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Sony (SNE) Q3 Earnings Beat Estimates, Revenues Decline Y/Y

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Sony Corporation (SNE - Free Report) reported solid third-quarter fiscal 2018 results, wherein the bottom line surpassed the Zacks Consensus Estimate and increased year over year. The Japanese electronics and entertainment company’s operating performance was largely driven by tax reductions, a favorable exchange rate and gains in Music segment.

Net Income

For the reported quarter, Sony’s net income surged 45% year over year to ¥429 billion or ¥330.77 per share ($3.8 billion or $2.93 per share) on the back of lower operating expenses and income tax benefit. Also, the bottom line surpassed the Zacks Consensus Estimate of $1.90 by a considerable margin.

Sony Corporation Price, Consensus and EPS Surprise

Revenues

Total operating revenues were down 10.1% year over year to ¥2,401.8 billion ($21.3 billion) due to significant decrease in Financial Services and Mobile Communications segment sales.

Segmental Performance

Sales at Game & Network Services (G&NS) increased 10.1% year over year to ¥790.6 billion primarily due to increase in game software sales. The segment’s operating income was ¥73.1 billion compared with ¥85.4 billion in the prior-year quarter.

Sales at Music declined 4% to ¥209.4 billion due to lower recorded music sales and lower visual media & platform sales. The segment’s operating income was ¥147.1 billion, which significantly increased from ¥39.3 billion in the prior-year quarter. This was due to a remeasurement gain of ¥116.9 billion resulting from the consolidation of EMI Music Publishing.

Sales from Pictures increased 6.3% to ¥276.7 billion largely due to rise in sales for Motion Pictures, including higher worldwide theatrical revenues as well as higher television licensing revenues for catalog titles. The segment’s operating income was ¥11.6 billion compared with ¥10.5 billion in the prior-year quarter.

Home Entertainment & Sound (HE&S) sales came in at ¥388.8 billion, down 9.5% on a year-over-year basis. This was due to decrease in television unit sales resulting from the strategic decision to not pursue scale in order to focus on premium models for higher profitability. The segment’s operating income was ¥47.5 billion compared with ¥46.2 billion in the prior-year quarter.

Sales at Imaging Products & Solutions (IP&S) were up 3.8% to ¥188 billion. Improvement in the product mix, reflecting a shift to high value-added models, drove the performance. The segment’s operating income was ¥34.2 billion compared with ¥26 billion in the prior-year quarter.

Mobile Communications (MC) sales declined 36.9% to ¥137.2 billion due to decrease in smartphone unit sales mainly in Japan, Europe and Latin America. The segment’s operating loss was ¥15.5 billion against income of ¥15.8 billion in the prior-year quarter.

Semiconductors sales in the fiscal third quarter decreased 8.2% year over year to ¥230.3 billion due to significant fall in sales of camera modules business and lower sales of image sensors for mobile products. The segment’s operating income was ¥46.5 billion compared with ¥60.6 billion in the prior-year quarter.

Financial Services sales were down 56.2% to ¥163.6 billion due to significant decrease in revenues at Sony Life. The segment’s operating income was ¥37.9 billion compared with ¥56.3 billion a year ago.

Sales at All Other were down 6.6% to ¥101.4 billion. The segment’s operating income was ¥6.1 billion compared with ¥2.3 billion in the prior-year quarter.

Other Quarter Details

Total expenses were ¥2,022.3 billion ($17.9 billion), down 13% year over year, primarily due to lower financial services costs and income from other sources. Operating income was ¥377 billion ($3.3 billion), up 7.5%. Remeasurement gain recorded in the Music segment as a result of the consolidation of EMI proved conducive to operating performance.

Cash Flow and Liquidity

For the first nine months of fiscal 2018, Sony generated ¥901.4 billion of cash from operations compared with ¥659.4 billion in the year-ago period.

As of Dec 31, 2018, the Japanese firm’s cash and cash equivalents were ¥1,480.8 billion ($13.5 billion) while its long-term debt totaled ¥549 billion ($5 billion).

Outlook Revised

Sony has revised its consolidated guidance for the fiscal year ending Mar 31, 2019 from the previous projection provided in concurrence with fiscal second-quarter results. Currently, the company expects sales and operating revenues to be ¥8,500 billion, down from ¥8,700 billion forecasted in October 2018. This is primarily due to lower-than-expected sales from Financial Services, Semiconductors, MC and IP&S segment. Operating income is projected to be ¥870 billion, unchanged from the October forecast. Income before income taxes is expected to be ¥950 billion, down from ¥975 billion, primarily due to higher-than-expected net loss on equity securities for the fiscal year. Despite expected decrease in income before income taxes, Sony anticipates net income to be ¥835 billion, up from ¥705 billion forecasted earlier due to the reversal of valuation allowances against a significant portion of deferred tax assets in the U.S. consolidated tax group in fiscal second quarter. This will likely result in a tax benefit for the company.

Zacks Rank and Other Stocks to Consider

Sony currently sports a Zacks Rank #1 (Strong Buy). Other top-ranked stocks in the broader industry include Comtech Telecommunications Corp. (CMTL - Free Report) , Harris Corporation (HRS - Free Report) and PCTEL, Inc. (PCTI - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.          

Comtech has a long-term earnings growth expectation of 5%.

Harris currently has a forward P/E (F1) of 19.6x.

PCTEL currently has a forward P/E (F1) of 66.9x.

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¥1 = $0.008870 (Period average from Oct 1, 2018 to Dec 31, 2018)

¥1 = $0.009089 (As of Dec 31, 2018)



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