索尼 (SONY) 2014 Q2 法說會逐字稿

Welcome to the Sony Corporation conference call, for overseas investors for the second quarter ended September 30, 2014. My name is Alexandra, and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded.

I will now turn the call over to Casey Kuester. You may begin.

Thank you very much for that introduction, Alexandra, and thank you all for joining us today, October 31, 2014, for a discussion of Sony's results for the second quarter ended September 30, 2014.

I am 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 QA session, with respect to Sony's current plan, 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.

Before turning to Yoshida-san for some remarks, please allow me to briefly give you an overview of our results for the quarter and forecast for the fiscal year.

In the second quarter, consolidated sales increased 7%, year on year, to JPY1.901.5 trillion. Consolidated operating loss was JPY85.6 billion, a deterioration of JPY99.5 billion year on year, which was mainly due to the recording of a JPY176 billion impairment charge for goodwill in the mobile communication segment, which we announced on September 17. Net loss attributable to Sony Corporation's stockholders was JPY136 billion.

Our forecast for consolidated sales and operating income has not changed since September 17, when we announced a downward revision in our forecast, due to the impairment of the goodwill in the MC segment.

However, the forecast for several of the segments have changed. In mobile communications, we've revised our unit sales forecast downward from JPY43 million to JPY41 million, due to lower unit sales of mid-range models.

Excluding the goodwill impairment, we have downwardly revised the forecast for operating income in the segment by JPY28 billion. This downward revision includes the negative impact of the appreciation of the dollar as well as restructuring charges primarily related to reducing headcount by 1,000 in order to significantly shrink the size of the mobile business in China.

In the game and network services segment, we revised the full-year forecast for sales upward, by JPY50 billion, from the July forecast. Due to the negative impact of the depreciation of the yen in this segment, we have only revised our forecast for operating income upward, by JPY10 billion.

From this earnings announcement, we are disclosing PS4 unit sales, and network services revenue. In imaging products and solutions, we have revised upward the full-year results forecast for the fiscal year, due to cost reductions per business unit, and at the sales company, as well as due to an increase in our unit sales forecast for digital cameras.

In the home entertainment and sound segment, we have revised our sales forecast downward, due to a downward revision in our unit sales forecast for LCD televisions. But we have not changed our forecast for operating income, due to our expectation that we will be able to offset this decrease in sales with cost reductions.

On a side note, the television business, which is included in this segment, recorded JPY4.9 billion of operating income. This is the first time that a profit has been recorded in two consecutive quarters since the third and fourth quarters of the fiscal year ended March 2004.

In the devices segment, we upwardly revised our full-year forecast for sales and operating income, because demand for image sensors for smartphones, including from Chinese makers, continues to be strong.

The battery business, which is being rebuilt, recorded a profit both in the second quarter and in the first half, due to the strong performance of both the polymer battery business for mobile phones, and batteries for power tools.

In the picture segment, we recorded a loss in the second quarter, although this is not unusual as the second quarter in this segment is usually negatively impacted by this business' seasonality. If you look back at the historical performance of this segment, it is often less strong in the first half.

For the full year, we have revised downward our pictures sales forecast by JPY20 billion, and operating income forecast by JPY7 billion. This reflects the revenue underperformance of some theatrical releases in the first half of the year, and lower than expected advertising revenues in media networks.

In music, we slightly revised upward our full-year forecast for sales and operating income from the July forecast, primarily due to the impact of foreign exchange rates.

In financial services, Sony Life continued to expand its policy amount in force and results are strong. We have made no change to the July forecast for this segment.

Now, I would like to turn the mic over to our CFO, Kenichiro Yoshida.

Thank you, Casey. I just wanted to mention a few key points before we turn to Q&A. First, the benefit of the restructuring we have undertaken in electronics since the fourth quarter of last year are manifesting themselves.

As Casey mentioned, we have recorded a profit in televisions in the first and second quarters for the first time in 10 years. However, issues such as high corporate costs and low profitability in electronics remain. I believe that we must continue to steadily implement the initiatives we have underway.

Second, as announced yesterday, Hiroki Totoki will be appointed as President and CEO of Sony Mobile Communications, effective November 16. The mission that Hirai has given Totoki is to transform Sony Mobile, based on the mid-range brands that we reviewed in September.

Hirai wants Totoki to strengthen our relationship with mobile carriers and enhance the appeal of our products. Under Totoki's leadership, we plan to stabilize and improve the profitability of the mobile business.

We have already begun developing a transformation plan, and Totoki will explain the direction of the plan at the IR day on November 25.

Thank you for your attention. Back to Casey.

Thank you, Yoshida-san. I am now going to turn things back over to Alexandra so we can start the Q&A session. Thank you, again, for your attention.

(Operator Instructions). Daniel Ernst, Hudson Square.

A couple of questions, if I might? First on the weakness in advertising sales in media networks; could you provide some color on that? Was there a particular geographic region that it was weak? Was there a pricing issue? Was it a ratings issue? Can you give us the drivers of that weakness in advertising sales at media networks?

Then a couple of questions on the game division, if I might? Looking at my tracking of the game segment profits for what I have here, about 11 years, it looks like your profit this quarter in game is the highest non-holiday quarter ever. I wonder if you could talk about what the drivers are for that and what the prospects of that continued profitability, even without holiday sales as a tailwind.

Then looking at longer term for game, I know that the Chinese market is something that has been looked at before, and maybe opening up, and I think you've announced some intentions to enter China. I wonder if you could give us an update there, and whether there's an opportunity to work with Chinese partners like Alibaba, which I understand there's some talk of you working with in the film division as well. If you could give us some color on the opportunity for games in China? Thanks.

Thank you very much. As for the first question, basically the area is India and [impact] from the ratings. I will ask Steve if he have any comment to add.

Nothing really to add to that. During the past cricket season, there were some competing elections that may have hurt the ratings of the cricket matches and had a little impact on our advertising revenue.

As for the momentum of the game business, I think that the largest driver of the game momentum is actually software titles. Particularly in September, we released -- there is, I believe by Activision, a title named Destiny, as well as FIFA. And those two titles enhanced the momentum quite significantly. At the same time as PS4 -- excuse me, PS Plus subscriber number has reached to 7.9 million number. That's the second question.

Last one is China. As for the game in China, we are currently seriously evaluating game business in China, and we plan to enter into the market in the early next year. We understand already Microsoft is doing business in China and we are following [that] in after the Microsoft. Since the Chinese business is quite regulated business, we are taking quite cautious step-by-step approach in China.

As for the Alibaba, I have no comment. We understand that we have a communication in [pictures side], but as far as game business, I don't know if there are any communication with Alibaba. Thank you.

Thanks for the help.

Richard Kramer, Arete Research.

My first question is with respect to the cash burn in the Sony business, excluding financial services, which looked like it was around JPY60 billion, despite JPY25 billion or so of FX benefit. Can you help us understand the second half cash flow position in Sony, excluding financial services, given that you seem to have taken very little of the JPY40 billion to JPY50 billion of restructuring charges for the central costs and so forth that you mentioned several quarters ago?

My second question is around the network sales in game which look like they've been flat for about the past three quarters, around JPY70 billion. And I'm curious, with the launch of the PlayStation Network and PlayStation 4, why haven't these ramped more and what should we look for in future quarters in terms of the mix shifting between hardware and the network business?

And my third question is on mobile. It looks like you had about a 10% drop in ASPs, and I think you also mentioned that the restructuring efforts would focus on withdrawing from the China market. But it seems that the developed markets in Japan are getting more and more competitive. How confident are you that, in the end, after these restructuring costs that we are going to hear about in November and on the other side of this, that you'll find a profitable business in mobile? And is there an alternative plan if it doesn't look like there's a sufficient profit pool for Sony to chase there? Thanks.

Well, as for the cash flow position for the second half, [not be JPY200 --] we are expecting around JPY550 billion net cash position, compared with the JPY459 billion cash position end of September. That is my first answer for the question.

And as for the second question, as for the network service revenue, as you mentioned, our network service revenue around, say, June to August was quite flat. But as I mentioned in the previous question, since September, helped by the Destiny and the FIFA [big] titles, we had again a momentum. And we are going into the peak season and we think the network sales will pick up again.

Anyway, the network sales, if you compare with the previous year, there is [sufficient] growth, like, around 70%?

Yes.

70%. And the third question, hold on. Well, as for the third question, in mobile business, currently, we are making the business [run] to transform this business. As I said, there's a management change in the mobile business and I think Totoki-san has found a comment for the policy of the mobile communications. Totoki-san.

Yes, as Yoshida mentioned, my mission is the Sony mobile to become a profitable company; that is my mission. And at least, I'd like to emphasize, as you mentioned, the competitive environment in the mobile business is changing rapidly. So I intend to change the structure so as to manage the business in a rapid manner. And we try to develop the restructuring plan as soon as possible. That I'd like to state now.

And one thing I would like to add to Totoki-san comment is, assuming we have restructuring in mobile business, the current fiscal year forecast includes any additional restructuring charges that might be incurred in the mobile this fiscal year. And also, I have to mention that there is a chance that we will record restructuring charges for mobile next fiscal year.

Perfect. Thank you. Okay. And maybe one last follow-up. Just with the US dollar now strengthening, and clearly you're citing the FX being a major impact in areas like televisions, how should we think about that impacting the various electronics businesses heading into the fiscal third quarter and beyond?

Okay, as for the FX impact, I am going to ask Takeda-san to explain, but basically, overall impact is negative. Although we have some positive impact business segment, such as DI as well as [game network and] device business.

Yes, in response to your question that we always communicated that the JPY1 to $1 have a impact to us and in case of our electronics business, approximately JPY3 billion. So if the dollar appreciate, we have a negative impact of JPY3 billion to the bottom line.

Then if you talk about the impact to our business segment, so game and network and mobile communications and home entertainment and sound, would have negative impact by the appreciation of dollar. The rest of the business, like digital imaging and device have a favorable impact by the strengthening of the dollar.

Okay, and maybe one more question? Can you say what further restructuring charges in absolute terms we can expect in the second half of this fiscal year? Because I'm a bit confused about what's been taken versus current plans and what's still to come.

Yes, in case of the electronics business, we would record JPY50 billion in the second half for the restructuring cost to the electronics business.

Okay. Thank you very much.

Kota Ezawa, Citigroup.

This is an extended question from our associate section to Totoki-san. Totoki-san mentioned in [Tokyo] session the mobile handset business strategy is a differentiation, stabilization and an improvement. Actually, in mobile, we don't usually believe this stabilization strategy works.

Mr. Ezawa, I'm sorry, but we're having a problem with connection on this end. We're having a hard time hearing you over here; your call is breaking up. Would you try calling in again?

Okay.

[Yoman Anara, Lansower Partner].

Just on the Sony business excluding financial services, I was just concerned about the gearing levels with equity assets remaining below 30% for this period. Just wondering how you think about the range of options you have to improve the balance sheet position and some of the more proactive measures that might help in maintaining the investment grade that you have, like equity raisings or equity linked facilities, given you've said that you don't have appetite at this time for asset sales.

Well, basically, we are trying to improve our balance sheet and actually, we reduced net debt compared with same period of last year. We reduced almost JPY320 billion of debt. But the credit rating agencies [Sony] is not vis-a-vis a debt leverage so it seems they are currently focusing on the annual profits or annual operating cash flow that applied. So we really have to improve the [flow of base] operation and operating profit. Thank you.

Thank you.

(Operator Instructions). Richard Kramer, Arete Research.

While I have you on the line, just two other fairly simple questions. Can you comment on the sustainability of the margin in imaging? It's actually had a quite healthy recovery. There's clearly a lot of pressure in the digital camera market, maybe not so much on the professional side but on the consumer side. Can you comment on how sustainable you believe those margins will be, given the restructuring you've done there?

And second, what we've seen over the past several years at Sony is a wide range of divestitures of real estate holdings, of stakes and so forth. Can you tell us whether there are any plans to, in the context of your comments about strengthening the balance sheet further, sell off any of the stakes that you might have, or are there any further disposals we should contemplate? Or should we think that that period, long period of disposals and real estate sales and so forth, is now over?

As for the first question about the IP&S which the majority of that is digital imaging, and I believe we can maintain the margin as far as we're focusing on the customer segment, particularly the customer segment which is camera [geek], or picture geek people. And currently, we are focusing on the high end compact, as well as mid-LRS interchangeable lens camera and we believe we are chasing market share in the high-LRS interchangeable lens camera area, so as far as we are focusing on high end segment.

We have no intention to expand the lineup to the middle and low end, so as far as, again, we keep that policy we think that we can maintain the margins.

Another point also I want emphasis on is, we have the imaging technology. Sony is the number one Company in both amount and technology in [stream of image sensors]. That helped this business profitability, sustainable.

And as for the second question, currently we have no plan to sell any assets or stock currently we have. Thank you.

And with your -- I know it's not an official target, but with your aspiration of JPY400 billion of operating income for the Group for FY15, will you consider that excluding or including restructuring charges, given that you mention the mobile restructuring charges might stretch into FY15? Thanks.

Thank you very much. First of all, JPY400 billion is not the forecast that our CEO, Mr. Hirai's, guidance for the next fiscal year. And we are not currently including the restructuring charge of mobile because we have not any plans yet.

Okay. 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, ladies and gentlemen, this concludes today's conference. Thank you for participating, you may now disconnect. Thank you and good night from Tokyo.

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