索尼 (SONY) 2012 Q3 法說會逐字稿

Welcome to the Sony Corporation third quarter fiscal year 2012 conference call for overseas investors. My name is John, and I'll be your operator for today's call. At this time, all participants are in 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, February 7, 2013, for the discussion of Sony's third quarter results. We hope you have all enjoyed the music from 2CELLOS' new album on Sony Masterworks, In2ition, while you were on hold.

I am 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 very much for joining us, all of you. In just a few moments, we will review today's announcement, and 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 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 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 to today's announcement. I shall begin by explaining the consolidated results for the third quarter ended December 31, 2012.

Consolidated sales increased 7%, primarily due to the consolidation of Sony Mobile, and higher sales in the Pictures and Financial Services segments. If Sony Mobile had been consolidated in the previous year, consolidated sales would have been essentially flat year on year.

The Pictures and Financial Services segments are performing quite well, with sales of Pictures up 30% and Financial Services up 21%; both significant increases.

Operating income of JPY46.4 billion was recorded; a JPY138.1 billion improvement, compared to the JPY91.7 billion operating loss recorded in the same quarter of the previous fiscal year.

This improvement was primarily due to the contribution of the Home Entertainment & Sound segment, where a JPY63.4 billion impairment loss on shares of S-LCD was recorded in the same quarter of the previous fiscal year and where improvement in the profitability structure of LCD TVs is progressing smoothly.

The Mobile Products & Communications segment also contributed to the improvement, due to the recording of a JPY33 billion valuation allowance on certain deferred tax assets at Sony Ericsson in the same quarter of the previous fiscal year, and an increase in unit sales of smartphones.

In addition, the Devices segment, which had a significant increase in sales of image sensors, and the Pictures segment, which had a significant increase in motion picture revenues, also contributed to the improvement in operating results.

Income before income taxes of JPY29.4 billion was recorded; an improvement of JPY135.3 billion, compared to the JPY105.9 billion loss recorded in the same quarter of the previous fiscal year.

JPY25.9 billion of income tax expense was recorded during the quarter. Since we continued to record valuation allowances against deferred tax assets, primarily in Japan and the US, the effective tax rate for the quarter exceeded the Japanese statutory tax rate.

Net loss attributable to Sony Corporation's stockholders decreased JPY148.2 billion year on year, to JPY10.8 billion.

I will now explain our forecast for the fiscal year ending March 31, 2013. Assumed foreign currency exchange rates for the fourth quarter are approximately JPY88 to the $1, and JPY115 to the EUR1.

The consolidated sales forecast for the fiscal year ending March 31, 2013 remains unchanged from our November forecast of JPY6.600 trillion. This is due to the favorable impact of the depreciation of the yen, as well as a higher than expected Financial Services revenue in the third quarter being offset by downward revisions in annual unit sales forecasts of several key electronic products resulting from the stagnation of the electronics device market and intensification of competition in all regions.

The consolidated operating income forecast for the fiscal year remains unchanged from the November forecast of JPY130 billion. This is because lower than expected results of the Electronic segments are expected to be offset primarily by higher than expected Financial Services revenue in the third quarter and by planned asset sales.

I refer you to our earnings release for a discussion of the results of each business segment compared to the previous fiscal year. And I will now briefly touch on how each segment's third quarter operating results compare to our November forecast and explain our revised fiscal year forecast.

In the Imaging Products & Solutions segment, operating results were approximately JPY10 billion below our November forecast.

The Games segment's operating income for the quarter was approximately JPY5 billion below our November forecast.

In the Mobile Products & Communication segment, operating results for the quarter were approximately JPY5 billion below the November forecast, due to the decrease in PC unit sales.

The Home Entertainment & Sound segment's operating results for the quarter were approximately JPY5 billion above our November forecast. In Television, things are improving faster than our November forecast while unit sales in revenue were impacted by our emphasis on establishing a profitable foundation and by price declines.

Our actions have resulted in operating loss improving significantly, even excluding the impact of the impairment of shares in S-LCD the previous year.

In the Devices segment, operating income for the quarter was in line with our November forecast.

Total inventory for the five Electronic segments, as of December 31, 2012, was lower than at the end of the previous quarter but about 20% higher year on year, primarily due to the consolidation of Sony Mobile. Excluding this impact, inventory is slightly heavy having increased approximately 9% year on year and we aim to reduce it by the end of March.

Sales and operating results for the current fiscal year are now expected to be below the November forecast in each of the five Electronic segments because the annual unit sales forecast for key Electronics products, other than smartphones and home-use game consoles, have been revised downward. Compared to the previous fiscal year, we expect sales to be essentially flat but operating results to improve.

We continue with our plans to keep on improving profitability structure in Televisions as we aim to turn a profit in the fiscal year ending March 31, 2014.

Next is the Pictures segment. Segment operating income for the quarter was approximately JPY5 billion above our November forecast. Fiscal year sales for the segment are expected to exceed the forecast. This is primarily due to the depreciation of the yen. The outlook for operating income remains unchanged. Sales and operating income are expected to increase year on year.

In the Music segment, operating income for the quarter was in line with our November forecast. Fiscal year sales and operating income for this segment are expected to be unchanged compared to our November forecast. Compared to the previous fiscal year, we expect sales and operating income to be essentially flat.

Next is the Financial Services segment. Segment operating income for the quarter was approximately JPY5 billion higher than our November forecast.

Fiscal year sales and operating income for this segment are expected to exceed our November forecast because of the recording of higher Financial Services revenue and operating income than our November forecast in the current quarter. Sales are expected to increase year on year and operating income is expected to decrease.

That ends my discussion of the results and forecast. I will now turn things over to Kato-san and Steve for Q&A. John, may I ask you to queue up the questions, please?

(Operator Instructions). Daniel Ernst, Hudson Square Research.

Kato-san, I have three questions that all relate to profitability, if I might, by segment.

First on the Television business, while there is a marked improvement from when we recorded a loss this time last year, we're still not on a real path to profitability.

If you could walk me through the confidence we have in having profits next fiscal year, what does that model look like? Is it further (inaudible) reduction? Is it more outsourcing? What has to happen to get that division to profitability, knowing that sales prices continue to be under pressure around the world?

And then second, looking at the Imaging business where we used to make good profits on camcorders and digital still cameras, now even in a peak quarter this year, and this time last year, we're producing losses.

What is the trajectory of that business profitability? Are we going to end up like in the TV business where we're in a perma-loss position? Or is there a plan to regain profits, despite the fact that those markets, on a unit basis, are (technical difficulty) in division?

If we look back seven years, eight years ago at the end of the last game cycle, the PlayStation 2 division was generating nice profits. It was at about 6% margin in the year ending March '05, before we headed into the loss category when the PS3 was launched.

Here we're looking at maybe a breakeven or slight loss for the fiscal year and we're apparently going to enter a new cycle sometime in the near term. What are the prospects for maintaining profitability in Game division? Or are we going to have a similar to the prior cycles where we go into a deep loss in the early stages of Game? Thank you.

Okay, let me answer your questions one by one.

First on Television, now almost two years ago when Kaz Hirai became responsible for this business, at that time, now this is fiscal year '11, that's fiscal year ending March 2012, our loss in this business was roughly JPY160 billion. Now, at that time he said that he would turn around the business by the end of next fiscal year, which is fiscal year 2013, fiscal year ending March 2014.

Now, on the way to turnaround he said for the current fiscal year he would aim to cut the losses in half; JPY80 billion. Now, we are on that trajectory at the moment.

Now, how did we get here? Basically firstly we tackled our issue of the cost of the panels, which were the biggest component of the overall cost. And, as you know, last year we dissolved the relationship we had with Samsung. Now, this produced immediate results and that is one big factor that have produced positive results towards better profitability.

Now second, we have taken initiatives to reduce our fixed cost. That is another big area.

And going forward, continuing on this path of reducing our costs and SG&A, etc., next year we aim to introduce products that can command a higher margin for us.

Now, competing in a very price-competitive market is not the main strategy that we're taking. This year, as you know, we have not pursued unit volume. Unit volume means we have to compete in very low-margin markets, very low-margin product lines, which we think would not help us this year. So we have deliberately cut down on the numbers which we aim to sell, but rather concentrate on profitability.

Now next year, based on a better cost structure, we aim to increase unit volume where possible. And, combined with high-quality products that differentiate against competition, for example stuff like 4K TVs that we introduced at CES, those are the things that we are looking to further improve the TV profitability. And, hopefully, by the end of the next fiscal year, do better than break even.

I must say at the beginning, although the segment IP&S, Imaging Products & Solutions, produced a negative OP margin, now the Digital Imaging consumer product area, we are not in red ink, even for the third quarter. But it is true that a lot of businesses in the low-end digital still cameras have shifted to smartphones.

Now here, what we intend to do is to concentrate more on the high-quality, high-end product within this segment.

In order to do that, -- How do we do that? We have very high-tech technology in image sensors, in lenses and signal processing semiconductor technology. We have all these component technologies in house, and we would like to come up with a product that will draw more attention from consumers who are interested in added-value product. That's one aspect.

The other is that, yes, consumers are shifting from digital still cameras to smartphones. Smartphone cameras are pretty good, but, as you know, we have invested in mobile phone business, mainly by taking the remaining shares from the Sony Ericsson joint venture and made it our wholly-owned subsidiary. If we increase the share in the mobile phones, that means that we are capturing the consumers who have shifted from digital still cameras to mobile phones. That's another aspect.

And third, if you take the Imaging business in a broader sense, including image sensors, we have a good component business in image sensors, and we can capture upside here as well.

In order to just give you a better picture of how the Imaging Products & Solution sector is made up of, we do have some difficulty here in the professional solutions group as well. So the segment as a whole, we have negative OP this third quarter, but it is mainly due from the professional solutions group and not the Digital Imaging consumer products that I have talked about.

Thirdly, Gaming. Now one thing clear for us, that, in terms of profitability, we have to do a better job in promoting the PlayStation Vita mobile product. How do we do that?

Well, gaming business software is the name of the game. So, as a fundamental measure, we are putting a lot of resources, not just first party, but also asking third parties to put out more attractive software. That's the basics.

The other thing, marketing, pricing of the products, etc. I cannot talk about pricing of this platform, but those are the things that we are looking to improve profitability in the mobile hand-held gaming business.

Now PS3, in its sixth year. I think it still has a long life, and here we're not in the stage where we are losing money on the hardware any more. So, again, there are discussions about the next platform. I cannot dwell on that at all at the moment, but, in any case, we have a lot of business in PS3.

Now, to give you an indication of how stable this business is, although we have reduced forecasts on many of our product lines, from television, digital still cameras, and, etc., but mobile phones and home game devices we have not changed the forecasts for this fiscal year. So that, I hope, will give an indication of our confidence in this platform going forward.

There's a lot to answer, and maybe I could not cover everything, but I hope it addresses most of your questions.

Yes. Thank you very much.

Richard Kramer, Arete Research.

I've just got two questions. And the first one is, can you help us understand the relative profitability between PCs and smartphones in your Mobile business, (inaudible) in that business segment? Because, clearly, there's a divergence of directions in those two businesses in Mobile Products & Communications, and I'm just curious which of the product areas really caused the losses, and if there's a big difference there.

And also in the Devices business, clearly the attach rates for high-quality megapixel sensors, CMOS sensors, on smartphones are rising sharply. In other areas of the supply chain we have seen suppliers talk about restricting CapEx and looking to increase pricing.

Can you talk about, in areas like image sensors or batteries, whether you would invest aggressively to boost capacity because you think there's share gains? Or you might restrict capacity investments so that you could look to increase pricing, since demand remains very robust, and you guys are market leaders in CMOS sensors? Thanks.

Okay, the first question, Mobile Products & Communication, between PCs and smartphones, what's the breakdown of the profitability?

Okay. These are different markets, as we see it today. There are similarities convergence, but the straight answer to your question is that, of the losses that we are incurring this quarter, the losses on the PC side is a little bit heavier than what we anticipated. It's a simple answer, but I hope it answers your question.

The story is quite different. Now on the PC side, one unexpected event that happened for us is the introduction of Windows 8. As we all know, there's a lot of stock of Windows 7 at the time of introduction of Windows 8. That kind of took the gas out of the introductory period.

Second, from our side, if you look at the market geographically, sales in China, the market itself is not growing as expected. That was, on a territorial geographical basis, the downside on the PC business.

Smartphones, losses yes, but here we are improving our business structure. We have taken steps to turn around the business; restructuring, changing the workforce, allocation of functions on a global basis. This is now a 100% wholly-owned subsidiary.

We have put in a lot of our technology to come up with a new product. To give you an example, the Xperia Z that we are going to introduce this spring that we showed at the CES, Consumer Electronics Show, got very good reviews. So there's a lot to be hoped for going forward.

And, from a business side, our shift to smartphones has raised our average selling price of the product [into] the business. So those are the good stuff that we are looking forward in the Mobile business.

Your second question, Devices. Now, I cannot dwell on our pricing strategy, but, just to give you a sense of direction where we are going on image sensors, the growth in the market for smartphones, tablets, high-end cameras, this means that the market is growing in a segment that we have superior product. So what we are doing right now is to invest in fabrication capacity so that we can gain from whatever uplift there is in the market.

Okay, thank you. And just as a follow up on the smartphone business, you made a comment in the outlook about some concerns about losses in the coming -- in the end of the year. You said operating results expected to deteriorate significantly due to the re-measurement gain.

But can you talk about the structural profitability of that business long term, and also how it reflects upon the piece that sits in between PCs and smartphones, and your approach to tablets? Thank you.

The smartphone business, again we are putting in all the cutting-edge technology that we have; in image sensors, in batteries, and in everything. So that, we hope, will maintain the average selling price.

Second, the markets we serve today are -- Japan, the domestic market, is a very good market for us. We are trying to regain foothold in the European markets, and then, after that, we aim to expand our footprint across the rest of the world.

So that, combined with technology, higher margins and geographical expansion, that is the basics of our strategy going forward.

If you look at our Mobile business, it ranges from, as you say, smartphones, tablets and PCs and other mobile devices. Now, all these products are -- we're not silos any more. We have not been silos for quite some time now, since Howard Stringer and [cars].

And all of these product divisions are coordinating their efforts, because the market is converging. And, if one segment grows, we have a broad range of mobile products to serve whichever market grows. So if PC's good, we have our VAIO product. If it's not, and it's shifting toward tablets, we do have our tablets.

Now, just for your information, our tablet developing group has been shifted from the former PC group to the Mobile group, the Xperia group. So, again, there's kind of a smooth transition between smartphones and tablets if the market moves into that direction. I hope I'm answering your question.

Yes. And, I guess, the last question is will the tablets strategy be based around the Windows 8 that we see coming in PCs? Or will it be based around the Android, which is entirely the basis of the smartphone business? And, therefore, if you do Windows 8 tablets, would you also do Windows 8 smartphones?

Here I cannot talk about specific products. But, in general terms, what I have said, two minutes ago, is that we have the range; Androids or Windows 8, or whatever. And, within this broad range, we will follow the market.

Okay. Thank you very much.

(Operator Instructions). Kota Ezawa, Citigroup.

I have two questions. Number one is how much actually you cut off the operating profit guidance in Electronics division from your November guidance? And also how much you picked up the profit guidance in the Financial business, and then asset divestiture from November guidance? Sorry, can I ask them one by one?

Yes, one by one. Ezawa-san, sorry, I cannot give you specifics by segment. But one thing is very clear. On the Electronics side, our performance, for me, is below expectations.

Now, we have given indication of this in the form of reduced sales projections in many of our categories. Exceptions are mobile phones, which is going to be our core business. Another exception is the PS3 home console gaming business.

And one other thing that I would like to mention is TV. Although we have reduced numbers for TVs, now these reduced numbers does not negatively reflect on profitability. As you know, we have shifted from pursuing volume, but would rather concentrate on profitability.

So, without giving you numbers, the downward impact of the revision against November forecast is, I have to say, quite severe. But, for this current fiscal year, we will make up the losses.

One thing is the exchange rate is moving towards our favor. That will offset some. The others, we have plans too of asset sales. We have a long list. And we shall continue to review this so that for this fiscal year we will produce the projected profits that we have announced today, which is the same as the November forecast.

Now, last word on this subject. I cannot give you straightforward numbers, but just to give you the flavor of where these downward forecasts are taking place, just to give you a kind of a sequence of order.

Now, the biggest hit was in the Information -- sorry, Imaging Products & Solutions; next, Mobile Products & Communications; next it is Home Electronics & Sound; followed by Devices and Game.

So that's the magnitude, the sequence of the magnitude, that we had to revise our profit projections negatively.

Okay. Thank you Kato-san. As a follow up for this question, can you say this asset divestiture, you already have some projection in your November guidance. So can we say this asset divestiture profit contribution you actually picked up the contribution in the latest, this time, new guidance?

Okay, let me explain this way. Now, we are looking into various opportunities to divest, or asset sales. Now, since these, we have negotiations, or business partners, etc., so we cannot give you concrete names or whatever. But those that we have decided, concluded and announced are included in the forecast.

For example, the 550 Madison, our US headquarters, the gains from this was partially included in the November forecast. The deal was not closed at the moment so it was only a projection. We signed a contract. It proved to be a little bit higher than the November projections, but it was included.

For other assets I cannot be specific, but we are looking into various opportunities.

Okay, that's understandable. The other question is you said JPY100 billion operating profit improvement for next fiscal year by LCD TVs and handset loss-making division turnaround. And also the restructuring cost, which you have JPY75 billion in the guidance, you said it will be smaller in March '14.

Assuming JPY130 billion profit guidance for this fiscal year, is it you mean that Sony can achieve well above JPY200 billion operating profit target in March '14 straight away?

Yes, and that's the obvious question I was expecting from you. But, to be very frank, I think it is a little bit premature to give you a number. We are working on our budgets at the moment.

The guidance, or the indications I gave you, I gave the audience this afternoon, was taking parts of the business where improvement can be expected. Now Television, if we hit breakeven, that's an improvement of JPY80 billion.

Mobile phones, we are incurring losses. If we do better than breakeven, we are expecting to do better than breakeven. So between TV and Mobile, I said, if we do our job right, the improvement would be more than JPY100 billion.

To repeat for the audience who were not present at the Investor Meeting in Tokyo this afternoon, I also said that restructuring costs would be less than this year, which is expected to be JPY75 billion.

Now one other thing that I did mention was the impact of the exchange rate. Now we cannot count on exchange rates. But suppose the current rate continued throughout the year, the uplift would be quite considerable.

So those are the elements that I touched upon. But, at this point, I am not going to give you a number of the overall operating profit.

But I hope I can communicate to you that all the measures that we have been taking so far in restructuring, in reforming the business, in reshuffling our business portfolio, improved in product, Television, Mobile and everything, we are quite confident that we can produce better results than this fiscal year in Electronics business.

Okay I'll stop here. Thank you very much.

That was our last question. I'll turn it back over to Edward for any closing remarks.

Thank you very much, John. We'd like to thank you all for joining us today to discuss the announcement. Please feel free to contact our London, New York or Tokyo Investor Relations offices if you have any further questions. Thank you all for joining us. And good night from Tokyo.

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