索尼 (SONY) 2015 Q3 法說會逐字稿

Welcome to the Sony Corporation conference call for overseas investors for the third quarter ended December 31, 2015. (Operator Instructions). Please note this conference is being recorded.

I will now turn the call over to your host Justin Hill.

Thank you very much, John. Good morning, good afternoon and good evening. Thank you all for joining us today, January 29, 2016, for a discussion of Sony's results for the third quarter ended December 31, 2015. We hope you enjoyed Adele's 25 while you were on hold. I am Justin Hill, General Manager of Investor Relations at Sony Corporation, returning as moderator of this conference call after a nearly 12-year hiatus.

Tonight here in Tokyo, I am joined by 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; Steven Kobe, Executive Vice President and Chief Financial Officer, Sony Corporation of America.

In just a few moments, Yoshida-san will make some short remarks. Then Takeda-san will provide you an explanation of our forecast. After that, we will take your questions.

Please be aware that during the following remarks and Q&A, statements made with respect to Sony's current plans, estimates, strategies, press release and other statements that are not historical facts, are forward-looking statements about the future performance of Sony. These statements are based on management's assumptions in light of the information currently available to 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 which could cause actual results to differ, please refer to today's press release which can be accessed by visiting www.sony.net/ir.

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

I will now turn things over to Yoshida-san for his remarks.

Thank you, Justin. Before turning things over to Takeda-san for a summary of our forecast, I want to share with you my view of the state of Sony's (inaudible) business today. I will touch on Sony's branded product business, our device business and our game and network services business.

First is the branded product business which is defined as our mobile communications, imaging products and solutions and home entertainment and sound segments. These segments contain our smartphone, camera and television businesses. I am very pleased with how these branded products are performing. All these segments recorded a year-on-year increase in operating income in the third quarter.

Their performance helped Sony to record the highest level of third-quarter consolidated operating income and net income since the third quarter of the fiscal year ended March 2008. This was primarily due to the significant cost reductions we undertook at our sales company and headquarters last fiscal year and due to our strategy of not chasing scale so as to emphasize profitability.

The improvement in the results of these segments can also be attributed to the quick decision making of their management teams. For example, the managers of these businesses moved quickly to reduce our exposure in emerging markets when performance there started to lag. They also moved quickly to reduce advertising and promotion expenses when inventory became tight.

Another factor which has helped to improve results in the branded products business is the fact that we put the global sales and marketing organization under one person last year. This too has increased the speed of our decision making.

Although the mobile business is projected to record a loss this fiscal year, its results are improving because it is following the same strategy as our other branded products.

Going forward, we plan to focus on the premium segments of the branded products market and we believe that by doing this, we can generate a healthy return despite using very little invested capital.

We are taking a conservative view as to the market for these products next fiscal year. We believe that the sales in emerging markets could decrease due to a slowing of their economies and a reduction in consumer purchasing power resulting from the depreciations of their currencies against the US dollar. As a result, we believe it is appropriate for us to take this view so as to mitigate downside risk.

Next is the devices business. We believe that demand for our devices could decelerate in the near term. In our image sensor business, we have changed our forecast to assume a slowdown in the growth of the market for smartphones. In fact, there is a risk that the market for high-end smartphones might decrease due to the issues in emerging markets I just mentioned. In light of this situation, the management team of Sony is taking quick action. We have instructed our sales team to more aggressively approach smartphone makers, particularly those we had to turn away last year when we were supply constrained.

We have made the decision to postpone our plans to reach production capacity of 87,000 wafers per month by the end of September 2016. Finally, we are seriously considering utilizing a portion of our facility in Oita we bought from Toshiba, to manufacture logic, instead of photodiodes which could lead to a reduction in the cost of our sensors.

Although we are taking these actions so as to mitigate the downside risk in this business, we are confident that -- in the long-term prospects of image sensors because we think there is room to expand their use in security cameras, automobiles and the Internet of Things.

We also believe that one of our competitive advantages in the image sensor space comes from the fact that we manufacture the sensor in house. Thus we believe that the investment we have made in production capacity for sensors will be valuable going forward.

We take very seriously the fact that we recorded an impairment in the battery business this quarter and the possibility that we might have to record an impairment in the camera module business in the future. We are working hard to right-size the part of the battery business devoted to smartphones and are encouraged by the part of the business which is devoted to power tools and other high-output appliances.

The possibility that we might have to impair assets in our camera module business comes from problems we had when starting up this business and a decrease in projected future demand from high-end smartphone makers.

The third and final area I want to touch on is the game and network services business. This business has great momentum and is different from our branded products and devices business because it is increasing its service-related revenue.

The install base of PS4 hardware is expanding faster than any of our previous consoles. Sales of the product during the holiday season were extremely strong and network revenue for the third quarter increased approximately 50% year on year.

The PlayStation is steadily growing into a global network entertainment platform due to the power of the PlayStation 4 hardware console and the ability of our team to bring diverse content creators to the platform. We are excited about the prospects of the PlayStation VR which is also being well received by content creators.

On Tuesday, we announced that we would be combining Sony Computer Entertainment and Sony Network Entertainment into a single company known as Sony Interactive Entertainment. The headquarters of the new company will be based in the United States. Many of our key partners across the network, network for services, content and technology are based in the United States and major shifts in the digital content landscape are happening fast in the US. Locating our headquarters there will allow us to quickly respond to the rapidly changing business environment and continue to expand and strengthen the PlayStation business.

This concludes my assessment of the state of our electronics business today. I thank you for your attention and will now ask Takeda-san to explain our forecast.

Thank you, Yoshida-san. I would like to take a few minutes to explain our forecast for the remainder of the fiscal year ending March 2016 and provide you a little more color on what is happening in our devices segment.

Our forecast for consolidated sales, consolidated operating income and net income remains unchanged from the forecast we announced last October. Although we increased our operating income forecast for the home entertainment, sound, music, game and network services and imaging products and solutions segment, we reduced our forecast for the devices segment. We also reduced our contingency budget contained in all other corporate and elimination from JPY80b to JPY30b.

In the mobile communications segment, we have downwardly revised our full year in itself forecast from 27m to 25m units but our forecast for operating income is unchanged. Despite the reduction in unit sales, we think we can maintain the same level of profitability as the previous forecast by maintaining prices at a higher level than originally planned and by reducing cost.

In the game and network services segment, we have upwardly revised our fiscal year operating income forecast by JPY5b to JPY85b pursuant to the strong momentum of the PS4 platform. We have been especially pleased with the strong performance of network sales which have been outperforming our expectations.

In the imaging products and solutions segment, we have upwardly revised our operating income forecast by JPY5b to JPY63b due to a projected improvement in product mix.

In the home entertainment and sound segment, we have upwardly revised our operating income forecast by JPY13b to JPY38b due to a reversal of certain sales incentives accruals, cost reductions and an improvement in product mix.

In the devices segment, we have downwardly revised our forecast by JPY82b to JPY39b due to a decrease in expected sales from our image sensors, camera module and battery businesses as well as a JPY30.6b impairment charge against fixed assets recorded in battery business.

At the briefing we gave to analysts and investors in Tokyo earlier today, we showed two slides that provide a visual breakdown of devices segment operating income between image sensors, camera modules, batteries and others. You can view these slides in the replay of the webcast on our IR website.

The first slide shows that image sensor business is expected to generate approximately the same amount of operating income this fiscal year as last fiscal year, although we originally expected this business to generate more operating income than the prior year. Lower than expected sales will likely cause the level of profit to be plus year on year.

The slide also shows that the battery business, the camera module business and the others are expected to generate a loss this fiscal year with the losses from the battery business and camera module business increasing year on year.

The second slide shows the trend in results for these four categories on a quarterly basis for last fiscal year and the current fiscal year, including our forecast for the fourth quarter. Last fiscal year, we received larger orders than expected in image sensor business. This caused our ability to supply the market to be constrained, a situation that continued through the beginning of the current fiscal year.

Then in the summer of 2015, we had an issue with our production equipment which resulted in our having to decline orders from certain customers. After we resolved this production issue and after new capacity had just come online, orders from our customers started to decline due to softer end-user demand for smartphones.

Further complicating matters was the fact that we supply custom designed sensors to some of our major customers and there is an approximately five-month lead time to manufacture our sensors. As a result, it is difficult to switch our production lines over to the other customers quickly.

We believe that image sensor business will start to recover from the first quarter of next fiscal year but we will formulate our business plan based on assumption that growth of the smartphone market will slow.

In the music segment, we have upwardly revised our forecast by JPY10b to JPY84b due to an increase in sales of recorded music and visual media and platform categories.

As of this quarter, we have started to disclose the breakdown of our digital revenues in recorded music category between downloads and streaming. Nearly one-quarter of revenue of the category came from streaming. This disclosure can be found in the supplemental data for the entertainment businesses that we disclose on our website.

We made no changes to our pictures and financial services segment forecasts this quarter.

Thank you for your attention, I will now hand things over to Justin.

Thank you very much, Takeda-san. I am now going now going to turn things over to John so we can start the Q&A session.

John, would you please cue up the questions.

(Operator Instructions). Kendrick Chia, Tahan Capital Management.

Hi. I have two questions. First question is because in the first half you said that you have JPY20b of FX buffer and I think JPY60b of non-FX buffer. So I would like to check the update. How much buffer is there left for this quarter respectively for FX and non-FX? And how much buffer did you use for 3Q including for the -- and is it used for the battery impairment? So that's my first question on the buffer.

Second question is on image sensor outlook because I understand you said that image sensors would recover from 1Q of next year and you think that the smartphone market will slow down. I would like to check with you whether this is the same between the image sensor as well as the camera module portion of the business? Also would it be worse than the previous year, given that you're saying slowing down but is it going to be a decline or what kind of -- small growth or what?

And could you also break down the factors? Is it the price or the volume? Or is it the utilization rate of your production plans? Thanks.

Thank you for the question. Our first question is about risk buffer. I will ask Takeda-san to explain about that.

And as for the second question is the image sensor outlook. Well, let me answer the question on -- the second one. Well, we expect to make some recovery in first quarter in fiscal year 2016, because we already have some orders for that. And as I said, well, we are expecting now almost no growth in the smartphone market. Currently, our main application for the smartphones -- main application for the image sensor is smartphone, so I think we are currently conservative about the prospects of the fiscal year 2016.

However, currently, we are aggressively doing the promotion of the image sensor business, particularly for the Chinese players, which we are low -- our production is constrained. So at this moment, we are in the midst of the budget process, so I cannot specify the price or borrowing or utilization at this point in time.

And as for, the question -- I'll ask Takeda-san to explain about this question.

Yes, with regard to your question about our fourth-quarter results, we have JPY30b buffer this time in fourth quarter, and as opposed to JPY80b in the previous quarter. Of JPY80b buffer in the third quarter announced, we used JPY30b for the impairment losses for the battery business in third quarter. That means we do not have any exchange rate risk in fourth quarter, so all JPY30b is buffer for fourth quarter is for business.

Can I just ask a quick follow-up question to that? Why did you use the FX buffer for 3Q? Because your FX assumptions, isn't it more favorable that the yen is stronger versus your assumptions, so why do you need to use the buffers for 3Q?

Sorry, let me clarify. We didn't use any -- we didn't use JPY20b buffer in third quarter.

We didn't use. Oh, okay, which means you have JPY20b buffer for FX left, as well as JPY30b for others, correct? So we have a total of JPY50b now for 4Q?

No, no, we have only JPY30b buffer in fourth quarter.

But you said you used up JPY20b for 3Q?

No, no, we didn't use JPY20b buffer, because the exchange rate went better than we expected for the buffer purpose.

Okay, okay, so you didn't -- okay, okay, understand. So what would the JPY30b of others be used for in 4Q? What are the possible scenarios that could it be used for?

Yes, we projected a lot of risk scenarios in our forecasting processes, and one of the areas is that the potential impairment loss for the camera module business.

The JPY30b, I'm sorry -- just, I'm sorry, I'm just asking another question. Would it be enough? Would the JPY30b be enough? Because looking at your camera module business, the maximum impairment seems to be much -- could be more than the battery impairment, so would the JPY30b be enough for that?

At this point of time, we just mentioned that there is a possibility to have the impairment charges in the fourth quarter for module business, so we do not -- we are not able to give you any number for the impairment losses at this point in time.

You say that it's 15% of the devices' long-lived assets, so wouldn't that be JPY60b, so that will be more than your JPY30b buffer. Like during your domestic, your --

Yes, at this point, again, I repeat that we do not comment on the exact number for the impairment at this point in time, so the JPY30b buffer in the other segment includes modules business impairment and other business risks.

Okay, okay, thank you.

(Operator Instructions). John Litschke, CREF.

Yes, hi. I'm just wondering on the capacity cutbacks for the targets for the CMOS sensor, [was] the 87,000. Could you give us a rough estimate of where that's going, and how were you deciding that capacity build? And you mentioned there's a five-month lead time, so that goes into the production ramp for most vendors for the rest of the year.

So could you provide any additional clarity as to the order activity prospects that you're seeing currently? Are you positively inclined about winning back some of the Chinese customer market share?

Repeat the question?

So, John, it's Justin. Let me just make sure I got your two questions -- two or three questions right. The first one you asked was about the 87,000-wafer-a month-capacity forecast that we have for September and correct me if I'm wrong, but I think you're wondering how that capacity will trend going forward. Is that right?

Yes. You said that you were going to cut back on that capacity target, so I'm just wondering what the new target is and how you frame that.

And then the other was just our kind of visibility into orders at this point in time and our confidence in getting back customer market share from Chinese customers.

Exactly.

Okay, I appreciate the questions. Well, as we said, in capacity, we have a plan to increase our capacity to 87,000 by September this year. And approximately 20% of that capacity increase via so-called outsource portion.

So currently, we are evaluating the current projection, and I think the production adjustment will be quite concentrated in that 20% portion. However, we haven't decided whether we reduce or we will change the current planned expansion diode side, at this point in time.

And as for the visibility of customer orders as of today, as you may know, Chinese customers basically tend to have two models a year. So we have some confidence that we can start to see some Chinese customers quite soon. However, the Korean players basically, they release once a year, so it may take some time to get orders from those players.

Okay, thank you. And do you have any thoughts on dual camera adoption over the next one to two years and the impact on Sony's operations?

Well, beginning from next year, for our so-called dual-lens, dual-camera smartphone will be launched by we believe from major smartphone players. However, as I said previously, recently, smartphone market is slowing, and particularly high-end smartphone market is now slowing down. So that may impact the demand or production schedule of dual-camera smartphones by the major smartphone manufacturers. So we believe the real start, fresh start of the takeoff of smartphones with dual-lens cameras will begin year of 2017.

Okay, thanks. And on the camera module side, can you talk a bit more about the reasons behind the restructuring and impairment charges?

And then going forward into next year, post the battery and camera module restructuring, once that's done, can you talk a little bit about what the expectations are outside of sensors within devices, about the profitability? Where do you think that that will go? Do you think you can get those to close to breakeven, and how much impact that would have?

And lastly, outside of devices, are there any large foreseen restructuring expenses that might be incurred going into next fiscal year, or should the restructuring charges come down dramatically?

Sure. John, did you -- did I hear you say restructuring in devices?

Well, battery.

Oh, oh, okay. Batteries.

And camera modules, right? Impairments.

Oh, yes. We don't necessarily term those restructuring, but I understand what you're saying, so you're interested --

Charges. Impairment charges/restructuring expenses. You have restructuring expenses I guess in mobile, impairments in device. They're rather large -- clarity on the mobile, the module impairment charges, and then going into next year, impairments and restructuring charges, can we expect those to come off dramatically?

Well, I appreciate this question. As for the battery, we already made an impairment of the asset. Other than that, we don't see the restructuring charge in this category at this point in time.

Our strategy in the battery business is to focus on the [power] business, where we are strong, as in the [record] type, and shrink the part of the business where we are weak, laminate type for smartphones.

And as for the modules, as you may know, we are a newcomer in this business, and two years ago, we started this business. However, at the beginning, we had to fail to supply the [in-share] projects, and after that, we are gradually improving our production itself, and now we are keeping very high level. However, at this moment, the forecast for the smartphone business itself is now declining. That's why we explained about the possibility of the impairment of the modules.

And as for the size or timing of the impairment of the module, at this point in time, we cannot comment on that. But as Takeda-san says, approximately or a little bit less than 15% of the device assets is in modules. Thank you.

(Operator Instructions). John.

Hi. I just had a quick question on the mobile comm business. Going into next year, the targets had been for trying to achieve breakeven. Is that broadly on track, and could you give us any further details of some of the actual actions that you've taken or are finishing up through this quarter to get to that path from breakeven?

Yes, thank you. I think we are on track for the breakeven of fiscal year 2016. Well, we are currently forecasting the product and area and country and telecom carriers. And also, we are conducting quite significant restructuring, and that is on track. And we believe we have a good chance to achieve the breakeven next fiscal year. Thank you.

Thanks. And music? Are there any new thoughts on streaming now that you're breaking it out? Is that having a positive impact on revenue growth in recorded music? And looking forward into the next year or two, do you think that trend will continue or accelerate, and is that a net positive, or what is the impact for Sony's business?

Well, again, thank you for the question. Well, we have -- we are having a quite significant momentum in the music streaming, and because of that, we see signs that the music market is finally bottoming out due to this rise of streaming services, such as Spotify and Apple Music, after 15 years of decline. Steven, do you have any other comment?

No, we're very positive with the growth in the streaming market. To some extent, it's replacing the download business, but the growth is positive. We expect it to keep going and accelerate, so as Yoshida-san said, we expect the music business to be on the rise again. Thank you.

Okay, thanks.

(Operator Instructions). Kendrick Chia, Tahan Capital.

Hey. Could I check your JPY50b of upward revision for the all other segment? What is it for? That's JPY49b, sorry.

Yes, as we talked earlier, in the third quarter, we put JPY80b of this cash for in other segments, and this time, we put only JPY30b for that purpose, so that improved the other segment in this quarter. Thank you.

Okay. Can I ask a follow-up question on the restructuring cost for mobile as well as the other segments? Is there a possibility that 4Q restructuring costs could be more than last year, which was quite massive?

Yes, thank you for asking the question about restructuring charge in fourth quarter compared to the previous year. As you know, we had last year restructuring activity in last fiscal year, but in this year, we have only big exercise in mobile communications segment.

Therefore, in the fourth quarter in this fiscal year, we expect to have a sizable restructuring charge for the mobile communications segment, but we do not expect a large one other than the mobile communication segment. Thank you.

Thank you.

(Operator Instructions). Thank you, ladies and gentlemen. As we're running out of time, I'd now like to hand -- we will now close the call. Thank you for participating, and you may now disconnect.