索尼 (SONY) 2012 Q2 法說會逐字稿

Welcome to the Sony Corporation second quarter fiscal year 2012 conference call for overseas investors. 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 that this conference is being recorded.

I will now turn the call over to Edward Reid. Edward, you may begin.

Thank you very much for that introduction, John; and thank you all for joining us today, November 1, 2012, for the discussion of Sony's second quarter results. I'm Edward Reid from the Investor Relations department here in Tokyo; and with me on the conference call tonight is Mark Kato, CFO of Sony Corporation; Steven Kober, Executive Vice President and Chief Financial Officer, Sony Corporation of America; and Yoshinori Hashitani, VP, Senior General Manager, Investor Relations division of Sony.

Thank you all very much for joining us, especially those overcoming difficult circumstances to do so on the east coast of the US. We would like to express our best wishes for a quick recovery to all those impacted by Hurricane Sandy.

In just a few moments, we will review today's announcement. Then we will be available to answer your questions. Please be aware that statements made during the following remarks and Q&A session with respect to Sony's current plans, estimates, strategies, press release and other 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 any 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 the risks and uncertainties, as well as other factors that could cause actual results to differ, please refer to today's press release, which can be accessed by visiting sony.net/ir.

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

With that, I'm now going to turn today's announcements. I will begin by explaining the consolidated results for the second quarter [ended].

Consolidated sales increased slightly year on year. This was primarily due to the consolidation of Sony Mobile, which had been an equity affiliate in the same quarter of the previous fiscal year, but became a wholly owned subsidiary on February 16.

Partially offsetting this impact was a decrease in unit sales of LCD televisions. Operating income of JPY30.3 billion was recorded compared to an operating loss of JPY1.6 billion in the same quarter of the previous fiscal year. This was primarily due to an improvement in operating results of the Devices and Home Entertainment & Sound segments.

The improvement in the operating results of the Devices segment was primarily due to the recording of expenses associated with the sale of the small and medium sized display business in the same quarter of the previous fiscal year, a significant increase in sales of image sensors in the current quarter, and the recording of a gain from the sale of the chemical products related business.

The improvement in operating results of the Home Entertainment & Sound segment was primarily due to an improvement in the TV business, where we are seeing the benefit of reduced LCD panel related expenses and operating expenses. Because the net effects of other income and expenses was a loss of JPY10.6 billion for the quarter, income tax before taxes was JPY19.7 billion.

We recorded JPY22 billion of income tax expense during the quarter. This was primarily because we did not record any tax benefit for losses we recorded at certain tax filing groups due to the establishment of valuation allowances against deferred tax assets in prior fiscal years. Due to the recording of this income tax expense, and a JPY13.1 billion loss for net income attributable to non-controlling interests, net loss attributable to Sony Corporation stockholders for the quarter was JPY15.5 billion, an improvement of JPY11.5 billion over the same quarter last year.

I will now compare this quarter's operating results to our August forecasts. On a consolidated basis, operating results were approximately [JPY20 million] higher than our August forecast. On a segment basis, the Games segment exceeded the August forecast by approximately [JPY5 billion], due to improvements in SG&A.

The Home Entertainment & Sound segment exceeded the August forecast by approximately JPY10 billion, due to cost improvements in the TV business that exceeded expectations.

Although sales of image sensors were below expectations, the Devices segment was approximately JPY10 billion higher than the August forecast due to the recording of a gain from the sale of chemical products related business and the benefit of insurance recoveries from the Thai floods.

The Pictures segment was approximately JPY5 billion below the August forecast due to the underperformance of certain films and the recognition earlier than expected of marketing expenses for motion pictures scheduled to be released in October.

The Financial Services segment was approximately JPY5 billion higher than the August forecast due to lower insurance payments than anticipated, and higher than expected investment performance in the general accounts.

The Imaging Products & Solutions segment, the Mobile Products & Communications segment and the Music segment, were all to expectations.

I will now explain the results of the Digital Imaging, Sony Mobile Communications, and Television product categories. Sales of the Digital Imaging product category for the quarter decreased significantly year on year because the previous year's second quarter benefit is from a rebound in sales after the earthquake or the slowdown in sales due to limited production in the first quarter. Sales of video cameras decreased significantly year on year, as unit sales decreased from a contraction of the market, but we continue to maintain a high market share and a high level of profitability.

Sales of compact digital cameras decreased significantly year on year due to a decrease in unit sales brought on by the popularization of smartphones and the deceleration of the economy. We will work to improve profitability through enhancement of our range of high value added products.

Sales of interchangeable single lens cameras increased due to the introduction of competitive models. Going forward, we aim for these products to gain market share and contribute to profitability through the introduction of new models such as the NEX-5R and the NEX-6, and through further enhancement of the product line-up.

Regarding the results of Sony Mobile Communications, on a standalone and pro forma basis, had Sony Mobile been fully consolidated in the same quarter of the previous fiscal year, sales for the current quarter have increased approximately 16%. This was primarily due to an increase in average selling prices, due to the shift in the product mix from feature phones to smartphones, and increased unit sales of smartphones primarily due to strong sales of the Experia series.

Television sales decreased 32% year on year to JPY146.7 billion, primarily because we are managing our business with an emphasis on profitability rather than unit sales, and because we were impacted by price declines. Unit sales decreased 30% year on year to 3.5 million units.

Excluding restructuring charges, a JPY10.2 billion operating loss was recorded, but this was a JPY30.5 billion improvement year on year. Both unit sales and revenue of LCD televisions for the quarter decreased year on year, but operating loss improved significantly.

Things are improving beyond our August expectations, and we are making steady progress towards a profitable structure. Although the improvement in profitability is progressing beyond expectations, we have not changed our August forecast for an operating loss of approximately JPY80 billion for the fiscal year due to our cautious view of market trends from the third quarter onward. We plan to continue to improve our profitability structure as we aim to turn a profit in the fiscal year ending March 31, 2014.

Lastly, I will explain our forecast for the fiscal year ending March 31, 2013. Assumed foreign currency exchange rates for the second half of the fiscal year are approximately JPY80 to $1, and approximately JPY100 to the euro. This represents no change from the August forecast.

Consolidated sales for the fiscal year are expected to be JPY200 billion below the August forecast, or JPY6.6 trillion, primarily due to downward revisions in annual unit sales forecasts of certain key products. Although we foresee a severe operating environment in the second half of the fiscal year resulting from continued uncertainty regarding economic trends, we have left operating income for the fiscal year unchanged, and we expect to record the JPY130 billion we forecast in August.

We have also made no change to our August forecast for income before income taxes, and net income attributable to Sony Corporation stockholders.

That ends my discussion of our results and forecast. I will now turn things over to Kato-san and Steve for Q&A.

John, may I ask you to cue up the questions, please?

(Operator Instructions). Jeff Loff, Macquarie.

So just real quick, you've revised down your sales target by JPY200 billion. It seems that that would have an impact on the operating profit as well, maybe even on the order of magnitude of JPY40 billion. So I was just wondering, how are you able to make such a big cut to sales but keep your profit forecast unchanged?

Okay. First, your assumption of the impact to the bottom line of JPY40 billion as a result of the reduction of sales of JPY200 billion is a little bit off for the following reasons. For example, part of the JPY200 billion reduction in sales, that is made up partly by the Picture segment.

Now in the Picture segment, the reason for the downward revision is that we have changed the release [date] a little bit, pushing back some of the titles, films into the next fiscal year. This means that revenue will go down, but at the same time, the marketing expenses related to the new releases would also be shifted to the next quarter, meaning there is no operating profit impact due to the decrease in sales.

So JPY40 billion is not the number that we were looking at, but that said, your point is how do we make up for the shortfall?

Now this is mainly offset by asset sales, certain asset sales that we have been studying for some time. I cannot give you details on what these are, but that is how we intend to maintain the bottom line, keep the forecast of JPY20 [million] after-tax profit to our shareholders.

Okay. And those asset sales which flow into the operating line? It doesn't seem like (multiple speakers).

Yes, both the operating line as well as the bottom line.

Okay. On the TV losses of about JPY16.3 billion in the first half of the year, if you combine Q1 and Q2, excluding restructuring charges, on that basis in terms of excluding restructuring charges, what's the target for that number for the full year? Is it --?

Yes, the results of the first and second quarter, in the first half, is very encouraging to us, in that all the efforts that we have put into improving Television is bearing fruit. Having said that, the second half, due to various reasons such as the -- very generally speaking, the state of the economy, there is some gloominess around there, some uncertainties, and as you might know, we do have some territorial disputes within China and Japan at the moment, which is very unfortunate. But due to some demonstrations or strikes around in China, our sales have been affected.

So these are part of the reason that we are taking a very cautious view towards the second half despite encouraging results in the first half in the Television business. So our annual forecast for the Television business remains at about a loss of JPY80 billion, which is a big improvement over last year; about half of last year's losses.

So we hope to be -- at the end of the fiscal year, if we can come out better than forecast, I'll be more than happy. But as for now, we are taking a cautious view.

Okay. And then shifting a bit to your Mobile Products division, that's lost, I guess, JPY50 billion over the first two quarters of the year. Can you explain if that's driven more by PCs or handsets?

And then how much of the handset operations right now is influenced by one-time items, and what do you think is the underlying profitability?

You're talking for the entire segment, or for the mobile phones?

So kind of both. The JPY50 billion loss is for the entire segment, so if you could first start off by explaining --

Okay, yes. This segment is primarily made up of cell phones, PC Vaio, tablets, e-readers, etc. The losses come from all business units that I mention to a different degree.

Okay, but what do things look like at the Mobile business right now? Are there still one-off factors there are affecting the profitability there? And (multiple speakers) underlying profitability?

Okay, understood. On the cellular phone business, we are shifting from feature phones to smartphones. We have acquired the remaining shares of the Sony Ericsson joint venture. Now it is 100% Sony owned. But we are going through a series of, I would say, reform, restructuring, realignment of the business, whatever, however we call it, to turn around the business.

This fiscal year, the cellular phone business is expected to be in the red, but we are taking the pains now so that we can get the business back into profitability next year. So, well, it's slightly different from a one-time cost, but we are taking steps so that we can have a profitable business in the next fiscal year.

Now switching to other parts of the business, PC. PC, I would say, is more of an industry trend. The market itself is not as strong that we had expected. So we have shifted downward the expected shipments of our PC products from 9.2 million to 8.5 million. That is the primary reason, which I would say is more of an industry-related or market-related issue.

Okay. Just one question on the restructuring charges, because if you look at the Home Entertainment & Sound business, just to get a little more clarity on what the underlying profit is there, are you able to give a sense of how much of the --?

First of all, what were the restructuring charges for the quarter, and how much of those were for Home Entertainment & Sound?

Can you give us a moment to check the numbers, please?

Sure.

Coming back to your question, restructuring charges for the quarter recorded about JPY11.3 billion, of which JPY3.8 billion is related to the Home Entertainment & Sound segment, basically TVs.

Thanks very much.

(Operator Instructions). Arvind Bhatia, Sterne Agee.

I was wondering if you can comment on your PlayStation business. Obviously, in the past, you guys have had a leadership position, and perhaps you guys lost out a little bit on this current generation. I was wondering what your specific strategies are to retake that leadership position in the coming console cycle, and maybe you can list a few things that you will do differently.

And also, just how do you see the next couple of years in terms of the transition from the existing generation to the next generation?

Thanks.

That's a big question; a lot of questions in one. Okay. As you know, the Gaming business is a platform business, and when we introduce a platform, whether it's a home console or a portable, we expect at least five years, but I would say more like 10 years for each platform.

Now the current platforms are mainly -- the home platform, as you know, is PS3, which is in its sixth year. Vita, the portable device, was launched only last year. So both platforms we think still have a pretty long life left. And we intend to grow these platforms, mainly with -- well, I would say software, because software is the name of the game here in this business.

On top of the package business that we have been enjoying in the past, as you know from several years past, we have been introducing this network side of the business, downloads or whatever.

Now looking forward, this quarter, we did acquire a company named Gaikai, which has a -- some technologies and business in cloud-based gaming. That is one, for example, new development in our Gaming business. Going forward, we would like to introduce gaming based on cloud applications and what the new cloud system might bring to the consumer in terms of forms of different gaming, different types of enjoyment in video gaming.

Okay. So a follow-up. How important is it or is it not for you to be first to market. Obviously, in the case of PlayStation 2, that was one of the reasons, apart from the fact that it had a great console and great software, that you had the number one position in the market for a number of years, is being first to market an important part of the strategy? Or right now that's not a factor that you are considering?

Okay. Generally speaking, first to market I would have to say is not unimportant; it is important. It was more so in past platforms, but in future platforms, I think the more important thing is what kind of services, applications, what type of new enjoyment can be realized on this new platform.

Now this has been a task for us for 15, 16, 17 years, but with the network business becoming a major part of the gaming platform, this new service, new application, it gives a much more wider, I would say, scope than the past package-based games.

So to answer your question, first to market is important, but more important is what kind of services, new types of enjoyment that you can bring to the market.

Okay, great. Thanks for that.

(Operator Instructions). Adam Gold, Espial Capital.

I wanted to ask about the Mobile Products division. In the slide deck on number 4, it says that if you included the full [scenarios] and results, they are roughly flat year over year instead of 125% growth. Is there anything else in the release that's similar? So if you think about total revenues, essentially if you add back that JPY160 billion, your revenues actually declined year over year. Are there other divisions or segments that would make that comparison different?

If you are talking about the consolidated sales number, adjusting for the mobile, the answer to your question is, yes, if you -- if we assume that we have some mobile, let's say on a pro forma basis, we had the Sony mobile unit last year, as you said, if you take that out, if you consider that, the rest of the business sales would have declined by approximately 8%.

Okay, yes. And then any change, anything on strategy you can mention in terms of operating systems or future plans? Are you still focused on Android? Or is there anything else that you're -- now that you've got the consolidation taken care of, overall strategy on the Mobile segment?

Okay. Here, today, we maybe are focused on Android, but future platforms and systems we are always considering our options. But we cannot be too specific on this point at this moment.

Thank you.

(Operator Instructions). Brian White, Topeka.

Wondering if you could talk a little bit about LCD TV demand by geography, if you look at US, Europe and then Asia, and what you saw in China over the Golden Week holiday.

Okay, TV geographically. The three, well, developed market, Japan, North America, Europe, we see a decline. In the emerging markets, BRICs countries, Brazil, Russia, India, we see growth. One, I would say negative development was in China, which at the beginning of the year we hoped that the market would grow. But the recent turn of events indicates that China is not growing as we had expected.

This I think is twofold. One, as you mention, during the holiday season, we did expect high sales, but due to the territorial disputes and the demonstration that happened in the street, our sales were affected. I have to admit that. But on top of that, even before this incident took place, China's economy was not -- a little bit, I would say, still growing, but not as strong that we had expected.

So I think there are two factors here. One, market industry related; and the other, the unfortunate incident that happened in September. But it's difficult to kind of break down which factor contributed to which much -- how much of the decline. But that's the situation in China.

Okay. And when we think about the holiday season in the US, in Europe, how are you thinking about growth for the December quarter in LCD televisions?

In LCD television, we hope to do better than last year but, as we have been saying all along, this year, we have put our emphasis on profitability, not in growing the top line, regaining market share, pushing units into the market, but that would result in a bigger loss for our business.

So we have been -- are being very selective. We have reduced the number of models that we put out in the market. We have put more emphasis on margins, ASP, etc.

So for this year for North America, LCD televisions, we're not pursuing volume or sales, but rather concentrate on profitability.

Great. Thank you.

(Operator Instructions).

Okay, thank you very much, John. I think we'll end the conference there.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect at this time.