(Bloomberg) — Sony Corp. reported weaker profits in the PlayStation business and cut its annual revenue forecast, triggering the steepest share decline in almost three and a half years.
The stock fell 8.1 percent in Tokyo on Monday, the most since September 2015, after operating income in games fell 14 percent to 73 billion yen ($666 million) for the holiday quarter. The Tokyo-based company sold 8.1 million PS4 consoles, down from 9 million a year ago, it said in a statement Friday.
The PlayStation 4, headed for its sixth year, will likely surpass the 100 million unit sales milestone by mid-2019, cementing it as one of the best-selling consoles in history. Even so, this year’s software lineup isn’t as impressive as it was last year, when blockbuster titles like God of War, Spider-Man and Red Dead Redemption 2 debuted. For the full fiscal year, Sony kept its forecast for the games division of 310 billion yen. Now, attention is turning to the details and timing of the next-generation console.
“Strong profits from game software were offset by higher promotional and marketing costs aimed at driving PS4 volumes,” Damian Thong, an analyst at Macquarie Group Ltd., wrote in a report after cutting his rating to neutral. “We are moving to the sidelines until we can better assess the risks in the Games segment.”
Additionally, Goldman Sachs Group Inc. and Nomura Holdings Inc. cut their price targets on Sony’s stock.
“There is more downside as we believe slowing growth in its games division signals a very likely PS5 launch for next fiscal year and the ensuing costs that come with the launch of a new platform,” said Amir Anvarzadeh, an analyst at Asymmetric Advisors Pte.
For total sales, Sony lowered its outlook to 8.5 trillion yen for the fiscal year through March, compared with the prior forecast for 8.7 trillion yen. Weaker demand for camera chips, mobile handsets and financial services were behind the revision although a tax adjustment will boost net income.
The figures underscore the struggle at big technology companies, which are seeing slowing demand for their products and services. Apple Inc. reported a decline in revenue for the first time in two years, while chipmakers Intel Corp. and Nvidia Corp. have warned of weaker sales as China’s economy starts to sputter and looming uncertainly over Brexit.
“It’s definitely not as positive as the headline numbers would suggest. It feels slightly negative overall,” said Andrew Jackson, head of Japanese equities at Soochow CSSD Capital Markets in Singapore.
Operating profit in the last three months of 2018 was 377 billion yen, compared with analysts’ projection for 365 billion yen. After adjusting for a one-time gain in the music business, the result was significantly lower, at 260 billion yen. Quarterly sales fell 10 percent to 2.4 trillion yen.
With fewer games in store for the already-aging PlayStation 4 and Sony’s own Xperia phone business still bleeding money, Chief Executive Officer Kenichiro Yoshida will have to prove that Sony’s turnaround can continue instead of peaking this year. The mobile division continued to struggle, with an operating loss of 15.5 billion yen during the quarter, the fourth straight period. Yoshida has so far rebuffed pressure to sell off the unit, saying it is vital for pushing innovation including 5G-related research.
“The market is closely watching for a turnaround in the mobile communications business, but it looks things are worse year-on-year due to a decrease in smartphone unit sales,” Jackson said.
For the current fiscal year, operating profit will be 870 billion yen, compared with analysts’ projections for 884 billion yen on average, according to estimates compiled by Bloomberg.
Sony’s camera chips business is also seeing an impact from slowing global demand for smartphones. Operating profit in chips fell 23 percent to 46.5 billion yen. Guidance for the division is now lower, at 130 billion yen for the current fiscal year, from October’s forecast of 140 billion yen.
“We are cautious but not overly worried about CMOS despite iPhone weakness,” Atul Goyal, an analyst at Jefferies, wrote in a report last week.
The company’s new 48-megapixel image sensor is proving to be a hit with manufacturers including Xiaomi and Huawei, who are promoting it as a key feature in their new models. Phones with at least two rear-facing cameras will account for 74 percent of the market by 2020, up from 29 percent this year, JPMorgan Chase & Co. predicted in a research report this month.