索尼 (SONY) 2015 Q4 法說會逐字稿

Welcome to the Sony Corporation conference call for overseas investors for the fiscal year ended March 31st, 2016. My name is John and I will be your operator for today's call.

At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note this conference is being recorded.

Now I'll turn the call over to your host, Justin Hill.

Good morning, good afternoon, and good evening. Thank you all for joining us today, April 28th, 2016, for a discussion of Sony's results for the fiscal year ended March 31st, 2016.

We hope you enjoyed our hold music, Songs from the Arc of Life by Yo-Yo Ma and Kathryn Stott. I am Justin Hill, General Manager of Investor Relations at Sony Corporation.

Tonight here in Tokyo, I am joined by Kenichiro Yoshida, Executive Deputy President and CFO of Sony Corporation; Kazuhiko Takeda, Corporate Executive, Corporate Planning and Control and Accounting; Atsuko Murakami, Vice President, Senior General Manager Finance Department; and Steven Kober, Executive Vice President and CFO, 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 results and 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 meeting 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. From this quarter, we have also made available on the website a written translation of the speech Yoshida-san made in Japanese at that investor meeting earlier today.

I will now turn things over to Yoshida-san.

Thank you, Justin. Today I want to speak for a few minutes about three topics. First is the impact of the earthquakes in Kumamoto. Second is the reason why we have not issued forecasts for our five electronics segments today. Third is a summary of our complete results for the fiscal year ended March 31st, 2016. After that, Takeda-san will explain the results and forecast for these segments.

First, let me say that we extend our deepest sympathy to all those affected by the earthquakes in Kumamoto and Oita. Although some of Sony's employees and their families are living in evacuation centers, we have confirmed the safety of everyone.

Sony has four semiconductor manufacturing facilities in Kyusyu. Immediately following the earthquakes, we temporarily suspended operations at three of them, but we quickly restarted production at two of the three. Currently one of the four facilities has yet to restart operations, Kumamoto Technology Center, or Kumamoto TEC.

Kumamoto TEC is extremely close to the epicenter of the largest -- the earthquake that happened on April 16th. It is the primary manufacturing site for image sensors for digital cameras and security cameras, as well as for the micro displays that go into projectors.

Kumamoto TEC has a bilayer structure with clean rooms in each layer. The clean rooms in the lower layer contain our wafer processing equipment, and the clean rooms in the upper layer contain our testing equipment, camera module production equipment, and other equipment.

The clean rooms in lower layer and the production equipment inside these clean rooms have not sustained significant damage. Since yesterday we have begun to start up the equipment in those clean rooms, and we expect to resume production in these rooms around the end of May.

On the other hand, the upper layer clean rooms did sustain damage, and we are not able to say yet when we will restart operations. Damage to Kumamoto TEC's finished goods inventory is limited, and we are currently inspecting the status of its work in progress inventory.

In the devices segment, we expect there to be direct physical damage to Kumamoto TEC, and we expect to incur expenses primarily for recovery and reinforcement work. In addition, there is a possibility that large opportunity losses will be incurred, mainly in the devices and imaging products and solutions segments, due to suspension of production at Kumamoto for a certain period of time.

Further, there is a possibility that the results of the mobile communications, game and network services, and home entertainment and sound segments will be adversely affected by the suspension of production at Kumamoto TEC and by the possibility that the supply of components might be interrupted due to the fact that certain vendors are located in the earthquake zone.

Since this is the case, we have decided to postpone today's announcement of the forecast for the five electronics segments and for consolidated results.

The last point I want to make about the earthquake pertains to insurance. Although Sony does have earthquake insurance that covers such things as direct physical damage and opportunity losses from lost sales, the maximum amount of compensation we can receive after our deductible is JPY20 billion, and there is a possibility that this amount will not cover the full amount of losses from the earthquakes.

Before turning to our results for the fiscal year ended March 31st, 2016, I want to emphasize the fact that we are working to assess as quickly as possible the impact of the earthquakes on Kumamoto TEC and our suppliers, while we are simultaneously working to minimize the negative impact on our business.

We are currently creating a schedule to assess the impact on our results. And as of now, we believe it will be possible to inform you of our forecast for the five electronics segments and consolidated results around May 24th.

Turning to the actual results for the fiscal year ended March 31st, 2016, I am pleased to report that we recorded JPY294.2 billion in consolidated operating income, which was 4.2 times as high as the previous fiscal year.

Net income attributable to Sony Corporation stockholders was JPY147.8 billion yen. This is the first time that we recorded net income in three years since the fiscal year ended March 31st, 2013, when we recorded JPY41.5 billion due to approximately JPY280 billion in one-time gains.

And if we exclude that year, this is the first time we recorded net income in eight years. This is also the first time in five years that we recorded operating income for the total of five electronics segments.

I will now ask Takeda-san to explain the results and forecast for each segment.

Thank you, Yoshida-san. First is the mobile communication segment.

During fiscal year 2015, segment sales decreased 20% year-on-year, and operating loss was JPY61.4 billion. Compared to the previous fiscal year, operating loss decreased JPY156.1 billion.

Our restructuring efforts have exceeded the target we initially set, and we were able to reduce our operating expenses in fiscal year 2015 by approximately JPY80 billion compared with the fiscal year 2014.

Headcount at Sony Mobile has decreased from approximately 7,100 people as of October 2014 to approximately 4,500 people as of April 2016.

Looking forward to fiscal year 2016, our target is to record a profit. A portion of the image sensors used in our smartphones and a portion of camera modules used in our smartphones are made at Kumamoto TEC, and there is a possibility that the status of these production lines might have an adverse impact on the result of this business.

Next is the game and network services segment. Both sales and operating income of the segment significantly increased year-on-year due to the strong momentum of PS4. Operating income was JPY88.7 billion. Also, network sales increased by more than 50% year-on-year.

In fiscal year 2016, we expect the strong momentum of the PS4 to continue. However, due to the impact of the earthquakes, there is a possibility that the supply of components from certain vendors might be affected. But, even with that impact, at this point in time we think that, in fiscal year 2106, we can exceed the 17.7 million units of PS4 hardware that we sold in the previous fiscal year.

Currently we are considering a variety of ways to minimize the impact of the earthquakes on the results of this business.

Next is the imaging products and solutions segment. In fiscal year 2015, sales decreased but operating income increased year-on-year to JPY72.1 billion. We succeeded in shifting to high value-added models at the time when the camera market shrank. Operating income increased significantly by JPY30.4 billion year-on-year.

Regrettably, many of the products in this segment have been adversely impacted by the suspension of production of components at Kumamoto TEC. As a result, we are unable to provide a forecast for this segment at this time.

Next is the home entertainment and sound segment. In fiscal year 2015, sales decreased but operating income increased year-on-year to JPY50.6 billion. The operating income of the television business, which is included in this segment, was JPY25.8 billion for the fiscal year.

The strong results of this segment are attributable to a shift to high value-added models and improvements in operations, including at sales companies, made over the last several years.

As we look forward to fiscal year 2016, there is a possibility that the supply of components from vendors for certain models of Blu-ray recorders will be affected due to the impact of the earthquakes. We expect the impact of the earthquakes on the production and sales of TVs to be negligible.

Next is devices segment. An operating loss of JPY28.6 billion was recorded in fiscal year 2015, significant deterioration of JPY117.6 billion compared to the previous fiscal year. As we announced last week, we recorded a JPY59.6 billion impairment charge against fixed assets in the camera module business in the fourth quarter.

We first entered the camera module business in the latter part of fiscal year 2013. However, our ramp in manufacturing has been slower than expected, and we recorded the large impairment charges as a result.

We thought that we could increase yields and profit margin through automation of the assembly process. But, precisely because we did increase automation, we have limited ability to adapt to change in specification and demand. Currently we are reconsidering the optimal size of this business.

In the battery business, which is also contained in devices segment, we recorded large impairment charges in both fiscal year 2013 and fiscal year 2015. The basic performance of smartphone batteries was below that of our competitors. Going forward, we expect to accelerate the shift to high power lithium type batteries, where we were more competitive, and will continue to work to improve the functionality of our smartphone batteries.

In the image sensor business, which accounts for the majority of sales and profits in the devices segment, we are currently expanding our sales efforts, primarily to Chinese smartphone manufacturers. And orders are strong, but demand is not expected to record in earnest until the second half of the fiscal year 2016.

As Yoshida-san mentioned, we are not yet able to formulate a forecast for the devices segment for fiscal year 2016 because of the impact of the earthquakes.

Next is the pictures segment. Sales increased and operating income decreased for fiscal year 2015 year-on-year, and operating income was JPY38.5 billion. For fiscal year 2016, we expect higher sales and operating income.

Of the three categories in this business, the biggest challenge is the motion pictures business. We regard fiscal year 2016 as a transition year, during which the turnaround of this business will be conducted under the new management team which started in spring of last year.

Next is the music segment. Sales and operating income for fiscal year 2015 increased year-on-year, and JPY87.3 billion in operating income was recorded.

We recently announced our decision to make Sony/ATV, our music publishing business, into our wholly owned subsidiary by acquiring our joint venture partner's stake. Music publishing is one of our recurring revenue businesses, and this strategic investment was aimed at enhancing that part of our business.

We expect to record JPY63 billion in operating income in fiscal year 2016. Operating income is expected to decrease year-on-year, but this is because we had a re-measurement gain in the prior year. Fiscal year 2016 is expected to be negatively impacted by appreciation of yen, and the segment has a larger allocation of corporate and other costs than the prior year.

Next is the financial services segment. For fiscal year 2015, sales and operating income decreased year-on-year. JPY156.5 billion of operating income was recorded, a decrease of JPY36.8 billion year-on-year. The decrease in operating income was mainly due to the decline in the long term interest rates and the decline in Japanese stock market.

We expect to record JPY150 billion in operating income in fiscal year 2016. We believe that the underlying operations of Sony Life are strong because new policies are continuing to increase.

With that, I will turn things back over to Justin.

Thank you very much, Yoshida-san and Takeda-san. I am now going to turn things over to John so we can begin the Q&A session. John, would you please queue up the questions?

Thank you. (Operator instructions.) Larry Haverty, GAMCO.

Hi. Could you -- just for purposes of clarification, the impairment charges were, I gather the way the accounting works, included in the operating income. Could you perhaps give us a total in yen of how much the various impairment charges were last year?

Yes, thank you for asking. Total impairment charge included in operating income in the last fiscal year was JPY90 billion. That consists of battery business and the camera module business. Thank you.

Okay. Now, the -- and then, in the game business, the network services, the revenue was up 50% last year. This business, as I understand it, you spend a lot of money on servers and then you collect the revenues over time, so there's a very high incremental margin on incremental revenue. Are we, in this business, still at the period where the capital spending has peaked? And are we looking at revenue growth anywhere near that, or is the business so good that we're going to have to have more CapEx in order to service the future demand?

Just to confirm, Larry, you're asking if we've gotten to the point where revenue growth is exceeding the amount of investment in the business.

Yes, that's correct.

Well, I appreciate the question. As for the capital spending for the network services business, that will not -- in proportion to the sales growth. So, the portion of the capital investment compared to the growth we see, we do see in the future. Thank you.

Great. Thanks a lot.

John Litschke, TIAA.

Hi, guys, just a quick question on CMOS. You mentioned that orders are strong. Could you provide any more details on that? Is that primarily for smartphone across the board?

And Kumamoto TEC doesn't seem to have much impact in the smartphone supply chain for CMOS. So, if some of these orders are related to smartphones, I'm just wondering, are you seeing any concerns there, any cancellations? Or your market positioning in that space, any risks there? Thanks.

So, John, just to confirm, you're interested in how our -- if we can provide any additional orders -- excuse me, any addition color on the orders that we've been getting for our imaging sensors in the smartphone space, and then what the impact of the Kumamoto TEC, or suspension in operations, is having on -- did you say smartphones in particular?

Yes. I don't think Kumamoto really has much impact, but wanted to confirm that and your positioning in the market, if that's intact.

Thank you for the question. As you may know, Kumamoto factory is mainly for the image sensor for audiovisual use like digital camera. And so, a major supply chain of the smartphone image sensors are in Nagasaki as well as Yamagata. So, we have no negative impact from the current suspension of Kumamoto TEC. Thank you.

Can you comment on the order situation? You mentioned that orders are strong and you're expecting in the second half a full recovery.

Yes. Currently we are getting good orders from the customers, smartphone manufacturers in China, but at the same time, last year even though we lost some major customers because -- due to the supply constraint. So, for the first half, acquisition of new customers and those lost customers, it actually offsets first half of this fiscal year.

So, that's why we are saying that we can see the expansion of sales in earnest in the second half of fiscal year. Thank you.

Okay. And on the game space, there's a lot of anticipation for virtual reality, the offering there. I believe you've opened up the preorders in the US. Can you talk about any of the initial interest in PSVR, maybe what the retail channel is thinking? I know it's still early in the year.

And then, as far as your preparations in the supply chain for production of the product, how is that going? And if demand is extremely strong, are you worried about any supply limitations?

So, John, that was two questions. I think the first one was on the status of preorders for VR, and the second was about our supply chain for VR, if we anticipate any kind of limitations on our ability to supply the market.

That's right.

Well, as for the preorder reaction, I heard there is a quite positive reaction in United States. However, the quantity is quite limited, so anyway that is not a big number.

As for the supply chain constraint, there is no significant supply chain constraint. However, we are currently planning a not large number of VR units this fiscal year, because this is the year of the startup of the VR experience for our customers. So, anyway, there is no big negative supply chain constraint concerns. Thank you.

Okay, thanks. And my last question, if I may, since a lot guidance was withheld, can we talk about the pictures segment? Could you provide a little bit more granular update on the sub-segments, how those are each going, TV, networks, and film?

This is Steve Kober. Let me respond to that question. As we've told you over the last year, we've changed management in the motion picture division. So, last fiscal year and in this upcoming fiscal year, we're rebuilding our motion picture slate.

On the positive side, television had another excellent year, as you can see from the results. That continues to do very well. It's also very strong in the fourth quarter, so that's doing well.

The media networks, we have a lot of channels all over the world. India is the biggest market, and that continues to do well. And we expect growth next year in the media networks business as well.

Okay. Thanks a lot.

(Operator instructions.) And now I'd like to turn the call back over to Justin for any final remarks.

Thanks very much, John. It looks like we're out of questions, so we're going to end the call here. Thank you all for participating. And I encourage you to call the Investor Relations offices in Tokyo, London, and New York if you have any follow up questions. Thank you very much. Good night.

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