Sony First Quarter 2020 Results – Gaming & Financial Services Rescue Virus Wary Revenues

Ramish Zafar
The Last of Us 3

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

The biggest highlight of Sony Corporation's (NYSE:SNE) fiscal year and fourth quarter 2019 earnings report was a trend that was eclipsed by other companies in general. Sony refrained from providing earnings estimates for its first quarter of the fiscal year 2020 (Q1 FY2020), as it was uncertain about the true nature of the economic disruptions ushered in by the coronavirus. Following the fiscal year results in March, Sony is back today with a crucial earnings report for the first quarter of 2020.

Out of Sony's seven operating segments, those that focus primarily on entertainment through music or film have experienced drops revenue. On the other hand, Sony's Gaming & Network Services (G&NS) segment has roared back to life via sales that the company made through the PlayStation Plus (PS Plus) premium network subscription service which maintained its recent growth trajectory.

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Sony's G&NS segment came to the company's rescue in the first quarter of the fiscal year 2020 (Q1 FY20) as it joined Financial Services to pull an overall two percent revenue growth. Image: Sony Corporation Q1 FY2020 Consolidated Financial Results

Sony Corporation's Year-Over-Year Revenue Growth Stays Flat In First Quarter of Fiscal Year 2020 As Only Two of Five Operating Segments Grow Revenue

At the end of the quarter that ended in June, Sony Corporation earned ¥1,968 billion in revenue, marking for a two percent year-over-year growth in a crucial quarter. The 2% year-over-year growth in revenue was however marred by a one percent drop in Sony's operating income as it struggled to keep up with costs as it prepares to refresh a major product line at a time when economies all over the globe are struggling with unprecedented drops in productivity and output.

Crucially for Sony though, revenue in G&NS that had dropped in the previous quarter grew sequentially as the Play Station 4 maintained its trend of sequential growth despite confirmation from Sony itself that an upgrade was headed consumers' way. Year-over-year, however, hardware sales in the segment dropped by ¥46 million, but despite this, the segment pulled through and awarded Sony with a 32%  revenue growth.

This was fuelled by a staggering 121% change in Sony's earnings through Digital Sales, which is the segment that denotes sales made through full video game downloads on the PlayStation Store. Digital Sales was aided by 65% growth in sales exhibited via in-game items, currency and upgrade options.

Both these heavy earners had dropped their revenues year-over-year in Sony's Q1 FY19, and their growth comes at a time when as-per the company, recently launched titles such as The Last of Us Part II and Ghosts of Tsushima are doing well.

According to Sony's own data revealed at the end of June, Ghost of Tsushima sold more than 2.4 million units globally in just three days post-launch. The Last of Us Part II, on the other hand, sold four million copies in the three days post-launch

Ghosts of Tsushima's Kurosawa Mode is named after Japanese film director Akiro Kurosawa known for movies such as Seven Samurai, Rashomon and Throne of Blood.

Moving forwards from G&NS, Sony's revenue in both Pictures and Music dropped year-over-year. For Pictures, the drop was expected as no motion pictures were released in North America during the previous quarter. Subsequently, this lull when combined with reduced media network spending ensured that Pictures revenue dropped by six percent year-over-year. However, at the same time, Sony's operating costs in the segment also drop and subsequently, the company was able to eke out more (roughly ¥24 billion year-over-year) in operating income following a drop in marketing expenditure.

Revenue in Music was hurt via drops in foot traffic to outlets that ended up affecting physical record sales, a slowdown in music publishing and cancellation of live music events. The only upside in the Music space was some growth in subscription and ad-supported streaming revenues. For the quarter, Harry Styles' Fine Line topped the charts and replaced Khalid's Free Spirit which had taken the top place at the end of Sony's fiscal year 2019. In Japan, Nogizaka46 was dethroned by JUJU whose YOUR STORY was the best selling recorded music project.

For its fiscal year 2020, Sony expects Music revenues to drop 7% year-over-year and operating income to drop by ¥12.3 billion. This drop will be fuelled by the same reasons that revenues dropped in the previous quarter as the company does not expect the current post-pandemic environment to stabilize significantly over the course of the coming months. Similar is Sony's prediction for the Pictures segment, which as per the company, will witness a 25% revenue decrease by the end of March 2021. In a discomforting reveal, Sony also admitted that the blocking of Motion Pictures release will end up impacting the company's financial statements over the course of the next two to three years.

Sony Corporation's Financial Services segment joined G&NS to lift the company's overall revenues to the growth territory. Image: Sony Corporation Q1 FY2020 Consolidated Financial Results

Financial Services Aids G&NE In Lifting Sony Up For Hairline Revenue Growth In Q1 FY2020

The star of Sony's first quarter was undoubtedly its Financial Services division. The division reported flat-year-over-year revenue growth in the year-ago quarter, and by the end of Sony's 1Q, this had reversed to show a 33% revenue increase that put net sales at ¥447 billion. Roughly 82% of the 110 billion in revenue growth shown by this division came courtesy of Sony's Insurance company Sony Life – with revenues from Life accounting for 87% of the segment's entire revenues. Given that Sony Corporation's overall revenue grew by ¥43 billion in Q1, it's clear that had Sony Life not performed the way that it did, the Corporation would have reported a year-over-year revenue drop in the quarter.

However, despite the revenue boost, Financial Services struggled during the quarter as new policy acquisitions dropped as opposed to those in the previous fiscal year and Sony struggled to keep up with costs.

Sony's crystal ball or its guidance for the current fiscal year is the most important aspect of today's earnings report. The company, like all others, has been hit hard by the coronavirus, and its expectations about the future will set the bar of what is to come ahead. At the end of its current fiscal year (FY2020) Sony expects to post flat year-over-year revenue growth, a 26.7% operating income drop and a 12.4% net income drop. The forecast comes at a time when management remains undecided on an updated dividend payout policy to satiate investor concerns at a time of global crisis.

Sony Corporation's forecasted results for the end of Fiscal Year 2020. Image: Sony Corporation Q1 FY2020 Consolidated Financial Results

The FY2020 forecast shows that the 26% G&NS growth that Sony expects will take place due to the launch of the Play Station 5 will not translte into the segment's operating income post-launch. Sony's launch date for the PS 5 is slated for the holiday season, and the company expects that the first quarter post-launch will result in the aforementioned revenue growth being reduced due to hardware and marketing costs.

Mirroring today's result, the only other segment apart from G&NS that Sony expects will post growth at the end of this fiscal year is Financial Services. Apart from this, all segments are expected to drop in revenue, with Pictures taking the brunt of the impact.

Today's forecast also confirms that Sony has in effect extended its estimates of when the post-coronavirus economic recovery might commence. By the looks of things, it's clear that the company has extended its timeline for when the current economic disruption might subside. In its earnings release for the fiscal year 2019 (FY2019) Sony had stated that it expected the coronavirus impact to be "significantly diminished" by the end of the company's Q2 FY2020 (the current quarter that will end in September).

Had this estimate persisted in the company's boardrooms in the previous quarter, Sony's FY20 forecasts would have been quite different. Yet, as evidenced by the company's severe pessimism for the near-term future of the Pictures division, management now believes that the virus might not be gone as soon as initially expected.

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