Sony (SNE) Q1 Earnings & Sales Fall Y/Y, Guidance Slashed
Zacks Equity Research
Updated
Sony Corp. SNE has managed to swing back to profits in the first quarter after posting losses in the prior quarter. The company reported first-quarter fiscal 2016 earnings per share of ¥16.44 (16 cents), down 76.6% from the year-ago tally.
The bottom-line decline is largely attributable to escalating charges related to the Semiconductors segment after the Kumamoto earthquakes. Also, dull top-line performance and foreign currency headwinds affected the bottom-line performance.
Inside the Headlines
In the quarter, Sony’s sales and operating revenues were down 10.8% year over year to ¥1,613.2 billion ($15.7 billion). Net sales also declined 9.3% to ¥1,362.5 billion ($13.2 billion).
Sony’s unimpressive top-line performance resulted from weak performance of six of its nine segments. Foreign currency headwinds and the aftermath of Kumamoto earthquakes also proved to be a major drag on first-quarter revenues.
Additionally, operating income came in at ¥56.2 million ($546 million) compared with the year-ago tally of ¥96.9 million. Primarily, the deterioration of operating results at the Semiconductors segment more than offset the improvements recorded in the Game & Network Services (“GN&S”) and Mobile Communications (“MC”) segments.
Sales and operating revenues at the G&NS segment increased 14.5% year over year to ¥330.4 billion ($3,208 million). As expected, phenomenal PS4 software sales (including sales through network) drove growth at this segment. However, currency fluctuations and soft PlayStation3 hardware and software sales acted as headwinds.
The Music segment experienced an 8.7% rise in sales and operating revenues to ¥141.5 billion ($1,374 million) on a year-over-year basis buoyed by an increase in Recorded Music and Visual Media & Platform sales. U.S. pop sensation Beyonce’s Lemonade album sales drove Recorded Music growth during the first quarter.
Pictures Segment’s sales and operating revenues rose 6.9% year over year to ¥183.3 billion ($1,780 million). Higher sales of Motion Pictures and Media Networks acted as primary growth drivers for this segment. The Angry Birds Movie, the strongest crowd pulling animation this summer, propelled Theatrical revenue growth during the quarter. Also, higher advertising revenues in India and Latin America fuelled Media Networks growth.
However, Financial Services revenues dropped 16.7% year over year to ¥232.7 billion ($2,259 million). Deterioration at Sony Life proved to be a drag on revenues.
MC’s sales and operating revenues tumbled 33.7% year on year to ¥185.9 billion ($1,805 million) due to the decrease in smartphone unit sales as a result of the company’s decision to prune this business. Overall sluggishness in smartphone sales across the globe added to Sony’s woes.
The Home Entertainment & Sound (“HE&S”) segment witnessed a 6.8% year-on-year decline in sales and operating revenues to ¥235.9 billion ($2,290 million). Foreign currency fluctuations acted as a major dampener, offsetting the improvement in LCD television unit sales.
Additionally, Semiconductors sales and operating revenues declined 22.9% year over year to ¥144.4 billion ($1,402 million) on account of weak image sensors sales. Also, factors including the Kumamoto earthquakes, lower demand from mobile makers and foreign exchange rates compounded the fall.
Components sales and operating revenues tumbled 22.7% year on year to ¥44.1 billion ($1,805 million). Prolonged weakness in battery business coupled with foreign currency headwinds weighed on sales.
Moreover, the Imaging Products & Solutions (“IP&S”) segment recorded a 25.8% year-over-year decline in sales and operating revenue to ¥122.2 billion ($1,187 million). Hindrance in procuring components since the Kumamoto earthquakes has impacted sales of Still and Video cameras, adding to Sony’s woes. Also, a general contraction of this market further aggravated the fall.
Liquidity & Cash Flow
As of Jun 30, 2016, Sony’s cash and cash equivalents were ¥631.1 billion ($6,127 million), down from ¥ 983.6 billion recorded at the end of Mar 31, 2016.
Long-term debt totaled ¥533.7 billion ($5,182 million) compared with ¥ ¥556.6 million as of Mar 31, 2016.
Guidance
Based on the present market scenario, Sony has revised its forecast for fiscal 2016 (year ending Mar 31, 2017) downward. The company now expects sales to be affected by stronger currency headwinds as well as lackluster sales in MC, Pictures and G&NS.
On a year-over-year basis, consolidated operating income is expected to improve marginally on the back of better operating results at the MC and G&NS segments. Sony has reiterated this operating income guidance. Meanwhile, the earthquake is expected to impact sales by ¥26 billion and ¥48 billion at the IP&S and Semiconductors segment, respectively. Sony affirmed that since the sales of these two segments are expected to be lower than the level anticipated prior to the earthquakes, it will result in total expected negative impact on consolidated operating income of approximately ¥80 billion.
As per segments, Sony believes that expected decrease in smartphone sales and foreign exchange rates will hurt Mobile communications sales more than what was expected earlier. This might aggravate the deterioration of sales at this segment. Sales of G&S, Pictures and HE & S are also expected to be lower than the earlier forecast on account of negative currency effects. Similarly, sales at the Semiconductors and Components segments are also expected to be lower. While lower-than-expected image sensor sales are expected to hurt the Semiconductors segment, a lackluster battery business is likely to dent margins at the Components segment.
However, sales at Music and Financial Services are expected to remain in line with the guidance provided earlier. Impressive performance of Recorded Music and Visual Media are expected to boost Music sales. IP&S is the only segment for which Sony has raised the sales guidance, banking on factors like the shorter-than-expected delay in the supply of components used for still and video cameras.
SONY CORP ADR Price, Consensus and EPS Surprise
SONY CORP ADR Price, Consensus and EPS Surprise | SONY CORP ADR Quote
Going Forward
Sony started fiscal 2016 on a rather dull note with bottom and top line declines on a year-over-year basis. Also, the downward guidance revision by the company is not likely to go well with investors. At present, the company is making concerted efforts to fend off the challenges posed by the Kumamoto earthquake at the beginning of the year. However, tepid sales across multiple segments including Mobile Communications, Home Entertainment & Sound, Semiconductors and Components signal at no immediate respite. In addition, currency fluctuations continue to pose as a major concern for the beleaguered Japanese conglomerate.
Despite these challenges, the company’s Games business is expected to be its strongest growth driver, as signaled by robust console sales and increase in subscribers to its PlayStation network. Also, Sony has high expectations from the Virtual reality field, which allows it to leverage from several of its capabilities like cameras and shooting, content production capabilities and entertainment assets.
During the first quarter of 2016, Sony’s gaming division, Sony Interactive Entertainment America LLC (“SIEA”), unveiled an attractive line-up of PS4 including Days Gone, Spider-Man, LEGO Star Wars: The Force Awakens, God of War, Death Stranding, Final Fantasy XV, Resident Evil 7 biohazard at the Electronic Entertainment Expo (“E3”) video game conference. Sony is largely banking on its PS4 customer base of 40 million for increased traction of the new games.
Sony currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include CBS Corporation CBS, Hanesbrands Inc. HBI and Marine Products Corp. MPX. All the three companies carry a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
