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Sony Corporation (NYSE:SNE)

F1Q09 (Qtr End 6/30/09) Earnings Call

July 30, 2009 9:30 am ET

Executives

Sam Levenson - Senior Vice President of IR at Sony Corporation of America

Nobuyuki Oneda - Corporate Executive Officer, EVP and CFO

Robert Wiesenthal - Group Executive of Corporate Development and M&A for Sony and EVP and CFO of Sony Corporation of America

Analysts

Ben Williams - GAM

Daniel Ernst - Hudson Square Research

Operator

Good day ladies and gentlemen and welcome to the first quarter 2009 Sony Corporation Earnings Call. My name is Dan, and I'll be your coordinator for today (Operator Instructions)

I would now like to turn the presentation over to your host for today's call Mr. Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America, please proceed sir.

Sam Levenson

Thank you very much for that introduction Dan and thank you all for joining us today, July 30, 2009 for the discussion of Sony's first quarter results. I'm Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America, with me on the conference call tonight is Nobuyuki Oneda, Corporate Executive Officer, EVP and Chief Financial Officer of Sony; Robert Wiesenthal, Group Executive of Corporate Development and M&A for Sony and EVP and CFO of Sony Corporation of America; and Gen Tsuchikawa, Senior General Manager of the Investor Relations division. Thank you all very much for joining us.

In just a few moments, we'll review today's announcement, 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 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 www.sony.net/ir.

With that, I'm now going to turn to today's announcements. Consolidated sales for the quarter decreased 19% year-on-year to 1.5999 trillion yen. This was a decrease of 379.2 billion yen, 163 billion of which can be attributed to exchange rates. On a local currency basis the decrease was 11%. On operating loss of 25.7 billion yen was recorded; a deterioration of 99.1 billion year-on-year, of this deterioration approximately 68 billion yen or almost 70% was due to the appreciation of the yen. Consolidated restructuring charges are 33.9 billion yen were recorded as operating expenses during the quarter as compared to 0.6 billion yen in the same quarter of the previous year.

As we explained at our earnings announcement in May, our restructuring is progressing at a pace which exceeds our original expectations. If we were to adjust for the impact of equity and net loss of affiliates and restructuring charges, we recorded operating income of 23.3 billion yen for the quarter. Loss before income taxes for the quarter was 32.9 billion yen compared to income before income taxes of 62.9 billion yen in the same quarter of the previous fiscal year. Sony recorded an income tax benefit amounting to 12.2 billion yen during the quarter. Net loss attributable to Sony Corporation shareholders was 37.1 billion yen compared to 35 billion yen in net profit recorded in the same quarter of the previous year.

Let's discuss the quarter's results on a segment basis. As I'm sure you're all aware we changed our organizational structure as of April 1, as a result US GAAP requires us to change how we report our segment results. The two most significant changes are the following; first we realigned the Electronics and Games segments and have established three reportable segments where we previously had two; they are the Consumer Products and Devices segment, the Networked Products and Services segment, and the B2B and Disc Manufacturing segment. The Consumer Products and Devices segment contains our television business, our digital imaging business, which includes digital camera and camcorder, our audio and video business, our semiconductor business and our components business.

The Networked Products and Services segment contains our game business, our PC business, and other networked businesses including our digital music player and personal navigation businesses.

In the B2B part of the B2B and Disc Manufacturing, segment we've included our broadcast use products, such as VTRs, cameras, and editing systems, and our professional use products, such as monitors and security cameras. The Disc Manufacturing part of the segment manufactures DVDs, Blu-ray, and other disks for home entertainment and game.

The second significant change is the establishment of a Music segment. As you already know, Sony made its former equity affiliate Sony BMG into a 100% subsidiary in October of last year, changing its name to Sony Music Entertainment. From this quarter Sony Music has been added to Sony Music Japan and Sony/ATV, which previously had been reported in all other, to form a separately reported music segment.

So now let's review the results. First, Consumer Products and Devices. Sales in this segment decreased 27% year-on-year. On a local currency basis sales decreased 18%. This decrease is primarily due to the impact of the appreciation of the yen versus the US dollar and the euro. The generation in the business environment brought on by the slowing global economy and the intensification of pricing competition. On a product category basis, sales of Bravia LCD TVs, Cyber-shot compact digital cameras and Handycam video cameras decreased.

An operating loss of 2 billion yen was recorded for the quarter compared to operating income of 36.1 billion yen in the same quarter of the previous fiscal year. Although. sale and general and administrative expenses decreased 33.7 billion yen and the cost of sales ratio improved 30.5 billion yen, this was more than offset by unfavorable exchange rates negatively impacting results by 47.9 billion yen and gross profit decreasing 44 billion yen due to the decrease in sales. During the quarter, 20.7 billion yen in restructuring charges were recorded in this segment. Excluding the impact of restructuring charges, operating income of 18.7 billion yen was recorded. Again, excluding restructuring charges, the product categories are the largest decrease in profit were video cameras, imaging sensors and compact digital cameras.

I'd now like to touch on our TV business. Although unit sales of LCD TVs for the quarter increased 100,000 units or 3% year-on-year to 3.2 million units, sales decreased 24% year-on-year to 237.0 billion yen due to price declines and the impact of exchange rates. On the other hand, excluding restructuring charges, operating results improved 11 billion yen to an 8 billion yen loss due to raw material cost reductions, primarily panel costs, and the reduction in fixed costs.

Sales and operating income of compact digital cameras decreased due to a decrease in unit sales in all regions brought on by the global economic slowdown and a contraction of the market, price declines and the impact of exchange rates, however, due to the impact of improved expenses we were able to maintain a similar profit margin as the same quarter of the previous fiscal year.

In video cameras, although the transition to the HD format is progressing smoothly, sales and operating income of video cameras also decreased due to a decrease in unit sales in regions outside of North America brought on by the global economic slowdown and a contraction of the market, price declines, and the impact of exchange rates, however, as was the case with compact digital cameras, we were able to secure a similar profit margin as the same quarter of the previous fiscal year due to successful expense reductions.

Turning to Networked Products and Services; sales in the Networked Products and Services segment decreased 37% year-on-year primarily due to a decrease in game and VAIO PC sales. On a local currency basis, sales decreased 30%. An operating loss of 39.7 billion yen was recorded compared to operating income of 4.6 billion yen in the same quarter of the previous fiscal year. This is primarily due to a decline in the profit of game and VAIO, although profit of digital music players increased.

Game sales decreased 48% year-on-year to 111 billion yen, this was primarily due to a decrease in unit sales of PSP and PS3 hardware, unit sales of overall software, and the impact of exchange rates. Game operating results deteriorated 40 billion yen and a 34 billion yen operating loss was recorded, this was primarily due to a decrease in overall software unit sales and a decrease in PSP hardware unit sales. For both PS3 and PSP, unit sales comparisons are very difficult year-on-year as sales of extremely popular titles were concentrated in the first quarter of the previous fiscal year, therefore unit sales decreased year-on-year to 1.1 million units for PS3 and 1.3 million units for PSP. Unit sales of PS2 were 1.6 million units in the quarter exceeding the same quarter of the previous fiscal year in Europe and North America, where the prices changed in April this year to $99 and 99 euro.

VAIO sales decreased due to a decline in unit selling prices brought on by the contraction of the high-end market and an overall decrease in market prices, a decrease in unit sales brought on primarily by the slowing global economy and the impact of exchange rates. Operating income decreased due to the impact of exchange rates, the impact of price declines, and the decrease in unit sales.

Next, B2B and Disc Manufacturing. Sales in the B2B and Disc Manufacturing segment decreased 28% year-on-year, on a local currency basis sales decreased 18%. This decrease is primarily due to a decrease in broadcast and professional use products and disc manufacturing. An operating loss of 12.4 billion yen was recorded in the quarter compared to operating income of 8.9 billion yen in the same quarter of the previous fiscal year, due to a decrease in profit from broadcast and professional use products and disk manufacturing, brought on by the decrease in sales.

Due to our efforts in reducing inventory, the total inventory for Consumer Products and Devices, Networked Product Services and B2B and Disc Manufacturing segments was 745.0 billion yen, a decrease of 34% compared with the level of the same time last year.

Next, the Pictures segment. Sales in the Pictures segment increased 7% year-on-year, this is mainly due to an increase in motion picture and television revenues. Motion picture revenues increased due to theatrical performance of Angels and Demons, and Terminator Salvation. Television revenues increased year-on-year due to an increase in revenues from US network and made-for-cable programming. Higher advertising revenues in India from the broadcast of the 2009 Indian Premier League cricket competition also contributed to the increased revenues.

Operating income of 1.8 billion yen was recorded compared to an operating loss of 8.3 billion yen in the same quarter of the previous fiscal year. This improvement was primarily due to the recording of an 8.3 billion yen gain from the sale of a portion of Sony Pictures equity interest in the US Cable Network. Operating results also benefitted from increased US television sales and motion picture product, partially offsetting the improvement, was higher costs relating to the media rights for the Indian Premier League.

Sales in the Music segment increased significantly primarily because of the results of SME were consolidated by Sony as a wholly-owned subsidiary beginning October 1, 2008. Sales at SME for the quarter were 61.2 billion yen, compared to the sales of SME in the same quarter of the previous year when it was not consolidated, sales decreased 19% on a US dollar basis. Sales were negatively impacted by unfavorable exchange rates and the continued accelerated decline in physical music market, as well as, the continuing impact of the worldwide economic slowdown. Sales at Sony Music Japan decreased year-on-year mainly due to a decrease in album sales resulting from the continuing decline in the physical music market.

Operating income increased 16% year-on-year primarily due to the consolidation of SME. In the current fiscal year's first quarter SME recorded an operating loss of 0.2 billion yen, in the same quarter of the previous year, 2.5 billion yen in equity and net losses of affiliated companies was recorded for Sony's 50% stake in Sony BMG. On a US dollar basis, SME's operating loss for the quarter was $2 million, on a pro forma basis, when this figure is compared with the operating loss Sony BMG recorded in the same quarter last year when its results were not consolidated, operating loss decreased by $47 million. The improved operating results were primarily due to lower restructuring and overhead costs compared with the first quarter of last year. Operating income at SMEJ decreased primarily due to decreased album sales.

Next, Financial Services, Financial Services revenue increased 24% year-on-year due to an increase in revenue at Sony Life. Revenue at Sony Life was 200.5 billion yen, a 29% increase year-on-year. Revenue increased year-on-year due to an increase in both net gains from investments in the separate accounts and valuation gains from investments in convertible bonds in the general account as a result of the rise in the Japanese stock market, on increase in net gains from other investments from the general account, and an increase in revenue from insurance premiums reflecting a higher policy amount in force.

Operating income increased to 58% year-on-year as a result of an increase in operating income at Sony Life. Operating income at Sony Life was 47.5 billion yen, a 72% increase compared with the same quarter of the previous fiscal year due to the increase in both valuation gains from investments in convertible bonds and net gains from other investments in the general account.

Finally, Sony Ericsson. Sony Ericsson sales decreased 40% year-on-year as unit sales decreased significantly reflecting the global economic slowdown, a shift in the market to low-end phones in Latin America, and other factors. Loss before taxes of 292 million euro was recorded due to lower sales and unfavorable exchange rates. Equity in net loss recorded by Sony for the quarter was 14.5 billion yen compared to equity in net income of 0.6 billion yen in the same quarter of the previous fiscal year.

Let me complete my prepared remarks by turning to our forecast for the balance of the year. Although our results for the first quarter exceeded expectations, we've not changed our forecast for the full fiscal year from the one we announced on May 14, due to the continued uncertainty in the operating environment. Operating loss in the first quarter was less than expected because foreign exchange rates depreciated versus expectations, the results of the CPD segment were better than expectations, and the Japanese stock market rose compared with its level in March, however, regarding results from the second quarter onward, we believe that the operations of NPS and B2B and Disc Manufacturing segments will be quite severe as there continue to be many uncertainties in the business environment. Moreover, we have revised our assumptions for foreign currency exchange rates from the second quarter onward to approximately 93 yen to the US dollar and approximately 130 yen to the euro.

With that we'd be pleased to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Daniel Ernst from Hudson Square Research, please proceed.

Daniel Ernst - Hudson Square Research

Yes, good evening and good morning as the case maybe, thanks for taking my call. I have three questions, two on margins and those are, on the TV side you discussed the margin improvement as a result of both fixed cost reductions and your panel cost reductions. Can you give us a sense of what those both were year-on-year, how much did fixed costs come down year-over-year and how much the panel costs come down year-over-year for you? And then similarly on the PlayStation 3 can you give us some metrics on how the profitability of that product are tracking maybe perhaps give us a sense of how much you've reduced the cost to build since inception or some color on what the slope of that curve looks like for reducing costs of PlayStation build? And then third question, your guidance for the fiscal year had included some minor components but the sales over the networked content sales over the network are 50 billion yen for the fiscal year, can you give us a sense of how that segment tracked in the quarter? Thanks.

Nobuyuki Oneda

Hi, this is Nick Oneda. Your first question on TV operating margin improvement is compared to last year or compared to the forecast, which one are you talking about?

Daniel Ernst - Hudson Square Research

I'm referring to the cost from last year, so that your fixed cost reduction year-over-year and the panel cost reductions year-over-year.

Nobuyuki Oneda

First of all, the biggest cost down is coming from the cost of the material and the second area is the reduction of the expenses for both the manufacturing expense and the SGAs, thanks to the restructuring costs on those for the saving of the other expenses and the material cost, of course, is the effort of the reduction of the regular parts and also some of the panel cost is also reduced.

Daniel Ernst - Hudson Square Research

And can you give us what that was on a year-over-year basis for both of those, panel costs came down 30% and overhead came down…

Nobuyuki Oneda

We didn't disclose the cost reduction by product group, by product basis, but we are still shooting for over 300 billion yen of the expense reductions compared to the last year. So we didn't disclose any specific reduction of the cost by TV group itself. Roughly speaking 50% of their fixed costs would be reduced over year-to-year basis.

Daniel Ernst - Hudson Square Research

50, got it, that’s the goal. And then on the PlayStation 3 perhaps some sense of how cost reductions have done there?

Nobuyuki Oneda

Your third question is the 50 billion yen deduction?

Daniel Ernst - Hudson Square Research

That's correct, no the third question was on networked content sales, so sales of content over your PlayStation, Network etcetera.

Nobuyuki Oneda

The cost reductions since we introduced the PS3 is very substantial and this is on schedule and we don't disclose how much of the PS3, specifically, the cost reduction was achieved during the past two years, but that is on schedule.

Unidentified Company Representative

We'll just give you some rough number…

Unidentified Company Representative

About 70%, roughly speaking.

Daniel Ernst - Hudson Square Research

70, got it. That's helpful.

Robert Wiesenthal

The third question is about just in general how we characterize the network sales so far?

Daniel Ernst - Hudson Square Research

Correct.

Robert Wiesenthal

Okay, it's Rob Wiesenthal speaking, I think we're pleased, there seems to be an increasing mix of films with respect to being downloaded and streamed especially as compared to the games, obviously, at the start of the PlayStation Network it was mostly just downloads of games and I think the breadth of the catalog's improving both on the game side and on the film side. I think right now close to half of our users have opted to signup for the network and I think it's running on track and we're expecting really great things this year from it, so, so far so good.

Nobuyuki Oneda

If you compare to the last year the networked sales is probably one-third of this year's forecast of 50 billion. The account number is up to 26 million, contents download has reached 540 million and we're on track for the projected 500 million.

Operator

Your next question comes from the line of Ben Lu from Seligman, please proceed

Ben Lu – Seligman

Hi guys, thank you for doing this call, congrats on a very good quarter obviously. Two questions, one, really wanted you to elaborate a little bit on the Sharp JV that you guys had announced, couple of questions on it. I know you guys are initially going to put in $10 billion which is about a 7% stake. Does that mean that you will only be responsible for purchasing 7% of the output or are you still liable to purchase 34% of the output?

Nobuyuki Oneda

Our responsibility to take their quantity in the initial stage is only 7% based upon the percentage of the investment and if we increase the investment in proportionally that our obligation to get their products will be increased.

Ben Lu – Seligman

Understood, okay, and then I think you guys have also mentioned that you're able to procure cells rather than modules?

Nobuyuki Oneda

Yes we can buy both the module and the panel itself. We have the option that we could buy as a whole module or that we can just buy the [glass panel] and then make the module by ourselves.

Ben Lu – Seligman

How will you recognize this JV on your P&L as you go from 7% to 34% ownership?

Nobuyuki Oneda

This year the impact toward the -- because of this Sharp business is almost none and they gradually will be increased then the profitability of course will be better than the current model.

Ben Lu – Seligman

Okay. But what I was referring to, was would it be recognized similar to SLCD where you were booking on the equity line?

Nobuyuki Oneda

Yes, after the investment reaches 20%.

Ben Lu – Seligman

So before 20% you don't have to recognize it anywhere?

Robert Wiesenthal

(inaudible) accounting.

Ben Lu – Seligman

And then my last question on the Sharp JV is, is the structure and terms similar to SLCD where you procure whether it's panels or cells on the lower of costs for market?

Nobuyuki Oneda

Well, basically that would be the way that we will negotiate with Sharp

Ben Lu – Seligman

Okay, I thought the JV was already signed?

Nobuyuki Oneda

Yes.

Ben Lu – Seligman

So I would think that the terms are finalized, right?

Robert Wiesenthal

There are some similarities but we're not disclosing the details.

Ben Lu – Seligman

Okay, but it should be similar to SLCD because otherwise you wouldn't be doing something that's more a disadvantage than SLCD…

Nobuyuki Oneda

In that the -- that was the purchase price, it's very similar.

Ben Lu – Seligman

Okay got it. My, second question, is I think you guys had commented that although you didn't change your guidance for the fiscal year of minus 110 billion your target is breakeven. Can you talk about how you narrow that gap, where you get the 110 billion coming from?

Nobuyuki Oneda

Of course, the one with the biggest possibility is that whether we can further decrease the purchase of the material costs. We announced that the purchase cost of the material could be reduced almost 20% which is $300 billion. But as of this moment we did achieve almost 80% which is the basis that we projected in -- we included into our forecast. So, this is one of the items that which we could improve our profitability and then narrow the gap of the (inaudible)

Ben Lu – Seligman

Okay. So, it was really just on the panel pricing?

Nobuyuki Oneda

No, no, no not the panel but also the general parts procurement

Ben Lu – Seligman

I see, I see it. So, that basically implies that you guys will get rid of the “Sony standard right”? Because the Sony standard was the one that was dragging down your costs, pardon me, dragging up your costs.

Robert Wiesenthal

No I think what Nick is talking about is about our -- there's an activity which we are trying to make a company-wide procurement platform where we would source not by product division but by the whole company and that is not just on panels but it's across all types of material we purchase, material and chips and products we purchases from third-party vendors.

Ben Lu – Seligman

Okay, understood.

Nobuyuki Oneda

And even though that we are projecting over 300 billion expense reductions we are trying to do more that could narrow down the gap.

Operator

(Operator instructions) Your next question comes from the line of Ben Williams from GAM, please proceed.

Ben Williams – GAM

I've got a question on your new Networked Products and Services division. Last year you reported 4.6 billion of profit and looking at the old standard games generated 5.4 billion. So, by definition PCs and Walkmans must have lost about 1 billion yen. We've got about a 40 billion or 45 billion deterioration for this year. Could you give a breakdown of the deterioration and how it splits between VAIO PCs and the game business?

Nobuyuki Oneda

You're talking about quarter-on-quarter comparisons?

Ben Williams – GAM

Year-on-year, yes, first quarter this year versus last quarter last year.

Sam Levenson

Standby, one second Ben, we're just pulling some stats

Nobuyuki Oneda

Are you talking about the first quarter result over the last year versus this year?

Ben Williams – GAM

Yes. Let me just go over it again. If we look at the game business, just the game business as it was defined last year that generated 5.4 billion in operating profit and the new Networked Products and Services which is on slide nine of this year's presentation, it says FY08, you generated 4.6 billion in profits and that includes the games. So, my understanding is that the new division includes VAIO PCs, Walkmans, and the game business. So, if last year the game business generated 5.4 billion and the new division generated 4.6 billion, that means that VAIOs and Walkmans lost 0.8 billion. We've now got minus 39.7 billion. So there's about a 45 deterioration. I'm trying to work out how much it came from PCs and how much came from the game business.

Sam Levenson

Yeah, Ben unfortunately the (inaudible) math looking at last year's numbers won't work because there's different allocation of internal pricing on exchange rates, whereas, last year all the stuff was within a segment, this year we've got multiple segments that have been reordered. So, it would probably be easier for us to have this conversation with you offline than to try and do it over the conference call.

Ben Williams – GAM

Well, I think we've got a meeting arranged for a couple of weeks, so we'll go through it then. That’s it, thanks.

Operator

At this time there are no further questions in queue, I would now like to turn the call back over to Mr. Sam Levenson for closing remarks.

Sam Levenson

Very good, well we appreciate everyone's attendance on the call tonight. We look forward to answering any further questions that you have. Please feel free to contact the IR department in London, New York or Tokyo. Thank you for your interest in Sony. Good day.

Operator

Thank you for your participation in today's conference, this concludes the presentation. You may now disconnect.

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