索尼 (SONY) 2014 Q3 法說會逐字稿

Welcome to the Sony Corporation conference call for overseas investors for the third quarter ended December 31, 2014. My name is John and I'll be your operator for today's call. (Operator Instructions). Please note that the conference is being recorded.

Now I'll turn the call over to Casey Kuester.

Thank you very much for that introduction, John; and thank you all for joining us today, February 4, 2015, for a discussion of Sony's forecasted results for the third quarter ended December 31, 2014.

We hope you have all enjoyed music from One Direction's hit album Four while you were on hold. 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; Kaz Takeda, Vice President and Senior General Manager of Sony's Corporate Control Department; and [Asco Municami], Vice President and Senior General Manager of Sony's Finance Department. Thank you all very much for joining us.

In just a few moments, we will review today's announcement, and 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 plan, estimates, strategies, press release, and other statements that are not historical fact, are forward-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 release, are available on our website for your access.

Also, as we originally announced in January, the finalization of our financial result was delayed due to the impact of a cyber attack at our consolidated subsidiary, Sony Pictures. Due to this, we are presenting forecast result for the pictures segment and for Sony on a consolidated basis. However, we are presenting actual results for the other segments which were not affected by the cyber attack. Sony plans to file its finalized results by March 31.

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

In the third quarter, consolidated sales are expected to increase 6.1% year on year to JPY2,557.8 billion.

Consolidated operating income is expected to be JPY178.3 billion, almost double the same quarter of the previous fiscal year.

Net income attributable to Sony Corporation stockholders is expected to be JPY89.0 billion.

For the full fiscal year, the forecast for consolidated sales has been revised upwards by JPY200 billion from the October forecast to JPY8 trillion.

After taking into account the relatively favorable third-quarter results, our operating income forecast has been revised upwards as well. We expect to record operating income of JPY20 billion, although we expect income before income taxes to be a JPY5 billion loss, and net income attributable to Sony Corporation stockholders to be a JPY170 billion loss.

In the mobile communications segment, fiscal-year sales are expected to decrease JPY30 billion from the October forecast due to a decrease in unit sales, primarily in the Asia Pacific region, despite the impact of an increase in sales from the depreciation of the yen.

We have revised downward our operating results forecast in this segment by JPY11 billion. This is primarily due to the negative effect of the appreciation of the US dollar and the decrease in sales.

In game and network services, we have revised the full-year forecast for sales upward by JPY90 billion. However, we have only revised our forecast for operating income upward by JPY5 billion due to the unfavorable impact of the appreciation of the US dollar in this segment, and the fact that we are expecting to record approximately JPY10 billion for the costs associated with the replacement of our music distribution platform and losses related to the sale of Sony Online Entertainment, as well as other restructuring charges.

We have not changed our sales forecast for imaging products and solutions, although we revised our forecast for operating income in this segment upwards by JPY1 billion due to the favorable impact of foreign exchange rates and cost reduction.

The forecast for sales in the home entertainment and sound segment has been revised upwards by JPY10 billion due to the favorable impact of foreign exchange rates.; and the forecast for operating income has been revised upwards by JPY3 billion due to cost reductions in audio and video.

In regards to the TV business, although Sony has recorded accumulative profit through the third quarter of JPY22.1 billion, we recorded a JPY16.6 billion operating loss in just the fourth quarter of the previous fiscal year. So we are being relatively cautious in forecasting this category's results.

In the devices segment, we upwardly revised our full-year forecast for sales and operating income because demand for image sensors for mobile devices remains strong.

We also recently announced approximately JPY105 billion in additional investment in image sensors to increase our total production capacity for image sensors from its current level of 60,000 wafers per month to 80,000 wafers per month by the end of June 2016.

In the pictures segment, we have revised upwardly our sales forecast for the fiscal year by JPY30 billion due to the impact of the depreciation of the yen; but we have revised downward our forecast of operating income by JPY4 billion mainly due to a decrease in media network sales and expenses associated with the cyber attack I mentioned earlier.

In the music segment, we have slightly revised our full-year forecast for sales and operating income upward, mainly due to the favorable impact of foreign exchange rates and an increase in recorded music sales in Japan.

In financial services, Sony Life continues to expand its policy amount in force, and results in the current quarter exceeded expectations, causing us to raise our full-year forecast in the segment.

Financial services revenue is expected to be JPY50 billion above the October forecast, and operating income is expected to be JPY14 billion above the October forecast.

Now I would like to turn the mic. over to our CFO, Kenichiro Yoshida, for some brief remarks.

Thank you, Casey. I just wanted to mention a few key points before we turn to Q&A.

First, as we have already announced, our finalized financial results have been delayed due to the impact of the cyber attack at Sony pictures. It is unfortunate that we can only show the latest forecast for the picture segment and for consolidated Sony as of today. We expect to be able to file our finalized results by the end of March.

Second, I'd like to take a moment to talk about how I view Sony's recent performance. As Casey mentioned earlier, we expect to record over JPY175 billion in the third quarter this year. Excluding the impairment charge that we recorded on our mobile business, we expect to have recorded approximately JPY335 billion in operating income on a nine-month basis. This is over a JPY200 billion improvement year on year.

Our restructuring is progressing, and we believe that a little more than 30% of this JPY200 billion is due to the benefit of restructuring. However, even though our results for the third quarter have improved significantly compared to the last year, our 7% operating margin for the quarter was no better than our recent historical average of 6.7%.

We are also currently forecasting a JPY142.5 billion loss in the fourth quarter, including JPY92 billion in restructuring-related costs. Due to these factors, I cannot say that we have finished our turnaround yet, and we must continue to follow through with our restructuring.

Third, I'd like to touch on the targets for the mobile communications segment that we announced today. In the fiscal year ending March 2018, we aim achieve JPY900 billion to JPY1.1 trillion in sales, and an operating income margin between 3% to 5% in this business.

We also decided to reduce headcount by a total of approximately 2,100 people in the mobile business, including the 1,000 people we already announced, by the end of fiscal year ending March of 2016. Restructuring charges related to the headcount reduction are expected to be around JPY30 billion.

Through headcount reduction and other cost saving efforts, we expect to reduce annual operating expenses from the fiscal year ending March 2017 by more than JPY90 billion compared with the current fiscal year.

Lastly, I'd like to inform you that we will be holding a corporate strategy meeting on February 18 in Tokyo. At the meeting, Hirai, CEO, will explain our strategy after moving out of our current restructuring phase.

Back to you, Casey.

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

John, would you please queue up the questions?

Thank you. We'll now begin the question and answer session. (Operator Instructions). Daniel Ernst, Hudson Square.

I have three categories. First, on the television business, I know you said you wanted to be conservative in your outlook, and certainly for the fiscal year and going into the March quarter, that makes sense. But given the dramatic swing back to profits for TVs, how does that change your strategic view of that division, which I think many people had thought that maybe you might exit televisions. Have you any thoughts on the longevity of the TV business at Sony?

And then second, in the games category where you continue to excel, in the last few months since a large price reduction from your competitor at Microsoft from roughly $500 for the Xbox to roughly $350, their sales have been slightly ahead of Sony's, at least in the west; and a few thoughts going into this second full year of the new console cycle, whether price reductions were part of the plan.

And then also on the games business related to content, where the launch of the Sony Vue, the commercial of your over-the-top television service, was.

And then third; given the relative success under difficult circumstances for The Interview on digital, what your thoughts were about further digital releases for new movies and the impact on the box office window.

Thanks.

Thank you for your questions. Just to recap, you had three points, the first of which was: Has the recent performance of the television business changed our strategic view of that business?

Also, the second question was about our pricing strategy in the game business versus our competitors.

And the third was regarding content, whether or not our experience with The Interview has changed our opinions about opening windows per film.

So with that, I'll turn it over to Yoshida-san.

Okay. Thank you very much.

As for the first question about the TV, currently, we have no plans to exit from the television business. As you know, currently, television business is more stabilized. However, still the profitability is volatile. So although we have no plans to exit, we are always seeking strategic alternatives such as to have a joint venture with other companies.

That is my answer for the first question.

And for the second question about the games, we are aware of that Xbox priced down. However, we have currently no plans to reduce the price. However, we think that the PlayStation team is now doing every effort to promote the PlayStation 4, such as giving coupons or free game downloads, such kinds of things, etc.

And as for the third point, you're right. There is an unintended window strategy, or window order change in the movie industry, and we are carefully -- we should carefully study the revenue stream from the on-demand streaming revenue. And that has a lot of implications to our business in the future.

That is my answer.

Great. Thank you for the color. But also, an update on when we might expect the commercial launch of Sony Vue, the television service for PlayStation.

Your question is: When will PlayStation Vue will be commercially launched?

Correct.

Currently, as you know, we are doing experimental services in New York City, and followed by Chicago and Philadelphia. Our current plan is to start this PS Vue service by the end of March of this year.

Thank you.

Thank you.

Richard Kramer, Arete Research.

I want to ask questions one at a time to make it a little easier. On the first one, I'm a bit confused about the mobile business. The aim seems to be to get back to a level of profit which is roughly equal to the amount of charges that you seem to be suggesting you'll be taking this year. And equally, the guidance, even for this year in units, implies a very steep decline. Can you tell us what the plan is in terms of managing through this coming period; maybe be a bit more specific about how you plan to reduce the costs in a way that allows you to lose one-third of your revenue but still sustain a business over time that will be profitable?

And then I'll get on to my next two questions. Thanks.

Thank you for your question. Just to recap, your question was about how we view cost reductions in the mobile business and how we are going to adjust that business to potential future drops in revenue.

Thank you very much for the question. As you know, as you may know, this year's initial unit target was 50 million units, and now we reduce that to around 40 million units. So this year, so adjusted, we actually increased the operation expense in large scale. So what we have to do is to reduce the so-called operational expenses by [increasing] fixed costs, marketing costs, R&D and headcount.

But those cost adjustment take some time and the sales reduction is much earlier than the cost reduction. So currently, what we have to do is to reduce the break-even point by reducing the operating expenses by 30%.

Okay. Maybe to ask the next two since Casey is recapping them. The next one is: Are you suggesting now that outside of mobile, your overall electronics business restructurings would be complete by the end of this current fiscal year?

And if we look at several of the divisions in electronics, the current levels of margin are above your long-term targets, for example, in imaging and, very specifically, devices. So do you need to revise those long-term targets, or are you suggesting that the market will be more difficult as you see it in the future?

And then I guess the last question is that we've started to see some impact of foreign exchange on the top line, but as we know, the impact on the bottom line, specifically in cost of goods sold and component sourcing, tends to be somewhat delayed.

Can you give us a sense of both hedging and your cost exposure in the electronics business to dollar-based FX costs and how that might affect numbers going forward? Is one of the reasons why we can read into the guidance that operating profit will be under pressure in a number of divisions in Q4 due to your FX thinking?

Thank you.

Thank you for your questions. Just to recap, your first question was about whether or not we are truly finished with restructuring in electronics outside of mobile in this year. And in light of our current relatively favorable performance, whether or not we are going to need to adjust our midterm targets for the electronics business.

And your second question was about our exposure to ForEx, in particular the US dollar, in terms of how we hedge, as well as what kind of cost exposure we have to the dollar as well.

Thank you for the last question. IP&S, as for the IP&S, majority of the IP&S is digital imaging products. And as you may know, digital imaging is a shrinking market. So in forecasting or in making a plan of mid term, we are quite conservative that this market is getting tough.

However, the market itself, although market itself is shrinking, actually our profitability is going up. So in the future, we may be revise the current target of the midterm plan. However, we just are finished the midterm plan, so right now, we have no plans to change the target or the margin.

And as for the FX impact on profitability, I will ask Takeda-san to explain.

Hello. This is Kaz Takeda speaking. Thank you for asking about the foreign exchange impact. You are quite right that we will have a negative impact from the appreciation dollar.

Then because of the sudden sharp decline in the other currencies, so we do not have much action to take at this point in time because our hedging policy is just to make one month ahead in our regular rolling and for hedging policy.

So therefore, what we can do is try to increase the sales in the local currency in the area of other-than-dollars currency territory, and also try to seek for the alternative sourcing in the production component. So by doing that, I know we can try to eliminate the impact from the appreciation of the dollar.

I would like some -- I could add some of hedging policies briefly.

As Kaz mentioned that we are normally hedging one month before the booking month. And the booking month -- and the settlement is always -- normally, the hedging -- I'm sorry. The settlement date is normally two months after the booking month. So therefore, that we are normally hedging for the three months.

And can you comment maybe finally on the devices business? Again, it has margins which are substantially above your long-term target, and it's a business that I imagine would also be very much affected by foreign exchange. Could you comment about the profit outlook again because it's implied that there would be a decline, a sharp decline in the margins in Q4 there?

Just to recap, your question is regarding our devices segment, and in light of the favorable performance, whether or not we are going to be able to maintain this current margin going forward.

Well, as for devices, actually, foreign exchange fluctuation or current -- [and our] situation is positive to the device business, and the [regional] projection is two points.

One is we are currently expecting some restructuring. Other is seasonality of smartphone [segment]. And lastly, as I mentioned at the press conference, we have some kind of [downward revisional] phobia. So we are quite conservative in forecasting the -- in financial forecast.

Thank you.

Okay. Thank you.

Atul Goyal, Jefferies.

First of all, congratulations for a wonderful set of results. This was in very difficult conditions, especially what Sony faced given the hacking issue. So it's quite remarkable that the Company stayed towards its focus and discipline. So congratulations.

I've got two questions. First is about your adjusted profits. And the second one is about if you could please comment something about mobile phones strategy, even though more detail might come out later; but something along the lines that you have mentioned about the TVs.

The first question is about the adjusted profits. Now you mentioned JPY335 billion of operating profit in the first nine months, excluding the non-cash goodwill write-off. But if you were also to adjust the losses and the write-offs on discontinued business of PC, what do the first nine months' numbers look like? And are these the record profits of all time, or are these the record profits of the last 20 years excluding one?

So that's the question on the adjusted numbers for the first nine months.

The second question is: You briefly mentioned about TV that you will actively consider all options including dealer partnerships, etc. When I spoke to you earlier, you had mentioned that just to break even is not a target. In fact, return on equity, return on -- generating enough returns to cover your cost of capital is an important issue. Now along those lines, do you think you also will be open to considering the joint venture and partnerships in smartphone business?

Those are the two questions about adjusted profits and smartphone versus TV partnerships.

Thank you.

Thank you, Atul, for your question. Your first question, just to recap, is that earlier we talked that we had approximately JPY335 billion recorded in the first nine months, excluding the goodwill impairment. Your question was: If we take out the PC exit costs as well, what kind of performance is that, and is that a record number?

And the second question was about our mobile strategy and whether or not break even is an appropriate target; and whether or not we are still considering perhaps other strategic partnerships or other options in this business.

Yes. Thank you very much, Casey.

Thank you very much for the question. As for the nine-month period, PC exit-related costs is approximately JPY30 billion. So if you add that amount, the adjusted profit would be JPY365 billion. I don't know if that is record number or not.

Probably not. In 2007, I think we had more operating profit than that.

Yes.

And as for the mobile strategy, we are not currently targeting a break even, but we want to have, say, [JPY3 billion] to [JPY5 billion] operating profit is our target.

But we do not deny the future possibility to have a joint venture or partnership with other companies, but that is a possible alternative. At this moment, we don't have any concrete plans.

Thank you very much.

Thank you. Can I ask one more follow-up question on the first part? In the total adjustment that you did, you've taken out the PC costs, which were exit costs. But there are also ongoing losses from this discontinued business. I think that's about JPY15 billion to JPY20 billion. So all in all, is it close to like JPY380 billion of operating profits in the first nine months? Or is my estimate wrong about the ongoing losses in the PC business?

Just trying to understand that if we clearly take out just two things which are one is mobile related and the other one PC related, what do the numbers look like? So trying to get an understanding on that one.

Thank you.

Just to recap, your question is: What would those nine-month numbers look like if we not only removed the PC restructuring cost and exit costs, but also the ongoing operating loss as well?

With regard to the JPY30 billion associated to the exit cost of PC, that includes both restructuring cost and the operating loss incurred in this year, so total JPY30 billion.

Is that clear for you?

Thank you very, very, much. Yes. Thank you.

[Samuel Ow], [Aco] Research.

I've got a couple of questions; the first one is on your game business. I understand that you revised up your sales up here by JPY90 billion, while operating profit was revised up by only JPY5 billion. Could you perhaps talk about what the reason why the OP was only revised up by JPY5 billion and not bigger?

And also here, if you look at the amount of one-off costs involved in this year, what kind of profitability do you think you will be able to make next year?

And my second question is on your cost reduction. Can you perhaps talk about the progress of your cost reduction, whether the scale and the pace is in line with your expectation; or whether you have managed to find more opportunities, like to reduce your costs by a larger scale and perhaps at a faster pace?

Thank you for your question. Just to recap, your first question was about our games segment and how in our recent announcement we revised our sales upward by roughly JPY90 billion, but we only revised our operating income forecast up by JPY5 billion, and what the gap there is.

Also, what potential profit level there is for game going into next year, considering we have these one-off costs that we've talked about recording later on this year.

And your second question was about how the progress of our cost reduction efforts are progressing and whether or not there is any more opportunities for cost reductions.

Thank you very much. As for the first question, there are a couple of reasons. One point is currency. As you know, basically, PS4 is [dollar] data-minute cost. So dollar appreciation is clearly [going to] impact. And also, as you may know, we recently announced -- well, a purchaser recently announced the purchase of Sony Online Entertainment. That will incur some loss from that deal.

And third point is -- again, this is also announced. We decided to change the music service platform, current one, to Spotify. So the cost of the platform change is third one. Also, we are expecting some restructuring cost in game segment.

Those are three reasons why we are quite conservative in this operating profit forecast.

And for the second question about the next-year level, although since we are going to announce offshore results for the next fiscal year, at the time of annual financial results announcement, which is scheduled late April, or early May, we cannot comment on the specific number of the OP level. However, since this platform for PS4, as the numbers of subscribers for the PlayStation network is quite -- has a momentum, so I am quite optimistic in this business.

That is the second point.

And third point is about the progress of costs out this year. We already announced that the overall restructuring in both sales companies, as well as headquarters and business segment. So at this moment, our cost reduction effort is on schedule, and as I mentioned, in this nine-month period, we actually recorded that almost JPY200 billion OP improvement, excluding one-time loss of mobile segment, could be write off.

Around this JPY200 billion OP improvement, approximately 30% -- a little bit more than 30% of the -- due to the cost-down impact. So our progress in cost-down activity is on track.

And I think in the future -- currently, our restructuring is so-called CEO-initiated finished restructuring phase. Now our CEO is saying that we should change the gear to the finished restructuring phase to be continuous cost-down phase. So still we think we have more opportunities to reduce costs.

Thank you.

Great. Thank you very much. Can I just ask one follow-up on the game business? How much of your cost in this -- in the current fiscal year would you consider to be one-off, please?

Just to recap, your question is: How much of the cost that we are occurring -- recording in the game segment this year would we consider one-time costs?

Well, approximately JPY20 billion is one-time costs.

Thank you.

Thank you very much.

(Operator Instructions). Ben Lu, Moon Capital.

I wanted to get a little bit more clarity into your semi division. I think recently, you guys increased your CapEx for image sensors. Can you talk through a little bit about your outlook for your image sensor business?

I know you gave a fiscal 2017 target at your Analysts' Day a few months ago, and you just recently raised your sales target by about JPY40 billion for this fiscal year. Can you talk about what is the outlook for that and what is the rationale behind the recent investment?

Thank you.

Thank you for your question. Just to recap, your question is about our investment in image sensors and our outlook for that business, and what we've used -- the trends for sales in this business and the reasons for investment going forward.

Thank you very much for the question. As you know, we recently announced the additional capital investment for the image sensors, approximately JPY100 billion. That is basically for sensor and sensor stacking production. And currently, the -- basically, there is a strong demand in mobile sensors.

As you know, mobile market itself is quite a volatile market. However, the market itself is still growing. And also, the need for high-end cameras is increasing. Also, in the future, it is said that dual camera -- dual (inaudible) camera demand is expected.

So those are our expectations for the market. So that's why we are quite positive and optimistic for the recent investment.

Thank you.

Great. And as a follow-up to that, I think you guys already gave out a target of about -- let's call it JPY1.4 billion for your device sales, of which, if I eyeball the chart, image sensors is about 55% of that, or about JPY630 billion sales versus JPY450 billion that you guys are targeting this year. So we're talking about pretty impressive growth over the next three years.

Can you talk about what is the split of, let's call it, resolution by 30 megapixel and above, or what do you think is the penetration of the dual cameras?

I just wanted to get a little bit more clarity into how you arrive at your image sensor sales guidance for fiscal 2017, especially since you guys just raised guidance by JPY40 billion this year.

Thank you.

Thank you for your question. Just to recap, you were asking about more detail in terms of where we think trends within semiconductors, specifically image centers are going to go going forward. For example, in terms of megapixels, what kind of adoption rate there will be for dual cameras and how we think that will affect us.

Just some targets specifically between what you think the penetration is for dual cameras by fiscal 2017, and what do you think will be the mix of megapixels. whether it's 8, 10, 13 etc. And basically, what do you think the SP trends are?

For the image sensors, there are several aspects of the functions. Of course, number of pixels is one of the important aspect features, but at the same time, the sensitivity is also very important, as well as the speed, speed to capture or speed to shutter. So those functions are also important.

So in developing image sensor, it's not just a number of pixel is only parameter to compete within the market. I believe that is -- I hope this is the answer for your question.

Okay. I was hoping that because you guys gave a pretty large target for fiscal 2017, I was hoping you had a little bit more detail into how you arrive at that forecast; whether it's --

I know you talked about there will be more dual cameras in the future. Maybe if you can talk about what you think the penetration of dual cameras will be by fiscal 2017.

I know you talked about this, more important than obviously just resolution but also sensitivity. I think image sensors are already down to, I think, pretty sensitive levels, so just was curious if you'd give a little bit more clarity specifically behind how you get that number. Or maybe you can just talk about what's your sales target for 2017; what you think is the split between smartphones versus automotive business that I know you guys are targeting to go into as well.

Thank you.

Again, what I can say is larger penetration of dual camera and more demand for high-end image sensor and other applications, including auto or [medical] and IOTs. But still largest portion is by far in mobile. That's what I can say right now.

Thank you.

Okay. And then my last question is also on your device business. Wanted to get any update on the camera module side of the business. I know you didn't raise -- I don't believe you raised the sales for camera modules. I think you're targeting about JPY250 billion in sales for camera modules in fiscal 2017. I think eyeballing your chart, it looks like it's probably around JPY30 billion/JPY40 billion fiscal 2013, so we're talking about significant factor increase in camera module sales. Just curious on how you plan on growing your camera module sales that much.

Thank you for your question. Just to re-cap, you would like to know why we believe that we can increase our camera module sales and if we have any granularity as why we think that's going to increase.

Yes, because there's almost [the next] increase in four years.

Thank you very much for the question. Basically, Sony has not a big -- has been not a big player in the module business. And actually, we are quite newcomer in this area. And recently, we are expanding our module production facility and we will continue to increase the capacity of the module, particularly for the dual camera [idea]. So that is the main reason why we are [reticent] in forecasting the module sales.

Thank you.

Okay. Great. Thank you so much.

As we're running out of time, I'd like to turn the call back over to Casey Kuester for closing remarks.

Thank you, John; and thank you, everyone, for your questions. This concludes today's conference call. Goodnight and thank you all again from Tokyo.

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