索尼 (SONY) 2016 Q3 法說會逐字稿

Ladies and gentlemen, it's time to begin this session to announce the Q3 consolidated financial results of Sony Corporation for fiscal 2016. Thank you very much for being with us despite your very busy schedules.

I'd like to introduce our speakers today. Executive Deputy President and CFO, also the Corporate Executive Officer, Kenichiro Yoshida. We have Kazuhiko Takeda, Corporate Executive in Corporate Planning and Control and Accounting. The Corporate Executive, Finance and Corporate Development, Atsuko Murakami.

Mr. Yoshida will make a presentation today, to be followed by questions and answers. We'll be spending 45 minutes altogether. With that, Mr. Yoshida, you have the floor.

I'm CFO, Kenichiro Yoshida. Today I'd like to explain these two topics in the next 15 minutes.

Consolidated sales for the third quarter of fiscal 2016 decreased 7% year-on-year to JPY2,397.5 billion. Consolidated operating income decreased 54% year-on-year, to JPY92.4 billion, mainly due to the JPY112.1 billion impairment of goodwills, recorded in the picture segment that we announced on January 30.

Net income attributable to Sony Corporation's stockholders decreased 84% year-on-year to JPY19.6 billion, primarily due to the impairment.

This charts shows accumulate results for the nine months. This chart shows the results of each segment for the third quarter. This chart shows the nine-month cumulative results by segment.

Next is a consolidated results forecast for the current fiscal year. Sales have been revised upward by JPY200 billion, compared with the November forecast to JPY7,600 billion, primarily due to the impact of the exchange rate.

Operating income was revised downward by JPY30 billion to JPY240 billion. Net income attributable to Sony's stockholders was revised downward by JPY34 billion to JPY26 billion.

This slide shows a comparison between our fiscal year forecast announced in November versus the forecast announced today. Operating income includes both the JPY112.1 billion goodwill impairment that I mentioned earlier and a JPY37.2 billion gain from the sale of portion of our shares of -- in M3 Inc., which was also previously announced. Incorporating these factors and the business operational improvement, operating income has been revised from our previous forecast of JPY270 billion to JPY240 billion.

Here you can see the current fiscal year forecast by segment. We significantly revised downward the operating income forecast for the picture segment, which recorded impairment charge, compared with the November forecast. But on the other hand, upward revision was made in the semiconductors segment.

Now first I will explain the mobile communication segment. Sales for the quarter decreased 35% year-on-year. Operating income decreased JPY2.9 billion year-on-year, to JPY21.2 billion, due to the effect of the decrease in smartphone sales, mainly in Europe, partially offset by cost reductions and the positive impact of foreign exchange rates.

We have revised downward our sales forecast for the fiscal year by JPY20 billion, due to a downward revision of our annual smartphone unit sales forecast by 2 million units, to 15 million units. This downward revision of unit sales was mainly due to a downward revision in Latin America and the Middle East.

Our operating income forecast for this fiscal year remains unchanged, because the impact of the lower sales is expected to be offset primarily by cost reductions and price maintenance. We are aiming to achieve an operating profit for the fiscal year, which is our target.

Next, I will explain the games and network services segment. Sales and the operating income for the current quarter increased year-on-year and JPY50 billion operating income was recorded. The year-on-year increase in operating income was mainly due to the hardware cost reduction and the increase in software sales, primarily offset by the negative impact of price reductions for PS4 hardware.

The business in holiday season was strong and installed base of PS4 reached 53.4 million units as of January 1 of this year. Network revenues increased 40% year-on-year, and continued to have strong momentum. PSVR is selling in line with expectations.

Our operating income forecast for this fiscal year remains unchanged, because the negative impact of foreign exchange rates is expected to be offset by the continuing strong momentum of the business.

We announced an array of game applications for mobile products through Forward Works Corporation in December 2016. The Company plans to start distributing the games from this spring. As we've shown on this slide, we will not only leverage our existing IP in the PlayStation library, but also work to create a new IP.

Next, I'll speak about the imaging products and solutions segment. Sales and operating income for the quarter decreased year-on-year, and JPY21.1 billion in operating income was recorded, although the impact of a decline in unit sales was offset by an improvement in product mix. Operating income decreased from the previous year, mainly due to the negative impact of the ForEx rates.

We have upwardly revised our operating income forecast by JPY9 billion, compared to the November forecast, now to JPY43 billion. This revision was due to an upward revision of the profitability forecast for digital imaging, mainly due to the positive impact of the depreciation of the yen.

Next will be the home entertainment and sound segment. Sales and operating income here for the quarter decreased year-on-year, and JPY25.9 billion of operating income was recorded.

The year-on-year decrease in operating income was because of the negative impact of foreign exchange rate, stemming from the depreciation of the emerging market currencies, partially offset by the continuing improvement in product mix.

The business environment for the television business, which is included in this segment, continues to be highly volatile, due to factors such as foreign exchange rates, key component prices and competitive trends. But we believe the business has significantly improved the operations, compared to the past, and fiscal year operating income has been revised upward by JPY6 billion, compared to November forecast, now to JPY53 billion.

Next is semiconductor segment. Sales and operating income for the quarter increased year-on-year and JPY27.2 billion of operating income was recorded. And operating income increased JPY5.9 billion, mainly due to an increase in unit sales of image sensors for mobile business, partially offset though, by the negative impact of the strong yen.

We are forecasting an operating loss of JPY19 billion, a reduction in loss of JPY34 billion compared to November forecast, because of positive impact from depreciation of the yen and the strong performance of the image sensors for mobile devices.

This slide shows the breakdown of operating results of the semiconductors business for fiscal 2015 and fiscal 2016. And this shows three parts, image sensors, camera modules and others.

In the image sensor business, profitability deteriorated significantly because of a decrease in the demand for mobile sensors, which is a key part of our business, and from the second half of the previous fiscal year, the negative impact of the appreciation of the yen, following that, and the impact of the Kumamoto earthquakes in April 2016.

This business continued to be weak in the first half of the current fiscal year, but from the third quarter, profitability started to recover, due mainly to higher sales to Chinese manufacturers, reduced impact from the earthquakes and the positive impact from the recent depreciation of the yen. However, we continue to have a cautious view as to the trend in the business, because the market for mobile sensors is volatile.

In the camera module business, in May 2016, we announced a discontinuation of all but a small portion of our high functionality camera module business for outside customers. And in November 2016 we made an announcement to sell the factory in China to Shenzhen O-film Tech Company. We take seriously the fact that we recorded large losses in the business, but as a result of these actions, we are significantly reducing our exposure to the smartphone camera module business.

And other includes (inaudible), a new business, the profitability of which is being challenged. We are assessing the future potential and profitability of these businesses but the operating loss for the fourth quarter indicated, it would include some expenses associated with the closure of certain businesses.

Next will be component segment. Sales for the quarter decreased 10% year-on-year and JPY3.7 billion in operating loss was recorded. And the first year forecast for -- fiscal year forecast for operating results has been revised downward by JPY3 billion to a loss of JPY51 billion. We continue to work toward the completion of the sale of the battery business, the Murata Manufacturing Company Limited.

Next, I would like to explain the big picture segment. Sales for the quarter decreased 14% year-on-year, mainly due to low theatrical revenues. As to operating results, a large operating loss, JPY106.8 billion was recorded, due to the JPY112.1 billion goodwill impairment that I mentioned earlier.

The fiscal year forecast for operating income is an operating loss of JPY83 billion, mainly resulting from the impairment. The management team takes very seriously the fact that we recorded such a large goodwill impairment.

The details of the impairment and the testing forces are explained in the press release we issued the other day. And we encourage you to refer to the additional explanatory slide, which is similar to the slide I'm showing now, on our website for more details.

We also need to take seriously the fact that our actual financial results in the picture segment have significantly underachieved the mid-range profitability projection we announced. The most recent operating income forecast for the current fiscal year, in dollar terms, and excluding the goodwill impairment, is $217 million. This is approximately 30% lower than the original forecast for the current fiscal year that was announced last May.

In addition, in June 2016, we reduced the target range for the fiscal year ending March 31, 2018 that was announced in November of 2014 as a mid-term target. And we expect the forecast for the fiscal year, which we would announce together with the current fiscal year and earnings results, will be lower than the bottom of that range.

Management takes seriously the fact that we have underachieved the profitability target for the mid-range plan and for several fiscal years for the entire segment, despite efforts to improve profitability.

From this month, President Hirai will keep a second office in Culver City, California, in the United States, where the headquarters of the pictures business is, so that he can involve himself even more deeply in the management of the entertainment business, particularly pictures. His highest priority will be to select the successor to the CEO of Sony Pictures and enhance the management of the business.

Now I would like to redirect the positioning of the picture segment within Sony. First, production and distribution, which is where we recorded impairment. It is comprised of the motion pictures and television production businesses. This slide shows representative examples of the IP in these two businesses.

IP mainly includes copyrighted content and rights to make motion pictures. Creating content in our core business -- creating content is our core business, and we believe that the value of owning premium content and creating that content is rising at a time when content distribution channels via the network are diversifying.

In order to improve the profitability of motion pictures, the Head of this business, Tom Rothman, is focusing on the three things shown on this slide, and we think it is essential for us to continue to undertake these measures consistently.

Our other business, media networks, is a channel business, and we are operating channels such as those shown on this slide. In order to expand our business outside of the United States, primarily in India, we are taking various measures to grow, including M&As. For example, Animax has a strong market position in Japan.

I would like to discuss now how the picture segment has aspects of a recurring revenue business. In addition to the channel business of media networks, which is a typical recurring revenue business, we think that motion pictures and television productions can also be recurring revenue businesses, if they consistently produce premium content, by leveraging, creating and accumulating IP.

Since focusing on recurring revenue business and aiming to grow profit in a stable manner fits with the mid-range strategy of the Sony Group, the picture segment is an important business of Sony.

Next, I would like to go on to the music segment. Sales decreased, but operating income increased year-on-year and JPY28 billion of operating income was recorded. The increase in operating income was due to the continuing strong performance of Fate/Grand Order, a mobile game application, partially offset by the negative impact of foreign exchange rates.

The fiscal year operating income forecast has been revised upward by JPY6 billion to JPY69 billion, reflecting the strong performance of the recorded music and Fate/Grand Order. Fate/Grand Order is a business of Aniplex Inc., a subsidiary of Sony Music Entertainment Japan, and it contributed significantly to the profit of the segment through its leveraging of animation IP.

Next, I'd like to discuss the financial services segment. Revenues and operating income decreased year-on-year and JPY29 billion of operating income was recorded. Operating income decreased year-on-year, primarily due to the decrease in investment performance in the general account at Sony Life.

This year-on-year decrease of investment performance was mainly due to two reasons. First, net gains and losses on derivative transactions to hedge market risk pertaining to minimum guarantees for variable life insurance deteriorated, and second, net gains on sales of securities decreased year-on-year. There's no change to the forecast for the fiscal year.

In concluding, I would like to show the results forecast for each of our business segments.

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 state your name and affiliation before asking questions. And please confine the number of questions to two per person. Anyone?

Thank you. Ayada of Daiwa Securities. The semiconductor segment and entertainment -- one each. In connection with semiconductor segment, during the second quarter, the way for production is 75 -- 73,000 per month. What is the number of December onward? And what is the outlook for the fourth quarter, January, March and the next year?

And also the end price, during the second quarter said they did the flat for full year. What is the current price trend and the future outlook of the price?

Next, on entertainment business. Mr. Michael Lynton steps down this time, and then in choosing his successor, what would be the qualities or attributes you would emphasize in selecting this successor as new management? What sort of person do you think would be best fitted to that position? Thank you.

The first point, semiconductor segment, Mr. Takeda would supplement me later, but first, my view is that during the third quarter the increases than the second quarter. There'll be further increase in the fourth quarter, so, on an average, 80,000 or 80K production per month.

And about the price, more or less we are able to maintain the price level.

Mr. Takeda.

If I may supplement, our own capacity is operating at the full capacity, and so we will look at the -- our partner or collaborating companies for a further operation.

Then the qualities we expect to see in the new CEO. The experience and the insight into motion pictures and television productions, but that will be desirable, but on the other hand, this solution is changing this segment very much. So the trend of change in this industry, as well as the new knowledge and insight into the new technology -- that would be required in addition to leadership.

(Inaudible), UBS Securities. One question on semiconductors and one on game business. First of all, semiconductors, you have a large profit. It looks as if sales are up with the lower inventory now and (inaudible) is your full operation. So, if we multiply by four the results for October, December period, we immediately get the full year results.

And on game business, with the launch of PSVR, PS4 sales have grown consistently, so during these quarters, on a year-on-year comparison basis, there has been a growth. But in Q4 as well, do you think this momentum will continue?

First of all, the inventory situation for semiconductors, as I said, we are at a full capacity operation mode. And in third quarter inventory was slightly higher than our expectations, so the basic inventory was kept at a higher level. But in the fourth quarter, with the volume increasing in the fourth quarter, to the end of the fiscal year, basic inventory of 95 days, we will not have that level of inventory, but we will be adjusting the capacity up a level -- the operation, by looking at the demand situation.

So it will be down -- the inventory is down in [fourth] quarter, well, the inventory, the amount in value will rise, but the turnover of the inventory will be lower until the end of the year.

But again, with the release or sales of PlayStation VR, has it resulted in the increase of sales of PS4? It's very difficult to give analysis. The purchasers are many years, so many of those already possess the cameras, which are needed for VR, so I think there were more positive factors than the negative. But looking at the purchasers, they are those people who already possess PS4, PlayStation 4.

Now, has it led to the increase of Pros? PS Pro. I think the answer is affirmative. The sales of Pro is stronger than that of Slim, as we see it. Yes but the PS4, it continues to do well. About 20 million in number. This remains unchanged for this fiscal year. And PS4 Pro -- PS4 Pro is running as we have expected, as we have assumed, but Pro maybe is doing more than we had anticipated.

Nakane of Mizuho Securities. Thank you for this opportunity. I have two questions. First, numbers. CapEx. JPY25 billion -- no, JPY35 billion -- that was -- affected the revision. It has to do with semiconductor -- depreciation and amortization was reduced by JPY30 billion. Can you give the breakdown by segment and the background?

And for the semiconductor, I trust that you'll be increasing your capital investment towards the next fiscal year, so why is it that there was a decline this fiscal year? And what do you intend to do the next fiscal year?

Now, the next question is about the pictures. Except for the impairment, you have not made any revisions. And when the first half was settled or announced, you said that it will not reach the mid-range ground, but you did not comment about the impairment. You were silent about the possible impairment, so what has happened between then and now? Can you give us an explanation that we'll be able to understand?

Let me ask, first, Mr. Takeda?

Now, I'll jump to investment, compared to December, why is there a decrease vis-a-vis December forecast? This is primarily due to the reduction in the semiconductor equipment. In other words, we are using the existing equipment. And also, in the area electronics, we are refraining from any investment that are not for immediate emergency and requirement.

On the pictures, your question about the pictures, in December we have put together a plan for 2017 to 2019. And as a result, we were required to make a downward revision to the earlier version of the forecast, therefore we are revisiting the forecast of earnings for the pictures.

That led to the need to take a conductor test to see whether we needed impairment. We have concluded that exercise in January and we have made an announcement on the 30th of the month. So it was in the beginning of December that we had started to look at the medium-term plan and started again the testing on the need for the impairment.

Next question, please.

Thank you. Ezawa, Citigroup Securities. Concerning the business, one has to do with TV, and the other, pictures. In connection with TV business, I think a perfect picture is favorable. And in terms of the management and supervision, the stability and the profit making would be a target, but 5% profit margin per year continues, and this year also you will be achieving that.

Then the conventional policies of not incurring loss or to stabilize, will that be sufficient? What about the positive, aggressive growth of that business? Are you thinking of shifting the policies? And OLED TV has been announced, and are you going to be on a very aggressive side in TV business going forward? Well, how -- what is the profit plan and the strategy in TV business going forward?

Second is the pictures. And this time you only announced the non-cash impairment and the business improvement or transformation plan have not been announced together. And some -- so that was disappointing. And for improvement of profitability, a short-term prescription may be a one-time impairment recording. But what about the recovery and improvement of a profitability structure or performance structure? Are you thinking about it?

And if that is to be left in the hands of the successor, meaning that plan cannot be formulated unless the new successor arrives, then Mr. Hirai now has a second office in Culver City, and how would that function if the plan has to wait with arrival -- has to wait arrival of the successor?

About the TV business, basically, we -- our policy is to place emphasis on profitability rather than pursuing the volume. But 12 million units, given the exchange rate situation, the sales of JPY700 billion or JPY800 billion maximize the profit. That is the basic policy.

But this time we announced the OLED TV, and especially the large-screen TV would be a focus. So the product mix, as well as there may be some strong or weak or up and down in the areas, so in some areas we place emphasis.

And also, we will look at the profitability per channels in terms of allocation. So we will continue to focus on operations to improve the profitability rather than increasing the volume per se.

About the pictures segment, your question is that if we are not thinking about the restructuring plan. Over the short term, the structural reform of a major improvement may not be in place, but we are thinking of an improvement in some extent. Philip Rowley, our new CFO, is now implementing the new projects, for instance, what to do with the too heavy corporate cost. And we are formulating the plan to reduce such corporate cost.

And then the successor, the new CEO, it's not that we cannot implement such a project unless the successor arrives. But as regards to President Hirai, he will be working to enhance and strengthen the management basis, as well as the selection of SPE CEO. Those would be the highest priority areas.

One point to supplement, in TV, 12 million units and JPY700 billion to JPY800 billion size, you are not going to enlarge it, but when the operation is improved, then profit would increase. Basically, yes, that's the direction. But whenever there is opportunity in business we will be flexible and agile, but we will not simply pursue volumes for the sake of increased volume.

Hirakawa, Merrill Lynch Securities. I have one question concerning semiconductors. There's been discussion about this already, the heavy investment (inaudible). Whether it's a recurring business now is even a factor, but your margin target for next year is between 6% and 8%. So 6% and 8% profit level seems to be very low. Do you think that it's still the adequate and appropriate level of profitability for this business? If so, between 6% and 8%, if you think this is a realistic level, what are you going to do to make further improvements on this and what results are you achieving through these improvement initiatives?

Thank you for the questions. So as things stand now, we are in the midst of budget formulations so we cannot say anything definite. But ideally, the semiconductor margin should be higher. The current level is too low. We have to try to improve the level of margin, and there is room for improvement.

And for the next particular year, how much percentage would that be? I will hesitate -- refrain from mentioning percentages, but I think we'll be able to raise the level of profitability. The current business condition is such that there's some positive factors, for instance in terms of sales mix, [the players] going for smartphones. Dual camera module is solidly increasing or likely to increase as we'd expected. And for the improved pixel size of the phone cameras for selfies, that's also increasing.

So the Chinese market, which is more than 500 million or so, high-function cameras are becoming mainstay instead of low-cost models. So these developments are all helping us. They are serving as a tailwind for us.

I'm not sure if I've adequately answered your questions but --

SMBC Nikko Securities. Katsura is my name. I would like to ask about the free cash flow of the financial services. And the next question is about mobile communication.

The free cash flow is additional of JPY200 billion for December, so it has shrunk to JPY160 billion on the accumulated basis. But still, it's really a large negative size. In the fourth quarter, you have the proceeds of the sales of the shares of M3, JPY50 billion, so I think this period it'll be in black. But the pictures I think is a big factor. And I think that is affecting the free cash flow.

Therefore, what would the operations be like in the future? Would there be a change in the direction, that is to say Tom Rothman will work on franchise and animation and increase or realize the pipeline-generating returns? That has been the approach taken by the Company for the past several years. So again, free cash flow is the question that I have.

Another is the mobile communication. And I think it's in black, 15 million in the volume. I think the ForEx market is helping. And I think you said that you needed 20 million, so what is your thoughts about the next fiscal year for the mobile business?

Thank you. Let me comment first on the first question and have Murakami supplement. Free cash flow, and you pointed -- referred to the pictures business as well, we have the second medium/mid-range business plan and we focus on investment and creating the opportunities and returns, profits. There was a major investment to be made, that is why there has been a negative cash flow for two consecutive periods.

But in the third medium or mid-range plan, I think we should be focusing more on cash flow and also on the recurring revenue business. Therefore, internally, we will not just look at P&L, but we will be more attentive to the cash flow and have the people fully realize, be conscious about CCC.

The overall cash flow for this fiscal year, our approach or our thought, 2015 free cash flow was minus JPY72.1 billion excluding the financial services. And I think that this figure will be improved for this fiscal year somewhat.

But one point of caution, last year, of the semiconductor capital investment that was implemented the year before, the JPY90 billion of investment was deferred to or was carried over. And even with that, we believe that the figure would be better than the previous year.

Now, for the pictures' free cash flow, it's a topic very difficult to discuss. I think the direction is for the better, improvement, but the timing of the pictures production and the recovery, there's some volatility or some fluctuation. So we are hoping that it will be improved, but again, given the volatility of the business, it's very difficult to give you a clear-cut answer.

On the mobile business, communication, we have the World Mobile Congress soon. We have to strengthen the product, the merchandizing. And also, we have to strengthen the sales and marketing part, particularly in Europe because last year we did not do well in Europe last year.

So reflecting upon what we did last year, we would like to strengthen the business and we will maintain a certain profit. And also, we'll continue to improve the overall profit structure. Thank you.

Next question.

Ono, Morgan Stanley. Thank you. One question. Concerning semiconductor business, in the slide you showed this graph or the quarterly change and you also explained that for the fourth quarter in the others sub segment, the extent of loss is incorporated. And what's your view on this? I'd like to confirm it.

At the time of settlement of second quarter, have you foreseen this or is this something you consider that will require some working out or disposal and you've come to realize that now? Or simply is it one-time items and would lead to the factors improving the profit in coming fiscal year?

Takeda-san to explain.

Thank you. About the others sub segment in semiconductor segment, the composition of this, that analog LSI and optical pickup, such existing business is one. And another is that (inaudible) we exposed -- exhibited in CES and IoT such new business. And then common R&D expense, or a common expense for semiconductor segment as a whole.

The fourth quarter, due to the seasonality, and there will be the expense handling for the year end and that happens during the fourth quarter. And in addition to that, in case of fiscal 2016, as Mr. Yoshida mentioned, some of the business was brought to a closure and that (inaudible) is included.

So in total, about 20% of total expense is related to the expense [relating to] closing of the business. For other new business, that would mean an investment for the future, so that would continue into the next fiscal year. And the common expense for R&D, it is a fixed expense.

Sugiyama, Goldman Sachs Securities. On pictures and on M3 I have questions. First of all, motion pictures, the motion pictures particularly, they've cited three initiatives for improvement, international reach and financial discipline. So you must have [concluded] actions. But leveraging of IP and particularly creation of new IPs, what actions do you have in store?

And secondly, this is about M3. You sold part of the M3 ownership, so M3's positioning in terms of your corporate strategy, what is it? And also, what is the use of the gain from the sales of these shares?

First of all, the creation of new IPs for pictures business, what actions do we have in plan -- in our plan? Well, the new scenarios that we purchased, so pictures that we are starting anew. For example, Stephen King's Dark Tower we released this year. And this is one example. Whether this will become IP, as such, we will have to see whether the pictures will attract audiences, so it will be decided by the audiences at the end of the day.

But another hopeful thinking is that leveraging of the IPs that we have in game, this is something we can do only because we have the game business and pictures business.

And your question about M3, the positioning of M3 within total Sony, we are continuing to own 34%. So our positioning remains unchanged in terms of importance of M3. But currently, the genome analysis servicing done by P5, which is a joint venture, we have that operation that we do with M3.

So in the medical service field, there will be a lot more about collaborating opportunities. And the future potential for these businesses in the medical services field, medical field, to add value, bring added value to medical field, I think the potential is very high. So the positioning for M3 for us remains unchanged.

The use of the gains from the sales, Mr. Murakami, can you explain?

No particular use of the fund has been identified.

Thank you.

We have very little time left, so the next question will be the final question that we can take.

Nishimura of Credit Suisse. And thank you for this opportunity. One question. The semiconductor production capacity, I think you're running at the fullest capacity. That's what you have said. Therefore, next fiscal year, the year after, would you be making investments to increase your capacity? What is your thought on this? Or maybe you could take advantage of the Toshiba Oita plant. They could be different options.

As you have rightly pointed out, we are in discussion, we are in consideration. Production capacity, I think that the overall direction is to increase the capacity, so we are discussing with the partner companies or the supporting members. Oita plant, we could not -- we could use it just -- we could use it for [masters] in addition to -- for the use of logics, for the logics. So we will be discussing what we might do in the future.

Thank you very much. We would like to close this gathering. Thank you very much for your kind attention.

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.