索尼 (SONY) 2013 Q3 法說會逐字稿

Welcome to the Sony Corporation conference call for overseas investors for the third quarter ended December 31, 2013. My name is John and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded. Now I'll turn the call over to [Casey Keister]. You may begin, Casey.

Thank you very much for that introduction, John, and thank you all for joining us today, February 6, 2014, for a discussion of Sony's results for the third quarter ended December 31, 2013. We hope you have all enjoyed One Direction's Midnight Memories while you were on hold.

I am Casey Keister in the Investor Relations department here in Tokyo, and with me on the conference call tonight is Kazuo Hirai, President and CEO of Sony Corporation; Masaru Kato, CFO of Sony Corporation; Steven Kober, Executive Vice President and Chief Financial Officer of Sony Corporation of America; and Yoshinori Hashitani, VP Investor Relations at Sony Corporation.

Thank you all very much for joining us. In just a few moments we will review today's announcement, and then we will 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 us, 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.

I will briefly begin by explaining the consolidated results for this quarter. Consolidated sales increased 24% year on year to JPY2,412.8b. This significant increase was primarily due to strong sales of PS4, a significant increase in unit sales of smartphones and the favorable impact of foreign exchange rates.

Consolidated operating income increased 95% year on year to JPY90.3b. We recorded this significant increase despite a JPY32.1b impairment charge in the battery business in the devices segment, an JPY8.2b impairment charge in the PC business in the mobile products and communications segment and a JPY6.2b write-off of certain PC game software titles in the game segment.

Thanks to the strong performance of digital imaging, operating results in imaging products and solutions segment improved year on year and a profit was recorded.

Strong sales related to the launch of the PS4 and the favorable impact of foreign exchange rates caused operating income in the game segment to increase year on year despite the write-off of PC software titles I mentioned earlier.

The operating result of the MP&C segment improved largely due to an improvement in smartphone profitability, despite the impairment charge related to the PC business.

And the operating result of the home entertainment and sound segment also improved and year on year a profit was recorded, due to improved operating result of the TV business.

On the other hand, the operating result of the devices segment declined primarily due to the recording of an impairment charge related to the battery business.

The pictures, music and financial services segments all made significant contributions to profit.

Compared to our October forecast, only the MP&C and devices segments exhibited a shortfall in operating result. The operating results of every other segment were either in line with or better than expectations.

IP&S segment profit was approximately JPY5b above our forecast, due to cost reductions in the digital imaging business.

Game segment profit was in line with our forecast, due to operational improvement and the favorable impact of foreign exchange rates, offset by the write-off I mentioned earlier.

MP&C segment profit was approximately JPY25b below our forecast, due to the JPY8.2b impairment charge related to the PC business and lower than expected unit sales of smartphones.

HE&S segment profit was in line with our forecast.

Devices segment profit was JPY30b below our forecast, primarily due to the impairment charge related to the battery business.

Pictures and music segment profit both exceeded the forecast by approximately JPY5b.

And in the financial services segment, profit was approximately JPY10b above the forecast.

If we were to exclude the impact of the impairment charges and write-offs, the electronics business was essentially in line with the October forecast. The core growth areas in electronics are performing well.

Despite a challenging market environment for digital imaging, we were able to increase profit in the IP&S segment year on year due to enhanced differentiation and a focus on high value-added products, both made possible by our in-house technologies.

The PS4 got off to a great start in the game business, with 4.2m units of hardware and 9.7m units of software being sold in the month and a half after launch. The PlayStation Network now has more than 150m registered accounts and the paid subscription service, PlayStation Plus, had a dramatic increase in membership due to the introduction of the PS4.

The mobile business within the MP&C segment has been profitable since the first quarter of this fiscal year, and during this quarter it continued to contribute to operating results in the segment through a significant year-on-year increase in smartphone unit sales and a rise in average selling price. However, sales were below expectations because we had hoped to sell more units in Asia and Europe. As a result of these lower than anticipated unit sales, operating income was lower than we expected.

Taking into account the results of the third quarter, we have revised down on our annual unit sales forecast for smartphones from 42m units to 40m units, but this still represents a significant increase from the 33m units we sold in the previous fiscal year. Going forward, we expect units to continue to grow.

I will now touch on our revised forecast for the fiscal year ending March 31, 2014. Although there are some changes in the forecasts for each segment, consolidated sales are expected to be unchanged from the October forecast of JPY7,700b. Consolidated operating income, on the other hand, is expected to be JPY80b, which is JPY90b below our October forecast.

The IP&S, game, music and financial services segments are expected to exceed expectations, while the MP&C, HE&S and devices segments are expected to be below expectations.

IP&S operating income is expected to be slightly better than the October forecast, mainly due to cost reduction. Despite the JPY6.2b write-off recorded in the third quarter, which was not included in our October forecast, game operating results are expected to be slightly better than the October forecast due to cost reductions as well.

Music operating income is expected to exceed our forecast, due to strong sales of recorded music. Financial services operating income is expected to be better than the October forecast, due to the strong third-quarter results.

MP&C operating results are expected to be significantly below the October forecast due to lower smartphone sales and the impairment charge in the PC business, which was not included in the previous forecast. HE&S operating results are expected to be slightly below the October forecast, due to lower sales of audio and video.

Devices operating results are expected to be significantly below the October forecast due to the impairment charge recorded in the battery business, which was not included in the previous forecast.

We also reconsidered planned asset sales, which had a negative impact on the consolidated operating income forecast.

A final factor contributing to the downward revision in consolidated operating income was our decision to increase restructuring charges by JPY20b due to profitability improvement measures that Hirai-san will discuss in a moment.

Due to the lower than expected consolidated operating income, higher than expected foreign exchange losses, higher than expected income tax due to stronger than expected results of the financial services segment and a larger than expected deduction from net income attributable to non-controlling interests due to the stronger than expected results of the financial services segment, net loss attributable to Sony Corporation stockholders for the year is expected to be JPY110b, a JPY140b decline compared with the October forecast.

This concludes my remarks regarding results for this quarter. And with that, I will turn things over to Hirai-san for his remarks.

Casey, thank you for that introduction. Hello, everybody. This is Kaz Hirai.

As CEO of Sony, I have repeatedly stated that my mission is to transform Sony and to do everything in my power to revitalize and grow our electronics business, and by further growing our financial services and entertainment businesses as well and to stabilize operations and ensure growth of the entire Sony Group.

As was just explained earlier, today at 3 pm, together with Sony's third-quarter earnings, we also announced plans to address the reform of our PC and TV businesses. And I want to take this opportunity to explain the nature of these reforms, as well as to take any questions that you may have in this regard.

As was talked about earlier, in the current quarter we reported large year-on-year increases in both consolidated net sales and consolidated operating income, despite certain businesses recording impairments and write-offs. Excluding these impairments and write-offs, results were essentially as forecast in October.

However, we expect our full-year earnings to be significantly below our October forecast, primarily due to the impairments and write-offs recorded in the third quarter, the additional restructuring costs that we are now allocating for reform measures to be executed that I will outline later, and the reconsideration of certain planned asset sales.

Given the increasingly challenging electronics business environment, we now anticipate our target of returning the television and PC businesses to profitability will not be achieved this fiscal year. Given these circumstances, we have decided to take further significant steps to accelerate the further revitalization and growth of our electronics business.

First, we will continue to shift resources to our three core businesses of imaging, gaming network services and mobile, as well as our other growth businesses, while also urgently implementing fundamental reforms within the TV and PC businesses. Secondly, we will optimize the scale of our sales company, headquarters and indirect functions, as well as the manufacturing operations that are relevant to our electronics business.

And in terms of entertainment, I emphasized at the entertainment business briefings for investors and analysts held in Los Angeles and Tokyo last November that the entertainment businesses are essential to our overall growth strategy and that we will continue to strive to enhance their profitability. As explained earlier today, we are currently undertaking initiatives to further grow each business and increase profitability towards fiscal 2015 and 2016.

In the electronics business, which we have identified as our most urgent turnaround priority, we have engaged in initiatives such as reducing fixed costs, strengthening operations and realigning our business portfolio for over a year now. At the same time, we identified our three core businesses and focused on the most important aspects of these businesses, that is, enhancing product competitiveness.

These initiatives have resulted in tangible progress with the launch of products that customers are acclaiming as truly Sony-esque. We are truly proud and extremely proud of the consistently positive feedback we have received from customers for our approach to product development, which doesn't just focus on creation of highly functional electronic products but also stimulates the creation of new content and services that connect with our customers on an emotional level.

At the same time, we identified PCs and TVs as businesses for which profitability improvement will be a key priority and implemented various reform measures, as a result of which the operational structure and product competitiveness of the TV business has significantly improved.

However, despite these efforts, we anticipate our target of returning the TV and PC businesses to profitability will not be achieved within the current fiscal year. Given our expectation that the market environment of the PC and TV businesses will only become more challenging, we decided it was vital to execute further reforms with even greater urgency and have decided to proceed with the following measures.

Let me first discuss the PC business. Today, we announced that Sony and Japan Industrial Partners, Inc., JIP for short, have concluded a memorandum of understanding confirming the parties' intent for Sony to transfer our PC business, currently operated under the Vaio brand, to a new company to be established by JIP.

Considering the drastic changes in the global PC industry that have been brought about by the rapid growth in mobile products such as tablets and smartphones and the pressing need for structural profitability improvements in Sony, we have decided to concentrate our mobile product lineup on smartphones and tablets. Sony and JIP will now proceed with due diligence and negotiate detailed terms and conditions of the business transfer, targeting the conclusion of a definitive agreement by the end of March 2014.

As a part of the business transfer to JIP, Sony will cease the planning, design and development of PC products. Manufacturing and sales will also be discontinued after the global launch of the spring 2014 lineup. Even after Sony withdraws from the PC market, Sony customers will of course continue to receive aftercare customer services.

Although Sony's PC business will be discontinued, we have great hopes that under the guidance and capital support of Japan Industrial Partners, the new company will revitalize the PC business and Vaio will continue to delight the customers who have shown such loyalty to the brand over the many years.

Next, I will discuss plans for the TV business. In November 2011, we announced a TV business profitability improvement plan which aimed to return the TV business to profitability in two years. Due to this plan, losses from the TV business were successfully reduced by more than half in fiscal 2012. These losses are now anticipated to be reduced even further, to JPY25b in fiscal 2013.

While we now anticipate our target of returning the TV business to profitability will not be achieved within fiscal 2013, largely due to unexpected factors such as the slowdown in emerging markets and declining currency rates, the reforms we have made within the TV business over the past two years are putting the business on a path to turnaround. We now plan to execute additional reform measures with the aim of establishing a structure capable of delivering stable profits beginning in fiscal year 2014.

First, we will further strengthen our 4K product lineup in order to reinforce our leading position in the 4K market and focus on increasing the proportion of sales from our high-end models, including 2K models. In emerging markets, Sony will aim to harness market expansion by developing and launching models that are tailored to specific local needs. Second, Sony will accelerate and broaden its ongoing cost reduction and operational improvement measures.

In addition, to help transform this business into a more efficient and dynamic organization, optimized in size and structure for the current competitive business environment and with greater management autonomy and a clearer chain of responsibility, Sony has decided to split out the TV business and operate it as a wholly owned subsidiary. The targeted timeframe for this transition is July 2014.

TVs continue to play a vital role as the centerpiece of the home viewing experience and remain an important element of our overall strategy as we leverage the wealth of technological expertise and assets accumulated within this business across our entire product lineup. And by implementing these measures, we aim to secure a return to profitability for the TV business as well as create a new world of home entertainment.

Since my appointment as CEO in 2012, I have worked to strengthen our core businesses and invest in new business as well as implement structural reforms such as realigning the electronics business portfolio, reducing costs and optimizing Group-wide headcount. This has included painful measures such as the reduction of global headcount by more than 10,000 last fiscal year.

However, in view of the strategic decisions regarding the PC and TV businesses and the increasingly aggressive process of selection and focus being implemented across Sony's electronics business portfolio, we have determined that further reforms to the sales, manufacturing and headquarters indirect functions that support these businesses are necessary.

We aim to realize an overall cost reduction of approximately 20% by fiscal 2015 across our electronics sales companies by identifying focus product categories for each specific country and region, rationalizing support functions and proactively implementing outsourcing and other efficiency measures. We will also further streamline Sony Corporation's headquarters and indirect functions, and by doing so we expect to achieve cost reductions of approximately 30% in fiscal 2015.

Due to the implementation of these measures across the TV and PC businesses, as well as Sony's sales, manufacturing and headquarters indirect functions, we are anticipating a Group-wide headcount reduction of approximately 5,000 by the end of fiscal 2014. Of these, approximately 1,500 are expected to be in Japan and 3,500 overseas.

In addition to all the measures that I have outlined today, we will also be accelerating our process of business portfolio realignment and refining our R&D project selection process across the electronics business.

Today, I have primarily discussed our planned measures for the PC and TV businesses that require urgent structural reform. But in order to ensure the increased profitability and growth of Sony as a whole, we must also grow our sales and profits in our three core electronics businesses and new businesses, together with our entertainment and financial service businesses.

While I have touched on some of these areas today, I plan to discuss a mid-term growth strategy in further detail at our next corporate strategy meeting, which we plan to hold after our full-year earnings announcement.

Thank you for your attention.

Thank you, Hirai-san. That concludes our review and now we'd like to turn it over to you and answer any questions which you might have. John, would you please queue for questions?

(Operator Instructions). Daniel Ernst, Hudson Square Research.

Yes. Good evening and good morning. Thanks for taking my question. Hirai-san, three questions, if I might. First, on the television business, given, as you say, that it's still a center of the entertainment experience in most homes and this is unlikely to change -- I think that much like movie theaters, people thought they would go away when big screen TVs came out. I think people still watch TV in the living room.

And so, with that in mind, and given that you want to keep TVs as part of a centerpiece of Sony, maybe we're thinking about it the wrong way. Maybe we can't get to profits in the actual hardware, much like we rarely get to hardware profits on game consoles, but it's a gateway to the rest of Sony. And if you think about it without the need to become profitable but as a gateway to make profits off of other content and services from Sony, it's a different way to look at the business and I wanted to get your thoughts on that.

Secondly, on TV, to the extent that you do want to keep TVs as part of the Sony portfolio, given now that you're breaking it out as a subsidiary, doesn't the management and employees at that subsidiary almost feel like discontinued ops and they look around the corner at their friends at Vaio and think that they're next to go? How do you motivate a group that almost looks like a lame duck presidency?

And then, third, with the exit of the PC business, it places undue or increased focus on the mobile business, and I wanted to know where you think Sony sits in mobile. Given that there's such competition at the low end of the market and margins are tough there and there is really only two major players at the high end of the market, where you see Sony fitting into the landscape of mobile. Thank you.

Okay. Thanks for the questions. I think I counted perhaps three questions, but let me try to address some of the questions you had. And then, on the third question, with regard to mobile, I'm going to ask Kato-san to jump in as well.

So, first of all, on the TV business, I think that one of the things that we have been embarking on, not just for the TV business but certainly in the mobile business and predominantly in the PlayStation business, is an ecosystem where we're not just selling a device but we're also selling content as well as related network services. And I think the PlayStation business has pushed us to having that initiative.

If you look at the PlayStation Plus and the take-up rate of the PlayStation Plus services, especially with regard to the new folks that have just come in with the PS4, that's creating a new business model, really, for the PlayStation guys.

On the TV side or other electronic devices, as you probably know, we have services like Video Unlimited, PlayMemories Online or Music Unlimited, and we're trying to differentiate the content that's available on those platforms, working through Sony Music or Sony Pictures so that we have differentiated content as well as differentiated, perhaps in some cases, timeline of deliveries, so you get some access to content earlier than other services, etc., to try to differentiate that TV experience as well.

I also think it's important, though, to take a step back, especially as we see the 4K business growing quite aggressively, as you probably saw at CES, with the entry into that business from a lot of non-Japanese companies. You probably know that we continue to have 60%, 70% market share in Japan for 4K TVs. We're neck and neck with our Korean competitors in the United States on 4K.

And also, at the same time, due to the aggressive cost-cutting reductions that we've done over two years, we unfortunately couldn't make it to breakeven, but the trajectory is definitely on the right path. So I can say that with the combination of continuing the aggressive things that we've been doing in the TV business, combining it with some unique network services, and also, and I'll touch upon this as well, making sure that we have an agile organization, a wholly owned subsidiary going forward, that we will be able to take the business into profitability for the next fiscal year and beyond.

With regard to your second question, are people going to be looking over the corner to see if the business is still going to be within the Sony organization, and I can tell you for a fact right now that the reason why we decided to take the business and make it into a wholly owned subsidiary is because I wanted to make sure that they were given the right-sized organization with a lean management structure, they are able to make management decisions as quickly as possible, but still be a part of the One Sony story.

Now, that seems like asking for a lot, but if you take a step back and look at the way that Sony Mobile Communications, our Xperia business, was set up as a separate corporate entity, the PlayStation business is set up as a separate corporate entity as Sony Computer Entertainment, and those two, even though they are separate corporate entities, are very agile and they are competing very aggressively in a very competitive market. And so I think that the same kind of attitude, if you will, is something that I'm looking for from the new TV business going forward from July.

Lastly, as a follow-up -- with regard to the mobile business, the important thing for Sony, as we talk about the mobile business, is that we are going to exit the PC business, but we want to double down and make sure that we continue to be very aggressive in the smartphone space and in the tablet space.

And that's very important to us because, as part of the way consumers enjoy content, hopefully our content, between televisions, between our tablets and our smartphones, and also making sure that we make services available to each of these devices, is an integral part of that Sony experience. And so we want to make sure that they are looked at as front and center, if you will, of our mobile strategy.

Mark, I don't know if you want to just address some numbers that we talked about on the mobile space.

Yes, okay. Now, I think some of you might be a little bit concerned that we have lowered our projections in terms of unit sales for this fiscal year, from 42m to 40m. Now, this I should explain in terms of our geographical expansion.

Product wise, with the recent efforts that we have put into our development, Xperia Z, Z1, its successors, its variations, it's all very well accepted by the consumers. That is fine. But geographically, we did miss out on some of the markets, mainly China and some parts of Asia and some countries in Europe. So those were the areas that we fell short.

Now, even so, last year we did 33m, this year 40m. So we do have high expectations going forward. Our market share is not that big at the moment. Well, in the smartphone area, 4%, give or take, in that range. So to grow much higher, I think we do have much more headroom going forward.

Thank you for the color.

Atul Goyal, Jefferies.

Hi. Thanks, Hirai-san. Thanks for taking question. Two questions. Firstly, just to keep it very simple, if we look at Company's profits breakdown starting with the insurance business, SFH, this year it's expected to generate about JPY180b in operating profits, another JPY20b coming from one-offs. Just those two things together, JPY200b. With everything else put together, it's destroying profits, not just this year but if you aggregate it for the last three years, five years, 10 years, whichever way you look at it, it's consistently been negative, despite content, music and movies, both contributing positively.

So this year, what is it in simple terms? Yes, there is restructuring and, yes, there is write-offs, but this is very bizarre. Additionally, JPY30b of -- sorry, net profit as well you've reduced from JPY30b to minus JPY10b. I'm sure there's some positive contribution from Sony Financial Holdings at the net profit level. There are some taxes. But what takes it down to minus JPY110b? That's the first question.

And there's another follow-up to do with return on equity. Your target about electronics business to breakeven, it's been there for like the last five, six years. Unfortunately, it has not materialized. Hopefully it works out in future.

My concern is companies are rewarded when the return on equity is higher than cost of equity. Right now, it's negative. At breakeven, it goes to zero. At 2%, it's still not justifying even 1 times price to book. When do you see Company generating enough profits from electronics overall, excluding the Sony Financial Holdings, to return an ROE being higher than cost of equity? So those are the two main questions. Thank you.

(Operator Instructions).

Hello. This is Tokyo. We're back. I apologize for the inconvenience. We were momentarily disconnected. If it's possible, we would like to continue the call with our question from Atul Goyal. So, Atul, if you're still connected, would you please be so kind as to ask your question again?

Yes. Can you hear me?

Yes, we can. I apologize for the inconvenience.

No worries. Again, two questions. The first one is fairly simple. If you just look at this year, operating profit from Sony Financial Holdings alone is roughly about JPY180b for the full year. Another JPY20b would come from one-offs from sale of assets. So that's JPY200b. And yet the full year is JPY80b, which means the rest of the business is generating negative JPY120b despite positive contribution from content, both in music and movies. So what essentially is this? We know there's restructuring charges, we do know there's write-offs, but isn't this just too large?

And similarly, at the net profit level as well, definitely there's positive contribution coming through from Sony Financial Holdings. But then again, at minus JPY110b, obviously there are some taxes, but what exactly is happening? If we do the same maths for this year, last two years, three years, five years, 10 years, it's the same story. Sony Financial Holdings' profit alone would exceed the rest of the Sony Group together. That's the first one.

And the second one is more towards return on equity. Sony has been trying to target breakeven in quite a few businesses. Unfortunately, it has not achieved. Hopefully it works out in future. But is breakeven the right target? Negative ROE right now. If it goes to zero, unless you get at least 6% to 7% ROE, how do investors reward the Company for 1 time price to book, because you need at least ROE to be equal to cost of equity to generate that much? Those are the two main questions. Thank you.

(Operator Instructions). Alex Lee, BNP Partners.

Yes (multiple speakers).

One moment, please, John. We're still -- we're just about to respond. One moment, please.

(Operator Instructions).

Hi. Can you hear me now? Okay. So maybe third time I would be lucky.

Yes, we can, Atul. One moment. We had a little trouble -- I'm sorry. We had a little trouble understanding you. Could you just try your question again one more time probably in the next minute or two?

Yes, surely.

We had a little trouble hearing exactly what you were saying. Please repeat your question. Thank you.

Can you hear me clearly, hopefully, now? So, firstly, very simple --

Yes, we can hear you.

Sony Financial Holdings JPY180b and one-offs JPY20b, so that's JPY200b. How do we get to JPY80b only? Obviously there's restructuring charge JPY70b and there's one-offs, etc., etc., but this is a meaningful cut which is not just this year. If you look at last two, three, five, 10 years, whichever way, it's always like that. Same thing is happening at net profit level. So that's the first question. Can you respond to that? Then I'll ask the second one, which is return on equity related.

Let me answer your question. This is the CFO speaking. Now, I'd like to sort out the number in a slightly different way than you have defined it.

Now, the operating forecast last time, October forecast, we said operating profit is JPY178b. Now we're saying it's JPY78.5b, which is roughly your JPY80b. Now, the difference here, roughly JPY90b. I cannot give you specific numbers in terms of the breakdown of this change, but what comprises this difference, let me explain in this way.

Now, the fourth quarter, well, been a little bit better than we had initially anticipated in October time. There are other business [groups] that we feel we have to account for in making our projections for the full year. That's one element.

The second is in the third quarter we took impairment charges which were not in the forecast in October, which is about JPY50b. Also, we have announced restructuring measures to improve our profitability going forward. Now, we have increased our restructuring charges for the current fiscal year from JPY50b to JPY70b. That's another JPY20b of additional charges.

And last is, I cannot go in detail, is that we had some asset sales in our forecast last time. This time, we have reviewed them and effectively taken out most of them. So those are the components that bring down the JPY170b operating profit forecast that we had last year to the current forecast of roughly JPY80b.

Atul, you said you had one more question.

Yes. The second -- I'll follow up with the first one later separately. Anyway, second one is return on equity related. This is the Company has tried to target breakeven in certain businesses for last five, six years. It has not managed that yet, unfortunately. And hopefully it works; it manages to break even in future. But is breakeven the right strategic target for these businesses or for any business whatsoever?

When investors reward -- or they want to invest in companies where return on equity should be higher than cost of equity. We haven't even reached zero. It's a long way to get to 6% or 7%. What is the long-term strategic plan for the electronics business? Is there an idea, is there a plan to generate 6%, 8%, 10% ROE, and if so how?

I'm having a bit of trouble hearing the question, unfortunately. But if I understood your question to me, you're talking about the future of the electronics business. I think that one of the things or one of the main things that I've embarked upon once I became CEO back about two years ago now, was really to first of all bring focus to the electronics business.

And I always talk about the three core businesses, mobile, games and network services and digital imaging, because I truly believe that those three businesses and the businesses that support those three core businesses have the potential to grow further and to bring more profitability to the Sony electronics business. And one of the things, for example, is the strategy that we've embarked on in the battery business, where again that's very additive and helpful to the mobile businesses in both games and in obviously the mobile space as well.

The businesses that we do not consider to be core or unfortunately we don't see growth potential, we've gotten out of or we've made other arrangements, and unfortunately we've had to make that decision on the PC business. But definitely I'd like to keep holding ourselves to a higher standard that goes beyond saying breakeven is good enough, because again I think that we have the potential with our product portfolio to do a lot better than that, and then when we combine that with our entertainment and financial services that we can bring value back to our shareholders.

Thank you, Hirai-san.

(Operator Instructions). Damian Thong, Macquarie.

Hi. This is Damian Thong with Macquarie. How are you? I just have one question. You had a very good result in the game segment in the December quarter; seems it's above target. Obviously you've already announced the fairly strong sales of PS4. Could you give some additional color as to the strength of the profitability in that quarter and where you see profits evolving in the March quarter and the June quarter?

Basically, again, I'm a little -- having a little difficulty understanding the question or hearing the question, I'm sorry. But basically, I think it's with regard to our console sales. And as you probably know, we have had very strong sell-through of the PS4 and we're continuing to chase the market.

And the last announcement that we made was that as of December 28 we had sold 4.2m PS4s. And we actually have the launch of the PS4 coming up in Japan later this month, on the 22nd, which will obviously further boost the number.

We have always talked about a combined 15m units between PS4 and PS3 for the fiscal year, and so obviously PS4 is certainly doing above our expectations. I think a bit of an impact that we're getting from that great sales number is the fact that our PS3 numbers are not as robust as we had originally anticipated.

So, basically, for the fiscal year we're going to keep the 15m for the combined number between PS3 and PS4. Obviously, based on some of the great results that we're seeing and we obviously need to see how the Japanese market goes, we're going to obviously look to grow the business further next fiscal year. But that's part of the discussions that we will start to have with the Sony Computer Entertainment team as we start getting into the budgeting process for the next fiscal year.

How has PS Plus helped the profitability in the third quarter, and where do you see that helping in the fourth quarter?

This is the CFO. I cannot give you straightforward numbers here, but just to give you a flavor of what's happening, PlayStation Network has accounts of about 150m as of this date. Now, with the introduction of PS4, that number is growing. And what is very encouraging is that a lot of the gamers, consumers are signing up for our PS Plus services.

Now, as you know, the PS Plus service is paid subscription services, a revenue stream we did not have in the past platform. So this is a tremendous boost for us going forward.

Now, that number for the third quarter I cannot disclose, but what is important is that with the very good take-off of the PS4 globally we have -- our teams have been very successful in broadening our revenue stream, not just from our package sales, not just from download sales of gaming and others, music and video and what not. But these paid subscription services and other new types of revenues, this is what is very promising for us, and I think that is what the success of the PS4 is for us going forward.

Sorry I cannot give you numbers, but we're very excited.

No, that's very clear. Thank you.

And I'll just add a little bit more color to that by saying that -- let me just add a little more color by saying that of the 4.2m PS4s that have already moved into the hands of the consumers, more than half of the people that have now gotten their hands on the PS4 have actually signed up for the PS Plus service, which will be very good for us as well. And we'll obviously be sharing more details as the months go on.

Great. Thank you very much. I just had one last question. You've targeted a JPY100b cost reduction with your restructuring program. If you look at your PC business, that's losing 20 -- sorry, your television business will lose JPY25b this year, and I suppose your PC business will lose perhaps up to JPY40b. So the JPY100b cost reduction would apply obviously to parts of Sony outside of PC and TV, but I suspect a large chunk of that will also apply to the television and the PC business as well. Is that correct?

Your understanding is correct.

All right. Thank you.

That's something we are (inaudible). Okay.

All right. Thank you very much.

Tim Lash, Third Point.

Hi. Thanks for taking my question. Can you hear me?

Yes, no problem.

Okay. Great. One quick question on the smartphone business. As you look at your opportunity to grow there, you've talked about your market share and that would seem to allow a tremendous amount of upside, but do you have specific -- do you see specific opportunities to expand distribution over the coming year? And if so, which geographies offer the richest opportunities in terms of expanding distribution of Xperia devices?

And then a second follow-up question. You recently reached an agreement to acquire the Renesas fab to expand your image sensor capacity. I'm just trying to -- help us understand expanding the capacity in the context of the weakness in the devices business in the most recent quarter. Was that specifically due to battery or was there also weakness in image sensor? And can you help us understand what gave you confidence in making that investment in the image sensor capacity? Thank you.

Let me try to address those two. First of all, in terms of the size of the market and therefore having the most potential for us really is first of all the US market and also the Chinese market. Having said that, though, again, those are very competitive markets. And I think that when we speak to the carriers, they see how strong the Xperia products are, but they're also looking for commitments on the marketing side as well, and obviously those marketing commitments can run into some very high numbers.

So I think we'll also be realistic by making sure that we're not trying to get into two large markets simultaneously in a big way, but also just trying to start out with small steps. As you probably know, we've already started with T-Mobile, for example, in the US and we look to expand that further.

I think there are other opportunities in some of the smaller South East Asian countries as well, where we have a very strong brand presence and where some of our competitors do not have the kind of sales and/or marketing strength that they may have in some of the other territories.

So I think there's still a lot of opportunities out there for us. But I think it's also important to make sure that we further shore up, for example, the Japanese market where it is one of the most profitable markets for the Xperia business. So it's making sure that we shore up the markets that we're strong in, look for opportunities in South East Asia, as well as, again, a considered entry into the US and into the Chinese market.

With regard to the image sensor investment, acquiring the Renesas manufacturing facilities up in Yamanashi, this is actually one where we believe that the image sensor business -- sorry, up in Yamagata. The image sensor business obviously has a lot more growth potential in the portable space, i.e. in the smartphone business, and also obviously in the tablet business as well.

And I think that the demand for image sensors will continue to grow as the smartphone and tablet business grows as well. And we want to make sure that we are in front of that, to take advantage of that growth and turn it into a business opportunity for Sony and not our competitors.

Thank you.

Dan Malkoun, Viking Global.

Hi. Yes. Thanks for taking my question. Just a quick question on the restructuring. Is there -- what's the cash portion of the restructuring charges that you guys announced today?

And then, on the PC business, the 250 to 300 employees that are transferring out of Sony, what was the total headcount in PC and what happens to the rest of those employees today? Are they part of the headcount reduction that you've announced over the next couple of years?

This is the CFO. I'll take the first question. Of the additional JPY20b additional restructuring charges, JPY8.2b is the impairment charges that we took in the PC business, so this is not cash. It's not additional cash outlay. The rest is headcount related, so eventually this will translate into cash outlay.

Okay. So the --

And I'll take the second portion of your question. Go ahead.

Just to be clear, so the JPY20b this year and the further JPY70b restructuring expenses, that will be roughly equivalent. There'll be a cash charge roughly equivalent to the JPY70b. Is that the way to think about it?

Your understanding is correct here, because the majority of the restructuring charges going forward next fiscal year is headcount related.

Thank you. I appreciate it.

Let me address the second part of your question. Right now, we need to obviously have further discussions with the folks over at JIP. But as we announced today, our expectation is that about 250 to about 300 employees that are currently predominantly involved in the Vaio business will be moving over to the new company.

Roughly, in Japan, we have about 1,100 employees that are involved with the Vaio business, excluding sales and marketing. And so some of these folks will be given opportunities to find other positions within the Sony Group of companies and others, if they can't make the transition, we will make sure that we help them in finding employment with other companies. So we will try to obviously move as many employees as possible to the new company and ensure that we take care of the folks that are not moving over by offering positions and/or helping them with outplacement resources.

Great. Thanks so much. I appreciate it.

As we are running out of time, I would like to turn the call back over to Casey for any closing remarks.

Thank you very much, John. We'd like to thank all of you for joining us today to discuss the announcement. Please feel free to contact our London, New York or Tokyo Investor Relations offices if you have any further questions. Thank you all for joining us and good night from Tokyo.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.