索尼 (SONY) 2015 Q2 法說會逐字稿

Welcome to the Sony Corporation conference call for overseas investors for the second quarter ended September 30, 2015. My name is John and I'll 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 you host, Casey Kuester.

Thank you very much for that introduction John and thank you all for joining us today, October 29, 2015 for a discussion of Sony's results for the second quarter ended September 30, 2015. We hope you have all enjoyed The Essential Van Morrison 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, Executive Deputy President and CFO of Sony Corporation; Kazuhiko Takeda, Senior Vice President and Senior General Manager of Sony's Corporate Control Department; Atsuko Murakami, Vice President and Senior General Manager of Sony's Finance 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 we'll be available to answer your questions.

Please be aware that statements made during the following remarks and Q&A session with respect to Sony's current plans, estimates, strategies, press release and other statement that are not historical facts, are forward-looking statements about the future performance of Sony. These statements are based on management's assumptions in light of the information currently available to it and therefore you should not place undue reliance on them. Sony cautions you that a number of important factors could cause actual results to differ materially from those discussed in the forward-looking statements. For additional information as to risks and uncertainties, as well as other factors that could cause actual results to differ, please refer to today's press release which can be accessed by visiting sony.net/ir.

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

Before turning to Yoshida San for some remarks please allow me to briefly give an overview of our results for the second quarter and our forecast for the remainder of the fiscal year.

In the second quarter, consolidated sales were essential flat year on year at JPY1,892.7b.

Consolidated operating income was JPY88b, an improvement of JPY173.6b year on year. This significant improvement was due to the recording of a JPY176b goodwill impairment loss in the mobile communications segment in the same quarter of the previous fiscal year. Excluding the impairment loss, operating results deteriorated JPY2.4b year on year. However the year-on-year negative impact of foreign exchange rates for all five electronic segments in aggregate was approximately JPY34b. So, if you exclude the impact of foreign exchange rates, results would have improved.

Income before income taxes of JPY72.2b was recorded and net income attributable to Sony Corporation's stockholders of JPY33.66b was recorded, both significant improvements year on year.

Please consult our earnings release and presentation materials from today's announcement for Sony's results for the second quarter and first half of the fiscal year.

Our consolidated sales and operating income forecasts for the fiscal year remain unchanged from the July forecast. However we did make changes to the forecast of several of our segments that I will now explain.

In game and network services we revised our sales forecast upward by JPY30b and our operating income forecast upward by JPY20b due to the continued strong performance of the PS4 platform, including software. We recently adjusted the sales price of PS4 hardware and today we revised our unit sales forecast upward by 1m units.

Imaging products and solutions sales and profit results for the quarter increased year on year mainly due to our continued successful shift to high-value-added models in the shrinking digital camera market. In light of this situation, although we downwardly revised our sales forecast for the segment due to the impact of foreign exchange rates, we upwardly revised our operating income forecast for this segment for the fiscal year by JPY10b.

As a side note, we have decided to include the medical business which was previously included in all other in the imaging products and solutions segment starting from the third quarter. The reason for this change is that we believe it is important to draw on synergies in the imaging field to strengthen and grow the medical business.

In home entertainment and sound, although we are forecasting lower sales due to the negative impact of foreign exchange rates, we upwardly revised our operating income forecast by JPY3b mainly due to cost reductions and further improvement in product mix. However, we have not changed the operating income forecast of the television business for the full year as we continue to have a cautious view going forward.

In devices, we have downwardly revised our forecast for sales from the July forecast due to lower sales of polymer-type batteries, as well as temporary problems in the second quarter with manufacturing equipment for image sensors. However, our forecast for operating income remains unchanged mainly due to an expect improvement in image sensor productivity and yield, as well as cost reduction.

As is mentioned in today's release, Sony is in the process of our annual review of our mid-range plan, including for our battery business. An increase in competition in the battery industry adversely impacted the financial performance of our battery business in the current quarter, was a factor in the downward revision of the full-year forecast of the devices segment and can continue to negatively impact this business going forward. As a result, it is possible that the business environment I just mentioned might result in an impairment charge against long-lived assets in the battery business.

We have downwardly reviewed our pictures sales forecast due to a decrease in sales in all categories. Within the motion pictures category, we have revised our sales forecast downward due to the underperformance of the current fiscal year's film slate. We have also revised downward our current year forecast for operating income in this segment, primarily due to the underperformance of the film slate, as well as the negative impact of foreign exchange rates and lower advertising revenue in media networks.

In regards to our music segment, our sales and operating income forecasts remain unchanged from the July forecast.

Our forecasts for the mobile communications segment remain unchanged as well. Within this business, the restructuring plan that we have announced is progressing according to plan and we are confident that we will be able to meet our forecast for the fiscal year.

The results of each business in the financial services segment continue to be strong, especially Sony Life, and our forecast for sales and operating income for the fiscal year remains unchanged.

We have slightly increased the projected loss in all other, corporate and elimination to JPY188b this fiscal year. JPY80b of this JPY188b is an allocation for risk, the same amount that we had budgeted at the time of our previous earnings announcement.

Now, before we turn to Q&A, I would like to turn the mike over to our CFO Kenichiro Yoshida.

Thank you, Casey. I wanted to take a little more time than usual tonight to give a view as to Sony's recent progress. It is true that during the past seven years we have been struggling as a company to maintain profitability, particularly in our electronics businesses, but we believe that the results we reported today are a sign that we have made significant progress.

In our traditional electronics segments including mobile, IP&S which contains our digital camera business, and HE&S, which contains our TV business, we have moved to an asset-light structure and are focused on improving our return on invested capital. All three of these segments are committed to prioritizing competitive advantage from both a product and a supply chain management perspective over the expansion of scale.

The financial performance of our TV business has stabilized and we expect that the mobile segment can achieve breakeven next fiscal year by applying a focus to its product line up and geographic footprint.

As Casey mentioned, we revised upward our profit forecast for both HE&S and IP&S today. We are also very pleased with the strides being made by the games segment, the forecast for which we revised upward today as well.

The difference between the game segment and the three segments I just mentioned is that we do want to grow scale in the game business. In particular, we are committed to turning the PlayStation network into a truly comprehensive global entertainment platform and we have already begun to have some success. In September we achieved a record amount of network revenue for a single month.

We are also focused on growing scale in the CMOS image sensor business within our device segment over the mid-term. Although we revised downward by JPY10b our sales forecast for the image sensor business today as a result of the temporary production equipment problems Casey mentioned earlier, we are still excited about the mid-to-long-term growth opportunities for this business.

One of the ways we plan to grow scale in image sensors is through expansion of production capacity. Yesterday we announced that we entered into an MOU with Toshiba to acquire certain semiconductor production facilities from them. One of the benefits of potentially acquiring these facilities is that we could utilize them to either increase our scale by adding to our photodiode production capacity, or to reduce our cost and improve our margins by internalizing the production of [logic] which is used in our world-class image sensors and is currently outsourced.

Another benefit of potentially acquiring these facilities is the possibility of bringing a large pool of engineering talent into Sony. Leveraging the expertise of these people will also help us to grow this business over the long term.

One area that we are concerned about is the pictures business. The motion picture part of our picture business is a windows business. In other words, we monetize the content we create and distribute multiple times and in multiple countries. Therefore, to maximize our profitability, we need to develop franchise IP which will appeal to customers in as many windows as possible.

The head of our entertainment business, Michael Lynton, recently appointed a new head of motion pictures business who we believe strongly values the development of franchise IP. Over the long-term we are optimistic about -- that the financial performance of the pictures business will improve, but it is going to take some time as we develop our IP.

Music is also a segment where monetization of content on a recurring basis is crucial. That is why we are excited about the growth of digital streaming platforms and we will continue to invest in artist development to ensure that we have a pipeline of content that can be exploited.

Financial services remains one of our most profitable segments. We believe we can continue to record consistent profits in the segment going forward.

So we know we are on track to achieve the 10% or higher ROI and the JPY500b or more operating income targets we have set for the mid-term.

Thank you for your attention. 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 again for your attention. John, would you please queue up the questions.

(Operator Instructions). Kota Ezawa, Citigroup.

Hi. Thanks for taking my question. Quickly on two questions. One is on the battery business write-off risk. You said that JPY40b, or 10% of JPY400b, assets is to your battery business. Is it that the whole JPY40b is then under the risk for the write-off? I guess the whole JPY40b, if you think about the business to shut down, or maybe smaller than that if the business is kept ongoing. Which is more likely, can I ask? This is the first question. I have a follow-up one.

Thank you for the question. As for the battery business, we said approximately 10% of the device segment is battery-related assets and at this moment we are currently examining the long-term business plan. So at this moment we cannot comment on the question you ask. Thank you.

Yoshida San, you said in the Tokyo briefing the battery business is still important to Sony, which means then you're not planning to shut this business down. Does that mean all JPY40b will not go for the write-off but then a smaller amount than the JPY40b?

So just to clarify, your question was if we choose to shut the battery business down, if that will result in an impairment or write-off of all of the asset, or if we keep the business continuing it won't result in all of the assets being written off?

Again, at this moment I can't comment how much we impair the assets of the battery business.

Okay. Thanks. The other question is on the mobile business. Can you remind me what was the reason for the JPY20b operating loss in the September quarter again? The currency, ForEx rate should be a positive impact quarter by quarter on quarter form the June quarter to September quarter but operating profit was only slight improved. What is the issue? And then also in which country or regions is making a bigger loss, is there any specific region or country? And also is it Sony trying to shrink this country or region because it keeps making big loss, or is there any other story or something to keep this area going? Thank you.

Just to clarify, your question was about the reason for the loss in the second quarter in the mobile business when, in your view, the impact of foreign exchange should have improved from first quarter to second quarter? And also in what geographies are we currently loss-making? And are we planning on shrinking our geographic footprint.

Well as for the year by year currency impact I will ask Takeda San to answer the question.

As for the countries we are making a loss, what I can explain is there are three countries, although we can't identify the name of the countries. But accumulated loss for the current fiscal year in those three countries will be around JPY50b. Takeda San.

Yes, with regard with the currency impact in the first quarter and second quarter, in our analysis, we had the same level of the negative impact both in the first quarter and second quarter. Did that answer your question?

Yes. Thank you. Just --

Excuse me. One thing I have to mention is in those three countries I mentioned, we are trying to reduce at this moment. Thank you.

Okay. Thank you very much.

(Operator Instructions). Nam Kim, Arete Research.

Thank you for taking my question. In mobile it seems that your operating income deteriorated, excluding impairment charge, even with the lower sales in the first half of the year. For you to achieve your annual target number of JPY60b loss I think you have to improve operating loss second half of the year. Can you give us some color how you can achieve that?

And also with this deteriorating operating income, you say you can make a breakeven 2017, so I'm kind of confused. Your operating income is worse than last year, but at the same time you said you can make breakeven this business. So, can you walk through how you can achieve this better performance in the second half and then breakeven later?

Just to make sure we understand your question. Your question is why we think that results are going to improve in the second half of the year when, in your view, they've deteriorated from quarter one to quarter two. And how confident we are and why we're confident that we think we can achieve breakeven or better in this business next fiscal year.

Yes.

Thank you for the question. As for the second half of the results of our mobile business, beginning from this month we are shipping new model out Xperia Z5. That's one point. We are expecting quite good sales, particularly in Japan. Also, ongoing costs down efforts are making some improved result in the second quarter.

And as for the next fiscal year, as I said, we are currently working on to reduce exposure of loss-making countries. And the second point is we are making a restructuring. It's on schedule. So we expect to reduce headcount by 2,000 from the 7,000 it was before.

So in those efforts, like our rightsizing the scale and its organizational structure and also supply chain, so we are quite confident that we can make a breakeven level next year. Thank you.

Okay. Thank you. One more question. In image sensors, can you give us an update on what caused image sensors to become a problem and how much did you lose of business during the quarter? And then, if you can, can you give us an update on the CMOS image sensor demand/supply situation?

Thank you for the question. As for the image sensor production problem, a problem occurred with our stacking process in Nagasaki plant, our stacking process equipment for about two weeks and our shipments decreased significantly during that time. And so, as a result, we were unable to fill the orders of several of our customers, therefore the impact of this trouble affected in the second quarter and, as well, some impact in the second half as well. That's why we revised downward the sales of image sensors by JPY10b.

That production problem occurred when we tried to increase our stacking process capacity to handle the increased output from Yamagata plant. So I would say a fundamental issue is the human resources capacity is not sufficient enough, particularly in the design side as well as production side. So I think if we can win a large pool engineering talent of Toshiba into Sony, that will be quite beneficial for our CMOS sensor business. Thank you.

Okay. Thank you.

(Operator Instructions). John Litshcke, CREF.

Yes, hi. Just to follow from the previous question, could you actually comment on the supply/demand outlook for CMOS?

And regarding the Toshiba Oita plant acquisition, could you talk a bit about how much, if any, CapEx you might need to spend to upgrade the plant and the timing of the integration? I imagine the margins there are relatively low. Do you think the turnaround time would be toward improved profitability would be relatively quick, or can you frame that a little bit better? Thanks.

Just so we understand your question, your first question is about the supply/demand outlook for CMOS sensors in general. And the second is about the announcement we made yesterday about the talks that we're currently in with Toshiba and how much CapEx would be necessary to upgrade that plant, and potentially what kind of timing it would take for us to bring that up to a level that we would like to see before bringing capacity online, right?

Well, just the improvement in the margin structure there, but yes.

Thank you very much for the question. As you know, as you well know, the CMOS sensor process is comprised of three parts, photodiodes and logic, the two together. And at this moment we have not decided which of the three will [said before].

Also, since we have not yet completed the negotiation with Toshiba, so we cannot comment on the CapEx amount at this moment.

And as for the timeframe of the production, basically, it takes a one year and a half to two years to be in the, well output the actual production of the acquired facility. Thank you.

And sorry, can you comment on the supply/demand of CMOS please?

Excuse me. As for the supply/demand outlook for CMOS sensors, at this moment we are in the full production capacity level. We are keeping our full production capacity. And we are fully aware that the market of smartphones, particularly in China, there is some softness. But at this moment we don't see any big negative impact from that. However we are currently carefully watching the market.

Okay. Thank you. And one other question on the risk buffer. You're maintaining the JPY80b risk buffer. You've changed the segments to reflect better outlooks in most of the segments and a deteriorated pictures environment from the first half. Barring those changes, looking at the macro, looking at just the end markets of your businesses, is there any other major factors that give you concern outside of let's say the battery business situation? Thank you.

So, just to clarify, you were asking if we have any other major concerns in our allocation for risk besides the battery announcement that we made today as well as foreign exchange, correct?

Sure.

Well, as for the risk buffer, well in the risk buffer we have, as we mentioned, we have a currency risk as well as a battery impairment risk and so that is the risk we identified in the buffer area.

Okay. Thank you.

Giles Edwards, Lazard.

Hi there. Just following on from that question on the risk buffer, can I get a sense of how much, given current FX rates, how much of the buffer would be used up for FX please? Is the first question.

Thank you. I will ask Takeda San to answer that question.

We have JPY20b in the risk buffer as for the currency risk. Thank you.

And is that applying current rates?

That is the -- a little bit conservative rate that exchange rate US dollar against euro 1.04. Thank you.

Okay. The second question was on music. What growth are you seeing in the music market? And if streaming takes off, do you think Japan will be significantly behind the rest of the world?

Just to clarify, your question was what kind of growth, if any, we are seeing in the overall music market? And if streaming takes off globally, whether or not Japan will be significantly behind the rest of the world?

Correct.

Well, thank you for the question. For the music, we recognize that the so-called paid subscription music service is now expanding and in Japan this year is the year to start quite many -- there are many services starting in Japan. So I believe in Japan, the paid subscription service will be one of the major entertainment enjoyment way of listening music in Japan as well.

Is Sony involved in any of those steaming services? I know you have a stake in some of the European-based ones but --

In Japan, Sony Music Entertainment Japan is partnering with other companies. Like we are doing with Line, Line Music Service, with a company called Line. Also, we are providing other music services including our service, a service which is led by Avex.

In the rest of the world we are seeing a continued increase in the digital streaming services. Apple as you know introduced their services last year. Spotify continue to grow. Some of it right now is substituting from digital downloading, but we're optimistic that it will continue to grow.

Okay. And then could you comment on your virtual reality business within PlayStation and the potential there?

So your question is about the potential with our virtual reality business, I'm assuming you're referring more to sales targets or operating profit target?

Yes.

Thank you for the question. Well we are quite excited about our PlayStation. We are spending lots of R&D related to PlayStation VR, but at this moment what I can tell you about the PlayStation VR would be the first half of next fiscal year, that is a busy schedule of PlayStation VR and the core application we are currently thinking about is mainly game. That's all I can say right now. Thank you.

Okay. And then could you comment on the movies business where the working capital on the cash flow has significantly increased. How is that going to change as we go forward?

So your question I'm referring to, that I believe you're referring to, is the deterioration in film costs, or the increase in film costs year on year that we have in our financial statement?

Correct, and perhaps mention within this the movie slate that is still coming, so obviously James Bond etc.

Let me respond to that. As you know, the film business is an intensive working capital business as you invest in films. The money is spent in advance of the films being released. But we've been managing that for years. As the films get more expensive, we do have more invested. We've also made many investments in our media networks as we grow the television business around the world and cable channels around the world.

As far as upcoming releases, we have coming up, well this quarter Goosebumps just opened a week ago and that's doing very well. But we're very excited, next Friday, Spectre is opening worldwide. It opened in London on Tuesday. But that's the next James Bond film starring Daniel Craig, that's coming out. Later in December we have Concussion with Will Smith coming out and then next year we have the Angry Birds Movie in May and we're very excited about the Ghostbusters film coming out next July. So we have a very exciting film slate coming up.

Okay. Thank you.

(Operator Instructions). Eric [Chamber] from Electro-motive.

Yes, hi. I have a question regarding your MP-CL1 that you're just introducing. In your website you show that you have developed the pico projector engines CXN0102 and 103. Would you be able to comment on the dimensions, or rough dimensions for the 102? Do you have any customers interested in these engines and is it ready for production?

I'm sorry, I really -- we're having a difficult time hearing your question at the moment. I believe you were saying something about our pico projector.

Yes, I'm sorry, I can repeat the question. You are introducing the MP-CL1 pico projector. In your website you show that you have the project modules, or the engines that you are developing CXN0102 and the CXN0103. I was wondering if you can comment on the rough dimensions for the 102, if you have any customer lined up or interested in this product, and also if it ready for production?

At the moment, unfortunately we're unable to comment on specific products that you're talking about. If you like, feel free to follow-up with us after this call though. Thank you.

Kendrick Chia, Tahan Capital.

Hi. I was reading about the Copyright Royalty Board impact on the streaming market. So I was wondering if you could comment on what you think would be the impact of their judgement on the royalty rates that you receive on your music library? I guess you have contracts with those streaming and radio services, so what is the nature of these kinds of contracts? Are they long term, short-term? If they expire soon, would the new judgement have a big impact on the rates they receive? And the last part of my question is, is this judgement by the CRB applicable to only the States or the whole world?

Thank you for the question. I will ask Steve Kober to answer the question.

Let me respond to that. Right now in the US, the FCC and the rate courts are evaluating the rates that will be set. They have not issued their ruling yet. Obviously, from a publishing standpoint we hope that they increase the rates paid to the publishers. Now, we have agreements with the writers, but we pass through the portion of revenue that we collect, so it would be a win for the writers as well as for us if the rates were increased. The rates that are being set right now are for the US only.

Okay, got it. Thanks.

Okay, I'd now like to hand the call back to Casey Kuester for closing remarks.

Thank you all for tuning in today to listen to Sony's results announcement for its second quarter results and goodnight from Tokyo.

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