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Sony Can't Wait for the Holidays

By Anders Bylund – Feb 5, 2020 at 7:13AM

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The Japanese electronics giant posted mixed results in the third quarter, but the PlayStation 5 launch should light up the next holiday season.

Japanese conglomerate Sony (SONY -1.37%) reported third-quarter results early Tuesday morning. It was a mixed report, but investors embraced it to drive share prices 4% higher.

Sony's fourth-quarter results by the numbers

Metric

Q4 2019

Q4 2018

Change

Analyst Consensus

Revenue

$22.6 billion

$21.3 billion

6%

$23.2 billion

GAAP net income

$2.11 billion

$3.80 billion

(44%)

N/A

GAAP earnings per share (diluted)

$1.68

$2.93

(43%)

$1.27

Data source: Sony. GAAP = generally accepted accounting principles.

Sony's sales generally drifted slowly downward with a couple of notable exceptions.

  • Sales fell 17% year over year in Sony's game and network services segment, landing at $5.81 billion. PlayStation 4 sales are fading fast as consumers around the world prepare for the launch of PlayStation 5 for the holiday season of 2020.
  • Sony Pictures saw revenues decline by 12% to $2.17 billion. The third title of Sony's Jumanji series skewed toward the end of the quarter with a very late release, and the film couldn't measure up to the blockbuster hit Venom in the year-ago period.
  • Financial services -- yep, Sony does a lot of this in the Japanese market -- posted a massive revenue gain of 158%, stopping at $3.74 billion. However, most of these gains were generated by strong investment returns in stock-based portfolios tied to the company's variable life insurance products. As such, these revenues were directly attributable to the owners of the related life insurance policies. Hence, these soaring sales didn't do much to support Sony's bottom line.
A video gamer holds a console controller in front of a screen, showing blurred images of a driving game.

Image source: Getty Images.

What's next for Sony?

Looking ahead, Sony raised its full-year net income guidance by 9% to $4.96 billion. That would be a 36% drop from the bottom-line earnings Sony recorded in fiscal year 2019. The guidance target also implies a fourth-quarter net profit of approximately $188 million or $0.15 per share. The same seasonally challenged period of 2019 saw a bottom-line profit of $778 million, or $0.62 per share.

On the earnings call, CFO Hiroki Totoki looked forward to a significant impact from the game console launch later this year, pivoting into a longer view of Sony's video game results.

"When you look at our results over the mid- to long term, you can see that our game business is steadily growing, as evidenced by the growth of network services such as PS Plus, and we expect this growth to continue going forward," he said. "We aim to leverage this large [PS Plus] community and network services revenue stream to effect a smooth transition from the current console generation to the next, unlike in the past when profitability deteriorated significantly due to development and marketing costs incurred."

The market largely shrugged off Sony's revenue miss to focus on the solid bottom-line result, lifting share prices by 4% on Tuesday. All told, Sony's shares gained 53% over the past year. The stock still looks reasonably affordable at 11.5 times trailing earnings or 11 times free cash flow, and the promise of PlayStation 5 windfalls next winter should appeal to long-term investors.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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