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Sony (SNE) Q4 Loss Narrows and Revenues Decline Y/Y

Sony Corp. SNE reported fourth-quarter fiscal 2015 GAAP loss per share of ¥70.03 (62 cents), which is narrower from the year-ago tally of ¥91.39.

The year-over-year improvement in the bottom line came on the back of lower operating costs and other expenses.

For full-year fiscal 2015, the company reported earnings of ¥117.49 ($1.04), up 3.9% from the year-ago tally of ¥113.04. Healthy performance by the Game & Network Services (G&NS), Imaging Products & Solutions (“IP&S”), Music and Home Entertainment & Sound (“HE&S”) segments contributed to the modest bottom-line growth. 

Inside the Headlines

For the quarter, Sony’s sales and operating revenue were down 5.9% year over year to ¥1,824.1 billion ($16.1 billion). Net sales also declined 6.4% to ¥1,1543.7 billion ($13.6 billion).

Sony’s unimpressive top-line performance resulted from weak performance of five of its eight segments. Stellar PlayStation4 (“PS4”) software sales continued to drive growth while lower Mobile Communications and Devices segment sales proved to be a drag.

For full-year 2015, sales declined 1.3% to ¥8105.7 ($71,732) largely on account of weakness in the Mobile Communications business as smartphone unit sales continued to take a beating. Also, currency fluctuations compounded Sony’s problems, offsetting the growth in sales.

Additionally, operating loss came in at ¥92.8 billion ($822 million) compared with the year-ago tally of ¥97.8 billion. Impressive performance by segments like IP&S, MC and HE&S resulted in the narrowing of operational losses.

Sales and operating revenues at the G&NS segment increased 9% year over year to ¥315.5 billion ($2,792 million), mainly on robust PS4 software and hardware unit sales.

The Music segment experienced a 10.9% rise in sales and operating revenues to ¥167.5 billion ($1,483 million) on a year-over-year basis due to an increase in Visual Media and Platform sales.

Pictures Segment’s sales and operating revenue rose 8.7% year over year to ¥320.7 billion ($2,838 million). Higher SVOD revenues in Motion Pictures and Television Productions coupled with growing subscription revenues in Media Networks in certain European regions and India drove sales.

Also, Financial Services revenues dropped 0.5% year over year to ¥260.9 billion ($2,309 million). While rise in insurance premium revenues at Sony Life contributed to sales, deterioration in investment performance revenues offset this improvement leading to an overall decline.

However, MC’s sales and operating revenue tumbled 37.9% year on year to ¥183.2 billion ($1,621 million) due to the decrease in smartphone unit sales as a result of the company’s decision to prune this business to boost profitability. Overall sluggishness in smartphone sales across the globe added to Sony’s woes.

The HE & S segment witnessed an 8.4% year-on-year decline in sales and operating revenues to ¥214.8 billion ($1,901 million). A sharp decrease in LCD televisions, home audio and video unit sales were attributable to the lackluster sales at this segment.

Additionally, Devices’ sales and operating revenues declined 15.4% year over year to ¥189.9 billion ($1,681 million) on account of weak sales of image sensors and battery business.

Moreover, the IP & S segment recorded a 9.6% year-over-year decline in sales and operating revenue to ¥160.4 billion ($1,419 million), largely attributable to a decline in sales of digital cameras.

Liquidity & Cash Flow

As of Mar 31, 2016, Sony’s cash and cash equivalents were ¥983.6 billion ($8,705 million), up from the year-ago tally of ¥949.4 billion.

Long-term debt of the company totaled ¥556.6 billion ($4,926 million) compared with ¥766,675 million as of Sep 30, 2015.

Guidance

On account of an earthquake in the Kumamoto region on Apr 14, 2016, Sony had to suspend operations at the Kumamoto Technology Center. This has hampered the formulation of sales forecast for the MC, G&NS, IP&S, HE&S and Devices segments. The company plans to offer its forecast for fiscal 2016 (for the fiscal year ending Mar 31, 2017) in May this year. However, according to preliminary assumptions, the Devices segment is expected to take the worst hit on account of this natural disaster. Also, the suspended operations at the Devices and IP&S segments are likely to translate into huge opportunity costs.

The catastrophe is also expected to have negative spillover effects on the MC, G&NS and HE&S segments. However, Sony provided its outlook for three of its segments for fiscal 2016, namely, Pictures, Music and Financial Services. The company expects Media Networks to ramp up sales at the Pictures segment. Music sales are expected to decline substantially due to currency fluctuations and lackluster sales at Recorded Music. Nevertheless, an increase in insurance premium revenues at Sony Life is expected to drive Financial sales in fiscal 2016.

To Conclude

We believe significant headwinds in Sony’s multiple business lines including mobile, sensor and devices have siginficantly hurt growth in fourth-quarter 2015. Also, the recent earthquake at the Kumamoto region signals bleak prospects for the company as the region accomodates the Kumamoto Technology Center – the manufacturing site for camera image sensors as well as micro-display devices. In addition, currency fluctuations are expected to act as headwinds for Sony.     

However, on the positive side, stellar sales of PS4 hardware coupled with some interesting upcoming launches like Uncharted 4 and Horizon: Zero Dawn are expected to bolster top-line sales. Also, a leaner organizational structure and strategic restructuring might be able to combat some of these weaknesses.

Sony currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same sector are Bridgepoint Education, Inc. BPI, Monarch Casino & Resort Inc. MCRI and Prestige Brands Holdings, Inc. PBH. All the three stocks carry a Zacks Rank #2 (Buy).

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