Sony Corporation reported fourth-quarter fiscal 2016 earnings per share of ¥21.45 (19 cents), against the year-ago quarter’s significant loss of ¥70.03 per share. The bottom line benefited from decent top-line growth, as well as fall in selling, general & administrative and financial services expenses.

For fiscal 2016, the company’s earnings per share came in at ¥56.89 (51 cents), down 51.6% compared with the year-ago figure. The earnings plunge came on the back of a ¥112B ($962 million) write-down in the company's movie business, charges for which were booked in the fiscal third quarter. The write-down followed a strategic review that signaled bleak future profit expectations for the segment.

Inside the Headlines

In the quarter, Sony’s sales and operating revenues were up 4.4% year over year to ¥1,903.6 billion ($17.0 billion). Solid top-line growth in six of the company’s nine segments drove the quarterly sales growth.

However, for fiscal 2016, Sony’s net sales dropped 6.2% to ¥7,603.3 billion ($67,886 million). Currency fluctuations and steep sales drop of the Mobile Communications (“MC”) segments proved to be a drag on the top-line performance.

Additionally, operating income came in at ¥94.4 million ($843 million), in stark contrast to an operating loss of ¥92.9 million in the year-ago quarter. Excellent rebound in the Semiconductor segment almost single-handedly drove the operating income growth.

Sales and operating revenues at the Game & Network Services (“GN&S”) segment climbed 21.0% year over year to ¥381.8 billion ($3,409 million). Improvements in the PS4 software sales (including sales through the network) and impressive market traction of the newly launched PlayStationVR proved conducive to sales growth.

Semiconductors sales and operating revenues jumped 36.0% year over year to ¥201.1 billion ($1,795 million). The rebound of the Semiconductors sales came on the back of solid demand for image sensors in mobile products.

MC’s sales and operating revenues declined 14.9% year on year to ¥155.9 billion ($1,392 million) due to decrease in smartphone unit sales.

Pictures Segment’s sales and operating revenues were down 5.7% year over year to ¥302.5 billion ($2,701 million). This is attributable to significantly lower SVOD revenues for Television Productions.

Components sales and operating revenues were up 8.4% year on year to ¥53.2 billion ($475 million). Increase in sales in the battery business, mainly attributable to increase in demand for products used in mobile devices, drove the sales of this segment.

Moreover, sales and operating revenues of the Imaging Products & Solutions (“IP&S”) segment inched up 0.9% year over year to ¥154.9 billion ($1,383 million). While improvement in product mix (reflecting a shift to high value-added models in still and video cameras) drove sales growth, this was largely offset by foreign currency headwinds.

The Music segment experienced a 5.4% increase in sales to ¥178.5 billion ($177 million) on a year-over-year basis. This segment benefited from higher visual media and platform sales.

Financial Services revenues were up 5.5%, year over year, to ¥275.1 billion ($2,457 million). Healthy investment performance of the “separate account” at Sony Life proved conducive to the sales growth of this segment.

The Home Entertainment & Sound (“HE&S”) segment sales and operating revenues came in at ¥214.7 billion ($1,918 million), flat on a year-over-year basis. While improvement in the product mix boosted sales, this was completely offset by a decrease in television unit sales.

Sales of “All Other” Segments fell 11.1% to ¥656 billion ($586 million).

Liquidity & Cash Flow

As of Mar 31, 2017, Sony’s cash and cash equivalents were ¥960.1 billion ($8,573 million) compared with ¥ 983.6 billion recorded at the end of Mar 31, 2016.

Long-term debt totaled ¥681.4 billion ($6,084 million) compared with ¥556.6 million as of Mar 31, 2016.

Guidance

Concurrent with the fiscal fourth-quarter results, Sony released the guidance for fiscal 2017. Currently, the company expects total sales to be around ¥8,000, up 5.2% from fiscal 2016. It believes that impressive sales at G&NS, Pictures and Semiconductors segments will fuel most of the top-line growth. Also, the company expects operating income to be around ¥500 billion, a jump of 73.2% from fiscal 2016. Improvements in operating income are expected to be driven by robust operating results in the Semiconductors and Pictures segments. These forecasts assume an exchange rate of $1= ¥105.

As per segments, increase in smartphone unit sales is expected to augment sales of MC. The GN&S segment is anticipated to benefit from higher network sales. Improvement in the product mix, on account of a shift to high value-added models, is expected to benefit the IP&S and HE&S segments. Also, increase in image sensor sales for mobile products and weakening impacts of the 2016 Kumamoto Earthquakes are expected to benefit the Semiconductor business significantly.

Increase in media networks and television productions sales, as well as insurance premium revenues are expected to stoke growth of the Pictures and Financial Services segment respectively. However, sales of the Music segment are likely to remain flat year on year, primarily due to a decline in the physical and digital download sales in Recorded Music.

Our Take

Sony ended fiscal 2016 on a decent note, with both top- and bottom-line growth year over year. Going forward, the company’s diligent restructuring efforts, which include separation of its businesses into distinct subsidiaries and a realignment of corporate functions, are expected to boost profitability. A number of measures, including cost-reduction initiatives, lower exposure in low-profit geographic regions and reduction in advertising and promotion expenses, are expected to benefit this business in the long run.

This apart, we believe that the solid rebound of the Semiconductor and Components segments will boost the company’s top line for the upcoming quarters. Most importantly, it seems that Sony has finally braved the challenges imposed by the Kumamoto Earthquakes, which significantly marred the fiscal 2016 results. However, some of these improvements are likely to be offset by steep currency fluctuations and weakness in the MC segment, thus restricting growth.

Zacks Ranks and Key Picks

Sony currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same space include Central Garden & Pet Company (CENT Quick QuoteCENT - Free Report) ,  H&R Block, Inc. (HRB Quick QuoteHRB - Free Report) and Nintendo Co., Ltd. (NTDOY Quick QuoteNTDOY - Free Report) . While Central Garden and H&R Blockstocks sport a Zacks Rank #1 (Strong Buy), Nintendo carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Nintendo has a positive earnings surprise of 40.0%, with two beats for as many misses over the trailing four quarters.

Central Garden & Pet Company has a solid average earnings surprise of 120.5%, beating estimates each time over the trailing four quarters.

With three beats in the trailing four quarters, H&R Block has a positive average surprise of 7.7%.

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