索尼 (SONY) 2013 Q1 法說會逐字稿

Welcome to the Sony Corporation conference call for overseas investors for the first quarter ended June 30, 2013. My name is John, and I'll be your operator for today's call.

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

I will now turn the call over to [Casey Keister]. Casey, you may begin.

Thank you very much for that introduction, John, and thank you all for joining us today, August 1, 2013, for a discussion of Sony's results for the first quarter ended June 30, 2013. We hope you have all enjoyed Kenny Chesney's Life on a Rock while you were on hold.

I'm Casey Keister in 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, Investor Relations at Sony Corporation.

Thank you all very much for joining us. In just a few moments, we will review today's announcement and then we'll 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 us 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 announcements. I will begin by explaining the consolidated results for this quarter.

During the quarter, both sales and operating income increased significantly year on year. Consolidated sales increased 13% year on year to JPY1,712.7 billion, and consolidated operating income increased JPY30.1 billion year on year to JPY36.4 billion.

These increases were primarily due to an increase in smartphone unit sales, the strong performance of the Financial Services business, and the favorable impact of exchange rates.

Results for the quarter were above our expectations, and we were able to record a profit for the total of the five electronic segments for the first time since the first quarter of the fiscal year ended March 31, 2012. This was primarily due to a significant improvement in operating results of the smartphone business, reflecting the strength of new products, and due to the television business turning to a profit for the first time since the first quarter of the fiscal year ended March 31, 2011.

The Pictures, Music and Financial Services segments each recorded an increase in sales and an improvement in operating results year on year, and they continue to contribute stable profit.

Consolidated sales for the quarter were over JPY100 billion higher than our May forecast, and operating income was approximately JPY35 billion higher than our May forecast. Net income attributable to Sony Corporation stockholders improved JPY28.1 billion year on year to a profit of JPY3.5 billion.

I will now touch on our forecast for the fiscal year ending March 31, 2014.

Our foreign currency exchange rate assumptions for the remainder of the fiscal year are approximately JPY100 to $1 and approximately JPY130 to EUR1. In May, the assumed foreign exchange rates were approximately JPY90 to $1, and approximately JPY120 to EUR1. The new rates have been revised to reflect the depreciation of the yen.

Consolidated sales for the fiscal year are expected to be JPY7,900 billion, exceeding the May forecast by JPY400 billion. This increase is due to the favorable impact of the depreciation of the yen, offset by downward revisions in annual unit sales forecasts of certain electronics products.

The forecast for consolidated operating income remains unchanged from the JPY230 billion announced in May, despite the upward revision in sales, primarily due to the unfavorable outlook regarding market conditions in the electronics business and the expected negative impact on operating income of currencies in emerging markets falling against the US dollar.

Our forecasts for income before income taxes and net income attributable to Sony Corporation stockholders remain unchanged from the May forecast. I encourage you to read today's earnings release for a discussion of the results of each business segment compared to the previous fiscal year.

I will now touch on each segment's forecast for the rest of the fiscal year.

First is the Imaging Products & Solutions segment. Segment sales and operating income for the fiscal year are expected to remain unchanged from the May forecast.

As for video cameras, we have revised our annual unit sales forecast downward due to the impact of the contraction of the market, but we expect to maintain our high level of market share.

Regarding digital still cameras, quarterly unit sales decreased significantly year on year, especially at the low end. But we were able to increase prices and improve profitability as a result of the favorable impact of exchange rates and an enhancement of our high value-added product offerings, including the high-end compact DSC-RX series, which is equipped with large image sensors developed by Sony.

Next is the Game segment. Segment sales for the fiscal year are expected to be higher than the May forecast, primarily due to the favorable impact of exchange rates.

In May, we expected operating results to be break even for the fiscal year due to the reporting of profit from the second quarter onward. But while the results from the first quarter were in line with expectations, results for the fiscal year are expected to be below the May forecast due to our cautious view of the rest of the fiscal year. This is because the depreciation of the yen against the US dollar is expected to have a negative impact on operating results, reflecting the high ratio of US dollar denominated hardware costs.

At the June Electronic Entertainment Expo (E3) in the US, we received accolades from the press and market participants when we announced the details of the PS4, which is scheduled to be available at the end of the year.

Next is the Mobile Products & Communications segment.

Segment sales for the fiscal year are expected to exceed the May forecast primarily due to the favorable impact of exchange rates. Operating income is expected to be lower than the May forecast due to the downward revision of the unit sales forecast for PCs and the negative impact of the depreciation of the yen against the US dollar, reflecting the high ratio of US dollar denominated hardware costs, similar to the Game business.

Regarding PCs, which are contained within the MP&C segment, unit sales for the industry are expected to decline by double digits this fiscal year. Accordingly, we have revised downward our annual season sales forecast for VAIO from 7.5 million units to 6.2 million units, although we expect to maintain our market share.

As for Sony Mobile, the Xperia Ace has captured the number one market share for Japan for nine weeks since its launch in May. In addition, the Xperia Z Ultra, which was announced in June and is equipped with a 6.4 inch large screen display, has received significant acclaim from a variety of sources, and expectations regarding its impact on our business are increasing.

As it works towards significantly improving its operating results for this fiscal year, Sony Mobile will roll out appealing products that combine the technology and assets of all its phones, not only smartphones like the ones I've mentioned, but also products like the Xperia tablet Z as well.

Next is the Home Entertainment and Sound segment.

Segment sales for the fiscal year are expected to remain unchanged from the May forecast. Operating income is expected to be lower than the May forecast, primarily due to the impact on profit of an expected decrease in sales on a local currency basis in the audio and video categories.

In the television business, we have revised downward our annual unit sales forecast from the 16 million units projected in May to 15 million units, out of caution regarding the market environment in the second quarter onwards in certain emerging markets such as Central and South America and the Middle East. Despite this increase, we expect -- we continue to aim to record a profit for the fiscal year through cost reductions.

Next is the Devices segment. Segment sales for the fiscal year are expected to remain unchanged from the May forecast, primarily due to the favorable impact of exchange rates, offset by lower than expected local currency sales in the semiconductor category. Operating income is expected to be higher than the May forecast due to the positive impact of exchange rates and expected cost improvements.

Next is the Pictures segment. Primarily due to the favorable impact of the depreciation of the yen against the US dollar, sales and operating income for the fiscal year are expected to exceed the May forecast. In addition to the production and acquisition of motion picture products, SPE has grown its television program production operations and television network operations into important businesses.

During this fiscal year, SPE plans to debut 15 new television series in the US, making this the most successful development season in more than a decade.

In the television networks business, SPE is targeting expansion in rapidly growing markets, such as India. SPE's television network in India broadcasted the India Premier League cricket tournament that reached a larger audience than earlier seasons, and generated a significant increase in advertising sales.

SPE also works closely with the electronics business to deliver to the home the first content captured on 4K cameras, timed to the release of 4K ultra HD television in an effort to create and distribute content using the latest technology.

Next is the Music segment. Primarily due to the favorable impact of the depreciation of the yen against the US dollar, sales and operating income for the fiscal year are expected to exceed the May forecast.

In the recorded Music business, a number of hits were released during this quarter, and market share in the US increased.

Going forward, we plan to grow this business by continuing its aggressive artist development combined with the broader exploitation of music through growing digital platforms.

In the Music Publishing business, the integration of EMI Music Publishing, which was acquired last year by Sony and a group of investors, and Sony/ATV Music Publishing, is progressing according to plan.

Going forward, we plan to further strengthen the business by maximizing the benefit of this integration as the world's largest music publishing group.

Next is the Financial Services segment. Financial Services revenue for the fiscal year remains unchanged from the May forecast. Operating income for the current fiscal year is expected to exceed the May forecast because results for the current quarter exceeded expectations.

That concludes our review, and now we'd like to turn it over to you and answer any questions which you might have.

So, John, would you please queue up the questions?

Thank you. We will now begin the question and answer session. (Operator Instructions). Daniel Ernst, Hudson Square Research.

I have three questions, if I might. First, Kato-san, given some questions from the market on the entertainment business, I'm wondering if you could give us some flavor as to the distribution between the various elements of the Pictures business; okay, there's the Movie Studio, the TV Studio and the growing TV networks, as you've been calling out the growth in India in particular. So could you give us a sense of what the mix is of revenue and operating income for those three segments within Pictures?

And then secondly, on the mobile phone business, you had both annual and sequential growth in smartphones. And with the continued success of the Xperia Z, I wonder if you could talk about the linearity of demand in the quarter, and whether you remain confident that that growth can be sustained. Or do you have to launch additional products or markets to hit the JPY42 million forecast?

And then third, looking at the five electronic segments, the operating profit that you recorded this quarter, if you back out the benefit of foreign exchange, actually, the Group is still at a loss. And so I wonder if you could comment on the prospects for continued profits more on a constant currency basis. As you overlap the benefit of currency, what's the prospect for getting those five electronics to profit as a whole without the currency benefits?

Thank you.

Before I answer your question, could you repeat the third question? I couldn't get the point of your question. I'm sorry for asking you to repeat.

Kato-san, my pleasure. The third question relates to the operating profits of the five core electronics businesses that you recorded in the quarter, so your operating profits there. But looking at the slide where the -- if you see -- if you back out the benefit from foreign exchange, those five would have actually been a loss. And so my question is, without the benefit of foreign exchange [element] that you've had, what's the prospect of continued profits or profits without the benefit of foreign exchange?

Thank you.

Okay. The first question about distribution of breakdown within the entertainment business, now so far at least, our policy regarding disclosure on this issue has been somewhat limited. I have been or we have been receiving requests to disclose more about our entertainment business. But as of today, we have not changed our policy regarding disclosure.

So I am not ready to disclose the breakdown in detail among the various units. But having said that, the recent developments in, let's say like Pictures, our focus or growth areas is more in the television production area and the networks. That is where we see growth to be more -- to be expected in the near-term and in the future.

Beyond this, we are in a process of -- we are always -- we do get many requests from our institutional investors and analysts, so when the time comes for us to discuss more disclosure about our business, not just entertainment but including others, we will do that. But as for today, this is as far as I can comment on the breakdown.

On the second, mobile, our market share -- we have made a lot of progress in smartphones. Last year, we did 33 million; this year, our objective is to hit 42 million.

Now the market is also growing, so in terms of market share, we're not being that aggressive, but our focus is to expand the business in the more profitable high-end section of this market. And if we look at it on a geographical basis, we have been very strong in the domestic or the Japanese market. We hope to maintain that.

The products that we have released so far have been getting very good reviews and actual sales. For example, the most recent Xperia Ace that we introduced in Japan, out of 10 weeks since launch, we have been on the top spot for eight weeks. The other areas that we are doing better is in Europe.

Now in the feature phone days, we did have a sizable share in the European market. We lost that when the market shifted more towards smartphones, and we are regaining that share again. Now when it comes to others, different by area, but I think the one obvious focus would be the North American market, which is a huge market, but again, a very tough market.

We have introduced our new product through T-Mobile. I think it's very early to say whether -- how this business will develop. But in terms of priorities, we have now the domestic market, European market, and after that, we may pursue more aggressively into the North American market.

But with the resources that we have we're taking one market at a time at the moment.

So I think we have a lot of headroom to continue to grow, and our products would be mainly aimed at the high end of the market where we can show our technology most to our consumers.

Am I answering your question? If not, please say so.

That was a great answer. Thank you.

Okay. Now relating to the ForEx situation, now here it is a little bit complicated situation, so let me go through it one by one.

At the last earnings call, I did say that the weakening of the yen overall would benefit the Company. We report in yen. That has not changed. But at the same time I said as far as the US dollar is concerned, we have a lot of manufacturing based in dollar-related costs. We have moved a lot of our manufacturing offshore out of Japan which -- where costs are related to the dollar. So when the yen weakens, the cost of goods will go up. So on an overall annual basis, the weakening of the yen against the dollar would be a negative hit to our bottom line.

On the other hand, the euro is an opposite story. The weakening of the yen will have tremendous benefit for us in terms of profitability.

But having said, overall, the easing of the year, weakening of the yen would be a benefit.

Now one thing that have happened since is that since late May, many of the emerging market currencies have depreciated against the US dollar. What this means is that the cost of goods, importing products into the local market, the cost will go up; and that would have a negative impact on the bottom line for us.

So if you combine all this, this is the kind of situation where we're at.

For the US dollar and the euro, yes, if you combine them together, the easing of the yen is beneficial to us, but since we have a lot of products and sales for the emerging markets, the weakening of the local currencies against the dollar would have a negative impact.

Now if you add them all up on a full fiscal year basis, the impact of the yen is almost -- I'm sorry, the impact of the recent currency situation, if it remains as it is for the full year, the impact, at least in the electronic side of the business, we don't have much uplift or negative downside.

I can say as a fact for the other parts of the business, entertainment, we do have some uplift from the weakening of the yen.

Now having said that, what we do in such a situation, there's no magic to it. We will focus more on streamlining our product lineup. We will rethink our marketing strategy, reduce costs where possible to cope with the situation.

But the impact on each of our segments within electronics I have to say differs. For example, mobile; for example gaming; since most of the manufacturing in these segments are offshore, the impact is negative. And I have to admit that although we are taking various measures to improve the situation, for example, the hit to the bottom line on the Gaming business, I have to say for the full year would be a negative impact.

On the other hand smartphones, here I think we have a better situation in that we have good product coming for the summer and fall. So there are ways to mitigate these impacts.

Other businesses, like semiconductors, here most of the cost is in yen, so it will benefit from the easing -- the weakening of the yen.

So it's a very complicated picture. I hope you get what kind of a situation we are in, but all in all, this situation is one reason that we have not changed the consolidated operating profit forecast.

Television is doing better than we had expected, smartphone is doing better, and we have a lot of high hopes for PlayStation 4. But since -- if you look at the whole market, there are a lot of complications, a lot of uncertainties, and currencies is one of them.

Thank you. That helps.

Richard Kramer, Arete Research.

Three questions as well, if I may. First of all, can you break out the portion of the operating profit in Financial Services which can be attributed to the rise in the Japanese stock market?

And also, it's a rather convoluted statement, but can you give us a sense of whether the decreases in amortization of deferred insurance acquisition costs and reserve provisions would be recurring or non-recurring as a benefit to Financial Services?

My second question is something you haven't mentioned at all, which is Sony launched some very attractive tablet products in spring, but we haven't heard anything about unit volumes. Is this a space that you think as a complement to the smartphone business you expect to expand upon or will this remain something that's just a niche for Sony?

And third, can you comment on your ability to generate positive operating cash flow for the full year, and maybe any ways you might make use of the [JPY6 billion] of net cash, excluding Financial Services, sitting on the balance sheet?

Thanks.

Let me answer the tablet question first. Yes, this tablet sales is for us is a pleasant surprise. Our position in this segment has not been that spectacular, and the most recent tablet that we have introduced is -- the sales performance is much better than we had expected. This is all good.

One thing that we did differently from the past is that we moved the tablet division out of the PC Group and combined it together with the Sony Mobile Group.

Now as you can see, it's named Xperia, not the tablet. Not just the naming and the marketing, the engineers have come together to make the product a more interoperable product with the other Sony Mobile products, the Smartphones, in terms of user interface, or the services that are available on products.

So those are the things that we have done, and I think as a result, some of the customers are choosing our product. This is good news for us.

But our market position is still very small, a long way to go, but this is, I think, one of the very encouraging developments we have seen in the past quarter.

And on the first and third question?

On the first question, please allow us some time to check the numbers, please.

Okay. And maybe on the third question, can you comment on the ability to generate positive operating cash for the year and any plans to make use of your net cash position?

Okay. The cash flow projections for -- not on a consolidated basis. When we talk about cash flow, we exclude the Financial Services. And on that basis, we have said that at the beginning of the year that our net cash flow would be positive.

We have not given numbers but, well, to give you a -- some indication, it will be in the range of about JPY100 billion. That's the initial projection that we had at the beginning of the year.

Now this cash flow projection will change over time that we have one quarter behind us. And if you look at our cash flow situation, still we are expecting to be in a positive position in cash flow, but for all the reasons that I stated about exchange rate, business situation in each segment, and the fact that we have lowered our projections from some our product areas like VAIOs and smartphones and camcorders, this cash flow projection at the time being a little bit less than we had initially projected.

How we use this year, there are many ways to use it, but we do not disclose this type of information. We will when the time comes, when we announce investment in certain areas, this would be part of our capital -- the source of our capital allocation to increase value of the Company to the shareholders and our stakeholders. But I cannot comment beyond that.

Okay.

In regards to your first question, give us a moment while we look it up.

Yes. The impact of the market to profitability to the Financial Services segment for the first quarter would be roughly about JPY10 billion.

Okay. And will the decreases in amortization and reserve provisions be a non-recurring item, or is this something we'll be able to see in every quarter this year?

That I cannot give you a definite answer at this point.

Okay.

If I can follow up, I will do so, and share it with others. But I have to check this with Sony Financial Holdings. I don't want to give you wrong answer.

No. Thank you very much.

Dan Loeb, Third Point.

Could you talk about a couple of things? First of all, what was the reason behind selling the music publishing catalog in the quarter, and who did you sell that to? And what would the operating income have been for the entertainment business had you not sold that catalog?

Okay. The sales of our music catalog, this is in SPE, this is for films. It is basically, Pictures segment makes money in various ways. Obviously, film, TV programming, distribution through network, etc. But sales of these catalogs of music rights is part of our business strategy in creating value and monetizing in every which way we can.

So when we make a film, there's obviously music to it, and if we acquire rights to it and we have a nice hit in a movie, that music catalog will increase in value. So this is one way of monetizing the value in what we have created.

Now having said that, this particular deal was made with a company called Olay Publishing in Canada, and the net effect to our bottom line was roughly in US dollars $106 million; in terms of yen, JPY10.3 billion.

Okay. So were it not for this one-time event, the Pictures business would not have been profitable.

And one other question, if you don't mind. How do you see profitability of the Playstation 4 product cycle versus the Playstation 3 cycle? And any comments on the consumer response to the Playstation 4; any further comments with respect to timing and ability to meet demand?

Okay. The comparison between the two platforms, Playstation 3 and Playstation 4, I think the one big difference is in the amount of investment that we are making in the platform.

PS3 was at that time the leading-edge product. We developed the LFIs, the CPU and the GPU from the ground up, working together with our partners in Toshiba and IBM. We spent millions of -- hundreds of millions of dollars in designing the chipset.

We spent billions of dollars in semiconductor fabrication technology, as well as fabrication capacity, building plants requiring equipment to fabricate semiconductors.

The reason why we did this was there was no chipset around to meet our requirements. There was no manufacturing capacity or technology to manufacture these chipsets. So the amount of investment that went into PS3 was quite big.

Now PS4 in contrast is a much more lighter platform in terms of investment, because as for the chipset, at the core we are taking off-the-shelf technology available and we are putting our proprietary technology around that core chipset. So the amount of investment is much, much smaller. I cannot give you absolute amount.

In terms of manufacturing, this time. we are totally fabless, meaning that we are relying on our foundries or semiconductor manufacturing companies to supply it for us. So we do not have CapEx related to having the chipset ready for us.

So on the software side, well, the PS4 is obviously more advanced than PS3, but here, the cost depends on how the development community works to create good titles for us.

So I cannot comment further than this.

Now as to your question, our capacity to meet demand, at the moment we have not disclosed how many units we will prepare for the launch and for the fiscal year. This I think Sony Computer Entertainment will inform you when the time comes.

But we are very much I would say encouraged by the response that we've received at E3. Some polls indicate that about 80% of potential customers prefer PS4 over our competition's new platform. This is very encouraging and we are doing our best to secure enough chipsets and capacity to meet whatever demand that is there for us.

So that is as far as I can say at the moment, but we are very encouraged with the developments so far.

Thank you very much.

[James Halford], Eco Research.

Can I ask a couple of questions, first about Games? Though listening to your answer to the last question, you may not be able to answer this. So I was just wondering, could you let me know how much the R&D increase is expected to this year in Games, and what the year-on-year increase was in quarter 1?

And as a second question, I wonder, you've mentioned you've changed your profit forecast for that division this year, cut it. Was all the change in profit forecast just down to the yen, or did you change some of the other factors, specifically the R&D spend?

Okay. Let me answer this way, the second part, the last part of your question.

Now we said at the beginning of the year the profit projections for the Game segment will be about the same as the previous year, in which year we didn't make much profit. It was very small operating profit that we made. So basically, our projection at the beginning of the year was break even for this segment.

Now as we have been explaining, the impact of the weakening yen will have an adverse effect to the bottom line in this section.

Again, I will repeat what I said previously. Now in terms of manufacturing of the hardware, it is almost -- most of it is done offshore; not in Japan, in other parts of the countries like -- the world, like China. And the costs here are really more linked to the dollar than other currencies.

So this is the only factor that we have factored into when we did our projection for the Game division. We have not changed other assumptions in terms of unit sales or software assumptions, or anything.

Now as to the first part of your question, I think it's a good question, but I'm sorry to say we have not disclosed our R&D cost in detail. But having said that, the amount of investment in R&D will increase over time up until then launch and then start to decline. This is because on the hardware side, the peak of investment will reach -- well, no, will peak out by launch and then go down.

On the software side, the more successful we become, we will be investing in our first party studio, so here I cannot say whether it rises or falls.

But software is a very, I would say, profitable business for us, first party, so we will keep a certain amount of capacity or teams in the studios to work on PS4 titles.

I hope this answers part of your question.

Great. Thank you very much. And can I ask just a separate question on the TV operations? And they were obviously in the black in the first quarter. However, you tend -- if I look historically, the profitability of your TV operations tends to be better in the first quarter maybe because marketing costs perhaps are a little less.

And I wonder, the performance you achieved in the first quarter, which was an improvement of about JPY12 billion year on year, can you comment on that in terms of what was that like relative to forecasts? And how confident are you now of achieving a performance in the black for the full year for TVs?

The TV business was better than our expectations but around JPY5 billion in terms of operating profit. Now the reason here continued cost-down efforts, but I think the major driver here been introduction of high value added products commanding a high average selling price.

Now for the full year, we have not changed our projections being better than break even. Going forward, I have mentioned many uncertainties about markets around the world, emerging countries, China; Europe has not being spectacular for us, and then currency. But all that, we are maintaining our projections to hit break even.

Now how confident are we? Well, here, I can only say that we will do our best to turn around this business.

But quarter by quarter, as you say, our third quarter is our biggest and best quarter. This is seasonality. This is the highest volume season. And with a certain amount of fixed cost, we have a better -- we're in a better position to make money in the third quarter.

The other quarters, second quarter and third quarter, since the business volume is not that high, we might not see a spectacular result here. I have to be very frank about it. But in any case, in the full fiscal -- as for the full fiscal year, our intention and aim is to work very diligently to deliver the result that we have committed to.

Excellent. Okay. Thank you very much.

As we're running out of time, I'd like to hand the call back over to Casey Keister for closing remarks.

Thank you very much, John. We'd like to thank all of you 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 further questions.

Thank you all for joining us and good night from Tokyo.

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