索尼 (SONY) 2004 Q3 法說會逐字稿

Good morning.

My name is Ashley and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Sony Corporation Third Quarter Fiscal Year 2004 conference call.

[Operator Instructions]

Thank you.

The conference will now begin.

Thank you very much for that introduction, Ashley.

Thank you all for joining us today, January 27 2005, for the discussion of Sony's Third Quarter results for the fiscal year ending March 31st 2005.

I am Jonathan Bates with Sony Investor Relations in Tokyo.

We are joined this evening in Tokyo by Katsumi Ihara, Executive Deputy President, Corporate Executive Officer, Group CSO&CFO; by Takao Yuhara, Senior Vice President, Corporate Executive Officer, in charge of Finance & Investor Relations.

And Mr. Rob Wiesenthal, Executive VP and CFO of Sony Corporation of America.

First I would like to have Mr. Ihara, Mr. Yuhara and Mr. Wiesenthal say a few words of welcome to our guests.

This is Katsumi Ihara speaking from Tokyo.

Thank you very much for joining this teleconference today.

Thank you.

This is Takao Yuhara speaking.

And I am very happy to talk with you.

Thank you.

Hi, this is Rob Wiesenthal speaking to you from Tokyo.

I'm happy to be here today to answer your questions about our entertainment operations.

Thank you very much for joining us Mr. Ihara, Mr. Yuhara and Mr. Wiesenthal.

In just a few moments, I'm going to give a brief summary of today's announcements.

Then Mr. Ihara, Mr. Yuhara and Mr. Wiesenthal will be available to answer your questions.

Please be aware that statements made during the following remarks and Q&A session with respect to Sony's current plans, estimates, strategies and press release and other statements that are not historical facts are forward-looking statements about the future performance of Sony.

These statements are based on management's assumptions and beliefs in light of the information currently available to it.

And therefore we should not place undue reliance on them.

Sony cautions you that a number of important factors could cause actual results to differ materially from those discussed in the forward-looking statements.

Additional information as to risks and uncertainties as well as other factors that could cause actual results to differ, please refer to today's press release, which can be accessed by choosing Investor Relations at the bottom of the page at www.sony.com.

With that I'm going to turn to our announcements.

Sony's consolidated operating results for the third quarter.

Consolidated sales and operating income.

Sales revenue decreased 8%, year on year.

There was a decline in sales in the Music segment due to the incorporation of Sony's overseas music business within the Sony BMG joint venture.

In the Games segment, although there was an increase in software sales, this was more than offset by a decline in hardware sales resulting in a decrease to overall segment sales.

However PSP, on sale in Japan as of December 2004 has enjoyed a very positive launch.

Operating income decreased 13% year on year.

In the Game segment, operating income declined as a result of a decrease in hardware sales.

In the Electronics segment, decline in operating income was mainly due to deterioration in the cost of good sold associated with falling unit prices.

However in the Pictures segment, there was an increase in sales, primarily as a result of strong home entertainment sales of Spider-Man 2.

There were ¥10.5 billion of restructuring charges included in operating expenses, a reduction of ¥43.1 billion year on year.

The effective tax rates for the quarter was 5%.

This was due to a significant decrease in tax expense as a result of the reversal of valuation allowances against deferred taxes, based on an improvement in operating performance at Sony's U.S. subsidiary.

Equity in net income of affiliated companies.

Equity in net income from Sony Ericsson was ¥3.1 billion an 11% increase year on year.

Equity in net income from Sony BMG was ¥1.1 million.

Overall equity in net income of affiliated companies decreased 23.5%, to ¥2.3 billion.

Net income.

As a result of the decrease in tax expenses, net income increased 55% year on year to ¥143.8 billion.

Electronics.

Sales decreased 1% year on year.

Operating income decreased 23%.

For your reference, we would also like to bring your attention to Sony Ericsson's results for the October December quarter, with relation to our summary of Electronics.

Sony Ericsson sales increased 40%.

Units shipped also increased 56% to 12.6 million units, a record for unit shipped for any one quarter.

GSM models equipped with inbuilt mega pixel cameras and 3G models contributed to strong results.

Income before taxes increased 204% to ¥19 billion due to the significant increase in sales.

Returning to Electronics.

Reasons for the decrease to operating income include restructuring expenses of ¥10.4 billion compared to ¥47.2 billion for the same quarter of the previous year.

A reduction of fixed costs resulting from restructuring charges of ¥23.5 billion, an increase of ¥4.8 billion, as a result of the foreign exchange impact.

And a decrease of ¥14.6 billion as a result of an increase in depreciation and amortization costs.

A decrease of ¥14.2 billion, as a result of a decrease in sales.

And a decrease of ¥54.5 billion as a result of a deterioration in variable costs.

Product categories within Electronics.

AVIT -- Audio, Video, TV and Information Communication. ¥1,058.6 billion of sales, a ¥16.9 billion decrease year on year.

Operating income was ¥45.0 billion, a ¥31.3 billion decrease year on year.

There was a decline in sales of CRT televisions, based with a continuous shift in demand towards flat panel television.

And portable audio faced with changes in its competitive environment.

However, there was an increase in sales of several products including digital still cameras and flat panel televisions, which experienced an increase in unit sales in all regions.

And LCD rear projection televisions, which experienced increased unit sales especially in the U.S.

The main reasons for the overall fall in operating income was primarily due to the decrease in sales of CRT televisions and portable audio, as well as video cameras, which were impacted by a fall in unit prices.

On the other hand VAIO PC has experienced increased profits as a result of pursuing added value in its product lineup and the implementation of operational reforms.

Device, semiconductors, components. ¥355.2 billion of sales, a ¥0.5 billion increase year on year.

Operating income of ¥3.7 billion, a ¥28.7 billion decrease.

There was a decrease in sales of optical heads faced with a decrease in demand.

Operating income decreased due to an increase in R&D expenses associated with the next generation microprocessor chip cell.

Inventory.

Inventory was ¥570.9 billion, ¥29.3 billion increase, year on year, but a ¥107.6 billion decrease compared with the end of September.

As a result of the integration of Sony's semiconductor manufacturing businesses, as of the second quarter, inventory that was previously recorded in the Game segment is now recorded in the Electronics segment.

If we discount this inventory now accounted for within the Electronic segment, inventory actually, actually decreased year on year.

We believe that inventory is at an appropriate level and there are no product categories with any significant problems.

We will continue to carefully control inventory levels this quarter.

Games.

Sales decreased 23% year on year.

Hardware.

In anticipation of the launch of the new PS2 model, a strategic curtailment of the production and shipment of the original PS2 model in the second quarter led to fall in unit sales in the third quarter.

In addition strategic price reductions compared to the same quarter of the previous fiscal year also contributed to decrease in sales.

Software.

Bumper years for the PS2 business are continuing.

Total production shipments for the quarter achieved an all time record for PS2 shipments.

In addition, Sony brand software share of total software increased to 14% from 11% in the previous quarter.

PSP on sale in Japan as of December 2004 has recorded very positive hardware and software sales.

Hardware sales for December were approximately 510,000 units.

And software sales were approximately 1.3 million units.

In preparation for launch in Europe and the U.S., we are rapidly working to enhance our production capacities.

Operating income decreased 37%.

This was a result of the fall in hardware unit sales coupled with strategic price reductions, although performance within our software business was strong.

As a result of expenses associated with the Japanese launch of PSP and impact of continuing active R&D investments necessary for our continued future business success, operating income was lower year on year.

Revision to our production shipment forecast.

Due to the favorable reception of the new PS2 model, we have upwardly revised our forecast for production shipments for the PS2 from 14.5 million shipments to 15 million shipments.

Music.

Sales decreased 60% year on year due to the establishment of Sony BMG as of August 1st 2004.

Results for Sony's overseas music business that were consolidated within Sony consolidated results are now accounted for within Sony BMG under the equity method.

At SMEJ which accounted for 86% of total sales in the segment, an increase primarily of album and singles sales lead to an increase in sales of 11%.

Sony BMG's sales for the October/December quarter were approximately ¥158.2 billion. ¥12.0 billion of operating income was recorded in the music segment.

Improved profits year on year at SMEJ were the result of strong album and single sales as well as an improvement in cost of goods sold.

In addition, although Sony BMG recorded approximately ¥17.6 billion of restructuring charges, income before income taxes was approximately ¥3.7 billion and net income, ¥2.2 billion.

Pictures.

Sales increase 12% year on year.

DVD and VHS sales increased primarily due to the contribution from Spider-Man 2 and the television series Seinfeld.

There were 28 million DVD and VHS unit shipments for Spider-Man 2 and 5.4 million units of Seinfeld.

SPE with 14% were number 1 in terms of market share from January to December 2004.

Operating income more than tripled as a result of strong DVD, VHS sales from Spider-Man 2 and the strong theatrical performance of The Grudge.

Financial services.

Financial services revenue increased 6% as a result of an increase in revenue at Sony Life.

Operating income increased 10% to ¥13.9 billion as a result of an improvement in profitability at Sony Bank.

Forecast.

Regarding Sony's forecast for the fiscal year ending March 31st, 2005, please refer to our announcement of January 20th 2005.

In addition we have revised our forecast for capital expenditures from ¥410 billion to ¥370 billion.

Of this, investments in semiconductors has been revived from ¥190 billion to ¥160 billion.

There was no change for our forecast for depreciation and amortization for R&D cost.

Finally, we would like to discuss how we are working to improve profitability within our Electronics business.

With regards to strengthening our display business, we plan to further differentiate our television through LCD and SXRD display devices, expand our small and mid size lineup and improve our cost competitiveness.

As for the digital imaging business, we'll bring high picture quality to the video camera market by promoting high definition and further expand our DVD camcorder line up.

We will also continue to propose new innovative types of products.

With regards to digital audio products.

Through the establishment of the Connect Company on November 1st, 2004, we are launching a complete audio business using download distribution services, content and hardware.

With regards to devices, we will continue our investment in key devices and semiconductors which are the core engine for generating added value and differentiating our products from those of our competitors.

With that, I would like to turn over to Mr. Ihara, Mr. Yuhara and Mr. Wiesenthal who will be happy to take any questions you may have.

[Operator's Instructions]

While we are waiting for the roster to be composed, I would like to go to an email question, first of all.

The first email question comes from Michael Chung (ph) from Deutsche Bank in London.

The question is: do you believe the price decline being observed today is a temporary phenomenon or a structural change in the industry?

Needless to say the price of the finished product has a strong correlation with the price of the component like LCD.

If we talk about the LCD televisions, the price is strongly correlated with the price of the LCD panel itself.

As the production process of LCD is getting very capital intensive being similar to the semiconductor business, I think that the price of the product is getting similar to the semicon cycle.

Sometimes we see a drastic price decrease in certain period and sometimes we will see some moderate price decline depending on the demand and supply situation of the key component in the marketplace.

But we will never see a stabilization of the product in the marketplace.

In that sense, I think this price decline trend is a sort of a structural change in the marketplace.

Thank you very much.

With that I would like to go to another email question from Connor Omara from Arete Research.

His question is: what major movie releases are in the pipeline for calendar year 2005?

Well, for the next 2 quarters we have 9 major releases.

I'll just hit on some of the highlights.

Coming February 11th, in the U.S., we have "Hitch," which is a romantic comedy with Will Smith and Kevin James, who's from the King of Queens – a highly anticipated film with a tremendous amount of awareness.

The marketing campaign has begun in earnest in the U.S. and we all are quite excited about that film.

And then in March, Guess Who which is a (inaudible) on the original "Guess who's Coming to Dinner" with Bernie Mac and Ashton Kutcher.

We'll have the sequel to Triple X, "Triple X - State of the Union," which will, the lead will be played by Ice Cube, also features Samuel L Jackson.

And then in early summer, "Fun with Dick and Jane" with Jim Carrey and Tea Leoni.

Looking further down the pipe in the summer we also have "Bewitched" with Nicole Kidman and Will Ferrell.

And that will give you some sense for the next couple of quarters.

Thank you very much, Rob.

We have one more question from email.

Could you please update us on how the MGM and Sony Pictures relationship is progressing?

Well, the road to closing the MGM transaction is proceeding well.

In December of 2004, U.S. regulatory approval was obtained and we are now waiting for European regulatory approval.

We expect the deal to close during the first half of this calendar year.

Overall, I think that Sony, our private equity partners, Providence Equity and Texas Pacific along with our strategic partner Comcast are working very closely together to ensure that we hit the ground running upon closing.

And that we really have an orderly transition.

We have agreed on a senior management structure and have identified a number of qualified candidates to fill those positions.

And we're also very happy to note that the United Artists Division was nominated for a number of prestigious Academy awards for the "Hotel Rwanda" film.

Those nominations are quite exciting.

So overall I think that the deal or transaction's proceeding as we have expected and hope to close the first half of this year.

Thank you very much, Rob.

We're going to go through another email question from Colin Sebastian from Thomas Weisel Partners.

When can we expect the PSP to launch in North America including price points and unit estimates?

Well, the PSP will be launched in North America in March of this year.

And price and other conditions are not yet announced.

And please wait for the moment.

Thank you very much, Mr. Yuhara.

We have another email question from Colin Sebastian from Thomas Weisel Partners.

Can you discuss some of the issues leading to short supplies to PS2 hardware in North America and Europe?

And when can we expect stores to receive consistent shipment?

Yes.

And we have launched the new PS2 back in November last year.

And I am very sorry we couldn't meet the very strong demand in a particular region or countries.

However, we are making every effort to increase our production output.

Even after the holiday season, for the fourth quarter.

We have had the total model change from the past PS to the new PlayStation 2.

And there is a delay to make a full production because of those activities.

Anyway, in the fourth quarter we are making every effort for the output, forms the very strong demand.

Thank you very much, Mr. Yuhara.

We have another email question.

At what point or at what event you plan to provide more details on the next PlayStation?

Yes.

There are some schedules that we have announced.

By the end of March, we are going to hold the premier event to announce the specification of the next generation console.

And we would like to show you the playable prototype models at the E3 in Los Angeles in May.

Thank you very much.

With that I would like to go over to a live questions.

Your first question comes from the line in DJ Mees (ph) from Lehman Brothers.

[Operator's Instructions]

Good evening.

Could you tell me what is your outlook for LCD TV sales in calendar '05?

And where do you see pricing as we exit '05 for 30 inch and 40 inch TVs?

In general, we cannot finalize the product line-ups and the pricing for next year yet.

But one thing I can tell you is that since the joint venture between Sony and Samsung for LCD panels, we'll be starting shipment sometimes in summer this year.

So we will have a significant supply of LCD panels from this factory.

So we are ready to implement some strong promotions of the Sony LCD color television next year, worldwide basis.

Thank you very much, Mr. Ihara.

With that I would like to go to another email question.

The question is: is there any evidence that the flat panel margins are decreasing in the channel allowing LCD TV and PDP prices to come down without further eroding the margins of Sony and other consumer electronics makers.

Like in Sony, what can Sony do to encourage the retail channel to drop margins to stimulate volume in flat panel TVs?

When I look at the price deterioration at the marketplace for the last third quarter by product categories, LCD TV and PDP display are one of the products where we see the most aggressive price deterioration in the marketplace.

And we believe that this tendency will continue for the rest of this year.

And so obviously Sony's effort is to regain the cost competitiveness of the flat panel display products taking advantage of the LCD supplied by the joint venture as well as using the key components, which we are developing at this point of time.

That is the kind of overall situation.

We will continue to see this very strong price drop in the fourth quarter and early part of next year.

Thank you very much, Mr. Ihara.

Next I would like to move to another email question.

Could you please update us on cell?

When will it ship and in which product?

Yes.

Concerning the cell chip, currently we have the production facility which is being set up in our semiconductor plant.

In the second half of next financial year, we'll start to make the production of the cell chip.

And then it will be utilized for the next generation PlayStation console.

Thank you very much Mr. Yuhara.

Next, another email question.

Where in your TV product mix will SXRD and LCD TV feature?

Do you view SXRD as a competitor to DLP?

And if so, do you have a semiconductor process roadmap that can deliver cost saving comparable to the plans of Texas Instruments with DLP.

Yes.

Sony has decided to focus on the 2 flat panel display solutions.

One is obviously the LCD TV and the other is the rear projection system using SXRD.

It is true that the rear projection system using SXRD is a kind of competitive product against the DLP systems.

And I am very much happy to report that the current market share of Sony’s Wega system has now more than 50% of the market share in the United States.

It is true that we have SXRD roadmap because this key device, it is being manufactured only within the Sony semiconductor businesses.

And our effort is to increase the number of pixels in LCD panels.

And also, we are making a tremendous effort trying to reduce the overall cost of these key devices.

Thank you very much Mr. Ihara.

With that I would like to go over to our next live question.

You next question comes from the line of Shawn Meoni (ph) from Friedman, Billing and Ramsey.

[Operator Instructions]

Your line is open; you may proceed with your question.

Thank you.

I just wanted 2 quick things.

One, could you repeat again?

Did you indicate the PSP is on track for launch in the late March in U.S. and Europe?

And secondly, could you give any outlook or color for calendar 2005 with the PS2?

Since the unit's been refreshed, we've seen very strong demand and stockouts?

Is there a chance that production, the production forecast for 2005, calendar 2005 could be as high as 2004?

Thank you.

Yes.

For this PSP in the North America, we confirmed the launch in March.

But we haven't yet confirmed the launch time for the PSP in Europe.

As far as the new PS2 hardware is concerned, the demand is very strong since we released this hardware.

But I believe that this demand will be continued in 2005.

Thank you very much for your question.

With that I would like to go to another (audio gap) -- can we go to another live question please?

Yes sir your next question comes from the line of Bill Linen (ph) with WR Hambridge.

[Operator's Instructions]

Bill, your line is open you may proceed with your question.

Thank you.

I just want to go back to the production delays that you had on PS2.

Could you elaborate just a little bit more -- I'm just wondering exactly what the production delays were?

And could you let us know are those delays something that could possibly be shared by the PS in the PSP process?

Or was it something completely particular to the PS2?

Thank you.

Well, there was a big delay as always happens for the period of set up, but, in the third quarter, we did ship almost 8 million units for the quarter.

And we are also trying to reach a high level of production output for this fourth quarter.

So that's the same.

That's the situation of the PlayStation.

Thank you very much for your question.

Thank you.

With that I would like to go over to another email question from Luke Moraga (ph).

His question is: any chance to get Connect network compatible with iTunes format sooner or later?

For the answer to this question, I will go over to Rob.

I think that the consumer in general has spoken and has asked for a greater compatibility between all digital entertainment products and the related services.

I think you've recently seen on Sony's own Connect products, us being now compatible with MP3, which is a new feature for our devices which consumers have demanded.

While I cannot speak about specific compatibility with iTunes, what I will say is that everyone at Sony is working in a very persistent fashion to ensure greater compatibility with all digital services enabling technologies and other consumer electronic devices.

It's something that the consumer right now really wants.

And it's going to help build the market when this does occur amongst all the manufacturers.

Thank you very much, Rob.

With that I would like to go over to another live question.

Your next question comes from the line of PJ McNealy from American Technologies Research.

[Operator Instructions]

Your line is open; you may proceed with your question.

Hi.

Question for your PSP production and ramping.

We've heard 500,000 units in December, another 300,000 units in January.

We’ve heard that you are targeting 1 million units per month and going to 2 million.

And can you just give us some sense of timing of when you expect to hit capacity of 1 million or 2 million units per month.

Thank you.

Yes.

Because of the strong initial demand in Japan and also our plan to release PSP in North America and Europe, we would like to increase our production capacity as soon as possible to 1 million per month and also targeting 2 million per month.

So that is all what we are making every effort at the moment.

Just to clarify.

Are you at 1 million per month now?

Well this will be in the spring time of this year.

In other words – the early time of the first quarter of the next fiscal year.

Thank you.

Thank you very much.

Now I would like, we have another question from email.

This is the last question today.

And the question comes from Amia Thanbagarden (ph) from KBC Securities.

Given that CRT has been a focus of your restructuring assets for some time, could you please tell us your progress in restructuring and reducing capacity in this area?

Yes.

Currently we are making just less than 10 million unit of CRT color TV per year.

However the quantity is declining quarter to quarter.

And we have just mentioned that streamlining the CRT production lines from 17 lines to 5 lines till the fiscal year 2006.

Then this is, as we have realized, we are just implementing the restructuring initiatives on the CRT production as it was scheduled.

Thank you very much, Mr. Yuhara.

And thank you very much everyone for joining us today.

With that I would like to conclude today's conference call.

Thank you, Mr. Ihara, Mr. Yuhara and Mr. Wiesenthal for joining us today.

I would like to take this opportunity to remind everyone, of our investor relations contact information.

In Tokyo, investor relations can be reached at 813-5448-2180.

New York, investor relations at 212-813-6722 (Correct Number is 212-833-6722).

And London, investor relations at 44-207-444-9713.

Again thank you very much for joining us.

And that concludes today's call.

Thank you very much.

This concludes today's conference call.

You may now disconnect.