索尼 (SONY) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Sony Corporation third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to Mr. Jonathon Bates with Investor Relations in Tokyo. You may proceed, please.

Thank you very much for that introduction. And thank you all for joining us today, January 26, 2006 for the discussion of Sony's results for the third quarter ended December 31, 2006. I'm Jonathon Bates with Sony Investor Relations in Tokyo. We are joined this evening by Takao Yuhara, Corporate Executive and SVP, Investor Relations Sony Corporation, and by Robert Wiesenthal, Group Executive in charge of Corporate Development and M&D, Sony Corporation, EVP and CFO, 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 announcements. 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 in light 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 am now going to turn to our announcements. Thanks to the strong performance of the electronics and games segment during the year end sales season, including strong sales of BRAVIA LCD TV's in all regions, as well as the strong revenue contribution of the financial services segment, Sony achieved record quarterly consolidated sales of 2,367.6 billion yen and recorded quarterly consolidated net income of 168.9 billion yen. Consolidated operating income was 202.8 billion yen. The second highest after the December 1997 quarter it has ever been. Income before income taxes was 225.9 billion yen, an increase of 51.4% year on year.

This increase was primarily due to a gain of 19 billion yen on the change of interest resulting from the IPO of Sony Communication Network Corporation. Equity and net income of affiliated companies was 19.5 billion yen, an increase of 17.2 billion yen year on year. Sony BMG contributed 10.3 billion yen. Sony Ericsson, 9.8 billion yen. And S-LCD 1 billion yen. As a result of this strong quarterly performance, we have revised upwards our forecast for the March 2006 fiscal year.

The principal reasons for this revision were; One, a weaker yen in the December quarter than we had originally anticipated. And, two, better than expected operating results in the electronics and financial services segment during the third quarter. In electronics, the TV business performed significantly better than anticipated due to the success of BRAVIA LCD TV's. And the PC business was also better than forecast. On the other hand, the performance of the Pictures segment was lower than expected. Although these factors had a positive effect on operating results during the third quarter, Sony continues to operate in an uncertain global business environment during the fourth quarter.

In addition to this revision in our forecast, Sony today announced a progress report on our structural reform activities, which are proceeding according to plan. And these were outlined at our corporate strategy meeting last September. For details of these, please see the slides on our Website, which can be accessed at www.sony.com.

Sales in the electronics segment increased 4.7%. While operating income increased 56% to 78.9 billion yen, mainly due to an improvement in the cost of sales ratio associated with strengthened product appeal and cost reductions. Sales of our audio, video, TV, and information and communication categories in aggregate increased 2%. While operating income increased 21.6 billion yen. Sales increased primarily due to the strength of BRAVIA, the success of which has propelled Sony to the leading position in the worldwide LCD TV market by sales amounts, based on Sony data. Operating income increased thanks to strong notebook PC sales in our VAIO PC business, increased sales of DVD and high definition of camcorder models and strong sales of HD broadcast equipment.

Sales of semiconductors and components increased 22%, while operating income increased 10.1 billion yen. Both increases are attributable to higher sales of semiconductors to the game business, optical heads for PSP, lithium ion batteries for notebook PC's and memory sticks. Sales in the games segment increased 48% year on year, reflecting a large increase in sales of both hardware and software.

The PS2 continued to perform well and the PSP continued its growth as the fastest penetrating game console in history. Software sales grew to the contribution of PSP software. Although we continue to invest proactively in PS3 research and development, and SGA expenses also increased primarily due to an increase in marketing expense; the steady global expansion of the PSP platform and continued strong performance of the PS2 business enabled us to increase operating income 52% to 67.8 billion yen.

Pictures segment sales in yen were flat year on year, but declined 10% on a U.S. dollar basis. This decrease in revenue was the result of the significant home entertainment contribution of "Spider-Man 2" in the prior year's third quarter and the underperformance of the "Legend of Zorro" and "Zathura" in the current quarter. An operating loss of 0.4 billion yen was recorded compared to profits in the prior year due to these same factors. Financial services revenue increased 31% year on year, mainly due to an increase in revenue at Sony life. And operating income for the segment rose 33.1 billion yen, mainly due to improvements in games and losses on investments in the general accounts at Sony life. Primarily resulting from an improvement in valuation gains from stock conversion rights in convertible bonds.

Lastly, sales in the other segments increased by 8% as a result of strong sales at several businesses within the segments. Revenue at SMEJ, which composes 40% of the other segment sales increased year on year, due to the success of such hits as the Ken Hirai album. Operating income also increased to 14.9 billion as a result of cost reductions at network-related businesses within Sony Corporation and an improved cost of sales ratio and higher sales at SMEJ. This concludes my opening remarks. With that, I would now like to turn you over to our operator. Thank you very much.

Thank you, sir. [OPERATOR INSTRUCTIONS]

Okay. So while we are waiting for a few live questions to queue up, Why don't we take a couple of email questions first. The first question is a question about CRT televisions. How big in value terms are CRT TV's in your TV sales in Q3 2005? For the answer to this question, I would like to go over to Mr. Yuhara.

Yes, I would like to answer this question. In this -- in the quarter the sales of the TV segment was a 361 billion yen and here CTV is accounting for around 20% of it.

Thank you very much, Mr. Yuhara. A second email question, do you have assumptions for the LCD TV market in 2006? And for example, growth rates and market size worldwide in million units?

Okay. Yes, again, the LCD TV market is a very fast growing market. And this year there are about 20 million units of sales on the worldwide basis. And next year in 2006 it would be increased by another 80%, so around 3.8 million, so that would be the anticipated LCD TV market in quantities.

Thank you very much, Mr. Yuhara. With that, operator, I would like to go over to our first live question.

Thank you, sir. Your first live question will come from the line of Jason Mauricio with Arete. Please proceed.

Thank you very much. A couple of quick questions. Could you maybe give some more commentary around the TV operating profit, excluding the currency effects, ie. in constant currency?

Jason --

Yes. Your question is about the TV operating margin?

Yes. Minus the effects of the foreign exchange rates?

That's right.

Well, we do not -- the-- disclose particularly the currency, the exchange, the benefits on a category basis. However the-- in the third quarter there was about 20 billion yen benefit was derived from the currency based on the second quarter to last quarter. That is the benefit from the -- on the figures.

Okay. Quick question on financial services. The benefit to both sales and operating profit this quarter seemed to include some one-time effects. Should we expect that to turn -- return to normalized levels in future quarters?

Well, the-- in the financial service, particularly in the Sony life, there is a valuation profits of their security investments namely, [bonds.] This was the increase thanks to the Tokyo's stock exchange, particularly [topics] and this was largely enforced in the Sony [inaudible] in the second quarter.

Okay.

Thank you very much, Jason. And with that, operator, let's go to another live question.

Your next live question will come from the line of Edward Williams with Harris Nesbitt. You may proceed, please.

Good morning. Couple of questions for you. Could you by any chance give us any update on the timing of PlayStation 3, what your thoughts are with that console system? And then secondly, looking at the games business, could you give us a breakdown on a geographic basis on hardware and software units for both PlayStation 2 and PlayStation portable during the December quarter?

Well, on this possible launch date, the launch timing of PS3, it could be a question to the [Mr. Chien's] strategy of the Sony computer entertainment. The SGE, we will announce those timing in appropriate time I believe.

Okay. Any idea as to when the appropriate time might be that we'll hear more about PlayStation 3?

I don't think we can give you any more than that at the moment.

Okay.

We're going to answer your question about the geographical breakdown. If you could just hold on a second.

The geographical breakdown of PS2 in the third quarter, the total shipment was 5.360 million, with Japan at 1.13 million and the North America, 2.21 million, and lastly in Europe is 2.02 million. So that is on the PlayStation 2. On PSP in the third quarter, total shipment quantity was 1.2 million-- sorry. This is nine months. 622,000. Excuse me. 6.2 million in Japan, 1.3 million and the North America, 1.68 million and in Europe is 1.2 million. That is geographical distribution of PlayStation portables.

Okay.

Thank you very much for your question, Edward. Operator, do we have another live call?

Yes, sir. Your next question will come from [Connor Omara] with HSBC. Please proceed.

Hi, there. Congratulations on an excellent quarter. I was wondering, could we talk about PSP profitability on hardware and software in aggregate? And how your strategy has changed there, for example, I know you're, for example, looking to accelerate outsourcing to the likes of Hon Hai to make the PSP more profitable. Could you help us understand your profitability strategy within gaming and how you're doing there at the moment?

Yes, and as you know, we have transferred a portion of those production, the in -- from Japan to Hon Hai. And as you can see PlayStation portable will make -- made gross profit from the hardwares. And we have seen the count of number of the softwares, which contribute to the total profit. So PSP sales is -- total shipment is now reached to the 15 million on a worldwide basis. And sales are beginning now over 2, more than 2 software, the [inaudible] the PSP. So I believe that those hardware sales will be increased in August when the PSP will be distributed more in the worldwide market.

Right. Do you think the Tai ratio could go to 3? And also, one of the things that's been positively surprising has been sales of the UMD disks. Are UMD disks as profitable for you as game software?

The -- it's Rob Wiesenthal speaking. The business model on the UMD disk is obviously different for the games and the movies. I think we're very pleasantly surprised of the take-up rate on home videos on UMD. Early in the process we packaged each PSP with a "Spiderman" disk and we're enjoying a lot of traction in retail for UMD movies at price points that are sometimes 50% to 100% more than comparable DVD's. So it's turning out to be a big part of our business and helping position overall PSP as more of a multimedia device, gone beyond games and getting into movies, television, and music videos.

Thank you very much for your questions today.

Mr. Omara, based upon the Tai issue, then when I looked at the PSP time, the Tai ratio is to 3 in one year time for the PSP, PS2. Then the computer disk at 2.3 is a little slow. However, this has just started and I'm also the pessimistic on this on the Tai issue for PlayStation portables.

Right, thank you. Could I perhaps ask two more questions, if that's okay?

If you could hold on a second. Do you have an extra comment?

No, but just obviously just wanted to clarify something. The model for the games in terms of platform fees and such, the games are more profitable than films, but go ahead with your question.

Right, got you. And could we maybe quickly just move on to the whole high-definition battle between HD DVD and Blu-Ray? And could you help us understand on the content side what Sony can bring to bear to kind of get the -- get Blu-Ray to be the winner and how important the PS3 platform is going to be to see the install base?

I think coupled with MGM, Sony distributes over half the color films ever made. Which I think was a very powerful proposition within the community, both in terms of hardware manufacturers and the consumers, to really position Blu-Ray properly as we kind of continue this kind of period of time before the introduction of the devices. I think PS3 is extremely important in our work towards making Blu-Ray the definitive HD standard. Largely because as you probably anticipate, as a game console, its ability to be competitive from a price perspective is less challenging than a stand-alone player because the business model is different. And I think that the hope is that you're not only going to be seeing people buying PS3 as a great game machine and home server, but also for the Blu-Ray capability as a high-definition DVD player.

Super. And just one last question on the kind of products that are doing well. Your Walkman phones have obviously been doing well, like the W800 but there's been some capacity constraint there I believe. Could you help us understand where that constraint was coming from and what kind of -- how you're going to resolve that over the coming quarters.

What kind of a capacity constraint?

I've heard that --.

I've not realized this the capacity constraint on W800.

Right. What I understood from I think it was Taiwanese component manufacturers was that you could have actually achieved more sales. It's just that you were not able to be supplied with all the components you needed. That's not the case, is it not?

No. Well, actually in the -- we just sold the 3 million cumulative since we announced it in July last year. And I -- this demand is very, very strong and we could have had a certain capacity issue in the particular devices but it's not so serious I believe.

Okay. Thank you very much.

Thank you very much, Connor. Operator?

[OPERATOR INSTRUCTIONS] And your next --

Thank you, operator. Could we go to another live call, please?

Yes, sir. Your next question will come from Matthew Troy with Citigroup. You may proceed, please.

Good morning. I was wondering if you could potentially size the global digital camera market for 2006? And specifically on a unit basis where you saw, or what your unit numbers are by geography and potentially some of the growth rates around those geographies in '06? Thanks.

The -- in year 2006, [Siepa] recently just released their forecast, which is around 65 million units in the worldwide. This is almost flat as in year 2005. The Sony, as you know, the shipments for 2005 -- I mean the current year will be 1.35 million -- sorry 13.5 million. So that is what we are predicting. And the -- we have the new model of compact camera T9, then that this is quite well accepted in the market. So in our cameras we have rather good -- the [leaders] at this point in time, both in the sales and also for [inaudible]. On top of this, the next year we are going to have our SLR cameras. Then this will be quite strategic products for the coming year. We are very much expect with these products.

Thank you very much, Mr. Yuhara and thank you for your comments, Mr. Troy. Operator, we would like to take another live call, if that's possible.

Absolutely sir. Your next question will come from Robert Hailey with Gabelli. Please proceed, sir.

Hi. Thanks for the question. I wanted to just follow up on the PlayStation 3. Any thoughts on how you plan to roll it out geographically, not necessarily the specific timing, but can you confirm it would be a regional launch? And also, any thoughts at the moment on pricing? Thanks.

Well, yes, as I mentioned the -- again the announcement will be made in the adequate time by Sony Computer Entertainment. And then in this meeting I would like to decline to specify the region. Thank you very much.

Thank you very much, Mr. Hailey. Operator with, that, we would like to go to another live question.

Yes, sir. Your next question will be a follow-up from Jason Mauricio with Arete. Please proceed.

Hi, there, I just pressed the button and hoping to get another question in. Two more quick questions, if I may. Can you discuss the impact of BRAVIA sales this quarter? You certainly have a max capacity versus what you're able to produce from S-LCD. Can you discuss if you are at that capacity in the third quarter? And what the impact on marketing costs for BRAVIA might have been? Were you profitable on that line in the third quarter?

Okay. BRAVIA and there are two things in the third quarter. One is the holiday season sales was very much satisfactory. And then the sales amounts of LCD TV sales was around 3.2 times more than the same period rest of year. Then perhaps we were maybe number one brand in terms of amount of it worldwide market. Then this is thanks to the BRAVIA branding was known by the customers very quickly, then as you know we did spend around $150 million U.S. for this other promotion campaign for this. Ideally, we did anticipated those LCD TV sales that will be continuously expanding in the marketplace.

Thank you, Mr. Yuhara and thank you, again, Jason, for calling in today.

Okay.

Operator do, we have another caller on the line?

Yes, sir. Your next question will come from Paul Smith with PK Investment Management. You may proceed, please.

Thank you very much for all the answers and the information on the call. I have two questions, both of them referring to answers given in the call that you did with -- or the meeting you did with analysts in Japan this morning. First of all, on the PC side, the results were to me surprisingly good and part of the explanation that -- and we have this morning was that some of the buyers, if you like, just spoke that being order made these days. Can you give some quantification of how large that business is or what the contribution is from the order-made VAIO's? Is that a big part of the turnaround?

Yes, in Japan, the price of both PC's are actually high compared to the other region and we just implemented that these are order-made. And the customer tends to choose whether the high end specifications in this sense. So therefore this will give us additional value for this multiple. So this was quite successful. And then in Japan, including this in the order-made, the direct sales of the multi VAIO is at least 25% in December, which is a significant increase. Such as six months ago, it's around 13%, 14%. So there is some good effect from this in all -- the order-made in the sales.

Okay, thank you very much for that. And congratulations on that improvement. The other area which, again, was a positive surprise, which I'm not sure I understand, is the Walkman side, the MD revenues. Did I understand that the revenues were flat year on year? Can you explain the -- how it is that you are maintaining business in Walkman?

You mean that the Walkman, the power H3's such as in a hard disc or the flat memory, or the MD and the CD Walkmans?

The MD, CD products.

This -- it would be for CD, the Walkmans, in this particular third quarter, the sales were almost flat compared to the last year. Again, we did make good cost reduction effort, coupled with the favorable currency situation. And we could increase operating profit of the Sony Walkman compared to the last year.

I understand that you introduced new products in Japan and Europe, but I'm not quite sure why it was as popular or -- in the absence of new products, one would have expected a big decline in that area?

Mr. Smith, actually within the audio segment, I think sales are more or less flat. I don't have the data in front of me for the entire segment but I can tell you that sales have been down for CD and MD Walkman, quite substantially. They have shrunk by about half in fact size since the previous year. And we are seeing slightly positive results from the A Series Walkmans in Japan. They have 20%, 25% at the market share, but Apple still has a pretty dominant share. In the UK, we've gained around 20%. I should also comment that the technology we use in our hard disc and flash Walkmans is that they have a very long life span. The battery lasts for a very long time. They also use organic EL screens, which gives the kind of design of the Walkman a kind of futuristic kind of shape. Obviously, there is room for improvement but we have got a small kind of -- well, basically around 20% of the market in the UK and Japan. I hope that helps to answer your question.

That's super. Thank you very much.

You're welcome. Okay. Operator, do we have another caller?

Yes, sir. Your next question will come from Rami Abdel-Misih with Level Global Investors. Please proceed.

Hi. I just had one question about the PS2 and PSP shipment guidance. It looks like you left the guidance unchanged but if you aggregate the first three quarters of PS2 shipments, you're at roughly 13.9 million units. So, I wondered if that just simply implies that you'll likely not be shipping much more units in the last quarter?

Yes, we are not change the guidance for both PS2 and PSP for the [inaudible]. The first quarter is always a rather quiet season and we are just carefully watching the balance of sales and productions. We will see in two months time the total contribution of it.

Are you currently comfortable with your inventory situation with -- at retail right now with the PS2?

I'm sorry. We didn't quite catch that last question. Could you repeat it one more time, please?

Sure. I just was curious, so I wondered how you felt about your inventory situation with the PS2 at retail currently.

The -- currently I don't see that the issues on the market total for PS2. And as I said, the current quarter's shipment in cumulative will very close to what [40] million. And for then for the first quarter, as I proceeded to say, we are just carefully watching the balance of our sales and the productions. So, we will see the end of March how many quantities on PS2.

Okay.

Thank you very much for your call today. Operator, do we have any more calls on the line?

Yes, sir. Your next question will come from Luc Mouzon with BNP Paribas. Please proceed.

Hi, good afternoon, gentlemen. My question is the following. Could we consider that most of the operating loss from the TV segments are now related to CRT TV's and the termination costs of the PDP? And just as a brief follow-up, should we consider that you now have the full benefit of the S-LCD softening or will that come a bit later on in 2006?

Yes, the -- for the third quarter, the loss derived from the mainly CRT TV's. And there's a very small loss in the PDP termination costs. Then the -- for LCD TV, as you know, they are currently, they are continuously shipped with their full capacities and also the, making the [inaudible] at the moment. And obviously the -- if this production is continued and we are very much expected for LCD TV to reduce their supplies of the LCD panel, lower than at the market price. That is our expectations.

Thank you very much, Mr. Yuhara.

Okay. Maybe just another question maybe for Mr. Wiesenthal about animation movie, especially in the U.S., some U.S. studios are now turning very angry about this market, especially. And according to my knowledge Sony picture didn't push animation that direction except for "Final Fantasy" about four or five years ago. What are your views there and do you plan to invest maybe in animation movie at some stage?

Can you restart your first part of the question again just one more time?

It's a question related to animation movies.

Yes.

Some of that in the U.S. market now, Pixar and DreamWorks have been absorbing other U.S. studios that the market is very angry about this specification in the film industry. And Sony picture didn't push that much in that direction historically. And what are your views right there and do you plan to invest more in animation movie in the coming years?

Yes. In fact, in fact, we have been very active in the animation, in the CG world in two ways. Number one, we have a Company called Sony Pictures Image Works that does a lot of CG for ourselves. They were instrumental obviously in "Spiderman" and a number of other movies. But also we have Sony Pictures Animation and we will be having our first animated film called "Open Season". And "Open Season" is our first CG film that everybody's extremely excited about. And again, it is our first entry into this world and I think that you'll see a measured approach of doing films from Image Works. Obviously, having the Image Works facility allows us to be much more cost effective in developing CG films than if we went to a -- outsourced model. But I don't think it's going to be a major part of our slate but something that we'll just do again on an opportunistic basis.

Thank you.

Thank you very much Luc, for that answer. With that, operator, I would like to go to our final call today.

Absolutely. Your final question, sir, will be a follow-up from Connor Omara with HSBC. Hi, there. Just two very quick questions, if I can. Konica has obviously pulled out of the digital SLR business and you've taken on those assets. Now, there's a very strong install base effect for Cannon and Nikon because of the lenses within digital SLR. Konica has obviously pulled out because it doesn't think it can differentiate. So, what assets or what strengths does Sony have to bring to bear that will allow it to get a decent market share in SLR? And secondly, could you help us understand what's driving the good recovery in profitability within the video category? Is that HD camcorders or is it something else? Thank you.

Well, we have announced that Konica Minolta and we will be transferred the part of their assets, particularly the SL products. And as you know, the Cannon and Nikon are giants in the SLR market. But this market is, again, the fast growing market. And as you know, the, particularly the -- we know that the cameras technologies are quite significant and we are going to -- the market for those in all the SLR cameras with their technologies. And those -- these cameras will be used with the existing replacement --

Replaceable lens?

Replaceable lenses.

Okay.

This is again, another advantage.

Got you.

Thank you very much for that question, Connor. I'm afraid we're going to have to end the call here today. But thank you very much.

Thank you very much.

Okay. Finally, I would just like to conclude today's call by thanking everyone for joining us. And also thanking Mr. Yuhara and Mr. Wiesenthal for joining today's call. Lastly, I would like to take this opportunity to remind everyone of our investor relations contact information. Tokyo investor relations can be reached at 813-544-8218-- [Audio Difficulties]. Hello? Operator, I'm just going run through some final remarks.

Absolutely.

So with that, I would like to conclude today's call and thank everyone for joining us. Thank you, Mr. Yuhara and Mr. Wiesenthal for 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 81-354-48-2180. In New York, Justin Hill and [Missy Emrai] can be reached at 212-833-6722. And in London, Chris Hohman and Shinji Tomita are available at 44-207-449-713. Again, thank you very much for joining us today. That concludes today's call.

Thank you. And ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a great day.