Sony Corp. Outlook Revised To Positive On Rosier Prospects For Earnings And Profitability; 'BBB+/A-2' Ratings Affirmed


  • We see an increased likelihood of Sony's earnings and profitability remaining strong and stable thanks to high-value-added products and recurring services revenue.
  • Its disciplined financial management and solid business performance will likely further improve its key financial ratios.
  • We are revising to positive from stable the outlook on our long-term issuer credit rating on Sony and are affirming all our 'BBB+' long- and 'A-2' short-term ratings.
  • The positive outlook reflects a heightened likelihood that Sony will steadily maintain high EBITDA and profitability and a strong financial standing even amid growing uncertainties about the global economy.
TOKYO (S&P Global Ratings) April 4, 2019--S&P Global Ratings today said it has 
revised to positive from stable the outlook on its 'BBB+' long-term issuer 
credit rating on Japan-based electronics maker Sony Corp. At the same time, we 
affirmed all our 'BBB+' long- and 'A-2' short-term ratings on Sony and certain 
overseas subsidiaries.

We revised the outlook because we see an increased likelihood that Sony's 
earnings and profitability will stay strong and stable thanks to its efforts 
to add high value to its products and secure recurring services revenue. We 
also incorporate a view that disciplined financial management and robust 
business performance are likely to further improve its key financial ratios. 

We affirmed our long- and short-term ratings because we see a risk of its 
earnings and profitability failing to stabilize at the high levels we assume. 
This is because its main businesses are likely to face stiffer competition and 
because uncertainties over the global economy are growing. 

Sony is likely to strengthen and stabilize its earnings, in our view, on the 
back of steps to add high value to products in its main electronics business 
and to secure recurring services revenue companywide. The earnings structure 
of some of its electronics businesses, such as the games and camera 
businesses, has become less susceptible to product cycles, in our view. This 
is because it has strengthened its services businesses, including after-sales 
services, in these segments.

In its mainstay games business, it is likely to ease the impact of product 
cycles and the intensifying competition with other streaming services, in our 
view. This is because we believe Sony can maintain its strong brand 
recognition while steadily increasing services revenue, including subscription 
revenue. We expect the image sensors business, with its development and 
technological prowess, to keep its earnings and profitability on track to 
improve gradually in the next one to two years. Its earnings growth has 
somewhat slowed in the face of a maturing smartphone market, its main end 
market. However, we think Sony can increase capacity, reduce costs, and 
explore new applications. 

Other main products in its electronics business, such as cameras and 
flat-screen TVs, are likely to underpin earnings by adding more high value 
using its superior imaging technology. We continue to expect its mobile 
business to make losses as its market matures. The entertainment business, 
another main pillar alongside the electronics business, will generate stable 
earnings, in our view. This is because the film business has been gradually 
recovering its capability to generate earnings as it has enhanced its cost 
management.

Recurring services revenue is likely to maintain a steady EBITDA margin 
(excluding one-time factors) of 13%-14% in Sony's nonfinancial businesses in 
the next year or two, despite economic uncertainties and intensifying 
competition. This compares with about 13% in fiscal 2018 (ended March 31, 
2019), by our estimate, thanks to Sony's strong business performance. We 
assess Sony's business risk profile as at the lower end of satisfactory, given 
stiff competition and low-profitability businesses, such as movies and mobile. 
Nevertheless, we expect Sony to improve its business risk profile with 
stronger and more stable capability to generate earnings.

Sony's nonfinancial business is likely to attain a net cash position in about 
a year. We base this view on our expectation that its robust business 
performance and continued management of its working capital and investments 
will further improve its key financial ratios. Despite cash outflows on share 
buybacks and acquisition of a music business, we estimate its nonfinancial 
business' debt-to-EBITDA ratio was about 0.1x as of the end of fiscal 2018, 
further improved from 0.3x the previous year. 

Large investments we expect Sony to make in image sensors are likely to 
produce a lighter burden than in typical semiconductor businesses. In 
addition, the burden is unlikely to grow significantly heavy, even as it 
accelerates investment for growth. This is because Sony has withdrawn from 
capital-intensive businesses and has outsourced production as it has 
restructured its businesses. We believe Sony can sufficiently absorb the 
impact of any drop in EBITDA beyond our assumption for the current ratings. 
This takes into account a still-large proportion of the volatile electronics 
and movie businesses relative to sales. Accordingly, we assess the financial 
risk profile for Sony as modest. We assume Sony can sell its holdings in 
publicly listed subsidiary Sony Financial Holdings Inc. to materially improve 
its finances if necessary.

The positive outlook indicates, we believe, that Sony can maintain high levels 
of both EBITDA and profitability even amid growing uncertainties over the 
global economy. We base this view on three assumptions. First, we think it 
will maintain the competitiveness of its main games and image sensors 
businesses while further striving to add value to its other electronics 
products. Second, we expect Sony to streamline its entertainment business and 
strengthen its creative ability. Third, it is likely to look to secure 
recurring services revenue companywide. The outlook also reflects our view 
that Sony, under disciplined financial management, can maintain stable and 
favorable financial standing compared to its peers.

In the next 12 months or so, we will consider upgrading Sony if it can 
maintain and improve the global competitiveness of its main businesses, 
including image sensors, games, and entertainment, and is likely to maintain a 
sustainable EBITDA margin of about 13% while keeping debt to EBITDA 
consistently below 1x.

We might consider revising the outlook to stable if we see a heightened 
likelihood of Sony's EBITDA margin staying below 13%. This could occur if the 
economy slows or its games and image sensors businesses face harsher 
competition. We might revise the outlook to stable also if its free cash flow 
turns negative and remains so as a result of weaker management of working 
capital or investment, leading us to believe its debt to EBITDA will stay 
above 1x.

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