Sony Q1 FY2019 (April-June) Results - PS4: 3.2m (LTD: 100 million) / 1 billion games sold / FY2019 FCT down to 15m PS4

[ArmGunar]

Sony released their Analyst and Investor Briefing Q&A

Highlights :

• Sony is positive about Q1 performance despite decrease in Revenue & Operating Profit
• Decrease expected because Days Gone only vs God of War + Detroit last Q1
• They expected lower PS4 sales due to competitor but sales are still decent
• Costs for next-gen are trending as planned
• Sony do not plan to be aggressive with PS4... "focusing instead on raising the level of penetration while securing a profit"
• Sales of 1st party games are more or less expected
• Sales of Add-on and F2P titles were well below their expectations
• Especially sales of F2P (microtransactions) declining sharply during Q1
• PS+ Members numbers declined slightly but were largely expected, outlook is modest growth for full year
• No major downside risk for the H2's outlook but they keep a close eye on sales trends and geopolitical risks
• Operating Profit for Full Year remains unchanged partly thanks to "a degree of cost cutting" by "greater organizational flexibility"

Question : Although the Game segment reported a decline in profit for Q1 versus the same quarter of last fiscal year, when first-party software sales were strong, profit still looked reasonably good. How much of the previously stated 30 billion yen increase in development costs related to the nextgeneration console hit the books in Q1? Could you give us an idea of whether you expect this cost growth to be more weighted to 2H or 1H?

Answer : We are relatively positive about our performance in the Game segment for Q1 versus the same quarter of last fiscal year. We had expected software sales to decline given that Q1's first-party title, Days Gone, is a weaker title than the previous Q1's God of War and Detroit. We haven't disclosed the breakdown of development costs between 1H and 2H, but I can say that the costs are trending as planned. We lowered our target for annual hardware sales (as of July, 2019) from 16 million to 15 million units, and sold 3.2 million units in Q1. This is roughly the same volume as in Q1 last fiscal year. We had thought sales could be somewhat weaker than expected in light of competitor trends, but sales so far have been decent. Partially because we have started to convey some information about the next-generation console, we are not being too aggressive in selling the current model, focusing instead on raising the level of penetration while securing a profit. This is why we have slightly lowered our sales outlook but maintained our profit target.

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Question : You mentioned in your speech that demand for Free-to-Play (F2P) and other third-party software in the G&NS segment was somewhat weak. Could you give us more details on the current situation and how we should view the risks into the second half?

Answer : In Q1, sales of first-party games were more or less as expected and our outlook remains unchanged. Sales of Add-Ons and F2P games were well below our expectations, with sales of F2P in particular declining sharply. This prompted us to reduce our forecast. PlayStation Plus subscriber numbers declined slightly versus the end of March, but this was largely as expected, and the outlook is for modest growth over the full year. We took all these factors into consideration in setting our current forecast. The current 2H outlook does not factor in any major downside risk, and we are not looking for any to arise. We continue to keep a close eye on sales trends and geopolitical risks.

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Question : Regarding forecast changes in the Game segment, you revised the sales outlook down by 100 billion yen, which I understand is largely because of hardware and free-to-play games, but despite the change in forex assumption and the lower sales outlook, your profit outlook remains unchanged. Has there been any change in outlook on costs or profitability?

Answer : We have become more sensitive to changes and are better able to compensate for them operationally. In addition, we are also developing greater organizational flexibility. If we see that demand for hardware is somewhat weak, for example, we can make modifications to the way we are promoting products or make cuts where possible in operating expenses. We are making gradual and solid progress in improving our capabilities in this regard. Therefore, our current profit projection includes a degree of cost cutting.

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