After Sony’s president Hiroki Totoki comments during the latest financial reports that saw the company announce that it will miss its projected 25 million PlayStation 5 console sales number this financial year, the company’s shares fell by 8.4% and closed 6.5% down.
Part of the reason for the sell-offs was also because of a drop in operating margin in Sony’s gaming business to 6%. That figure was 9% in Q3 2022 and 12 to 13% in the year before that. Sony revised its sales target and said it expects to miss the initial PS5 sales target by 4 million.
In a new report by CNBC, the media made calculations using FactSet data and the result obtained suggests that the drop in share price has wiped out around $10 billion of Sony’s value. Atul Goyal, a Jefferies equity analyst told CNBC that the low operating margin was more disappointing compared to the revised PS5 hardware shipment.
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According to Goyal, the operating margin at Sony’s gaming division stood at 12 to 13% for four years. Therefore, the current 6% margin was “extremely disappointing” and was “almost near decade lows”.
Sony’s president Hiroki Totoki
The analyst also said Sony’s margin should have been on the rise during this period instead of its downward trajectory since there are “various tailwinds that should have driven up the margins towards 20%”. Goyal highlighted some of the tailwinds which include the rising digital game sales and Sony’s PS Plus service with a margin of around 50%.
“Their revenue on digital sales, add-on-content, digital downloads are at all-time highs,” Goyal said, “and yet their margins are at decade-lows. This is just not acceptable.”
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During the earnings report, Totoki said that Sony doesn’t hope to release a sequel to some of its main IPs in the next financial year which leaves a huge vacuum for players. Also, during the Q&A session, the president said he wants the company to be “aggressive” in improving the gaming division’s profit margins.
Sony’s president wants Bungie to be accountable for development timelines
Another question that came up during the Q&A session following the company’s latest financial report was an update on Bungie. Totoki was asked if there were initiatives planned for the studio in the next financial year. In response, Sony’s president said although he was impressed by Bungie’s game development ability, he believed there was room for improvement from a business perspective.
“I visited the Bungie studios and had meetings with [the] management,” he said, “and I saw that employees working at the studios were highly motivated, showing great creativity as well as an impressive knowledge of live services.”
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“However, I also felt that there was room for improvement from a business perspective with regard to areas such as the use of business expenses and assuming accountability for development timelines. I hope to continue the dialogue and come up with some good solutions.”
Although Totoki answered the question during the earnings call Q&A session, the live English translation provided last week by Sony referred to PlayStation studios in general. However, the company has released a new official translation it said “is intended to replace the simultaneous translation of the question and answer session previously provided”. The new translation narrowed down the president’s studio tour statement to Bungie instead of PlayStations studios as previously provided.
When PlayStation announced the acquisition of Bungie in 2022, it promised the studio would “continue to operate independently, maintaining the ability to self-publish and reach players wherever they choose to play”. However, by December last year, it was claimed that Bungie’s independent position was under threat.
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According to an IGN report, the criteria for Bungie to continue to operate independently was based on the studio’s ability to hit stipulated financial goals. According to reports, Sony could dissolve the existing board and take full control of the studio if they fail to meet their financial targets.
By October last year, Bungie’s staff were told revenue was running 45% below projections for the year which it attributed to poor player retention for Destiny 2. To cut costs, Bungie carried out a round of layoffs that saw 100 employees leave.
