Sony (SNE) Posts Striking Earnings Beat in Q2, Guides Up

Sony Corporation SNE reported second-quarter fiscal 2017 earnings per share of ¥101.35 (90 cents), which surpassed the Zacks Consensus Estimate of 54 cents by a whopping 66.7%.

Also, earnings grew a colossal 2600% from the year-ago quarter figure of ¥3.76, thanks to robust revenue growth.

Inside the Headlines

Sony’s sales and operating revenues were up an impressive 22.1% year over year to ¥2,062.5 billion ($18.3 billion). Solid growth in the Game and Network Services segment and positive effect of foreign currency translation spurred top-line growth. Sony witnessed spectacular performance across its segments.

Additionally, operating income came in at ¥204.2 million ($1,807 million), up a whopping 346.4% from the year-ago quarter. Robust improvement in the operating results of the Semiconductors and G&NS segments proved conducive to operating income. Further, the results of the year-ago quarter were adversely affected by inventory write-downs, charges due to the Kumamoto earthquake and also impairment charges related to the transfer of the battery business, which contributed to the favorable year-over-year comparison.

Sony Corp Ord Price, Consensus and EPS Surprise

Sony Corp Ord Price, Consensus and EPS Surprise | Sony Corp Ord Quote

Semiconductors sales and operating revenues jumped 17.9% year over year to ¥228.4 billion ($2.1 billion). Strong sales of image sensors for mobile products and absence of the impact of lower image sensor production due to the Kumamoto earthquakes bolstered sales of this segment.

Financial Services revenues were up 7.2%, year over year, to ¥279.2 billion ($2.5 billion). Healthy investment performance of the “separate account” at Sony Life proved conducive to sales growth of this segment. Higher insurance premiums revenue also drove this segment’s top line.

Moreover, sales and operating revenues of the Imaging Products & Solutions (“IP&S”) segment climbed 15.8% year over year to ¥156.7 billion ($1.4 billion). Absence of impact from the Kumamoto earthquakes and favorable foreign currency movements acted as a catalyst for the IP&S segment.

The Music segment experienced a 37.5% increase in sales to ¥206.6 billion ($1.9 billion) on a year-over-year basis. It benefited from elevated Visual Media and Platform sales, driven by “Fate/Grand Order” application. Also, Recorded Music sales grew supported by a steady rise in digital streaming revenues.

The Home Entertainment & Sound (“HE&S”) segment sales and operating revenues came in at ¥300.9 billion ($2.7 billion), up a striking 28.1% on a year-over-year basis. The top-line rise came on the back of improvement in product mix reflecting a shift to high value-added models, as well as favorable foreign currency movements.

Sales and operating revenues from the Pictures segment were up 27% year over year to ¥244 billion ($2.2 billion). Higher sales in Motion Pictures and Media Networks drove the overall growth. While strong worldwide theatrical performance of “Spider-Man: Homecoming” drove Motion Pictures sales, robust advertising and subscription revenues in India boosted Media Networks sales.

Sales and operating revenues at the Game & Network Services (“GN&S”) segment climbed an impressive 35.4% year over year to ¥433.2 billion ($3.9 billion). Improvements in the PS4 software sales (including sales through the network), impressive sales of PS4 hardware and favorable foreign currency movements proved conducive to increase in sales.

Mobile Communications (“MC”) sales inched up 1.9% year on year to ¥172 billion ($1.5 billion) due to an increase in sales of the fixed-line communications business, which was substantially offset by lower unit sales of smartphones.

Liquidity & Cash Flow

As of Sep 30, 2017, Sony’s cash and cash equivalents were ¥1000.8 million ($9 million) compared with ¥960.1 billion recorded on Mar 31, 2017.

Long-term debt totaled ¥587.8 million ($5.3 million) compared with ¥681.5 million as of Mar 31, 2017.

Acquisition

During the quarter, Sony's operating arm, Pictures Television Networks, signed an agreement to acquire a substantial majority stake in Japanese anime distributor, Funimation Productions, Ltd. The closing of the transaction, valued at $150 million, is subject to regulatory approvals and certain other conditions.

Funimation licenses and distributes Japanese anime content in the United States and operates the subscription streaming service FunimationNOW, available via PlayStation Store, iTunes Store, Google Play, Amazon Apps, Xbox Store and mobile devices. Funimation has enjoyed a solid growth trajectory since 2011. Sony believes this acquisition will help it deliver the best anime to fans across all screens and platform.

Guidance

Concurrent with the fiscal second-quarter results, Sony revised its revenue guidance for fiscal 2017 upward once again. Currently, the company expects total sales to be around ¥8,500, up 2.4% from the earlier figure of ¥8,300. The upward revision is largely attributable to changes in the expected impact of foreign exchange rates, as well as higher sales in Music and HE&S segments.

The company also raised its operating income guidance and now expects it to be around ¥630 billion (earlier projection: ¥500 billion), a jump of 118.2% from fiscal 2016. Improvements in operating income are anticipated to be driven by growth in Semiconductors Music and HE&S segments.

Per segments, four of the company’s divisions, namely GN&S, Music, Semiconductors and HE&S, are estimated to garner higher revenues than previously expected in August.

Overall, the GN&S segment is anticipated to benefit from an expected increase in PS4 hardware sales as well as network sales, while Music sales are predicted to be driven by higher-than-expected Visual Media and Platform sales as well as Recorded Music sales. Image sensor unit sales for mobile products will likely drive Semiconductors sales higher, while an expected increase in television unit sales will benefit HE&S revenues.

The forecasts for sales and operating income for the IP&S, Pictures and Financial Services segments remain unchanged from the August forecast. On the other hand, MC sales are forecast to be lower than earlier expected due to an expected decrease in smartphone unit sales.

Our Take

Sony’s first-half of fiscal 2017 was impressive, with spectacular top- and bottom-line growth and impressive numbers. The lingering effects of the Kumamoto earthquakes, which had washed out a chunk of its profits for fiscal 2016, have subsided for the most part. Also, the impressive rebound of the Semiconductor business is a major positive and is likely to accelerate the company’s growth momentum.

In addition, Sony’s focus on cost-saving initiatives, lower exposure in low-profit geographic regions, and reduction in advertising and promotion expenses are projected to drive the top line. Over the past few quarters, major restructuring efforts and internal shuffles have helped Sony optimize its business structure, thus raising profitability. This apart, we believe the company’s bolt-on acquisitions and strategic investments will help it expand its addressable markets.

Zacks Rank & Stocks to Consider

Sony currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the same space include Nintendo Co., Ltd. NTDOY, Wynn Resorts, Limited WYNN and GoPro, Inc. GPRO. While Nintendo and Wynn Resorts Block sport a Zacks Rank of 1 (Strong Buy), GoPro carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Nintendo has a positive earnings surprise of a whopping 190%, with three massive, consecutive beats over the trailing four quarters.

Wynn Resorts has beaten earnings thrice over the trailing four quarters and boasts an average positive surprise of 15.4%.

With three beats in the trailing four quarters, GoPro has a positive average surprise of 10.3%.

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Note: $1 = ¥111 (Average foreign exchange rate for the quarter ended Sep 30, 2017)

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