony's terms for Net Sales or Revenue before the cost of goods sold is subtracted) for Sony's Music and Pictures division has shown impressive year-over-year and quarterly increases. As of March 31st, 2020, Sony had brought in ¥839 billion by selling Music and related productions, and the company had brought in ¥1 trillion through its Pictures division.

These sales translate into operating incomes of ¥90.1 billion for Music and ¥68.2 billion for Pictures. Sony's performance in Pictures was helped by mega-blockbusters such as Spider-Man: Far From Home, Once Upon a Time in Hollywood and Jumanji: The Next Level. The three titles combined have netted Sony a cool $2.3 billion in revenue, with Spider-Man: Far From Home alone earning Sony $1.1 billion.

Tom Holland (Peter Parker) with a pair of smart-glasses in Spider-Man: Far From Home. The glasses play a crucial role in the movie's central plot, defining character motives. (Image Credit: Sony Corporation)

Pictures also witnessed an operating income bump of ¥1.5 billion through the coronavirus, Sony reports, due to digital sales growth and a drop in marketing spending because of delayed motion picture title releases in the coronavirus quarter.

Music's healthy revenue growth was aided by an increase in music streamed and an increase in published music. The former is likely to have been aided by lockdown restrictions all over the globe, and the latter has witnessed growth due to Sony's EMI Music Publishing Limited acquisition. Music streaming grew revenue by roughly ¥15 billion during the previous quarter, making for the segment's biggest growth in all four quarters of Sony's fiscal year 2019.

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Lil Nax X, Khalid, Harry Styles, Chris Brown and TOOL led aggregated revenue in Music and were followed by last year's highest earner Travis Scott who came in at a respectable sixth place despite being much older than others. Khalid's Free Sprit was a surprise this year as the title jumped to second place for aggregated revenues in FY19 despite being in seventh place in FY18.

In Japan, Nogizaka46 continued to dominate by bagging four of the top five places in terms of aggregate revenue earned. Sony defines aggregate revenue as a combination of digital track and album sales.

Sony's Game & Network & Services was the biggest beneficiary from the coronavirus outbreak during the company's FY19.

Electronics Products & Solutions and Game & Network Services Witness Revenue Drops Despite Positive Virus Effect on Latter

Heading into earnings results for the fiscal year 2019, it was clear that the tail-end of the console cycle would undoubtedly impact revenue in Sony's G&NS (Game and Network Services) operating segment. Sales in the segment stood at roughly ¥2 trillion (¥238 million operating income, -23%), after dropping by 14% year-over-year. This drop was fuelled by the aforementioned drop in PlayStation 4 sales, ¥65 billion worth of foreign exchange headwinds and decreasing game sales.

Looking at these factors, the reader is bound to wonder about the benefit from the coronavirus to Sony's gaming division. This benefit, it seems, has come primarily through growth in PlayStation Plus subscribers. At the end of March, subscribers of the gaming service stood at 41.5 million, having grown by 2.7 million over the previous quarter and by 5.1 million year-over-year.

Diving deeper into Sony's performance in the segment, it's clear that PlayStation Plus was the only bearer of good news for the company in this segment during the fiscal year 2019. During the year, PlayStation 4 hardware sales dropped by 4.2 million units and during the fourth fiscal quarter, they stood at a record low of 1.5 million units. Game software units also dropped by roughly 13 million units during the year, as digital downloads/total game sales percentage stood at a record high of 66% during the fourth – reflecting a trend observed by others including Apple and NVIDIA and reflecting upgraded purchasing habits following the coronavirus.

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Electronics Products & Solutions was Sony's only other operating division apart from Pictures that witnessed operating income growth during the quarter. This growth has not been due to an increase in revenue, as evidenced by the ¥329 billion drop in revenue exhibited by the division due to decreasing mobile and television unit sales during the fiscal year 2019. EP&S consolidates earnings from Sony's home entertainment and mobile products, and the segment's operating income increased by ¥10.8 billion during the year despite the ¥23 billion foreign currency headwinds.

Concluding last year's performance by taking a look at exchange rate headwinds, the Japanese Yen's appreciation against the U.S. Dollar and Euro has hurt Sony by ensuring that fewer Yuans make it in the company's coffers. Sony states that the Yen's impact has reduced sales by ¥180 billion and operating income by ¥58.2 billion. Given that they reported a drop of ¥48.8 billion in operating income, had the exchange rates remained stable, Sony might have fared a lot better in the quarter.

Heading into the Current Fiscal Year, It's Clear That Sony's Got Its Work Cut Out In Several Areas

Following other companies, and taking stock of the current uncertainty prevalent in markets following the global economic disruption ushered in by the coronavirus, Sony too has refused to provide guidance for the current fiscal year. Yet, given knowledge of the company's expected game, movie and console launched due to take place throughout this fiscal year, we can make estimates on what to expect from it at the end of the current fiscal year (FY20).

The biggest positive contributor to Sony's revenue during FY20 will be the PlayStation 5 launch. the next-generation gaming console will drive up gaming sales at a time when Sony is reeling from hits to its other opeating areas. However, if supply chain gluts persist following the PlayStation 5 launch, then it's possible that Sony is unable to realize the full revenue potential from the console's sales. Analyst opinions regarding the console have been mixed, with some expecting things to proceed smoothly while others believe that the PlayStation 5 will undersell as compared to its predecessor and witness other delays.

Additionally, while Sony has the PlayStation 5 launch to look forward to, the company also has new gaming titles headed our way later this year. The Last of Us Part II and Ghost of Tsushima will make positive contributions to the company's revenue stream and aid its Gaming segment in growing revenues.

Sony Corporation expects the coronavirus to peak at the end of June, with restrictions losing during the third quarter of the calendar year 2020.

Sony's Music division should also see growth in sales during the current quarter as populations continue to stay indoors due to the coronavirus. However, the company's Pictures division shouldn't see favor from the coronavirus as shutdowns across the globe mean reduced foot traffic to cinemas and delayed production for both television and cinematic titles. Sony expects to release eight titles in the U.S. during its current fiscal year, and the company intends to launch new seasons of at least 27 titles in the future, provided that production is able to pick up the pace.

While the company did not provide revenue or net income guidance for the current fiscal year, it did nevertheless share its beliefs on the current working environment impacted by the coronavirus. Taking a look at Sony's data, it's clear that the company expects its EP&S segment to be the biggest loser following the virus's outbreak. Sony believes that operating income for this segment will be at best half and at worst a quarter of the operating income that this segment brought in during the fiscal year 2019.

Music is anticipated to be the best-performing segment during this year in terms of operating income, with Sony expecting it to earn roughly 80% of FY19 operating income in FY20 in a best-case scenario. Gaming appears to be the least volatile operating segment for the current fiscal year, with best and worst-case estimates putting the segment in a roughly 70%-80% of FY19 operating income.

Sony factors in several assumptions in its model. The company believes that the virus will peak at the end of this calendar year's first half, and therefore continue to force populations all over the globe in lockdowns. Additionally, it also believes that by the end of December 2020, business disruption ushered in by the virus will have fully subsided and things will have returned to normal. Sony's assumptions provide the reader with a grim reality that assures one that the virus will have wiped off one full year following its outbreak in Wuhan, China last year.

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All-in-all, Sony's earnings results mirror the grim reality ushered in by the coronavirus. In what would otherwise have been a great year for the company due to the PlayStation 5 launch and the upcoming release of highly-anticipatd gaming titles has now been reduced to a year for which management has no choice but to speculate the extent of the losses that it expects to incur. Sony's decision to determine operating incomes for its different segments as percentages of last fscal year's results is evidence of this fact, and given the lockdowns in place currently, the company has few avenues on which it can count on to produce strong results for the 12 months that will end on March 31st, 2021.

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