Sony Corp.  reported third-quarter fiscal 2016 earnings per share of ¥15.24 (13 cents), down 83.7% from the year-ago tally.

The earnings plunge came on the back of a ¥112B ($962 million) write-down in its movie business, charges for which were booked in the company’s fiscal third quarter. The write-down followed a strategic review that signaled bleak future profit expectations for the segment. In addition, the top-line decline proved to be a major dampener, compounding the fall.

Inside the Headlines

In the quarter, Sony’s sales and operating revenues were down 7.1% year over year to ¥2,397.5 billion ($20.7 billion).

Sony’s lackluster revenues resulted from foreign currency headwinds. Seven out of its two segments witnessed revenue declines, thus weighing on the top line. 

Additionally, operating income came in at ¥92.4 billion ($796 million) compared with the year-ago tally of ¥202.1 million. The steep decline is attributable to impairment charge of goodwill recorded in the Pictures segment.

Sales and operating revenues at the Game & Network Services (“GN&S”) segment climbed 5.2% year over year to ¥617.7 billion ($5,325 million). Improvements in the PS4 software sales and impressive market traction of the newly launched – PlayStationVR – proved conducive to the sales growth.

Semiconductorssales and operating revenues jumped 16.9% year over year to ¥233.9 billion ($2,016 million). The rebound of the Semiconductors sales, after a couple of dreary quarters, came on the back of solid image sensors demand for mobile products.

MC’s sales and operating revenues plunged 35.3% year on year to ¥248.6 billion ($2,143 million) on account of dip in smartphone unit sales. Also, absence of revenues from the previously exited smartphone business in unprofitable regions aggravated the fall.

Pictures Segment’s sales and operating revenues were down 14.1% year over year to ¥225.2 billion ($ 1,941 million). This is attributable to lower sales in Motion Pictures business lines. Motion Pictures mainly suffered due to poor theatrical revenues.  

Components sales and operating revenues were down 10.3% year on year to ¥51.4 billion ($443 million). Foreign currency headwinds played a major spoilsport for this segment.

Moreover, the Imaging Products & Solutions (“IP&S”) segment recorded a 9.6% year-over-year decrease in sales and operating revenues to ¥167.1 billion ($1,441 million), primarily due to foreign currency headwinds.

The Music segment experienced a 1.8% declinein sales to ¥178.5 billion ($1,539 million) on a year-over-year basis. Lower sales of Recorded Music as well as currency headwinds more than offset the benefits of robust Visual Media and Platform sales.

Financial Services revenues edged down 0.9%, year over year, to ¥319.1 billion ($2,751 million). Poor investment performance in “general account” at Sony Life acted as the spoilsport, completely offsetting the healthy investment performance of the “separate account”.

The Home Entertainment & Sound (“HE&S”) segment witnessed a 12.1% year-on-year decline in sales and operating revenues to ¥353.4 billion ($3,047 million). Foreign currency fluctuations acted as major dampener, along with decrease in home audio and video unit sales.

Liquidity & Cash Flow

As of Dec 31, 2016, Sony’s cash and cash equivalents were ¥771.7 billion ($6,652million), down from ¥ 983.6 billion recorded at the end of Mar 31, 2016.

Long-term debt totaled ¥703.4 billion ($6,064 million) compared with ¥556.6 million as of Mar 31, 2016.

Guidance

Based on the present market scenario, Sony has revised its initial forecast. The company, now, expects consolidated operating income to be lower than the Nov 2016 projection on account of steep impairment charge of goodwill in the Pictures Segment. It also believes net income attributable to shareholders to take a beating owing to lower income before income taxes and higher effective tax rates.

However, on a positive note, the company’s sales are anticipated to be better than the previous forecast on the back of favorable revision of assumed foreign currency exchange rates for the remaining fiscal 2016.

As per segments, Sony believes that the projected fall in smartphone sales will hurt Mobile communications sales more than what was predicted in Nov 2016. Sales forecast of the G&S segment, HE&S and IP&S segments have been revised upward on account of favorable foreign exchange rates.

For the Semiconductor segment, Sony announced that robust demand for image sensor products is likely to result in higher sales than the Nov 2016 forecast. Additionally, Music sales are estimated to be higher than the earlier projection, largely attributable to the better-than-expected Recorded Music and Visual Media and Platform sales. For the other three segments – Components, Pictures and Financial Services – sales are predicted to remain unchanged from the previous forecast.

To Conclude

Sony’s tepid third-quarter fiscal 2016 results came across as a huge disappointment for investors. The company’s fiscal 2016 profit guidance cut, for the second consecutive time, along with the colossal goodwill impairment charge in the Pictures Segment is not likely to go down well with investors. Moreover, softness in multiple business lines, including mobile, camera and devices, are anticipated to make matters worse for Sony.

Going forward, persistent appreciation of the Yen remains a key concern for the company, which can thwart growth significantly. This apart, escalating impairment charges and high restructuring costs are likely to hurt the Zacks Rank #3 (Hold) company’s profitability in the near term.

Key Picks

Some better-ranked stocks in the sector include Harman International Industries, Incorporated , Hyatt Hotels Corporation (H Quick QuoteH - Free Report) and Dolby Laboratories, Inc. (DLB Quick QuoteDLB - Free Report) . All three companies hold a Zacks Rank #2 (Buy).

Harman International has topped estimates thrice in the trailing four quarters, with an average beat of 9.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hyatt Hotels Corporation has an average positive surprise of 24.7%, having beaten estimates thrice over the trailing four quarters.

Dolby has a striking earnings surprise history, with an average surprise of 30.9% for the trailing four quarters, beating estimates each time.

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