Now up this quarter for console manufacturers and game development is Sony, owner of PlayStation and responsible for many commercial hardware successes plus some of the most memorable, big budget titles of all time.
Speaking of all time, Sony established yet another massive record when it reported fiscal 2021 second quarter results ending September. Its Game & Network Services (G&NS) segment, which houses the PlayStation brand, just achieved its best ever revenue during a second quarter: $5.86 billion. The prior record holder was three years ago in 2018 at roughly $5 billion, when PlayStation 4 was well into its lifecycle.
The Japanese consumer tech giant attributed this top-line success to an increase in hardware sales, a better 3rd party software effect plus exchange rate impact despite a dip in first-party game sales mainly on a more sparse lineup. This means PlayStation 5 is showing solid momentum at this stage, bolstered by buyers spending on multi-platform software, services and add-on content.
On the downside, operating profit for the PlayStation unit dipped more than 20% in the second fiscal quarter ending September to just over $750 million. Partially because of a tough comparable to a powerful number last year during maximum quarantine restrictions globally. Sony is of course selling less PlayStation 4 consoles and related accessories lately. Not to mention the average cost of making a PlayStation 5 during the quarter exceeded its price point, and first-party software is currently lagging.
When focusing on hardware shipments, PlayStation 5 has already reached its fourth quarter on the market. Time flies. Sony said it produced 3.3 million PlayStation 5 consoles during July to September, bringing its lifetime total to 13.4 million. Both of these figures are ever so slightly below the PlayStation 4 during the same relative time frame, which moved 3.4 million during the same fiscal quarter and reached 13.8 million at this point in its life span.
No doubt Sony is feeling the impact of global component and chip shortages, though the good news is the latest hardware is mostly selling out when available. Technically we haven’t heard a formal update on PlayStation 5 hardware unit sell-thru since the 10 million milestone back in July, when the company announced it as the fastest-selling console it’s ever made. I’m confident it’s at least 13 million right now, implying parity with its predecessor. Or even better.
During the firm’s conference call, Chief Financial Officer (CFO) Hiroki Totoki acknowledged the production difficulties yet reiterated both its hardware shipment goal of 14.8 million PlayStation 5’s and current financial targets for Sony’s gaming business this fiscal year ending in March.
“We have not changed this target,” said Totoki, referencing the aforementioned 14.8 million guidance. “Worldwide there is a disruption in logistics and mainly semiconductors device supply are being constrained. This is having a larger impact. And as you know, the hardware sales in the first quarter were less unit-wise, and so this is having an impact on us likewise with the second quarter. I think with effort and putting in place different measures, the PlayStation platform momentum can be maintained.”
In order to reach this number Sony needs to ship an additional 9.2 million PlayStation 5’s in the next six months, a bulk of which will happen during the holiday season. Personally, I’m leaning towards betting this will be achieved. Even if I’m not as sure as I once was. More on that later.
For now, the fun starts. I’ll dig into some quick analysis of underlying numbers within this latest report and then it’s forecasting time!
On the whole, Sony generated roughly $21.5 billion in sales during the quarter which was a 13% increase. This was attributed to major boosts in G&NS, Pictures, Music plus its Electronics Products & Solutions (EP&S).
From a profitability standpoint accounting for expenses, the firm’s output was effectively flat. Operating income during Q2 moved up 1% to $2.87 billion. EP&S provided a substantial boon here, while the aforementioned decline in gaming profit led on the downside.
PlayStation was still the company’s main contributor from both a sales and profit standpoint. That record Q2 revenue of $5.86 billion was up 27% and represents right around 27% of Sony’s total top-line. While the $751 million in operating profit from this business marked a decline of 22%, it still comprises 26% of total profit.
Where does this fall in the context of results lately? Taking a look at trailing annual figures helps add to that perspective, which is displayed in the first two charts I’ve compiled. Over the last four quarters, the PlayStation brand is responsible for $25.47 billion in sales. This is its best ever aggregate result, a billion U.S. dollars more than any rolling period in recent memory.
Operating profit tells a different story of course since earlier days of the pandemic, as expenses rise plus first party software output slides. Adding up the past year, G&NS segment income was $2.54 billion. This is the lowest since fourth quarter fiscal 2019.
The last chart in the gallery above displays quarterly contributions from each product category within PlayStation’s portfolio. Add-On Content is the primary factor at $1.71 billion, nearly 30% of gaming revenue and 10% higher than Q2 in 2020. Hardware is the clear growth story, nearly tripling since the final hurrah of last generation. PlayStation consoles contributed a quarter of gaming sales for Sony, reaching $1.46 billion. On the software side, Physical dipped 17% while Digital edged up slightly.
These dynamics reveal a couple intriguing trends. Even if there are less people playing than last year, they are still purchasing additional items and downloadable content for the games they own. It’s representative of a modern industry where games have longer tails and stay supported well after release. Digital is proving resilient, while retail is inconsistent. Oh, and PlayStation 5 is popular. That’s an easy one.
It’s only natural at this stage to run a quick comparison against two of Sony’s main global competitors in Microsoft and Nintendo. As I wrote earlier this week, Microsoft’s corresponding quarter was also a record-breaker internally on the revenue side and it’s reached $15.86 billion over the last year. Nintendo reports next week, its latest trailing 12-month sales around $15.56 billion. I expect that to increase accounting for its latest quarter so it’s not apples-to-apples just yet. Either way, PlayStation is clearly exhibiting its sales prowess. With my usual caveat that top-line doesn’t tell the whole story.
Financials and hardware sales weren’t the only juicy parts of Sony’s latest report. There’s also updates on PlayStation Plus, user engagement, software then its corresponding digital split. Note I included a full excerpt in the earlier gallery containing this supplemental data.
PlayStation Plus subscribers reached 47.2 million as of September month-end, which is up compared to 45.9 million 12 months back. A mere fraction off the quarterly high of 47.4 million subs back in March.
Monthly Active Users (MAUs), or the estimated total unique accounts that used PlayStation Network or played software in the ecosystem, shrank from 108 million last year to 104 million now. It’s the lowest in at least the latest six quarters, a statistic which was reflected by executive comments.
On the conference call we learned gameplay of PlayStation users was down 17% in Q2. Still with PlayStation Plus momentum, additional content spend and digital sales consistency based on category metrics, management called it an improving “quality” of engagement. Basically while player count is an important barometer, it’s more about how much people are spending. If the former is down while the latter is up, it’s really a win.
Full game software unit sales across PlayStation platforms, a figure which includes bundles, totaled 76.4 million, roughly 10% of which were first-party titles. Compare that to 81.8 million and 16% first-party from July to September 2020. Digital download ratio is now at 62%, up a bit from 59%. Sony doesn’t report exact physical versus digital units. Based on that earlier physical software revenue decline, the implication is retail softness is behind the change.
These indicators reflect a handful of things to me: Lower exclusive output, better spend on evergreen experiences plus a general impact of game delays. The period between July and September was light for PlayStation exclusives. Deathloop and Kena: Bridge of Spirits led the charge really, alongside “director’s cuts” for Ghost of Tsushima and Death Stranding. The first is actually published by Xbox Game Studios and while the second recouped its development costs and did well on platform ranks, it’s still an indie project. Multi-platform launches like FIFA 22 and Madden NFL 22 weren’t enough to beat out a strong prior comparable.
Not to be forgotten just yet, PlayStation 4 is still active on the software side even if much less so on hardware shipments which were 200K. That brings lifetime to 116.7 million. Any hopes of the second best-selling home console of all time moving past PlayStation 2’s 155 million is out the window by now. The upside is the latest generational transition is the most opportunistic for consumers, as PlayStation 5 does have backwards compatibility.
That’s enough looking back. Instead, what’s next for Sony?
Well management is certainly optimistic on future prospects, raising fiscal year ending March guidance for both sales by 2% and operating income by 6%. It now anticipates almost $90 billion in revenue, then $9.45 billion in profit.
At the same time, it reiterated internal forecasts for the PlayStation business even in the face of weakening operating profit. Target is $26.34 billion in sales for the year, with almost $3 billion in operating profit expected. Both of these would be substantial, establishing new financial year records.
This historic performance would require a strong showing from PlayStation 5 hardware shipments naturally, hitting that 14.8 million figure targeted for the full year ending March 2022.
Responding to an analyst question, Managing Director of Investor Relations Sadahiko Hayakawa echoed confidence in the platform. “I think that with effort and putting in place different measures, the PlayStation platform momentum can be maintained. And especially to the users waiting for their PlayStation 5, said Hayakawa. “We want to be able to supply as many PlayStation 5’s as possible to our customers who are waiting. That is our thinking.”
Right now I tend to agree with the top-line target for G&NS, taking into account another holiday for PlayStation 5 and related software. A steady hardware prediction is trickier, given so many uncertainties and how a lot of it is out of Sony’s control, no matter what executives claim. I’ve moved toward being less confident in my 15 million annual shipment estimate, though I will keep it temporarily. Perhaps out of stubbornness.
And I’m nowhere near bullish on the profit target. Especially with rising component prices, lower chip availability, player figures wavering and inching up digital sales. Will additional content spending and hardware growth be enough to offset expenses? I’m going to say it misses slightly, with the room for review once seeing where the holiday quarter lands.
Before wrapping, I want to mention further comments from Sony’s leaders on investment and focusing efforts. After purchasing Bluepoint Games, Fabrik Games and Firesprite all during the past quarter, the team plans to maintain “aggressive” investment in its development capabilities. This implies expansion beyond its current studio suite, so I’m curious where the next move will be.
CFO Totoki also said Sony wants to enhance and increase PlayStation Studios to invest more on development of games for PC and mobile, pushing beyond its traditional console market share. The announcement of God of War (2018) planning a PC release in January 2022 echoes this statement.
PlayStation is clearly the most important part of Sony’s overall business, hitting records and doing its best to keep up with hardware demand. The cost of investment and input prices to make PlayStation 5 has had an effect on its bottom line lately, though maintaining its annual targets shows a positivity that I don’t fully share across the board until gleaning more from the global chip situation and holiday performance.
Did anything stand out to you while checking out my article or Sony’s announcement? Do you think it will meet its targets and boast record PlayStation performance? Give a shout here or on social media. Be safe and thanks for reading!
Note: Comparisons are year-over-year unless otherwise mentioned. Exchange rate is based on the reported conversion: US $1 to ¥ 110.1.
Sources: Microsoft, Nintendo, Sony.