Sony’s entertainment business gets an investor outing every now and then.
In December 2012, it got a big, positive reception from investors.
This time around, after an investor briefing on November 18, long buyers liked what they saw but remain speculative on the movie and music segments in particular. They were mostly positive about Sony's TV production and media networks business, especially assets with exposure to emerging markets in Asia as well as scalable assets in mature, accretive markets such as the UK.
The meeting was helmed by Sony Corp. CEO Kazuo Hirai and Sony Entertainment CEO Michael Lynton.
Kazuo Hirai stressed that the Entertainment division is “core" to Sony with the Sony Pictures unit existing since 1989 and Sony Music around since 1968, both generating profits consistently over the past 18 years.
Significantly, the company revised down its FY2014 outlook for the entertainment business though this news came with the caveat of higher cost savings, up US$50 million to US$300 million.
Sony Pictures, which includes movies, program sales and branded TV channels (largely pay-TV), will grow top line from US$8.1 billion in FY2014 to US$10-11 billion in FY2017, while operating margins should grow from 6.6% to 7-8% over the same period.
The guidance is conservative, and it may well be that program sales and TV channels contribute to outperformance.
Sony Music aims to grow from US$4.8 billion in FY2014 to US$4.8-5.2 billion in FY2017, with operating margins targeted to grow from 9.8% to 10.5-11.5% over the same period.
Highlights of the presentation included:
- Movies. Company execs continue to hedge risks in a business that most investors are concerned about, especially with respect to volatile cycles and where Sony sits in terms of benchmarks versus its peer group. Sony has entered into a three-year co-financing agreement with LStar Capital, whereby LStar Capital will invest in a majority of Sony movies. In addition, Village Roadshow has agreed to finance a selection of Sony titles. Recent box office hits include Spider-Man, 22 Jump Street and American Hustle.
- Media Networks. This business, largely anchored to branded TV channels, is on a growth path and continues to scale up. Media Networks will generate US$1.6 billion in revenue for FY2014, with India contributing 37% and Asia another 12%.
In India, the company goal is to continue to invest in its MSM asset, focusing on premium content to build strength in advertising and distribution.
In particular, the company is expanding its national channel footprint in India to drive future growth, and wants to launch more regional language and niche genre channels.
New Indian offerings include Pal, Max2 and Liv Sports. However, the performance of Pal has disappointed thus far and Sony’s core Hindi entertainment franchise needs reviving. Competitive bidding for sports rights has escalated.
The company has also acquired UK’s CSC Media, an independent provider of 16 pay channels across GE, kids, movies and music, which will help boost operating income and increase Sony’s scale in the UK.
Sony is investing more in first-window rights and local production across its AXN and SET pay channels in Asia, and plans to scale up further its One channel, a JV with Korea’s SBS.
Overall, company management is guiding for stronger margin growth at Media Networks over the next three years.
- TV Production. A steady cash generator, anchored to a number of hit shows such as Breaking Bad, Blacklist and Shark Tank. Sony will continue to invest in this business as it produces strong returns.
- Sony Music. The big concern in the mix, as growth appears to have saturated. The future is all about digital subscription, where Sony is strong. Sony retains a decent share in the US market at 30%, leading Universal (17%).