索尼 (SONY) 2010 Q1 法說會逐字稿

Good day and welcome to the Sony Corporation's consolidated financial results for the first quarter ended June 30, 2010, conference call.

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

We will facilitate a question-and-answer session towards the end of the conference.

(OPERATOR INSTRUCTIONS.)

I will now turn the call over to your host for today, Mr.

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

Please proceed.

Thank you very much for that introduction, Nikita.

Thank you all for joining us today, July 29, 2010, for the discussion of Sony's first quarter results.

I am Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America, and with me on the conference call tonight is Mark Kato, CFO, 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 will 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.

Let me remind you that a webcast replay of the investor meeting, along with the slides presented at that meeting and our detailed earnings release, are available on our website for your access.

The operating results that we achieved in the first quarter were well ahead of our internal expectations.

Sales rose 4% year over year, despite the significant negative impact of exchange rates.

We recorded an operating profit of JPY67 billion for the quarter, as compared with an operating loss in the prior year period of nearly JPY26 billion.

Net income attributable to Sony's shareholders was JPY25.7 billion for the quarter compared with a net loss of JPY37.1 billion in the same quarter of the previous fiscal year.

The Consumer, Professional, and Devices segment and the Network Products and Services segment each contributed significantly to the improved results, and the TV, Game, and Sony Ericsson businesses all recorded a profit for the quarter.

In fact, despite the negative impact of foreign exchange rates, all of our reportable segments achieved improved operating results year over year, with the exception of the Financial Services segment, which was impacted by a declining Japanese stock market.

Now let's look at the results of each segment.

Sales in the Consumer Products, Professional, and Devices segment increased primarily due to an increase in unit sales of LCD TVs.

The primary factors causing the improvement year over year, on the positive side, about JPY31 billion improvement in the cost of sales ratio, about JPY25 billion increase in gross profit from increased sales, and about JPY20 billion decrease in restructuring charges.

Negative factors were a JPY21 billion increase in SG&A and about a JPY7 billion negative impact from exchange rates.

Excluding the impact of restructuring charges, the product categories with improved results included semiconductors, which benefited from higher sales of image sensors, and televisions, which had higher sales.

Let's take a moment to talk about the TV business.

Sales increased 23% to JPY292 billion, primarily due to a 60% increase in LCD TV unit sales year on year to 5.1 million units.

Excluding restructuring charges, JPY3 billion in operating income was reported, an improvement of JPY11 billion year over year.

This was due to the increase in unit sales, reductions in materials and other costs, and the benefit of restructuring, although prices declined.

In other major electronics categories, both compact digital cameras and video cameras achieved higher profits in the current year period versus the prior year.

Turning to the Network Products and Services segment, sales rose due to increased sales in the PC and game business, and operating results improved significantly year on year.

Again, the primary factors causing the change on the positive side, about JPY31 billion improvement in cost of sales and about a JPY16 billion increase in gross profit from increased sales.

On the negative side, approximately JPY8 billion negative impact from exchange rates and about a JPY7 billion increase in SG&A.

Excluding the impact of restructuring charges, the categories with improved results included game, which benefited from improved cost of the PS3, and PCs, which had higher sales.

Looking for a moment at a little more detail on the game business, sales rose 28% year on year, primarily due to a significant increase in unit sales of PS3 hardware and software.

Operating results improved JPY34.5 billion year on year to a JPY0.5 billion profit.

This significant improvement resulted from the reduction in the cost of PS3 hardware and an increase in unit sales of PS3 software, despite the negative impact of exchange rates.

The game business has now recorded a profit for three consecutive quarters.

PS3 hardware sales units reached 2.4 million in the quarter, as strong sales in the introduction of hit software titles expanded the penetration of the console.

We are on track to reach our target of 15 million units for the year.

PC sales increased due to a significant increase in unit sales, and operating results improved primarily due to the unit sales increase, although prices declined.

Turning briefly to the picture segment, we recorded a decrease in sales and a 58% increase in profit.

Karate Kid was the hit for the quarter; however, theatrical revenues declined because in the prior year period, it benefited from the strength of Angels and Demons and Terminator Salvation.

Several television revenues increased in the quarter due to higher advertising and subscription revenues from several channels outside the US.

Operating income increased due to the decrease in marketing expenses, reflecting fewer major theatrical releases and the higher TV advertising and subscription revenues.

In the music segment, sales increased 1% and profit increased 39%.

We continue to see a contraction in the physical music market; however, sales increased due to strong sales of a number of key releases, including AC/DC's soundtrack to Iron Man II and music from the hit US TV show, Glee.

Profit increased due to the contribution from the hit releases and a decrease in marketing and overhead costs.

Finally, Financial Services recorded a decrease in revenue of 26% and a decrease in profit of 38%, driven primarily to a deterioration in net gains and losses from investments in Sony Life, as there was a significant decline in the Japanese stock market during the quarter compared with a significant rise in the same quarter last year.

However, the underlying business continues to do well, and insurance premium revenue at Sony Life continued to increase due to an increase in newly acquired policies and an expansion in policy amount in force.

Last, let me turn our attention to the revised full-year forecast.

As the results of the first quarter demonstrate, the trend toward improvement in performance seen since the second half of last year continues.

In determining our new forecast, we've taken into consider this strong operating performance and also the impact of foreign exchange rates.

For the revised forecast, we're changing our yen-to-the-Euro exchange rate assumption from JPY125 to JPY110.

The forecast for consolidated sales remains unchanged at JPY7,600,000,000,000.

We've increased the forecast for consolidated operating income from JPY160 billion to JPY180 billion.

We have increased our forecast for income before taxes from JPY140 billion to JPY170 billion, and net income attributable to Sony's shareholders from JPY50 billion to JPY60 billion.

Again, the primary reason for the outlook revision in operating income is the significant outperformance of the Consumer, Professional, and Devices segment compared to our May forecast.

This is partially offset by a modest reduction in our expectations for the Network Products and Services segment, largely due to the foreign exchange impact.

On balance, our assumptions for the remainder of the businesses are essentially unchanged.

Before we take your questions, I'd like to ask our CFO, Mark Kato, to close with a few of his thoughts on the results of the quarter and our revised outlook.

Mark?

Thank you, Sam.

The improvements in results that we saw in the second half of the previous fiscal year continued during the first quarter, as a result, significantly exceeded our May forecast.

The benefits of the restructuring we have been engaging in has manifested itself, and we have introduced new, competitive products to the marketplace, causing the results to steadily improve.

The true driver of improved performance must be customer acceptance of our products, services, and wealth of content.

I believe that this year's first quarter earnings announcement signals that from this perspective as well.

Our core electronics business has begun again to drive our financial improvement as it continues its momentums from the previous year.

Some concrete example of recent hit products include the NEX interchangeable lens camera, which combines high resolution with a compact form factor and the Sony Ericsson Xperia smart phone.

Another successful example is the well accepted new lineup of TV products, including monolithic design modes.

In the realm of 3D, which is beginning to take off, we have a wide range of business opportunities, from content creation to displays.

At the FIFA World Cup, held in June in South Africa, we broadcast highlights of 25 matches in 3D to more than 4,000 showrooms, direct sales outlets, and retailers around the world so that customers in every region could experience 3D.

The 3D LCD TVs we introduced around the world have been selling well, and demand for our 3D cinema projectors is growing.

PS3 hardware and software are also selling well.

In the emerging BRIC countries, we have been successful in embracing an opportunity of the growing markets to introducing products that fit the individual needs of those countries.

It is true that one of the underpinnings of our financial improvement has been the modest economic recovery over the past several months.

We also believe that we have yet to eliminate future risks, such as foreign exchange rates and uncertainty regarding the global economy.

There are many challenges ahead, but we will move forward in an effort to further improve our business by continuing and accelerating the momentum generated from our competitive products.

Great.

Thank you so much, Mark.

Nikita, we're ready to go with questions.

Thank you.

(OPERATOR INSTRUCTIONS.) Our first question comes from the line of Daniel Ernst with Hudson Square Research.

Please proceed.

Yes, good evening, and thanks for taking my call.

Kato-San, the tremendous improvements in operating profits in the consumer group, I think, was yielded in part by the JPY3 billion that you achieved in televisions in the third quarter, as you said.

But, obviously, much of, the bulk of that would have come from the other segments, and I assume that the video and camera category continues to be large contributors.

In those markets, we continue to see pressure from emerging technologies or emerging products like mobile phones, smart phones that have those things built in.

And then on the TV side, while we're getting, I think, some near-term WIP from the mix of the 3D and LED backlights, what is your sense that those profit margins are sustainable longer term or at least in the medium term?

What gives you the confidence that the improvement in margins is sustainable from here?

And then, just a minor question on the TV side.

Can you give us some color on what the contribution in units was from 3D, and then also from geographical?

Thanks.

Okay.

To answer the last question about 3D TVs, it's quite early days in the introduction of 3D TV.

So I will talk more in general sense for the fiscal year, how we look at 3D.

Our plan at the moment is to see about 10% of our TVs in 3D, give or take.

But initial indications say that we might have a little bit higher expectations of 3D, higher than 10%.

That's how it looks at the moment.

Your first question regarding, is the profitability in the first quarter sustainable throughout the rest of the year, what we saw in the first quarter was that, well, if you take TV, the first thing, we had good product.

We have good product this year.

Compared to last year, we have a range of LED backlit TVs, we have a range of monolithic design TVs, we have a range of 3D products.

So I think those are one reason that we did not have to price adjust the product to meet declining market prices.

Now, we did assume a certain percentage of price drop in the plan, but it turned out to be that we did not have to go as low as we expected.

That is one of the major reasons that we had very good profitability in the first quarter.

Now, looking forward--now, this is competition, so I'm not saying that prices would hold for the rest of the year.

But we do have our marketing plans and ways to add value in terms of 3D or the Internet TVs.

And we will further continue our cost-down efforts.

We have been continuing this for the past couple of years, I think, and we have seen results of a much leaner organization in TVs.

I think your last question was about smart phones putting pressure on the camera business.

While it's true a lot of full-features phones are resulting in a lot of increased consumer acceptance, the digital still camera business is growing, as evidenced by the new MEX products.

And just as the phones are improving in terms of quality and features, so are the cameras, so are EWs, and you're seeing wireless cameras coming out as well.

Digital photography continues to grow--and right now, there really seems to be a strong and distinct market from those and cell phones.

The kind of cannibalization that people have been talking about really has not emerged for the camera makers yet.

And just quickly to add to the first question, so last year we had higher fixed costs, and we had less room to spend and grow activities.

But this year, with the lower fixed costs, we have more opportunities to spend on and grow.

And in terms of what Mark talked about better products, it's not only just Sony's thing, but it is--this is what we are hearing from all our retailers around the world, that the products this year are much better than what they've experienced last year.

Thank you very much for the color.

Appreciate it.

Our next question comes from the line of Yuji Fujimori with Sony.

Please proceed.

Okay, thank you very much for taking my question.

I have very quick three questions.

First of all, in terms of the regional color, at the Tokyo meeting, Kato-San commented the BRICs revenue was up slightly less than 40% year on year.

So could you give us the same kind of growth numbers by region, especially by countries?

And if you can add some color on products or cost stability, that's great.

And secondly, in terms of financial business, Q1 stock market down had some near impacts.

But actual OP was very close to JPY30 billion, which seems quite well.

So is there any one of elements affecting these numbers?

And thirdly, in terms of Sony Online Services, could you give us the update or how is the progress of those projects?

That's three questions, please.

In terms of the sales regarding the developing countries, TV and Vaio have been the main contributors.

And one of the famous, well known products, like the BX model in China, which was more at the lower end.

So we also had some achievements such as for in India.

Our market share has gone up to be neck and neck with Samsung, and that's another achievement.

And in also, in terms of Vaio, our selling of Vaios in China markets through more of our branded channels being able to deliver the Sony experience is also an important part of our business key in developing markets.

Okay, I'll answer the question on Sony Online Services progress.

The PS3 is selling quite well, and as of now, we have registered accounts north of 52 million at the moment.

Now, sales of the servicing side, last year we did slightly less than 400 oku yen, which was triple of previous year.

Now, this was last year's numbers.

Now, this year we're looking to double that amount to less than 800 oku yen.

First quarter results indicates that we are on this path at the moment.

Now, the services that are available on the Sony Online Services, both Qriocity and PSNO included, we have expanded to other countries/regions than the United States.

We have begun a gradual rollout into Europe and into Japan.

On the hardware side, PS3, PSP are the major pieces of equipment that are connected to the network, but we have expanded that to cable TVs and BD players as well.

Okay, on the content side, we have begun a subscription service for PSN customers so that by paying a monthly fee, they can get access to a premium content and a preview of new games, et cetera, et cetera.

That's an update on the online side.

Anything to add?

The only thing I would add is that, as Mark said, the transition from a la carte purchases of content to subscription continues.

In the United States, we launched very successfully major league baseball, which had a very good take-up rate.

We're looking at other sports content, which customers seem very open to paying monthly fees.

And obviously, we've been talking about subscription music services as well.

This goes across the line, not only on the PlayStation 3, PSP, but also on our Internet-connected televisions and Sony Ericsson phones.

Okay, there's one more question on Sony Financial Holdings.

Basically, I think Sony Life Insurance, their business is sound at the moment.

They are getting more contracts, new premiums from, it's gradually growing.

I would say operationally, they are very fit and sound at the moment.

If there is any one-time item I would mention, there was a slight uplift due to the exchange rate with Sony Bank.

This is exchange rate-related, so you can call it one-off.

But the effect of this exchange rate thing was roughly--let me get the numbers straight, so please wait for a moment--about 30 oku yen.

As you know, from a reporting perspective, we do not forecast any improvement in the stock market.

So the forecast that you see, that we use for SFH, assumes basically a flat market.

Okay, thank you very much.

Let me clarify one thing.

Most of the earnings growth, rather than the top line growth, comes from emerging countries.

Is that a fair statement?

No, "most" would be a too strong expression, I guess.

I cannot give you a breakdown by region, by country, by product, but if you had to say, most of the profitability comes from emerging markets, that would be a little bit of an overstatement.

It was definitely a strong contributor.

All right, good.

Thank you very much.

Our next question comes from the line of Mark Harding with Maxim Group.

Please proceed.

Okay, great.

Thanks for taking my call.

Congratulations on a good quarter there.

A couple of quick questions.

Firstly, on the inventory side, I see that inventory was down about 10% year over year, and I guess TV units were also tracking, even though they did very well, were tracking a little bit, perhaps, below expectations.

What gives you confidence that the supply shortages in the future isn't going to hamper the 25 million outlook?

And then I just have a couple of other questions relating to the margin improvements.

One second, Mark.

Okay.

The panel situation.

Our first quarter, it is a known fact that we had some shortages on some of the inch sizes, but going forward, especially for the holiday season, we are expanding our vendor base for the panels.

As you know, we have SLCD, the joint venture with Samsung.

We have a joint venture with Sharp.

But on top of that, we are in negotiation, or currently sourcing our products, from several other manufacturers who have their manufacturing base in Taiwan and China.

So the expanded vendor base, we're quite confident that we will be able to supply enough panels to meet the 25 million TV set sales projections that we're looking at this moment.

Okay, great.

Thank you.

And then, I guess, relating to the margin improvement, could you give a little, perhaps a little bit of color as to how much of that TV margin improvement was related to prior restructuring and how much was related to lower promotions and perhaps the more stable pricing?

I guess what I'm getting at is, how much of the improvement is sustainable going forward?

Stand by, Mark.

Sure.

Okay.

I'm a little bit hesitant to give you a breakdown of all the factors, because it will be (inaudible) on our cost structure.

But this will give you a flavor.

The factors that contribute to the higher margins is a breakdown, price is one.

As I said before, we did not have to lower the prices of our TVs as much as we had expected in the budget.

Other factors are quantity and mix of product.

We have a broad range of products here, so that was another factor.

Obviously, cost, material, bill of materials.

The other items would be the manufacturing overhead, SG&A, and others.

Now, I would like to mention another factor, maybe.

This is included in the SG&A improvement is that because we were tight on supply on some of the models, we did not have to spend as much money on advertising and promotion.

This money, though, we will keep it for future needs.

To be more specific, we got to go into competition in the second quarter, and onwards we will use this money to maintain our position in the market.

I'm sorry for not giving you much detail in terms of numbers, but I hope this answers some of your questions.

Sure.

So, I guess, just to look at those different factors, then, the quantity and product mix, as well as the improvements in the cost of goods ratios, those would be sustainable cost improvements and margin enhancements going forward, whereas perhaps the price stability and lower promotions, those would be, really, more one-time in nature?

Not necessarily one-time in nature, Mark, because pricing changes from week to week and market to market.

That's something that we're always dealing with.

There was some benefit this quarter relative to our plan.

But there's certainly very significant demand in the market.

Okay, let me answer your question in this way.

Now, rather than answering, is the factors that contributed to first quarter earnings sustainable, I would answer from the other end, in that for the whole fiscal year, there are factors that we have to think about, such as for some inch sizes, the rising cost of the panels or the rising cost of material.

But all those things factored out, our plan or projection at the moment is to do better than break even on the TV business, which is quite a change from the past, I think.

Oh, absolutely.

Okay.

Okay, great, thank you.

And then, I guess, just finally, the demand environment, or the regional demand environment, how has that changed for this quarter relative to last quarter, noting that you didn't change your revenue outlook?

Is there any change to it?

On a regional basis?

Yes.

Not in the big pictures, but I think the sales in the emerging markets, the rate of growth is obviously much higher than other parts of the world--namely, Japan, North America, and Europe.

But I cannot give you a breakdown by product, by country, but that's the general outlook.

And I think we have been quite successful in raking in a lot of customers' money from this growing segment of the market.

Okay, great.

I appreciate it.

Thanks a lot, gentlemen.

Thank you, Mark.

(OPERATOR INSTRUCTIONS.) Our next question comes from the line of Larry Haverty with GAMCO.

Please proceed.

Yes, good morning.

I have a couple of follow-up questions on 3D.

The first is, are you planning on producing any big movies in 3D over the next six to twelve months?

And then secondly, I'm just curious in the games division, what your strategy is for combating the 3DS from Nintendo if, in fact, the thing ever sees the sunny side of the market.

It's Rob.

How are you?

I'll do the--.

And if you can tell me why you're laughing at the second question, too.

Okay, all right.

Well, let's talk about the 3D films.

In September, Screen Gems will have Resident Evil: Afterlife in 3D, which was a film that was natively designed and scripted for 3D.

We also have The Green Hornet in January with Seth Rogen; Priest, another Screen Gems film; The Smurfs (inaudible); and obviously, what we've all been waiting for, we're going to have at the end of '11, Men in Black III and then Spiderman in 2012.

So there's a lot on the plate in terms of 3D.

And again, there's been a lot in the press about, "Take a break from 3D," and "What is it going to mean for the box office and for Blu-Ray?" And we continue to believe that quality 3D films will persevere in terms of being able to get that price premium, both in the box office and in a Blu-Ray.

And then, obviously, in terms of Blu-Ray, we released our first Blu-Ray 3D movie this summer with Cloudy with a Chance of Meatballs.

And Kato-San, do you want to take the question about the portable?

Portable Nintendo DS, how are we going to compete?

I'm sorry, at the moment we have nothing to disclose.

We are, of course, thinking of ways to improve our portable business, but at this point, I'm sorry, I have nothing to disclose.

Now, Sony Computer Entertainment, when the time comes, they will announce their plans, but not today.

I think Kaz Hirai had one comment recently at a conference that, when we think the quality's going to be there in a portable device, we'll be there.

And there are people obviously looking at this.

But whether it's on the hardware side or on the content side, we're really looking to make sure there's that distinct, high-quality 3D experience.

And on the game side, there's still work to be done in the industry, for sure.

Okay, thanks very much.

Thank you, Larry.

Our next question comes from the line of [John Glanhill] with [Bering].

Please proceed.

Hi.

Thanks for taking the question.

Just a very quick question, actually, on PlayStation 3.

You mentioned the cost reductions.

I wondered if you could just give us a bit more clarity on what the scale of the cost reductions year on year are, and how that will look going forward?

I'm sorry, I cannot give you details of further cost reduction plans.

Now, what I can say in general is that as the semiconductors and our progress into the new fabrication technologies, we will be able to reduce costs, not just from the chipset but, for example, lower power consumption would mean that we can eliminate the chief deduction path, for example.

So as a combined effort, that is how we have been reducing the cost of the console, and it will continue into the future.

I'm sorry I cannot give you numbers or percentages, but that's the way we have managed this, and I would say when we launched the product back in 2006--I'm sorry, again, I cannot give you a number--but today's cost, we have eliminated the negative margins already back in the last fiscal quarter of 2009, which ended March of 2010.

And we are continuing to make money on the console.

Do you have a follow-on question?

No.

Operator, we can take one more question.

Our last question will come from the line of Jeremy Richardson with First State Investments.

Please proceed.

Oh, excuse me, this has already been asked late in the call.

But I've got a question on the cash flow statements.

I know working capital management has been a big focus of the management team.

I note also that the inventories in consumer network products are down year over year.

But if I look at the cash flow statement, then there's a working capital outflow, particularly JPY151 billion on inventories.

Given the comments on the Consumer Network Products inventory, this presumably is related to something else.

So I was wondering if you could provide a little bit more detail into that, please?

Want to take that one offline?

Yes.

Jeremy, let's do this.

I'll have to follow up with you on that offline rather than dig through the detail and keep people waiting here, if you wouldn't mind.

Thank you very much.

With that, we're going to wrap the call, and we invite anybody with any remaining questions to contact our IR offices in London, Tokyo, or New York.

Our contact information is on the earnings release.

Thank you all for joining us tonight.

Goodnight.

This concludes the presentation.

You may now disconnect.

Good day.