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Sony's key image sensor business hit by smartphone market decline

Japanese group forecasts 12% drop in net profit for FY2020 amid coronavirus

Sony's plan to launch its next-generation console PlayStation 5 around the end of the year is still on track. (Photo by Masayuki Kozono)

TOKYO -- Sony expects net profit for this fiscal year to slide 12% to 510 billion yen ($4.8 billion), marking the lowest level in three years, the Japanese conglomerate said on Tuesday, as the economic fallout from the coronavirus pandemic puts the brakes on its image sensor business.

"Business confidence and economic activity have weakened amid the coronavirus and has led to a slowdown in the smartphone market," said Sony Chief Financial Officer Hiroki Totoki.

The company is one of the world's biggest producers of image sensors, which are used in smartphones as well as in cameras. Last year, Sony held 50% of global market share.

The image sensor business has been a crucial growth driver for the conglomerate, however, prospects have changed following the pandemic.

Global lockdowns have slammed the brakes on consumption and have led to dwindling sales of smartphones and digital cameras.

Sony Chief Financial Officer Hiroki Totoki said that amid reduced economic activity during the pandemic, 'consumers are shifting towards mid- to lower-end products'. (Screenshot from Sony website)

Totoki noted that "consumers are shifting towards mid- to lower-end products," amid the coronavirus. Sony's strength, however, lies in its ability to provide high-quality image sensors for high-end products.

The company said it would review its image sensor business strategy by reevaluating its investment as well as its plans for research.

Sony had previously aimed to invest 700 billion yen in the three years to fiscal 2021 to meet increasing demand but now plans to reduce that to 650 billion yen as the market slows.

In addition, sales to major customer Huawei have also been clouded by the U.S.'s increased restrictions on the Chinese tech group, which it accuses of industrial espionage.

However, Sony does not expect the downtrend to last forever, with Totoki saying, "We believe this to be a short-term slump and once the pandemic is under control, we will see an uptick in the smartphone market."

The CFO pointed out that consumers would once again seek out smartphones with high-quality cameras. "We will adjust our business strategy to match the current market environment, but expect to get back on track for profit growth by the latter half of fiscal 2021," he said.

Along with a decline in net profit, Sony also forecasts operating profit to decline 27% to 620 billion yen for the year ending March 2021, with revenue remaining flat at 8.3 trillion yen, a 0.5% increase from the previous year.

Sony had previously said it anticipated operating profit to fall around 30% this fiscal year.

Forced lockdowns to prevent the spread of COVID-19 have also delayed productions in Sony's music and movie business. Movie ticket sales have also declined. Reduced consumption continues to hurt sales of TVs, digital cameras and other electronic devices.

On the other hand, Sony's breadwinning games segment, featuring subscription-based models like PlayStation Plus and PlayStation Network, has seen an increase in users with people forced to stay at home during the pandemic. PlayStation Plus, which allows users to access online multiplayer games for a monthly fee, experienced an 8% jump in subscribers in the three months through June, to over 45 million.

Gaming software sales are also expected to boost revenue, with the plan to launch Sony's next-generation PlayStation 5 console near the end of the year still on track.

"We are seeing a surge in demand as more people stay at home," said Totoki.

Software titles like The Last of Us Part II, developed by California-based studio Naughty Dog under Sony and released in June, sold over 4 million copies worldwide in its first three days, becoming one of the fastest-selling titles for the PS4 console.

However, the massive sales growth in its gaming business will not be able to offset the decline in Sony's other segments. In addition, the initial costs of rolling out the PS5 mean there will only be a slight increase in profit for the game business.

In the April-June period, net profit increased 53% to 233 billion yen, while operating profit declined 1% to 228 billion yen. A decrease in tax expenses, as well as gains on owned shares boosted net profit.

The company posted a 2% jump in revenue to 1.9 trillion yen. Its gaming business benefited from the pandemic-led boost in homebound game players while its financial services business also experienced a surge in sales.

The current fiscal year will be another tough one for the Japanese company. For the year through this past March, Sony's net profit fell 36% to 582 billion yen compared with 916 billion the previous year. Operating profits fell 5% to 845 billion yen while revenue fell 5% to 8.2 trillion yen.

Sony also announced a stock buyback plan worth up to 100 billion yen, purchasing around 20 million shares -- about 1.64% of the group's outstanding shares -- between Aug. 5 and March 31, 2021.

The company's stock price closed at 8,686 yen on Tuesday and is trading at a 19-year high.

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