Sony (TYO: 6758) Reports Dismal Quarterly Earnings for Q2 FY 2022 - But There Is More Than Meets The Eye

A Sony PS VR poster with a Star Wars theme.

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In that location are times in a visitor'south history where a financial cannot be an accurate metric for its functioning or future profitability. This is normally the case with companies that are starting out or take yet to breakeven. This particular iteration of Sony'south (TYO:6758 and NYSE:SNE) earnings saw a massive subtract in acquirement, and consequently profitability, and not merely are we going to be reporting on the earnings itself but digging a flake deeper to figure out what the numbers mean.

Before we begin, it'south important to begin with a little context. To the casual observer, Sony has had a wildly successful year. It launched a new console nether the PS4 brand, with another on the way. The Sony PS4 Slim and the upcoming PS4 Neo (at present officially chosen the PS4 Pro) are both examples of this. This is one of the reasons why it would, initially, appear surprising that Sony has actually bled money this quarter.

Fiscal highlights for Sony (TYO:6758) Q2 FY16 Quarterly results

For the second quarter of the twelvemonth ended 2022, the visitor managed to rake in four.8 Billion Yen in internet income compared to 33.6 Billion Yen final quarter. This is an almost 86% decrease in profitability twelvemonth over year and is something that is commonly enough to send warning bells ringing for investors. The stated reasons for the stark dissimilarity is the appreciation of the Yen confronting the Dollar (something which besides adversely impacted Nintendo'southward Earnings here), the impact of the 2022 Kumamoto Earthquakes and the smartphone business unit losing money.

Operating income for the quarter fell 48% to 45.7 Billion yen (from 88 Billion yen) indicating an in operating expenses for this quarter. This figure also includes an harm accuse of 32.8 Billion yen related to the auction of its bombardment business.
The semiconductor segment has also swung to a loss of 4.2 Billion yen from an operating profit of 34.1 Billion yen concluding year.
Sony (TYO:6758) took a 1.2 Billion yen hit due to the Kunamoto earthquake due to which one manufacturing plant closed down.
The operating profit of the gaming business organisation was also down 20% year on year.
Mobile sales were downward by around 39.6% but the company managed to bring in an operating profit of 3.7 Billion yen from a loss of 20.6 Billion yen in the yr before thanks to a couple of things such as an increased focus on the loftier end besides as the appreciation of the yen.

The key to agreement Sony (NYSE:SNE)'due south 2nd quarter earnings – our take!

Virtually of the analysts are currently talking about the following reasons for the startlingly poor operation of Sony this quarter. The Yen has appreciatedin double digits confronting the dollar and while this certainly has affected Sony's revenue stream we desire to include a few qualifying statements. Here's the thing, while the stronger Yen does impact the company'due south financial reserves and petty cash transactions, more important and material contracts are protected by FRAs (Forward Rate Agreements) so the exchange rate risk can be managed. This ways that companies are usually not hit by the maximum point of the volatility in Yen, if risk is managed correctly.

Secondly, even though the Yen has strengthened, the cost of its products is usually set up on a purchasing power parity basis (for major markets). For example, the PS4 targets the $299, $399 marks respectively in the American marketplace, also known equally price points. A depreciation of 20% in the Yen will have no effect on this item sale price and could really assistance negate some of the increased cost of appurtenances sold when the profits are converted dorsum to Yen. All that said, the toll of goods sold has increased and we can use an aligning of 10.8% to 20% depending on the particular example.

The acquirement of the company (TYO:6758) decreased 10.8% from the same quarter last twelvemonth and fifty-fifty if we were to assume a completely direct and complete impact from the currency exchange charge per unit deviation, a depreciation of twenty% in the Yen does not account for an income drop of 86%. This is one of the reasons why we believe that the yen is not the main line particular to blame for the income drop.

Moving on, Sony's smartphone business has lost considerable business organisation and we expect this to continue to decline. The company's smartphone products are neither here nor there. They are not the highest end product out in that location, nor the best bang for the buck mobile. In an historic period where android markets are saturated with the same basic chipsets with thousands of variations – you must have a differentiation factor. Sony's smartphones arguably accept petty to none of this. The company'south low to mid stop lineup deemed for the bulk of the sales pass up. It does currently hold a niche merely pregnant fan base of operations with some of its higher end products – and it would do well to focus on those as this quarter has shown.

Lastly, and then what exactly changed? Well. The thing is, investors might meet that the company has released 3 different consoles nether the same brand proper noun of the PS4. This might seem a similar case to the PS3 and PS3 Slim versions simply nosotros are looking at a very unlike scenario here. The thing is, while the PS4 and PS4 Slim are practically the same matter – the PS4 Neo is a completely different class of console. Ignoring what Sony says, and judging form a completely technical ground – it is a brand new console. It has much more powerful hardware (twice as powerful in fact) and a completely unlike processor.

Since the APU in question is a very large one, the economies of scale applicable to PS4 Slim thanks to the use of the 14nm process node, no longer utilize. This also means that speaking on a purely technical ground, Sony (TYO:6758) is funding the toll of not just ane panel class but two. And the story doesn't end in that location, the visitor as well launched the PS VR platform, which tin be construed as a completely different (and make new!) class of cost that Sony has incurred this quarter. The headset is not cheap to produce and since at that place aren't many titles out there – has not yet gained the sweetness spot in terms of economies of scale.

The console is all set to launch next financial quarter, the matching principle dictates that most of the cost should also be incurred in the next financial quarter. Nevertheless, and this is a large ane, since the console falls under the catenary of the PS4 proper name, they would be allowed to include costs of the PS4 Neo in this fiscal quarter as well nether US GAAP. Accounting wizardry principles (this is non a real standard) would dictate that the brunt cost of these new platforms (PSVR and PS4 Neo) exist spread every bit much as possible to emphasize the return next quarter.

To sum it all up, we take seen no warning signs in the fundamentals of Sony Corporation (TYO:6758 and NYSE:SNE); (autonomously from the obvious question mark that is the smartphone concern) regardless of whatever any sharp decline in net income which may be accounted for past the global slowdown in the silicon manufacture, earthquake, depreciation in yen and two new tiers of cost (PS4 Neo and PS VR).