Elevator Pitch
My rating for Sony Group Corporation (NYSE:SONY) (OTCPK:SNEJF) [6758:JP] shares is a Hold.
I wrote about Sony Group’s two potential catalysts pertaining to the financial services unit’s spinoff and the company’s actions to deal with the rise of cloud gaming in my earlier article published on June 8, 2023.
In the current update, I share my views on the recently announced changes to Sony Group’s management team. Jim Ryan is retiring next year, and it is unknown who will succeed him in leading Sony Group’s PlayStation business. In consideration of the uncertainty over Sony Interactive Entertainment’s future leadership, I have decided to downgrade SONY’s rating from a Buy earlier to a Hold now.
Management Team Changes
Seeking Alpha News reported on September 28, 2023, that the “CEO of Sony Interactive Entertainment,” Jim Ryan “will retire in March 2024, after 30 years in the PlayStation business.” In the same news article, it is highlighted that Sony Group’s current COO, Hiroki Totoki will be appointed as interim CEO at Sony Interactive Entertainment in April next year.
I will elaborate on the implications of this latest development for SONY in the subsequent sections of this article.
Game & Network Services Business
As the CEO of Sony Interactive Entertainment, Jim Ryan oversees Sony Group’s Game & Network Services, or G&NS, business.
The G&NS segment is arguably the most important business unit for Sony Group. The company is arguably best known for its Sony PlayStation game consoles, and this G&NS division is Sony Group’s largest revenue contributor among its various business groups. As disclosed in its most recent quarterly results presentation slides, the G&NS business contributed 26% and 19% of Sony Group’s top line and operating profit, respectively for Q1 FY 2023 (April 1, 2023, to June 30, 2023).
Looking ahead, the G&NS business is also the key growth driver for SONY in the near term. According to Sony Group’s FY 2023 (year ended March 31, 2024) financial guidance outlined in its first quarter earnings presentation, G&NS and the music unit are the only two businesses expected to deliver positive operating income growth for this fiscal year. In contrast, Sony Group sees its Pictures, ET&S (Entertainment, Technology & Services), I&S (Imaging & Sensing Solutions), and Financial Services businesses either reporting flattish EBIT growth or suffering from a decline in operating earnings in the current year.
As such, it is clear that any change in strategic direction for Sony Group’s G&NS or PlayStation business might have an adverse impact on the company’s overall financial performance in the future.
Jim Ryan’s Retirement
The retirement of Jim Ryan as CEO of Sony Interactive Entertainment and the man in charge of the G&NS division is something that investors need to pay special attention to.
Jim Ryan has been working at Sony Interactive Entertainment and the PlayStation business for close to three decades since 1994. He was promoted to CEO of Sony Interactive Entertainment in February 2019. During the time that he was CEO, Jim Ryan led the PlayStation business to be better prepared for disruption threats associated with cloud gaming.
In my June 2023 write-up for Sony Group, I highlighted that the “PlayStation Plus cloud gaming subscription service already offers 800 titles and over a billion hours of gameplay in its current form.” I also made reference to management commentary at Sony Group’s 2023 Business Segment Meeting, which indicated that the G&NS business has “some fairly interesting and quite aggressive plans to accelerate our initiatives in the space of the cloud” going forward. It is an understatement to say that Jim Ryan’s presence will be sorely missed when the PlayStation business executes on new growth plans after March next year.
Interim CEO Appointment
It is worth noting that Sony Group didn’t announce a new permanent CEO to take over from Jim Ryan. Given that this was a retirement rather an abrupt resignation, it is reasonable to assume that SONY would have disclosed the identity of the new CEO for Sony Interactive Entertainment if there was an obvious choice. This raises questions about whether Sony Group can get someone as competent as Jim Ryan to run the G&NS business.
In a worst case scenario, Sony Interactive Entertainment might possibly have to operate with an interim CEO for a longer than expected period of time, assuming that the CEO search process gets extended. Considering that Hiroki Totoki, the interim CEO for Sony Interactive Entertainment, is already wearing multiple hats (“President / CFO/ COO / Representative Executive Officer” as per Bloomberg), he might not have a lot of time to oversee the PlayStation business’ operations. In my opinion, the key members of the management team for a holding company should focus their full attention on capital allocation and strategic direction.
Of course, if a permanent CEO for Sony Interactive Entertainment gets appointed swiftly, the above-mentioned issues won’t be key concerns. Nevertheless, these are risks that have to considered based on the facts available now.
Concluding Thoughts
My updated investment rating for Sony Group is a Hold. There are unanswered questions with respect to Jim Ryan’s retirement and the potential successor. I think it is appropriate to have a Hold rating assigned to SONY for now, considering the leadership transition at the PlayStation business.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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