Sony (SNE, Financial) reported its Q3 2015 earnings on Jan. 29. The stock subsequently jumped from $20.29 to $23.88 per share on the favorable earnings release. For Q3, net income increased 33.5% year over year from 90 billion yen to 120.1 billion yen or $1 billion U.S. dollars. Sales were up slightly, and operating income grew by 11%.
Sony is known as a consumer electronics company that sells televisions, Blu-Ray disc players, cameras, headphones, the PlayStation, etc. In addition, Sony provides nonconsumer items such as “CMOS image sensors, CCDs, system LSIs and other semiconductors; batteries, audio/video/data recording media, storage media and optical pickups; and chemical products comprising materials and components for electronic devices, such as anisotropic conductive films.” The company also makes movies, TV shows, recorded music, animated titles, etc.
After the earnings announcement, the headline “Sony Profit Rises Due to PlayStation, Movie Business Strength” appeared on The Wall Street Journal and an article titled, “James Bond, Adele Save Sony Profit in Global Smartphone Rut” appeared on Bloomberg. If we read Sony’s profile on Yahoo! (YHOO, Financial) Finance, there’s another interesting line:
“Additionally, [Sony] provides various financial services, including life and nonlife insurance, savings products and loans; researches, designs, develops, produces, markets, sells, distributes and services mobile phones, tablets, accessories and applications.”
Given that Sony barely mentions its finance divisions in its profile and the focus is on PlayStation and media revenue from news headlines, it would be natural for people to assume that the finance-related divisions don’t contribute much to Sony’s bottom line. Upon closer inspection, most people would be surprised to learn that, from an operating income standpoint, Sony is less of an electronics company than it is a financial services company.
From the table above you can see that in fiscal 2014, Sony’s total operating income was 68.5 billion yen. If you look at the financial services operating income, you’ll see that the division contributed 193.3 billion yen which was offset by the 217.6 billion yen loss from the mobile division. Financial services contributed more than twice the operating income of any other division in fiscal 2014. Looking at “FY15 January FCT,” Sony is forecasting 320 billion yen in total company operating income for fiscal 2015. Financial services is predicted to be 175 billion yen which is over half of total operating income. It’s also noteworthy that financial services is expected to fall 9.5% year over year.
Sony is a prime example of why it’s essential to look at financial statements. If an investor bought Sony stock based on optimism for PlayStation and movie revenue, they would not account for the risk associated with Sony’s financial division. The financial services division has Sony Bank and then a number of insurance companies such as Sony Life, Sony Assurance, Sony Bank and Sony Lifecare. From the 2014 annual report, Sony explains the financial services divisions’ performance, “Revenue at Sony Life increased 9.6% year on year to 967.1 billion yen mainly due to an improvement in investment performance resulting from a larger rise in the Japanese stock market in the fiscal year ended March 31, 2015, than in the fiscal year ended March 31, 2014.”
If the financial services division's performance is primarily driven by the Japanese stock market, then that makes earnings extremely challenging to forecast. Furthermore, The Bank of Japan adopted a negative interest rate policy the same day that Sony released Q3 earnings. Negative interest rate policy incentivizes banks to loan money. Who knows how this will affect the financial division’s operating income? Will it make Sony’s bank engage in riskier lending? While Sony’s consumer electronics, media, and high profile projects like virtual reality get all of the headlines, investors need to be aware of the company’s exposure to financial markets to truly evaluate the company’s intrinsic value.