Sony Financial Results for FY13 - A Loss Despite Strong Sales of PS4, Smartphones

Sony just released the full details of its performance for the fiscal year FY13. Sales and operating income are up on last year yet net profit has been eroded, with a loss of ¥130bn / $1.27bn / €929m. The Japanese corporation pointed to a steep fall in disk-based media sales in Europe and further costs related to escorting the PC business out of the corp. as the main culprits for the net loss.

Of the three priority segments for the company, the PS4 unit sales continue to impress with a sharp rise in software sales also. Xperia smartphones came in 6m units up on FY12 but a little short of full year targets. Imaging products were flat, but very profitable.

Read on for a closer look at each segment and key unit sales.

Sales, Operating Revenue, Net Profit (Loss)

This data which was briefly shown off earlier this month reflects a net loss for the year 2013, despite a 14% jump in sales and operating revenue. Operating income has fallen 88% which includes cost of goods sold. There has been a jump in manufacturing of at least one flagship product that we know of – the PS4. There was much speculation in the past year about how much of a loss that Sony and rival Microsoft may have to sell their consoles. It’s unclear at this point if the PS4 was also a drag on profits, possibly being sold below cost price.

Also noteworthy is the foreign exchange rate. Sony frequently brings this to attention with its products. The Yen fell against the Dollar and the Euro, at least partially driven by Japanese government economic policy. This should have helped Sony export it’s goods.

Q4 2013 Performance (March-April 2014)

The full year pattern is captured well in the Q4 report, the bottom line seems to be that costs are higher than sales in certain areas, resulting in a loss even if there is an increase in sales compared with FY12. Either products need to made more cheaply or cuts have to made somewhere.

Results by Segment: Overview

The results are mixed here. Some areas are stable and some even showed healthy, growing sales but a profit problem.

The management topics in previous quarterly reports labelled Mobile, Game and Imaging as the triple column of priority. Given the growth of the past two years in these areas and expected/planned growth in 2014, you can see why they’re key. Both Mobile and Game are expected to double in sales in the two-year period 2012-2014. Though the margin of profit isn’t tremendous yet. At least these two areas that have been targeted show a clear rise in sales and profit backed by well-utilized R&D investment. Sony has R&D spending will reduce in Game as they are ‘over the hill’ in that segment with the launch window complete. The third division in the chosen tier, Imaging is looking at a slight dip in sales in 2014, yet a strong jump in profit compared with 2012.

Of the rest, notably, financial services sales were flat in the last year but continue to be the most profitable area of the whole corporation.

There is a drag on profits in a few segments. Home Entertainment & Sound was one such area showing a boost in sales and a stretch in operating income, but it’s still running at a loss. Devices is a bit of a mystery. It’s one of the more overlooked areas of the corp. and unfortunately little is mentioned in the main report or supplementary documents what is going on in that segment. ‘Impairment charges for the battery business’ was listed but little else. What we can see above is that sales are down and profit has turned to loss. Pictures and Music both showed a rise in both sales and profit, holding a steady backdrop to the rest. For the Pictures segment, that’s going to be important partially because a notable investor has been calling for a spin-off of the Pictures division. Stability will ward off some of that attention.

Bar chart version:

2013: Performance by Segment – A Closer Look

The PC Restructuring Charges

Here the corporation is telling us that the costs related to this escort out of Sony have already piqued. More costs are expected in 2014 however. PC activity is being moved out of Mobile and into All Other in 2014.

Home Entertainment & Sound

Interestingly, this segment isn’t a targeted high-priority area by management, despite the determined push into 4K everywhere. Sales are exactly the same as the previous year at 13.5m units. Flat sales, in this case, may be better than a decline. Operating profit still made a loss in FY13 but improved significantly since FY12. FY14 is expected to be better for sales, perhaps the 4K push is beginning to pay off.

The TV business spin-off was given more detail. It’s expected to be completed in July and the three benefits of this listed are: 1) cost reduction 2) more reactive to changes, 3) “autonomy of management”.

Music and Pictures

From above, these two areas are running smoothly. Pictures is such a high-profile division and as we know has come under scrutiny by investors calling for separation of the division so that fire is likely to calm down. Music continues to sell quietly in the background but at least it’s profitable. Sony mentions that the drop in value of the Yen vs. the Dollar has inflated the appearance of sales, and that when running on like-for-like values, motion pictures dropped by 6% in sales while media networks sales ‘significantly improved’. For music, sales and operating revenue are flat.

On Pictures Sony says:

Sales for Motion Pictures decreased significantly year-on-year due to lower theatrical and home entertainment revenues as the previous fiscal year benefitted from the strong performances of Skyfall , The Amazing Spider-Man and Men in Black 3 as well as a greater number of home entertainment releases. On a U.S. dollar basis, sales for Television Productions increased significantly year-on-year primarily due to the extension and expansion in scope of a licensing agreement for game shows produced by SPE, including Wheel of Fortune, and higher home entertainment and subscription video on demand (“SVOD”) revenues for the U.S. television series Breaking Bad.

On Music Sony says:

Recorded Music sales decreased primarily due to a contraction of the Japanese music market, partially offset by an increase in digital revenue and the strong performances of a number of releases in most regions excluding Japan. However, Music Publishing and Visual Media and Platform sales increased, resulting in overall segment sales being essentially flat year-on-year. Best-selling titles in the current fiscal year included One Direction’s Midnight Memories, Daft Punk’s Random Access Memories, Beyoncé’s BEYONCÉ and Miley Cyrus’ Bangerz.

Mobile Communications

They have outlined the key points for FY13 in this area above; unit sales are up, average selling price is up, the mobile business just produced a profit. All of that is expected to grow in FY14 also. One other note is that at the start of the year, the company was aiming for 42m units and has now come in at 39m. It’s still a boost on the 33m in FY12. This is expected to reach 50m this year.

Game and Network Services

Sales are clearly up on account of the PS4, yet the report is of a deeper loss than in FY12. It’s FY14 when they expect to covert more of those sales into an overall profit. It’s clearly not as easy money as it looks, despite 7m unit sales to date. Portable system units are expected to half between FY12 and FY14. Software sales are holding steady, showing a jump by one-third in just the past year. Is the PS4 breaking even, is it advertising and other cost of goods sold that has affected profitability here?

Imaging Products & Solutions

Of the three core areas for the company, this one produced least change. Sales are down on the last year and are expected to decrease into FY14. Despite this, operating profit was very healthy this year and is predicted to continue upwards throughout FY14. Sony says to expect in FY14: a “significant decrease in sales of video cameras”. Is this in the consumer areas, professional or both? If it’s consumers, presumably because smartphone cameras are taking over, then a good portion of the R&D in this area need only move down the hall to the Mobile group where that will be immediately put to use.

Devices

An area least exposed to consumers and decidedly unglitzy, but you can’t assess and find financial drains in the corporation by skipping over entire divisions. Yep, we have found more money on the way out too, a loss was recorded for FY13. Impairment charges from the battery business are noted. The floods in Thailand in 2011 which damaged or destroyed Sony assets are referenced too, with a “lower net benefit”. Sales and operating profit are down from the previous year.

Financial Services

A very underreported division – especially since this is the most profitable area of Sony today, and has been for the past few years. Compared with the previous year, sales are down just a fraction while profit is up quite a bit. Sony mentions that Sony Life (insurance) was down somewhat while Sony Bank rose (customer deposits).

Sales Overview of Key Products in 2013

2014: Forecast

The forecast for this year is unsettling – a loss is still expected. Sales are expected to be higher than FY13 but just by a fraction. Crucially, they’re expecting costs to fall dramatically, allowing for an operating income. They have to pull through on this though. Like governments, companies sometimes put out positive forecasts knowing that they’ll be cut later in the year. Sony needs to pull though for FY14.

The forecast for FY14 compared with FY13, FY12 tells us where they’re expecting or planning growth and which divisions are losing importance.

Segment Realignment in 2014

Mobile Products & Communications will be split, with PC and Digital Reader activity moving to All Other. The remaining smartphone and tablet activity will be now under Mobile Communications.
Network business was previously including in All Other, will be moved to Game, becoming Game & Network Services.

Final Notes

There is no official news on whether certain executives are indeed cutting pay by 50%. As for boardroom politics, 6 board members are retiring, including the CFO. Perhaps the worst thing that a company facing swiftly changing markets could do, is to do nothing. Concentrating on three key, growing areas and evaluating the cost/benefit of others at least means that the corporation isn’t sitting still.