索尼 (SONY) 2016 Q1 法說會逐字稿

Ladies and gentlemen, we would like to have the presentation from Q1 fiscal year 2016 consolidated financial results of Sony Corporation. We like to thank for your attendance despite your busy schedule. Let me introduce the representatives who are seated on the stage. First, Kenichiro Yoshida the Executive Deputy President and CFO, the Representative Corporate Executive Officer. Next to him is Kazuhiko Takeda, the Corporate Executive, Corporate Planning & Control and Accounting and also we have Miss Atsuko Murakami, the Corporate Executive, Finance Department.

First Mr. Yoshida will give the initial presentation and in the remainder of the time we would accommodate your questions. Overall, we intend to spend 45 minutes. So to you, Mr. Yoshida.

I am CFO, Kenichiro Yoshida. Today I would like to explain two topics in the next 15 minutes. Consolidated sales for the first quarter of fiscal 2016 decreased 11% year-year to JPY1,613.2 billion. Consolidated operating income decreased 42% year on year to JPY56.2 billion. We estimate that the negative impact of April Kumamoto earthquakes on the operating income of the first quarter was approximately JPY34.2 billion including opportunity losses.

Net income attributable to Sony Corporation's stockholders decreased 74% year on year to JPY21.2 billion. In the same quarter of the previous fiscal year, we recorded several one-time items such as asset sales gains. Specific examples are shown here. A total of JPY35.1 billion in one-time profit was included in operating income and a total of JPY49.5 billion in one time profit was included in other income of the first quarter of the previous fiscal year.

Next I will turn to the result by segment. From this fiscal year, we have separated the devices segment into two segments, a semiconductor segment, which was recently made into a separate subsidiary, and the components segment. Compared with the same quarter of the previous year, an improvement in the profitability of the game and network services segment and the mobile communications segment contributed significantly to the result. On the other hand, the profitability of the semiconductors segment deteriorated significantly year on year.

Next is the consolidated results forecast for the current fiscal year. Our consolidated sales forecast has been revised downward by JPY400 billion mainly due to the impact of the appreciation of the yen. Profit forecast remains unchanged from our May forecast and foreign exchange rate assumption has been changed to JPY103 to US dollar and JPY114 to the euro as is shown here. The negative impact of the change in the ForEx assumption from May forecast on the operating income of the six electronic segments is estimated to be approximately JPY48 billion including the impact which was realized during the first quarters.

This negative impact takes into account not only US dollars and the euro but also the impact of the emerging market currencies. For your reference, a negative ForEx impact on the operating income the six electronic segments compared with the previous fiscal year is estimated to be about JPY59 billion.

As we will be showing later, the negative impact of the earthquakes for the current fiscal year is expected to decrease by about JPY35 billion from May forecast. And moreover, there is a possibility that we might record a loss in connection with the transfer of our battery business, the Murata Manufacturing Company Limited, regarding we announced the execution of the Memorandum of Understanding yesterday. Such a loss is not included in July consolidated results forecast for fiscal 2016. Here you see the forecast for the fiscal year by segment.

Here you can see the impact on operating income for full year of the earthquakes. Although this impact has been estimated based on certain assumptions, the impact is expected to decrease by approximately JPY80 billion from the JPY115 billion we announced in May thanks to the restoration of production at the Kumamoto factory which is proceeding ahead of our May forecast. We had previously said the full utilization on the wafer input bases was expected to be reached by the end of August. But the timing has been advanced by one month to the end of July.

Now I will turn to the situation of each of our businesses. First, mobile communications segment. Due to a reduction in mid-range smartphone unit sales and downsizing of the business of unprofitable geographical areas, sales for the quarter decreased 34% year on year. Operating profitability improved by JPY23.3 billion and a JPY400 million operating profit was recorded. Despite the significant decrease in the sales, the earnings structure is improving because of improved profitability due to improved product mix, reduction in operating costs and a decrease in restructuring charges.

Although sales in Japan are strong, we have reduced our smartphone unit sales forecast by 1 million units mainly due to a lower-than-expected performance, especially in Europe. We have revised downward our forecast for full-year sales to JPY840 billion due to this reduction and the impact of appreciation of the yen. Cost reduction has been progressing but the severe competitive environment in the smartphone space continues. We have made no change to our goal of achieving profit in this fiscal year by continuing to improve our earnings structures.

Next, I would like to explain the game and network services segment. Sales for the quarter increased 14% primarily due to the strong performance of Uncharted 4, a first party title that went on sale in May. Operating income increased JPY24.6 billion to JPY44 billion. Network revenue increased 38% year on year and accounts for 46% of the sales of this segment. Our operating income forecast for this fiscal year remains unchanged.

Next going to the imaging products and solutions segment. Sales for the quarter decreased 26% year on year due to the impact of the earthquakes although the impact of the decrease in sales was partially offset by an improvement in product mix, cost reduction and other factors. Operating income decreased JPY10.2 billion year on year to JPY7.5 billion. The impact on operating income from the earthquakes is estimated to have been approximately JPY7 billion for this quarter. We expect to be able to reduce the amount of the fiscal-year impact of the earthquakes from the JPY45 billion forecasted in May to approximately JPY26 billion primarily because recovery at our Kumamoto factory is progressing ahead of schedule.

We made an upward revision to the operating income forecast by JPY6 billion to JPY22 billion primarily because of the reduced impact of the earthquake additional cost reduction and increase in sales of (inaudible) whilst such effect was partially offset by the negative impact of appreciation of the yen.

Next, I would like to explain the home entertainment and sound segment. Although the sales decreased 7% year on year, operating income increased JPY9.3 billion to JPY20.2 billion. Despite the decrease in sales from the negative impact of the foreign exchange rates, we were able to achieve an increase in operating income due to cost reduction and a shift to higher-valued-added products. The fiscal-year operating income forecasts have been revised upwards by JPY5 billion to JPY41 billion primarily due to the strong performance of televisions.

Next, I would like explain the semiconductor segment. Sales for the quarter decreased 23% year on year and an operating loss of JPY43.5 billion was recorded, a deterioration of JPY76.3 billion year on year. This decrease in sales was primarily due to the impact of the earthquake and decrease in demand for image sensors for mobile. The deterioration in operating profitability was primarily due to approximately JPY24.7 billion in impact from the earthquakes including opportunity loss at JPY20.3 billion impairment against Kumamoto long-lived assets and JPY8.2 billion negative impact from the stronger yen.

Although we expect to be able to reduce the amount of fiscal=-year impact of the earthquakes from JPY60 billion forecasted in May to approximately JPY48 billion, we have downwardly revised our operating income forecast by JPY27 billion to a loss of JPY64 billion primarily due to the negative impact of the appreciation of the yen against the US dollar.

Now I would like to speak briefly about the current situation and the issues in in the semiconductor business from the perspective of the rows listed on the slide. Firstly, so unit sales of our image sensors for mobile use which account for a large portion of our revenue. These sales have begun to trend upward from -- after hitting the bottom in the fourth quarter of the previous fiscal year. We expect them to exceed a level of the same period of the previous year from the second quarter of the current fiscal year. Expansion of sales to smartphone manufacturers is progressing reasonably although some areas are stronger than the others.

Next, is the impact of foreign exchange rates. Although yen-denominated cost is quite large in the image sensor business, most sales are denominated in US dollars which causes the business to endure a negative impact from the appreciation of the yen. As I mentioned earlier, sales volume expected to increase significantly due to sales expansion efforts that started last year. And even though we anticipate only a relatively small decline in average selling price on a US dollar basis, a decrease in sales from the appreciation of the yen is having a large negative impact on operating income. We estimate that the foreign exchange rate sensitivity in the semiconductor segment to be approximately JPY3.5 billion negative impact on operating income for the year from a JPY1 appreciation against the US dollar.

Next, the production capacity we have installed as of today including a portion, which is outsourced, has decreased from the 87,000 wafers per month we previously announced to 85,000 wafers per month. This decrease is due to a shift in production of certain image sensors for mobile use that were previously manufactured at our Kumamoto factory to our Yamagata factory in an effort to respond to the earthquakes. Since we allocated equipment at our Kumamoto facility to the production of AV and surveillance camera sensors, our production capacity has decreased. Our current production footprint including orders to our outsourcing partner is 73,000 per month.

As President Hirai said at the corporate strategy meeting last month, we have not changed our view that the imaging and sensor business is one with growth potential over the medium to long term. Going forward, we aim to improve profitability by increasing the ratio of customers' products for mobile use via efforts to increase the adoption rate among our expanded customer base of higher-value-added image sensors including those for dual lens cameras into next fiscal year.

We also aim to improve profitability by improving our cost structure via efforts such as starting to internally produce logic. Moreover, over the medium term we believe that it is important to improve the business scale and profitability of image sensors other than for mobile such as for surveillance, factory automation and automobiles.

Next, I will explain the component segment. This main products of this segment include batteries and recording media. Sales decreased and operating results deteriorated year on year and we recorded an operating loss of JPY4.7 billion. The fiscal-year forecast for operating results has been revised downward by JPY9 billion to an operating loss of JPY12 billion mainly due to a downward revision in projected sales of the battery business partially resulting from the stronger yen.

As I mentioned before, we announced the signing of a Memorandum of Understanding with Murata Manufacturing Company Limited relating to the transfer of the battery business, which is included in this segment. We reached the conclusion that transferring the business to Murata Manufacturing Company Limited would enable the human resource and technological assets that we have accumulated in this business to be better utilized given the competitive environment of the battery business and our business portfolio strategy for the Sony Group as a whole. We are aiming to complete this transaction by the end of March 2017.

Next, I will explain the pictures segment. Sales for the quarter increased 7% year on year and JPY10.6 billion in operating loss was recorded, an improvement of JPY1.0 billion year on year. The main reason for the operating results improvement was a decrease in the Japanese-yen-based operating loss amount resulting from the strong yen against the US dollar. The fiscal-year forecast for sales and operating income have been revised downward due to a stronger yen against US dollar and operating income of JPY38 billion is expected to be recorded.

Next, I will explain the music segment. Sales for the quarter increased 9% year on year but operating income decreased JPY15.8 billion year on year to JPY15.9 billion. As was shown in the previous slide, the same quarter of the previous fiscal year included a JPY18.1 billion gain from the remeasurement of our stake in Orchard Media Inc. Excluding this impact, operating income increased year on year. Like the picture segment, this segment is negatively impacted by stronger yen against the US dollar but this negative impact is expected to be offset by the profitability of hit titles in recorded music and the continued strong performance of a mobile game application. As a result, there is no change to our sales and operating income forecast for the fiscal year.

Lastly, I will explain the financial services segment. Revenues decreased 17% year on year but operating income increased JPY2.6 billion year on year to JPY48.5 billion. Revenue decreased due to the deterioration of investment performance in the separate account at our primary business Sony Life mainly reflecting a decline of the Japanese stock market in the current quarter. However, the impact of the investment performance has a limited negative impact on operating income because the investment performance is attributed to policyholders. Operating income increase year on year due to the recording of foreign exchange gains on foreign-currency-denominated customer deposits at Sony Bank resulting from stronger yen.

Our revenue and operating income forecast for the year remain unchanged. This concludes my explanation, thank you.

Now the floor is open to your questions. Those of you with questions please wait for the microphone and please identify yourself by stating your name and affiliation before asking questions. Please confine the number of questions to two per person. Anyone with questions please raise your hand. The person at the front row of the block there.

Ayada of Daiwa Securities. Two questions if I may. First question, the page 10 on semiconductors and the first-quarter results I like to ask about. This time they did aggravation by JPY76 billion the first quarter and JPY68 billion yen decline excluding the ForEx impact. About the breakdown of it. The camera module impairment JPY20.3 billion and the Kumamoto earthquake burden JPY24.7 billion so JPY45 billion as factors and the difference is JPY23 billion. It would come from decline in sales.

This said, the impact of decline in sales will be about JPY10 billion to JPY15 billion which means excluding the primary factors the decline in profit appears to be larger. Is there any other aggravation in product mix in the first quarter compared to previous year or the increase in cost? Are there any supplementary factors you can talk about? That's the first point.

And the second question, this time in some cases you have changed the full-year results and a cancellation for the headquarters are increasing in JPY30 billion. At the beginning of the year, exchange rate by segment and the whole there are differences and that accounts for JPY20 billion and opportunity JPY35 billion, they were included. And how these were changed this time around in your full-year forecast?

The first point about the semiconductor first-quarter results. The volume and the high cost of depreciation and Takeda will explain in details. And about the opportunity what is our accounting? We increased the opportunities which means that the hurdle is higher to achieve the results. And Takeda will further supplement this.

The first point. Semiconductors segment. The aggravation of profitability over the previous year as I pointed out, JPY24.7 billion impact of earthquake and the impairment of module JPY20.3 billion. In addition to that, JPY7 billion impact of exchange rate and the volume and the price sales-related factors amounted to JPY9 billion. And the remaining JPY10 billion increase in capacity starting from previous year and that pushed up the cost of depreciation along with that investment.

And the headquarter cancellation and elimination as you pointed out JPY20 billion. In May we included as the ForEx risk buffer and at the time a JPY30 billion opportunity was included and in this regard increase in JPY10 billion. So we have the opportunity of about JPY45 billion. And the business upside during the first quarter there is -- the TV business was brisk, game and network and the music. In these business segments, we have an upside and in addition to that the insurance payment received about the earthquakes and for the Company as a whole we would like to achieve that by improving the results and reducing the cost.

And now we take the next question and please raise your hand if you do. Thank you.

Sugiyama from Goldman Sachs, I have three questions. Firstly about the game business -- two questions about the game. PlayStation VR reservation seems to be very brisk, doing quite well and I think you are getting additional reservations. But what is your production plan? Has there been any change made to the production plan versus the beginning of the year?

And the next is your first-party title Uncharted 4 title, the number of units sold and given this good performance what would be the additional titles that may -- would come towards the end of the year such as Gran Turismo.

The third point is you are selling your battery business in transferring your business in the future would there be a particular in-house standard that you will apply. Is there any criteria such as if you are in red for a certain number of years that you would decide to sell? So please explain.

First on the VR, the production plan of course reservations are doing quite well. But we have the annual budget or the plan and we are not making any change to the overall volume.

And Uncharted 4 the downloads and the number of units including the downloads. I'm afraid we cannot give you the total number. But suffice to say that in the first week we sold 2.7 million units, that's the number that we have publicly stated. Gran Turismo and you commented on those other titles. At this point of time it's very difficult to really assume any but the volume is increasing and PS4 volume is increasing and I believe that the sales in on the upward trend. And for the first party the title the profitabilities are high; therefore, we have high expectations on the performance of such title.

About the transfer business, do we have any particular standard in making a decision on transfer? No, we are looking at each piece of business and are trying to make the best of the decision for any particular business. Thank you.

Yes, the person who is sitting next to the previous one.

Thank you very much for your discussion from Mitsubishi UFJ Morgan Stanley Securities, Miyamoto. First about semiconductor, the production platform -- the current production platform you said that 73,000 wafers and in May it was a -- the expectation was 71,000 or 70,000. It seems that you are going to increase the production. You're in the midst of -- increase the production. The vendors to a certain extent are requested with their customers in the second half they are facing tough times. If you could just explain the situation in a systematic manner -- consistent manner, I would appreciate it very much. Now PS4 if you could -- PS Vue if you could update on the current situation PlayStation.

First question will be answered by Takeda -- Mr. Takeda. And then I will take care of the second one.

(Interpreted) Thank you for the question about the production platform. As you already know, as of April the production capacity was 70,000 wafers. That was how we announced the situation to be. In addition, this time 75,000 is the number now. That is to say Yamagata, which was not used before, a part of the facilities are being utilized and what used to be produced at Kumamoto , a mobile sensor -- certain mobile sensors have been transferred to Yamagata. The mobile sensor -- mobile tech lines which are used to produce the mobile sensors, they are turned to the use of producing surveillance and AV sensors. Then as a result, the wafer basis 85,000 was the wafers and out of which at this moment 75,000 are being produced at this moment.

Next for PS Vue, thank you for the question about PlayStation Vue. As you know, most recently contents lineup, ESPN, Disney contents lineup have increased. Also the hardware compatible hardware is increasing and then the nationwide services being provided. The number of subscribers is steadily increasing. At the same time, -- we cannot disclose the detailed numbers but the conversion rate is improving from trial to real use. So we have a good feeling about this going forward. Thank you.

I earlier mentioned 75,000 but 73,000 as of July and other supplementation the demand trend itself shows improvement for CMOS sensors compared to May. Is that the case?

About the sales expansion, compared to the end of the previous year we are very energetic about sales promotion and in some cases of customers, there are difference so positive or negative but the sales expansion itself is going smoothly. So compared to the previous year, the fourth quarter previous year was the bottom in terms of volume and starting from first quarter there has been improvement. Next questions.

SMBC Nikko (inaudible) two questions. The first-quarter landing zone compared to internal budget probably you do not disclose it and we understand. But in terms of the consensus including the impact of earthquake we thought it would start as a negative but you had a very good result. So in terms of change from your original thinking could you give us the hint of the process?

And in this connection for the full year you maintain the numbers and unchanged and for corporate elimination you mentioned the hurdle has been raised but a buffer opportunity had been increased. And also you have transaction with Murata and that would incur negative results but we are thinking of OP of JPY300 billion. You mentioned initially the hurdle is high but overall the first quarter with the operate revision. Even though there negative impact on Murata transaction this would be achieved. Is that the thinking?

And the second point about the battery business. And you divided it as component and the batteries and other than that maybe part of the battery would remain under components but for Sony what -- how would you position this component business?

Thank you. The first point, based on the result of first quarter how do we forecast the full-year results? And the second, component business other than batteries. Basically, for first quarter as you would realize every time we see operate results in the first quarter because of the budgeting process. Maybe the budget and the budget assumption may be misleading so we do not talk about it or disclose it. But still the first quarter has been very sound.

And based on that, the JPY300 billion OP for the fiscal year to achieve has become a little bit more difficult because of the major negative impact of the ForEx as we talked about earlier. In addition to that, well, this time we did not include it but the battery business transfer and that may accompany the loss associated with the transaction. That is why it's become a little bit more difficult to achieve the OP goals.

And the component business other than batteries the main would be the recording media or tapes -- high-end tapes as well as disk business. So we will continue our business in a solid way. But this is not the type of business we will pursue a greater volume.

Ono from Morgan Stanley. Thank you for the opportunity, I have two questions. The sixth slide talks about mobile communication. You have changed the unit forecast -- the volume forecast, and yet you have not changed the forecast for the profit. And you talked about these three positive factors since May meeting. And there are also two other factors. So there are three positive factors. If you are going to put in order how would those three factors compare in terms of the size of the magnitude of influence.

And the next is about game which is on page 7. There has been increase of marketing expense which recognize as a negative factor. How big was that increase and how was it used? Where was such an expense used? Thank you.

I think the first question had to do with three positive factors that contributed to the mobile communication and if we could put an order in terms of the size or priority. And the next was on the increase of marketing cost for the mobile communication -- the game.

On the mobile, JPY100 billion was the revision that we have made. Now in terms of the size they are almost comparable should I say. If you look at the numbers, we do not intend to chase after the sales or the volume but [want to appeal] the added value we are aiming for the higher added value order price range. And we will continue to reduce cost and there are also ForEx implications and maybe by comparison ForEx implications are bigger. Now let me rephrase it, price, ForEx and the material are the cost reduction in this order.

The second question is about the marketing expenditure for games, the increase of the marketing expenditure for game business. Yes, I cannot disclose the concrete numbers, which may have to do with increase of marketing cost for the game. PS Vue advertising and promotion was increased -- strengthened to prepare for the future expansion. SGA there was increase by JPY8 billion.

SGA increase you said JPY8 billion? Is this that you have increased or the SGA is JPY8 billion more than you have anticipated?

Yes.

Point of confirmation, mobile the unit price went up, you have improved the product mix during the first quarter. So I trust that you have some very hard facts that would substantiate the increase of the unit price.

Yes.

Thank you.

Anyone? Yes, the next one please.

Thank you very much for your explanation. My name is Taguchi from Deutsche Securities. About pictures I have two questions, page 12. First, the first quarter landing, well, I don't think you have disclosed the numbers and figures but the landing how -- when you landed, how does it compare to our original expectations? So in the operating income there is this decrease by JPY5.6 billion. Is it all attributable to the currency hit or any other factors such as increase in the advertisement cost? Any other items? At the backdrop, JPY38 billion, is it the lowest setting -- how certain are you about this JPY38 billion as a lowest limit?

About the pictures, thank you very much for your question. In the first quarter, to a large extent, the movement was within what we expected. In the motion pictures, some didn't reach the budget but some others went smoothly. So not a major negative from the motion pictures. The decrease by JPY5 billion basically that's from the currency hit -- exchange rate impact. If you are asking whether there is a risk or not about JPY38 billion, the pictures itself, sometimes they are big hits, sometimes no hits. So there are risks involved. The profitability volatility is relatively large in pictures.

Thank you.

This is going to be one last question because of time constraint. The person in the middle of the room.

Hirakawa of Merrill Lynch and Nomura, two questions. The first question related to an earlier question about the battery business that there may be a loss associated with transfer. Last year, JPY30 billion in impairment was recorded but still will there be another loss as a result of transfer of the business? At the loss, is it necessary to sell that business? And if the loss is to the tune of several tens of billions then what was the meaning of impairment cost last year?

And the second question about impact of earthquakes and the full-year forecast and first-quarter estimate indicated. But what about the estimated size for the second quarter, if you have any forecast?

The first point, the battery business sales loss and the second point, the second-quarter impact coming from the earthquake. As you pointed out, impairment was recorded and that reduces the asset valuation and it is not definitive yet we are still in negotiation and I would refrain from making any special comments. But basically it all depends on the negotiated price.

The rationale and reason of sales. Well, at the major loss you decide to sell and what is the background of such a decision based on the negotiation if it is decided to sell even at a loss you will be selling the business and what's the reason behind this?

(Interpreted) In 1991, well, we started the development of lithium ion batteries. We are the developer and the pioneer. And as you know, in the past several years, there has been a rather unfavorable performance. And this is the type of business that development investment and the capital investment for facility would be needed continuously. So including [Hirai] and others we know that we have accumulated technology asset and the human resources. And they should be fully made use of.

Therefore, in the electronics parts industry Murata is the top-notch excellent company. So under Murata the technology could be further pursued as well as the sales channels and the business opportunities and we thought that would be better for all.

And the second question has to do with the impact of the earthquake. And most likely the impact of the earthquake will be larger in second quarter than the first quarter. For the second half we will not see the specific impact of earthquake to the extent of nine versus one. So the first half 90% and the second half 10%. So the first quarter and second quarter not a major difference in monetary amount. But the second quarter has slightly larger negative impact compared to the first quarter. This concludes my answer.

Thank you.

Thank you and with this we like to conclude the earnings announcement session. Thank you very much for coming.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.