Sony Corp. SNE reported second-quarter fiscal 2016 earnings per share of ¥3.76 (4 cents), down 85.6% from the year-ago tally.
The earnings plunge is largely attributable to dismal top-line performance and poor operating income. Other factors including currency headwinds, damage and restoration costs related to the Kumamoto earthquake and impairment charge associated with the planned transfer of the battery business also weighed on the bottom-line performance.
Inside the Headlines
In the quarter, Sony’s sales and operating revenues were down 10.8% year over year to ¥1,688.9 billion ($16.7 billion). Net sales also declined 15.1% to ¥1,411.9 billion ($14.0 billion).
Sony’s lackluster revenues resulted from the 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 second-quarter revenues.
Additionally, operating income came in at ¥45.7 million ($453 million) compared with the year-ago tally of ¥88 million. Primarily, the deterioration of operating results at the Semiconductors and Components segments more than offset the improvements recorded in the Pictures and Mobile Communications (“MC”) segments.
The Music segment experienced an 8.0% rise in sales and operating revenues to ¥150.2 billion ($1,487 million) on a year-over-year basis, buoyed by an increase in Recorded Music and Visual Media & Platform sales. Strong performance of the game application – Fate/Grand Order – for mobile devices drove Visual Media & Platform sales. Recorded music sales were supported by Celine Dion’s Encore unsoir, Nogizaka46’s Hadashi de Summer and Kana Nishino’s Just Love.
Pictures Segment’s sales and operating revenues were up 4.6% year over year to ¥192.1 billion ($1,902 million). Higher sales of Motion Pictures, Television Production and Media Networks acted as primary growth drivers for this segment. Blockbusters, including Ghostbusters, Sausage Party and Don’t Breathe, propelled Theatrical revenue growth during the quarter. While higher subscription “video-on-demand licensing revenues” for shows like The Crown and The Get Down drove Television Production revenues, higher advertising revenues in India and Latin America fueled Media Networks’ growth.
Financial Services revenues jumped 23.6% year over year to ¥260.5 billion ($2,279 million). Improvement of revenues at Sony Life, driven by a rise in the Japanese stock market, boosted the performance of this segment.
Sales and operating revenues at the Game & Network Services (“GN&S”) segment fell 11.3% year over year to ¥319.9 billion ($3,167 million). Currency fluctuations and price reduction of Play Station 4 (“PS4”) hardware more than offset the improvements in PS4 software sales.
MC’s sales and operating revenues tumbled 39.6% year on year to ¥168.8 billion ($1,671 million) stemmed by the decrease in mid-range smartphone unit sales as well as reduction in smartphone unit sales in unprofitable region. This segment is in the midst of a transformation as Sony has decided to prune its non-profitable businesses to optimize growth.
The Home Entertainment & Sound (“HE&S”) segment witnessed an18.7% year-on-year decline in sales and operating revenues to ¥234.9 billion ($2,326 million). Foreign currency fluctuations acted as major dampeners, along with decrease in home audio and video unit sales.
Additionally, Semiconductors sales and operating revenues declined 5.0% year over year to ¥193.7 billion ($1,918 million). Weak image sensors sales had more than offset higher image sensors sales for mobile products, resulting in the overall decline.
Components sales and operating revenues plummeted 23.7% year on year to ¥46.7 billion ($462 million). Prolonged weakness in battery business, along with foreign currency headwinds weighed on sales.
Moreover, the Imaging Products & Solutions (“IP&S”) segment recorded a 25.2% year-over-year drop in sales and operating revenues to ¥135.4 billion ($1,340 million). Hindrance in procuring components since the Kumamoto earthquakes has hurt sales of Still and Video cameras, adding to Sony’s woes. Also, a general contraction of this market and foreign currency headwinds aggravated the fall.
Liquidity & Cash Flow
As of Sep 30, 2016, Sony’s cash and cash equivalents were ¥525.2 billion ($5,200 million), down from ¥ 983.6 billion recorded at the end of Mar 31, 2016.
Long-term debt totaled ¥654.9 billion ($6,484 million) compared with ¥556.6 million as of Mar 31, 2016.
Based on the present market scenario, Sony has revised the forecast for consolidated operating income downward by ¥30 billion compared with the July forecast. Also, a loss of approximately ¥37.5 billion is projected to be recorded in the company’s net income. Sony anticipates incurring impairment charge of approximately ¥33.0 billion on account of transfer of the battery business.
As a matter of fact, a loss of ¥33.0 billion associated with the transfer of the battery business to Murata Manufacturing, is responsible for this downcast operating income outlook. Also, an anticipated rise in operating loss in the Components segment is expected to hamper the operating income.
In addition, the Kumamoto earthquake is expected to have a negative impact of ¥10.5 billion and ¥39.5 billion on consolidated operating income of the IP&S segment and Semiconductors segment. Meanwhile, Sony affirmed that the sales of these two segments are expected to be lower than the level anticipated prior to the earthquakes.
As per segments, Sony believes that the estimated fall in smartphone sales will hurt Mobile communications sales more than what was predicted earlier. Better-than-expected improvement in product mix and cost reduction initiatives is expected to benefit operating income of this segment. Sales and operating income forecast of the G&S segment remains unchanged. While higher network sales are expected to benefit this segment, deferrals in launch date of software titles may act as a spoilsport.
IP&S segments’ sales are expected to be higher than the previous forecasts as timely recovery in the supply of components of still &video cameras after the Kumamoto are proving to be conducive to segment’s growth. Also, an uptick in LCD television sales has caused the company revise the sales expectations of the HE&S segment. Similarly, Sony expects better sales at the Semiconductors segment on account of increased demand for image sensors and timely recovery of production sites after the earthquake.
However, sales for both Components and Pictures segment have been revised downward. While dismal sales of and recording media is expected to play a dampener for Components segment, Pictures segment is likely to take a beating from the weakening Media Networks revenues and the negative influence of the appreciation of the Yen. For its other two segments, namely Music and Financial Services segments, sales forecasts remain unchanged.
SONY CORP ADR Price, Consensus and EPS Surprise
SONY CORP ADR Price, Consensus and EPS Surprise | SONY CORP ADR Quote
Sony’s second-quarter fiscal 2016 performance was quite similar to the previous one, wherein both bottom and top line declined significantly, on a year-over-year basis. Also, the downcast outlook may be an additional disappointment for investors. Precipitous decline in sales across multiple segments, including Mobile Communications, Home Entertainment & Sound, Semiconductors and Components, is adding to the company’s woes. Also, currency fluctuations are thwarting the sales growth of the GN&S segment, the company’s key profit churner..
This apart, the Kumamoto earthquakes are also proving to be a major drag on the company’s financials. Also, the recent shift of the battery business may continue to exert pressure on the company’s margins in the near term.
Despite these negatives, Sony has braved most headwinds, leveraging on the strength of its flagship gaming product, PlayStation (PS). PS4 hardware and software sales have surpassed all the previous versions, bolstering Sony’s revenues to a great extent.
Going forward, we believe that the launch of the PlayStation’s VR headset, interesting lineup of PS4 games and strategic collaborations to expand its portfolio will act as meaningful growth drivers. Also, we perceive that diligent changes in its internal administration and uptick of sales in MC, HE&S and IP&S segments signal brighter days ahead for this Zacks Rank #1 (Strong Buy) company.
Other Stocks to Consider
Some other stocks in the sector include Capella Education Co. CPLA, Intrawest Resorts Holdings, Inc. SNOW and Michael Kors Holdings Ltd. KORS. While Capella Education and Intrawest Resorts Holdings sport the same Zacks Rank as Sony, Michael Kors carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in Minneapolis, MN, Capella Education, through its wholly owned subsidiaries, provides online post-secondary education services in the U.S, focused primarily on working adults. The company has an excellent earnings surprise history, beating estimates all through in the trailing four quarters. It boasts an average positive surprise of 10.9%.
Intrawest Resorts Holdings operates as a mountain resort and adventure company which delivers vacation and travel experiences to its customers. The company has managed to beat earnings thrice over the trailing four quarters and has an average positive surprise of 5.4%.
Michael Kors is a global accessories, footwear and apparel company. They offer two primary collections, namely luxury collection and accessible luxury collection. The company has beat estimates each time in the trailing four quarters, with an average beat of 10.8%.
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