Gamers should be happy, for once, because the PlayStation 5 has finally arrived!
At least that’s according to Sony’s 2022 annual financial results, which proved that any lingering supply issues for the newest console generation are now over.
The Japanese consumer tech giant reported earnings in Japan last week for the fiscal year ending March 2023. Within, its PlayStation division had an exceptional time as hardware inventories returned and people everywhere could buy PlayStations once again. Its Game & Network Services (G&NS) segment produced almost $27 billion in annual sales, an all-time best.
What’s the catch?
Well, a historically weak yen had an outsized impact and was responsible for a substantial portion of revenue growth. Gaming also proved less profitable because of higher development and acquisition expenses. I’ll cover that more later.
Still, that’s not to dampen what Sony is doing with its gaming hardware business emerging out of the height of pandemic times. During January to March, the PlayStation 5 had the best non-holiday quarter for a gaming console ever with 6.3 million units sold. For perspective, it had shipped 3.3 million and 3.9 million in the same quarter during 2020 and 2021, respectively.
This means Sony beat its ambitious fiscal year target of 19 million shipped, reaching 19.1 million. It also drove lifetime shipments to 38.4 million, moving past the 30.75 million for Sega Genesis and Nintendo 64’s 32.93 million.
On the content side for PlayStation, while yearly software unit sales declined, its services and engagement statistics showed progress as PlayStation Plus and Monthly Active Users (MAUs) either remained flat or gained ground.
“Distribution inventories have normalized, and we are now able to deliver PS5 to customers without waiting almost all over the world,” executives said in prepared remarks. “In addition, the positive impact of increased PS5 sell-in has begun to appear in engagement metrics, with dollar-based third-party software sales exceeding the same month of the previous fiscal year in February and March.”
Here’s a closer look at the numbers for 2022, plus a preview of the year ahead with my new predictions.
Starting with Sony overall, its Q4 revenue jumped 35% to $22.6 billion. During fiscal 2022, sales rose 16% to over $85 billion, slightly above its target. This benefited from contributions across a number of business lines, including G&NS in addition to Entertainment, Technology & Services (ET&S) and its Music segment.
On the other hand, quarterly operating profit suffered a 51% decline to $950 million. It was virtually flat for the year, at $8.92 billion, above estimate. Headwinds included currency impact alongside lower contributions from PlayStation and Sony Pictures.
Gaming is a major factor for Sony’s overall performance. Both Q4 and 2022 overall proved to be mixed, with excellent top-line growth yet a weaker profitability outcome. PlayStation revenue between January and March launched 61% higher, to an all-time Q4 record of $7.9 billion. That was over a third of Sony’s sales for the quarter. During 2022, PlayStation sales grew 33% to a record $26.9 billion.
Again, on the flip side was profitability. Fourth quarter operating profit dipped 55% to $287 million. This drove the annual figure down 28% to $1.85 billion.
There’s great top-line movement yet worsening profit tells a totally different tale. Part of the reason behind record sales was massive exchange rate impact. Over the course of 2022, currency effect was upwards of $3.1 billion. That’s 12% of the total! If backing out this portion, for illustration purposes, Sony’s annual revenue would have been virtually flat.
Profitability took a hit mainly due to higher costs associated with making blockbuster first-party games like God of War Ragnarok, which had a reported budget of at least $200 million, plus purchasing Destiny creator Bungie among other smaller studios. Sony is also investing in its services suite and cloud offerings, and rebranded its PlayStation Plus membership structure. And frankly, it costs money to supply more hardware.
A primary growth driver was, naturally, PlayStation 5 hardware shipments. As regional data came in from key markets, indicators pointed to a big quarter. I still didn’t know if it could be this massive. Sony just shipped the most PlayStations in any fiscal Q4. To put this 6.3 million in context, the biggest January to March shipment total was 3.1 million right after its launch in fiscal 2013. Last year, Sony moved a paltry 2 million.
Even more, I bet most if not all stock is selling-thru to customers. The supply and demand equation has equalized, and Sony is clearly making up for lost time.
While this is impressive stuff, the PlayStation 5 continues to lagging its predecessor, which was at 40 million shipped by the end of its third fiscal cycle. That’s currently the fastest-selling console in Sony’s history. We’ll see if PlayStation 5 catches up. (Tease: It should by next year).
This performance was reflected in its product mix, where Hardware made up 35% of the quarter’s sales after more than doubling year-over-year. Next up was 21% via Add-On Content as it benefited from spend on third-party software and downloadable expansions. Digital games comprised 16%, no doubt bolstered by a monumental launch for Warner Bros’ Hogwarts Legacy. And the Others category contributed 13%, moving up 176% since last year. This includes Sony’s games on PC, such as The Last of Us Part 1 which launched in March.
As I did during my Microsoft earnings reaction, here’s a quick rundown of where Sony’s latest annual output fits compared to peers. Tencent’s latest was nearly $26 billion, meaning that if we account for extreme exchange rate fluctuations, Sony’s $26.9 billion would be tops. Backing out that effect, Sony occupies the second spot again at $23.82 billion. This is where Microsoft’s Xbox sales sit at $15.43 billion. Activision Blizzard’s 12-month revenue was $8.14 billion, so the combined firm could be $22 billion to $23 billion, accounting for redundancies and sales overlaps. Nintendo previously produced $12.25 billion, yet the company is reporting more recent results next week.
Sony’s management also shared supplemental statistics, which give insight into the number of folks playing regularly on PlayStation, if those users actively sticking around plus how well are services being received.
To keep it simple, I’ll focus on annual figures. Intriguingly, full game software sales across the PlayStation family took a substantial hit during 2022, moving down 13% to 264.2 million. Out of that, 43.5 million were from first-party titles published by Sony itself. That number is down only marginally from last year’s 43.9 million. In fact, Sony claims that dollar sales of first-party software rose 41%, including the impact from Bungie. The bulk of the unit drop was external games.
Digital represented 67% last year, up slightly from the 66% of fiscal 2021. That means more than two-thirds of games purchased for a PlayStation platform are via download. Digital’s slice didn’t dip below 62% during any quarter over the past two years.
It appears that, for now, the refurbished PlayStation Plus service is attracting and retaining users. There were 47.4 million memberships at the end of March, the same exact figure as the prior year and up 1 million sequentially since the holiday season.
Reflecting a similar engagement theme was active users on PlayStation. MAUs, defined as the “estimated total number of unique accounts that played games or used services on the PlayStation Network during the last month of the quarter” rose from 106 million in March 2022 to 108 million now.
Thus, while software sales declined for Sony this fiscal year, just as many people are subscribing to its catalog of older titles on PlayStation Plus and even more people are active on the ecosystem, which contributed to its elevated financial results.
“The number of monthly active users for PlayStation as a whole increased 2.3 million accounts compared to the same month of the previous fiscal year in March,” management said on its conference call.
There’s two sides to Sony’s story last year, and I’ve fully delved into both. To summarize, it was one of the best years gaming has ever seen. Albeit with the caveat of revenue benefiting greatly from a weak local currency and profit facing hits from big costs. There’s macro elements like supply lines being shored up that greatly benefit, and even though people are buying less games, perhaps partially due to inflation pressure, they are playing the games they bought.
One disappointing element of Sony’s announcement was nothing much on PlayStation VR2, which launched in February. For such a major product launch to receive zero airtime is concerning, and reinforces my viewpoint that its launch isn’t moving the needle for PlayStation or virtual reality as a niche.
Looking ahead, Sony has set a rather ambitious target for its gaming division in fiscal 2023. Namely, it expects the best year ever for PlayStation hardware, even with a single system-selling title on the docket for the upcoming 12 months.
“We are planning to release a major title, Marvel’s Spider-Man 2, this fiscal year, and we aim to continue creating new IP, rolling out catalog titles for PC and strengthening live game service development.”
Starting with hardware guidance, executives anticipate shipping a staggering 25 million PlayStation 5’s between April 2023 and March 2024. That would be the single best year of PlayStation console sales in its three decade history. If this happens, lifetime PlayStation 5 sales would reach 63.4 million, thus blowing past PlayStation 4’s 60 million on a launch-aligned basis.
I believe Sony will in fact meet this mark. I’m forecasting 25 to 25.5 million in annual PlayStation 5 shipments. I don’t expect any sort of new enhanced version, despite what “insiders” claim. Sony doesn’t need one right now. Supply has caught up to demand and it will milk the current devices until there are more games available solely on this generation.
Effectively, I’m targeting calendar 2025 for a PlayStation 5 model refresh.
Unlike Sony’s overall guidance expecting lower results in fiscal 2023, the firm is upbeat on the gaming segment. It anticipates 7% higher revenue and 8% better operating profit for PlayStation, to $28.8 billion and $1.99 billion respectively. The former would be another all-time best.
Will it hit these? I’m hesitant, not because of games or hardware, mainly because of exchange rate uncertainty plus cost upside. I’m expecting a more modest rise in the low single-digits, and operating profit to be flat or down slightly.
I’m expecting a great upcoming 12 months for software on PlayStation. Marvel’s Spider-Man 2 is undoubtedly a system seller. Square Enix’s Final Fantasy XVI and Capcom’s Street Fighter 6 will attract audiences. Activision Blizzard will launch Diablo IV to critical and commercial acclaim, and will have some sort of premium Call of Duty to sell. MLB The Show is a quiet success every year. Even Ubisoft will, allegedly, launch some games.
There’s also the transmedia portion and PC sales, incorporating brands like The Last of Us and Twisted Metal, which can provide upside if costs are kept in check. The great unknown is Sony’s live services push because it’s still in the ramp-up phase, where it generates expenses long before revenues and I remain a skeptic on just how many players will obsess over ongoing games exclusive to a single platform. At least Naughty Dog should share more on The Last of Us multiplayer this year.
I’ve come to the end of another fun rundown, within what’s already been a busy season. Next up will be Nintendo next week. Thanks for hanging out. Until then, take care, and be well everyone!
Note: Comparisons are year-over-year unless otherwise noted. Exchange rate is based on reported average conversion: US $1 to ¥135.4.
Sources: Ariana Ruiz/Picture Alliance (Image Credit), Circana, Company Investor Relations Websites, The Guardian.
-Dom