Sony Earnings: Expect Subpar Results But Long-Term Still Intact (NYSE:SONY)

Introduction

Sony (NYSE:SONY) is due to announce its Q4 earnings on May 14, so I wanted to have a look at how the company performed throughout fiscal 2023, and what I would expect the company will do over the next year. Margin declines were expected, while revenues recovered. And given the share price is back to where it was when I first covered the company, I’m looking at this as a good entry point for the long-term investment and will be adding more shares to my position.

Briefly on performance

Revenues seem to have recovered from their negative trend at the end of fiscal 2023 helped by a 16% increase in sales of third-party software in the G&NS segment, a 16% increase in the Music segment, a 10% increase in the Pictures segment, and a respectable 21% increase in Imaging and Sensing Solutions segment, fueled by a recovery in the mobile industry.

In terms of margins, these have deteriorated across the board in the last year due to the promotions of the PS5 consoles, which is in its fifth year of release and was expected to happen. The company is trying to sell through its inventory of the older generation of the PS5, so sacrificing some of that income is essential. On the positive side, this means there will be a higher install base in the long run.

In terms of the company’s financial health, at the end of the year, Sony had around $7B in cash and equivalents and around $8.1B in long-term debt, which is not a bad position to be in, in my opinion. The company’s interest coverage ratio is well over 70x, meaning EBIT can easily cover the company’s annual interest expense on debt.

Overall, it looks like the company is doing decent. There’s still a lot of demand for the PS5, especially with the new “slim” version that recently came out, which should bolster the company’s top-line further, while there are no major first-party releases on the near horizon.

What to expect from Q4

Analysts are expecting the company to make around $18.85B in revenues and $0.94 a share of earnings. This is around a -17% sequential decline in revenues and an -18% year-over-year decrease. Seasonally, this quarter is the worst performer for the company, so it’s not surprising to see such numbers, especially since, as I mentioned before, the PS5 cycle is in the discount stage now, and many customers can easily get their hands on a new console, unlike a couple of years before due to scalpers, and the supply shortages.

Whether the company will beat these estimates is hard to tell. Over the past 10 quarters, the company missed revenue estimates four times while missing EPS estimates only twice. However, a revenue miss of $1.73B in the last quarter was substantial, and so was the quarter prior.

Unfortunately, the company did lower its guidance for full FY24 when it reported Q3 earnings slightly, which isn’t what anyone wanted to hear. I don’t think it was unexpected. As I mentioned, the decrease in sales of hardware is natural at this stage of the console cycle.

Comments on the outlook

I expect the biggest revenue generator the Game and Network Services (G&NS) to show a lackluster performance. There are no major first-party games on the horizon for the rest of the 2024 period, however, there are always new games coming out from third-party publishers. In the last few months, we saw the highly anticipated releases of Tekken 8, Prince Persia The Lost Crown, and of course Final Fantasy VII Rebirth. These games should help the company’s top line alone.

In terms of subscription services of PS Plus, since the introduction of the price hike back in September 2023, there has been quite a bit of an outrage, which led to some people accumulating years of subscriptions before the price hike took effect. Sony has stopped reporting subscriber numbers at the same time the price hikes were announced, which tells me they do not want to see how this strategy is going to affect them in the short run. But from reading around forums, many disgruntled gamers are not going to be renewing their subscription when the old one runs out. My subscription is running out in July, and it’s going to be 125 Euros. It’s quite a hike considering I’m not taking advantage of all the games available to me. However, I don’t expect to see many canceling their subscription and the ones who did will easily be offset by that 33% increase in prices. In the long run, I expect the operating margins of the segment to improve.

In terms of the highest contributor to operating profits, the music segment, it’s hard to tell how it will continue to perform. However, what the company has been doing here is working, and if it continues to acquire more valuable artists and their catalogs, the company is positioned very well in this streaming era.

I’m probably the most positive about the Imaging & Sensing segment of the company which, as I mentioned earlier, saw a 21% y/y increase in sales due to the recovery of the smartphone market. It’s not a secret that this market saw a massive glut in the last year or two due to oversupply, high interest rates, and sticky inflation, which delayed many customers from upgrading. Now that the negative sentiment and the destocking and normalizing of inventory are well on their way, I believe we will continue to see a rather good performance in the segment of the market, and Sony should see decent revenue growth here also.

Should you jump in before the results?

I believe with the improving smartphone market, a very well-performing music segment, and the decent performance of the gaming segment with price hikes and the new PS5 slim stocking the shelves since November of last year, it’s not a bad time to start a small position if you already haven’t.

My buy recommendation remains and price point of around $100 a share still stands. The company did reach this PT a few times in January of this year, and given that the share price came right back down again, I’m going to be adding a few more shares to my position as I’m looking at this as a blessing in disguise, which provided me with another good entry point into a company that I’ve been a fan of for many years and I believe the products they provide are worth the money. Just try to avoid controversies like the Helldivers 2 recent drama because you don’t want to get on the wrong side of the vocal gamers who are spending their hard-earned cash on your products.