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Sony (SNE) pins hope on PS5 launch as pandemic poses threat to profit this year

Withholds full-year guidance due to uncertainty in the market

Executives at Sony Corp. (NYSE: SNE) faced several questions on the upcoming release of PlayStation-5, during the interaction with analysts at the fourth-quarter earnings conference call this week. There will be continued focus on the company’s gaming and streaming services, for their bright prospects during the Covid-related shutdown, even as uncertainty looms over the other areas of the business.

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Estimates show that game development will face delays in 2020 due to operational restrictions, after an upbeat year. The new version of PlayStation (PS) is crucial for the company as it constantly strives to beat Microsoft’s (MSFT) Xbox, which is all set to roll out the Series X console this year. Despite the shutdown-linked disruptions and supply chain issues, Sony ruled out any delay in the PS5 launch that is expected to be held before the year-end.

Poor Show

The impact of the crisis was clearly visible in the Electronics Products and Solutions segment during the quarter, which is expected to affect the other key divisions in the coming weeks. In contrast, Games and Network Services performed well and stands to benefit from the upsurge in consumption during the shutdown.

Mixed Outlook

Since Sony is predominantly an entertainment company, the business will be influenced by the changing dynamics of the film and music market, considering the unpredictability of audience behavior going forward. So far, the trend suggests that the company’s services based on networking and remote operations would witness a spike in demand, with the ongoing 5G deployment acting as a catalyst.

“Speaking of pictures, theatrical release is always very important and because of the coronavirus, negative impact we currently are suffering. But once the situation settles and if we restart the theatrical operations, the people may not come to theaters to view pictures. If that happens, then we have to discuss with the businesses concerned to create a new way of releasing Sony Pictures and also we can use online.”

Hiroki Totoki, chief financial officer of Sony

Recession Fears

Responding to a question at the earnings call, Totoki refused to liken the current economic crisis to the 2008 recession and assured that necessary steps would be taken to prevent earnings from slipping into the negative territory this year.

Music releases and CD sales could be affected by social distancing, with revenues taking a hit from decreased advertising and decline in the production of movies and commercials. The Pictures and Electronics Products/Solutions segments feel the pinch of the closure of cinema halls and production stoppage, while the Imaging & Sensing Solutions division seems to be resilient to the crisis as manufacturing facilities in Japan remain operational.

Smartphone Slump

However, the slowdown in the smartphone market could be a drag on the Imaging & Sensing Solutions business. The management has decided to postpone the remaining part of a major investment planned for this business segment over the next three years. When it comes to Financial Services, fourth-quarter results benefited from an increase in insurance premium revenues. However, the segment’s performance will likely be impacted by poor sales in the coming months.

Meanwhile, Sony seems to have enough cash to deal with a potential liquidity crunch, since there is sufficient credit available and the company does not have to repay any debt this year. The positive capital position should allow it to continue hiking the dividend and investing in growth initiatives.

Q4 Outcome

Earnings plunged 86% year-over-year to 10.10 yen per share during the three months ended March, hurt by cost escalation and a double-digit fall in revenues to about 1749 billion yen. All the key business segments recorded decline in sales, except Pictures and Imaging & Sensing Solutions. The stock has been in a free-fall since the announcement.

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While the management expects full-year operating income to be lower by a third year-over-year, it refrained from providing a detailed outlook due to the volatile market scenario. A clearer picture is expected to emerge in the coming weeks, allowing the company to provide a proper outlook while reporting first-quarter results.

Stock Suffers

Sony’s shares entered 2020 on an upbeat note, climbing to the highest level in more than two decades. However, they changed course in the early weeks of the year when the business world was shaken by coronavirus. The stock closed the last trading session down 9% from the levels seen at the beginning of the year.

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