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It is quarterly earnings time and in the video game industry, Sony has become
the leading company to watch. Hardware shortages of the PlayStation 5 ha



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It is quarterly earnings time and in the video game industry, Sony has become
the leading company to watch. Hardware shortages of the PlayStation 5 have been
a major industry drag. Unfortunately, the latest earnings release indicates
shortages are still an issue.


PLAYSTATION 5 SALES BELOW EXPECTATIONS

On the surface, the Sony results look pretty good. In Sony’s Games & Network
Services revenue was up 12% over the previous year quarter. However, Sony
reports revenue in Japanese yen. In 2002 the dollar has soared in relation to
the yen. When the year started 1 U.S. dollar was worth about 110 Japanese yen,
where it has comfortably been for several years. As of the end of October one
U.S. dollar could buy nearly 150 yen.

Indeed, Sony lists the main reason for the revenue increase as favorable
exchange rates. Unfortunately, a deeper dive raises concerns. The number of
PlayStation 5 units shipped in the quarter ended 9/30/2022 was 3.3 million. This
was exactly the same as the previous year quarter ending 9/30/2021.

Obviously, the PlayStation 5 remains in short supply. Sony has said they plan to
ship 18 million units by the end of the fiscal year ending 3/31/2023. However,
after the first six months PlayStation 5 is right on track with the previous
year’s sales which were 11.5 million units. If Sony is to reach its goals the
shortage needs to clear up in the second half.

PlayStation 5 sales are starting to lag significantl behind the PlayStation 4


PLAYSTATION SOFTWARE SALES ARE ALSO LAGGING

In its latest forecasts, DFC Intelligence estimated that PlayStation 5 shipments
for 2022 would fall slightly below Sony’s goal. However, now it appears, unless
the last three months of 2022 are very strong, there could be a larger miss.
Unfortunately, going into November channel checks show PlayStation 5 units
difficult to find.

PlayStation 5 shipments are critical because many companies rely on an active
installed base to sell their third-party products. Unfortunately, once again the
news was not good. In the second quarter ended 9/30/2022 full-game software unit
sales were down 18% over the previous year's quarter. For the first half of the
fiscal year ended 3/31/2023, full game software unit sales were down 22% over
the previous year.

It should be noted that Sony reports digital sales in its full game software
unit report (digital accounted for 63% of units last quarter). In other words,
the decrease cannot be blamed on the decline in brick-and-mortar retail and
physical software.

Digital add-on software and network services did hold steady in terms of
revenue. However, this is somewhat misleading because of the previously
mentioned yen-to-dollar ratio. With major currency fluctuations, it is difficult
to do year-to-year analysis, but any adjustment for exchange rates will show a
decline in PlayStation add-on content and network services.




GOOD NEWS = DEMAND IS AT A RECORD HIGH

The good news is Sony’s disappointing results can be blamed almost entirely on
supply shortages, not lack of consumer demand. The question is not whether
consumers have lost interest in video games but instead when will these
shortages end?

On the PC side, at the end of October, Valve’s Steam service reached another
record with 30 million peak concurrent users. The demand is there. The hope
going into 2022 was that product manufacturing would be able to take advantage
of that record demand. Unfortunately, those expectations have been pushed
forward into 2023.

So going into 2023, DFC is addressing many questions including:

What is Sony doing to resolve supply shortages?

Is the continued console shortage going to cause people to consider Xbox given
the Game Pass content ramp-up?

What impact is this having on customers and brand loyalty? This is a topic
addressed in DFC's regular console game surveys as fickle consumer loyalty can
quickly cause major industry shifts that are otherwise hard to detect.

Is the Xbox having similar issues or are trends working in Microsoft's favor?

If you want to address any questions or join an investor call contact us.

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