EQUITIES UPDATE: Cindy discusses Sony's earnings and positive outlook



Sony is down 6% from its recent highs despite posting a record-breaking result for fiscal 2017 with operating profit up 155% y/y to 734.86 billion yen. In addition, the company earned its highest group net profit in 10 years, booking 490.79 billion yen, a more than five-fold increase from the previous year. This increase was led primarily by the semiconductors group which includes mobile camera chips and imaging sensors supplied to global smartphone customers, including Apple.

However, the stock price sold off sharply when, in a surprise to analysts, management predicted lower group operating profit for the fiscal year through next March of 670 billion yen, down 8.8%, and a consolidated net profit of 480 billion yen, down 2.2%. The company blames weaker sales in its semiconductor groups and mobile segment as well as a stronger exchange rate for the more cautious outlook.

The biggest concern seems to be with the semiconductor segment which showed strong growth in FY 2017 with operating profit of 164 billion yen, beating Sony’s own estimate for 155 billion yen and reversing a 7.8 billion yen loss from the previous year. However, for the next fiscal year, the company is forecasting that the semi division will record a decline of 39% in operating profit to 100 billion yen on slowing smartphone sales. Additionally, Sony said it will increase its capital expenditures to 160 billion yen.

Another worry is the future of the gaming segment as PS4, which was launched in 2013, ends its product cycle. Already, momentum for this once highly popular offering is waning. For the entire the game & network division, the company earned 1.94 trillion yen for the fiscal year, a year-on-year increase of 18%. Operating income rose by 31% to 178 billion yen but missed Sony’s estimate for 180 billion yen. In the coming year, it expects to earn 1.9 trillion yen in revenue and generate 190 billion yen in operating profit, while PS4 sales will slow to 16 million from 19mn in FY2017.

However, countering the slowdown in games was a strong increase in gaming software sales which came in at 246.9 million units, a significant increase over the 217.9 million in the previous year. Also, subscribers to PlayStation Plus showed impressive growth with a y/y increase of 23% to 34.2 million subs. Sony can also expect a strong Q1 for its new God of War title which has received great reviews and strong intimal sales.

Finally, there appears to be some doubts about the future of Sony’s mobile business. Since 2014, this division has experienced a revenue decline every year. For FY2017, it posted sales of 724 billion yen, down 35 million yen y/y resulting in an operating loss of 28 billion yen. The company booked a 31.3 billion yen write down in fiscal Q4 and announced plans to reduce unit sales in an effort to turn the segment around.

While the outlook from the company may look disappointing, it can be argued that much of the conservative guidance can be attributed to the new Chief Executive Officer Kenichiro Yoshida as he takes over from retiring chief Kazuo Hirai. Mr. Hirai was responsible for the remarkable restructuring of the company in the past five years when he transformed the firm from a low-margin consumer electronics firm to a more sophisticated semiconductor and gaming play.

He has left the firm on solids footing for Mr. Yoshida set to continue the company’s transformation and he develops the heir apparent to PS4, continues it switch to a major online game player, redirects its mobile division from struggling Xperia models to 5G and pumps money into AI. We think the weakness in the name will be short-lived as the new CEO continues efforts to re-rate the company. The Model Thematic Portfolio holds Sony in its Japan and Asia technology basket.

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