索尼 (SONY) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sony Corporation fiscal year 2008 second quarter earnings announcement.

My name is Dan and I'll be your coordinator for today.

At this time, all participants are in listen-only mode.

We will conduct a question and answer session towards the end of this conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's call, Mr.

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

Please proceed, sir.

Thank you very much for that introduction, Dan.

Thank you all for joining us today, October 29, 2008, for the discussion of Sony's results for the quarter ended September 30, 2008.

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

And I'm joined here this evening in Tokyo by Nobuyuki Oneda, Corporate Executive Officer, EVP and CFO of Sony Corporation, by Robert Wiesenthal, Group Executive Corporate Development and M&A for Sony Corporation and EVP and CFO of Sony Corporation of America, and by Gen Tsuchikawa, Senior General Manager of the Investor Relations division.

In just a few minutes, I'm going to give a brief summary of today's announcement and then we'll 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 assumptions in light of the information currently available to it and therefore you should not place undue reliance on them.

Sony cautions you that a number of important factors could cause actual results to differ materially from those discussed in the forward-looking statements.

For additional information as to risks and uncertainties, as well as other factors that could cause actual results to differ, please refer to today's press release which can be accessed by visiting www.sony.net/ir.

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

As we released preliminary second quarter results and our revised full year forecast last week, I will limit my remarks today to the details of the second quarter.

Second quarter consolidated sales decreased 0.5% year on year, to JPY2,072.3b.

But on a local currency basis, sales increased 5%.

Operating income decreased by 90% year on year, to JPY11b.

The impact of the decline in the Japanese stock market on the Financial Services segment expanded from approximately JPY9b in the same quarter of the previous year to approximately JPY50b this year, a more than JPY40b downward impact on operating income year on year.

In addition, a gain of JPY60.7b on the sale of a portion of the former headquarters site was recorded in last year's operating income.

If we were to exclude the impact of these two factors, operating income would have been unchanged year on year.

Non-operating income deteriorated by JPY1.2b year on year, to negative JPY3.7b.

This deterioration was mainly due to the recording of foreign exchange losses during the current quarter compared with foreign exchange gains in the same quarter of the previous year.

As a result, income before income taxes decreased to JPY7.3b.

During the quarter, the Company recorded an income tax benefit of JPY8.9b.

The benefit resulted from the utilization of tax credits and a reversal of tax reserves principally due to the favorable outcome of tax audits and litigation at certain Sony subsidiaries outside of Japan.

Minority interest in loss of consolidated subsidiaries was JPY4.6b, compared with JPY0.5b in income in the same quarter of the previous fiscal year.

Minority interest in loss was recorded during the quarter primarily due to the recording of a loss at Sony Life.

Sony Life is a consolidated subsidiary of Sony Financial Holdings in which Sony's ownership decreased from 100% to 60% as a result of the global IPO of SFH in October 2007.

Taking all these into account, net income was JPY20.8b for the quarter.

I'd now like to cover the results of each of the business segments, starting with Electronics.

Sales in the Electronics segment decreased by 1% due to the negative impact of the appreciation of the yen against the US dollar.

On a local currency basis, sales increased by 5%.

Sales to outside customers increased by 2% year on year.

On a local currency basis, sales increased 8%.

On a product category basis, sales of BRAVIA LCD TVs, which saw increased unit sales in all regions, VAIO PCs, which saw increased sales outside of Japan, and Alpha digital SLR cameras, which had an expanded lineup and higher market share, all increased.

Operating income in Electronics decreased by 41% year on year, primarily due to a deterioration of the cost of sales ratio as a result of a decline in unit selling prices and a decrease in equity and net income for Sony Ericsson.

Excluding equity in net income of affiliated companies, operating income decreased by 30%.

The largest profit-generating product categories were, in order of magnitude, System LSI, video cameras, imaging sensors, broadcast and professional equipment and compact digital still cameras.

I'll now discuss the change on operating income on a product category basis.

The categories which had the largest decrease in profit were compact digital still cameras, PCs and video cameras.

Compact digital still cameras had a decrease in profit due to decreased unit sales resulting from a slowdown in market growth in North America and Europe, and due to price declines.

PCs had a decrease in profit due to intensification of competition and a shift towards lower priced products.

Video cameras had a decrease in profit due to decreased sales in all regions, due to contraction of the market.

On the other hand, profit increased from LCD TVs, which had a significant increase in unit sales, and from imaging sensors, which saw an increase in sales of CMOS sensors and an improvement in operations.

Sales for the TV category during the quarter increased by 19% year on year, to JPY365b, and operating performance improved by JPY13b to a loss of JPY9b.

Inventory at the end of September was JPY1,086.5b, an increase of 8% compared to the same time last year.

The end of this quarter is the one during which we hold inventory in advance of the year end holiday selling season.

But since the market environment has deteriorated rapidly, the level of inventory is a little high.

The days-to-sales ratio is higher than in the past.

Turning to Sony Ericsson.

Sony Ericsson sales decreased by 10% year on year, due to the impact of exchange rate fluctuations and a shift of the product mix to lower priced phones.

Loss before income taxes of EUR13m was recorded, a significant deterioration year on year, mainly due to continued pricing pressure at a time of adverse cost trends and a continuingly difficult competitive environment, particularly in Europe, which more than offset the contribution of new products introduced at the end of the previous quarter.

Turning to the Game segment.

Sales in the Game segment increased by 10%, or 15% on a local currency basis.

Approximately 80% of sales came from hardware and accessories and the rest came from software.

Looking at hardware, overall hardware sales increased due to a year-on-year increase in PS3 and PSP unit sales.

Sales of PS2 decreased, but the business continues to be strong in the Middle East and Asia.

PS3 unit sales were 2.43m for the quarter, or 1.9 times the amount of the same quarter of the prior year.

We are on track for our goal of selling 10m units for the year.

Since the start of the second half, sales of the 80 gigabyte model got off to a good start in Europe and North America, ahead of the launch in Japan.

As we approach the year end holiday selling season, we will expand our business to an ever wider user base through continued efforts to strengthen our game software lineup and an expansion of non-game content and network services.

PSP unit sales increased by 23% year on year, to 3.18m units.

The strong sales seen in the first half of the fiscal year continue.

And as we described on October 23, we have revised our unit sales forecast upward for the year to 16m units.

The new PSP model, with its improved display, has gotten off to a great start.

And we're working to expand penetration of the console even further, with continued marketing efforts tailored to each market.

Overall software sales decreased due to a significant decrease in PS2 software sales, although sales of PS3 and PSP software increased.

Looking at network services, in mid-September we began the Life with PlayStation online service for PS3.

And in mid-October we began a content download service that can be accessed directly from PSP.

With the number of registered accounts on the PlayStation network increasing rapidly to now over 13m, of which 5m were added in the last six months, our business is expanding smoothly.

Moreover, the video download service we began in July in the US has been well received by our customers and the business is growing smoothly.

Operating loss in the Game segment was JPY39.5b, an improvement of JPY57.2b year on year.

This improvement was mainly due to a significant improvement in the operating performance of the PS3 business as a result of PS3 hardware cost reductions and increased sales of PS3 software, as well as strong sales of PSP hardware.

Although profit from PS2 business decreased year on year, it continues to contribute to profit of the segment.

Inventory in the Game segment at the end of September was JPY243.2b, a decrease of 2% year on year.

Compared with the level as of June 30, inventory increased by 53% to JPY83.7b due to an increase in inventory of PS3 and PSP in advance of the year end holiday selling season.

Turning next to the Pictures segment.

Sales increased by 3% year on year.

The increase was due to higher motion picture revenues, primarily from the strong worldwide theatrical performance of Hancock.

We're looking forward to the upcoming opening of the new James Bond film, Quantum of Solace.

Operating income increased 200% to JPY11b.

Operating income benefited from the higher motion picture revenue I've just mentioned, as well as higher equity income from the sale of a European cable TV channel by an equity affiliate.

Looking at Financial Services.

Revenue decreased by 36% due to a decrease in revenue at Sony Life.

Although insurance premium revenue increased due to an increase in insurance in force, revenue at Sony Life decreased by 42% to JPY72.8b, due to increased net valuation losses from convertible bonds and impairment losses on equity securities in the general account, and net losses from investments in a separate account brought on by the significant decline in the Japanese stock market.

Although an increase in insurance premium revenue contributed positively to results, a JPY25.5b operating loss was recorded at Sony Life, primarily due to an approximately JPY50b negative impact from devaluation losses and impairments on equity securities.

Although Sony Life recorded an operating loss for the quarter under US GAAP, as was announced today by Sony Financial Holdings in their consolidated results summary, under Japanese GAAP, which Sony Life complies with, the entity was profitable.

The full results of Sony Financial Holdings, containing Sony Life, are scheduled to be announced in November.

Please be aware that those results will differ -- will be different due to the different accounting standards.

The All Other segment sales decreased by 5% year on year.

Although sales at So-net Entertainment Corporation increased due to higher fee revenue from broadband connection services, especially fiber optic, overall segment sales decreased due to a decrease in sales at Sony Music Entertainment Japan.

Operating income decreased by 67% year on year, primarily due to decreased sales at Sony Music Entertainment Japan and a deterioration in equity in net income for Sony BMG.

Last, looking at Sony BMG, sales at Sony BMG decreased by 10% year on year, primarily due to the timing of new releases, combined with the continued decline in the worldwide physical music market not being offset by growth in digital product sales.

Sony BMG recorded a loss before income taxes of $45m for the quarter, compared to income before income taxes of $8m in the same quarter last year.

The loss for the period reflects the impact of the lower revenue, as well as a year-on-year increase in restructuring costs.

On October 1, Sony completed the previously announced acquisition of Bertelsmann AG's 50% stake in Sony BMG.

The new company, which will eventually be called Sony Music Entertainment, became a wholly owned subsidiary of Sony on that date as a result.

With that, we would now be pleased to take your questions.

(Operator Instructions).

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

Please proceed.

Thanks.

I've got three questions, the first on LCD televisions.

Could you talk about your -- in a little more detail talk about the inventory situation for LCD televisions, both internally and in the channel, if you have any separate detail for both of those, and then specifically how you've adjusted your orders for new panels?

Second question would be on the Japanese call you discussed some changes in your expectation for VAIO profitability because of competition in some of the mini-PCs and netbooks out there.

Could you give some more detail on the outlook for profitability for VAIO going forward?

And then third, for Rob, could you discuss your expectations for Quantum of Solace and how the early tracking looks there?

Okay.

The inventory level as of end of September for television is slightly higher than we expected, quantity wise, probably 200,000 to 300,000 pieces.

Because of our second quarter forecast was higher than the actual result, so therefore this is one of the reasons why that we have somewhat the increased inventory.

The other factor is we also strategically decided to buy the panel, particularly for the small inch size, because we had the very big shortage problem last year.

That -- because of the recent supply -- has enough supply for the panels, we have a little bit excess inventory.

That, I understand, is probably $300m, $400m because of this.

But we are sure that we can adjust this inventory towards end of this fiscal year.

So, therefore, the overall finished goods inventory is slightly higher, but not so the significant level of the [problem].

Number two question, VAIO profitability.

Last year, we had a very fortunate season because the PC market was not so much low-end oriented, second-tier products.

So we could relatively enjoy the mid-range to the high-end models.

But as you know, recently the PC pricing is pretty much deteriorating, particularly because of the more quantity from the entry models.

So, therefore, even though that we could enjoy 7%, 8% of the profitability of last year, I don't think that we could continue that high level of the profitability this year.

Year before, we only recorded 2%, 3%.

So I think this level of the profitability would be the reasonable level for coming several month period.

With respect to James Bond, Quantum of Solace, the premiere is tonight in London.

The tracking has been very, very strong.

Obviously, the expectation has been very high for this film.

And we're happy to say that the reviews that have come out so far, both abroad and in the United States, have been strong, and so we're quite excited about it.

Our most important film this fall.

Thank you.

Your next question comes from the line of Dan Ernst from Hudson Square.

Please proceed.

Yes.

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

Thanks for taking my call.

A few questions, if I might.

First, on the call in Tokyo today you discussed the potential impact if you close the fiscal year today at today's exchange rates against the euro.

And the same thing with the [CapEx], where it is today, what that would do to the current operating income guidance if those levels were persistent through the end of the fiscal year.

And then, secondly, do you have an updated view of fiscal year end profitability or breakeven for TVs and the Game division?

Thanks.

Okay.

To answer your first question, the potential foreign exchange impact if we use today's market rate, that is the 90 -- $1 equal to JPY97, JPY98, and the euro is around JPY125, the overall impact of the foreign exchange would be around 900 compared to what we announced today.

However, we have the forward hedging or the option deals we have, so that we could recover about 300 oku yen.

So, therefore, the net impact to our net income before tax number would be around 600 oku yen impact.

So the hedging, the benefit is not recorded into our operating profit line, but rather non-operating line.

So, therefore, impact to the operating income is negative 900, but the non-operating income is 300.

So, therefore, the net impact is 600 if we mathematically calculated the foreign exchange impact.

And the TV and the Game profitability.

As of this moment, the TV profitability of this fiscal year would be a loss operation.

One of the big reasons is the foreign exchange situation.

And also, the second is the price deterioration in the various markets.

US and Europe is the most affected.

And also, the third one is, because of the recent economic environment, the overall quantity which we projected has to be adjusted downward by 1m.

Our original forecast was 17m and now we are projecting 16m.

That is the update of the TV.

And the Game business itself, we have the more than 300m foreign exchange impact based upon the foreign exchange assumption of $1 equal to JPY100 and EUR1 is equal to JPY140.

Our bottom number would be negative 300 oku yen or plus because of the foreign exchange impact.

However, the operation wise, we are probably on schedule, or in other words the as-budgeted basis.

So, if we take a look at the foreign exchange impact, our Game business is probably black number.

But if we take the same foreign exchange assumptions, which used the JPY125, then the difference between our latest forecast of JPY140 versus JPY125, which is the JPY15 difference, probably the JPY1 impact towards the Game business is probably 20 oku yen annual basis.

So, probably another 150 oku yen could be affected.

Understood.

And then just a follow-up on the call also this evening or this morning in Tokyo, you mentioned that the deterioration in sales happened in the latter part of the quarter or the latter part of September.

Do you have any view as to whether that same velocity of deceleration continued in October so far or has it stabilized?

Has that fall-off in sales volume stabilized?

I think that there will be some deterioration for coming months.

As I said, at television we reduced the quantity, let's say, over 1m units, even though the -- up to now we are behind about 300,000 pieces.

So, in other words, the balance of the 700,000 units could be the second half impact.

And the same thing for the digital camera.

Our original forecast was the -- the July forecast was -- the quantity was 26m.

Now that we reduced to 24m and most of the quantity deterioration is coming from second half.

So, we [priced in some of] the impact towards the coming months.

Understood.

Thank you.

Your next question comes from the line of Jason Mauricio from Arete.

Please proceed.

Yes.

Hi.

Thanks.

Quick question on the Game business.

Were there any charges for writing down the difference between the sales and the cost of goods this quarter?

And if there were, can you disclose what that is?

And also, can you potentially quantify or qualify the cost reductions that you've seen year over year in the PlayStation 3 and maybe specifically talk about BluRay costs and where those are tracking?

And then I've got a final question on the Financial Services business.

Is there an issue -- obviously you're mark-to-marketing the asset portfolio now.

Is there a certain amount of assets you have to keep at book value in order to insure against your deposits?

Thanks.

To answer your first question, the PS3 write down -- write back in second quarter, every quarter we divide the write ups and write downs.

So this second quarter, net impact is a positive impact.

In other words, even though we have to set up the new reserves based upon the new quantity and new cost of sales ratio, but at the same time we will revise the previous quarter reserves.

So second quarter is a positive impact as far as the write down, write back, the amount.

And the balance of the write down reserves is over 450 oku yen, so toward the --

Let me just give the exact amount.

The amount that was booked as of the end of second quarter is 433 oku yen, and it's a 21 oku yen [reimburse].

So I think towards the end of the fiscal year we still have some -- the write up or write down reserves, because we are still projecting that the cost is still higher than the price.

So that is the Q2 and toward the end of this fiscal year.

But the cost itself is steadily improving.

However, the cost of sales ratio is slightly behind because of the recent price -- the currency deterioration, particularly for the euro against the yen.

So that is the main reason.

So the cost itself is improving, but the price deterioration because of the currency reasons, we have to still write down the inventories.

Okay.

Maybe just a quick follow-up.

You have said emphatically that you would not cut the price of the PlayStation 3 this year.

But is there a possibility you'll cut the price of the PlayStation 2 at some point in the next six months?

As far as the price strategy concerns, we cannot say anything about the future pricing.

But this assumption of the write up, write down for the PS3 is assuming that the price is not changed towards end of this fiscal year.

Okay.

Thanks.

(Operator Instructions).

Your next question comes from the line of Ben Lu from Seligman.

Please proceed, sir.

Hi.

Thank you for taking my questions.

I have two questions.

On the local call you specifically said, I think, that you had renegotiated the S-LCD contract.

Without giving us obviously contractual details, can you give us a little bit of granularity in terms of whether the renegotiating were centered on volume, pricing or currency?

My second question is when I look at your balance sheet, excluding Financial Services, your cash as of the September quarter was JPY535b, short-term debt is about JPY435b and your CapEx is estimated for the full year at JPY430b.

Can you talk about whether you still have the financial wherewithal to invest another JPY100b by April into Sharp's (inaudible) JV or do you have any plans as part of your restructuring to renegotiate the [contract if the] currency exchange rate is more favorable for the won than the yen?

Okay.

The JV negotiation is still going on with Sharp and at this moment I cannot say any progress of the negotiation.

So, please allow me to say no comment at this stage.

In terms of the cash availability for this investment, as of this moment, unless there is the drastic downside market trend, I think we don't have to raise big money because of this transaction.

Hopefully, that we could handle within our cash-on-hand basis.

Just to clarify, you are in the process of renegotiating S-LCD?

No, no, no.

This has nothing to do with S-LCD.

We have an ongoing relationship with Samsung we call S-LCD, which is unchanged.

Okay.

Because I think I was under the impression on the local call you made some comments in respect of renegotiating the S-LCD contract, giving them more favorable won exchange rates.

No.

That is not correct.

Okay.

And then I think last week Oneda San had alluded to possibly -- possibility of delaying investment in Sakai.

Can you elaborate on that?

Sorry, delaying investment in what?

In Sharp's Sakai 10G fab.

No.

As I said, I cannot say any specific comments on this issue because we are negotiating with Sharp for the deal.

Okay.

Great.

Thank you so much, then.

At this time, you have no further questions in queue.

I would now like to turn the call back over to Mr.

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

Well, with that, we'd like to conclude today's conference call and remind everyone that the contact numbers for the IR offices in Tokyo, New York and London are available on the earnings release and on our website.

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

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.