索尼 (SONY) 2008 Q1 法說會逐字稿

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

(OPERATOR INSTRUCTIONS)

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

Thank you operator.

Hello, everyone, and welcome to our call.

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

We will be making forward-looking statements during the call today.

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 release.

I would now like to hand the call over to Dick Komiyama.

Thank you for joining our media and analysts' call this morning.

I'm not going into the numbers in detail as Ulf Lilja, our CFO, will do this at the end of this presentation.

As you are aware, Sony Ericsson made an interim financial announcement on May 19, and I'm happy to say that numbers were reported today and that we (inaudible) that announcement.

Highlights for the quarter include the fact that we have managed to grow the volume around 2% year-on-year and the reported net income before tax of EUR193 million, which is at the higher end of our interim forecast of between EUR150 million to EUR200 million.

Sony Ericsson experienced a number of difficulties in the quarter which negatively impacted both volume and sales.

We experienced the softening of demand for mid- to high-end phones in the market where we have a strong market presence, particularly Western Europe.

We [believe] this was caused by a combination of a channel inventory build up at the start of the quarter as well as a possibly weak consumer confidence due to the macroeconomic climate.

In addition, Sony Electronics has experienced and the [components operation, especially] in display, was popular (inaudible) models such as W580 and S500.

This meant that we could not benefit from all this consumer demand for those [two phones].

We are also seeing a quicker than anticipated acceleration in the growth of lower priced phones in the emerging market, especially in Asia Pacific at the point where traditionally we have been weak.

This means that as a company we need to address this and assure we will continue to grow the number and [ensure the product of low priced] models in our portfolio as quickly as possible.

Although market conditions have been difficult, we continue to improve in R&D during the quarter to expand our portfolio, especially in the area where we need additional strength to be competitive.

It is not about just having more products in the portfolio, but about building a portfolio that has the right mix of products to be competitive in the wider (inaudible) market at the correct price and doing this in the product way.

A good example of our portfolio growth we are targeting is the announcement of the new sub-brand at the highest end of the portfolio XPERIA, for media, convergence and phones.

The XPERIA brand was launched with the announcement of the X1 which we will ship in the second half of the year.

Although the quarter was being challenging we still believe that the global handset market will continue to grow at around 10% in 2008.

This means that the industry still has a good potential for growth and our challenge is to ensure that we have the right product at the correct price and to continue this growth, to capture this growing market.

The first quarter of the year is always very, very busy in the telephone industry.

And this is my first year as the President of Sony Ericsson, it gives me a great opportunity to meet the people and immerse myself into the business.

Sony Ericsson started the year [with] CES, the Consumer Electronics Show in Las Vegas, where we announced three new products -- the W350, W760 and Z555.

They are all global products that have been well received by the operators, and one of the reasons we made announcement at CES is that these products are optimized for the U.S.

market.

In our mid-January Q4 analyst and media call, I talk about how 2008 could be the year where we begin to make headway in the North American market.

Having the right products in the portfolio to appeal to North American operators and the consumer is the first step to achieve this.

I came back from CTIA Wireless at the beginning of April where I witnessed the segment, the news XPERIA X1 generated among those American journalist and analysts.

As you can see, it won the prestigious [Radstock] Magazine award for the best show, which was a great milestone for us in North America and I hope a taste of things to come.

Another great piece of news during CTIA was arranging of the Z750 with AT&T, which is our first HSDPA model for North America, arranged by the major carrier.

This is another good indication that things are beginning to happen for us in a very important market.

Mobile world congress in Europe was also an important event during Q1 and saw us make a number of key product announcements, including new Cyber-shot and Walkman models in addition to our new web category such as the G700 and G900 models.

We are also happy to see the industry being as excited as we are with announcement of XPERIA X1 as we get ready to launch this product in the second half of the year and are able to demonstrate more about this personalization and customization capable.

We will be able to give the market a flavor of where Sony Ericsson is in the product development going and in the future in the middle (inaudible).

What I'd like to stress as I end my part of presentation is that, although it has been a difficult quarter, Sony Ericsson believe we can be cautiously optimistic that we are on the right track in the long term.

The products we are announcing in Q1 we'll be shipping in late Q2 and Q3 and have been positively received by the operators.

We are beginning to see a positive momentum in North America and believe we can build on the going forward.

The internal work we are going to build our portfolio at the lower end is on track.

A good example of this is the R300 and R303 radio phone which Indian market in mind bringing simple innovation at the lower price point can make Sony experience [brand the] new group of consumer in new markets.

Expect to see more innovative (inaudible) and models in months ahead and we continue to be seen by the industry as setting a standard for the music with the Walkman phone, having sold almost 70 million Walkman branded model to date.

We are confident we can extend this leadership propositions in area of multimedia convergence phones with launch of XPERIA.

There I must pass over to Ulf.

I would like to mention two products announcement we made to coincide with this financial today.

The G502, our lowest price HSDPA model to date, and the G80 sister model for the [Z770], which is HSDPA model optimized for North and Latin America and selected Asian Pacific market.

This product has built-in GPS.

Now let me hand over to Ulf to take you through a more detailed look at the numbers.

Thank you, Dick, and good morning everyone.

As usual we have provided some additional financial information in the addendum to our earnings release this morning.

You will find income statements, balance sheets, cash flow as well as net sales by market area.

Let me got to the first quarter 2008 financial results.

Units shipped in the quarter 22.3 million units, up 2% versus last year, but down 27% sequentially.

And that was partly due to seasonality, but also due to other factors as just outlined by Dick in his section.

Net sales down 8% compared to previous year to EUR2,702 million, and that is mainly due to slowing market growth in mid- to high-end phones in markets where Sony Ericsson has a strong presence.

Net sales would have been down 1% using constant currencies compared to a year ago.

Income before tax EUR193 million, which was at the high end range, EUR150 million to EUR200 million, we announced in our interim earnings release on March 19, 2008.

Net income for the quarter EUR133 million, 48% lower than the same quarter last year.

Tax rate first quarter 2008 was 29% which is in line with our typical level.

Lastly, average sales price, ASP, decreased some 1% sequentially to EUR121, mainly due to product mix.

That concludes my presentation and I hand back to Aldo.

Thank you.

Thank you, Ulf.

Operator we're now ready to open our Q&A session.

Thank you.

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

(OPERATOR INSTRUCTIONS) As always, please limit yourself to one question at a time and please keep your questions at a broad level.

Detailed information is provided in the report and Sony Ericsson's corporation communications team will be happy to take additional questions and discuss further details with you after the call.

We'll take our first question today from James Faucette from Pacific Crest.

Please go ahead.

Thank you.

I just wanted to delve in a little bit into what you see in the markets and what you believe may be causing a slowdown in the sales of high-end phones that seem to have affected you in the first quarter.

And if you could also talk about how we should think about your outlook in the second quarter, particularly do you expect that you will see continued pressure in that segment and as such the ASPs could come down further?

Or do you feel like the new product launches that you expect to ramp at the end of the quarter will begin to lift your ASP?

Thank you.

I think in general what we see in the market, as we say, is overall ASP coming down; I think that is the general trend of the market.

And we don't expect that that trend will reverse, so to speak.

We continue to see as an industry then ASPs coming down.

It's of course very hard to put your finger exactly what happens on the high end, but I think there is probably more careful consumers when it comes to spending that influenced the willingness to buy the high-end phones in the market.

So we see that the demand on the high end has softened and I think -- there are macroeconomics factors, of course, that probably influenced the retail.

So you feel like the pressure that you saw at the high end is a macroeconomic-driven phenomenon rather than a competitive one, at least in your particular case where new phones from say Apple etc., in Western Europe have put pressure on you?

We feel it's a general softness in that segment of the market and also in the different geographical areas.

And, of course, we will always have tough competition; we had that in the first quarter and we expect that going forward.

I think that's also definitely part of the market.

Great, thank you very much.

Thank you.

We'll take our next question today from Ilkka Rauvola from Danske.

Please go ahead.

Thanks very much.

It seems that the cost base improved, or actually increased somewhat, during the quarter.

What's your outlook for perhaps reducing costs?

Thanks.

Yes, Ulf here.

Well, on a general note, we have seen some pressure on the component side upwards from various sectors, so we do expect that to continue.

We, of course, work then hard to find ways to compensate for that.

And also as we mentioned in the last call, operational excellence and streamlining the organization in an industry with continued falling prices it's, of course, very critical to continue to do so.

So that's our intention also going forward.

Thanks very much.

Thank you.

We'll take our next question today from Tim Boddy from Goldman Sachs.

Please go ahead.

Yes thanks.

Two related questions if I may?

The first; it would be helpful just to understand or try and quantify the impact of the component shortages you referred to in the first quarter as to whether they're a significant element of the shortfall or a minor element.

And then secondly, typically when companies face product transitions it's important to protect shelf space at retail and it can make sense in the short run to use price to do that before the product refreshes.

Is that how you're thinking about the second quarter?

Well, this is Komiyama, the component shortage, particularly on LCD and LCD demand for the large screen, is a manufacturer sees much profitability on large screen.

And therefore allocation to the small screen is getting shorter, and that's why everybody, including us, is struggling to take this fair share of the productions.

And that is going up [like] 10%, 15% easily and it's a difficult position to see how it will continue for the remaining years depending on additional capacities going to available.

But on the other hand, through this process, however, additional source coming into the supply group, so more expanding to the new [supply] area is also very important action plan for us to keep our price under control for this particular [tool].

But there's other area of materials including some of the unique [cadmium] type material as well as to the extent there is some part that is ours so, prices are going up.

So because of the globally oil relationship as well as a shortage of oil and also the situation price of oil, it is difficult to challenge -- a challenging time to get a realistic as planned cost of material.

But we want to do it anyway the best for we can.

Is there another question he has?

Yes the follow-up question was just around whether you'd use price.

Price?

To support the portfolio in the second quarter before your new products arrive.

Not on normal situation.

Of course we adjust the price continuously.

We introduce product and we use our normal price adjustment during the lifetime of the product and when we have certain product introduction cycles.

We have not changed the strategy on how we operate the price strategy towards the product launch strategy.

That's a continuous process, of course.

Okay, thanks for that.

Thank you.

We'll take our next question from Didier Scemama from ABN Amro.

Please go ahead.

Good morning, thanks for taking my questions.

A couple of questions if I may?

First of all, you had an inventory increase sequentially of about 10%.

Can you maybe talk about what your intentions are for the next quarter in terms of maybe reducing this inventory and what that means for your suppliers?

And the second question is, can you maybe give us a sense of where you see your volumes for the full year?

Do you intend to grow your volumes year-over-year for calendar year '08?

Ulf here, if I take the first part of the question when it comes to inventory.

That is mainly due to that we have geared up production for coming product launches, so it's work in progress.

And that is then for several markets.

So I think you should expect inventory to continue to increase slightly, but not significantly.

And, as you might know, we do not work with finished goods inventory so this is mainly then, as I mentioned, work in progress.

And over to Anders maybe for the second part of the question.

Our plans to grow volume full year, year-on-year.

That is definitely our plan as we also grow volume in Q1 year-over-year.

Okay, thanks very much.

Thank you.

Our next question today comes from Edward Snyder from Charter Equity Research.

Please go ahead.

Thank you very much.

You mentioned on the call that accumulatively you've sold about 70 million Walkman phones, could you give a number for the quarter itself?

Also your 3G sales, historically you said it's about twice as a high market share in 3G as you were in your normal business.

Can you give us any guidance on how 3G did for you in this particular quarter?

And on Cyber-shot too what, in terms of unit volumes, you might be doing there?

I'm just trying to get an idea of where you are playing these days.

According to this total Walkman and music and ambient phones, there are around 9 million Walkman shipped quarter one this year.

And the Cyber-shot is around 4 million of Cyber-shot from [6 million] first quarter of this year.

Then 3G (multiple speakers)?

3G.

On the 3G side we expect that we maintain the same relationship on market share GSM 3G as we've stated before.

So we estimated our market share in 3G is about twice that of our market share in GSM, so the same ratios more or less.

Excellent, thank you very much.

Thank you our next question today comes from Rod Hall from JP Morgan.

Please go ahead.

Yes, hi.

I just wanted to ask you a question, going back to Asia and the 25% year-on-year decline there and you're saying that you're seeing much lower priced phones being sold.

And I wonder just strategically if you think that you're going to be able to produce phones at a price point that's going to be in demand in Asia at a profit?

Whether you've got the scale to do that?

So I guess that's the main question I've got.

And then the second question is with regards to the dividend payment this quarter.

Just double checking that you're going to continue to pay the dividend in Q1?

And also if you can give any color on what you're hearing from the parents in terms of their timing desires on dividend payments.

Should we be assuming that the next dividend payment gets made in Q3 or can you give us any elaboration on the timing there?

Thanks.

Ulf here; let me take the dividend one.

Yes, we did pay EUR470 million in total to both parents in March Q1, and it's, of course, a decision for the owners as to future dividend.

But I think we should expect that they, subject to the business development, would prefer to see a second payment sometime second half year and still to be decided when.

But for planning purposes you could use Q3 I think.

If I could comment a bit on the sales in Asia Pacific.

It's of course also [saw] that here we have a pretty big impact of the currency, all our sales, if we compare them in euro year-on-year.

So all our sales in Asia Pacific is basically dollar based.

And of course we have some large movements on the currency, dollar to euro, during the year.

So that is, of course, also a factor as well as that we see that the growth in Asia Pacific comes at the lower and lower price points.

One of our ambitions in that lower price segment it remains, as Komiyama [San] said during the call, we have released new radio products for the Indian market, to be shipped by the later part of the year.

And we continue to increase our capability in the [entry] segment, but we do it on a various stepped-wise approach.

And of course it's always balancing the products with (inaudible) and the volume with (inaudible) we can generate at different price points.

Okay thank you.

Thank you.

Thank you, our next question today comes from Mats Nystrom from SEB Enskilda.

Please go ahead.

Yes, good morning, two questions if I may?

Could you please be a little bit more specific on your efforts in the low end, and I was thinking especially on the Sagem Corporation there?

Please, if you could remind me, have you said anything specifically on the timing for those product launches?

And secondly, perhaps a question to Ulf, could you please elaborate on the rather small decline in accounts receivable during the last quarter?

Thank you.

We are happy with our collaboration with Sagem and that strategy remains when it comes to the entry.

We are on track on the internal projects and timeline that set for when we will bring phones to the market, based on that collaboration.

And, as usual, we will come back to the product announcement when we have something to announce on those products.

But have you said or have you not said the second half 2008?

Sorry can you repeat that?

Sure, have you previously stated that those release dates would happen in second half 2008?

No, we haven't.

We have not released any products as of today.

Okay, thank you.

And on the receivables if I may?

Yes, the decrease is related to that.

We had a very high shipment level in December due to the Christmas scene, so in March it went down to a more normal level.

So that is the reason for the decline.

But maybe I'm misunderstanding things here, but wouldn't one expect a larger decline so to speak sequentially or am I misunderstanding this?

No, I think you're quite sharp here.

The reason why the decline isn't bigger is that, as we stated and you can see in the addenda, we had a very successful business in Latin America in first quarter and they grew that significantly compared to fourth quarter.

And the payment terms in Latin America in the industry is significantly longer than the average.

So that's the background to that one.

Thank you.

Thank you.

Our next question today comes from Alexander Peterc from Exane.

Please go ahead.

Yes, good morning.

I'd like to ask a question about what happened exactly in Europe in the quarter.

The reason why you seem to have lost some market share there, is that related to your portfolio, or is it related to where market demand has shifted?

And then if it's really the market demand shift from high end to low end, is that related to the macro environment in your view, or any other issues such as different operative subsidy strategies?

If you could just clarify that a little bit?

And then the second question would be related to your operating margin level.

Clearly, we were roughly half of what we would be expecting, or a little bit above that, but still how do you plan to adjust your operating model in order to get to the desired margins and what is that level of margin [that you'd like to see]?

Thanks.

If we look at the year-on-year comparison we don't feel that we have lost market share in Western Europe.

We see, as we have said and very much as you describe, we see several factors in the European market that has led to a bigger demand on the lower price phones compared to the higher price phones.

So we are seeing a shift in demand.

We normally see that, actually, already in Q4, since Q4 is traditionally more a prepaid market also in Europe.

But we've seen that also then coming into Q1 that the mix in the market has shifted to a bit more toward the lower pricing.

There could, of course, be several explanation on this -- consumer spending, willingness to spend, length of contracts from the operators.

I think all of these are possible explanations.

Okay thanks on that.

On your operating model?

Ulf here.

We'll try to shed some light on that one.

Yes of course we have seen a lot of challenging factors in the first quarter impacting our operating margin.

I think well during the quarter also try to paint the picture that we do expect some challenging conditions also and in particular in the near term.

And, as you know, we do not give specific guidance on our margins, but we have in the past also made clear that in our strategy we see it equally important to maintain healthy margins when we grow the company.

So we plan to continue to go that way.

And lastly, in line with broadening the product portfolio we have seen an increase in OpEx, particularly in the R&D section, and we do continue to expand the portfolio.

That would be my comment on the margin one.

So would you say that your margins currently are healthy or not?

I think in the past we have talked about that low double-digit numbers long term is what we strive for.

So I think that probably gives you the answer to the first quarter one.

Okay, thank you very much for your comments.

Thank you.

We'll now move to Gareth Jenkins from UBS.

Please go ahead.

Yes, thanks very much, a couple, if I could?

I just wanted to follow up on your comment on R&D and I just wondered which particular areas you're focusing your R&D efforts on, obviously a big increase year-over-year.

Was it particularly in the low end or was it in some other areas like touch etc?

And then just secondly, strategically it sounds like you're shifting more towards an ODM strategy with the XPERIA.

And I just wondered whether you could give us a sense of whether the margins on products like the XPERIA would be as high as if you manufactured those devices yourself and whether we'll see more ODM based products coming through from you?

Thanks.

Your question is not clear.

Excuse me, sound is a little disturbed and we cannot hear clearly what you're saying.

Sorry.

My first question is just on R&D and what focused areas your R&D increase was focused on in the current quarter.

Was it in low end or was it in the high end, touch screen products?

And secondly it was just on outsourced manufacturing.

I think your XPERIA product is outsourced to HDC and I just wondered whether we'll see more ODM-based products from you going forwards and what the margins look like on those products?

Thank you.

Okay.

When you say R&D, sometimes it includes a large range of product development and engineering activity and also for some (inaudible) and R&D activities.

The definition of R&D is, sometimes it's different.

In our case R&D also covers the product engineering development activities.

And so, as we have [one idea of a] product application in the market such as music, such as imaging and such as like web capable and now with the smartphone plus, this mobile Windows based of XPERIA [all those] coming in.

And so R&D function in such a way that those required activity is (inaudible) improving in that area.

And as progress -- we are going to see this additional software engineer to be added and make more overall activities going to be meet our requirements.

But the trend is, as a platform, is an increase and also the new application always coming up, R&D requirements are going to be -- tendencies increasing.

But the question is whereas we have some opportunity and what is the return on the investment on this area?

And I think we have to be careful about where we put our resources for R&D and what [investment] we are making in this category.

So with that we are moving rather selectively and, based on the long term strategy or what Sony Ericsson's competency, and we're trying to make unique products.

I can add on the touch that we actually have had such capability for quite some time in the Symbian UIQ.

And we will actually, we have released two new contact touch phones that will reach the market now, also in Q2.

So we feel that we have a good capability from an R&D point of view on the touch technology, that [we also].

Thank you.

We'll take our next question today from [Jan Dworsky] from Handelsbanken.

Please go ahead.

Yes, good morning.

I just wanted to come back to the component shortage issue.

Is there any way you can quantify what shortfall that's left in terms of volumes and if you see that that is now out of the way going into the second quarter?

Well, I don't think we can give a specific figure of how we're short.

We're working very closely with the first suppliers.

But also now, our next quarter on, we're adding additional supplier and so that we are able to meet those requirements by the middle of third quarter.

I think we will be able to catch up with this.

But as we started a company originally and supply went well, but because of price situation and because of the sudden demand our market change -- (inaudible) market change.

And then right now we are (inaudible) our resources and those [resources] also coming into a (inaudible) second quarter to [July to] third quarter, beginning of third quarter and that we are hoping that the situation will be [delayed].

So in the second quarter you see a similar situation to the first quarter?

Yes, we are experiencing [delivery shortage].

Okay, then a second question if I may?

In terms of R&D, of course, when you alluded to why it's increased, should we see that the spending level in the first quarter is that a run rate that we would should see R&D at, or will there be further increases from that level?

Well, we currently are reviewing about project for second half, and also the first half of next year.

And we also see the effectiveness of each model and the competitiveness of each model with anticipated product developed by the competitions.

And in order to make most efficient effective way of introducing product to market is that based on these factors price, competitiveness is one, but appealing and also features and performance and styling.

And I tend to admit we have a very increased portfolio, particularly for Q4 last year through our entire '08.

And at the same time, however, because of market change, price decline, there is a certain competition showing up within Sony Ericsson's product range and which may not be necessarily a welcome sign.

So we are [living all the scenario] and more or less [rectifying] the entire portfolio of the company and make this a whole (inaudible) of (inaudible).

So when this happens, a certain model could be eliminated and so that we can use these resources to find what improvement other features and other (inaudible) area where (inaudible) are needed.

So that kind of strategies we were taking and our entire plan will be not probably shown until maybe another couple of months.

Okay, thank you.

Thank you.

Our next question today comes from Robert Sanders from Dresdner Kleinwort.

Please go ahead.

Yes, hi, thanks for taking my question.

I was just wondering if you could characterize Western European demand in a bit more detail by country?

If you could just tell us which were the key countries where you saw a double-digit decline, and which of the major European countries where you saw some growth, even in Q1?

Thanks a lot.

Well, as before we don't break down either than the geographical areas that we provide in the report.

So I can't give you that on a country data level.

Or maybe another way of asking it.

You said that you'd seen a shift to the lower price points in euro partly because of the lengthening of contracts, therefore a move more to the prepay element.

I was just wondering if you expected that to continue in the European market this year, if you see that trend continuing?

Thanks.

The trend that we see from Q1 we expect to continue to be the trend in the European market.

Okay, and then just a final question on your OpEx in 2008.

Do you have a guidance that you can just give us -- is 10% too much for your overall operating expenditure that we should factor in in 2008?

Thanks a lot.

Again also on the OpEx side we don't give any forward guidance.

Our ambition and our (inaudible) just like Komiyama [San] expressed, is of course to balance our cost structure and our OpEx structure with our revenue.

And, at the same time, as we also say, that we are broadening our lineup to address new segment and that require investments in R&D, also going forward in order to expand the portfolio into new relevant market areas.

Okay, thanks a lot.

Thank you.

We'd like to take a final question please before we close the call.

So one final question please.

Thank you sir.

Our final question today comes from Andrew Griffin from Merrill Lynch.

Please go ahead.

Hi, and thanks for taking my question.

I wondered if you could give any unit detail or revenue detail on your UIQ Symbian shipments both for Q4 and Q1?

I think this is an important, just as being a high ASP and a high margin area, and I just wondered what your smartphone outlook was?

We don't give specific volumes in the different segments of our portfolio, so I can't give you that kind of data.

We are very happy with the performance on our Symbian UIQ product.

P1 has been in the market for some time and we continue to see good momentum on the P1.

As I said, we have released two new compact touch phones, one with a 5 megapixel camera and one with a 3.2 megapixel camera, a very, very sleek touch user interface.

So we are happy on our internal expectations on the Symbian UIQ progression, but we can't give data or numbers or margins on specific operating systems.

Could you perhaps just give a relative growth in -- I'm just interested because some of the smartphone companies had a pretty good Q1.

One of your bigger competitors actually was pretty weak in smartphones in Q1, so relative to your sequential unit decline in Q1, can you say whether smartphones did relatively better or worse?

No, not really.

It's not a significant change in that part in our numbers in Q1 when it comes to the smartphone, the relations are very stable, relation smartphones and relation UIQ phones and others.

Okay, thank you very much.

Ladies and gentlemen, thank you for taking part in today's call and if you have any additional questions please refer them to the PR and Investor Relation teams, to Sony and Ericsson or the PR team at Sony Ericsson.

Thank you very much.

Ladies and gentlemen, thank you for participating in our call.

Once again, should you have any additional questions please call our PR and IR teams.