SEGA: 2020 will be extremely difficult for us

SEGA expects 2020 will be an 'extremely difficult period' due to coronavirus disruption, and forecasts 2.5 billion yen ($23.2 million) extraordinary losses.

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SEGA is in trouble. The company is warning investors that COVID-19 is significantly negatively impacting all areas of its business outside of physical and digital gaming. SEGA arcades and pachinko are a big part of its business--or they were before coronavirus. It also operates resorts, but in 2020, both resorts and arcade segments are expected to incur -6.5 billion yen ($60.4 million) and -9.5 billion yen losses ($88 million), respectively. SEGA has already shut down its well-known Akihabara arcade in Japan.

"As for resorts, we are in a very tough situation.

"However, if the current pace will continue in the future, it is highly likely that the deficit will widen. However, utilization of hotels has been recovering to a very high level and use by Koreans has been strong particularly on the weekend. In August of this year, the figure of hotels on a non-consolidated basis has recovered to a level where can be achieved a profit."

"Regarding Amusement Machine Sales and Amusement Center Operation, we are struggling now.

"In order to survive, we believe that each company will curb expenditures for new machines, and that while standard machines and prize machines are selling well, I expect it is difficult to sell new machines in the current fiscal year."

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SEGA says that 2020 will be a very hard year, and it's already making plans to restructure its business. First, it's changing how it reports earnings. Instead of reporting both operating income and ordinary income, it will now only report ordinary income. Operating income only includes money generated from operations, e.g. pachinko arcades and game sales. Ordinary income is the sum of operating income + non-operating income, which includes cash from investments, foreign exchange fluctuations, and write-downs.

Basically this means SEGA's earnings will be less transparent, and this might be an effort to somewhat mask the performance of certain ailing segments like resorts and pachinko.

Secondly, SEGA Is restructuring its business. Physical + digital games are now part of the new Consumer subsegment. Pachinkpo and pachislot are now longer part of the Entertainment Contents segment.

So it goes like this:

Entertainment Contents

-> Consumer

-> Physical & Digital game sales

Pachislot and Pachinko Machines Business

Further dividend plans have also been delayed because of the COVID-19 impact and restructuring.

SEGA plans to lean harder on its special structural reform committee established 5 years ago. Led by president Haruki Satomi, the committee seeks to make SEGA into a more lean and profitable games company.

"As I mentioned earlier, we will not go out of business even if COVID-19 status continues for two years, but not only that, but we also must make solid profits. To this end, we will first put our company system in place that can sustainably generate income,"Satomi said.

"We expect this year will be an extremely difficult period for our group. The main reason is that the impact of COVID-19 has spread to all business other than Consumer area," SEGA said in a recent Q1 presentation.

"We have already begun discussions and studies on structural reform of business to reduce expenses and streamline business group-wide in order to build a strong business base for future growth, as well as to reduce losses in the current fiscal year. Satomi will provide a detailed explanation of this later."

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The company's full-year Fiscal Year 2020 earnings forecast lays out more losses.

The full-year 2020 forecast looks like this:

Sales (277 billion yen, down 24%)

• Pachislot - 56 billion yen, down 48%
• Entertainment Contents - 214 billion yen, down 13%
• Resorts - 6.5 billion yen, down 37%

Operating Income (-15 billion yen, down 154%)

• Pachislot -9.5 billion yen, down 141%
• Entertainment Contents - 9 billion yen, down 45%
• Resort - -6.5 billion yen, down 44%
• Other/Eliminations - -8.0, up 6%

Ordinary Income (-20 billion yen, down 179%)

• Pachislot --10 billion yen, down 144%
• Entertainment Contents - 11 billion yen, down 32%
• Resort - -12.5 billion yen, down 135%
• Other/Eliminations - -8.5, down 1%

SEGA is optimistic that its reform plans will help restructure the company into a more COVID-19-proof business, but for now the games sector will be its main anchor point while its other segments suffer from coronavirus.