索尼 (SONY) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sony Corporation fiscal year 2008 third 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.

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

Please proceed sir.

Thank you very much for that introduction, Dan.

And thank you all for joining us today, January 29, 2009, for the discussion of Sony's third quarter results.

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

With me on the conference call tonight is Nobuyuki Oneda, Corporate Executive Officer, EVP and CFO of Sony Corporation, Robert Wiesenthal, Group Executive Corporate Development and M&A for Sony Corporation and EVP and CFO of Sony Corporation of America, and Gen Tsuchikawa, Senior General Manager of the Investor Relations division.

Thank you all very much for joining us.

In just a few moments we'll review today's announcement 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's 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 third quarter results and revised full year forecast last week, I will limit my remarks today to the details of the third quarter.

Third quarter consolidated sales decreased 25% year on year, to JPY2,154.6b.

On a local currency basis, sales decreased 9%.

An operating loss of JPY18b was recorded for the quarter.

Approximately half of the year over year deterioration of JPY254.2b or JPY127b was due to the appreciation of the yen.

Other factors causing the operating loss were JPY57.7b from lower contributions from equity affiliates such as Sony Ericsson and JPY33.2b from larger losses in the Financial Services segment as a result of the decline in the Japanese Stock Market.

Non-operating income decreased 15% to JPY84.4b.

Although net foreign exchange gains were significantly higher in the current year period, this was more than offset by a JPY81.0b benefit recorded in the prior year period as a result of the IPO for Sony Financial Holdings in Japan.

As a result, income before income taxes decreased 80% to JPY66.5b.

During the quarter, the Company recorded JPY66.4b of income taxes, resulting in an effective tax rate of 97%.

Because of the anticipated taxable loss position of the Company, deferred tax assets for foreign tax credits previously recorded were reversed, and tax credits available for research and development expenses were reduced.

Minority interest in loss of consolidated subsidiaries was JPY8.4b, compared with JPY0.1b loss in the same quarter of the previous fiscal year.

Minority interest in loss was recorded due to the loss of -- recording of the loss of Sony Life.

Take into account all these factors, net income decreased 95% to JPY10.4b.

I would now like to explain the results of each of the business segments.

First Electronics, sales in the Electronics segment decreased 29% year on year to JPY1,462.1b.

On a local currency basis, sales decreased 14%.

This decrease was primarily due to the negative impact of exchange rates and the impact of the global slowdown of the economy.

On a product category basis, Blu-ray players had an increase in sales due to increased unit sales.

But compact digital cameras and video cameras, which had a decrease in unit sales, and PCs, which were negatively impacted by a decline in prices, experienced a decline in sales.

An operating loss of JPY15.9b was recorded during the quarter compared to an operating profit of JPY200.6b in the same quarter of the previous fiscal year.

The year over year decrease in operating income was comprised of JPY94.2b from unfavorable exchange rates, JPY63.9b from decreased sales, JPY45.3b from the deterioration in net income of affiliated companies, primarily Sony Ericsson, JPY9.1b for the deterioration in the cost of sales ratio, resulting from price declines in LCD TVs and PCs, and JPY4b from an increase in SG&A.

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

Although unit sales increased, unfavorable exchange rates, price declines and other factors caused LCD TVs and PCs to record a decrease in operating income.

Compact digital cameras experienced a decrease in operating income as a result of price declines, unfavorable exchange rates, and a decrease in unit sales primarily in North America, due to a slowdown in market growth.

Sales for the TV category during the quarter decreased 27% year on year to JPY370b, and operating performance deteriorated JPY50b to a loss of JPY43b.

Unit sales for the quarter were 5m units, a 1m unit increase compared with the sale quarter of the previous year.

Regarding the establishment of a joint venture with Sharp for large sized LCD panels and LCD modules, faced with changes in the world economy, today Sony and Sharp amended and extended the non-binding MOI to confirm their mutual intent to postpone the targeted establishment of a joint venture until March 2010, approximately one year later than originally scheduled.

Sharp and Sony will, through continued discussion of how the two companies can best deploy their resources and expertise, continue to negotiate in good faith, and have set June 30, 2009 as the target date by which to enter into a definitive agreement to establish a joint venture that will be mutually beneficial for both companies.

Inventory in the Electronics segment at the end of December 2008 was JPY845.1b a decrease of 5% compared with the same time last year.

Although we adjusted production in nearly every product category, as a result of the downturn of the market from the middle of September, inventory at the end of December was higher than appropriate.

We believe that demand from the fourth quarter will be light, so we will continue to adjust production.

Sony Ericsson sales decreased 23% year on year, primarily due to reduced demand for products brought on by the global economic slowdown, and lower unit sales resulting from reduced availability of credit.

Loss before taxes of EUR256m was recorded compared to a EUR501m of profit in the same quarter of the previous year.

This is mainly due to a decrease in unit sales, lower sales of mid to high end phones, price pressure and the recording of restructuring charges.

Turning to the Game segment, sales in the Game segment decreased 32% year on year, an 18% decrease on a local currency basis.

Overall hardware sales decreased due to unfavorable exchange rates and the year on year decrease in unit sales.

PS3 unit sales were 4.46m for the quarter, less than in the same quarter of the prior year.

However, year to date approximately 8.5m units have been sold as compared with 6.9m units in the comparable period last year.

We remain on track to achieve our target of 10m units for the fiscal year.

PSP unit sales were 5.08m for the quarter.

Year to date, approximately 12m units have been sold as compared with approximately 10.5m units in the comparable period of the prior year.

In October, we had increased our fiscal year unit forecast by 1m units due to the strong sales experienced in the first half of the fiscal year.

However, since units did not grow as much as we expected in the third quarter, we have reverted back to our 15m unit forecast for the year.

PS2 unit sales were 2.52m or 2.88m units less than the same quarter of the prior year.

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

Network Services, the foundation of our network business is steadily expanding with 2.1m PlayStation network accounts registered in the month of December alone, and the worldwide cumulative total number of accounts exceeding 17m.

In the second quarter we launched the video download service, and Life with PlayStation.

In December we launched the Network Community PlayStation Home, which enables PS3 users to share game experiences and enjoy communication with each other.

The Community has gotten off to a smooth start with the number of participating users reaching 3.4m in the one month since launch.

Operating income in the Game segment decreased due to unfavorable exchange rates and a decrease in sales in the PS2 and PSP businesses.

However, due to steady reductions in the cost of PS3 hardware, we were able to remain profitable.

Inventory in the Game segment at the end of December 2008 was JPY198.5b, an increase of 8% year on year.

Turning next to the Pictures segment, sales decreased 22% year on year despite the strong theatrical performances of Quantum of Solace, sales decreased because of the strong worldwide performance of the home entertainment release of Spider-Man 3 in the same quarter as the previous year.

Operating income decreased 8% to JPY12.9b.

However, on a US dollar basis, operating income increased 6%.

The increase in operating income on a US dollar basis was primarily due to the significant contribution of Quantum of Solace.

Next the Financial Services segment.

Revenue decreased 24% 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 33% to JPY72.8b, due to the increase in net losses from investments in the separate account and increased impairment losses on equity securities in the general account, resulting from a decline in the Japanese Stock Market during the current quarter that surpassed the decline in the same quarter in the previous fiscal year.

An operating loss of JPY37.4b was recorded, a deterioration of JPY33.2b year on year, primarily due to an increase in losses at Sony Life.

Although insurance premium revenue increased, Sony Life recorded a JPY37.7b operating loss, a deterioration of JPY31.8b year over year, mainly due to the recording of policy reserves in the separate account and an increase of impairment losses on equity securities in the general account, resulting from the significant decline in the Japanese Stock Market.

All Other.

Sales in All Other increased 107% year on year.

This increase was primarily due to the impact of Sony consolidating 100% of Sony BMG as of October 1, 2008.

As of January 1, 2009 Sony BMG's name has been changed to Sony Music Entertainment.

Sales at Sony Music for the current quarter decreased 22% year on year.

The decrease was mainly due to the continuing decline in the worldwide physical music market and unfavorable exchange rates.

Excluding, the impact of the consolidation of Sony Music, sales of All Other decreased year on year.

Although sales at So-Net Entertainment Corporation increased through the higher fee revenue from broadband connection services, sales at Sony Music Entertainment Japan decreased due to a decrease in album sales.

Operating income increased 10% year on year, primarily due to the consolidation of Sony Music.

In last year's third quarter, equity in net income of Sony BMG was included in the operating income of All Other.

Excluding, the impact of the consolidation of Sony Music, operating income of All Other decreased year on year, primarily due to a decrease in trademark royalty income from Sony Ericsson.

This concludes my review of the third quarter results, and with that we'll be pleased to take your questions.

(Operator Instructions).

Your first question comes from the line of Daniel Ernst from Hudson Square Research, please proceed sir.

Yes.

Good morning and evening.

Thanks for taking my call.

Two questions if I might.

First on the Game segment operating income.

Can you just tell us what the inventory charge accrual reversal was in the quarter?

And then secondly, looking at -- for the revised guidance for the fiscal year implies rather unprecedented operating loss in the fourth quarter, which as I recall from your pre-announcement call last week, you suggested did not factor any sort of product write-down.

But I wonder if you could just sort of walk us through that math, particularly on the Electronics.

What kind of operating margin you are assuming for the Electronics division in the fourth quarter?

Thanks.

Hi this is [Nobuyuki]; I will answer your questions.

Your first question that the Game inventory write-down or write-up or reversal is, -- how much is included in the third quarter, about 180 (inaudible) or JPY18b is included in the third quarter.

So, still the cost is still higher than the market price.

We still have to have the inventory write-down or the reversal.

And your second question is the new -- the quarter four.

Yes, that we may have more than JPY300b loss.

That is primarily because of the sales, the reduction compared to last year and compared to the October forecast.

That is the biggest deal of the drastic decline in the third quarter -- fourth quarter.

And on top of that, we have to incur some of the restructuring expenses, and also we have to incur some of the appliance adjustment to sell the new models, which will be sold starting from next fiscal year.

And also the -- mainly for those reasons, we may have the big loss in the fourth quarter.

Okay.

Thank you.

Heavy write-down of the inventory.

But actually we -- it's the same impact, but we have to produce the finished goods inventory.

Your next question comes from the line of Jessica Reif Cohen from Bank of America, please proceed.

Thank you.

Its Bank of America, Merrill Lynch.

I have a couple of questions, first of all on DVD trends, can you just discuss what you are seeing in terms of new releases in catalogues?

What percent now of titles or Blu-ray sales?

And have you made changes to your [Ultimate's] given what's going on in the market currently?

Hey Jess its Rob calling.

In terms of the trends on the video side, there was a drop in new release spending that was really driven by the product flow.

If you take a look at our box office for the new Sony Pictures, home entertainment titles, they were down for the specific period.

So that's consistent with what we saw in the market.

But adjusting for the actual box office of the films we are pretty much on track.

On catalogue we maintain our market share.

We are number two in the market.

There was a decline, I would say about 6.7%, as compared with the prior year.

I think what we are seeing is that retail there is still a lot of impulse purchase of DVD and CDs with less traffic in the stores.

There is less impulse purchase, so we are starting to feel the impact of that.

In terms of the Blu-ray side it's a very good story.

In 2008 we've sold over four times the amount of Blu-ray than we did in 2007.

There are 1,100 titles now available.

And there are now about, a little bit under 6m Blu-ray capable players.

And there are a lot of strong titles like Dark Knight and Iron Man and obviously Hancock from Sony.

So there is definitely a lot of momentum there.

And I would say on the pricing side there's still strong differentiation obviously between the Blu-Ray titles and standard titles.

However, there was some heavy discounting that happened in Christmas.

In terms of the ultimate we are taking into account our ultimates, what we're seeing in home video, but we're also putting into our ultimates some pickup on the digital side, which is starting to get some momentum.

And then just to move on to music.

There seems to be no end to the physical decline.

Can you discuss your outlook for when you see the crossover, or what your view is of the crossover when digital is enough to offset the physical decline?

Can you discuss your release schedules and also the potential for further restructuring?

Well, I think the restructuring has been ongoing this year for us at Sony Music.

Largely this is the completion of the merger between Sony BMG and Sony Corporation.

There was a lot of stuff that we couldn't do in a joint venture context that we can do now.

The good news is there are lots of relationships intra Sony between Sony Music, Playstation and Electronics, that you really couldn't do in a joint venture context that we now can finally exploit.

So, I think over the next year you're going to start seeing pickup from that.

But, yes, it was a difficult quarter for the industry again, not unlike we saw on the DVD side, less traffic to stores, more pressure on consumer spending.

I think the big level concern on the digital side was the fact that digital growth did slow a bit.

However, it's still a big part of the growth and I think that right now for the next year we don't see it making up the difference in the physical business.

In terms of the release slate, just this week we have the new Springsteen album, Franz Ferdinand, and coming on the frame, Leanna Lewis, and then in March we have the new Kelly Clarkson album that we're very excited about.

So, there's a pretty strong level of new releases that we're excited about.

But, it is tough slogging out there.

I think the good news is versus our competition we do not have to deal with the vagaries of the capital markets.

We do not have to deal with issues of private equity or high yield debt on our specific music company.

So, our music company's really free to focus on the operations of the Company and that allows us -- gives us a very strong advantage versus our peers out there and beyond that I think what I said before that the fact that we're now holding on we can make decisions much faster.

So, we're pretty optimistic for our potential over the coming year.

Can I have just one more question on -- one more topic, the film division.

Can you discuss what, if any, opportunities you have in terms of film financing?

And then just a really basic question, how many films do you expect to release in calendar '09 versus calendar '08?

Along with that can you discuss any changes that you're seeing in post production costs and marketing costs?

Sure.

I think the film -- in terms of the number of films, this year we've about 21 films, excluding classics, for this coming year, and we should be around that.

So, you always see us kind of 20 to 24 range, the general sum.

Obviously, things slip in and slip out of release schedules.

And -- Jessica, what was the other part of your question?

I'm sorry?

As part of the number of films --

Film financing.

What I would say is that film financing that's in place right now seems to be secure.

And, obviously, we finance pretty much half the negative costs, half of our slate going forward for the next couple of years.

In terms of new film financing that market is pretty much shut down.

We haven't seen anything of real consequence that I think has any, at least I don't believe, has a real strong chance of getting executed in the current market.

Obviously, a lot of the credit markets are shut down.

I think the good news is most of our deals were done in a previous environment and we have visibility over the next couple of years with our in place film financing that we can really reduce the risk in terms of the volatility of our slate.

Because, as I said, half of it is covered and financed, which does reduce the volatility of the current film production.

And in terms of the stuff in place we don't see, at least in our minds, any risk in that not continuing.

But, again, new stuff, I'm not seeing it, Jessica.

This is Nik Oneda.

Adding to the comments from Rob for the number two items, the music industries.

The physical package media has been decreased about 20% worldwide basis compared to the last year and this now is 30% increase compared to the last year.

But, overall, declined by 14%.

But, as you know, the dollar and the cents wise we still based our market is one fifth or one sixth of the total market.

So, therefore, overall you see the sales volume-wise is down by 14%/15%.

Thank you.

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

Please proceed.

Thank you very much.

I'm just curious if you had any color on the inventory, if you could talk about what percent of that is finished goods?

And then maybe a much broader question in terms of the overall manufacturing base.

But, can you maybe put any detail around what sort of percent of either units or sales are produced internally, what internal manufacturing versus what's outsourced today?

And where given the new plan that might go in the future?

Thanks.

The inventory, the breakdown of the finished goods and the other materials, I will give you the information soon.

But, overall, the inventory level itself is slightly, I would say, relatively heavy compared to the average level.

And we are trying to adjust the production quantity and also we adjust the price to reduce our inventory before we start the new models starting from April or May period.

And what percentage -- what category is heavy inventory, we don't disclose that so much detail but, roughly speaking, TV is a little bit heavier and also DI is also heavier because of the quantity we expected in third quarter was not good as we expected.

For example, TV was about 900,000 units.

That's not what we expected and the data imaging itself is also 1.7m or 1.8m units less than what we expected.

What Nik just described is more about the digital cameras.

More about cameras, less about camcorders.

Okay.

And maybe just a follow up to the inventory question.

What would you consider is the appropriate level that you would like to carry in the business?

Depending upon the product line, but if we see the future ourselves focused maybe two months to five months is probably the appropriate level of inventory.

We don't disclose the month of supply type information compared to the future focus.

So, we usually disclose the inventory level based upon the past three months average sales.

But, realistically, we always evaluate the inventory level based upon our future sales level.

In terms of this quarter, the inventory level is a little higher than we expected, (inaudible) net sales than we expected within the third quarter.

Okay.

And any idea looking at your internal production versus external what the breakdown might be, either on a units or a sales basis?

No, we don't disclose the breakdown over each product category.

Maybe for Sony as a whole?

No.

It's actually depending upon the product, the category, it's completely different.

For example, the game business, most of the production is made by China and in the case of semiconductor most of the product is made in Japan side.

It depends upon the category, it makes a big difference between, I mean, among the product lines.

But, to summarize what percentage wise --

What about if you looked at your gross margin, your COGs, what percentage of that might be fixed cost versus variable?

This is also not so much disclosed but, roughly speaking, around 30% is to be considered the contribution margin.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Arvind Bhatiafrom Sterne Agee.

Please proceed.

Thank you very much.

I was wondering if you could tell us your expectations for next fiscal year in respect to your PS3 hardware and software unit sales, both in the US and the European territories?

I'm sorry we cannot disclose these numbers until we will finish next year's budget which is towards the end of March.

But, our expectation is that this fiscal year, we told the outside industry, that this year is the year that we will strengthen our software area and also the network area.

So, therefore, we don't have the very aggressive sales numbers within this fiscal year.

But, next year we will probably increase the quantity for PS3 more than this year.

And do you think the biggest gain in the next fiscal year will be in the US market, the European market, just directionally?

Where do you think you'll get the most gains?

The next year, I am sorry I shouldn't make any guess, but Europe and the US market size wise is very close to each other.

Last question, Nik.

I'm not sure if you talked about this, but can you shed some light on what some of the big first party game titles might be coming out, we should expect in the next calendar year, from Sony?

Killzone, is the most recent one.

We're expecting a pretty strong impact of Killzone.

And Demonsouls (inaudible).

So, there are basically two big ones, one is the Killzone, the other is the Demonsouls.

Those are the two big ones that we are expecting to be sold well.

And after that, as you know, is Infamous and God of War 3, are the big potential titles for this year.

Okay.

Is there anything that's not -- that's in the pipeline that you have not talked about?

Something that might be big but hasn't been discussed yet?

Well, I think that the introduction of those titles will come out separately from Sony Computer Entertainment, but I think the overall feeling the Sony Computer Entertainment software team is having is that we've established a base to continuously publish our own internal games on a pretty continuous basis, and that's something I think we're pretty proud about.

Okay.

Great.

Thank you guys.

At this time there are no further questions in queue.

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

Samuel Levenson for closing remarks.

We appreciate everyone's attendance tonight and your interest in Sony.

Please feel free to call the investor relations offices in Tokyo, New York or London.

Our phone numbers are in the press release and we look forward to speaking with you.

Thanks so much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.