Sony Management Discusses Q1 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Sony Corporation (SNE)

Sony (NYSE:SNE)

Q1 2013 Earnings Call

August 01, 2013 4:50 am ET

Executives

Masaru Kato - Chief Financial Officer, Executive Vice President, Representative Corporate Executive Officer, Director, Member of Compensation Committee and Member of Nominating Committee

Yoshinori Hashitani

Analysts

Kota Ezawa - Citigroup Inc, Research Division

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

Junya Ayada - Daiwa Securities Co. Ltd., Research Division

Yasuo Nakane - Deutsche Bank AG, Research Division

Masahiro Ono - Morgan Stanley, Research Division

Eiichi Katayama - BofA Merrill Lynch, Research Division

Unknown Executive

Good evening. Thank you for waiting. I'd like to start the meeting to announce the result of Sony's earnings for the first quarter of fiscal year ending 2014. I'd like to introduce our presenters, to your right, Corporate Executive Officer and CFO, Mr. Kato, Masaru Kato; and in charge of IR, Vice President, Yoshinori Hashitani. Mr. Kato will give you an overview of the results first. And then for segment by segment information, Mr. Hashitani will speak. And then that will be followed by Q&A. We'll be standing by for this session. Thank you.

Masaru Kato

[Japanese] Now I will begin by explaining consolidated results for the first quarter of fiscal 2013. This quarter's results, shown in this slide, that during this quarter, sales and operating income increased significantly year-on-year. Consolidated sales for the year increased 13% year-on-year to JPY 1,712.7 billion. Consolidated operating income increased JPY 30.1 billion year-on-year to JPY 36.4 billion. This significant increase in sales and operating income was due to an increase in smartphone unit sales, the strength of the Financial Services business and the favorable impact of the exchange rate.

Results for the quarter were above of our expectations, and we were able to record a profit for the 5 electronics segments in total for the first time since the first quarter of fiscal 2011, and this was due to significant improvement in our result of smartphone business and the strength of new products, and the change of profit of the TV business for the first time since first quarter fiscal 2010. The Picture, Music and Financial Services segments each recorded an increase in sales and improvement in operating results year-on-year, and they continued to contribute stable profit. Consolidated sales are over JPY 100 billion higher than our May forecast, and operating income was JPY 35 billion higher than our May forecast.

Net income attributable to Sony Corporation shareholders improved JPY 28.1 billion to a profit of JPY 3.5 billion. We will now touch on our forecast for the full year fiscal year '13.

Assumed foreign currency exchange rates for the remainder of the fiscal year are JPY 100 to U.S. dollars and JPY 130 to the euro. In May, the assumed foreign exchange rates were JPY 90 to the U.S. dollar and JPY 120 to the euro. So the new rates reflect depreciation of the yen.

Consolidated sales for the fiscal year are expected to be JPY 7,900 billion, exceeding the May forecast by JPY 400 billion. This increase is due to the favorable impact or depreciation of the yen offset by downward revisions in annual -- in sales forecast of certain electronics products.

The forecast for consolidated operating income remains unchanged from the JPY 230 billion announced in May forecast despite the upward revision in sales, primarily due to the unfavorable outlook for the electronics market conditions and expected relative impact on the profit of currencies in emerging markets falling against the U.S. dollar.

Our forecast for income before income taxes and net income attributable to Sony Corporation shareholders remain unchanged from the May forecast.

Then I'd like to ask Hashitani-san to talk about segment result.

Yoshinori Hashitani

You can see here the sales and operating results for each segment for the quarter.

First, the Imaging Products & Solutions segment. IP&S segment sales decreased 10%. This decrease was due to a significant decrease in unit sales of video cameras and compact digital cameras, resulting from the contraction of the market, partially offset by the favorable impact of the exchange rates during the quarter. Operating income decreased JPY 4.5 billion year-on-year to JPY 8.1 billion, mainly due to the impact of the decrease in sales of video cameras. Segment sales and operating income for the fiscal year are expected to remain unchanged from the May forecast. Sales are expected to increase, and operating income is expected to increase significantly year-on-year.

I would like to make some additional comments about Digital Imaging Products. Although we have downwardly revised our forecast for annual unit sales due to the impact of the contraction of the market, we continue to maintain our high level of market share in video cameras. Although unit sales decreased significantly year-on-year, especially at the low end, we were able to increase prices and improve profitability, so a result of the favorable impact of exchange rate and enhancement of our high value-added product offering, including the high-end compact DSC-RX series, which is equipped with large image sensors developed by Sony. Under these conditions, Sony reaccelerated, of course, the enhanced product appeal in the high value-added space by utilizing key devices we developed in house, such as image processing engines, lenses and image sensors. In addition, in July, we implemented a change in our organizational structures aimed to accelerate unified management of the consumer and professional businesses. The purpose is to accelerate the interaction between the technological and human resources in both businesses and to deploy Sony's strong digital imaging technology over the wide field.

Game segment. Sales were essentially flat year-on-year. This was due to the favorable impact of the exchange rate and increased software sales being offset mainly by decreasing unit sales for PS3 and PSP hardware, as well as the impact of same shipment of PS2 at the end of the last year. Operating loss increased JPY 11.2 billion to JPY 14.8 billion due to an increase in R&D cost related to the introduction of PS4 and the benefit in the same quarter of the previous year of the reversal of a Blu-ray Disc patent royal accrual. Game segment sales for the fiscal year are expected to be higher than the May forecast, mainly due to the favorable impact of the exchange rate. In May, we expect that operating result to be breakeven for the fiscal year due to the recording of profits from the second quarter onward. While results in the first quarter were in line with expectations, results for the fiscal year are expected to be below the May forecast. This is because the depreciation of the yen against the U.S. dollar is expected to have a negative impact on operating result. Because of high weight of dollar-denominated hardware cost compared to the previous year, we expect the increase -- sales are expected to increase significantly and operating results to deteriorate.

In E3 in the U.S., Sony received accolades from the press and market participants when it announced the details of PS4, which is scheduled to be available at the end of the year. PS4 not only delivers the ultimate gaming experience, but it also deepens connections amongst users through a combination of gaming and social connectivity, as Sony is enhancing profiles and software lineup as we prepare for the PS4 for holiday season.

Now Mobile Products & Communications segment. Sales increased 36%. This significant increase was primarily due to the favorable impact of exchange rates and a significant increase in unit sales of smartphones and increase of the average price -- selling price. Operating income of JPY 5.9 billion was recorded, an improvement of JPY 34.1 billion. This was due to the increase in sales of smartphone. MP&C segment sales for the fiscal year is expected to exceed the May forecast due to the favorable impact of the exchange rate. Operating income is expected to be lower than the May forecast due to the downward revision of the PC's unit sales forecast and the negative impact of the depreciation of the yen against the U.S. dollar, reflecting the higher ratio of dollar-denominated hardware cost. Sales are expected to increase significantly, and operating results are expected to improve significantly year-on-year, with a profit expected to be recorded.

Now regarding PCs, unit sales for the industry are expected to decline by a double digit this fiscal year. Accordingly, we have revised downward our unit -- annual unit sales forecast for VAIO from 7.5 million to 6.2 million units, although we expect to maintain our market share. Our VAIO Duo '13 and VAIO Pro 13 with Windows 8 model, which went on sale in June, have received high praise. And going forward, we will focus on developing high value-added models with strong appeal that capitalize on VAIO's affinity with entertainment.

Now Sony mobile. Xperia A has captured a number of landmark #1 market share for 9 weeks since its launch in Japan in May. In addition, Xperia Z Ultra, which was announced in June, with a 6.4-inch large screen display, has received significant acclaim. And we expect increasing positive impact on our business. In addition to improve its operating results, we will actually create a mobile -- Sony Mobile will roll out teasing products.

Now Home Entertainment & Sound segment. Our sales increased 9% due to the favorable impact of the ForEx. And operating income of JPY 3.4 billion was recorded, an improvement of JPY 13.4 billion. This significant improvement in operating result was mainly the favorable impact of exchange rates and significant improvement in television. HE&S 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, but for -- due to an impact on profit of an expected decrease in sales on a local currency basis of Audio and Video category. But for the full year, sales are expected to increase significantly, and operating profit is expected to be recorded. In the Televisions business, sales for the quarter increased 18% year-on-year to JPY 185.6 billion due to an increase in price resulting from shift to high value-added models, including 4K. And operating income of JPY 5.2 billion was recorded, compared to -- compared with an operating loss of JPY 6.6 billion in the same quarter last year. We have been still implementing our profitability improvement, the plan announced November 2011. Partly due to the improvement in product mix this quarter, we were able to record a profit on a quarterly basis for the first time since the first quarter of the fiscal year ending March 2011. We have revised downward our annual unit sales forecast from 16 million projected in May to 15 million and -- because of our forecast of the Central and South America and Middle East and the unit sales of issued devices. Sales decreased 10% year-on-year. This decrease was primarily due to the absence of the sales of chemical products business, which was sold in September last year, partially offset by the favorable impact of exchange rate and a significant increase in sales of image sensors for mobile products. Operating income decreased JPY 5.1 billion year-on-year to JPY 10.8 billion. This decrease was due to a significant decrease in net benefit from insurance recoveries related to floods in Thailand and decrease in sales of System LSI for the Game business.

Devices segment sales for the fiscal year is expected to remain unchanged from the May forecast, mainly due to the favorable impact of exchange rates, offset by lower than expected local currency sales in semiconductor category. Operating income is expected to be higher than the May forecast due to the positive impact of exchange rates and expected cost improvement. For the full year, our sales are expected to be essentially flat, and operating income is expected to decrease.

The factors that led to the change in operating results of electronics are shown here. Total inventory for the 5 electronic segments at the end of June 2013 increased JPY 41.8 billion year-on-year to JPY 751.6 billion due to the depreciation of the yen. Inventory increased JPY 128.7 billion, compared with the level of the end of 2013. At this point in time, we believe there is no problem with this level, but we plan to continue to carefully control our inventory.

Next is the Pictures segment. The sales here increased 4% year-on-year, and operating income improved JPY 8.6 billion to JPY 3.7 billion. This increase in sales was due to the depreciation of the yen against the U.S. dollar. On the U.S. dollar basis, sales declined significantly due to lower theatrical and home entertainment revenues. And this is because, in the first quarter of previous year, we enjoyed the worldwide theatrical release of Men in Black 3 and a greater number of home entertainment releases.

Now for films released during the quarter. The recently released This Is The End outperformed expectations, while After Earth underperformed. The improvement in operating results was mainly due to a gain of JPY 10.3 billion from the sale of Sony Pictures' music publishing catalog in the current year and lower theatrical marketing expenses. And mainly due to the favorable impact of the weaker yen against the dollar, sales and operating income for the fiscal year are expected to exceed the May forecast. On a year-on-year basis, sales are expected to increase significantly as is operating income.

In addition to the production and distribution of motion pictures, Sony Pictures has grown its television program production and television network operations into -- making it -- them into important businesses. During this fiscal year, SPE plans the debut of 15 new television series in the United States. In the television networks business, Sony Pictures is targeting expansion in rapidly growing markets, such as India. Sony Pictures' television network in India broadcasted the Indian Premier League cricket tournament and reached the largest audience ever. And it generated a significant increase in advertising sales. Sony Pictures is also working closely with the electronics businesses in an effort to create and distribute content using the latest technologies, delivering to the home the first content shot in 4K, thanks to the release of 4K Ultra HD television.

The Sales in Music segment increased 13%, and operating income increased JPY 3.5 billion year-on-year to JPY 10.8 billion. This is a large increase. It's primarily due to the weaker yen against the dollar. On a constant currency basis, sales remained essentially flat year-on-year, mainly since the growth in digital revenues and the success of a number of recent releases in the U.S. and Europe was offset by the continued worldwide contraction of the physical music market. Operating income increased primarily thanks to the impact of the depreciation of yen and improvement in net income of EMI Music Publishing. Thanks mainly to the depreciation of the yen against the dollar, sales and operating income for the fiscal year are expected to exceed the May forecast. Sales and operating income are expected to increase significantly year-on-year.

The primary businesses in the Music segment are the recorded music business and the music publishing. In the recorded music business, a large number of hit titles were released during the quarter, and market share in the United States increased. And going forward, Sony has to grow this business by continuing its aggressive artist development, combined with a broader exploitation of music through growing digital distribution platforms. In the music publishing business, integration of Sony/ATV Music Publishing with EMI Music Publishing, which was acquired last year by Sony with a group of investors, is progressing according to the plan. And 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, about the Financial Services segment. Financial Services revenue increased 30%, and operating income increased JPY 18.4 billion to JPY 46 billion. Revenue and operating income for the segment increased largely due to a significant improvement in investment performance as Sony Life reflecting a significant rise in the Japanese stock market during the quarter, as compared with a significant decline in the same quarter of the previous year. Financial Services revenues for the full 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 quarter exceeded expectations. The Financial Services revenue is expected to be essentially flat, and operating income is likely to increase year-on-year.

And this ends my explanation of segment results.

Masaru Kato

Thank you. So that's it for the first quarter. Thank you very much. We're obviously profitable, but it was an okay quarter as far as we're concerned. In our initial annual budget plan for Pictures and Music and the Financial Services, we expected them to contribute to our profitability. But turning around of electronics and, in particular, TV business, are the biggest challenge and agenda for us. So in that sense, the results of the first quarter has been a very important quarter because the results would suggest it and the direction going forward. So we're able to make profits in TV and electronics. And on a consolidated basis, I think this is all good. It's been a good thing. And as we've informed you, during some of our annual forecast -- sorry, we've maintained -- we are maintaining the annualized forecast because even though first quarter was good, we have to be concerned about the fluctuation in the ForEx market, as well as some of the uncertainties remaining. So we take a cautious view of the days ahead. And therefore, we are keeping our forecast numbers for the full year. But TV business went to -- even though it was only for 1 quarter, but we're able to make a turnaround and make it profitable. The smartphones business also made money. So we achieved these targets. So all of the initiatives and the actions we've taken before are now bearing fruit. And also, our yet to be launched PS4 was announced recently. And as of now, customer acceptance has been very high and very excellent. So that will give us a boost, and that will build up its momentum so that we are able to achieve the target we set for the full year.

That's it for myself. Thank you.

Unknown Executive

Thank you. The floor is open for questions. And please wait for the microphone, and please identify yourself by stating your name and affiliation before asking the question. When the questions are asked in English, it will be interpreted consecutively into Japanese and answers will be given in English. And please confine the number of question to 2 per person in the interest of time.

And I'd like to show this chart I usually show to you before Q&A, the first quarter result, how that compares to the May forecast for each segment. First, for the 5 electronics segments, MP&C plus JPY 10 billion, that is a reversal of patent fee; and HE&S, positive JPY 5 billion, mainly due to improvement in TV business; Devices, JPY 5 billion positive, due to ForEx positive impacts; and then Pictures -- Game and IP&S as assumed; Pictures, Music catalog sales planned in second quarter actually took place in the first quarter, so a positive JPY 5 billion; and Music, the good result of release in Europe and U.S. and also the improvement in equity income, so positive JPY 5 billion; Financial Services, with a good impact of the stock market, positive JPY 10 billion; and then others, negative JPY 5 billion. So together, JPY 35 billion higher than the May forecast as the first quarter result. You may be asking questions. Refer back to this piece of information before your question. Now any questions? The person in the front row in the middle of the room.

Question-and-Answer Session

Kota Ezawa - Citigroup Inc, Research Division

Ezawa from Citigroup Securities. I have 2 questions concerning Game business, the R&D expenditure of PS4 recorded. And this is the first time the PS4 impact on the results. And what is the actual amount of R&D expenditure for PS4 and actual sales and services? Are they to generate the profit? How much? And what has been the cost for the preparation of the launch of PS4? That's one. And second question, concerning TV business and the 5 electronic segment, during the first quarter, you've achieved profits in both. And for second quarter and third quarter onwards, second and third quarter, you've maintained profit, but the fourth quarter incurred a negative? Would that be the correct way to look at it?

Unknown Executive

First, about the Game business, the breakdown of the P&L. And I'd like to refrain from citing specific numbers in the -- a further breakdown. But theoretically, as you might know very well and would not need an explanation, but compared to the same period the previous year, PS3 number declined and software business increased. And PSP continues the decline. And PS Vita, as you know, are not performing that well. And PS2 ceased to exist. So top line difference would be there. In R&D cost, I cannot cite any specific numbers. But in terms of the substance, the software development, we have first-party software development, and prior to the actual launch, the expenditure increases for first-party software development. And also, the development tools or the support to third-party developers, that would be included in the cost of development and the increase prior to launch. As we have been saying that -- we have not incurred a tremendous amount of investment for semiconductor development or the development of semiconductor to come up with chipset. We did not make a sizable investment there. Well, partially, there has been some development of chipset. But in terms of the weight of investment, PS4 is a much lighter platform compared to PS3. And the second point about the quarterly balance, without specific numbers, I would say that we are very cautious about the immediate business environment. In the second quarter, we will make preparation for the year-end season and also some -- the holding time difference between the first quarter -- the first half and second half. And so the purpose that we have is during the second half.

Kota Ezawa - Citigroup Inc, Research Division

And a further supplementation, if you could. Do you say the development cost for PS4 is not that much? But on a quarterly basis, the deficit is about JPY 15 billion. And the PlayStation3 softwares are still selling. So without the recording of the cost of development, the Game business would have registered a solid profit. Can you say that?

Unknown Executive

Well, I would like to refrain from going into any other details. Thank you. [Japanese] Next question, please? So on this side, on this part, the first line in the middle.

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

Watanabe, Goldman Sachs. I also like to ask 2 questions. The first question is related to the previous question, talking about inventories. Channel inventory currently, are they all in a sound situation for all the products? And also, between the first quarter and second quarter announced in the second quarter, the -- what will be the trend of the profits of the following 5 products to the extent that you know them now. Five products that you referred to is the compact digital still cameras and video cameras, TV, smartphones and PCs. So what would be the sales development, first and second quarter?

Unknown Executive

What is the fifth one?

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

PCs, VAIO, right? And my second question is, you said earlier, talking about Sony Pictures, TV production and TV network business. You made some explanation about it. But what about film production, TV production and network TV business, respectively? The growth trend in the first quarter compared to the previous year is muted. And also, the annual forecast for these 3 sub-segments, if you have the information available, please tell us.

Unknown Executive

Well, your 2 questions are divided into multiple questions. But with regard to channel inventory in the market, first of all, the analog [ph distribution by country is all different. But as far as our products are concerned, both inventory on hand and the channel inventory, our understanding is that there is no particular problem that's worse. But looking at the industry as a whole, including our peers, we're all -- depending on some product headwinds, it could be a different situation it might encounter. So other companies are taking place, looking at the inventory situation. And we are in competition against them. So depending on what they do about their inventory -- or maybe affected, but as far as inventories of our product is concerned, there is no problem or challenge with regard to our channel inventory. Now the second part of your first question -- well, actually, there were 5 questions. But I'll just to give you a trend, an image. First of all, digital cameras, there, although the market is shrinking, so how can we be profitable in that shrinking environment is the key. The IP&S business has not changed its forecast. As I said, there is an impact of foreign currency. And in this category, the impact is positive. Yes, we do produce some of the parts outside of Japan. But major parts and components are not exactly denominated in the U.S. dollar, so the volume reduction and upside from ForEx fluctuation and also initiative to cut down on the cost through this. And the profit margin is rather high now. So what we have to do is maintain the higher level of margins. And camcorders, as well, it's the same structure in business as that of the digital cameras. So next is TV. In the first quarter, yes, we were profitable. The reason for us being profitable are many, actually. We've reduced our cost, cost cut, or reduced our billable cost. But one factor, importantly, was the 4K, the strength of 4K and all the high value-added models of TV as we launch them. We're able to maintain the average sales price. So that's the situation in the first quarter. In the days ahead, we'll continue to take the same, basically, strategies. But looking at Middle East or Latin American market situations, economic situations are not -- particularly on TV, are not stable, so we revise our sales forecast downwards. So the unit sales will decline and while profitability, hopefully, will improve. In other words, we will change our product mix so that we will focus more on more profitable products. So the total sales volume may decline, but with a better product mix, we will gain in profitability. And in the meantime, it will boost our activities to reduce cost so that our target of making this [indiscernible] we are still targeting that, honestly. And smartphones, in the first quarter, I guess, we made this turnaround. We made money. And because we focused on high-end models, the average price is higher and could be maintained there. And that's what our -- was due to that, and we'll maintain that status going forward. In terms of the product lineup, [indiscernible] was particularly our most profitable model. And we truly subsidized this business sufficiently last year, and that we've been able to be quick in commercializing our products and in launching our products. And that has already been bearing fruit. And the focus we have, the initiatives, will continue to work for our products to be launched in the summer. Now in personal computers, profitability there is very severe. I must be honest. It's been very difficult to make money because the market itself is -- and according to our own view and also the views of the outside analysts, the market size is smaller than it's expected initially throughout the year. We're not going to reduce the share. But in terms of the volume unit sales, we've revised them downwards, so -- as well, we'd like to leverage, I think. High value-added products will be receiving more of our focus. And in the meantime, we'll continue to work on cutting costs. And now for the throughout year -- making profit for full year probably will be difficult in this severe environment on this business. About Pictures and TVs, the sales trend was -- that's part of your question. We don't have specific numbers or figures, but let me give you some idea of direction. First of all, on Pictures, movie production, last year was an excellent year for us, meaning that this year is sort of a hiatus period, meaning that sales are not likely to grow for Pictures. But for TVs business, the networking business, networks business and TV program production, on both sides of the business, the trend is that both will likely grow. But please allow me to refrain from giving or citing any numbers. Next, the person next to the previous one?

Junya Ayada - Daiwa Securities Co. Ltd., Research Division

Ayada from Daiwa Securities. I have 2 questions myself. First point, this time, a full year operating profit forecast remained unchanged. And I would like to know the breakdown or the content. R&D and depreciation in a JPY 20 billion increase. That means JPY 20 billion positive factors in other areas must be there, exchange rate and the increase or decrease of sales. What sort of changed the forecast to have impact on this? And by segment, was there any product segment that you changed your forecast significantly?

Unknown Executive

Operating profit of JPY 230 billion, no change. And R&D and depreciation, you mentioned. Well, exchange rates have impact on those 2. Now the breakdown of operating income, entertainment business and Financial Services business are some upward -- upside. On the other side, the electronics, of course, we are trying to achieve a turnaround. But at the beginning of the year, we were expecting JPY 100 billion operating profit in 5 segments in electronics, but we revised this downward a little bit. In terms of size of downward, I would say a bit over 10% downward, a downward revision. Now about by segment, let's say Devices, I think they're good. IP&S volume has been revised downward, but exchange rate is -- exchange rate, they are positive. Impact is positive. But I think it's flat overall. MP&C and Game and HE&S, those 3 segments, have downward revision to some extent.

Junya Ayada - Daiwa Securities Co. Ltd., Research Division

The second question, about mobile business, regarding smartphones, are mobile communication sales divided by units sales? At 27,000 in the fourth quarter to 31,000 in this first quarter in terms of ASP, will this trend continue in the second quarter and onwards?

Unknown Executive

Well, I cannot share with you the exact ASP number, average selling price. But we cannot tell you our expected ASP. But as I mentioned, we haven't changed our direction. In other words, we try to make profit by providing high value-added products. There are some products which haven't been actually announced. But from summer to autumn, at the appropriate time, Sony Mobile will announce new products. In other words, we make efforts to maintain or increase our profit by seeking to a direction and strategy. Next question? The right-hand side of the room.

Yasuo Nakane - Deutsche Bank AG, Research Division

Nakane from Deutsche Securities. Two points, first question, concerning the emerging markets, what is the situation in electronics business? You referred to TV business, but when -- the currencies are depreciating. Are there any particular countries or products where our sales are hard to grow? Can you talk more specifically? And how would you incorporate that in your revision?

Unknown Executive

There's a second question. I could not hear the latter part of your question.

Yasuo Nakane - Deutsche Bank AG, Research Division

About the emerging market situation for each country and by product, how have you incorporated in the revision of the forecast in terms of specific numbers and the extent? And the second question concerning Devices business -- and you have reduced from 5,000 to 4,900. What's the breakdown for Game or image sensors among image sensor for camera or for mobile, different breakdown? Or are they may be a good performing product and maybe not so much? So qualitatively, there is a breakdown and the profit.

Unknown Executive

So let me start talking up, answering your second question. Semiconductor shipment is declining. But in terms of product category, other LSI is the area. But when it comes to the image sensors, very sound and good risk. So analog LSI, basically, is the area we see a decline. And the impact on the profit for this category, among our semiconductor product, whether it is the highest category, that's not the case. That's not the case. And the first question, so far as first quarter is concerned and the emerging markets, Brazil or CIS or China and the Middle East and Africa, our sales declined, with sales lower than forecast. And also, India, about leveling of -- and compared to our assumptions, the results were lower than our assumptions or forecast. And going forward, in all of these emerging market countries, the first half and second half, as for the first half on a local currency basis concerning consumer electronics market compared to the previous year, about the same level. But for the second half for the area as a whole, we expect to see a major increase in revenue. But compared to the original assumption or forecast, there may be areas from one area to the other. And the impact of exchange rate -- or about the overall outlook, the BRICs and the Middle East and Africa as a whole, smartphone business is positive. And we expect the significant increase in sales. But among the regions -- we foresee the growth. But in a country like Brazil, there may be deceleration of the growth. But there are growth in Game and smartphones in Brazil. So in overall sense, we foresee increase in sales. So electronics as a whole, other than Game and smartphone, a decline -- saw the overall decline. Then the impact of exchange rates, starting from the middle of the first quarter, we begin to see the depreciation of some of the currency, wherein in rupee or Brazil -- or Russian ruble declined or depreciated against the dollar. Therefore, the impact on annual profit coming from the decline in the emerging country currencies, then a negative impact about JPY 20 billion in both in sales and profit. So the exchange rate impact, we cannot simply analyze in terms of yen to a dollar and to a euro per se. The emerging market currencies, during the first quarter, we did not see much of the impact because we see such a change from the middle of May after Chairman Bernanke's comment. So from second quarter onwards, if the current trend of the rate continues for a full year or the remainder of the year, we cannot say differently. But on that basis, the impact on the sales and profit will be around JPY 20 billion. It will be after a drop or start to see in June. Therefore, the impact on the first quarter is little. But for the 9 months, remainder of the year, there may be a sizeable impact. [Japanese] Next question, please? On the right-hand side, fourth row?

Masahiro Ono - Morgan Stanley, Research Division

Ono from Morgan Stanley. Two questions, please. Firstly, about TV, this time, you revised the volume trends downward. And I'd like to ask you about the background of how -- why you are be doing this. In the first quarter, you had a double-digit profit. So I expected to lose money. And you talked about this is due to the ASP being maintained, as well as foreign currency. But can you tell about the impact of the product mix policy that you've taken? Also, by a downward revising in the volume, previously, it was 3.5 million. And you have to at least maintain that business volume into breakeven. But now you're down by 1 million. Is it within your expectations? Or is it something that would help us? Because the market situation has changed, what's your take on this? And the second question is not related to your earnings, but media has told me this, about the entertainment business, possible spinning out of the entertainment business. Of course, I know you can talk about this on a limited basis. But can you tell us what's your basic posit is, listing of both the parent and the subsidiary like the Financial Services already a public company? So what is your stance on listing of the entertainment part of your business? And also, Pictures, mainly focusing on Pictures business, and as we see in the letter submitted to your company, compared to overseas peers, your Pictures operation had a low profitability. Is that your understanding? And also, in terms of global synergies that you're foreseeing, do you believe the level is about appropriate and reasonable?

Unknown Executive

Now first of all, about the TV business, first quarter, the volume was as we'd expected. But foreign currency situation changed and impacted us significantly, but the fact that we shifted to -- and the focus on high value-added products, but also growth. And so some expenses were not incurred during the period, so I guess the expectation is that's an improvement. That's for our TV business. And beyond the second quarter, yes, the volume is now down by 1 million. We are revising each unit, but the focus that fact to the ForEx situation, the sales amount, basically, will be as we expected, as planned. But then again, in the emerging countries, mainly, we will be affected by the market conditions. So we're watching the situation carefully. On the operating income line, there's a native impact from the ForEx market development, but we will work on improving the operational cost. And our initiatives will bear fruit fully. So we should be able to break even or do even better as we planned. Your second question about proposal from TTE [ph] and also, you made a reference in your question. And this has been an important item. So our board is and will discuss and deliver this matter very carefully. That's the status that we've made public so far. The status means unchanged. But your question was what are our thoughts and "what's your stance?" If I started talking about this, then we have to get into the discussion of the contents of the proposal. So as things stand now, as of today, please understand that there's nothing we can share with you. I'm afraid that's the extent of what I can say. I apologize for that. And the Pictures profitability may be low. Some are sales. And we are analyzing the objective situation by -- analyzing the situation objectively using services of outside financial advisors. And on the basis of the objective data, we are going to discuss this carefully and then come to a solid conclusion. But as of this time, because it involves the context of the proposal, I have to keep on talking about this further, please understand. At the corporate strategy meeting, Mr. Hirai talked about this, improving profitability of LSIs is the biggest agenda for this company. But at the same time, entertainment and the Financial Services are the core part of Sony's business. As long as we're in this business, we will continue to work on improving profitability of these segments as well.

Masahiro Ono - Morgan Stanley, Research Division

Let me repeat that point, the entertainment business. So you cannot comment on your firm's stance on this directly, I understand that. But I think as there is business management, you are trying to maximize market capitalization. And turning the electronic business around is a difficult mission. But in entertainment at all, is there a room?

Unknown Executive

I think there's a lot of more room to improve the enterprise value of electronics part of the business. From what you are saying, we understand -- we take that as a matter of cost. It's a matter of a given. We are trying to manage this company. And we pursue growth. And pursue means that we're improving profitability. And that's a matter of cost. I don't have to say that. It supplies the entertainment, no exceptions. Whether there's room for improvement in entertainment business or it can be a set of any business, there's room for always improvement. And that's the responsibility of the corporate management to pursue that, in maximizing the enterprise value advised to electronics, entertainment. That's the basis. And the total -- overall enterprise value is what we're looking at. It's going to maximize them. That's Mr. Hirai's mission and that's our understanding as well.

Masahiro Ono - Morgan Stanley, Research Division

Let me make a confirmation about this to TTE's [ph] proposal, time-wise, timeline, you may be affected by the news. And now that you made the money in the first quarter, that's a good, a little bit better. But the stock market, we fully appreciate all that. I think all this is being affected. And at the mercy of the reporting done by media, and I think you're saying that as soon as possible. So what timeline are you thinking about?

Unknown Executive

Well, we are still in the midst of our discussions, deliberating on this. So I cannot tell you when are we going to issue our assets or responses. Once we are done with the full deliberation and considerations, when we arrive at reasonable solution, we will be making that conclusion known. In the interest of time, the next question would have to be the last question.

Eiichi Katayama - BofA Merrill Lynch, Research Division

Katayama, Merrill Lynch. About smartphone. Mr. Hashitani said -- talked about the domestic situation surrounding smartphones, yes. So we can feel it because -- about the domestic situation. But we do not have good grasp of overseas smartphone situation, especially that of Sony in the first quarter. What is the situation by region? And compared to domestic, how did you actually improve profitability? Dividing that into domestic, as well as overseas, you can give us qualitative analysis as well. And we are very happy as an analyst about the turnaround of TV. In order to make sure that this will -- I think, will actually be maintained for the full year. You have 1 million downward revision of unit sales. But you say 60 million. So it's actually 6 million. So in terms of cost, it's a JPY 10 billion impact. I don't know about the exchange rate impact only on TV. But you have to reduce cost by JPY 10 billion additionally or else, you cannot really maintain the black ink for the full year of TV business. So what sort of initiatives are you going to do to offset the downward revision of the volume and the ForEx and cost cut? Of course, you must have some -- got specific initiatives.

Unknown Executive

Now as far as TV is concerned, all Sony is working really hard to achieve a turnaround. In the first quarter, we made profit. And in the remaining 3 quarters, there is some uncertainty. That's what I said in my presentation. But we have really indomitable resolve to achieve the black ink at the end of the year. We talked about the Middle East and Latin America in terms of sales volume reduction. But as I mentioned beforehand, we shift to high value-added products. In other words, shift of the product mix. This is the same strategy as before. But we will stick to it, and we will work on it. And of course, fixed cost reduction, we will do as we planned. But furthermore, we will pursue further reduction of fixed cost. In which region, how much, we cannot give you analysis by region. But those who are in charge of the TV have actually taken various initiatives in the first quarter. And they are really enthusiastic about the black ink in the next quarter. And this enthusiasm might not be translated into certain numbers. But at least, they're really well motivated and with high morale. So I think including that, we will, by all means, try to achieve the black ink. About the -- about smartphones, we cannot tell you the breakdown of profitability by region. However, image, 20% in Japan; Europe, 40%; rest of the world, rest. The remaining one is the rest of the world. And sales are increasing in each of those 3 regions. And the profitability is in the direction of improvement in every region. That is the situation, of course, in certain -- if there's an increased regions where they are -- which are profitable.

Eiichi Katayama - BofA Merrill Lynch, Research Division

[Japanese] In Europe and the rest of the world, can you tell us that increase of market share in the major countries, for example, in those regions? If you can leave us some leads or hint, I would be appreciative. I understand that the TV, you have determination. But when you say a shift to high value-added, for example, certain percentage of increase of ASP, for example. Because in -- there is a specific number for volume reduction. And you have -- you cannot just tell us the countermeasure is motivation.

Unknown Executive

Yes. I think unless we can tell you some specific measures, you might not be convinced. But the way we think about it is when the market is kind of depressed and there's an impact of exchange rates, we will not pursue volume. We will not, for example, try to increase market share or sell certain products by all means. Rather, we will pursue profitability, even though we might sometimes not pursue volume. Usually, if the volume will come down, margin -- gross margin will come down. That's true in the worksheet. But Sony's idea is that we will take measures to achieve breakeven even though the volume will come down. So we will not really impose our products into the market because we have to improve profitability to maintain ASP and a pursuit of product mix with high value-added. And we do that in every region, and we reduce cost. There's no a sleight of hand. And even though I will give you some breakdown by region, I think that is not really -- that will not help. Every quarter, we will give you earnings release. And you can kind of -- we can always share with you about the future forecast in each earnings release meeting. About smartphones, our market share increased in Europe compared to the previous year. In the rest of the world, other than China, our market share is increasing.

With this, since the time has come, we would like to close the earnings release meeting. Thank you very much for coming. Thank you.

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