Shares of Sony fell by 8% after the Japanese entertainment and technology giant recorded a decline in sales and profits. Specifically, Sony’s gaming division, which has become increasingly critical to the conglomerate saw operating income from games fell by 14% to $666 million during the October-December holiday quarter, according to Bloomberg.
Sony sold 8.1 million units of the PlayStation 4 during the quarter in question. The PS4 is currently in its sixth year.
For the full year, Sony also reduced its forecast from 8.7 trillion yen to 8.5 trillion yen.
Consequently, Sony’s shares fell 8.1% in Asia on Monday. This was the largest decline in Sony’s stock price in over a three-year period.
The decline in PS4 hardware sales did not come as a surprise given that the console is more than half a decade old. Investors were, however, were disappointed due to expectations that variants of the PS4 such as the PS4 Slim and the PS4 Pro did not boost the bottom line. The PS VR, a virtual reality headset, had also been expected to boost Sony’s gaming hardware business.
Despite the decline in sales, the PlayStation 4 is still one of the biggest-selling gaming consoles of all time. Currently, it has sold more than 84 million units and could very well exceed 100 million units in the coming months.
Sony did not give an indication of what it plans to do to boost its gaming hardware business though. But launching new gaming hardware, perhaps the next generation PlayStation (PS5?), might be one of the options. Sony competitor Nintendo has proven that newer hardware always does the trick. During the 2018 holiday quarter, Nintendo shipped 9.4 million Switch consoles compared to Sony’s 8.1 million PS$ consoles.
Some analysts have already anticipated this and this includes Ace Securities’ Hideki Yasuda, per Reuters. According to Yasuda, demand naturally drops off as the market begins anticipating new hardware:
The gaming business, which has been Sony’s profit driver in the last couple of years, is set to peak out ahead of the launch of the next gaming console. That’s inevitable due to product cycle.
Some analysts have also reduced the price targets of the stock based on the calculation that launching a new platform will come with extra costs that will weigh on profits. Marketing and advertising costs could be especially high given competitor plans to launch even cheaper gaming hardware.
One of the analysts expecting a surge in costs if Sony releases new hardware is Asymmetric Advisors’ Amir Anvarzadeh:
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.
Not all was gloomy in Sony’s gaming division though. Game software sales rose with Marvel’s Spider-Man especially doing brisk sales.
The downturn in the worldwide smartphone market did not leave Sony unscathed either. This weakness has seen the Japanese conglomerate reduce its profit forecast for imaging sensors. Despite the bad news, Sony’s chief financial officer, Hiroki Totoki, has stated that the conglomerate intends to boost capacity in this niche:
We haven’t changed our view that demand for our high-end sensors will increase, or our plans to increase production capacity to the full. But we will adjust the timing of the capacity boost depending on demand.
Overall Sony’s mobile division recorded 15.5 billion yen in operating loss. This division includes Sony’s smartphone-making business, Xperia.
On a positive note, Sony’s quarterly profit jumped to a record high. This was driven primarily by a one-off gain which was attributed to the Japanese conglomerate purchase of EMI Music Publishing at a price of $2.3 billion.
Specifically, operating profit increased by 7.5% to a figure of $3.46 billion during the October-December quarter. Music sales, however, dropped by 4%, according to The Motley Fool .