索尼 (SONY) 2005 Q1 法說會逐字稿

I would like to welcome everyone to the Sony Corporation first quarter fiscal year 2005 conference call. (OPERATOR INSTRUCTIONS). The conference will now begin.

Good evening from Tokyo, and thank you all for joining us today, July 28, 2005 for the discussion of Sony's results for the first quarter ended June 30, 2005. I am Jonathan Bates, with Sony Investor Relations in Tokyo. We're joined this evening in Tokyo by Nobuyuki Oneda, Corporate Executive Officer, EVP CFO Sony Corporation, by Takao Yuhara, Corporate Executive and Executive VP Investor Relations Sony Corporation, and by Rob Wiesenthal, Group Executive in charge of Corporate Development (indiscernible) Sony Corporation, EVP and CFO Sony Corporation of America.

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

Good morning or good afternoon whatever it is. My name is Nobu (ph) Oneda, newly appointed as CFO since June 22nd. And this is my first appearance for this conference call. Thank you.

Thank you very much.

Hells, this is that Takao Yuhara. I want to say I'm very pleased to join with you in this conference call.

This is Rob Wiesenthal, and I look forward to answering your questions about the entertainment segment.

Thank you very much for joining us Mr. Oneda, Mr. Yuhara and Mr. Wiesenthal. In just a few moments I'm going to give a brief summary of today's announcement. Then Mr. Oneda and Mr. Yuhara and Mr. Wiesenthal will be available to answer your questions.

Please beware that statements made during the following remarks and Q&A session with respect to Sony's current plans, estimates, strategies, and 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 in line of the information currently available to us, 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. For 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 would like to turn to the financial results for the first quarter ended June 30, 2005. Please note that all gross comparisons relate to the previous fiscal year, unless otherwise -- the same quarter of the previous fiscal year, unless otherwise stated.

Consolidated sales decreased 3%, mostly due to the deconsolidation of our music business into the Sony BMG joint venture. Excluding such impact, consolidated sales would have been flat. Operating loss of 15.3 billion yen was recorded compared to a gain in the previous year, mainly due to the recording of a loss in electronics due to price declines, and an increase in loss in games due to increased marketing and R&D expenses.

Despite the operation loss, income before income taxes of 12.9 billion yen was recorded, mainly due to a gain on change in interest associated with the sale of a portion of the stock in SoNet M3, a consolidated subsidiary of SCN and DeNa, an equity affiliate of SCN.

We reported 12.1 billion yen in income taxes. And an equity in net loss of affiliates of 9.1 billion yen, caused us to record a consolidated net loss of 7.3 billion yen. The equity in net loss included losses of 7.6 billion yen at S-LCD, and 6.5 billion yen at MGM, as well as 1.0 billion yen at Sony BMG as the result of the recording of restructuring charges of $93 million.

Electronic sales decreased 1%. And an operating loss of 56.3 billion yen was recorded compared to an operating profit last year. A 7% decline in sales to outside customers negatively impacted our operating profitability by 19.3 billion yen. And variable cost deterioration undermined the profitability by 25.7 billion yen, resulting in a 44.6 billion yen swing from profit to loss.

While sales of flash memory and hard drive network Walkman audio players, as well as LCD TVs increased. Sales of CRT TVs and plasma TVs declined dramatically leading to a drop in sales to outside customers. The decline in unit -- unit prices of LCD TVs and rear projection TVs was the primary reason for the deterioration in variable costs.

We did have a number of successes during the quarter, with our VAIO PC business contributing to higher operating income due to higher sales and operational improvements. Our flash memory network Walkman is leading the Japanese market in sales with a marketshare of approximately 30%. And our new high-definition camcorder, HDR-HC1 is commanding 20% of the market in Japan. Additionally, the DCR_DVD403 DVD camcorder leads the market with an approximate share of 16%.

Sales in the game segment increased 64%, due to a significant increase in hardware sales brought on by strong sales in Europe and the U.S. of the smaller and thinner PS2 hardware, and sales of PlayStation Portable. Software sales also increased due to continued strong sales of PS2 software and the contribution of the PSP's software.

Two-thirds of the overall segment sales were from hardware and accessories. This compares to 50% last year. Operating loss in the segment increased mainly due to an increase in advertising and marketing expenses, as well as aggressive R&D spending.

First quarter production shipments for hardware were a total of 3,530,000 of the PS2, and a total of 2,090,000 for PSP, including 890,000 in Japan and 1,200,000 in North America. As of July 20, cumulative PSP product production shipments were 5,070,000 units in Japan and North America. As of the end of June, we had 76 PSP software titles available in Japan and 28 in North America. We plan to bring the PlayStation Portable to Europe in September.

We have revised our production shipment forecast for both hardware and software for the fiscal year. Slightly more PS2 hardware will be manufactured in our initial plan, a revision from 12 to 13 million units due to robust demand. A large number of pre-orders placed in Europe for PSP has also led us to raise our PSP hardware forecasts from 12 to 13 million units. And the strong contribution from PSP software has led us to raise our fiscal year production for software on all platforms to 270 million units from 250 million units.

On a U.S. dollar basis, sales in the Picture segment decreased 1%, while operating income increased 8%. Sales declined primarily due to lower theatrical revenues on fewer films. The decline was partially offset, however, by fees earned from distributing MGM titles starting in the first quarter, and an increase in television advertising revenues generated by international channels. These revenues also led to the increase in operating income.

The Financial Services segment experienced a 15% increase in revenue, and a doubling of operating income, mainly due to increased revenue at Sony Life, and an improvement in gains and losses from investments in the general account of Sony Life. The other segments had a 35% decrease in sales due to the fact that Sony Music Entertainment Inc. recorded music business was consolidated last year, ever since they moved (ph) the Sony BMG joint venture.

The current year's results only contains Sony Music Publishing business and Sony Music Entertainment Japan. Sony's Japan and U.S.-based disk manufacturing businesses are now consolidated within the electronics sector. Operating income for the segment improved because the apples to apples results of Sony Music Entertainment Japan improved year-on-year, and Sony Music Entertainment Inc. recorded a loss from the previous year.

Please note that due to the establishment of Sony BMG we no longer disclose a separate music segment. Results of the music businesses (indiscernible) consolidated are now, as I mentioned previously, contained in the other segment.

Our forecast for the current year have been revised downward, primarily due to the under performance of our TV business. The operating income forecast has been revised from 160 billion yen to 30 billion yen. Forecasted restructuring expenses have gone up from 72 billion yen to 88 billion yen. This means that the fee restructuring charge decreased in projected operating income is 114 billion yen.

Expected operating income in electronics has been reduced by 135 billion yen. Almost all of this reduction is in the TV category, as the other categories in electronics are on the whole unchanged. Unit sales of TVs are expected to be below our initial forecasts. And the decline in market prices is going to be greater than initially expected.

We have been forced to respond to higher than anticipated price erosion in LCD television in Europe, and a higher than expected reduction in plasma TV prices in North America, which is placing pressure on our rear projection TV business. In the LCD TV market in Japan, Sony's marketshare fell as there was an unexpected shift in demand to lower-priced models, and there was an accelerated shift in demand in Europe away from CRT TV towards flat-panel TVs due to price erosion for large sized LCD and plasma TVs.

Sony is of course taking steps to combat these pressures on our position in the TV markets. We're working to improve our cost structure through, one, the adoption of 7G panels. Two, the introduction of a cost competitive worldwide common strategy for LCD TVs and LCD rear projection TVs. And, three, the in-house manufacture of optical devices for LCD rear projection TVs.

Product competitiveness is also a crucial area. And we are launching a new LCD TV lineup featuring Sony panels from S-LCD, introducing products worldwide with Sony original and unique features, and enhancing our product line up of SXRD rear projection TVs.

Lastly, we're consolidating our CRT TV manufacturing operations, as you know, from the recent announcements involving manufacturing operations in Europe. As for other segments, due to the strong performance of our finance and game segments, we have raised our forecast for operating income across all segments, excluding (technical difficulty) by 20 billion yen.

In addition, we also expect the (indiscernible) pension transfer gain to positively impact our operating income in the second quarter by 60 billion yen. Assuming an effective tax rate of 41%, 35 billion yen of this estimated gain is reflected in our net income forecast of 10 billion yen.

As many of you know, on June 22nd, 2005 a new senior management team took over responsibility for managing Sony. A detailed review is now underway with regard to business strategy and operating structure. And the announcement of the resulting plan is expected to take place in September 2005.

With that I would like to turn over to our questions.

(OPERATOR INSTRUCTIONS).

While we are waiting and -- the roster to be compiled, I would like to go directly to an e-mail question. The e-mail question is about the PS3. How is development progressing on the PS3? Is the console on track for its spring 2006 launch in Japan? And what we can expect North American and European launches? Are there measures in place to increase the numbers of PS3 development kits available to third-party software publishers?

For this answer, I would like to go over to Nobu Oneda.

The development progress on the PS3 is on schedule. And the introduction of the product will be still spring of 2006, which is a fast launch in Japan. And we cannot say exactly when and what day we could launch in Japan and North America and Europe.

The number two question is when we could ourselves -- we could develop the a kit available to third-party software publishers. We are still planning to release that kit sometime in September this year.

With that I would like to go over to our first live question. Actually, do we have a live question available?

No, sir, not at this time. I do apologize. You do have a question from the line of Edward Williams. (OPERATOR INSTRUCTIONS)

A couple of questions. I'm curious as to when we might hear more color about the details of the launch of PlayStation 3. And then secondly, if you could just remind us how much of the R&D expense associated with the cell processor and Blu-Ray have already gone through your income statement?

I'm sorry, we couldn't hear your question very clearly. Could you repeat it one more time?

Sure. The first question is when will we hear more information about the launch of Playstation 3? And then the second question is can you just let us know how much of the R&D expense associated with the cell processor and Blu-Ray have already gone through your income statement?

To answer this question for the (indiscernible) of Playstation 3 (indiscernible). And in this month we had a PlayStation meeting held in Japan and we just informed the (indiscernible) information about the PS3. And in September we're going to have a game show. Then we're going to display the Playstation 3 in front of our customers. So by that time you should have more information if it would be available.

Around the Tokyo game show?

That's right.

And then any information about the R&D expense associated with the cell processor and Blu-Ray? How much has already gone through your income statement versus how much has been capitalized?

We're not disclosing the specifics R&D expenses relating to those June activities. But overall R&D expenses associated with the game business this year would be about 750 OP (ph) yen, which includes both hardware and software.

With that I would like to go over to another e-mail question. The e-mail question is about restructuring. When the current -- when will restructuring be finished, and will there be further restructuring after that?

Our new management is now reviewing the necessary restructuring this year, and hopefully that most of the restructuring actions will be taken within this fiscal year.

Thank you very much, Mr. Oneda. With that I would like to go over to another live question. Ashley, do we have a live question available?

No, sir, not at this time.

Let's go over to our next e-mail question. The e-mail question is about Sony BMG. Please explain the 23 billion pretax loss in Sony BMG. Does the Sony BMG loss include one-off restructuring charges?

Restructuring is in the final phases of the merger of Sony Music and BMG. You'll see on the press release at the bottom of page 6 we recorded a net loss of about 18 million during the quarter, and a loss before income taxes. It did include about 93 million of restructuring charge that was the result of the pretax earnings of approximately 70 million before the restructuring charge.

Thank you very much, Rob, for that answer. Do we have a live question available now?

No, sir, not at this time. You do have a question from Ian Cary. (OPERATOR INSTRUCTIONS). (technical difficulty) Sir, I do apologize, you have no questions at this time.

As we have no questions currently, let's hold the line for a few seconds and see if we have any further questions. Do we have any live questions available at this time?

I do apologize, I'm not showing any at this time.

Then let's go to another e-mail question. This question is about PS3. It is the PS3 launch on schedule? And what is the approximate timing for it? What can be done to reduce component costs, especially Blu-Ray? And finally what is the target selling price?

As of this moment, there is no delay of introduction of the PS3. And at this moment also we couldn't disclose any price or cost details of this product because this is the very important strategic issues.

Thank you very much, Mr. Oneda. With that I would like to go over to a live question. Do we have a live question available at this point?

Yes, sir, you do. Your next question comes from the line of Nick Perzero (ph) from Numarial Securities (ph).

I have several questions. The first one, you made a significant down revision for the full year this time. Could we know what exactly type of the price erosion did you assume for this changes? If possible we would like to hear by major phone (ph) factor by regions please?

Yes, the price deterioration of the LCDs is primarily coming from two areas. One is Europe, which we are now expecting that the price deterioration will be around 50%, 5 0 percent, which compares to the beginning of this year and then ending of this year.

And in the case of Japan, we are anticipating around a 30% price deterioration of LCDs. And in the case of U.S., the projector, the LCD projector, we are anticipating around 20% price deterioration, which also compared to January this year versus the end of this year.

I have a quick follow-up for this. So based on this assumption did you already take a pricing changes? Did you take already price actions? Or you're planning to do so? And if you do -- (multiple speakers)?

We're planning to do so.

Could you provide us a time frame?

I cannot say exactly say when, because this is a very much -- the marketing strategy issues. So depending upon the competitors situation we will try to adjust our prices.

My second question is again about (indiscernible) business. Could you comment on the status of the inventory by region, by product, if there is any where you feel it is heavy? And also where you are in terms of cleaning up the inventory?

We don't think that we have any inventory issues as of this moment. So we cannot disclose by region, by product line basis, but overall we are in good shape.

Another question. May I ask you one more question?

Okay. Go ahead.

This is an overall question. What made you to make decision of down revising your projection at the early stage of the fiscal year? Also you're considering probably (indiscernible) restructuring. So could you put this in the context, whether for example -- whether this new projection is a very conservative figure? What would happen when the management is going to make announcements about restructuring also?

On the operational level -- operational level of focus, I think this time our focus is conservative enough. And your past question is when did we know the price deterioration, which actually caused us to reduce the downside adjustment.

Yes, that's one.

: This is -- most of the reason -- most of the reason of this downside adjustment came from TV. And right after we announced the April focus, the market, particularly in Europe and in the United States -- the new products announcement by our competitors was much higher than we expected. So we tried to compete with them by taking the additional promotions -- have done the promotions. And we also adjusted the price in some areas. But we finally decided that we have to adjust the price drastically. That is why we adjusted our forecast to down side drastically.

Thank you very much for your answer, Mr. Oneda. And thank you very much for your question. Ashley, do we have another live question available?

Yes, sir, you do. Jason Marishco (ph) from Howard Research (ph) . (OPERATOR INSTRUCTIONS) (technical difficulty). Sir, I do apologize about that. Right now we have no further live questions.

We have another e-mail question which has arrived now. The question is about S-LCD. Why were profits so poor given S-LCD's ramp up? Could things improve by Christmas?

As you know that the S-LCD and wrapups actually coming from now, and this is actually just -- the S-LCD operating in other words just started. So we could see the improvement in the second half of this year, because we could increase enough quantity.

Thank you very much. Ashley, do we have a live question?

Yes, sir. Hold one moment for your next question. Tyso Ashido (ph) with Wellington Management. (OPERATOR INSTRUCTIONS)

My question is on PSP. Looking at your Q1 results (indiscernible) a 2 million hardware and you are actually revising upward the EOE (ph) number from 12 to 13 million for this year. I'm wondering when this ramp up will start? Can we expect that -- 2Q to be a strong -- it looks like if you calculate the rest of the year a quarter -- 3.6 million a quarter -- I was wondering if the other number is going to Christmas or (indiscernible) hardware going to Europe and that is why you are ramping up? And just tell me what is happening currently.

Yes, there is also a very strong demand in overseas countries, particularly in Europe. And we will introduce the PS3 product in Europe -- PSP product in Europe in September, so therefore the capacity will be increased.

I guess there is no problem producing hardware, it is a matter of demand.

Yes. Demand is the key.

Do we have any other live questions available at this time?

No, sir, not at this time.

We have no further e-mail questions that have arrived at this time, so we will just hold the line for a minute also. Ashley, if you could just give us a shout when you have a live call available, that would be great.

Yes, sir, I sure will. You have another question from Francis Ho (ph) from Capital Research. (OPERATOR INSTRUCTIONS)

My question has to do with what is happening in your TV market. It seems like Sony's brand premium hasn't been able to keep your prices up in the TV market. I remember usually Sony's TV sales at a premium versus competitors. And now with regards to your comment earlier on the TV pricing environment, it doesn't seem that that premium is holding up that well. I was wondering if the management has looked into the issues, and kind of figure out some of the reasons why was happening in the market, and what is happening to your brand?

I'm sorry. Could you repeat your question one more time. We couldn't hear very clearly in Tokyo.

I am just trying to figure out your comments regarding the TV market. It seems like pricing pressure has been very severe, but I always remember that Sony TV products come at a premium versus the market. But it seems that Sony is basically following the market trends these days. So I was wondering if management has some ideas what is happening with regard to your brand? And what consumers' perception of your brand in digital TVs?

Until now we are buying the LCD panel from outside vendors. And from now on we will buy -- we will get our own new LCDs, which is joint venture with Samsung, plus our technologies, our know-how will be put into the Sony LCDs. So therefore until now our -- how do you say -- the differentiation with other competitors was a little bit difficult. But from now I believe that we could put into our know-how and technologies into the new coming products. And we can differentiate the qualities and pricing even. So I think that we could regain the brand image of Sony even through the LCD operations.

Thank you very much, Mr. Ondea. Do you have any further questions?

Not at this moment, sir. Hold just one moment.

First of all we would like to go over to an e-mail question which has just arrived. This question is about TVs. Please explain the large deterioration in electronic variable costs, specific areas and categories. And please explain why the JV with Samsung is not having a positive effect on components costs. What is the strategy now in the CRT TVs.

First of all, let's deal with the first question.

The deterioration of the electronics division sector is primarily because of the TV operation. And that is coming from the price deterioration, very sharp price deterioration. That's number one.

And number two is the product mix is now changing from CRT to the flat TVs. And in the past we had been the very high -- what is it called -- (indiscernible) -- add value internally. But the flat TV as of this moment we're still buying from outside suppliers. So that added on value in this category has been changed. So that is the second reason. So again, this is a price deterioration and the products mix is changing towards more lower added on value.

The second question is the -- I think this is the repeated question about LCD costs are down. Impact will be realized in the second half of this fiscal year because we just started production.

Number three is the CRT operations. As you know that we recently announced the CRT (technical difficulty) operation shutdown in England. And we already closed the CRT TV operations in Japan. But still there is the demand, particularly from the developing countries. So we're now trying to -- how do you say -- reorganize the manufacturing operations of CRT LCD TV related operations on a global basis.

Thank you very much, Mr. Oneda. Do we have a live call available at this time?

Yes, sir, you do. Adam Wolfman (ph) from (indiscernible). (OPERATOR INSTRUCTIONS)

I was hoping you could review the foreign exchange sensitivity for the remaining nine months of the year, and discus the Company's changes to its foreign exchange rate assumptions. And then I have a quick follow-up question.

The sensitivity of the following foreign exchange is in the case of yen, one yen difference will create (indiscernible). And in the case of the euro, it is almost the same. In other words 60 (indiscernible) yen, 1 yen difference. And foreign exchange focus from second half toward the fourth quarter, the rest of the fiscal year? (multiple speakers)

Second quarter.

Second quarter only?

Second quarter.

Yes, second quarter until the end of the fiscal year, right? The average is the 107 for the dollar and the 130 for euro.

Adam Wolfman The Company has indicated that the PS3 will launch in the spring of this coming year. Without understanding or asking for the specific timing, could you please help us to understand whether the impact of the launch -- if the Company does launch PS3 before the end of the fiscal year, would that require a further adjustment to the Company's operating profit estimates for the gaming business, either positively or negatively, or has that already been factored into the current revision in Company forecasts?

As of this moment we don't have any reasonably accurate cost information and also the price information. So we don't have any -- how do you say it -- the projections in terms of the impact of the PS3 within this fiscal year. However, all the necessarily costs associated with this PS3 development were included into our forecast.

Adam Wolfman And you mentioned two factors impacting the gaming profitability during the first fiscal quarter, higher marketing costs, as well as higher research and development costs on a year-over-year basis. Is it possible to split out the impact of those two factors and quantify those for us in terms of the impact just on the reported first quarter profits for the gaming business?

On this R&D expenses, annual -- the R&D expenses 75 billion yen both on the hardware and the software. And this development R&D cost is you know the split view (ph) into the quarter basis. And as far as past quarter is concerned, we have spent as we -- the figures in the beginning of the (technical difficulty).

With that I would like to conclude today's conference call, and thank everyone for joining us. Also, I would like to thank Mr. Oneda, Mr. Yuhara and Mr. Wiesenthal for also joining us today.

Lastly, I would like to take this opportunity to remind everyone of our Investor Relations contact information. In Tokyo, Investor Relations can be contacted at 813-448-2180. In New York, Dustin Hill (ph) can be reached at 212-813-6722. In London, Chris Cullman (ph) Sinjy Komenca (ph) are available at 44-207-449713. Again, thank you very much for joining us today. That concludes today's call.

Thank you very much.

Thank you.

Thank you.

Thank you for attending today's conference. Now this concludes (technical difficulty).