索尼 (SONY) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Sony Corporation’s Earnings Conference Call for the First Quarter of fiscal year 2006. My name is Michelle and I’ll be your audio coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today’s call, Mr. Jonathan Bates with Sony Investor Relations in Tokyo. Please proceed, sir.

Thank you very much for that introduction, Michelle, and thank you all for joining us today, July 27, 2006, for the discussion of Sony’s results for the first quarter of the fiscal year ended March 31, 2007. I am Jonathan Bates with Sony Investor Relations in Tokyo. We are joined this evening in Tokyo by Takao Yuhara, Corporate Executive and SVP Investor Relations, Sony Corporation; and from Los Angeles by Robert Wiesenthal, Group Executive in charge of Corporate Development and M&A, Sony Corporation, EVP and CFO, Sony Corporation of America. Thank you very much for joining us today, Mr. Yuhara and Mr. Wiesenthal.

Hello. This is Yuhara and thank you very much for joining with our conference call and I am very happy – very pleased to be with you.

Hi. It’s Rob Wiesenthal and Steve [Kover] from Los Angeles and we look forward to answering your questions.

Thank you very much, Mr. Yuhara and Mr. Wiesenthal. In just a few moments, I’m going to give you 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 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 now going to turn to our announcements.

Announcements of Sony’s results for the first quarter of the fiscal year ended March 31, 2007. Allow me to begin by explaining an accounting change. From the first quarter, we have reclassified royalty income as a component of consolidated sales and operating revenue rather than as a component of other income as previously recorded. The reasons for this change were (1) generating income from patents has become an important business strategy; (2) the research and development expenses which lead to royalty income are incurred at the operating level; and (3) royalty use expenses have been and continue to be incurred in SG&A. Figures from the same quarter of the previous year have been restated in accordance with this reclassification. The first quarter included 8.6 billion yen of royalty income, predominantly recorded in the electronics segment.

Now on to the consolidated results which reflect this reclassification and other current topics. During the first quarter, consolidated sales increased 11% year-on-year to 1.7442 trillion yen, primarily due to increases in the electronics and picture segments. Consolidated operating income improved 33.6 billion yen from a loss of 6.6 billion yen in the same quarter of the previous year to a profit of 27 billion yen this year. Operating income in the electronics segment contributed the most to this improvement, primarily due to the strength of digital still cameras and BRAVIA LCD TV’s.

The strength of the electronics segment also caused our overall consolidated results to exceed our expectations for the quarter in April. We believe the electronics business is steadily moving down the path to recovery, and strengthening the appeal of our products is key to the recovery of electronics.

BRAVIA LCD TV’s have formed the basis for the recovery until now, and we have received much positive feedback on our Alpha 100 digital single-lens reflex camera which went on sale this month.

Other current topics for Sony include the fact that our equity affiliate, Sony Ericsson, became the number four market share player during the quarter due to the hit sales of its Walkman phones, and in our picture segment, “The DaVinci Code”, which was released this quarter, recorded a huge success in terms of worldwide box office revenue, which has exceeded $740 million since its release in May.

Moving back to our consolidated results. Consolidated restructuring charges for the quarter were 10.7 billion yen, compared with 15.9 billion yen in the same quarter of the previous year. Most of these restructuring charges were recorded in the electronic segment, with 10.1 billion yen being recorded in the segment during the current quarter, compared with 15.5 billion yen the previous year.

The restructuring plan we announced at our Corporate Strategy Meeting in September 2005 is proceeding according to plan. Of the 200 billion yen in costs we aim to reduce, 76 billion yen have been eliminated by the end of June. Income before income taxes was 54 billion yen, an increase of 320% year-on-year. In addition to the significant increase in operating income, there was an improvement in the net effects of other income and expenses. Other income and expenses improved due to the recording of a foreign exchange gain, as well as due to an increase in gain on sales of securities investments.

3.6 billion yen in equity and net income of affiliated companies was recorded during the quarter, an improvement of 12.7 billion yen over the previous year. 3.4 billion yen in profits was recorded from SLCD and 10.2 billion yen in profits was recorded from Sony Ericsson, while 4.6 billion yen in losses were recorded from Sony BMG and 2.6 billion yen in losses were recorded from MGM. As a result of all these factors, net income improved 39.6 billion yen year-on-year to 32.3 billion yen.

Due to the reclassification of royalty income as a component of sales and operating revenue rather than as a component of other income, we have revised upward our April forecast for consolidated sales and operating income by the amount of this reclassification, 30 billion yen. No other revision has been made to the figures announced in April.

Now I would like the turn to the results of our business segments, starting with electronics. Sales in the electronics segment increased 14%. LCD TV’s and digital still cameras, which had strong sales in all regions, and VAIO PC’s, where notebooks performed strongly, contributed the most to the increase in sales. Operating income improved 74.1 billion yen to 47.4 billion yen. The largest profit-contributing products were, in order of magnitude, camcorders, digital still cameras and imaging sensors. A large loss-making product was system LSI’s. Products which had the largest increases in profits were digital still cameras, LCD TV’s, camcorders, broadcast equipment and CRT TV’s. Digital still cameras had both an increase in sales and profits due to strong market acceptance of product in all regions. LCD TV’s had a large increase in sales in all regions due to the continued success of the BRAVIA line, and profit performance also improved significantly due to the strength of the line-up as well as cost reduction. Within camcorders, sales of both DVD and high definition format models increased, and profit increased due to the contribution of the high value-added models. Broadcast equipment had an increase in profits due to strong sales of high-definition production equipment. Profit performance of CRT TV’s improved due to fixed cost reductions resulting from restructuring initiatives. Products which had a large decrease in profits were system LSI’s which saw a decrease in sales to the game business.

Within this discussion of electronics, I would also like to talk briefly about the television and semiconductor businesses to provide you with a better understanding of our electronics segment results. Firstly, overall sales of the television category for the quarter were approximately 260 billion yen, an increase of 70% year-on-year. Operating loss was approximately 11 billion yen, an improvement of approximately 30 billion yen year-on-year. Despite the increase in competition, LCD TV’s trended according to plan. There is no change in our forecast for the business to be profitable in the second half of the fiscal year.

Secondly, overall sales of the semiconductor business for the quarter were approximately 110 billion yen, flat year-on-year. Operating loss was about 5 billion yen, flat year-on-year. Effective this quarter, due to a change in product classification, low-temperature polysilicon LCD’s and organic EL panels, which were recorded in the semiconductor category, have been moved to components. We maintain our forecast that, for the full fiscal year, the semiconductor business will see a significant improvement in its profit performance.

Electronics inventory days to sales at June-end increased to 52 days due to an increase in LCD TV inventory, resulting from the expansion of that business and due to an increase in semiconductors for PS3. Even when we exclude the PS3 chips, the amount of inventory is slightly high. Given the expected growth in the market for LCD TV’s, however, we believe this level is manageable.

The next segment is games. Sales in the games segment decreased 29%. Approximately 60% of sales came from hardware and accessories and the remainder was from software. Hardware sales decreased as a result of lower PS2 and PSP unit sales year-on-year. Last year, in the same quarter, there was strong demand for new model PS2. Although sales from PSP software increased, overall sales of software decreased due to a decrease in unit sales and continued price declines of PS2 software. Combined profits for the PS2 and PSP businesses was relatively unchanged year-on-year. However, the segment recorded an operating loss of 26.8 billion yen for the quarter because charges were incurred in preparation for the launch of the PS3, including approximately 16 billion yen in inventory write-downs for semiconductors, and further investments were made in research and development for the PS3 business.

Revenue in the picture segment increased 42%, a 34% increase on a U.S.-dollar basis, primarily due to the worldwide success of the theatrical release of “The DaVinci Code”. Despite this increase in revenue, an operating loss of 1.2 billion yen was recorded compared to operating income of 4.2 billion yen the previous year, due to higher marketing costs incurred for upcoming second quarter theatrical releases. Other factors leading to the decline were a lower contribution from the prior fiscal year’s film slate and a decline in television operating income, mainly due to production expenses incurred on new network series for the upcoming fall season.

Financial service revenue decreased 19% due to a drop in revenue at Sony Life. Revenue at Sony Life decreased because, although revenue from insurance premiums increased, there were lower valuation gains in the general and separate accounts as a result of the downturn in the Japanese stock market. Operating income of the segment decreased 79% to 4.6 billion yen as a result of reduced profits at Sony Life. Operating profits at Sony Life dropped because, although insurance premium revenue increased, there was a significant decrease in valuation gains from convertible bonds in the general account as a result of the Japanese stock market downturn.

All other sales decreased 5% year-on-year. This decrease was primarily due to the sale of a portion of our retail businesses, which have been deconsolidated, and declining sales at Sony Music Entertainment Japan. Album and single sales at SMEJ decreased year-on-year. Operating income decreased 0.5 billion yen to 4.7 billion yen, primarily due to the decline in sales at SMEJ.

That concludes my opening remarks. With that, I would like to turn you over to our operator. Michelle?

Thank you, sir. [OPERATOR INSTRUCTIONS] And our first question comes from the line of Evan Wilson of Pacific Crest Securities. Please proceed.

Hi there. Thanks for taking the question. I have two. The first, relative to your game business. You reiterated your targets for PS3 shipments for the fiscal year. I was wondering if there was any change in the linearity of the PS3 shipments relative to your previous announcement of 2 million on launch day and 4 million in calendar year. Also, second question is on BMG. You said in the announcement that we didn’t expect operating income came because of a few titles shipping after the second half of the year. I was hoping you’d give just a little more detail there. Thanks.

Okay. I’ll answer the game – question about the game and Rob Wiesenthal will answer the BMG matter, okay? First, I – we got in this PS3 shipment. As you know, the [bulking to the] May. We have announced the launch date of the November simultaneously in, Japan, U.S. and the European markets as of our Play Station conference. Then at this moment, we are making every effort to prepare the production of the PS3 shipment as of that date. So far, I don’t have new information over this. Okay?

Thank you.

Thank you very much, Mr. Yuhara. Maybe we can go over to Rob in Los Angeles for the answer to the second question.

Hi, it’s Rob Wiesenthal. Just a point of clarification on Sony BMG. The performance of Sony BMG would not impact the operating income line as we recorded on the equity method, but with respect to your question, clearly the continued pressure on the core CD business has impacted the numbers and slippage, but there are a lot of important albums that we’re expecting coming out past this summer – Christina Aguilera, Bob Dylan, Beyonce, Justin Timberlake, John Legend. So although there has been some slippage in the release pattern that we previously expected, but those albums seem on track and we’re excited about the year as a whole.

Thank you. And to follow up on the game business, the spike in inventory that you saw there on the game side, does that include finished goods now for the PS3?

I’m sorry. We couldn’t quite catch your question in Tokyo. Could you repeat it one more time please?

Sure. I’m looking for some details in the components of the inventory spike in the game business and whether or not that includes finished goods for the PS3 at this time.

No, this is not included. This game inventory is increased but mainly this is the PSP, Play Station Portable, as a finished good. Not PS3.

Thank you.

I think that, going forward, we’re going to have to limit callers to one or two questions, if you don’t mind. Thank you very much for your questions.

And our next question comes from the line of William Drewry of Credit Suisse. Please proceed.

Thank you. I’ll be brief. Just wondering if Rob could talk, or Mr. Yuhara, about the outlook for the movie margins which obviously are a little bit depressed with the advertising, the P&A costs that you’re incurring right now. Just was wondering what we can expect for full-year margins for the movie division. Thank you.

Hi, it’s Rob Wiesenthal. Hi, Bill. We’re expecting significant profits in the third and fourth quarter. It is very difficult, as you know, to look at the film business on a quarter-by-quarter basis, and I think some of the impact that you’ve seen in our recent release has to do with the timing of marketing spending. From an accounting perspective, you have to book those costs as incurred, but looking forward, the James Bond film this fall, the Will Smith “Pursuit of Happiness”, the Nancy Meyers film, “Holiday”, our first major CD release, “Open Season”. All those films look very strong. We’re very excited about it and I think the pictures company is going to have a terrific finish to the year.

Good. Thank you.

And our next question comes from the line of Conor O’Mara of HSBC. Please proceed.

Conor O’Mara: Hi there. Two questions, if I may. First of all, regarding financial services. About a year ago, we were thinking that there might be a spinout of that business. I’m just wondering what the situation is in terms of sitting that business out at the moment. And secondly, the EU coming back on Sony BMG merger. What is the impact operationally at the moment? Is it curtailing any kind of restructuring or is that continuing to just motor along as you expected? Thanks.

Okay. I’d like to respond to you first about financial service, and this, I feel timing is announced, as you know, we will just see the end product, the IPO, the year 2007. And the financial holding a company is just preparing the for this IPO at this point. This is nonsense basically.

Conor O’Mara: Okay.

Could you restate back to the second part of the question, please. We had some technical problems here.

Conor O’Mara: I’m sorry. Yes. It’s just, with the EU trying to block the Sony BMG merger, or at least they’ve ruled in a real disfavorable manner, has that impacted the way you’re restructuring the business, and what should we expect to happen now in terms of the way this plays out?

We’re studying the judgment very carefully and we are discussing the appropriate next steps with the European Commission. But in terms of our ongoing business, we are operating the business as we should and we do not expect any impact in how we handle our operation on a going-forward basis in a material way.

Conor O’Mara: That’s great. Thank you.

Thank you very much. Operator?

And our next question comes from the line of Daniel Ernst of Hudson Square Research.

Good evening and good morning, respectively. Thanks for taking my call. Two questions, if I could. First, you mentioned that on the LCD side, inventory was still high, if you x’ed out the build on PS3 to put into electronics. Can you give me a stab at what the LCD DSO’s looks like? And then second question. Given that you’ve reiterated timing and volumes for PS3, have you changed at all your forecast for operating loss for the gaming division, which I think at last count was around 100 billion yen loss for cash for the fiscal year? Thank you.

The our electronics inventory at the end of June and there was the rather high level of inventory of LCD. But this is a mainly the LCD panels. That inventory was rather high, compared to what we have expected. I don’t [indiscernible – highly accented language] LCD base applied, but as you know, since the inventory sales [reserves] material and, therefore, we could the control inventory level toward the second quarter to the third quarter when we expected that the new model or more quantities are expected. So therefore this is within the control at this point in time

I’m sorry. Could you just repeat your second question one more time?

Certainly. The second question regarded any changes or not to your operating loss forecast for the game division for the current fiscal year.

Yes. And we just mentioned that. The operating loss we expected. The four digit operating [between the] more than the 100 billion yen. So far, we have no change on this estimate for this games unit.

Okay, thank you very much.

And our next question comes from the line of Ben Atkinson of Gagnon Securities. Please proceed.

Yes, good morning and good evening. Thanks for taking my question. I actually have a follow up but I’ll wait to see how this one takes. I just had some – trying to tie some things together on the PS3. You said that in the electronics divisions, one of the reasons for system LSI profit deterioration is because of the decline of sales in the game division. You also had a ramp in electronic inventory related to PS3 production. And then you had a 60 billion yen inventory write-down, so I’m kind of thinking system LSI sales in the gaming division would be up in anticipation of a ramp of PS3. That wasn’t the case. Trying to understand then what perhaps the inventory would be for PS3 and then maybe a little bit of explanation on the 60 billion yen inventory write-down.

Okay. First, as you know, the systems areas area categories because of the low level of production for the cell chips for game. Therefore, the transporting [products] was decreased. Not that we are meaning of product decreasing areas in LSI categories. This surely because of the current games [situation]. Then inventory of the system areas like [memory synergy[ was [binding] up at the electronics segment, the 440’s, the PS3. Then, as you know, there is a limited margins expected that between our manufacturing costs of PS3 and also the sales price. So, therefore, when we just have an inventory, then we just record it, the write-down of those inventory value [up until] the sales price. So that’s the reason why we just recorded those write-downs of [16] billion for the first quarter this year. As you know, the fourth quarter last year, we also recorded the 25 billion yen write-down as the same reasons. So the [indiscernible] increased the [indiscernible – highly accented language] inventories for PS3. This write-down will continue until the PS3 launch date.

I see. So the system LSI segment is selling to the game division at a prearranged price and perhaps has not yet achieved the yields in order that it’s going to lead to profits on selling at that price. Is that a good way to look at it?

Transfer – the sales is not realized yet. The inventories stay in the electronic segment. However, those inventories are only used only for the PS3. So therefore this write-down amount is recorded as a provision in the game segment. So that is what we have done as accounting [close this year].

Okay, that’s great. Thank you very much.

And our next question comes from the line of Jason Mauricio of Arete. Please proceed.

Yes, hi there.

Yes.

Just a couple of quick questions. One, can you tell us – you gave an indication on the earlier call of TV profitability. Within that, were LCD TV’s, was the BRAVIA range profitable? Or was it still in losses? Second, could you also give us indication of where cell chip yields are at this point?

TV, the BRAVIA TV’s, as you know, the first quarter, there is the profit situation where you include the income over [LCD] of a joint ventures. And, as you know, the LCD TV was well-accepted, and if you compare the quantity, it was increased up to three and half times, year-on-year. And in amount, it’s almost five times increase year-on-year. So therefore, as you know, the profitability of LCD TV has vastly increased in the past quarter. So we are very much pleased to see this. And [BRAVIA] is the not disclosed unfortunately, but I will say according to the head of semiconductor division, the BRAVIA were better than what we expected originally, so that is all I can say.

Great. Just a quick follow up on maybe Play Station 3. I know it’s probably a hot topic these days, but plenty of rumors in the press about contract manufacturers giving sample shipments. That seems to be a big departure for Sony, who tends to keep that sort of production in-house. Is this – can you clarify now if you’re actually outsourcing production of Play Station 3 units?

Yes. We just plan to -- the manufacturers to PS3 final [indiscernible – highly accented language] causing others [plants] in Japan and those in China. That is our subcontractors. So this is what we are planning at the moment.

Great. Thank you very much.

And our next question comes from the line of Richard Peterson of Levan Capital. Please proceed.

Hi. Thank you. Question about foreign exchange and the impact on your electronic segment margins. It looks like almost a quarter of the improvement in operating profit this quarter year-over-year came from 4X, and wondering where you’re going to make up the extra margin in your guidance going forward, given that you see foreign currency being flat, are you going to see more fixed cost reductions, or where is the margin improvement coming from to replace that?

Yes. As you know the products, the benefit is obtained from sales [indiscernible] difference. The [indiscernible – highly accented language] of Japanese yen, which has depreciated about 6% to each currency. However, if the other product is very strong in the position in the market we may, retain our service, retain those who benefit ourselves, but if it’s competitive, we may release results. The exchange yen to the marketplace as a price reduction. So therefore, please understand this is a time of [indiscernible – highly accented language], the benefit from the current [negotiations] so that is what we indicated in today’s announcement.

Okay, thank you.

And our next question comes from the line of Olga Levinson of Lehman Brothers. Please proceed.

Hi. I have a couple of questions about your LCD TV division. I see that you maintained your guidance for fiscal shipments of 60 million units. Can you talk about how many units you shipped in the June quarter and what you’re projecting for December?

Well, we do not disclose the quarterly quantities. As I said, the quantity for this quarter was 3.5 times year-on-year. At this quantity, [serves] on line of this 6 million, which is the expected shipment quantity for the year.

Okay. And then could you talk about what percentage of output you are taking for the first gen line, of the SLCD JV and how much from the second line?

I’m sorry. Could you repeat your question one more time please?

Yes, sure. In terms of what percentage of output are you taking from this first gen seven line of SLCD JV and how much are you taking from the second line?

50% goes to Sony from first line. And second line – I guess you’re talking about the eighth generation line. You are talking about the Samsung line?

Yes. Are you going to be taking anything from there?

Yes, and we are taking those LCD panels from our line, too. They are quite big quantities. We are – I am not personally sure how much the quantities come from that, but we are taking quite a big number of the LCD panels from the second line of Samsung.

And do you plan on expanding your outsourcing for the Taiwanese panel makers as TV demands ramp for the second half?

Yes, that’s right. And we take 50% from first line, which is under SLCD joint venture. And then another 50% is, as I said, mainly from the second line of Samsung Electronics. And also Taiwanese, the manufacturers who supply us to the [indiscernible – highly accented language] LCD TV’s.

Okay, thanks so much.

Thank you so much, Mr. Yuhara. With that, I’d like to move to our next live caller please. Operator?

And our next question comes from the line of John Taylor of Arcadia Investment Corp. Please proceed.

Hello. Thanks for taking my question as well. Two things quickly. The reclassification of royalty income into above the line. Could you quantify how much that contributed to the electronics division profitability, specifically in the first quarter. That’s the first question. And then, I wonder if you could give us a quick update on the status of PS3 development issues. Are the beta kits available and are they out there? Do we have final bata kits available and second, when will we get more information on Sony’s online game strategy? Thank you.

On this royalty income and mostly in this, the electronics segment, which is more than 90%.

Yes.

So that is what we have recorded as royalty income. And –

John, could you remind us of your second question? I think you’re asking about development chips being sent to game developers, right?

Yes. I’m looking kind of for the status, do we have complete betas out there, kind of how would you characterize the latest version that’s out there, and maybe more importantly, when will we get more details of Sony’s online strategy, because most developers are still trying to figure out exactly what components they’re going to be able to put in games for the fall.

The software issue in Sony Computer in Japan is announcing appropriate timing and could you kindly just wait to hear announcement. And you mentioned the online game strategy?

Yes. The timing of when we’ll get more details of what’s available when.

In May, we just announced the PS3 is more to the online and you can have the game contents online, but as you know, the PS3 involvement is very important. And this is not immediate. Again, I should say that Sony Computer Entertainment will provide this involvement and that they should tell you at appropriate time, I guess.

Okay. Thank you.

Thank you very much for calling in today, John. Operator, I think we have time left for one final question.

Thank you, sir. And our last question comes from the line of Russell Robles-Thome of Walter Scott & Partners Limited. Please proceed.

Hello there. Just a clarifying question on something I’m just trying to understand what you said a few moments ago about the LCD TV numbers, and you said that the numbers were up 3.5 times year-on-year in the first quarter, and you said that they were in line with your projection for the year, which currently is 6 million. Is that correct?

Yes. Correct.

And does that mean that we brought 1.5 million in the first quarter? Or does it mean that you expect some further growth in the rest of the year and what growth are you expecting for the rest of the year to meet target?

No, no, no. You cannot divide by 4 because third quarter is a high season. So therefore, we have more, quantity be shipped in the third quarter.

And do you expect any continuing growth – how stretchy is the target and do you expect continuing growth year-on-year at the 3.5 times level or is it more sedate?

No. As you know, 3.5 times means that the first quarter in the last year was just before the [indiscernible – highly accented language]. So therefore, this is rather difficult to compare apples to apples, as you know. So therefore, in the year we are going to direct activities of 6 million unique as our target for this year.

Alright. Thank you.

Thank you very much, Russell. With that, I would like to conclude today’s conference call and thank everyone again for joining us. Also, I’d like to thank Mr. Yuhara and Mr. Wiesenthal for also joining us today. And lastly, I’d like to take this opportunity to remind everyone of our Investor Relations contact information. In Tokyo, Investor Relations can be contacted at 81-3-5448-2180. In New York, Justin Hill and Micky Imura can be reached at 212-833-6722. And in London, Chris Homan and Chinji Tomita are available at 44-207-444-9713. Again, thank you very much for joining us today. That concludes today’s call. Thank you.

Thank you very much.

Ladies and gentlemen, thank you for you participation in today’s conference call. This does conclude your presentation and you may now disconnect.