索尼 (SONY) 2007 Q4 法說會逐字稿

Welcome to Sony Ericsson's media and analyst conference call.

To view visual aids for this call, please log on to www.sonyericsson.com/press or www.ericsson.com/investor or www.sony.net/ir.

(OPERATOR INSTRUCTIONS).

As a reminder, replay will be available one hour after today's conference call.

Aldo Liguori, Corporate Vice President of Global Corporate Communications for Sony Ericsson will now open the call.

Thank you, operator.

Hello everyone.

Good morning.

Good afternoon.

Welcome to the Sony Ericsson call today.

With me here today in London is Dick Komiyama, President of Sony Ericsson Mobile Communications, Anders Runevad, Executive Vice President and Head of Sales, and Ulf Lilja, Chief Financial Officer.

We will be making forward-looking statements during the call today and these statements are based on our current expectations and certain planning assumptions which are subject to risk and uncertainties.

The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call.

We, therefore, encourage you to read about these risks and uncertainties in our earnings report.

And with that out of the way I would like to now hand the call over to Dick Komiyama.

Dick.

Hello.

This is Dick Komiyama.

It's nice to be with you and I'm looking forward to meeting many of you in person in the coming months.

Today I want to share with you the highlight of the last quarter and summarize our business performance in the last 12 months.

First, let me give you a few highlights for the Q4.

The Company continued to grow faster than market during the quarter, selling a total just under the 33 million (sic --- see press release) units, which represents 18% growth on the -- in a year ago.

We captured market share in a number of our key markets, such as the Americas, Eastern and Western Europe, and [internally calculate] our market share stands around slightly over 9%.

This is based on the total global market for the quarter of 328 million units.

We continue to invest for the future in order to expand the portfolio still further in 2008.

This means expanding downwards the lower price point and also upward with more high-end 3G multimedia devices.

If we take a look at the Q4 in relation to the full year we can see the steadily increasing volume over the quarters and our ability to hold the margins in low double-digit while ASP decreased around 16% over the 12 months.

This illustrates the management's commitment to grow market share in a profitable way and not sacrifice margins for the quick and unsustainable growth.

Looking at the full year result of Sony Ericsson, sold over 100 million units during the year.

A first in the Company's six years' history.

We grew around 38% on an annual basis, which is over double the global market growth rate.

2007 saw us further build our position as a broader portfolio player with a greater proportion of mid-tier products in our product mix.

A fact reflected in the reduction in the ASP during the year.

We continued to be the industry leader in the music phone in 2007 and have sold over 145 million music enabled phones to date, of which 57 million were Walkman brand phones.

Those are the accumulated numbers and we sold around 12 million Walkman phones in Q4 alone.

Let's take a quick look at how the Company has grown since 2002.

Where we look at the result from the beginning of the joint venture it's clear to see the Company has now established a considerable momentum.

We started, as many of you know, losing money but have managed to establish ourselves over the past three years as a company that's committed to becoming a top three industry player.

The telecom sector continued to be a highly dynamic industry, which we believe will grow around 14% last year.

We estimate market in 2007 to have been over 1.1 billion units, which was in line with our expectation.

Looking forward in the coming 12 months we start the year feeling slightly cautious about the future growth especially with the economic slowdown and the credit crunch in the United States and the European market.

However, we are cautiously optimistic, we will still see the global handset market continue to grow at around 10% in 2008 though business conditions will become harder.

Now I'd like to touch on a few key milestones for Sony Ericsson during the quarter.

We have announced a number of new and very exciting products.

The K660 and the K630, which are the HSDPA phones, optimized for the mobile web, one targeted at the mainstream consumer audience and the other targeted at the younger early-adopter demographic.

We continue to expand and enrich the Walkman experience with both new high-end and mid-tier models plus added to our exciting line of accessory which will really help bringing our product, our proposition, to life for the consumer.

Another exciting development during the quarter was our agreement with Motorola.

That [saw us] invest in 50% of UIQ.

This has now been ratified by the competition authority.

During Q4 Sony Ericsson has announced its intention to unify and consolidate its various content offering under the existing PlayNow download service.

For those of you who don't know the PlayNow, it is Sony Ericsson's existing content download offering which started way back in 2004 with polyphonic ringtones and has been expanded gradually since then.

In November, we announced our aim to offer the consumers an open experience based area of content, including full track music, games and wallpaper etc., as dual download to both Sony Ericsson phones and PCs, as well as all MP3 and Windows Media DRM compatible devices.

The rollout of this new enhanced PlayNow service will start in Q2 in 2008.

Let me talk about a couple of areas where we believe that a shift in technology plays to the unique strength of Sony Ericsson.

In the more developed market, the accelerated transition to 3G and super [type of] 3G or HSDPA will [enable] a number of us to grow market shares in high-end devices, where Sony Ericsson has always been strong.

We currently enjoy around double the market shares in 3G devices that we do globally and have established ourselves as one of the leaders in rapidly growing area of the market.

We believe we have ability to retain this advantage going forward, with best in class applications and handset design.

Many of the phones we announced for the second half of 2007 were HSDPA models, packed with the exciting features that takes full advantage of increased data speed.

As the first, faster data speed enables networks operation to offer the true mobile web experience, the area of service and application on the handsets will definitely grow in importance for consumers.

This is an area where Sony Ericsson has always excelled and we believe will play our strengths in the future.

Many of our high-end HSDPA products such as W760 Walkman phone we recently announced at the Consumer Electronics Show in Las Vegas, only show the possibility of what Sony Ericsson can offer in this area.

A music phone that's fully mobile, web-enabled, plus offer the consumers the most advanced Sony Ericsson gaming experience to date.

Before I hand over to Ulf Lilja, our CFO, who will give you some more details on the numbers for the quarters and the full year, I would like to point out that we are already getting prepared for our busiest Q1 ever.

As some of you will be aware, we have already announced three new phones plus accessories at Consumer Electronics Shows in the United States, and are planning to follow this up, a pre-announcement and press event before the end of the quarter.

We will be in India next week, holding a press conference in Delhi, to give an update on our business in that market and Asian-Pacific region.

On the 27th of this month we will be at MIDEM, the world's largest music industry trade show in Cannes, to give a further update on our plans for the rollout of the PlayNow content service.

And then on Sunday February 10, we'll hold the biggest press and analyst event of the year, in Barcelona, to kick off 2008 Mobile World Congress.

I hope you all join us for that event as it's going to be the best party in the town.

I'm now going to pass over to Ulf, and look forward to answering your questions in a few moments.

Ulf?

Thank you Dick and good morning everyone.

I will start walking you through some of our numbers.

I will start with the fourth quarter.

Units shipped become 30.8 million units in the quarter, up 18%, compared to last year.

Net sales flat versus last year, at EUR3,771 million, but up 21% versus previous quarter.

Gross margin increased to 38.8% versus 29% a year ago and 30.7% the previous quarter.

Operating margin increased to 13% versus 12.8% a year ago, 12.7% previous quarter.

Net income -- excuse me, income before tax, EUR501 million, flat versus last year.

However up 30% compared to previous quarter.

Net income down to EUR373 million compared to last year's EUR447 million.

However, we should then point out that the tax rate 2006 was impacted by a release of our valuation allowances for our businesses in the US and Japan, leading to a very low tax rate of 8% versus 24% in this quarter, more in line with our typical tax rate.

ASP EUR123 versus EUR146 a year ago, up from EUR120 previous quarter.

If I may turn to the full year numbers.

Units shipped passed 100 million units, as Dick mentioned, for the first time in the Company's history.

That's up 38% versus last year.

Net sales rose to EUR12,916 million, which is up 18% from the last year.

Also gross margin increased to 30.6% from 29.1% a year ago.

Operating margin up to 11.9% versus 11.5% a year ago.

Income before tax became EUR1,574 million, up 21% versus last year's EUR1,298 million.

Net income up 12% to EUR1,114 million.

Let me also here mention that the tax rate last year was severely impacted by the previously mentioned release of tax valuation allowances.

Tax rate last year 21%, this year the more typical 27%.

ASP declined to EUR125 per unit, compared to EUR146 a year ago.

That concludes my presentation.

Thank you.

Thank you Ulf.

Operator, we're now ready to open the Q&A session please.

Thank you sir.

Ladies and gentlemen, at this time we will begin the question and answer session.

(OPERATOR INSTRUCTIONS).

Our first question today will come from [E.F.

Grippenberg] with [Jagens Measure].

Please go ahead.

Yes hello sir.

I've seen that Sony Ericsson is focusing on North America as one of the most important markets this coming year and the same kind of message has come from Nokia as well.

Can you develop how you look at the competition in North America and other markets in the near future?

Dick Komiyama Okay, this is Dick Komiyama, and I think, as you know, Sony Ericsson has been holding rather strong market share for many years in Western Europe and Eastern Europe, as well as Middle East.

But the US market has been one of the weaker areas that we have.

But as we, for the past two years, we diligently developed the relationship with their operators and also developed a product for US consumer need.

And I think all the preparation to launch our US business is going to be ready, and which we have already kicked off at the Winter CES in Las Vegas this early part of the month.

And we are very pleased at reactions and our product portfolio was well accepted.

And therefore, I think we believe we will be starting a right place.

But, in the meantime, this product is going to be delivered towards more on the second half.

And I think we are going to plan to have market promotions, as well as more on the product awareness campaign, brand awareness campaign, and strengthen overall Sony Ericsson's market position.

That's our plan.

But I know that there are many competition, the US is one of the most competitive markets; but we think we are ready for that.

Okay, can you -- you also mentioned in your speech you said that business conditions will become harder.

Can you also develop that, what does that mean more specific?

Well I think in general, as I said, the handset market will continue to grow.

But yet, certainly there's global economic concerns including subprime rate issues in the US and Western Europe and this is wide spreading.

And also, of course, as everybody aware, that energy costs are going high and there is a distinctively uncertain economic conditions ahead.

And whilst we were going through this we have to anticipate that business condition is going to be harder.

But, yet, we are of course, prepared for this stormy climate ahead and we will try our best, but yet inevitable that we will be affected one way or another with this economic climate.

Okay, thank you very much.

Thank you, we'll take our next question today from Tim Boddy with Goldman Sachs.

Please go ahead.

Yes, it's Tim Boddy from Goldman Sachs, thanks for the question.

I'd like to ask about market share in two directions.

On the high end, clearly you do have a very strong position but particularly in music, we're seeing increasing competition.

I wonder if you could comment on how you see that dynamic playing out in the market?

And on the low end, it seems perhaps your share gain in the fourth quarter was more modest than people had been anticipating.

Can you talk about the progress you're making in gain share in the lower and the low to mid end of the market?

Thanks.

It's Anders Runevad here, so let me start then with the high end and your question on music.

In fourth quarter we are growing faster than the market.

We are -- our feeling is definitely that we maintain our leadership in the music category.

We have actually increased ASP a bit in the fourth quarter, very much due to our flagship Walkman phone.

So we feel confident in the music segment.

And of course, as you say, the competition is tough but I would say that the competition is hard in all segments of this market.

It is a very competitive industry in both high, mid and low end.

Looking at the low-end price segment, we maintain our strategy that we've talked about before, that is profitable growth, where we have taken several steps this year to enhance our portfolio, increase our breadth of our portfolio into the low-end segment of the market.

And at the same time, for that segment, our overall strategy remains that we address this in a profitable way and we take those steps to introduce products at lower and lower price points will maintain margin.

Well just let me add one more comment.

As you know the Walkman brand I believe is revitalized under the Sony Ericsson's and mobile phones.

And however, in order to enhance the benefit of the music phone, we are preparing also, or maybe I would say that differentiating ourselves, in a way providing more different features and including integrated application of the feature called TrackIDs, or SensMes, [unified media].

All this new features are built into our phone will help or make it easy for end user to use this phone.

And plus, as I mentioned, PlayNow is going to be added service and that will also enhance overall music entertainment, easier for consumer.

And I think this will be the strategy that we're pursuing for that category.

So just to clarify, there's no particular reason why you didn't gain more share in the fourth quarter, as you've been doing in previous quarters?

No.

Okay, thanks.

Thank you, our next question today comes from Alexandre Peterc with Exane/BNP Paribas.

Please go ahead.

Yes, good morning and thank you for taking my question.

I would like to shift a little bit to the geographic distribution of your sales.

Apparently, if I am reading this correct, growth has slowed down significantly in Asia.

We are coming from plus 35 in Q1 to minus 18 in Q4.

Also, Europe, Middle East and Africa is down in terms of growth as well.

Americas is holding up kind of well.

It appears to me that there has been, indeed, a shift in Q4 from the expansion into more low-end and emerging markets and the higher has been favored.

And that's probably also reflected in your gross margins.

Now how do you reconcile that with your overall strategy for the longer term?

That would be the key question I would have here, thank you.

Okay if I start with your growth question then.

If we look at from Q3 to Q4, we have a solid growth in all the three regions.

In Europe, Middle East and Africa 31%, in Americas of 11%, and Asia on 8%.

So I would say that our growth was in market share and volume is pretty spread.

If we compare then a year ago, quarter-on-quarter, as you point out then, we have a decline in Asia, compared to Q4 last year.

That is very much due to some different reasons.

First of all in parts of Asia, we've seen a detraction in the market due to political unrest, for example in Pakistan, where we see the whole market detracting.

We also have, as we reported last quarter, lost a bit of momentum in Japan and China.

So that is in line with what we reported in Q3.

Japan and China are obviously two very different markets.

Japan, a highly mature market, where we've also seen a new kind of subscription packages being introduced from the operators into the market.

That has influenced our sales.

In China, we have lost a bit of momentum, as I said already in Q3.

We have addressed the issues both in Japan and China and we are confident that we have put the right actions in place to address this now over time.

Okay, thank you.

And can I just allow myself a very quick follow-up regarding guidance?

Plus 10% for next year, against the backdrop of an economic slowdown, I don't quite understand whether your forecast already includes the risk of a slowdown in the US and the implications of the credit crunch, or are you just saying there is a higher risk for this plus 10% forecast?

What did he say?

I'm sorry, could we hear the question again please?

It didn't come very clearly.

Okay, I'll try again.

If you could speak a little bit louder as well, it would help, thank you.

Yes, I would just like to find out whether your plus 10% forecast for the market, already includes a risk of a market slowdown or are you just saying that this prediction is at risk, given the market economic environment?

Thank you.

Well, certainly at the normal conditions, it could be slightly higher than what we have projected at this moment.

And therefore we are anticipating this percentage, including this economic slowdown because of the general growth momentum of this handset industry.

But -- and again, this is depending on how severely the economy (inaudible).

And if the situation is much different, or let me say worse, then we may be [affected].

We may have to revise this forecast in the upcoming quarter.

But today, at this stage, we are seeing this despite all this anticipation of the future economic prospect.

Okay.

Thank you very much.

Thank you.

We'll take our next question Peter Dionisio with Morgan Stanley.

Please go ahead.

Thank you.

Just to clarify, and apologies for another macroeconomic question, you've talked about your assessment in terms of the macroeconomic impact in 2008.

My question is that, have you seen any impact so far on the back of macroeconomic issues, be it in the US or the UK or Europe in general in your business or the handset market in Q4, or so far in January?

No.

We haven't really.

We, of course we have just closed Q4 now then; and Q4, the overall market in Q4 is very much according to our expectation.

And that's also [learned] -- that is also a global market as we have said during the year on 1.1 billion plus, very much in line with our expectation.

And just as a follow-up on that, on the back of your concerns on the macroeconomy, do you expect any change in the subsidy policy of telcos here in Europe or in the US?

I think -- of course this is a very dynamic industry and I think it's not really for us to speculate what the operators will do.

So I think that question is probably much more relevant for them.

Okay.

Thank you.

Thank you.

Our next question today comes from Kulbinder Garcha with Credit Suisse.

Please go ahead.

Thank you.

Just a couple of brief questions.

First of all, in the fourth quarter I think you said the industry unit number, according to your estimates, was 328 million.

Just on your estimates what kind of sequential growth did the industry do in Q4?

Then my second question is, when I look at your operating margins you've done better than the number two and number three player for the last several quarters now, and on top of that it seems you're embarking on more aggressive expansion in North America as well as possibly India as well.

So I'm kind of wondering about the sustainability of Sony Ericsson's margins as we go through 2008.

Do you think you might see some pressure as you try and grab the business?

Or do you think you can replicate the success that you had in 2007 of taking some share and expanding the portfolio but sustaining double-digit margins?

Many thanks.

Well, as you have seen that our growth history starting 2002 we are building momentum but yet we are deliberately careful about where we are going to strengthen our positioning.

Not only the portfolio and at the same time features and at the same time in the regions.

And looking ahead, well as you can see, our margin has been stable and will allow us some improvement.

[It's due] to because a lot of effort on making our operation efficient and also our cost cutting effort, and which despite the fact that ASP are, not only because of the expanding lower pricing market but at the same time because of the new phones that are coming up.

And all this area we have been working in terms of competitiveness of the product.

And so as a result we are holding up our margin despite this ASP price down, and we intend to do that simply because of all supply chain issues and production issues and product planning issues, and all these make it more [cost] competitive.

Therefore, we are going to expand this lower-price area; but yet we are determined to hold our margins because of this productivity overall increase.

Thank you.

And the question on the handset industry in Q4?

The 328 million, is that -- what kind of sequential growth is that do you think?

We estimate it to be about 16%.

16%?

Yes.

Okay.

Great.

Thank you.

Thank you.

We'll move now to a question from James Faucette with Pacific Crest.

Please go ahead.

Thank you very much for taking my question.

I just wanted to go back to your current outlook on the industry and if you could comment on how you are seeing inventory levels, both for your own products and maybe for the industry, particularly in the Western hemisphere countries as we come out of the traditionally strong holiday sales period?

We don't -- we see inventory situation as we can see it today basically on normal levels after Christmas.

That's what we see today.

We are, of course, just finishing Q4 and, of course, now take the next step looking forward.

But we don't see any not normal seasonality at this point in time.

I'm sorry, could you repeat that again?

You do see normal seasonality or you do not?

We do not see anythings that is not normal seasonality.

That's very helpful.

Thank you very much.

Of course we see, as you pointed out as well, of course we see the normal seasonality pattern that we have over Christmas; but we don't see anything that is not normal for this kind of seasonality.

That's great.

Thank you.

We move now to Jason Mauricio with Arete.

Please go ahead.

Yes, hi.

Just curious if you were able to book the UIQ gain this quarter and if this was the EUR15 million gain in other income?

Yes.

Ulf here.

Yes, that is correct.

The transaction was approved by all authorities before we closed the books; so that is correct.

Some EUR15 million is recorded in the quarter.

What was the final amount -- the cash flow statement?

That was around EUR25 million.

Okay.

Great.

And if I could just ask another quick one.

You announced [play for now] back in November, any update on any operators that may be taking or distributing the service at the moment?

Well, no but we'd like to make it further this our plans in the future at the (inaudible) and that's where we're going to talk about the later part of this MIDEM and together with Barcelona.

We are working many, many business development stage and I think we can be appropriate position to talk about in this MIDEM conference.

Thank you very much.

And I should add, of course, we have had PlayNow since 2004 and we have constantly developed PlayNow and we already today have around 75 commercial agreements around PlayNow services and several of those with operators.

Okay.

I was more curious about the full PlayNow service with the game downloads and the full music tracks etc.?

I think there we have to, as Dick said, come back at the next event.

Okay.

Great.

Thank you very much.

Our next question today comes from Rod Hall with JP Morgan.

Please go ahead.

Yes.

Good morning.

Thanks for taking my question.

Just a quick one on the weakness in Asia, the 18% year-on-year decline.

You said that you gave two reasons for that, one was Pakistani political unrest and the second was the momentum loss in Japan and China.

I wonder if you could elaborate a little bit on just how important the Pakistani political unrest was within that.

Can you give us any kind of ideas how big the impact from that was proportionately on that 18% year-on-year decline?

That's my first question.

And then the second question is related to the whole multimedia strategy, and I'm hoping that, maybe Komiyama-san, since you're new to the business, you can give us some idea of how you're thinking about this.

Apple, clearly, moving very aggressively now into video and already pretty strong in music.

How important do you think video is for your offering going forward?

Also, how important do you believe it is to be able to distribute the content around the home, which Apple is moving pretty aggressively on, as well, with various hardware products?

Let me take the first question.

We don't breakdown our numbers further than the regional breakdown that we provide so I can't give additional insight for you there.

It's of course so that in the Pakistan case it's the total market that detracts substantially because simply the retail activities are obviously a lot lower today.

But we don't break down our geographical markets further than we've done in the report.

Okay.

I guess I was just trying to get an idea of whether it was a small impact or relatively significant.

Well about these new features and although you quoted the Apple, we certainly, as I mentioned before, this year we're going to focus much on the music aspect.

But yet in Japan introduced the Bravia phone, and although it's unique in the Japanese market that can receive the television -- digital TV tuner built in.

But in the meantime that you know this area of consumer, Sony's consumer operation, as well as the market for the consumer is converging.

And many of the features, as well as together with the phone capability is going to be important one.

And therefore the video aspect is important strategy.

Although as I mentioned that we're going to focus more on the music side this year, but naturally many other Sony's assets or their technology available for games and videos.

Those are the next, of course, agenda which we have been working on, although I cannot go more specific.

But naturally because of this consumer aspect those things are important, and as to -- but another important is, I think, area of how user interface.

And also therefore we are trying to make it the best user experience, and which also we think is important that we work closely as operators together.

And so this operator integrated customized experience, as well as the new features and as well as our new technologies of the 3G.

And all this combined we'd like to make more good packages of entertainment aspects of these new phone features.

Okay.

Thank you.

Operator, we'd like to take one last question, please?

Thank you, sir.

Our final question today will come from Mats Nystrom with SEB Enskilda.

Please go ahead.

Yes, good morning, [sirs].

Following up on Asia Pacific, if I may here, is it possible to quantify how lower Japan was in terms of sales?

And secondly, I know you don't really have any entry products yet before the [session] corporation, etc.

But is it also possible to give us some -- shed some light on the, let's call it, low-end share of volume?

Thank you.

Yes, no, unfortunately, as we said several times, we don't break our numbers down further than the regional breakdown we've done.

And we don't really go down to specify market share into different price bands of the portfolio, so I can't help you more there.

We are basically following the strategy that we have done during the year also in Q4.

We are continuously expanding into lower-price segment phones.

We talked about bringing Walkman down to under EUR100, actually already in Q2 we have done that.

We have expanded our talk and text capability of the portfolio into lower-price segment phones.

And I think that's clearly shown then that over the year our ASP has come down, which of course is very much a function of the portfolio and the different segments that we address in the portfolio.

And we continue to follow our strategy to do it step-by-step and to grow market share in a profitable way.

So we have no changes in that overall strategy that we have executed on during the year.

And finally, if I may, excluding Pakistan, Japan and China, which you have elaborated on, are you satisfied with how sales in the rest of Asia Pacific have developed?

Thank you.

Yes, we are.

Asia Pacific is of course a huge variety of markets and we are happy with the performance -- with our performance in Asia Pacific.

Thank you very much.

Ladies and gentlemen, thank you for your questions and for participating in today's call.

If you have any additional questions please contact Sony Ericsson or the Sony or Ericsson investor relations, analyst relations teams.

Thank you very much and enjoy the rest of the day.

Ladies and gentlemen, that will conclude today's conference call.

Thank you for your participation.

You may now disconnect.