As August rolls on, I’m back with my latest and likely last results recap of the season.
Earlier today out of Japan, Sony Corp released its fiscal 2023 first quarter announcement. Both the company at large and the PlayStation business experienced similar dynamics in that revenue grew in the double-digits, yet profitability weakened on higher cost recognition.
Focusing on its largest segment of Game & Network Services (G&NS), it was a gigantic first quarter on the revenue side for the PlayStation business. Quarterly sales reached over $5.6 billion, up 28%, which is a record high. Main contributors to this historic Q1 were better third-party software sales, console growth and exchange rate movement.
Sony saw steady engagement for active users and play hours in the three months ending June. Unfortunately, it no longer reports a key metric on the player side related to subscriptions.
The firm moved 3.3 million PlayStation 5 consoles to retailers in the quarter, pushing lifetime shipments to 41.7 million. That’s 38% higher than last year’s 2.4 million, as supply lines are now shored up and pumping out enough to satiate demand.
While nearly 40% console growth looks great on paper, the company’s management specifically said that PlayStation 5 hardware units came in lower than expected. Which will make working towards its massive annual target a bit harder than originally surmised. Plus, its gap compared to PlayStation 4 sales widened with this latest number.
“We have positioned the accelerated penetration of PlayStation 5 hardware as one of the highest priorities in this fiscal year,” executives wrote in prepared remarks. “And we will try to work steadily to implement necessary measures to achieve our hardware sales target of 25 million units.”
At least yen sales of the hardware segment were among the fastest-growing product categories within this division, behind only that of digital software, as I’ll detail later.
The other main down note for PlayStation during Q1 was profitability. Operating income came in 7% lower than the same time in fiscal 2022 plus it continues to trail one of its main local competitors in Nintendo. While partly due to where each is in their console cycle, it also reflects Sony’s big investment in studios and live services development.
One thing I’ll mention throughout is the impact of the yen’s standing on Sony’s results and my conversions from the local currency into dollars. I’ll point this out when it’s relevant, as there’s a material impact on a global business like this.
See below for more on the individual numbers and a look ahead to the next quarter!
For the overall firm, revenue grew 33% to $16.7 billion. While positive impact came from its gaming and music segments, plus exchange rate, the most substantial bump came from financial services which was affected by an accounting change around its Sony Life insurance business. On the flip side, Sony’s total quarterly operating profit dropped 31% to $1.85 billion, mostly driven by that same financial services segment.
Within the G&NS unit, revenue rose 28% to $5.63 billion. Based on this, gaming currently makes up a third of Sony’s total business. Top-line was bolstered by external partner game sales, additional content buying and improved hardware availability.
Keep in mind, the exchange rate impact was upwards of $300 million. Even accounting for that, PlayStation would boast best-ever Q1 sales. In fact, for more perspective, it’s a sizeable bump from the previous best of first quarter fiscal 2021 when revenue reached $4.5 billion based on the same exchange rate conversion.
Paralleling the overall firm’s scenario, G&NS experienced declining operating profit during the quarter ending June. This number went down 7% to under $360 million, where third party game sales weren’t enough to offset ongoing cost recognition from Bungie and other acquisitions, among other expenses.
I’ll say, for the accounting nerds, this does account for an increase in depreciation and amortization, which impacts traditional operating profit (as opposed to an adjusted figure that Sony reports, which did go up).
Underlying the revenue momentum were double-digit quarterly gains across every single product sub-segment. As you’ll see in the gallery above, somewhat surprisingly, the biggest contributor wasn’t Hardware. It was Add-On Content at 27% of the total, after experiencing a solid 15% growth in revenue. Next was Hardware at 24% of the pie, with sales jumping 42% since last year. Digital Software comprised 20% of the total and had the best year-on-year growth of 52%.
Sony also introduced a new product segment called Other Software, which accounts for first-party titles sold outside of the PlayStation family of devices. Thus, its PC offerings like Horizon Zero Dawn and The Last of Us Part 1. While it’s slight from a slice standpoint, only contributing 2% at present, it grew 17% since Q1 last year.
Right now, annual gaming revenue for Sony is a best-ever $27.83 billion. This is the first time it’s been above $27 billion, no doubt boosted by the yen impact I’ve already mentioned many times. However, annual operating profit is currently $1.8 billion, down from $2.3 billion this time last year. That’s a substantial change in profit margin, from 12% to 6%. Looking at annualized figures intensifies Sony’s predicament of expanding revenue yet deteriorating profit, which I believe is somewhat temporary as the console cycle matures.
How does that annual figure compare across the biggest industry peers? Well, Sony’s last 12 month revenue from gaming leads the pack as reported. Then there’s Tencent, which doesn’t report for a few more weeks, around $26 billion for now. Microsoft has $15.47 billion yet could see over $20 billion or better once the Activision Blizzard deal finalizes in the coming months. Nintendo’s big first quarter bumped it to $13.46 billion at the top-line, yet it has $4.49 billion in annual operating profit versus PlayStation’s $1.8 billion.
New chart alert!
Here I’ve presented launch-aligned unit sales for the last two PlayStation generations. It’s a simple, yet effective in my opinion, way to put PlayStation 5’s quarterly bounce-back in perspective. Notably since the PlayStation 4 is Sony’s fastest-selling console, one of the biggest consoles of all time, and its newest sibling is trying desperately to keep pace amidst a more challenging macro environment.
What stands out immediately is the gap between the two widened this quarter, moving from a 1.8 million divergence to now 2 million. That’s the wrong direction, and I’d bet why management said it missed expectations because it wants to cross that trend-line as soon as possible. Occurring during this fiscal year will be challenging, considering PlayStation 4 had its biggest holiday ever in the corresponding period, with nearly 10 million sold in the October to December period of fiscal 2016 alone. That year’s 20 million was the PlayStation 4’s best result; Sony expects PlayStation 5 to ship 5 million more than that!
Moving on to an even more important hardware metric, PlayStation 5 achieved 40 million in sell-thru to consumers right after the June quarter ended, as of July 16th. Like the above, its predecessor reached that same milestone 2 months faster. I probably sound more negative than I should, because in the broader context of the industry’s history, and its Xbox counterpart, PlayStation 5 is selling quite well.
Supplemental stats shown in the report include full game PlayStation software unit sales increasing from 47.2 million last year to 56.5 million in the three months ending June. First party sales were flat at 6.6 million. Which means third party games were responsible for all of growth, namely the likes of new launches like Diablo IV, Final Fantasy XVI and Street Fighter 6, all of which I covered in my recent piece on June’s U.S. sales report from Circana.
Contribution from digital downloads as a portion of total software sales declined in the quarter, shifting from 79% last year to now 72%. That’s still slightly above fiscal 2022, when downloads made up 67% of the total.
The main engagement metric that PlayStation shares is Monthly Active Users or MAUs. This figure, which is an estimate of how many people used PlayStation Network in the last month of the quarter, came in at 108 million. This is the same as last quarter, and up from the 101 million last year. Essentially, about the same amount of people have been active on the network throughout the first half of the calendar year.
“Total game play time during the quarter was only 2% higher year-on-year,” cited management. “And we see the year-on-year growth in software sales as being driven mainly by a considerable increase in spending per play hour by the expanding PlayStation user base.” This fits with the MAU indicator, in that engagement has been mostly consistent lately without growing substantially.
Here’s where another type if disappointment enters, mainly for those of us that want more transparency from companies. Apparently, this is the first quarter during which Sony won’t be reporting PlayStation Plus memberships anymore. It’s an odd decision to me, considering how much trouble it went thru rebranding the service and how it’s seemingly a core part of its future growth strategy to keep people engaged in its library of games. Hopefully this will be updated on an annual basis, or when it hits a fresh milestone.
Thus, the last number we’ll have for PlayStation Plus subscribers is 47.4 million as of March 2023.
Oh, and there’s no mention of PlayStation VR 2 at all. Not entirely unexpected, I suppose.
Just like last quarter, which ended its 2022 fiscal year, Sony’s latest result was mixed when considering both financial elements and expectations for hardware against what happened through June. The firm is generating staggering growth at the top-line, a ridiculous record first quarter with the bump from external partners launching huge multi-platform or timed exclusives. (Plus, don’t forget about that exchange rate benefit.)
Then there was the solid increase in PlayStation shipments, making up for lost time due to earlier chip shortages and pandemic hurdles. Still, last quarter’s number came in below estimate, and expense recognitions due to M&A and other expense types are hitting the bottom line. Hard.
An aspect that’s exceedingly important for PlayStation, as opposed to say Microsoft’s gaming business, is growth due to new exclusive games. Which, as I mentioned in the software section, was nonexistent this past quarter. While third parties like annual iterations from Madden and NBA 2K annual will drive the quarter ending September, first party will certainly pick up in the holiday quarter.
Here’s a look ahead to forecasts and the near future.
Sony raised annual guidance for full year 2023 revenue, both overall and for the PlayStation business, then maintained other forecasts around profit values.
The firm increased total annual sales forecast 6%, to over $89 billion. Similarly, revenue guidance for its gaming division was bumped up 7%, to roughly $30 billion which would be a record. Even with these, it kept forecasts for operating profit the same, and reiterated the annual PlayStation 5 hardware estimate.
“Although we upwardly revised the sales forecast for third-party software which is performing well, we have incorporated a deterioration in the profitability of PS5 hardware mainly due to changes in promotions by geographic region and the sales channel mix,” management wrote, explaining why it didn’t change the PlayStation profit estimate for now.
While I certainly think the top-line is achievable, I’m more skeptical on profit guidance and think it could miss depending on where expenses go in later months. Then, for console sell-in, I had my estimate at 25 to 25.5 million three months back. I’m shifting towards the lower end, now at 24 million to 24.5 million. Partially because I maintain hesitance on a model refresh happening this year, still targeting Calendar 2025 for a slimmer or more powerful PlayStation 5.
While it’s more relevant for the quarter ending December, I’ll go on record now that Marvel’s Spider-Man 2 will have a super start at market in October. It will outpace the 3.3 million copies at launch for its 2018 predecessor. Though with it only on PlayStation 5, I’m hesitant to claim it becomes the fastest-selling PlayStation exclusive ever, currently held by 2022’s God of War: Ragnarök at 5.1 million. I’m more in the 4 million range, which will beat the 3 million of June’s Final Fantasy XVI for the highest launch of titles exclusive to PlayStation 5 (of which there aren’t many).
How about that internal live services push? Well, it will certainly have an impact on costs and profitability towards the downside because of staffing, investment etc ramping up. I don’t foresee a big impact this fiscal year on revenue, unless perhaps Concord from Firewalk Studios sneaks into the January to March quarter. Even then, it won’t sell like its usual exclusives. The largest, most concrete first party release that we know about might be Destiny 2: The Final Shape, which will be around February 2024.
That brings me to the end of my “big three” recaps for this quarter, covering the main manufacturers across the industry. I recommend heading back to the earnings calendar for more events. Thanks for reading! Be well!
Note: Comparisons are year-over-year unless otherwise noted. Exchange rate is based on reported average conversion: US $1 to ¥137.
Sources: Bloomberg (Image Credit), Company Investor Relations Websites, Sony Interactive Entertainment.