As the calendar turns to November, the ongoing earnings season across gaming, tech and media keeps on rolling. Those who follow my latest calendar post will know it’s only picking up steam!
Yesterday, Sony announced fiscal 2022 second quarter results. It’s the definition of a mixed bag, akin to receiving both an apple and candy bar while trick-or-treating! (I miss the spooky season already.)
Overall the Japanese consumer tech company saw improved sales and profitability. Within the PlayStation business, revenue rose in the double-digits to its best fiscal Q2 on record. However, operating profit saw a precipitous drop of nearly 50% in what was one of its toughest outcomes in recent memory.
Underlying this dynamic of good top-line growth yet decreasing profitability was favorable impact from exchange rate movement, as the Japanese yen is near its weakest point in decades. It’s also attributed to lower software output from external publishers. Then, for profit, better margins for PlayStation 5 hardware couldn’t offset high expenses from ongoing development and acquisition activity, namely the purchase of Bungie.
Speaking of hardware, PlayStation 5 lifetime unit sales reached 25 million after Sony shipped 3.3 million units in the quarter ending September. That’s the same exact quarterly shipment amount as last year. While it now outpaces Nintendo GameCube’s 21.74 million and the original Xbox at 24 million, it’s still hitting market at a much slower pace than its predecessor. Sony is upbeat on the remainder of this fiscal year at least, reiterating its 18 million shipped target. Which means it must reach 12.3 million in the back half. Read my predictions later in the piece to see if I agree.
As for engagement stats given the rebranding of PlayStation Plus during this quarter, it’s better than it first appears. From a subscriber and active user standpoint, things are looking down as both PlayStation Plus and Monthly Active Users (MAUs) across the network declined. However, Network Services dollar revenue is up double-digits. Which means the rebranding is attracting buyers that are spending more, and shedding those that aren’t interested in paying within the ecosystem. It’s actually been a win for PlayStation, despite a lower subscriber count.
“Production itself has been quite well,” said Sony Chief Financial Officer Hiroki Totoki. “We have the decline of MAUs and the other indices. The second quarter, more people are now going outdoors. And we have yet to get out of the negative cycles. PlayStation 4’s and third-party software sales have been rather sluggish. Catalog and historical titles have been declining. Against that, PlayStation 5 engagement is quite high.”
That said, here’s a deep dive into Sony’s latest numbers.
Sony’s consolidated results for the latest quarter are shown on the first slide above, and the remainder reveal insight into its Game & Network Services (G&NS) business.
Overall sales moved up 16% to $19.91 billion, while operating profit rose 8% to almost $2.5 billion. Both of these figures are best-ever second quarter results, as reported in Japanese yen. Even amidst a global scenario that’s experiencing economic slowdowns and rising inflation, Sony is proving to be resilient so far.
Now onto the PlayStation business. This unit improved quarterly revenue by 12% to a Q2 record $5.2 billion, contributing 26% of the company’s total. Operating income on the other hand was hit hard in the three months ending September, dropping 49% to $305 million.
On the top-line, these gaming results benefited from currency fluctuations even as sales of software not published by PlayStation softened. Profitability was drastically eroded by the aforementioned content sales drop and higher expenses amidst rising costs in general. There was a bit of good news sprinkled, as Sony indicated it’s losing less money on hardware in recent months.
Moving into the product sales split chart will help illustrate these talking points, showcasing what’s driving PlayStation right now. All categories were either flat or up, many of them in the double-digits. Intriguingly, Physical Software saw the biggest gain at 32%. Next up was Network Services, clearly benefiting from PlayStation Plus’ new tiered system (as cumbersome as it might be). Digital Software rose 14% while Hardware moved up 12% on better inventories. Add-On Content was the only source not to grow; though it also didn’t lose any ground, coming in flat for the quarter.
To help provide even more perspective, there are two additional charts showing the last 12 months of sales and profit for PlayStation. Summing up the last four quarters, Sony’s annual gaming revenue is currently nearly $20.3 billion. That’s the second best trailing 12-month revenue in PlayStation history, nearly identical to last year’s figure. On the flip side, the last year of operating income being under $2 billion is the worst in over two-and-a-half years. This clearly shows the challenge for Sony when it comes to gaming, maintaining profitability in a cooling economic situation as it pushes forward with big budget projects.
As I did in my recent article on Microsoft’s latest results, here’s a quick rundown of where PlayStation’s annual sales fit in the industry right now. I’ll mention the same caveat: when converted to United States dollars, the Japanese companies look a bit lighter than usual because of yen weakness. That said, Tencent’s $24 billion from gaming is tops. Sony maintains the second slot with its nearly $20 billion, while Xbox continues in third with $16 billion. Nintendo, which reports next week, was at $13 billion though that will likely move up.
Moving on from the financial side, here’s a closer look at Sony’s supplemental information highlighting even more recent stats for the G&NS division.
Full game software sales across PlayStation platforms totaled 62.5 million in Q2, which is down 18% or almost 14 million units since the same three months in fiscal 2021. This is partly driven by release slate, where last year saw titles like Ratchet & Clank: Rift Apart just before the quarter started then launches for both Ghost of Tsushima Director’s Cut and Deathloop. This year’s flagship was solely The Last of Us Part 1.
First party titles sold nearly a million less units in Q2 this year, at 6.7 million compared to 7.6 million. Even considering third party titles, mainly in the sports genre, content sales proved to be lighter. Digital split within full game software remained relatively constant, at 63% in Q2 versus 62% last year.
“When we compare software sales for this quarter with the same period of the previous fiscal year, we see sales of past library titles declined sharply, while sales of major new titles remained strong,” management said. “Users appear to be playing a smaller number of titles out of a desire to spend less money.”
Then there’s the element of subscription services and player engagement. PlayStation Plus ended September with 45.4 million subscribers, down 1.8 million since last year and 1.9 million compared with last quarter. This was mainly due to user engagement on PlayStation 4 performing worse than the company anticipated.
MAUs across the PlayStation network moved down to 102 million, seeing similar contractions against last year’s 104 million and Q1’s 103 million. Sony pointed out that total gameplay time rose “slightly” compared to the prior quarter, it declined 10%. Why? People have more opportunities to “go outside” now that COVID 19 infections are trending down. Basically, gamers are apparently touching more grass.
The last tidbit provided by executives during their prepared remarks is that PlayStation Plus subscriber ratio among PlayStation 5 general is “significantly above” that of PlayStation 4. Which makes sense, it’s a much more digital world now that’s open to paying for subscriptions like this and Xbox Game Pass. Sony’s latest rebranding and alignment of services shows its focus on attracting people to its ecosystem, so they can spend within it.
Thus concludes what I’d classify as one of PlayStation’s most divergent quarters in recent memory, presenting a clear divide between record sales and diminishing profits.
Sales growth is great to see, especially for Hardware and Network Services. I’d still argue that reigning in costs is much more important given today’s recessionary environment. PlayStation 5 availability is better than it’s been since launch and demand is certainly there on the consumer side. Its Sony’s expenditures on big budget projects, including PlayStation VR2 as a new peripheral, and buying of studios like Bungie that impacts the bottom line.
Management’s forward-looking guidance for the second half of fiscal 2022 reflects this same situation. First, it raised total company guidance for both sales and operating profit by 1% and 5% respectively. Then, it expects slightly higher sales from PlayStation however is forecasting 12% lower operating profit. This is much more in-line with my expectations.
As I mentioned above, PlayStation 5’s full year target is still 18 million units. Management claims that both material supply and logistical challenges have eased, thus it actually produced 6.5 million in Q2 and shipped around half of those to retail. I remain skeptical, keeping my previous annual estimate of between 15 and 16 million.
If it happens to meet the 12.3 million PlayStation 5 units required in the back half of fiscal 2022 to get there, lifetime sales would be 37.3 million by March 2023. Still below the 40 million of PlayStation 4 during the same time frame. It sounds like Sony’s target for fiscal year 2023 is 23 million, trying to make up ground on its predecessor. I think it will need more than that.
While Sony doesn’t provide formal guidance on software, I’m quite bullish on the next quarter and into the first calendar portion of 2023. Mainly because of two major new releases, one first-party and the other multi-platform. God of War Ragnarok hits market next week, and will rival or outpace the year’s biggest PlayStation 5 exclusives. As part of this report, Sony shared updated unit sales for God of War (2018): It’s now reached 23 million units, up from just under 20 million a year ago.
Then of course we have Call of Duty: Modern Warfare 2, what I expect to be 2022’s best-selling premium title. Yes, even considering the beast that is Elden Ring. Activision Blizzard’s Call of Duty franchise is on another level, especially its Modern Warfare sub-brand, seeing as this year’s title earned a record opening weekend of $800 million in sales to consumers. Considering PlayStation has a marketing deal in place, it benefits more than any other platform when the military shooter does well. Between that and PlayStation Plus continuing to fill out its offering, I’m upbeat on both software and add-on content sales in the coming quarters.
“We are actively pursuing various measures to further increase user engagement and re-accelerate the growth of our game business from both the hardware and software perspectives,” said Sony’s executives in prepared remarks. “We expect to see the results of these efforts contribute to sales and
profit in earnest from the second half of this fiscal year and next fiscal year.”
Finally, there’s Sony’s announcement today on the timing and cost of PlayStation VR2. The follow-up to its original virtual reality headset back in 2016 will launch on February 22nd at the lofty price of US $549.99 for its base model. This reflects the same sort of revenue and profit considerations as before: It’s a major barrier to entry considering users also need to own a PlayStation 5, which will push up sales, however margins will likely be small considering how much it costs to make each unit. I’m cautious on its commercial prospects initially, and think it will appeal more over time once more people own its corresponding console.
That’s a wrap on Sony’s latest results. What were your reactions? Any surprises? Do you think Sony can hit its financial and hardware targets by March? Drop a note here or social media and check back soon for even more coverage of gaming, tech and media. Be well, and thanks for stopping by!
Note: Comparisons are year-over-year unless otherwise mentioned. Exchange rate is based on reported average conversion: US $1 to ¥138.2.
Sources: Activision Blizzard, Company Investor Relations Websites, Forbes (Image Credit), Michael Ng (Image Credit), PlayStation Blog.