索尼 (SONY) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter Sony Corporation earnings conference call.

My name is Nika and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Jonathan Bates.

Please proceed, sir.

Thank you very much for that introduction, Nika.

Thank you all for joining us today, October 27, 2005, for the discussion of Sony's results for the second quarter ended September 30, 2005.

I'm Jonathan Bates with Sony Investor Relations in Tokyo.

We're joined this evening by Takao Yuhara, Corporate Executive and SVP, Investor Relations, Sony Corporation, and by Robert Weisenthal, Group Executive in charge of corporate development and M&A, Sony Corporation;

EVP and CFO of Sony Corporation of America.

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

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

Then, 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 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.

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'm going to turn to our announcements.

Consolidated sales were flat year on year at 1.703 trillion yen, but consolidated operating income increased 52% to 65.9 billion yen.

This increase was due to a onetime gain of 73.5 billion yen from the transfer to the Japanese government of the substitutional portion of Sony's employee pension funds.

Consolidated restructuring charges for the quarter were 32.9 billion yen versus 18.8 billion yen last year, with 32.3 of that 32.9 billion yen recorded in electronics.

Income before income taxes was 95.4 billion yen, an increase of 50.8% year on year.

This increase was mainly due to a gain of 20.7 billion yen on the change in interest resulting from the sale of a portion of stock in Monex Beans Holdings Inc., previously an equity affiliate.

Our effective tax rate for the quarter was 68.3%.

This high tax rate was primarily due to the recording of both an additional tax provision for undistributed earnings of foreign subsidiaries and additional valuation allowances against deferred tax assets.

Equity and net loss for the affiliated companies was 2.6 billion yen, an 8.7 billion yen deterioration year on year.

Although SLCD registered an equity loss of 2.8 billion yen for the quarter, it recorded operating income in September.

MGM recorded an equity loss of 4.4 billion yen and Sony BMG an equity loss of 3.2 billion yen.

Sony Ericsson on the other hand, had equity and net income of 7 billion yen, a 1 billion yen improvement year on year.

Net income for Sony was 28.5 billion yen, a decrease of 46.5% year on year, due to the tax expense and equity affiliate losses.

Sales in the electronics business were largely unchanged year on year, while operating income increased 10.2 billion yen to 17.3 billion yen.

This increase was due to the recording of 63.9 billion yen from the pension fund transfer to the government.

Excluding this effect, there was a 53.7 billion yen decrease in operating income.

The primary reasons for this pro forma operating loss were a 22.5 billion yen impact to operating income from a decline in sales to outside customers and the 15.7 billion yen increase in restructuring expenses, a large portion of which were impairments of CRT television manufacturing facilities in the U.S.

Next, let me talk about some of our new products.

We have high hopes about several new products which are gaining traction in the marketplace.

Firstly, in Japan, we launched the new BRAVIA TVs on October 7, and its market share is steadily increasing.

In North America, we launched BRAVIA at the end of August, and it is selling very well.

In the first week of October, it captured the number one market share at over 30% on a value basis.

The digital high-definition Handycam, launched in Japan in July, sold phenomenally well.

For the week of October 17 to 23, the Sony brand maintained its number one share position at 40% on a value basis.

In November, we will introduce the new Walkman A series, which has an intelligent shuffle function which, when on random play, automatically selects your most listened-to songs, and an artist link function, which allows you to search for artists of a similar genre to ones you already listen to.

And at Sony Ericsson, the W800 Walkman phone is proving to be a successful hit.

We will introduce the W900, a UMTS phone, which has enhanced music features, at the end of the year.

Sales in the game business increased 79% year on year, reflecting a large increase in sales of both hardware and software, especially the contribution from PSP.

Approximately two-thirds of overall sales for the quarter came from hardware and accessories, the rest from software.

The PS2 business continued to run smoothly, with the number of units sold in the U.S. and Europe increasing significantly.

As for the PSP, we had a successful launch in Europe in September, adding that region to Japan, the U.S. and Asia as places where PSP is currently sold.

In October, PSP reached cumulative worldwide production shipments of 10 million units.

Meanwhile, strong sales of PSP software led to an increase in software sales for the segment as a whole, and the ratio of first-party software increased from 11% to 14%.

The favorable performance at both these businesses -- PS2 and PSP -- caused operating income for the segment to increase from near breakeven last year to 8.2 billion yen this year.

We have raised our forecast for both PS2 and PSP hardware production shipments from 13 to 14 million units.

Pictures segment sales decreased 17% year on year, and an operating loss of 6.6 billion yen was recorded, compared to an operating profit of 27.4 billion yen in the previous year.

Both sales and profits were adversely affected by the difficult comparison with the previous year, in which Spiderman 2 performed well, and the current year's disappointing performance of Stealth.

An increase year on year of marketing costs for upcoming releases also put downward pressure on profit.

Financial service segment revenue increased 40% year on year and operating income rose 25.2 billion yen to 40 billion yen.

Sony Life led the improvement with an improvement in gains and losses from investments and an increase in revenue from insurance premiums.

As many of you know, on September 22, we announced an organizational restructuring and adjusted our forecast to reflect additional restructuring costs of 52 billion yen.

A gain from the transfer to the Japanese government of the substitutional portion of Sony's employee pension fund was greater than what was forecast in September.

Our performance in the second quarter was also better than our expectations.

Despite these improvements, we have not revised our full-year forecast from September -- from the September numbers, as we are erring on the side of caution when taking into account the business environment for the second half of the fiscal year.

That concludes my opening remarks.

With that, I would like to turn over to our Q&A.

(Operator Instructions).

First of all, we would like to go to an e-mail question to start the proceedings.

The question is about the PS3.

How many video game titles are currently in development for the PS3 -- first-party Sony and third-party?

Well, as you know, the game developing, the titles vary from time to time, so I would like to just introduce the Japanese market.

Sony Computer Entertainment is, of course, internally developing several titles for PS3, including the new title for the Gran Turismo series.

As you may know, at Tokyo Game Show, we have announced that we had about 100 titles in development for the Japanese market, and also about 70 supposed to be American companies committed to do for the Japanese market at the moment.

So when these figures are available for other markets, then of course I would like to introduce you from -- thank you.

Thank you very much, Mr. Yuhara.

I would like to move to one more e-mail question.

This is a question regarding restructuring at Sony BMG.

The question is when will the restructuring charges at Sony BMG come to an end?

We've had a very successful integration between the BMG Music Company and Sony Music Entertainment, accumulating over $400 million worth of cost savings that will be enjoyed over the next year.

In terms of restructuring, I think within this fiscal year for Sony, the vast majority of all restructuring costs will be behind us.

There could be a small amount next year, but predominantly, the bulk of it will be done this fiscal year.

There was an additional part to that e-mail question about restructuring charges at MGM.

With respect to MGM, the integration between MGM, MGM operating as more of a virtual studio, leveraging the Sony Pictures -- that infrastructure for theatrical distribution and home entertainment distribution is going very well.

And we're very excited about the progress we've made there.

Again, like as in with Sony BMG, we would expect that the vast majority of that restructuring would be behind us in terms of cost by the end of this fiscal year as well.

With that, I would like to move to a live question.

William Drewry, CSFB.

I have a couple of questions, actually, and I'll just go ahead and ask them all at one time.

One, just wondering if you could elaborate on the comment that you are airing on the cautious side for the second half.

I'm just wondering if you're seeing anything in market conditions in terms of pricing in electronics that makes you cautious, and do you think you can hold your current market share?

And then a second question is the Network Walkman launch, if that product is successful, can that return the audio business to profitability?

And then maybe just one more question for Rob.

Just wondering with the marketing expense the second quarter impacting the film division, will that help profitability -- will there be better profitability in the third quarter as a result of those films being in the market and already having the marketing costs behind you?

Thank you very much.

Okay, I just answering you your first question about our year-end forecast.

And as we just announced this September in Tokyo, we have the second-quarter results were better than what we anticipated in our G&A forecast, as well as, you know, the Daiko Henjo or the favorable difference.

However, and we're just looking at very conservatively on the second-half business, particularly the Christmas and the year-end sales business as far as the other (technical difficulty).

So therefore, we are very much anticipating building the sales (ph) themselves.

However, we just wait and see those results that are coming in January.

So therefore, this is just our conservative look on this business for the (indiscernible).

There was a question about marketing costs this year and Sony Pictures' performance.

For the quarter, the Sony Pictures performance was below our own internal expectations, driven largely by The Wish, Stealth and a couple of films that just did not get to where we really had hoped them to be.

While a lot of those marketing costs are behind us, we really do have a full slate ahead, so I don't think there's going to be necessarily a breather in terms of expenditure, but hopefully these films perform better.

We're very excited about Memoirs of a Geisha, Zorro, Zathura and Fun with Jane.

So on a cost side, I think there will be still steady marketing costs, and we will do our best to make sure that these films perform as best as they possibly can.

Next quarter, though, we will also have a -- I mean, during this quarter, we will have a difficult comparison for next quarter due to the fact that we had Spiderman 2 last year, which obviously was an outstanding performing film.

So that's just something to keep in mind as well.

Your question about the Walkman A series launch -- yes, we're going to launch this in November.

They start with Japan.

And then this is just a start.

Therefore, it is too early to say for this product to contribute in the first -- at least in this year.

However, the audio business itself, because of our personal efforts and the distribution (ph) efforts, and I anticipate that this business will be first of all toward the end of this year.

Thank you very much, Mr. Yuhara.

I think we have another live question available.

Peter Boardman, NWQ.

I was wondering if you could reconcile the cash flow statement, where you have a large increase in the amortization of film costs, and that you have this big increase in film costs in the negative.

I'm not sure I -- I understand that you had a drop in your profit of films, but it seems like the numbers seem a lot larger here than what is showing up on the cash flow.

I'm wondering if sort of if there's anything else.

Can you repeat?

You kind of broke up towards the end of your question.

The second half -- could you repeat it again?

We're just having trouble hearing it here.

I wonder if you can reconcile the cash flow statement for film costs with your profits on films -- your loss in film for the quarter.

On your cash flow statement, you have a big increase in amortization of film cost of 127 to 170 billion yen, and then below that, in net working capital, increase in film cost shrinks from 127 to 218.

I'm just sort of wondering how do you reconcile that with your loss?

Essentially, what you're doing is you are taking a write-off, and the way the film accounting works is that when the film is not performing, you really got to take that hit right as incurred.

So that jump in the amortization is really a write-off associated with the underperforming films of that quarter.

Okay.

And then the increase in film cost, the shrinkage, is that for future films?

No, it's the same thing for the quarter.

So if you add those things up, then they should equal out?

I'm not sure what you mean by equal out.

If you add them up, then that should equal the loss that you're showing.

Some goes to the P&L as well.

It's just very difficult to disaggregate.

And then when you look at your cash flow and you are definitely not covering your dividend now (multiple speakers)

We only have a limited time today, so I think we should be fair to our other questions today.

Just one last one.

You're not cover your dividend.

At what time would you decide to cut your dividend?

We take the dividend, the year-end, and those are interim, and this is a -- you know, no change, the same amount of dividend -- the (technical difficulty).

I understand, but your cash flow is not covering your dividend.

Therefore, maybe you should be cutting your dividend.

There's been a dividend policy in place for this Company for quite some time.

We have with strong investment grade credit.

We have full access to the capital markets and the bank markets.

There are no plans to make any changes to the dividend right now.

And it is also included in our cash flow statement, as you can see -- the almost bottom line of this cash flow statement.

But does the increase (multiple speakers)

I think we have to move on because we have other questions available.

At this time, I think we would like to kind of reprompt the call.

(Operator Instructions).

We have one more e-mail question.

This question is about the strategy meeting in September.

At the strategy meeting, it was promised that you would give quarterly disclosure of KPI's progress.

This has not happened this quarter.

Why not?

We plan to update the financial community on our vision of KPI progress from the third quarter.

So therefore, we will report to you the progress, you know, the January announcement for the third quarter.

Thank you very much, Mr. Yuhara.

Let's go to another live question.

Jason Mauricio, Arete Research.

A couple quick questions.

Can you outline the reasons for the losses in LCD TV?

You've pointed to that was a positive product for growth.

You are sourcing panels internally now.

It seems like you should be well into profits there.

Second, can you break down the restructuring charges between redundancies, asset write-offs, or at least indicate what the key portion of restructuring charges are?

And maybe a more strategic question.

Given the troubles in the Pictures business, understanding that there is a tough comparable out there, but do you think there might be room for more industry consolidation there?

I'd just like to kind of reiterate your question, just to check we're understanding you here.

Your first point is about reasons for loss in the LCD business, right?

Correct.

And then second question is about the kind of the mix on the restructuring, the breakdown for the restructuring?

Yes.

And your third question was about the Pictures business.

It was more strategic, regarding consolidation within film businesses overall, and whether strategically you see more room for industry consolidation there.

Okay, so maybe we --

Let's talk about Pictures.

Sure.

In terms of -- obviously, it's been a difficult market for many of the studios in terms of box office revenues and pressure, obviously, in the home video market on DVD in terms of unit pricing.

Obviously, in the past year, there's been some consolidation that we've been part of in terms of our joint acquisition of MGM.

I really don't see in terms of the large-cap film studios any real consolidation coming.

And there are a couple smaller studios out there like Lion's Gate that are independently trading that possibly could be sold at some point.

But in terms of the big guys, like Warner, Universal, ourselves and MGM and Fox, my bet is over the mid-term, you are really going to see those -- and even including Disney, remain with their corporate parents.

Your question about LCD TV, and up until now, particularly the large size and you know the (indiscernible) 30 inches, those in our price situation is much, much faster than the cost of production speed (ph).

So therefore, currently, we are looking at the growth from this LCD TV.

But as we announced the new series of BRAVIA, the TV, we are expected more (technical difficulty)

Hello?

You know, with this BRAVIA, and results are anticipated -- the cost reduction maturity and similarly these channels from the LCD TVs.

And also, the more quantities are accepted.

So therefore, the more those BRAVIA and the LCD TVs into the marketplace, the better for stability.

But currently, though, those are the operations we include.

Restructuring -- in the history on this side (ph), we plan to spend 140 billion yen, of which 130 billion yen is in electronics.

And you know, the 10 billion is from the other segments.

But in total, 45 billion is from the personal electronics expense, and the 95 billion yen, those centers of improvement (ph).

So that is the detail of the different expenses in this financial year.

In this quarter?

No, no.

This is a whole, including the forecast.

With that, I would like to move to another live question.

Patrick Gaffney, Citigroup.

I just had a quick question about your guidance for production of hardware and software for PS2 and PS3.

Can you talk about why you are raising the hardware guidance and not the software guidance?

I'm sorry.

The line wasn't so clear.

Could you repeat your question again one more time?

Can you hear me now?

Yes, I can hear you now.

I was just wondering talking about the PS2 and PS3, it looks like you've raised guidance for hardware, but not for software.

Can you talk about why that is and what your production goals are?

Your question is about why we have raised guidance for hardware, but not for software.

Yes.

You know, the software, we have already announced our forecast of software, that 270 million in this fiscal year.

So this quantity is unchanged at the moment.

So that's the reason why I didn't mention about the software.

With that, I would like to move to an e-mail question.

The question is about Blu-Ray HD-DVD.

Several former backers of HD-DVD have now decided to support both next-generation formats.

Why is this, and can Sony and its partners now deliver on a single standard for the industry?

We're very excited about all the support that has come out in recent weeks from all the studios.

I think we really have made more than tremendous progress.

I think there's really been a recognition of the superiority of the Blu-Ray format with respect to the level of interactivity it provides, the higher capacity.

There is now an understanding out there that this is a PC-friendly format, and we now have Paramount, Fox, Time Warner, Disney, Lion's Gate, ourselves, our family of studios.

So on a constant side, we're clearly there.

In terms of why we can't come up with a single format for the industry, obviously, we would like that, and given that the Blu-Ray is an integral part of PlayStation 3, and that is something that we're obviously intending to come out in short order, it is very difficult to continually change the specifications.

At some point, you have to kind of lock things in.

That being said, we're very open and obviously understand the necessity and how good it would be for the consumers to have a single format.

Right now, we think the best format out there is ours, and we will continue to work with all our partners in the hardware and the software businesses to ensure that we have a success on our hands.

And so far, we're very pleased where we are in this process.

With that, I would like to ask if there are any more live calls remaining in the queue?

Not at this time, sir.

There are no audio questions.

If that is the case, then I would like to end our second-quarter conference call.

Thank you very much for joining us.

Thank you very much.

Thank you very much for joining us (multiple speakers)

We thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.