Sony's internal business plan reforms resulted in record profits?

CINNO Research industry information, Sony announced its performance for the March 2019 period (fiscal year 2018), with both operating profit and net profit setting new historical highs, and achieving a gratifying result of pre-tax profit exceeding 1 trillion yen (about 60 billion yuan) for the first time.

1. Achievements in the midst of rapid change

Sony's overall performance in fiscal 2018 was encouraging, with sales increasing by 1% year-on-year to 8.6657 trillion yen (about 519.9 billion yuan); operating profit increased by 22% year-on-year to 894.2 billion yen (about 53.7 billion yuan); pre-tax profit increased by 45% year-on-year to 11.6 billion yen (about 700 million yuan); and net profit for the period increased by 87% year-on-year to 916.3 billion yen (about 55 billion yuan).

Sony's overall performance in fiscal 2018 (Image source: Sony official website)

Kenichiro Yoshida has been Sony's chairman and CEO since April 1, 2018. This is the first financial report since he took office.

Regarding Sony's performance, EVP CFO Hiroki Totoki said, "We have been working hard to maintain a high level of profits, and this year we set a new record for the first time. Although the situation in each business unit has changed significantly, they have responded positively. Even the mid-term figures show the potential for continued growth."

Sony EVP CFO - Mr. Hiroki Totoki (Photo source: monoist)

In fact, from the perspective of each business unit, except for the mobile phone business unit centered on smartphone terminals, other business units have maintained a high profit structure. In particular, the growth of the game and network service (Network Service) field centered on games is particularly significant. Although the revenue of PS4 hardware has decreased, it has achieved a substantial increase in revenue due to the increase in game software (Game Software) and paid membership services. Sony has launched and strengthened the policy of "recurring business", and the game business is one of the successful examples of this policy. The membership of membership streaming media (Streaming Media)-"PS Now" has increased by 40% annually worldwide, and currently has 700,000 users worldwide. These continued increases in revenue have driven the increase in the performance of the business unit.

In the game business, the main focus will be on the new generation game console (Game Console) of PS4. Regarding the cost of the new generation of game consoles, Mr. Totoki said that the operating profit of the game and network service field reached 311.1 billion yen (about 18.666 billion yuan) in fiscal 2018, and it is expected to reach 280 billion yen (about 16.8 billion yuan) in fiscal 2019. The difference (31.1 billion yen, about 1.866 billion yuan) is basically used for the new generation of game consoles.

Sony's 2018 business unit performance (Image source: Sony official website)

Due to the decrease in revenue from the camera module business and the temporary decline in revenue in 2017, the semiconductor division has increased revenue and decreased profit, but overall the semiconductor division has formed a system that can stably obtain huge profits. Mr. Toshiki said that the overall market for smartphone terminals, the main application of the main product image sensor, is becoming increasingly saturated, but smartphones have a trend of "multi-camera" and large-screen, and even mid-range models are gradually developing towards large screens. Therefore, the sales volume of smartphones is no longer directly linked to the sales of image sensors. The above market development trends have enabled Sony to leverage its development.

In response to the above continued strong demand, Sony is also considering increasing production capacity. In terms of production capacity, the fourth quarter of fiscal year 2018 did not reach full capacity, and full capacity production began in the first quarter of fiscal year 2019. Mr. Totoki pointed out that in order to increase production capacity, it is not necessary to purchase new factory land, but to add equipment to the existing factory, with an estimated investment of 100 billion yen (about 6 billion yuan). Regarding future investment in semiconductor equipment, Mr. Totoki said that since the trend of rapid growth in market demand is expected to continue until fiscal year 2021, it is necessary to take corresponding measures; however, market demand is expected to slow down after fiscal year 2022, and equipment investment will be adjusted down accordingly.

Transition of wafer production capacity for semiconductor image sensors (Image source: Sony official website)

2. The business scale of the smartphone division will be gradually halved

In order to target the 5G era, continue to develop business, and also to ensure profits, the smartphone division has carried out organizational reforms. However, the sales volume of smartphones has dropped from 13.5 million in 2017 to 6.5 million in 2018, almost halved, and profits have deteriorated significantly. In order to achieve profitability in 2020, it has decided to cut operating costs by 50%, close the Beijing base, and withdraw from the Middle East and Near East and Central and South America. Sony will focus on developing businesses that can ensure profits.

Mr. Totoki also pointed out that the institutional reform in the field of mobile communications is proceeding as planned. Although a deficit of 97.1 billion yen (about 5.826 billion yuan) occurred in fiscal 2018, the deficit is expected to be halved to 47 billion yen (about 2.82 billion yuan) in 2019, and a profit will be achieved in fiscal 2020.

Mobile Communication Division's 2018 fiscal year results (Image source: Sony official website)

3. Cancel the operating profit targets for each division in the three-year mid-term business plan

Sony is promoting its 3-year mid-term business plan from 2018 to 2020 and has decided to adjust the mid-term business plan targets. As an overall goal, the cumulative operating cash flow will remain unchanged at 2 trillion yen (about 120 billion yuan), but the operating profit targets of each business unit will be cancelled.

Mr. Totoki emphasized that the fiscal year 2018 was a year of rapid change. The mid-term management plan was established based on the performance targets set at the beginning of the fiscal year 2018. At that time, the operating profit was expected to be 670 billion yen (about 40.2 billion yuan), but the result was 894.2 billion yen (about 53.652 billion yuan), resulting in a big difference. Analyzing this difference from the perspective of each business unit, each business unit has undergone great changes in the past year.

Mr. Totoki said that Sony attaches great importance to medium- and long-term development. Specifically, the software business of the game division has developed better than expected, but with the emergence of large-scale mergers and acquisitions, the background of the development of the music business is also changing; the decision to reduce the mobile communications division in 2018 is also due to changes in its development background; in the semiconductor business, the increase in demand caused by "multi-camera" and "large screen" is more obvious than the sales volume of smartphones. All of the above happened in 2018. Among the above changes, it is unfair to evaluate the operating profit by 2020 based on only one aspect; and it is meaningful to evaluate it through the cumulative operating cash flow of the first three years, which can reflect the value of the business.

Currently, the accumulated operating cash flow has exceeded 2.2 trillion yen (about 132 billion yuan), and if it decides to increase investment in semiconductor equipment, it is expected to increase by another 100 billion yen (about 6 billion yuan). Mr. Totoki said: "We will continue to operate with a long-term perspective."

2018-2020 Three-year Mid-term Business Plan