Sony Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Sony Corporation (SNE)


Q3 2013 Earnings Call

February 06, 2014 3:50 am ET


Kazuo Hirai - Chief Executive Officer, President, Representative Corporate Executive Officer, Director and Member of Nominating Committee

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


Yasuo Nakane - Deutsche Bank AG, Research Division

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

Eiichi Katayama - BofA Merrill Lynch, Research Division

Kota Ezawa - Citigroup Inc, Research Division

Hideki Yasuda - Ace Securities Co., Ltd., Research Division

Unknown Executive

[Japanese] Ladies and gentlemen, at this time, we'd like to begin this conference for the announcement of the earnings for quarter 3. I'd like to thank you very much for attending this conference despite your very busy schedules. As we have informed you, we will be announcing the results of the quarter 3 today, but also, there will be announcement concerning -- we have made an announcement concerning the reform of the PC and TV businesses.

And regard to details, we have the -- Kazuo Hirai, CEO, and Representative [ph] Director of Sony Corporation, to give you some presentation. And regard to the quarter 3 results, as is usually the case, we have Masaru Kato, EVP and CFO, to make the presentation. But also, the Vice President in charge of Investor Relations, Hashitani, is also with us as well. And we will be spending 15 minutes more than usual until 5 minutes past 7 for this conference. Mr. Hirai?

Kazuo Hirai

I'd like to thank you very much for being part of this conference despite your very busy schedules. I'm Kazuo Hirai. Today, at 3:00, together with Sony's third quarter earning results, we made announcement concerning plans to address the reform of our PC and TV businesses, and I wanted to take the opportunity today to explain the nature of these reforms to you in person, as well as to take any questions that you may have.

You will be hearing specific details of the third quarter earnings from Masaru Kato in a moment, but broadly, we recorded large increases in revenues and profit compared to the same quarter last year. In both consolidated net sales and consolidated operating income in the 5 electronic segments, although certain businesses recorded impairment, losses and write-downs, even including these adjustments, there are -- there was significant profit improvement compared to the same quarter last year. And excluding these impairment losses or write-downs, results were essentially as we forecasted in October.

However, due to the impairment losses and write-downs recorded during the quarter, the additional restructuring costs that we are now allocating for reform measures that -- to be executed and I will be outlining later, and also because of the review made of certain planned asset sales, we expect our full year earnings to be significantly below our October forecast, resulting in a net loss attributable to Sony Corporation's stockholders.

Given the increasing -- the challenging electronics business environment, we now anticipate our target of returning the TV and PC businesses to profitability to be difficult to achieve this fiscal year. And given these circumstances, we have decided to implement further significant steps to accelerate the future revitalization and the growth of our electronics business, central to which are the following 2 reform measures: First, we will continue to shift resources to our 3 core businesses of Imaging, Game and Mobile and our growth businesses while also urgently implementing a fundamental reform plan within the TV and PC businesses that have continued to face challenges. Secondly, we will optimize the scale of our sales companies, headquarters and indirect functions, as well as the manufacturing operations that are relevant to our electronics business. And I will go into further detail about these measures later after we hear from Mr. Kato.

Masaru Kato

[Japanese] Now I will begin by explaining the consolidated results for the third quarter. As you see, the sales and operating income for the quarter both increased significantly year-on-year primarily due to the improvement in results of the 4 electronics segments, excluding Devices, and strong performance of the Financial Services and Music segments.

Consolidated sales increased 24% year-on-year to JPY 2,412,800,000,000. This significant increase in sales was due to strong sales for PS4, significant increase in unit sales of smartphones and the favorable impact of foreign exchange rates. Consolidated operating income increased 95% year-on-year to JPY 90.3 billion despite a JPY 32.1 billion impairment charges in the battery business and JPY 8.2 billion impairment charges in the PC business, and a JPY 6.2 billion write-off of the PC game software titles, all in electronics.

The significant increase in profit this quarter was due to favorable impact of foreign exchange rates and improvement in the profitability of the Television and smartphones and the increase in profit in the Game, Financial Services and Music segments. Net income attributable to Sony Corporation shareholders was JPY 27 billion positive. In battery business, impairment was booked because we view our future cash flow being sufficient to achieve return on long-lived asset book value in view of insufficient profitability improvement and the strategic review of the market trend.

Regarding PC business, because of continued challenging business environment, the strategy was reviewed to focus resources on smartphones and tablets in Mobile business. Reflecting the prospect of ultimate exit from PC business on future cash flow estimate, it became necessary to record impairment losses on long-lived assets concerned.

Next chart, please. Here, you see the step chart showing comparison between the operating income results of this quarter in each of the segment with that of the previous year. The 4 electronic segments then Devices segment had an improvement in operating results year-on-year. And probably, rather than the year-on-year, you would be more interested in how it would compare with the October forecast. So as usual, I should like to talk a little about it.

What you see here is the comparison between the actual results of the quarter and the October forecast. As you see, IP&S segment was approximately JPY 5 billion better than our forecast due to cost reduction in the DI [ph] business, and the MP&C segment has a JPY 25 billion shortfall due to the JPY 8.2 billion impairment charge in the PC business and a lower than expected unit sales of smartphones.

The Devices, I explained already. And the Pictures and Music both exceeded expectation by JPY 5 billion. Financial Services segment was JPY 10 billion above expectations due to the positive impact of the stock market. Now the Game segment, which is not displayed, they -- but it was in line with October forecast, so due to operational improvement and favorable impact of foreign exchange rates offsetting sequential billion yen write-off of the PC game software titles.

And next chart, please. So there has been the major impact of the impairment. And in other businesses, the results in electronics business is along the line of October forecast. And in other words, this is indicator of the businesses where impairment or write-offs were not taken.

Next, please. [Japanese] Now I would like to explain more about core businesses of electronics, Mobile, Game and Digital Imaging. First, Imaging Products & Solutions segment, despite a market environment which continues to be challenging for the Digital Imaging business in the segment, we were able to increase profit year-on-year due to differentiation from our competitors through the use of development of components developed in-house and due to high value-added strategy bearing fruit in interchangeable single-lens camera and compact digital camera businesses.

About the Games segment, the PS4, which went on sale in November of last year, sold 4.2 million units of hardware and 9.7 million units of software in the 1.5 months after launch. The PlayStation Network already has more than 150 million registered accounts, and the pay subscription service, PlayStation Plus, has gotten off to a strong start with a dramatic increase in membership due to the introduction of the PlayStation 4.

The Sony Network Entertainment (sic) [Sony Entertainment Network] that offers network services recorded the highest sales ever in the month of December. At the Consumer Electronics Show in January, we announced the PS Now service, which streams games to a variety of devices, such as smartphones, tablets and TV. We are diversifying revenue streams by aggressively rolling out network services in addition to the packaged software we have sold traditionally, and we are making moves with an eye onto the future. So the speed of the spread of PS4 is quite encouraging.

Now let me talk about the Mobile Products & Communications segment. The Mobile business, within the MP&C segment, has been profitable since the first quarter. During this quarter, it continued to contribute to the operating results of the entire segment due to a year-on-year significant increase in unit sales and a rising average selling price. However, sales were below expectations due to lower than expected unit sales, primarily in Asia and Europe. Due to the impact of the lower unit sales, operating income was also below the expectations.

Due to the actual results of the third quarter, we have revised downward our unit sales forecast for the fiscal year from 42 million units to 40 million units. But this is a significant increase from the 33 million units we sold in the previous fiscal year. Going forward, we're optimistic because the market continues to grow rapidly.

Image sensors. Although imaging sensors for using compact digital cameras are feeling the effects of market contraction, we are doing a good business due to healthy demand for sensors going into smartphones. In order to increase production capacity, we have also announced, on the 29th of last month, that we would acquire Renases Electronics' semiconductor facility in Tsuruoka City, Yamagata prefecture, and would establish it as a new technology center. So for the core businesses, I think we are delivering achievements steadily.

Now I will touch on the focus for the fiscal year ending March 31, 2014. Assumed foreign currency and exchange rates for the fourth quarter ending March 31, 2014, are approximately JPY 104 to the U.S. dollar and approximately JPY 140 to the euro. Although there are some changes in the forecast for each segment, consolidated sales are expected to be unchanged from October forecast at JPY 7,700,000,000,000.

MP&C segment sales for the fiscal year are expected to be below the October forecast due to the revision downward in the annual unit sales forecast for smartphones. HE&S segment sales for the fiscal year are expected to be below the October forecast due to a decrease in expected sales of Audio and Video category. On the other hand, we expect the Music segment and Financial Services segment to exceed the October forecast. Operating income is expected to be JPY 80 billion, JPY 90 billion below the October forecast.

And I would like to discuss the breakdown. The 4 segments of IP&S, Game, Music and Financial Services are expected to exceed expectations, but the 3 segments of MP&C, HE&S and Devices are expected to be below expectations. As I have explained, impairment charges and write-offs that I explained earlier were not included in the October forecast. And also, we did reconsider some planned asset sales. If you will just excuse me, another factor was our decision to increase restructuring charges by JPY 20 billion due to the profitability improvement measures.

Net loss attributable to Sony Corporation's stockholders is expected to be JPY 110 billion, a JPY 140 billion decline compared with the October forecast. This decline is due to the forecast for operating income being below the October forecast, as I have explained, and an increase in foreign exchange losses, the reconsideration of asset sales and an increase in tax expense resulting from the strong performance of the Financial Services segment and also the minority interest deduction. Those factors have contributed to the expected bottom line. As for the fourth quarter, electronics business would experience seasonality and would anticipate operating loss, but compared to the last year, the improvements are being viewed compared to the last year. So there is a steady increase in profitability.

Mr. Hirai will later explain our plans to address expectation of the businesses with issues in a moment, but I will explain a little more about the metrics in the TV business, which is recording loss. We targeted breakeven this fiscal year. That was our intent, but as things stand now, it seems difficult that we'll be achieving this target. 3 years ago, in November 2011, Mr. Hirai outlined a roadmap to return to profitability spanning 2 years and talked about various measures or the team that will be responsible for this. And as a result, we said that we were -- at that time, we expected a loss of JPY 175 billion, but we'll be working on improving the resulting expense so that the year ended March 31, 2012, our actual result was JPY 147.5 billion.

So we were able to compress and reduce the loss. So you may not believe that's inadequate, but that was a result of our improvement measures. And so -- and on next year, we move to even half that to almost JPY 70 billion in ETA [ph] ending March 31, 2013. We missed the breakeven target, but we are now looking in terms of JPY 25 billion of loss on our books. In the 2 years, we did make an improvement of JPY 150 billion in terms of reducing the loss and then managed to reduce losses to 1/6 of what they were before, but still, unfortunately, we were -- we missed the target. But as you see here, we're doing what we've done to achieve this.

There is no trick about this. We worked in all the areas, steadily implementing the actions that we were able to take, reducing the panel cost, elimination of the joint venture, and product appeal was improved so that margin of profit increased for large-screen-sized TVs in the 4K models. Margin of profit level increased significantly. Operational extension [ph] so that we introduced the product in the market in a timely manner.

So all in all, there was significant improvement, I think, that we were able to realize. And also, fixed cost reduced lower to breakeven point. So all the things that we could put our hand on, we did work on them. But toward the very end of this year, as we are reaching the final stretches, there was some, shall I say, drag in terms of our efforts because in the emerging countries, sales increase has been expected. We're hoping for that, but the economy and the market situation in emerging countries deteriorated not up to our expectations. So the results were lower. Also, the currencies of these countries -- in emerging countries against the dollar have deteriorated, which is a negative factor over Sony's results.

And also, at the beginning of this year, we said that we are going to launch and introduce high added value product, but there was some delay in actually bringing these products to the market. So regrettably, we're not able to achieve our target. I will not -- I'm not trying to say this as an excuse, but we feel actual results of these actions that we have taken, is a solid reaction positively into what has been done. As a result, [indiscernible] we'll see growth in business or stop bleeding in some of the challenging businesses, a lot of actions, so including the plans so that -- and I'm sure you're interested in what all of this result in terms of the performance next year.

We are still in the month of February. We are still working on our budget. So I cannot give you details about the sales or the profit lines, not yet. But there are several points that I would like to, nevertheless, share with you.

So as the core business is concerned -- by the way, Mr. Hirai will refer to this. For the few years now, we've made investment and we've enhanced that product lineup, the appearance of the product in Mobile, Game and Digital Imaging. Next year, the momentum that we now have will continue. Therefore, they will contribute to our profitability to a degree greater than this year.

In the meantime, each business with challenges in the PC and TV or reduction of fixed costs, the revamping of the batteries business refer to some of these programs that in those areas, compared to this year, we will be able to stop bleeding or be able to reduce the loss next year. The results will be more manifest for next year. And particularly, with regard to fix cost reduction relating to headquarters and manufacturing and sales of the companies, rationalization is called for as we've been aware of. And we are working on this one by one, and the results will start to appear next year and onwards. But the full positive impact will be only felt in 1 year’s time in 2015. By that time, we believe the fixed cost can be reduced by 100 -- as much as JPY 100 billion, thanks to efforts that we are making now.

With regard to Music and Pictures and Financial Services, the financial foundation is well established, and the profit foundation is there. Therefore, next year, we can expect to be more profitable than this year. Particularly, we held Investor Day for entertainment and Music last year, and we decided to make further disclosure, particularly with this business, and some metrics have been already disclosed to you. And along with those targets and objectives, we will try to see further improvements in the results of these businesses.

What will be the level of profitability next year, as I said, this is not yet the time for me to divulge such information, but we will be taking all these actions so that next year, there will be a certain solid rise in our business situation. At the time of the earnings announcement that we will be conducting next in May, we should be able to explain more details about the results. Thank you.

Kazuo Hirai

[Japanese] Thank you, Kato-san. Now I will explain the measures we will be implementing in the electronics businesses, that is why our urgent turnaround. As CEO of Sony, I have repeatedly stated that my mission is to transform Sony and do everything I can to revitalize and grow our electronics business and by further growing of our Financial Services and entertainment businesses to stabilize operation and growth of the entire Sony Group.

As Kato-san mentioned, in terms of the entertainment businesses, as I emphasized the entertainment business briefings for investors and analysts, held in Los Angeles and Tokyo last November. The entertainment businesses are essential to our overall growth strategy, and we will continue to strive to enhance their profitability structure, as I explained then, as we're currently undertaking initiatives to further grow each business and increase profitability towards fiscal 2015 and 2016.

In the electronics business that we identified as our most urgent turnaround priority, we have engaged in initiatives, such as reducing fixed cost, strengthening operations and realigning our business portfolio for over a year now. And at the same time, we identified Imaging, Game and Mobile as our 3 core businesses and focus on the most important aspect, namely enhancing product competitiveness. These initiatives have resulted in a tangible progress with the launch of products that customers are proclaiming as truly Sony, such as RX series that we wrote the rule book for high-end compact digital cameras; Xperia Z1, which brings together the best of Sony's technology; and PlayStation 4.

We also made a number of new announcements at the Consumer Electronics Show in Las Vegas at the beginning of the year, including the evolution of our smartphone wearable technology and 4K lineup; and a new cloud-based streaming game service, PlayStation Now; and a new cloud-based TV service, with tests to begin in the U.S. within the year; and the Life Space UX concept that creates a brand-new central and atmospheric experience utilizing the living space itself to enjoy entertainment content. We are extremely proud of the consistently positive feedback we have received from customers for our approach to product development, which doesn't just focus on the creation of highly functional electronics products but also stimulate the creation of new content and services that connect with our customers on an emotional level.

Of our core businesses, in the Game business, we launched the PlayStation 4 in the United States and Europe in November, where it went on to reach sales of 4.2 million units by December 28. And within Japan, release is imminent on February 22. We anticipate further robust growth and its firm establishment as a next-generation platform.

In our Mobile business, we launched a succession of models to extremely positive reviews, such as Xperia Z1, which brings together the best of Sony's technology; and Xperia Z1S, which deliver all the same functionality in a compact body; and Xperia Ace, which was a huge hit in Japan during the summer sales season. Both sales and profit for the Mobile business have significantly improved over the last year, and the Mobile business is growing to become a significant profit contributor to the entire group.

In the Imaging business, we have taken further steps to consolidate our industry-leading position with the acquisition of the Tsuruoka plant from Renesas Electronics Corporation announced on January 29, which will further increase our seamless image sensor production capacity. This facility, which will be named Sony Semiconductor Yamagata Technology Center, will manufacture stacked CMOS image sensor, for which we anticipate even greater future demand, driven by the ever-growing market for mobile products, such as smartphones and tablets.

While we have laid a firm foundation for future growth in these core businesses, in the PC business and TV business, we implemented various profitability improvement measures. As a result of which divisional structure and product competitiveness of our TV business have significantly improved. However, despite these inflows, we anticipate our target returning to the TV and PC businesses' profitability will not be achieved within the current fiscal year. Given the expectation, we decided on the images [ph] this time.

[Japanese] Let me first discuss the PC business. And today, we announced that Sony and Japan Industrial Partners Inc. have concluded a memorandum of understanding confirming the parties' intent for Sony to transfer our PC business currently operated under VAIO brand to a new company to be established by JIP.

Considering the drastic changes in the global PC industry that have been brought about by the rapid growth in mobile products, such as tablets and smartphones, and the pressing need for structural profitability improvements at Sony, we have decided to concentrate our mobile product lineup onto smartphones and tablets following a comprehensive analysis of factors, including Sony's overall business portfolio and strategy, the need for continued support of Sony's valued VAIO customers and future employment opportunities for personnel involved in the VAIO business, we have determined the ultimate solution is to transfer the PC business to a new company established by JIP.

Sony and JIP will now proceed with due diligence, targeting the conclusion of a definitive agreement by the end of March 2014. As a part of business transfer to JIP, Sony will cease planning, design and development of PC products. Manufacturing and sales will also be discontinued after the global launch in countries throughout the world of the spring 2014 lineup. Even after Sony withdraws from the PC market, Sony customers will, as a matter, of course, continue to receive aftercare customer services.

The new company established under JIP is expected to operate the VAIO-branded PC business from planning, design and development to manufacturing and sales as an independent entity whose management team will be centered around Yoske Akabane [ph], who has led the VAIO PC business so far at Sony. We will continue to hold discussions with the Japan Industrial Partners towards concluding a definitive agreement, but the current plan is that following reevaluation of the product lineup, the new company will initially concentrate on sales of consumer and corporate PCs in the Japanese market and seek to optimize its sales channels and scale of operations. While -- and through these measures, the new company will aim to quickly secure stable profit.

The new company is due to be based at the Nagano Technology Site in Azumino City, the hub of Sony's current PC operations. A new company will be established and operated with a capital investment from and the management support of JIP, but Sony plans to initially invest 5% of the new company's capital to support its launch and facilitate a smooth business transition. We are exploring opportunities for Sony employees involved in PC operations in Japan to be hired by the new company created by JIP and also to be transferred to other businesses within the Sony Group. For employees that are not -- and who will not be hired by the new company or transferred within the Sony Group, Sony plans to offer an early retirement support program to assist their reemployment outside of the Sony Group.

Although Sony's PC business will now be discontinued, we have great hopes that under the guidance and capital support of Japan Industrial Partners, the new company will revitalize the VAIO PC business, and VAIO will continue to delight the customers who have shown loyalty to the brand over the years. And at Sony, we will, of course, support the establishment of the new company and facilitate a smooth transition of the business. And the expertise and innovative product design, operational know-how and creative suite accumulated over many years cultivating the VAIO business will be utilized and leveraged across Sony's other business categories.

Let me now discuss our plans for the TV business. In November 2011, we announced the TV business profitability improvement plan, which aim to return the TV business to profitability in 2 years. The plan outlined various cost-reduction initiatives, including enhancing LCD panel cost efficiency and rationalizing expenses, as well as strengthening product competitiveness and operational efficiency in order to improve margin and profit ratio. Due to these measures, losses from the TV business, which amounted to JPY 147.5 billion in fiscal 2011, not including JPY 64.1 billion equity in net losses of the period from the joint venture with Samsung, as Mr. Kato already mentioned, these was successfully reduced by more than half to JPY 69.6 billion in 2012.

These losses are now anticipated to be reduced even further to JPY 25 billion in fiscal 2013. Well we now anticipate our target of returning to the TV business to profitability will not be achieved due to unexpected factors. But the reforms we have made with the TV business over the past 3 years are putting the business on the path to turnaround. In particular, we have [indiscernible] enhanced product competitiveness and accelerated our shift to high-end models, especially in areas of 4K, where Sony has secured more than 75% market share in Japan and sold as the #1 market share in the U.S. for 4K models during 2013.

We now plan to execute additional reform measures with the aim of establishing a structured, capable [indiscernible] stable profit beginning fiscal year 2014. First, we will further strengthen our 4K product lineup in order to reinforce a leading position in the 4K market. We will focus on increasing the proportion of sales from our high-end models, including 2K models, with wide color range and image-enhancing technologies. In emerging markets, Sony will aim to harness market expansion by developing and launching models which are tailored to specific local needs.

Second, Sony would accelerate and broaden its ongoing cost reduction and operational improvement measures, focusing attention across all functions relevant to the TV business, including manufacturing, sales and headquarters/indirect functions. In addition to help transform this business into a more efficient and dynamic organization, optimizing size and structure for the current competitive business environment and with greater management independence and clear chain of responsibility, Sony has decided to split out the TV business and operate it as a whole lease-owned subsidiary. The targeted time frame for this transition is July 2014.

We will still finalize the details of this new subsidiary, but Masashi Imamura is scheduled to be appointed as the President of the newly formed company, having led the transformation of the TV business as President of the Home Entertainment & Sound business group. He will lead his team and build on the momentum from the great profitability improvements made over the last 2 years and work towards the target of returning Television business to profitability in the next fiscal year.

TV continues to play a vital role as a centerpiece of the home viewing experience and remains an important element of our overall strategy. We will also leverage the roles of technology expertise in assets accumulated within this business, such as TRILUMINOS and X-Reality PRO image processing technology as key differentiation technologies across our entire group. By implementing these measures, we aim to secure return to profitability of the TV business, as well as the creation of the new world of home entertainment.

Let me turn to sales manufacturing, headquarters/indirect functions. Since my appointment as CEO in 2012, I have worked to strengthen our core businesses and invest in new businesses, as well as implement structural reforms, such as realigning electronics business portfolio, reducing cost and optimizing group-wide headcount.

This has included painful measures, such as reduction of global headcount by more than 10,000 last fiscal year. However, in view of these strategic decisions about the PC and TV businesses and increasingly aggressive process of selection and focus being implemented across Sony electronic businesses, we have determined that the further reforms in sales, manufacturing and headquarters/indirect functions to support this businesses are necessary and plan to implement structural reforms in these areas accordingly.

We aim to realize an overall cost reduction of approximately 20% by fiscal 2015 across our electronic sales companies by identifying focus for the categories for each specific country or region, rationalizing support functions and proactively implementing outsourcing and other efficiency measures. By streamlining the number of product categories on which we are focusing, both in mature and emerging markets, we aim to create an organization of an appropriate scale as aside [ph] to market growth both in developed countries in which market growth is slowing and in emerging economies.

Turning to manufacturing sites. As reported in certain media, at the end of last year, Sony EMCS Corporation, which is responsible for Sony's production in Japan, will proceed with the further optimization of manufacturing and other operations, as well as headcount reduction. We would also pursue greater efficiency in the manufacturing sites globally. We would also further streamline Sony Corporation headquarters and indirect functions, and by doing so, we expect to achieve cost reduction of approximately 30% in fiscal 2015.

Due to the implementation of these measures across Sony TV and PC businesses and sales, manufacturing and headquarters/indirect functions, we're anticipating a group-wide headcount reduction of approximately 5,000 by the end of fiscal 2014. Of these, approximately 1,500 are expected to be in Japan and 3,500 overseas. And in order to execute these measures, in fiscal year 2013, we are allocating an additional JPY 20 billion in restructuring expenses in addition to the JPY 50 billion originally allocated in 15 -- fiscal year '13 and a further JPY 70 billion in restructuring expenses in fiscal 2014.

We expect that -- these additional measures to result in annual fixed cost reduction of more than JPY 100 billion, starting in fiscal year 2015. In addition to all the measures that I have outlined today, we would also be accelerating our process of business portfolio realignment and refining our R&D project selection process across the electronics business.

Finally, I would like to touch briefly on the battery business. As Mr. Kato has mentioned earlier, in the third quarter, we recorded an impairment loss in our battery-related business, but this relates to our decision to clearly identify, within the battery business, the area that we are focusing for growth. As I have previously stated, Digital Imaging, Game and Mobile, are Sony core electronic businesses, but batteries are a vital component used in portable products across these 3 categories.

Our rechargeable lithium ion polymer laminate batteries use a gel polymer electrolyte, which is thin, lightweight and 3D moldable and are highly regarded not just within the group, but also among external smartphone and tablet manufacturers. Therefore, while we plan to continue to optimize and streamline the increasingly commoditized liquid sales lithium ion batteries business, lithium ion polymer battery for mobile devices is an area on which we will focus and drive growth.

Today, I have primarily discussed on our planned measures for the PC and TV businesses that require urgent structural reform, but in order to ensure the increased profitability and growth of Sony as a whole, we must also grow our sales and profit in our 3 core electronic businesses and new businesses, together with Entertainment and Financial Services businesses. While I have touched on some of these areas today, I plan to discuss our midterm growth strategy in further detail at our next corporate strategy meeting that we plan to hold after our full year annual results. I thank you for kind attention. [Japanese]

Question-and-Answer Session

Unknown Executive

And so do I. Thank you. Now the floor is open to your questions. Those of you with questions, please wait for the microphone and please identify yourself by stating your name and affiliation before asking the questions. When a question is asked in English, there'll be interpretation into Japanese and answers will be given in Japanese. And please confine the number of question to 2 per person because of time constraint. Please raise your hand if you have any questions.

Unknown Executive

[Operator Instructions] The forefront of the room, in the middle.

Yasuo Nakane - Deutsche Bank AG, Research Division

Nakane, Deutsche Securities. Two questions. First point addressed to Mr. Kato. You took impairment losses. Are they tangible fixed asset or intangible asset and what are the assets covered? And at the end of third quarter, you have JPY 528.5 billion of tangible assets and what would be more which we cannot estimate or anticipate? And the second question directed to Mr. Hirai, I do not mean to be cross about this, but PC and TV and other overall reform, probably these reform plans should have been produced at this time last year. Now the question concerning VAIO, at the time of settlement last year, you said the positive turnaround is possible. But in the process of making the management decision this time, where do you think the mistake occurred, the information coming from business unit was misleading or the management decision? What went wrong to come up with -- to come to this result and what would you be correcting to arrive at the appropriate results taking the example of VAIO?

Masaru Kato

Now let me respond to the first question. The asset covered by impairment loss or write-downs, there are various types of asset and they are concerning the PC business basically, tangible fixed asset of buildings and equipment and machinery and facilities mainly. But there are some intangible assets. Intangible asset is not 0. So which is larger? I would say tangible fixed asset would be larger but some intangibles. In the battery business, basically tangible fixed assets. And partially some temporary account for construction and machinery facilities like for PC and the software asset. PC Game, that's a software asset and other aspects. At this point in time, there is none we incorporate in forecast in the way of impairment.

If we estimated that then we should take the impairment loss at this point in time, so there's none in our estimate. But on the other hand, going forward, as Hirai mentioned, we will be focusing on a sharper focus and concentration. And so, in that sense, not only PC and TV we took measure this time, our core businesses actually Mobile Electronics and Digital Imaging in Electronics business. So when we concentrate our managerial resources on these core businesses, we continue to look at other businesses to realign business portfolio through the process of focusing concentration and selection. So in that process, well, we have the impression to say how much they were [ph] in the future, but maybe a possibility that we have to look at that case. But in terms of size in the immediate future or foreseeable future, I do not expect to see a sizable case.

Yasuo Nakane - Deutsche Bank AG, Research Division

Third quarter, JPY 528.3 billion, what's the breakdown of it?

Masaru Kato

That JPY 528.3 billion, well, I'm not in a position to give you any breakdown.

Kazuo Hirai

And the second question, there are various factors at work. For one thing, more than we expected, our own anticipation and also external information we analyzed were more than what was expected. The conventional type of PC business market shrunk and at the same time, well, more shift to tablet and smartphone, in particular, to tablets. And the competition became more intense under such circumstances. And also, Windows 8 -- or the introduction of Windows 8, we hope and expected the market would expand further, but our expectation was not quite right. So under intense competition, the VAIO business or the unique aspect of VAIO was very well-received in the marketplace and it was appreciated there, that we know. But still, because of the marketing industry factors, we could not fully catch up with these changes yet. And that's the overall view. So we will continue to look at other aspects of Electronics business, but in such process, we will look at the strengths and the asset we have. And we will scrutinize further to make that into a product customers would sell and those products and services which will win in the competition in the marketplace.

Unknown Executive

I'd like to invite the next question. The first row on the right-hand side.

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

Watanabe, Goldman Sachs Equities. I also have 2 questions. Firstly, the headcount reduction, with regard to that, the 5,000 people, mostly I understand it would be in developed countries. But I'm understanding, in Japan and U.S., Electronics have about 50,000, so that will be 10% of the total headcount that will be subject to this program.

Now in the third quarter, at JPY 4.1 trillion, PC is JPY 32 million -- JPY 30 billion [ph] in sales. So we'll lose 8% of PC sales, so it's exactly the size, the question [ph] is the PC business, this 5,000 headcount reduction. So as you say that's adequate in size, but excluding the ForEx, the impact in TV business, or excluding smartphones in all areas, your sales are down this term. And next year as well, likely that this declining trend will continue. So commensurate with the current size of sales, if you are to optimize your business, then in 2- or 3-years' time, whatever you are doing now may no longer be adequate or optimal in 2 or 3 years' time. May I invite your comment on that?

Secondly, related to that is, if my assumption is correct, then you have to increase your sales the next year and onwards. But to do so, as Mr. Hirai said, differentiation hardware is not enough. The differentiation both in hardware and services will be the key, I agree. Now you have this PlayStation Now or the cloud distribution of TV programming, focusing that. But Apple and Google are strong contenders in service provision, so how are you going to make your services different? What's your strategy for differentiation?

Masaru Kato

To your first question, this time, are you doing the rightsizing in terms of our fixed costs? And in total, we said 5,000, 1,500 in Japan, 3,500 outside of Japan. And as you pointed out, mostly this will be in the developed, fast countries. But the scope of this initiative, we of course think that this is the last one. Once we did this, we no longer will have to do this. Of course, businesses rise sometimes, they fall sometimes, so we cannot deny all possibilities in the future because things change.

Things renew themselves sometimes, but the size of it is going to have to be the very last, that's our view. But going beyond, depending on the market development, sales may decline even more than we're experiencing now. So there could be further cut down in headcounts, as your question suggested. So what we have to do is to increase sales by realignment -- realigning our portfolio to avoid such consequences? We've identified some areas with a challenge, and we're trying to stop bleeding there. And to these initiatives we are working on now, will be completed as soon as possible.

And toward the future, we have some preparations made on the core business, so we didn't indicate all of them that we are doing. So changing and realigning the business portfolio to make sure that we make our presence known in more competitive areas, and for that, fixed cost needed will be kept and incurred. But in other areas, there could be subject to -- those will be subject to rightsizing it.

About network services, differentiation, how are you going to realize that? Well, as you pointed out, on the PlayStation Network, we already have PlayStation Plus or PS Now services. In those services, the key is the PlayStation contents, that one differentiation factors very strongly. But in another respects, Video Unlimited, or in Japan recently, high-res audio distribution has started. And the people say that we have contents that are general, but we can be different in terms of actual distribution, as a part of the high-res strategy of Sony, we can emphasize the high-res to make a differentiation in mura for instance. And though other players are doing it, but we have a film studio within our group.

And last year, in [ph] 3, we made announcement about PlayStation, about Plus Video Unlimited service and unique exclusive contents we made available working with Sony Pictures or producing with Sony Pictures. So there are different ways of this. The run-of-the-mill video or film media contents, you might think they are all general, but still, we can be unique and different because we have important assets within the group, which can be brought to bear for differentiation. I believe that. But also, at the end of the day, the customers, the idea is to give more options and choices to customers, and that's the key thing. And at CES, recently, within the video and the media services, 4K content from Netflix will be distributed to BRAVIA, which will be beneficial to our customers. So it's not just limited to Video Unlimited, but we offer more options to customers to select from, then we will decide what's so unique about Video Unlimited.

And if I may say this to your first question with regard to headcount reduction, the size of it, and is related to the size of any business. 5,000 this total, actually, not many of them are involved with the PC business, because PC is already right in fixed cost.

So in your question, you alluded that all of this headcount reduction will be related to the PC business being moved out, that's not relevant. But PC-related sales and marketing team cost, to the extent PC business will be gone, you have -- you'll be rid of them. Well, but that's not all because we work on the TV business as well. And also, we're thinking about the future and by rightsizing now, optimizing now, we should be able to achieve a greater growth in business.

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

Well, what about R&D? There was no comment about any reduction there next year and onwards? What will be the size of the R&D spending?

Kazuo Hirai

In terms of numbers, the amount, next year, R&D budget, we are still preparing the budget for next year, so I'll refrain from making comment. But R&D, again, will be subject to this idea of being selective and being more focused. The 3 core businesses, of course, will be important. But businesses with issues or challenges, we are contemplating reducing the size of, that is PC, there'll be no more R&D there. Or the same resources can be now reapplied to other areas of business. But anyway, R&D will be core subject to the focus and selection concept. Let me add these words to that. Because of the situation that we are in now, as Mr. Kato just said, we'll be more focused in terms of themes to be taken up in R&D, topics to be studied in R&D. But of course, we have to be future oriented in R&D, looking at the future. If we're future-oriented, how they are related to our business, Digital Imaging, R&D directly related to our business maybe next year or a few years beyond is important. Business that we conduct in R&D must be aligned. That's the key. And as I said [ph], the key response of R&D, we're always discussing that R&D must be part and parcel of our business. I would hope to be able to say that they have all free hands in working whatever R&D idea they have, but now, there has to be this alignment between business and R&D.

Unknown Executive

We are coming to the first row.

Eiichi Katayama - BofA Merrill Lynch, Research Division

Katayama from Merrill Lynch. The first question is about the restructuring expense. The views of the management vis-à-vis this next year, you would be spending JPY 70 billion for restructuring. So that would be, for 7 consecutive years, the minimum was JPY 60 billion, but at one time, altogether you were spending some JPY 75 billion for restructuring. Now of course, TV is one of the reasons, so do you think that beginning March 2016, that you will have a profit [ph] that would no longer need the restructuring expense after spending the restructuring expense this year, next fiscal year. That's the question one.

And the second question is that you are going to reduce the fixed cost, and as a result of those reforms, where are you headed? You anticipated the turnaround Electronics last year and this year, but those were in vain. And next year, at least you'll be expected to turnaround Electronics. Mr. Kato did not say he cannot give the numbers, but you missed the target for the last consecutive years, so next year, at least, Electronics should achieve a turnaround, including the restructuring costs. Would you be able to commit to that turnaround?

Masaru Kato

I'm sure Mr. Hirai would like to comment, but let me go first. Restructuring cost, would it be the very last? If that's the question, again, businesses are dynamic. There's always changes in results. We invest and we compete, and we'll win and sometimes lose. Of course, we always try to win, but we need to realign -- rebalance the business portfolio. So I cannot say that it will be 0 in the 2-years' time. But again, size-wise, the restructuring of the size that we have implemented would be coming to an end, JPY 70 billion next year. I think that size of a restructuring would be the -- would be ended next year.

Kazuo Hirai

There's one component, a lot has to do with personnel and human resources. Because there are local rules and laws of each country, so we cannot do away with individuals right away, we may discontinue the PC business this spring, but the restructuring of the organization may take much longer until next fiscal year. But again, the restructuring of this size would no longer be repeated in the future. We believe that the restructuring of this size would come to a end by the end of the next fiscal year. And of course, in May, we will have a strategic meeting, where we'll give you the details. But of course, we -- the management aims to achieve a turnaround of Electronics even including the restructuring cost.

I'm afraid at this point of time, I cannot give you any numbers. But if you recall at the outset, I said I have broken down into different factors and I have talked about the factors that will contribute to the breakeven. And I think even this year, we have taken actions that will contribute in realizing the turnaround. We tried to stop bleeding, and we have taken actions and we tried to organize ourselves better. So whatever we could have done this year, we did so, so that this will not be a pending issue going into the next fiscal year, so those issues will not carried over. One of the factors that contributed to this negative result is because of different reasons. We reviewed the planned sales of the assets, the equity market environment being one. But again, notwithstanding this, it is quite possible that we may sell certain assets next year. So in any case, we are truly committed. We would very much like to achieve the turnaround of the Electronics business next year.

Eiichi Katayama - BofA Merrill Lynch, Research Division

So are you saying that you're contemplating the sales of the assets to achieve turnaround?

Masaru Kato

Well, assets may include Electronics-related assets and assets of miscellaneous nature. We cannot go by item-by-item, so I can only talk this far. But shall I say that the sales of asset may include the Electronics related.

Kazuo Hirai

I have a little to add, but indeed, this fiscal year, we were compelled to make some very difficult painful decisions, and unfortunately, some of the tax had to be carried forward next year. But we would like to strengthen the fabric of the organization to be more robust and rigid. So that next fiscal year, as Mr. Kato has said, yes, we will be spending JPY 70 billion of the restructuring cost, but after that, even with that, we hope to effect a turnaround of the Electronics business next year.

Unknown Executive

Next question, in the central part of the room.

Kota Ezawa - Citigroup Inc, Research Division

Ezawa, Citigroup Securities. I have 2 questions. First, concerning the structural reform or restructuring, 5,000 headcount reduction, covering the headquarters and functions and the sales companies. Well, those team dedicated to TV or PC or those dedicated support to such businesses in headquarters, it's not that. So if you reduce the sales function by 20%, then well AV -- IP&S or AV products, the sales may drop by 20%, isn't there any such worries? So if okay, more specifically, where you see the redundancy and where would you be streamlining and where do you think much room for improvement in terms of headcount reduction, if you can show us the content or breakdown of it?

And the second question, as Mr. Katayama asked, there's been continuous restructuring efforts going on for quite some time, but if you do it all at one point, there may be a lopsided asset picture, and so you have to do it along with the growth strategies, so I can understand that, the need for balance. But in that sense, you made a downward adjustment of sales units of the smartphone and you presented that is a growth area, but the smartphone sales unit dropped. To what extent it is worrisome? In the future, your plan is to double the business, and where do you see the business opportunities and where you see the risks in smartphone business?

Kazuo Hirai

The first question I'd like to answer. Depending on country and the region, the market situation differs. But basically, when I always meet with the marketing head or sales company's head, I emphasize that in terms of the shopfront operation, and what's important is how the products are presented to customers at the shopfront, how it's explained to the customers. So the sales room capacity and capability would be of great importance in the future. So we talk about headcount, but if necessary, in terms of the shopfront sales room capability, we have to increase the human resources, because we will lose our capacity to sell our products. So that's important.

And also, in some cases, they doesn't have to be Sony employees. We could be outsourced or could merge the sales function or other functions of other Sony Groups of Companies -- Sony Group Companies to reduce the cost or if we could outsource such a work and to reduce the cost, we have to look into that. And so we've asked everyone to do the stock taking in that sense to reduce the cost. And I appeal to all the sales company people to do that. If it's across-the-board, 20%, and now we talk about the combating strength of gained by the marketplace. If there is a 20% reduction, then the product could no longer be sold. So in some cases, we will strengthen the combating strengths, the forefront of the market, while some back office function or others could be streamlined.

The second question, about the smartphone, mainly in Asia and Europe, sales unit turned out to be lower than expectation, especially in the third quarter. The speed of building the sales setup was slower than we expected. It depends on the country or region. And with the low sales unit in the third quarter, we decided to adjust the sales unit downward by 2 million. But we will regain the delay and then strengthen our sales and marketing setup. So for the fourth quarter, our forecast there is that we remain unchanged.

Kota Ezawa - Citigroup Inc, Research Division

One point of supplementation, headcount reduction, well you mentioned that it differs from one region or country to the other, but sales or marketing or indirect functions costs -- I think there is a overwhelming surplus or a redundancy mainly in Japan and Europe, and is it correct then the main target would be U.S. and Japan?

Kazuo Hirai

Well, ordinarily in the U.S. and also other regions, matured companies in Europe and also emerging markets where sales may not be increasing, therefore, we are reviewing in an overall sense. It's not that we will only look at the matured markets, Japan and U.S., but across-the-board review. And we will do the budgeting process and, in that process, we'll look at the HR headcount aspect covering both manufacturers in the matured countries and the emerging countries. And it's not across-the-board 20% reduction -- if it's reduced that much, if it weakens the sales setup, we will not do that, so it's not across-the-board in the same number.

In response to Mr. Katayama's question, my answer might not have been clear enough, so if I may supplement. The purpose of the question, if you are talking -- you started talking about the positive turnaround of Electronics, and so I talked about the various aspects of growth and the summer aspects are low, starting -- the loss starting. And then there was reference to asset sales, and so it might have been misleading. The asset sales, there are various types, for instance, if we sell land or building, it will go to the Electronics not necessarily. If it's the sales of business and reductions, it may be related to that. So I started talking about the positive turnaround of Electronics and leading on to the overall positive net results, and so I made reference to the sales -- of asset of sales. But what we are aiming at is not these asset sales per se, but based on the operation, and excluding such aspects, achieve a positive turnaround.

Masaru Kato

To confirm this point, so in the new year, adjusting operations, Electronics will be turning around its business, that's just objective, not relying on asset sales, right, that's for the Electronics.

Unknown Executive

Let's see if there's a next question, the person in the middle in the first row.

Hideki Yasuda - Ace Securities Co., Ltd., Research Division

Yasuda, Economic Institute. I'd like to bring this positive kind of a question about PS4. 5 million was your previous guidance, and you haven't reviewed that number for the year, so what about PS4? Has there been any change in your forecast or estimates? And also, at the corporate strategy meeting before, you said that software support and marketing costs will be spent to make a successful launch of PS4. And I think the situation is much better than is expected. So next year, these costs related PS4 to be able more profitable, what about that? And also the next corporate strategy meeting, I'm sure, as I said, you're going to talk about more growth strategies. But listening to Mr. Kato's comment, you have been going through the history of restructuring all this time, so I've never felt that there was a turnaround -- but next time around, like we used to experience when you came up with a Walkman or new products, impress us, wow us for some time, with a growth strategy and impressive product. As things stand now, can you promise me that?

Kazuo Hirai

Well, first of all, the game console, it's true that toward the end of December, we indicated 4.2 million or 4.5 million. But consistently, we're saying between PS3 and PS4, our target is to sell 15 million for the year. And that number, 15 million, remains unchanged in total PS3 and PS4. That's how we looking at the business now, where we stand now. PS4, by the way, is doing a lot better than our expectations. But PS3, because PS4 is doing so well, maybe PS3 is slightly behind anticipation, so there's pluses and minuses, but altogether, remain with the same target of 15 million.

About the marketing expenses in the future, I think your second question, and again, the start will stay smooth, yes, but then again, our competitors are coming up with strong platform products. So PlayStation 4 and the PlayStation format, in general, we have to make sure that acceleration is fair and we need to do that with the marketing. And therefore, it's too early to decide on reducing and cutting the cost for marketing. From my experience, however, I would say, it's not yet time for us to ease on the marketing spend. And if there are opportunities, actually, we have to add to an increase maybe to the marketing spend, this is the time now to do so. I can say that from my experience. Now the third point, thank you for your comment. This time around, I've given you only the, shall I say, difficult discussions in my presentation today, but back in January, I had an opportunity to make a keynote speech at the Computer Electronics Show in Japan.

I know how people accepted my speech. But my view, my dream, about the future of Sony, my vision, as it were, I gave all that in my speech and also lifestyle, the experience, particularly after a shorter [ph] 4K and it as my presentation to make a product out of this, have a team working on this, and that's why we were able to demonstrate this at CES -- the actual product, though the setup wasn't perfect, the line was very long, but about 3,500 people altogether were there to actually see this product. And in the corporate strategy meeting, we -- basically the repeat of that kind of exciting discussions, not just the product, but it's actually, today, however, was not the opportunity to do so. But at the CES, I had total freedom in sharing my dream with the audience there, and in all the opportunities going forward, I will make sure to make my dreams and provisions known.

Hideki Yasuda - Ace Securities Co., Ltd., Research Division

So 1 year ago, for the PS4, you wanted to devote and invest people and money, and I think you've successfully done that. I hope you'll be able to talk about the Electronics in such a positive way, to be able to invest more money and people for the future success.

Kazuo Hirai

Again, today is an opportunity to talk about that, but personally, myself, I'm a stickler as far as Electronics business is concerned, as electronics product is concerned, our then installed cameras on PS4 are just examples. But it's our core business and our products in our core businesses, I think we now have a product line up which the customers accept and evaluate. But that's not enough, how would that translate to a bottom line, you may ask. But half of this equation, in terms of the product appeal, even though that is yet to be done, but I think my ideas are now being reflected in the products that we've launched in recent times. So as far as product appeal is concerned, the results are there, but I'll continue to bring my passion to be able to introduce these products to our customers.

Unknown Executive

All of your questions, we were not able to take up, but unfortunately, it's time to conclude our press conference. Thank you very much for your attendance.

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