索尼 (SONY) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sony Corporation's Third Quarter 2011 Conference Call for Overseas Investors. My name is Katie, and I'll be your coordinator for today. (Operator instructions).

I would like to now hand the call over to Sam Levenson, Senior Vice President Investor Relations of Sony Corporation. Please, proceed.

Thank you very much for that introduction, Katie, and thank you, all, for joining us so early back east for our discussion of our third quarter results. We hope you enjoyed the music from Sony music artist, Ron Long, while you were on hold.

I'm 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 of Sony Corporation; Rob Wiesenthal, the Group Executive Corporate Development and M&A for Sony Corporation, as well as EVP and CFO of Sony Corporation of America; and Yoshinori Hashitani, the VP, Senior General Manager of Investor Relations Division of Sony. Thank you all very much for joining us.

In just a few moments, we will review today's announcement, as well as discuss our television business and the recently announced acquisition of the remaining interest in Sony Ericsson. No. That was last quarter. 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 Sony.net/ir.

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

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

During the third quarter, we saw the continuation of a number of trends recorded during the first half of the year; notably, a competitive operating environment and an even stronger yen. Nevertheless, operating results in nearly every segment improved as compared with the forecast we shared with you in November when reporting last quarter's results.

During the quarter, there were three notable events which significantly impacted our operating results. First, as previously announced, we recorded a JPY63.4 billion impairment loss resulting from the re-measurement of our shares in the S-LCD joint venture. As you know, we agreed with Samsung to close this joint venture, and we received proceeds in excess of JPY72 billion in exchange for our shares.

Second, Sony Ericsson recorded a valuation allowance on deferred tax assets at the end of the December quarter. The resulting impact upon Sony's results was JPY33 billion.

Finally, as discussed last quarter, the flooding in Thailand has had a very detrimental impact on our operations, both directly in our plants, as well as impacting our supply chain. The impact of this event became greater than was anticipated in the November forecast, as damage became more widespread.

Together, these three events drove our operating results into the red for the quarter.

I'll now explain our income statement in more detail.

Consolidated sales decreased 17% year on year. On a local currency basis, sales decreased 12%. Consolidated operating results deteriorated JPY229.2 billion year on year to an operating loss of JPY91.7 billion.

Equity net loss of affiliated companies reported within operating income was JPY108.8 billion, compared to profit of JPY2.6 billion in the same quarter last year. As I explained earlier, contained within this loss was the JPY63.4 billion impairment loss on our shares in S-LCD and the JPY33 billion valuation allowance on deferred tax assets at Sony Ericsson.

The net effect of other income and expenses was expense of JPY14.2 billion, compared to expense of JPY6 billion in the same quarter last year.

Loss before income taxes was JPY105.9 billion, compared to profit last year of JPY131.5 billion. Net loss attributable to Sony Corporation's stockholders was JPY159 billion, compared to net income of JPY72.3 billion in the same quarter last year.

Now, let's take a moment to explain our segment results.

First is the Consumer Products & Services segment. CPS segment sales decreased 24%, partially due to the impact of the floods in Thailand. Nearly every product category in the CPS segment was impacted by the floods. Operating loss was JPY85.7 billion, compared to operating income of JPY63.5 billion in the same quarter of the previous fiscal year. This decrease was driven primarily by deterioration in equity in net income of affiliated companies, which included the impairment losses, a decrease in gross profit from lower sales, and deterioration of the cost of sales ratio, partially offset by a decrease in SG&A costs.

TV business sales decreased 42% year on year to JPY237 billion. This was due to our shifting emphasis from unit sales expansion to profitability, as we explained last quarter, as well as price declines resulting from deterioration in the operating environment and the impact of the floods in Thailand. During the quarter, LCD unit sales decreased 24% year on year to 6 million units. Operating loss, excluding impairment losses in the TV business, of JPY33.5 billion was better than our November forecast, and we believe we're making progress toward a steadily profitable structure.

Let me also briefly touch upon the digital imaging business. This category was also significantly impacted by the floods in Thailand. Unit sales of video cameras decreased due to the impact of the floods and contraction of the market in Europe and the US. But, due to cost improvement efforts, we continued to maintain a high profit margin.

Compact digital cameras experienced a decline in sales and deterioration in operating results. Since some of the cameras are made in Thailand, they were impacted significantly by the floods. This fact and the deterioration of market conditions in Europe and the US led to a decrease in unit sales year on year. The impact of exchange rates also had an impact. We have moved production to alternate facilities, and we started to manufacture product beginning in January 2012.

Next is the game business. Sales and operating income decreased year on year in the game business, which does include network services. Although we achieved sales that were basically on our expectations for PS Vita, which went on sale December 17 in Japan, game business sales decreased due to the strategic price reduction on PS3 hardware and a decrease in unit sales of PSP hardware. Despite an increase in marketing expenses for network services and the impact of the price change for PS3 hardware, we maintained consistent profitability. PS3 hardware unit sales were 6.5 million units, tying the March 2010 fiscal year for the highest recorded sales on record.

Next I'll explain the Professional, Device & Solutions segment. PDS sales decreased 21%, mainly due to a decrease in sales of components and semiconductors, which both suffered from the Thai floods. An operating loss of JPY14.8 billion was recorded in the quarter, compared to operating income of JPY9 billion in the same quarter last year. This was primarily due to deterioration in the cost of sales ratio and a decrease in gross profit resulting from lower sales.

Sales in the semiconductor business decreased due to the impact of the floods. Operating results deteriorated due to decreased sales and the increase in depreciation expense resulting from investments in image sensor production capacity. Despite the temporary drop in demand, we are increasing production capacity of our competitive image sensors as we move forward plans to invest in our Kumamoto and Nagasaki manufacturing facilities. We are also preparing alternative production venues to make up for the capacity that was affected by the floods in Thailand. And we are aggressively developing technology to further enhance our unique competitive strengths through such products as the stacked CMOS image sensor we announced last month.

Next is Pictures segment. At Pictures, sales increased 8%, and operating income of JPY0.7 billion was recorded, a decrease of JPY4 billion year over year. Sales increased primarily due to an increase in theatrical revenue, reflecting a year-on-year increase in the number of films released and higher television revenues from US network programming. Operating income decreased significantly. This is mainly due to an increase in marketing costs in support of the greater number of theatrical releases in the quarter.

Sales in the Music segment decreased 12%, and operating income decreased JPY4.2 billion to JPY15.3 billion. Sales decreased primarily due to fewer new, significant releases in the current quarter compared with the same quarter last year and the appreciation of the yen. Operating income decreased due to lower sales, partially offset by lower marketing expenses.

Next is Financial Services. Financial Services revenue increased 5%, and operating income was basically flat. Revenue increased primarily due to an increase in insurance premium revenue, reflecting a higher policy amount in force, and an increase in net gains on sales of securities in the general account. Financial Services operating income was unchanged as deterioration in operating results at Sony Bank, which is reflecting a foreign exchange loss in foreign-currency-denominated customer deposits compared to the gain last year, was offset by an increase in operating income at Sony Life.

Sales at our equity affiliate Sony Ericsson decreased 16% year on year, and sales of -- although sales of smartphones increased, sales of feature phones decreased. Profitability deteriorated due to changes in the product and geographic mix, intense smartphone price competition, and restructuring charges. As I mentioned earlier, Sony reflected JPY33 billion, or 50% of the valuation allowance Sony Ericsson recorded during the quarter under US GAAP in equity and net loss of affiliated companies. As a result, Sony recorded equity net loss from Sony Ericsson of JPY43.1 billion, compared to equity net income of JPY0.4 billion in the same quarter of the previous fiscal year.

So that ends my explanation of segment results. Let's take just a moment to talk about the forecast revisions for the balance of this fiscal year.

For our forecast, we've assumed foreign currency exchange rates for the remainder of the year of approximately JPY77 to the US dollar and JPY100 to the euro.

Consolidated sales for the fiscal year ending March 31, 2012 are expected to be JPY100 billion below our November forecast. This change is primarily due to deterioration in the operating environment in developed countries.

Consolidated operating loss is expected to be JPY95 billion, compared to the JPY20 billion in operating income announced in November. The primary reasons for the downward revision are the JPY63.4 billion impairment loss resulting from the sale of our shares in S-LCD and approximately JPY45 billion revision in our expected impact from the Thai floods, and approximately JPY20 billion in negative impact from exchange rates. These factors together total approximately JPY130 billion.

You can find the factors leading to the revision of each segment on page 11 of the earnings release.

And, finally, just to touch on Sony Ericsson just a little bit more, due to the recording of the valuation allowance on the deferred tax assets we talked about, that loss was not included in our November forecast. However, the loss will be offset by an increase compared to the November forecast of a noncash gain we expect to record as a result of the full consolidation of Sony Ericsson scheduled for February. As a result, there's no impact on our forecast for consolidated operating results.

Our forecasts for income before income taxes and all other P&L items have been revised to reflect the change in operating income. Please, refer to the earnings release for more detail.

So, with that, we'd like to turn it over to you and answer any questions which you might have. So, Katie, if you'd queue up questions, please.

(Operator instructions). Jessica Reif Cohen, Bank of America Merrill Lynch.

I have a two-part question and then one other, separate question for Rob, probably.

Can you talk a little bit about the success that you've had with your early digital offering? Do you see any cannibalization from existing windows, or do believe it's just truly incremental?

In terms of early digital releases, we've been very active with our early digital releases. We did a early digital release of "Bad Teacher," "30 Minutes or Less." That was about a two-week incremental window for the consumers with an electronic sell-through. And we found that digital sales were actually up 70%, and digital revenues were up 20%, digital revenues including both rentals and sell-throughs.

I think this is a very interesting way for our studio to create value on EST, electronic sell-through, because, obviously, there's been a huge shift to rental. And we have seen no apparent cannibalization [physical]. And, in fact, we did another early release with "Moneyball," where we had a three and a half week window before the DVD. And that is the largest window we've had yet, and it was extremely successful.

I think you're going to see a lot more of that. There's a lot of white space, a tremendous amount of white space within the motion picture windows, and I think there's a great opportunity for studios to monetize that without sacrificing the economics of the other players in our industry.

And, just as part of that question, how important are the content companies to Sony overall?

I think, right now, ownership of our entertainment assets have actually never been more relevant to our strategy than it is today. If you think about it, in a sea of commoditized consumer electronics products, we are really the only one who can provide consistent, early, and exclusive content to our consumers. And now that we have over about 100 million screens that are connected to the internet, 100 million Sony screens that are connected via Wi-Fi Blu-ray players, PlayStations, or connected Sony TVs, this is a very large user base that we can now leverage with this content.

And it's a great way to differentiate amongst our competition. If you take a look at Hulu and Netflix spending hundreds of millions of dollars on content, we have two of the greatest entertainment companies in house with Sony Pictures, both in film and television, and Sony Music. So I think that's a great advantage. And, obviously, it goes without mentioning that these are highly profitable businesses to the overall Sony Group as well.

And just one last question from me. On Music, the business overall seems to be stabilizing. And your Company really seems to be rejuvenated under extremely strong management led by Doug Morris. Could you just talk a little bit about how -- your outlook for your Company? [Say about] the upcoming release schedule would be helpful.

Well, I think, in terms of the release schedule this March, there's a new Bruce Springsteen album, "Wrecking Ball," Adam Lambert, another "Glee" cast album, which obviously was extremely successful, the number-three for us last year. So there's a very, very strong lineup.

And I think that Sony Music has done a terrific job under Doug Morris of expanding creative leadership with L.A. Reid strengthening the X Factor franchise through a relationship with Pyscho, which we own 50%; Peter Edge and Tom Corson under RCA; then, obviously, Dr. Luke with his new Kemosabe Records imprint. Dr. Luke is probably one of the most successful writer/producers in the past couple years. So I think that the creative leadership at Sony Music has truly been fortified, and we expect to see great financial results from this group in the months to come.

Great. Thank you so much.

Daniel Ernst, Hudson Square Research.

I have three questions, if I might. First, earlier today, Hirai-san indicated a willingness, a direction to shutter or exit noncompetitive businesses. And, in the past, my interpretation is what you've done is tried to aggressively restructure those businesses and exit noncore businesses. So I wonder if you could give a little color on what the thinking is around exiting businesses that are noncompetitive that might actually be core, if that's a correct characterization of what Hirai-san said.

Secondly, on the ongoing process to restructure the television business, now that you've sold some facilities to [Hong Hai], you're giving back your portion in the Samsung JV, what percentage of operating cost in TV today is fixed versus variable? And kind of what's the headcount around your TV operations?

And then a third question. Can you give us a little bit of color on the process and timing of integrating the Sony Ericsson team into, I guess, what I'll Sony [Global]? Thanks.

Okay. I'll answer your first question about Kaz Hirai mentioning exiting noncompetitive businesses. Okay. Obviously, I cannot be too specific because, you know, there are people involved here. But, just to give you the thinking behind his comment and say, for any business -- for one thing, it has to be profitable, but not just profitability is the criteria when we make the decisions.

The other side of it is that, for example, if we take devices, we do manufacture and sell a lot of AVC equipment. So any device -- it would be, in an ideal situation, if those key devices add to the differentiation of our product, something that adds to enhancing the attractiveness of the product to our consumers. So, if you -- if I give you just one good example is the nice combination we have with image sensors, a key device, and our digital imaging business in camcorders, digital still cameras, security cameras, or what not. So this combination is a vertically integrated, very profitable combo.

So, for example, if we did have a device business that does not have this kind of added value to our other side of our businesses or if it's not profitable, that would be a candidate for us to rethink its future.

On your second question, breakdown between fixed and variable, I'm sorry, we do not disclose this kind of cost information.

On headcount, we don't disclose headcount by division also. I'm sorry.

On Sony --

Would you repeat your question about Sony Ericsson one more time?

Yes. On Sony Ericsson, the question is -- what's the process and timing on integrating Sony Ericsson into Sony?

We haven't released any timing. Obviously, we're just finalizing the approvals from the various government authorities. And the good news there is that there's a very strong base of engineering talent that actually originally came from Sony, in addition to design talent. And the closing is expected in February. But we're not releasing any timing in terms of the overall integration.

And just a follow-up on the TV question, since we can't seem to get the color on fixed/variables and employees. Can you give us some flavor as to the direction and plans for turning that business back to profits?

Yes. I can. For one thing, we did terminate the joint venture with Samsung, the S-LCD joint venture. Now, this has changed our cost structure for sourcing panels, obviously. The arrangement now we have with them is that we get panels at -- I cannot give you the pricing formula. But close to market prices would be the benchmark when we decide on prices between the two companies. It has not been so in the past.

Secondly, since the joint venture was a manufacturing joint venture, if we had idle capacity due to lower demand, both companies would have to bear the cost of that idle capacity. Now, the arrangement that we have today, we do not have to compensate for idle capacity. So that burden -- if you take this year and a combination of prices higher than market on sourcing the panels and compensation for idle capacity, that would be, roughly speaking, about JPY50 billion. So next year, with this new arrangement in place, that cost we can take out of our losses, for example.

Other areas we are looking into is -- nothing new. It's not magic. We review our cost structure, variable costs, and our headcount, fixed costs. We try to put in a lot of engineering to differentiate our products as much as we can to be -- halt the deterioration of the price as low as possible.

So, with a combination of all those, I think we are on a good track to improve profitability. Kaz Hirai mentioned last November that it will take some time for us to break even. Fiscal year ending March 14 would be his target. And, next year, at least, we would like to half the losses compared to his year. And I think we are on that trajectory at the moment.

Thank you.

Andy Hargreaves, Pacific Crest Securities.

A bit of a follow-up to that question is -- I understand changes in profitability on the cost side of the TV business. Is there anything you think that you could do to get consumers to move up market and buy higher-value TVs, because the focus has definitely shifted, it seems like, to the value portion of the market.

Yes. I think that, finally, we're starting to see very good take-up on connected -- what we call connected televisions, internet-connected televisions. When we first started with those, they were not Wi-Fi, they were not easy to hook up. It's a much more simple user experience. And the combination of Sony Music Unlimited, Sony Video Unlimited, and then, obviously, conventional services like Netflix, are really giving people an interesting reason to kind of jump to those connected sets.

Additionally, I think that, as we see more and more 3D content come online -- and I don't know if you were at CES, but, if you saw the new, inexpensive, extremely lightweight glasses, I think that's going to be helping to jump consumers into the space. And, for better or for worse, obviously, the pricing, which has been coming down, has been enabling consumers to jump into size. And that high end is very, obviously, gauged to size. So what was -- you know, 60-inch television sets, 50-inch television sets were once unattainable for consumers. They're now attainable. And it's an interesting way for people to get into televisions that are actually higher margins for us here at Sony.

In addition to that, on the technology side, the new panels -- one is OLED. We are working on OLED as well. As you know, we were the first to come up with an OLED TV set back several years ago. Since then, we have not come out with a consumer product but have several professional, non-consumer -- for example, medical usage, very crisp OLED monitors, for example. But, on the consumer side, we are looking at our options on how to enter this market as well.

On the technology side, again, if you had a chance to go to Las Vegas for the Consumer Electronics Show this January, we displayed our crystal LED television. This was just kind of a technology showcase. But it shows what kind of technology we're working on. That's another story.

The third one would be 4K monitors. I think this is -- it's further down the road, but I think we have a very good opportunity to have nice margins on much better quality pictures, much higher than the high-definition stuff we have today.

And, just going back to the connected TV side of it real quick, I mean, we saw some of your TVs were Google TV operated. Some of it was a proprietary interface. Is the thinking just to kind of test the market at this point and see what consumers react to, or do you think that you'll end up going with one interface, one operating system, if you will, over another?

Google is -- I mean, obviously, it's been an iterative process. Their new operating system is coming out. Obviously, with the Android store that will operate for Google TV, that gives the unique opportunity to have a strong base of programmers offering apps in which we can actually have a strong economic incentive to be using that kind of platform and earn another revenue stream by having consumers of that TV. It is very difficult to do your own platform because you've got to get, obviously, developers on board.

But I think the most important part is the user interface, and that's where people are really focusing on it. I think the marriage between the tablet and the TV is something you'll see a lot more of as well. And that is -- you know, with us, it's DLNA, which enables you to use digital services on your tablet and send it to your connected TV. That may in fact be a very important kind of a user protocol in the future.

So it's undecided at this point. We're experimenting with both Google TV and (inaudible) internet link to continue.

Okay. That's helpful. Thank you. And then, lastly, just on Sony Ericsson, is there anything strategically that you guys think needs to change in that business, or is the current strategy, particularly at the smartphone level, in line with how you intend to run the business?

I think one of the important aspects of bringing Sony Ericsson in house was to be able to have this four-screen strategy implemented, where each of the four screens were owned wholly by Sony. So, if you think about advantaging, having -- integrating other parts of Sony between tablets, laptops, TV screens, and phones, it was very difficult to do it quickly and dynamically when you were part of a joint venture. So I think the most important thing is to be able to get that speed there and then, again, be able to leverage our content and services offerings in a way we weren't able to do it because it would always have to be an arm's-length basis.

Additionally, on the tablet side, the relationships that we have with carriers at Sony Ericsson is critical, relationships with Vodafone, AT&T, Verizon. That is a critical part of any plan for any kind of tablet launch. While we have launched our tablet, we think that having Sony Ericsson in house with those relationships could help super charge our business going forward.

Thank you.

(Operator instructions). [Grant Anneka, Tannic Capital].

I'm sorry I didn't see Harai-san's comments this morning. But I just was wondering if you could be a little bit more specific about what you need to do to get the cost cutting in place and what the eventual profit margin goals are for all of Sony or maybe even some of the parts. Thank you.

The profit margins -- we are aiming to reach 5% as quickly as possible. Two years ago, when we set our goals, that 5% we set for year 2012, fiscal year ending March 2013. Now, as we see it right now, it is a little bit of a steep hill to achieve this 5% next fiscal year. But, in the following year, fiscal year ending March 2014, I think we have a very good shot at achieving that number.

Now, where does that come from? It comes from various growth strategies. But you mentioned about cost cutting, so I would like to spend a little bit of time on here -- on this subject. For example, television is one category that we need to improve our profitability. Among the various action plans that we are taking, eliminating fixed SG&A is one area that we are working on. This is a Companywide effort, not just at the TV business unit. Of course, we'll be looking into that. But, in the sales companies in the regions, in the headquarters, no stone will be left unturned to seek any areas that we can reduce our fixed SG&A.

I cannot give you an absolute amount of what we are looking at, but the ultimate goal will be to reduce costs in these fixed areas in the order of -- okay, in Japanese yen, it's hundreds -- but in billions -- it's, I would say, tens of billions of yen, in that magnitude.

Then, if you look at the pieces that you'll be now integrated within Sony, what kind of top line growth do you foresee in this environment, say, the next three years?

Top line growth? Well, one obvious reason we have -- we will be consolidating Sony Ericsson 100%. So far, we have been adopting the equity method. But, from next year on, it will be 100%.

Now, other areas we are looking into -- well, medical was one area that we are seeking to grow our business. The other would come from organic growth.

But, from my standpoint, I see for top line growth is important, but profitability is even more important. So, on the one hand, we will be going into some sectors, yes. But, on the other hand, we will be divesting from others. So, with this combination, if you just look at the top line, you might not see as an aggressive growth like double-digit every year. Before we do that, I think, for us, it's to realign our business portfolio so that we have a much more profitable assortment of businesses and try to reach this 5% operating margin as soon as possible.

And then, in terms of corporate strategies, do you need to assemble any other pieces to complete the product lineup, whether it's technology or in product areas in terms of M&A, mergers and acquisitions going forward?

Yes. We will be looking into M&A opportunities. But in terms of product technology, I think we have a lot within the Group. I think what we need to do is to kind of combine the resources that we have so that we can offer consumers a good product, service, user experience. Now, if there are areas that we do not have those resources, yes, we will be looking into M&A opportunities as well.

Thank you. Good luck.

Ryosuke Katsura, Mizuho.

Just one question regarding the phone meeting from Hirai-san's comment on the fourth quarter business. On a first area he mentioned about the core business, also mentioned about the medical area. And it seems to be -- me that it was a new message that was not given before. So I just want to make clear why this timing the medical story came out as one of the core business. And, my understanding, medical business is more like a different kind of business timeline cycle thing. I understand it's kind of a sexy, growing area people are looking into -- a lot of people are looking into. But combining with recent articles talking about Olympus story also, could you give us a message of why now and how you want to operate on this medical area?

Just to create one -- Kaz Hirai did not include medical as one of the core businesses. As core businesses, he mentioned digital imaging, PlayStation gaming business, and the mobile arena.

He did mention about medical as new area to seek for growth. Now, medical is not, well, actually, new for us because we do have business in this field in the form of monitors, printers. We do sell display systems and image sensors for endoscopes and such. So it's not really new. And we have bought some companies in this medical area in the past two years. But we are trying to accelerate this effort because we think that we do have a lot of technology that you can utilize in this field. Image sensors is one thing. Display technology, 3D technology, signal processing -- so we have a lot in our R&D which can be applied to medical business in the future.

About Olympus, I'm sorry. I cannot comment anything on the subject at this time.

Okay. Thank you.

At this time, we have no further questions. I'd like to hand the call back over to Sam Levenson for closing remarks.

Thank you so much, Katie. We'd like to thank all of you for joining us today to discuss our results. Please, feel free to contact our London, New York, and Tokyo Investor Relations offices if you have any other questions. And we'll speak to you next quarter. Thank you.

Ladies and gentlemen, thank you very much for your participation in today's conference call. You may disconnect. Have a wonderful day.