Morningstar | Impressive Network Sales Growth Drives Margin Expansion on Game Business; Lift Sony FVE to JPY 6,000. See Updated Analyst Note from 31 Jul 2018
Sony's operating income for the June quarter was JPY 195 billion, exceeding our forecast of JPY 145 billion, thanks to the stunning performance of the game & network service segment. June quarter revenue for the segment increased 36% from the previous year, which is driven by the 54% growth of network revenue, pushing up its operating income to JPY 83 billion from JPY 18 billion on the previous year. We estimate there were three major factors contributing to the impressive growth: 1) robust software sales of God of War; 2) additional contents revenue from Fortnite, a free-to-play third party game; and 3) increasing monthly subscription fee of PS Plus. Over the past few years, Sony has been focusing on establishing its own ecosystem to mitigate the cyclicality of the gaming business, and as a result, we believe Sony's operating margin on its PlayStation business will stabilize at a much higher level than we had anticipated, even at the trough of the gaming cycle. As a conclusion, while we retain our no-moat rating, we raise our operating income forecast for fiscal 2021 (financial year ending March 2021) to JPY 800 billion from JPY 685 billion, and revise our fair value estimate to JPY 6,000 from JPY 5,200.Meanwhile, we are concerned about the intense competition on the smartphone market. Sony plans to sell 9 million smartphones this fiscal year, which is less than 1% of the market, and is down from 39 million five years ago. We assess that this number is too small to benefit from economies of scale, and that components suppliers will not prioritize providing the latest components necessary to assemble competitive handsets. In fact, Sony revised its operating loss forecast for the mobile communications segment to JPY 30 billion from JPY 15 billion, and its midterm plan is currently under review by management. We consider that drastic action, such as exiting or restructuring should be necessary, even though it may drag down the profitability in the short run.
Sony is engaged in the development, design, production, manufacture, offer and sale of various kinds of electronic equipment, instruments and devices for consumer, professional and industrial markets such as network services, game hardware and software, televisions, audio and video recorders and players, still and video cameras, mobile phones, and semiconductors. Co. is engaged in the development, production, manufacture, and distribution of recorded music and the management and licensing of the words and music of songs as well as the production and distribution of animation titles. Co. is also engaged in the production, acquisition and distribution of motion pictures and television.
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