索尼 (SONY) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Sony Corporation earnings conference call.

My name's Michelle and I'll be your audio 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 call, Mr.

Sam Levenson, Senior Vice President Investor Relations at Sony Corporation of America.

Please proceed, sir.

Thank you very much for that introduction, Michelle.

Thank you all for joining us today, July 26, 2007, for the discussion of Sony's results for the quarter ended June 30, 2007.

I'm Sam Levenson, Senior Vice President Investor Relations of Sony Corporation of America, and I'm joined this evening in Tokyo by Nik Oneda, Corporate Executive Officer, Executive Vice President and Chief Financial Officer of Sony Corporation, and by Robert Wiesenthal, Group Executive in charge of Corporate Development and M&A for Sony Corporation and EVP and CFO of Sony Corporation of America.

Thank you both very much for joining us.

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

Then Mr.

Oneda 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, press release and other statements that are not historical facts are forward-looking statements about the future performance of Sony.

These statements are based on management's assumptions in light of the information currently available to it and therefore you should not place undue reliance upon 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 other results to differ, please refer to today's press release, which can be accessed by visiting www.sony.net/ir.

With that, I'm now going to turn to today's announcement.

I'll begin with a discussion of our consolidated results and segment results for the quarter ended June 30 and then review our forecast for the year ended March 2008.

Consolidated sales, operating income and net income all achieved a new record for the first quarter.

Consolidated sales increased 13% year on year to JPY1,976.5b, due to the large increase in sales of all segments except All Other.

Consolidated operating income increased to JPY99.3b from JPY27b in the prior year.

Although the Electronics and Financial Services segments saw significant increases in operating income, the Games segment recorded an operating loss.

Restructuring charges, which are recorded as operating expenses, amounted to JPY3.4b for the quarter compared to JPY10.7b for the same quarter of the previous year.

Non-operating income deteriorated JPY42.5b to a JPY15.6b loss.

This was primarily due to a JPY21.5b swing from a foreign currency exchange gain to a loss.

In addition, in the prior year an JPY18b gain was recorded due to Sony's sale of its majority stake in StylingLife Holdings Inc., whereas no gain was recorded in the current-year period.

Equity and net income of affiliated companies increased JPY18.3b year on year to JPY22b.

The contributions of the major affiliates are as follows.

Sony Ericsson contributed equity and net income to Sony of JPY17.7b, an increase of JPY7.5b due to its continued strong performance.

S-LCD contributed JPY1.5b, an improvement of JPY1.8b.

Sony BMG contributed JPY1.2b, an increase of JPY5.8b.

No income or loss was recorded in the current-year period for MGM, as compared with the loss reflected in the prior-year period of JPY2.6b.

So on the bottom line net income doubled versus the prior year, to JPY56.5b.

Now I'll take a few minutes to discuss the quarterly results on a segment-by-segment basis.

First, Electronics.

Sales in the Electronics segment increased 12%, or 4% on a local currency basis.

Sales to outside customers increased 7%.

By product, digital cameras which had strong sales in all regions, Bravia LCD TVs which experienced higher unit sales outside of Japan, and video cameras which recorded increased sales primarily in the U.S.

and Europe, all contributed to the sales increase.

Inter-segment sales increased significantly, mainly due to sales of PS3 semiconductors.

Operating income in Electronics increased 77%.

The largest profit-contributing products were, in order of magnitude, digital cameras, video cameras, image sensors, and PCs.

The largest loss-making products were LCD TVs and LCD rear projection TVs.

The two primary contributors to this significant year-on-year increase in operating income were the positive impact from foreign exchange and increased sales.

Looking more specifically at the TV and semiconductor categories, in television overall sales of the TV category for the quarter were approximately JPY235b, a decrease of 10% year on year.

Operating loss was approximately JPY39b, a deterioration of JPY28b year on year.

LCD rear projection TVs were affected by rapid market shrinkage and price declines.

Although there was a negative impact from the price decline, the sales increased nearly 20% over prior year to approximately JPY200b.

As we approach the year-end holiday sale season, we will enhance our line-up, focusing on larger screen sizes and full HD models.

Now, semiconductors.

Overall sales of the semiconductor category for the fiscal year were approximately JPY155b, an increase of 41% year over year.

Operating income was approximately JPY8b, an improvement of approximately JPY13b year over year.

Sales and profits increased due to sales of chips for the PS3.

We do expect that the semiconductor business will be profitable for the full fiscal year ending March 2008.

Next, Sony Ericsson.

Sony Ericsson sales increased 37% to EUR3.112b.

As I noted earlier, Sony recorded JPY17.7b of equity net income from the venture, an increase of JPY7.5b.

Unit sales were approximately 24.9m, an increase of 59%.

Walkman and Cyber-shot phones contributed to the improved results.

Sony Ericsson's market share increased 3 percentage points year over year to over 9%, primarily due to the expansion of its product line-up in the affordable and middle parts of the market.

Turning to the Game segment, sales increased 60% or 49% on a local currency basis.

Approximately 70% of sales came from hardware and accessories and the balance from software.

Looking at each of the hardware platforms, first PS2.

Due to the launch of diverse software titles in every region, we are seeing demand for the PS2 which exceeds our expectations.

Even though it has entered its eighth year since launch, the PS2 recorded an increase in sales as unit sales increased year over year.

PSP hardware sales increased due to a significant increase in unit sales year on year.

Penetration of PSP is steadily expanding in every region.

In September we will introduce a new PSP which is slimmer and lighter.

We will accelerate the product's penetration by enhancing the software line-up.

Although PS3 contributed to the increased sales, actual results for this quarter were slightly below our original expectation.

In an effort to expand the user base, we cut the price of the 60-gigabyte PS3 in July and we introduced an 80-gigabyte PS3 in North America, which will be bundled with a popular software title beginning in August.

These actions have led to an increase in sales over the past few weeks, since the announcement of the price cut.

In Japan and Europe we want to introduce a PS3 bundled with a popular software title and accessories.

Next, turning to software, PS2 software sales increased as we had a hit first party title which had a high unit price.

Despite an increase in unit sales, PSP software revenues decreased because some of the best sellers were affordably priced titles.

PS3 software also contributed to sales.

At the E3 Game Conference in the U.S.

and at the Playstation Premiere in Japan, we revealed our plans to enhance our PS3 software line-up.

And we're currently working to provide various high-quality PS3 software titles for the year-end holiday sale season.

Taking first and third party titles together, we plan to release approximately 200 new disc-based games worldwide by the end of March 2008.

Operating loss in the Game segment increased JPY2.4b to JPY29.2b.

Although profit from software increased, as hardware penetration grew, segment losses increased primarily due to the loss arising from the strategic pricing of PS3 at points lower than its production cost.

JPY5.2b of the segment loss was a write-down of in-transit and component inventory.

As you may have noticed, this quarter we have changed the actual unit disclosure for hardware and software from production shipments to selling.

We've also done this for the unit forecast for each game platform.

The result, however, is no change in the forecast figures.

PS2 hardware unit sales are expected to be 10m units, PSP hardware unit sales are expected to be 9m units, and PS3 hardware unit sales are expected to be 11m units.

Overall, software unit sales are expected to 250m units.

Turning to the Pictures segment, sales increased 13% year on year, or 7% on a U.S.

dollar basis.

Sales increased primarily due to the highly successful theatrical performance worldwide for the Spiderman 3, combined with growth in advertising revenues from several of Sony Picture Entertainment's international channels.

Operating income increased to JPY3.3b, compared to an operating loss of JPY1.2b in the same quarter of the previous year.

The current quarter's result benefited from sales in the home entertainment market of such films as Casino Royale and Stomp the Yard.

Operating income also benefited from lower marketing expenses incurred for upcoming summer releases compared to the same quarter of the prior year.

Next, Financial Services.

Revenue increased 49% due to an increase in revenue at Sony Life.

Revenue at Sony Life was JPY161.8b, a 65% increase over the same quarter the previous fiscal year.

The main reason for this higher revenue was an improvement in both valuation gains from convertible bonds in the general account and gains from investments in the separate account, as well as an increase in insurance premium revenue reflecting an increase in policy amounts in force.

Operating income increased to JPY33.8b from JPY4.6b as a result of significant increase in operating income at Sony Life.

Operating income at Sony Life was JPY34.6b, a tenfold increase, due to the improvement in valuation gains from convertible bonds in the general account and an increase in insurance premium revenue reflecting an increase in policy amounts in force.

Results at Sony Assurance and Sony Bank are also trending well.

Sales in the All Other segment decreased 4% compared to the same quarter of the previous fiscal year.

This sales decrease was due to the fact that the first quarter of the previous fiscal year included two months of results from six of Sony's former retail businesses.

Sales increased at Sony Music Entertainment of Japan as a result of an increase in consignment sales and album sales.

Operating income increased 64%.

This increase was primarily a result of the increased sales recorded at SMEJ, as well as higher fee revenue from new subscribers at Sony Entertainment Corporation.

Sales of Sony BMG increased slightly to $875m.

This increase was due to the combined strength of several releases and the growth in digital sales, being mostly offset by the decline in the worldwide physical music market.

Sony BMG recorded income before income taxes of $31m as compared to a loss before income taxes of $73m in the same quarter last year.

Profitability improved primarily due to lower marketing overhead and restructuring expenses, as well as a gain on a sale of an interest in a joint venture of Sony BMG.

Now I'd like to explain our forecast for the March 2008 fiscal year.

Our forecast for the March 2008 fiscal year has not changed from the forecast we announced on May 16.

Although the results for the first quarter were better than our internal forecasts as of May, and we revised our foreign exchange assumptions to reflect a weaker yen after the second quarter, we currently view the business environment for Electronics and Game going forward to be more severe than our internal assumption made in May.

Our foreign exchange assumptions for the remaining three-quarters of the fiscal year are JPY117 to the dollar and JPY158 to the euro.

Before Mr.

Oneda and Mr.

Wiesenthal take your questions, I would like to summarize the key points discussed today.

The Electronics segment, which continues to enjoy a resurgence in growth and profitability, drove the year-over-year increase in operating profit this quarter.

The Financial Services segment also delivered strong year-over-year operating profit growth.

Sony Ericsson and Sony Pictures continue to be key contributors to profit growth.

In the Game segment we've seen continued success with PS2, a resurgence of sales in PSP, and we expect to have hundreds of new titles available for the PS3 over the coming months.

Our full-year earnings forecast remains unchanged and we're on track to achieve a six-fold increase in operating income and our operating margin goal is forecast -- continues to be forecast to be 5%.

At this time we'll be pleased to take your questions.

Thank you, sir.

(OPERATOR INSTRUCTIONS).

And our first question comes from the line of Evan Wilson of Pacific Crest.

Please proceed.

Hi there.

Good morning.

Two questions, one on the Game business.

Could you first clarify on the change in how you're giving guidance relative to the Game business, when specifically you record a sale and will actually recognize it into the guidance versus the shipment model before it's actually -- does have to actually hit the retail channel before now you'll count it?

And then, secondly on the Game business, could you address the inventory of the PS3?

And how long do you think it will take for those PS3s to sell through?

And also, when do you expect to get a 65-nanometer version of the PS3 in the channel?

And then I've got a follow-up.

Evan, I'm sorry, we're going to have to ask you to speak up a little bit louder, please.

Sure.

First question is a little more detail on the shift in the guidance on the Game business from the -- to the recorded sales model from the previous model.

When exactly are you counting that as a recorded sale?

Is it when it hits the retail channel?

And then, secondly on the Game business, some more detail on inventory of the PS3 at the end of the quarter.

And how long do you think it'll take for that inventory to sell through and what the possibility is to get a cost down version of the PS3 into the channel by the end of the year?

This is Nik Oneda.

I will answer your questions.

We just changed the shipping information from the production basis to the shipping basis starting from this quarter.

The reason of this is at the last earnings call we (inaudible) from the media and the investors that the production or shipment unit is not relating to our sales volume, sales amount, so it's better to change from the production to the sales basis, selling basis.

So that is the main reason.

And, of course, there is another reason, that in the past when we have been competing with Nintendo they used to ship to the distributors rather than the dealers.

So in other words, if we ship to the dealers versus they ship the distributors, there is some big differences.

So therefore we apply the production basis or shipping basis rather than the selling basis to achieve the more closer figure with the Nintendo number in terms of the shipping time.

That's clear?

Yes.

Okay.

The number two question is the PS inventory at the end of June.

As you know, our selling season is December/November timeframe but those two months' quantities so huge, so therefore we are having to pile up inventory starting from the early stages, like May/June period, because we have the capacity issue.

So it is a month of supply basis, yes, we have some bigger numbers compared to the current sales volume, but we don't think it is too risky inventory level at this moment.

And your third question, when the 65-nanometer version would be in the channel.

I couldn't exactly tell the timing at this moment, but of course within this peak season, that I can say.

Thank you.

And also a follow-up relative to the pricing commentary on the LCD business.

That business and its decline in price, it sounded like potentially it could be greater than what you were previously expecting.

Could you talk specifically about the differences between the European business and the U.S.

business, and what, if any, you think will happen with prices as we get closer to the holiday season?

Thank you.

Okay.

This time the price deterioration in Europe was much higher than we expected, particularly because of the Samsung pricing strategies.

And in the U.S.

the price deterioration is not so bad as we expected but the problem was the projection TV area, MDP, [FX-Audi] and the bigger type projection TV.

This category the market is shrinking because of the competitive situation with the PDP and also the other LCD product pricing is so competitive.

So this category is losing share.

That's one of the reasons why that we couldn't achieve the expected profit of the projection areas.

But overall, frankly speaking, our product competitiveness of this category was not so good compared to the other competitors.

The reason of this is our competitors introduced the true High Definition type model this April and May timeframe, but our plan was to introduce those models in September and -- August and September timeframe.

That's kind of the mistake of the line-up this year.

But we are confident that we can come back when we start to sell those new products in August and September timeframe.

But this first quarter our products were not so competitive.

So that's the main reason.

Thank you.

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

Please proceed.

Yes.

Good morning and good evening, as the case may be.

Thanks for taking my questions.

I have three questions, if I might, first on the LCD TV business again.

On the call this morning sitting in Tokyo, you mentioned that roughly half of the loss in the TV segment was attributed to the LCD business.

I was wondering if you could walk me through some of those components.

I understand pricing in Europe was more pressured and you didn't have the exact line-up for a full HD, but yet a close to negative 10% margin on the LCD business seems a little bit surprising relevant to your peers.

Maybe perhaps you had some mark downs of inventory that are included in that, non-recurring charges.

And then second, on the semiconductor business, can you just generally say if you expect this level of operating margin to -- positive operating margins to be maintained through the year?

And third question, on the Pictures business, despite a great many hits and many hits coming to DVD with higher-margin sales, I think if you characterize the operating margin there, which is under 2% and it was 4.5% in the fiscal year ending March '07.

Relative to your peers in Hollywood it's certainly less and I wondered if you could talk about the opportunity to bring margins up in Pictures.

Thank you.

As I explained in the daytime, the LCD business in Europe was mostly affected because of the Samsung pricing strategy.

And particularly the small size, like 32 inches, was pretty much affected.

So, yes, our margin was the loss of about 10%; that's maybe correct.

But as I said, this situation may be improved when we introduce the new models in August and September period.

So please consider, please think this is not a continuous situation for this category.

Okay.

And our next question come from the line --

Michelle, Michelle, hold on one second.

We had two more questions to answer for Dan.

I apologize, sir.

Let me talk about the Pictures question.

Again, we could say this pretty often on this call, you really can't look at the Pictures business on a quarter-by-quarter basis, especially in terms of margins.

It can be lumpy.

We had obviously a very big film in Spiderman 3 with a lot of revenue this quarter but very little profit, due to the marketing costs which we incurred.

The profits of Spiderman, which has been an exceptionally profitable film, will come in the third and fourth quarter when the DVD comes out.

But in terms of overall margins, I would want to make sure you don't characterize our margins being low.

I think we're probably right where we should be on a studio-to-studio basis for the film group.

Obviously a lot of our peers have other assets such as cable networks and own-station groups that have higher margins than the film business, but I think Sony Pictures is where they should, in the top quartile of operating margin.

And again, as we've said before, we've a goal of a 10% operating margin for our studio.

Semiconductors profitability for the rest of the fiscal year would be maintained at the level of the past quarter.

So we don't see any downside possibility of semiconductor businesses unless there could be some big adjustment of the Playstation business.

Okay.

Next question, please.

And our next question comes from the line of Jessica Reif-Cohen of Merrill Lynch.

Thanks.

These questions are for Rob.

Rob, why are we seeing no book basis on MGM?

And then a couple of questions on Music.

What JV was sold?

And could you talk about trends in the second half -- your expectations for second calendar or second half '07?

What kind of changes are you making to A&R and marketing?

And should we expect further restructuring charges?

Sure.

Let's start with MGM.

As you may know, this was an LBO and the way the equity returns were divvied up to the partners were based on a picking preferred security.

There was a very large non-cash paid security that generated a tremendous amount of book losses.

So the performance of MGM cannot be looked at on a net income basis.

It can only be looked at on a cash flow basis.

And as such, on a net income basis, due to this pick preferred, there were lots of book losses and we have enough book losses to cover our investment at this point.

We remain confident, though, that MGM is going to be a very attractive investment for us in the long term.

And obviously it's been helpful to us in terms of our film products, such as Bond and Rocky, on the distribution side.

With respect to Sony BMG, it was disclosed that there was a sale of our interest in AG to Universal and that was -- the big asset there was Maroon 5.

So that was partially responsible for some of the improvement over the -- for the quarter.

And in terms of trends that we see, obviously digital continues to be very large in terms of the percentage basis of revenues.

Total revenues, I think right now we're looking over -- I think about 21% of total revenues on the digital side are in the U.S.

and about [13%] worldwide.

So it's a bigger piece of our pie and we're obviously moving towards a model that -- it really has much more of a focus in terms of master tones, ringtones and downloads.

In terms of restructuring, I think we're expecting about $75m for the year.

We're right where we should be.

I always leave open the possibility of further restructuring but I think that the integration is really largely behind us in Sony BMG and we're now enjoying a lot of the benefits of that merger.

Obviously, you can see it's partially in terms of the performance this quarter.

And I can I ask one follow-up?

It looks like, given the summer releases, it's going to be a very, very grounded fourth calendar quarter video release schedule.

Would you consider moving Spiderman, given the (inaudible) of titles throughout the holiday season?

In terms -- you're saying in terms of the home video release?

The home video release.

I think that obviously Spiderman is a franchise on its own and we're very comfortable with the ability to compete in the market.

All right.

All right.

Thank you.

Thanks, Jess.

(OPERATOR INSTUCTIONS).

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

Please proceed.

Hello.

Thanks a lot.

A few quick questions.

When you talk about cautiousness for Electronics and Game, I was wondering if you could maybe go in a bit deeper.

You mentioned pricing as one element.

Are there any economic or consumer spending concerns overarching?

And what in particular with the Game business are you concerned about or cautious about for the rest of the year?

As comparison purposes, can you give us the production shipments for the PS3 as they would have been reported last year, so we can see what the differential is?

And finally, you mentioned in the full-year results that you're planning a sale lease back on your Headquarters.

Can you give us a view on timing when that might be booked in the P&L?

Thank you.

The pricing of LCD television is, of course, one of our concerns for the rest of the fiscal year.

As you know, Woolworths sell close to the 10m LCD televisions within this fiscal year.

And if our projection of the pricing is deteriorating more than 5% average basis for the annual basis, then it could affect the 500m balance.

So that is one of the reasons why that we have to be cautious about the profitability of the TV businesses.

For example, this quarter, in Europe our price deterioration was 5% to 7%/8% bigger than we expected.

If that situation would continue global basis, that impact is so huge.

That's one of the reasons why we are taking this cautious stance of this fiscal year.

And the second is that Game is also another concern is the bigger sales is expected from now on and we have so many new plans, sales promotion plans, starting from now.

For example, we recently reduced the 60G Playstation 3 from $599 to $499 and we also introduced at the same time -- introduced the $599 with the [ATEG] product and with bundling of the software.

Those are the new promotions program which started very recently, so we will have to very carefully watch for those results.

Same type of promotion would be made in Europe.

For example, 60G models we will bundle the two softwares and perhaps two controllers with the EUR599.

So those kinds of programs we really have to be very careful what would be the result of those promotions.

That's why we have to be a little more cautious about those situations.

So if I can just clarify, your cautiousness is on profitability rather than sales?

You mean in the area of the LCD?

Yes.

The cautious is primarily because of the profitability itself.

Okay.

Thank you.

And on the production shipments, what might be the comparison versus previous quarters?

The previous quarter, you mean the fourth quarter?

I'm just curious what the -- no, for this quarter if you could give us what unit numbers would be from a production standpoint as a comparison.

Starting from this quarter, we decided not to disclose the production quantity.

But it is obviously higher than what we sold this quarter.

As I said, the selling season is November and December timeframe but the production capacity is not so huge enough to produce the huge quantity in November and December period.

So we have to increase the inventory starting from now on, so the inventory is a little higher, yes.

Okay.

Thank you.

And the Headquarters?

Headquarters, we will report the selling of the Headquarter site would be second quarter, one quarter.

Great.

Thank you very much.

And our next question comes from the line of C.J.

Muse of Lehman Brothers.

Please proceed.

Yes.

Good morning.

Thank you for taking my call.

I have a couple of quick questions that are specific to your LCD TV business.

I guess first off, can you help us with what the mix of the sales looks like by size in the June quarter and what your expectations are for the second half?

And then, in terms of inventory, can you give us an update as to where you stand for TVs today, as well as what your view is for the industry, and whether or the not the excess 40 inch inventory has improved at all?

And I guess that's it.

We do not disclose each breakdown by quarter-to-quarter basis.

But overall quantity for the first quarter and second quarter, I would say that the second quarter quantity is higher than the first quarter.

And the 40 inch inventory situation would be improved, that's your question?

I guess two-fold.

First, are you comfortable with where your inventory is today?

How does it compare to where you were, say, a year ago at this time?

And what your expectations are for your inventory going forward, as well as the health of inventory in the channel for the entire industry.

Yes.

I think that our inventory level is reasonable level I think at this moment.

Even though because the quantity was slightly less than what we expected, so therefore slightly higher but within our expected delivery of the inventory.

Operator, do we have any more questions?

Ladies and gentlemen, due to time constraints, this does conclude the question and answer portion of today's conference call.

I would like to turn the presentation back over to management for any closing remarks.

Thank you very much, Michelle.

With that, we'd like to conclude today's conference call and to remind everyone of our Investor Relations contact information.

In Tokyo, IR can be reached at 813 6748 2180.

In New York our team can be reached at 212 833 6722.

And in London the IR team is available at 44 207 444 9713.

Again, thank you very much for joining us and that concludes today's call.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference call.

This does conclude your presentation and you may now disconnect.

Have a great day.