Sony (SNE +2.08%) recently posted an impressive first quarter that beat analyst expectations on the top and bottom lines.
The Japanese conglomerate's revenue rose 5% annually to 1.95 trillion yen ($17.91 billion), beating expectations by 70 billion yen. Its net income surged 180% to 226.4 billion yen ($2.08 billion), or 147.80 yen ($1.60) per share, topping estimates by over 100 yen. Sony's stock rose 3% after the report on July 31, extending its 30% rally over the past 12 months.
Image source: Sony.
Which businesses grew?
Sony's top line growth was supported by five businesses: Game & Network Services (G&NS), Music, Home Entertainment & Sound (HE&S), Imaging Products & Solutions (IP&S), and Financial Services.
| Unit | YOY revenue growth | YOY operating income growth |
|---|---|---|
|
G&NS |
35.6% |
371.8% |
|
Music |
7.7% |
28.4% |
|
HE&S |
5.9% |
(23%) |
|
IP&S |
5.5% |
12.5% |
|
Financial Services |
10.6% |
(12.1%) |
Source: Sony Q1 earnings report.
The G&NS business matters the most to Sony since it generated 24% of the company's sales and 43% of its operating income. Sony attributed the unit's massive growth to strong sales of PS4 software, particularly through the PlayStation Network.
The Music unit, which accounted for 9% of Sony's sales and 16% of its operating income, was supported by rising streaming revenues, its stake in Spotify, and the strong performance of mobile games like Fate/Grand Order (which are included in the Music unit instead of GN&S).
The HE&S unit, which generated 14% of Sony's sales but just 9% of its operating income, struggled with a higher "allocation of indirect expenses incurred by sales companies," which offset rising sales of its TVs and audio products.
Image source: Sony.
The camera-producing IP&S business, which accounted for 8% of Sony's sales and 13% of its operating income, posted impressive growth despite the notion that smartphones are replacing cameras. The unit reported strong demand for its high-end cameras with interchangeable lenses, which boosted its overall revenues per customer.
The Financial Services unit, which accounted for 17% of Sony's sales and 21% of its operating income, generated higher sales growth from bigger insurance policies at Sony Life. But the unit also saw higher expenses, a loss on investment securities, and currency headwinds erode its operating profits.
Which businesses flopped?
Meanwhile, Sony's lagging businesses -- namely Pictures, Mobile Communications (MC), and Semiconductors -- all posted ugly declines.
|
Unit |
YOY revenue growth |
YOY operating income growth |
|---|---|---|
|
Pictures |
(14.9%) |
N/A (operating loss) |
|
MC |
(26.9%) |
N/A (operating loss) |
|
Semiconductors |
(1%) |
(47.5%) |
Source: Sony Q1 earnings report.
The Pictures unit suffered from tough comparisons to the previous year, when The Last Tycoon and Better Call Saul boosted its TV revenues. Meanwhile, its movie unit didn't release any major hits during the quarter. The business generated 9% of Sony's sales during the quarter, but its operating loss only narrowed slightly, from 9.5 billion yen to 7.6 billion yen.
The Mobile Communications unit struggled as its smartphones failed to stand out in a crowded market dominated by Samsung (NASDAQOTH: SSNLF) and Apple (AAPL 3.40%). Sony shipped just 14.6 million smartphones last year, compared to Apple's 216.8 million iPhone shipments and Samsung's 317.3 million shipments. The unit's revenue accounted for 7% of Sony's top line, but it reported an operating loss of 10.8 billion yen -- compared to an operating profit of 3.6 billion yen a year earlier.
Sony's semiconductor unit, which accounted for 10% of its sales and 15% of its operating income, was hit by higher operating expenses. Sales of the unit's image sensors (which are used in other smartphones and devices) rose, but that growth was likely throttled by slowing sales of smartphones worldwide.
Understanding the big picture
Sony is a complicated company, but the growth of its stronger businesses is clearly offsetting the softness of its weaker ones. Investors should track the growth of its PlayStation business as it expands its ecosystem beyond hardware, and see if Sony finds fresh ways to revive its movie and mobile businesses.
On a yen basis, analysts expect Sony's revenue to stay nearly flat this year as its earnings rise 10%. Those aren't great growth rates, but the stock isn't expensive at 13 times this year's earnings. Sony's stock probably won't rally to new highs anytime soon, but the company's core growth engines should make it a sound investment for the foreseeable future.
