索尼 (SONY) 2014 Q1 法說會逐字稿

Welcome to the Sony Corporation conference call for overseas investors for the first quarter ended June 30, 2014. My name is John and I'll be you operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Casey Kuester. Mr. Kuester, you may begin.

Thank you very much for that introduction, John, and thank you all for joining us today, July 31, 2014 for a discussion of Sony's results for the first quarter ended June 30, 2014. We hope you have all enjoyed Jack White's hit album, Lazaretto, while you were on hold.

I'm Casey Kuester in the Investor Relations Department here in Tokyo and with me on the conference call tonight is Kenichiro Yoshida, CFO of Sony Corporation; Hiroki Totoki, Senior Vice President; Kazuhiko Takeda; Vice President and Senior General Manager of Sony's Corporate Control Department; and Steven Kober, Executive Vice President and Chief Financial Officer, Sony Corporation of America. Thank you all very much for joining us. In just a few moments, we will review today's announcement and then 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 plans, estimates, strategies, press release, and other statements that are not historical fact 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.

Before turning to Yoshida-san for some remarks, please allow me to briefly give you an overview of our results for the quarter and our forecast for the fiscal year. Consolidated sales, operating income, and net income were all up year on year. Sales increased 5.8% to JPY1,809.9 billion. Operating income increased 96.7% to JPY69.8 billion. And net income was 8.6 times that of the same quarter of the previous fiscal year at JPY26.8 billion. Most of our business segments demonstrated an improvement in operating results with the Game & Network Services segment exhibiting the biggest improvement.

The forecast for the current fiscal year that we announced in May for consolidated sales, operating income, and net loss remains unchanged. Although we have revised our operating income forecast for the Mobile Communications segment down to breakeven, we have upwardly revised our operating income forecast for the Devices and the Game & Network Services segments.

The Mobile Communications segment recorded a JPY2.7 billion loss in the quarter, primarily because an increase in marketing and R&D expenses did not yield the expected increase in unit sales, primarily in our mid-range. For the full year, we have lowered our forecast from 50 million units to 43 million units. However, going forward, we are going to continue to pursue cost reductions in order to offset the impact of this revision as much as possible.

The Game & Network Services segment posted nearly double the sales of the same quarter of the previous fiscal year and operating results improved JPY20.7 billion. In the Network Services area, more than half of the people who have bought a PS4 have subscribed to PlayStation Plus, our fee-based network service, and we see this trend continuing. We have upwardly revised the full-year operating income forecast for this segment by JPY5 billion, due to the strong sales of PS4 and PS4 hardware cost reductions.

In the Imaging Products & Solutions segment, although sales for the quarter decreased, operating income increased year on year, mainly due to reductions in SG&A. We revised downward the full-year forecast for sales by JPY10 billion, but operating income is expected to remain unchanged from our May forecast.

In the Home Entertainment & Sound segment, the TV business recorded a profit for the quarter. Sales of that business were JPY205.0 billion and operating income was JPY7.9 billion. Although we have revised our unit sales forecast for TVs downward to 15.5 million units, we believe we can offset this impact through cost reductions.

We have revised the operating income forecast for the Devices segment upward, as demand for image sensors in smartphones, including from Chinese manufacturers, has increased from the second quarter. We have made no change to our forecast for the Pictures segment. We are continuing to invest in the Media Networks business within this segment, most recently by announcing the acquisition of CSC Media Group in the UK. CSC is a cable and satellite TV channel company with a diverse set of entertainment channels.

We have also made no change to our forecast for the Music segment. Although physical media sales and recorded music continued to shrink, we saw an increase in music publishing and visual media and platform sales during the quarter. Lastly, we made no change to the forecast for the Financial Services segment. We continue to see steady expansion of policy amount in-force at Sony Life.

With that, let me turn things over to Yoshida-san for a brief statement before we get into Q&A.

Thank you, Casey. I wanted to take a few minutes to touch on four key points and make an announcement before we turn to Q&A.

First, although all of the consolidated metrics, sales, operating income and net income for first increased year on year, we continue to be cautious about the outlook for the fiscal year. If you subtract the operating income of the Pictures, Music, and the Financial Services segments from consolidated operating income as well as the gain we recorded from the sale of real estate this quarter, we actually generated a consolidated operating loss. This is due to electronics and corporate expenses. We continue to have a strong sense of urgency regarding the turnaround of electronics. And we plan to aggressively implement our restructuring plan. Headquarters and sales company restructuring is beginning in earnest and the bulk of the expenses will be incurred in the fourth quarter. There is no change to our forecast for JPY135 billion in cost for restructuring and as a business transformation initiative.

Second, as Casey explained, we have revised downward our full-year forecast for Mobile Communications. Based on the current quarter's financial performance and the downward revision in the full-year forecast, we have begun our review of the mid-range plan for this business in July. It is possible that this review might result in important impairment charges against goodwill and fixed assets. Going forward, we will deploy country-specific strategies, maintain strong relationships with carriers, and strengthen our positions a premier brand all in an effort to build a profitable business model. We have already begun to review our product lineup and the number of models in our portfolio. We will also prioritize profitability of our scale so as to reduce the risk associated with this business.

Third, while we are happy that we recorded a profit in the TV business in the first quarter, we also recorded a profit in the first quarter of last fiscal year and then ended the year with a loss. So we continue to closely monitor this business. Changing scale is not a priority for us and I have requested the new TV company's management to avoid relying on stretch (ph) costs. We will work to improve our profitability by adapting to the environment of each market in which we do business.

Fourth, I am happy to report that during the quarter, we paid off some bonds and a syndicated loan, reducing our debt level by JPY230 billion compared with the end of March. We will continue to strengthen our financial structure going forward.

In conclusion, please let me inform you that we are planning to hold an Electronics Investor Day in Tokyo in late November. Thank you for your attention. Back to Casey.

Thank you, Yoshida-san. I am now going to turn things back over to John so we can start up the Q&A session. Thank you again for your attention. John, would you please queue up the questions?

We will now begin the question and answer session. (Operator Instructions). Daniel Ernst, Hudson Square.

Yes. Good morning and good evening. Thanks for taking my questions. I have three, if I might. First, on the Mobile segment, you discussed the review of the mid-range products and potentially taking some impairments in that category. I'm wondering, just thinking out of it, given that everyone is having problems with the mid- and low-end phone in profits including Samsung; is there an opportunity for Sony to do what you've done with the TV business and just move to the high end of the business as in not going for scale but in going for a higher-profit, lower-volume segment?

Two, regarding the profits in the Game division, I know for the full year the forecast factored investments in upgrading the PlayStation Network as well as investments in content for the service your provide there. I wonder if you could give us an update on where we are on those costs and upgrades of the PlayStation Network.

And then, third, on the Pictures segment, speaking to the recent announcement that the next Amazing Spider-Man, I guess 3, is moving from 2016 to 2018. I wonder if you could give us some color on why that move is being made, but also if you could talk about what that means for the Pictures slate and the number of tent poles that you have to support the group beyond Spider-Man and James Bond. Thanks

Thank you for the question. Let me answer the question. The first question about the Mobile, your question was if we are having problems in low end. And, you're right, we had the problem in low-end and mid-range products in the first quarter. Originally, Sony's Xperia smartphone is a high-end more luxury product. And actually this is the issue. We started to expand our product line to the middle end. During the course of reviewing the current mid-term plan, probably we re-evaluate the product line strategy; maybe you should more focus on the high-end side. That is my answer for the first question.

And second question was the Game business. Yes, our focus included investment in networks. As you may know, currently almost 52 million unique users a month. Again, as you may know, PS4 has a so-called social function which doubles or triples the total traffic and sessions. So, that requires the network investment as well as server investment to handle that kind of tremendous sessions and traffic. And as for the progress of the investment, we have been investing, but we are forecasting quite significant increase in the latter half of the year during the year-end season in November and December. So, actually investment in the network side would be increased in the latter half of this fiscal year. And question number three, Spider-Man, I'm going to ask you to answer the question.

Sure. The question was; with Spider-Man moving from 2016 to 2018, what does that mean and what other tent poles do we have? Amazing Spider-Man 3 took in over $706 million, which we're very pleased with. It was down a little bit from the last film so we've decided to delay the next one, but instead we're going to make Sinister Six, which is a spinoff from the Spider-Man series. So, we've announced that for 2016 and we look forward to that film taking its place for the time being. We also have other franchises that we've been very successful with, such as the Jump Street series. 22 Jump Street just had a terrific quarter. The Men in Black series performs well for us. And there are other franchises in the making. Thank you.

Thank you for the color. And if I could just follow up on the PlayStation investment question. You mentioned that there will be a significant uptick in that spending in the second half. But shouldn't network investments precede when you expect the traffic to pick up with the holidays? Thanks.

Yes. We should prepare for the increased traffic definitely before the holiday season.

Thank you.

Richard Kramer, Arete Research.

Thanks very much. Three brief questions, if I may. On Mobile, the review you mentioned, does it go as deep as questioning whether Mobile should remain one of the three key focus areas for Electronics alongside Games and Imaging?

Second question, in Game, can you tell us the rough split or the precise split between PS3 and PS4 shipments so that we can understand how the new platform is performing?

And third, just on the cash flow and balance sheet position for the Sony business, excluding Financial Services, it looks like there was some cash outflow there and I'm just wondering with restructuring charges coming over the course of the year; will Sony core businesses, excluding Financial Services, generate or consume cash in fiscal year 2014? Thanks.

Thank you very much for the question. Okay, yes, currently Mobile business is one of the three key business pillars in Electronics business and currently, yes, that is absolutely a core business of Electronics. One reason is smartphones evolved many functions of Sony's product lineup, DIs and Walkmans and some part of Games. So we have to face the deal with this smartphone business anyway.

However, of course the vision of the Company which President Hirai-san provide us, which is (inaudible) use experience, we've not changed but what is a core business in Electronics business is kind of a strategy issue and strategy may change in accordance with change in business environment. So, in the future, we may change this current strategy or the definition of core business. If that will occur, the timing will be the next corporate strategy meeting scheduled in May next year. Thank you very much.

And as for the second question. We can't provide the breakdown of our PS3 and PS4. Sorry.

And as for the third question, Totoki-san will answer the question.

Right, about the cash flow excluding Financial Services sector, fiscal year 2014 we estimate a breakeven cash flow even including the restructuring charges. Thank you.

Okay. Thank you very much.

Kota Ezawa, Citigroup.

Hi. Thanks for taking question. Two quick questions for Yoshida-san. One is the question regarding handset future profit. You mentioned potential write-off the asset mobile handset. I'm curious what sort of the business trend in your mind for the future of Sony Mobile. I know it's too early to ask this question but I'd like to share your brief mind. Given that the goodwill write-off you mentioned in now possible in Sony Mobile, that means Sony Mobile will not be able to recoup cash or profit in the future once you lose this year with the possible restructuring. Is this correct to assume you're now thinking you will have a large-scale downward revision in handset business segment from the write-off and that will remain lower cash flow or lower profit situation next year and after? That's question number one.

Go ahead and ask your questions all at once, if you'd be so kind.

Okay. My second question is about the CFO mentioned about IR day. Now, what is the principal purpose for this IR day you're planning to do and what are you expecting for this event? Will that more like we can discuss about the business strategy in division management?

Thank you very much for the question. As for the Mobile, as I explained, we just started review of the mid-term plan so it's too early to tell about the possibility of the scale of write-off. We can't tell it's happen or not. And so we can't predict or mention any numbers at this moment.

And as for the second question, IR day, the main purpose is to push accountability to each business group. And to enhance accountability is good for this company. And each session has, say, one hour or 50 minutes and we are going have enough Q&A timeframe so you can have good communication with each business segment management. Thank you.

Okay, could I follow up on the first question? The fact that you had called it in the presentation that might be the asset write-off in mobile handset business. If that's the case, this means then you're not going to make profit or cash flow with the business for the certain time in the future. Does that stand on those principles?

This is Steven Kober. Let me just answer that from an accounting perspective. When you do an impairment review it's a complicated calculation looking at all future cash flows, residual values, and then it's present valued back to the date of the testing. That does not mean we will not make any profit or cash flow in the future. An impairment is just an impairment of the carrying value of the goodwill, but that takes into account certain growth rates, residual values, discount rates, tax rates. So if, in fact, they determine impairment is necessary, that will not signify that there will not be any future profits or cash flow.

Okay, got it. Thank you.

(Operator Instructions). Eric Smith, Strategy Analytics.

Hi. Thank you for taking my call this morning and evening. My first question would be; one of your competitors has plans in place for the Chinese console business following the lifting of the ban there. Are you able to provide any color on your plans for the Chinese market for PlayStation?

And second, about the TV business, you've pivoted to the high-end market recently. So, to what extent could you say that ultra-high-definition TVs are a priority compared to regular high-end HD TVs? Thank you.

Well, I recognize that we have one of our competitors has plans to gain business in China. But we also recently made a joint venture with Chinese partner and we are going to release a game business in China -- excuse me. As for the actual sales timing, we haven't decided yet. But we already established a joint venture with a Chinese partner.

And second question; yes, we intend to enhance our TV ASPs. In that sense we have priority in (inaudible) HD, so-called 4K TVs, compared to 3K TVs.

Great, thank you. If I could follow up on the first question, are you at least able to say whether or not 2015 is in the works for a Chinese market entrance?

We haven't announced that launch schedule yet. Thank you.

Very good. Thank you so much.

Larry Haverty; Gamco Investors, Inc.

Yes. Thanks. In the Game division, a couple of questions. One, could you perhaps share with us the order of magnitude of the investment in the servers? And then second, would it be possible to break out the revenue of Network Services? You get companies like EA in the business; the stocks have responded very positively to them breaking out their digital revenues which has very, very high incremental margin and has tended to be valued very heavily by investors.

Well, as for the first question about the investment in network, that quite has a magnitude but, at the same time, the magnitude is almost the same level as the payment fee level. As you know, on Network Service we have to incur the payment cost such as the actual (inaudible) cash as whereas the mobile from payment. That kind of payment fee is almost equivalent to the total network cost; is my first answer.

And, as for the second question, as for the network revenue, currently we are making 1.5 times revenue compared with the same period of last year.

Okay.

(inaudible) ratio.

The more information the better. Thank you.

(Operator Instructions). Richard Doherty, Envisioneering.

Thank you and good morning and good evening. It seems that Sony seems to have a unique position in high-resolution audio, both through network distribution and your catalogs. And I wonder if you could expand a little bit on your ambitions for this category for being a success for Sony now and in the future.

One moment, please.

Yes, we have a very high expectation for the so-called high-resolution audio. Last year we launched a high-resolution already Walkman, which costs approximately $700, approximately. And that remains very well and we are currently gradually expanding our lineup of the high-res products. Thank you very much.

Thank you.

Dan Malcolm, Viking Global.

Hi. Just a question on the Mobile Communications division, two questions. The first is just, in terms of the amount goodwill or intangibles on the balance sheet that could potentially be written down, I guess. How much is assigned to the Mobile Communications division out of the JPY683 billion that you've got in goodwill and the JPY654 billion intangibles on the balance sheet in total?

And then the second question is, when you look at the Mobile Communications business overall now, if you think about the strategy and not having as much success kind of moving down market; what do you think the strategy looks like now going forward for Mobile Communications? And that is, what markets do you think you play in? Where do you take market share? And then how do you grow units over time in terms of high-end, low-end, and mid-range; North America, Europe, Asia, China, etc.? Thank you.

One moment, please

What I can tell you about the first question is the amount of the goodwill allocated to Mobile Communication business segment is JPY176 billion. That is the amount allocated in Mobile Communications.

Okay, great.

Yes. As for the strategy of the Mobile, we tried to reduce the portion of middle-range product line and as whereas we tried to concentrate on the profitable countries and telecom carriers, such as we do in Japan. Thank you.

Understood. And so, just a follow-up to that then. I know your plans before had been to expand into the U.S. market and I know that part of the debate on that, obviously, was the cost of expanding into the U.S. market where marketing spend, co-marketing dollars with the carriers tend to be higher than in some of the other markets. Is the plan still to try to expand into the U.S. market? Or is the new strategy to forgo markets like the U.S. and just focus on markets like Japan?

We do still have a plan to expand into the U.S. market and that's in kind of an incremental way. And we are currently updating our ability to collaborate with our other divisions, such as the Game division. And currently, U.S. telecom carriers want to enhance their data upward. So far we are trying to provide is streaming music as well as streaming game functions, combined with Xperia smartphones. In such way we try to persuade what approach the telecom carriers in the United States. So, my answer is, yes, we still have plans to expand. Thank you.

Thank you.

We have no further questions at this time. I'd like to hand the call back over to Casey Kuester for 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 goodnight from Tokyo.

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