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Executives

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

Analysts

Daniel Ernst - Hudson Square Research, Inc.

Atul Goyal - Jefferies LLC, Research Division

Damian Thong - Macquarie Research

Timothy Lash - Third Point LLC

Sony (SNE) Q3 2013 Earnings Call February 6, 2014 8:00 AM ET

Operator

Welcome to the Sony Corporation Conference Call for Overseas Investors for the Third Quarter Ended December 31, 2013. My name is John, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. And I will now turn the call over to Casey Keister [ph]. You may begin, Casey [ph].

Unknown Executive

Thank you very much for that introduction, John, and thank you, all, for joining us today, February 6, 2014, for a discussion of Sony's results for the third quarter ended December 31, 2013. We hope you have all enjoyed One Direction's Midnight Memories while you were on hold. I am Casey Keister [ph] in Investor Relations Department here in Tokyo. And with me on the conference call tonight is Kazuo Hirai, President and CEO of Sony Corporation; Masaru Kato, CFO of Sony Corporation; Steven Kober, Executive Vice President and Chief Financial Officer, Sony Corporation of America; and Yoshinori Hashitani, VP, Investor Relations at Sony Corporation.

Thank you, all, very much for joining us. In just a few moments, we will review today's announcement and then will be available to answer your questions. Please be aware that statements made during the following remarks and Q&A session with respect to Sony's current plans, estimates, strategies, press release and other statements that are not historical facts are forward-looking statements about the future performance of Sony. These statements are based on management's assumptions in light of the information currently available to us, and therefore, you should not place undue reliance on them. Sony cautions you that a number of important factors could cause actual results to differ materially from those discussed in the forward-looking statements. For additional information as to risks and uncertainties, as well as other factors that could cause actual results to differ, please refer to today's press release, which can be accessed by visiting sony.net/ir.

Let me remind you that a webcast replay of the investor meeting held earlier today, along with the slides presented at that meeting and our detailed earnings release, are available on our website for your access.

I will briefly begin by explaining the consolidated results for this quarter. Consolidated sales increased 24% year-on-year to JPY 2,412,800,000,000. The significant increase was primarily due to strong sales of PS4, a significant increase in unit sales of smartphones and the favorable impact of foreign exchange rate. Consolidated operating income increased to 95% year-on-year to JPY 90.3 billion. We recorded this significant increase despite a JPY 32.1 billion impairment charge in the battery business in the Devices segment, an JPY 8.2 billion impairment charge in the PC business in the Mobile Products & Communications segment and a JPY 6.2 billion write-off of certain PC games software title in the Game segment.

Thanks to the strong performance of digital imaging, operating results in the Imaging Products & Solutions segment improved year-on-year, and a profit was recorded. Strong sales related to the launch of the PS4 and the favorable impact of foreign exchange rates caused operating income in the Game segment to increase year-on-year despite the write-off of PC software titles I mentioned earlier. The operating results in the MP&C improved largely due to the improvement in smartphone profitability despite the impairment charge related to the PC business. And the operating results of the Home Entertainment & Sound segment also improved, and year-on-year profit was recorded due to improved operating results of the TV business. On the other hand, the operating results of the Devices segment declined primarily due to the recording of the impairment charge related to the battery business. The Pictures, Music and Financial Services segment all made significant contributions to profit. Compared to our October forecast, only the MP&C and Devices segment exhibited a shortfall on operating results. The operating results of every other segment were either in line with or better than expectations.

IP&S segment profit was approximately JPY 5 billion above our forecast due to cost reductions in the digital imaging business. Same-segment profit was in line with our forecast due to operational improvement and the favorable impact of foreign exchange rates offset by the write-off I mentioned earlier. MP&C segment profit was approximately JPY 25 billion below our forecast due to the JPY 8.2 billion impairment charge related to the PC business and lower than expected unit sales in smartphones. HE&S segment profit was in line with our forecast. Devices segment profit was JPY 30 billion below our forecast primarily due to the impairment charge related to the battery business. Pictures and Music segment profit both exceeded the forecast by approximately JPY 5 billion. And in the Financial Services segment, profit was approximately JPY 10 billion above the forecast.

If we were to exclude the impact of the impairment charges and write-offs, the electronics business was essentially in line with the October forecast. The core growth areas in electronics are performing well. Despite a challenging market environment for digital imaging, we were able to increase profit in the IP&S segment year-on-year due to enhanced differentiation and a focus on high value-added products, both made possible by our in-house technology. The PS4 got off to a great start in the Game business, with 4.2 million units of hardware and 9.7 million units in software being sold in 1.5 months after launch. The PlayStation Network now has more than 150 million registered accounts, and the paid subscription service, PlayStation Plus, had a dramatic increase in membership due to the introduction of the PS4.

The Mobile business within the MP&C segment has been profitable since the first quarter of this fiscal year. And during this quarter, it continued to contribute to operating results in the segment due to the significant year-on-year increase in smartphone unit sales and a rise in average selling price. However, sales were below expectations because we had hoped to sell more units in Asia and Europe. As a result of these lower than anticipated unit sales, operating income was lower than we expected. Taking into account the results of the third quarter, we have revised downward our annual unit sales forecast for smartphones, 42 million units to 40 million units, but this still represents a significant increase from the 33 million units we sold in the previous fiscal year. Going forward, we expect units to continue to grow.

I will now touch on our revised forecast for the fiscal year ending March 31, 2014. Although there are some changes in the forecast for each segment, consolidated sales are expected to be unchanged in the October forecast of JPY 7,700,000,000,000. Consolidated operating income, on the other hand, is expected to be JPY 80 billion, which is JPY 90 billion below our October forecast. The IP&S, Game, Music and Financial Services segments are expected to exceed expectation, while the MP&C, HE&S and Devices segment are expected to be below expectations. IP&S operating income is expected to be slightly better than the October forecast mainly due to cost reduction. Despite the JPY 6.2 billion write-off recorded in the third quarter, which was not included in our October forecast, Game operating results are expected to be slightly better than the October forecast due to cost reductions as well. Music operating income is expected to exceed our forecast due to strong sales of recorded music. Financial Services operating income is expected to be better than the October forecast due to the strong third quarter results. MP&C operating results are expected to be significantly below the October forecast due to lower smartphone sales and the impairment charge in the PC business, which was not included in the previous forecast. HE&S operating results are expected to be slightly below the October forecast due to lower sales of Audio and Video. Devices operating results are expected to be significantly below the October forecast due to the impairment charge recorded in the battery business, which was not included in the previous forecast. We also reconsidered planned assets sales, which had a negative impact on the consolidated operating income forecast. A final factor contributing to the downward revision in consolidated operating income was our decision to increase restructuring charges by JPY 20 billion due to profitability improvement measures that Hirai-san will discuss in a moment. Due to the lower than expected consolidated operating income, higher than expected foreign exchange losses, higher than expected income tax due to stronger than expected results for the Financial Services segment and a larger than expected deduction for net income attributable to noncontrolling interest due to the unexpected result of the Financial Services segment, net loss attributable to Sony Corporation's stockholders for the year is expected to be JPY 110 billion, a JPY 140 billion decline compared with the October forecast.

This concludes my remarks regarding results for this quarter. And with that, I will turn things over to Hirai-san for his remarks.

Kazuo Hirai

Casey [ph], thank you for that introduction. Hello, everybody. This is Kaz Hirai. As CEO of Sony, I have repeatedly stated that my mission is to transform Sony and to do everything in my power to revitalize and grow our electronics business, and by further growing our Financial Services and entertainment businesses as well, and to stabilize operations and ensure growth of the entire Sony Group. As we've just explained earlier today at 3:00 p.m., together with Sony's third quarter earnings, we also announced plans to address the reform of our PC and TV businesses, and I want to take this opportunity to explain the nature of these reforms, as well as to take any questions that you may have in this regard.

As was talked about earlier, in the current quarter, we recorded large year-on-year increases in both consolidated net sales and consolidated operating income despite certain businesses recording impairments and write-offs. Excluding these impairments and write-offs, results were essentially as forecast in October. However, we expect our full year earnings to be significantly below our October forecast primarily due to the impairments and write-offs recorded in the third quarter, the additional restructuring cost that we are now allocating for reform measures to be executed that I will outline later, and the reconsideration of certain planned asset sales.

Given the increasingly challenging electronics business environment, we now anticipate our target of returning the Television and PC businesses to profitability will not be achieved this fiscal year. And given these circumstances, we have decided to implement further significant steps to accelerate the further revitalization and growth of our electronics business. First, we will continue to shift resources through our 3 core businesses of Imaging, Game and network services and Mobile, as well as our other growth businesses, while also urgently implementing fundamental reforms within the TV and PC businesses. Secondly, we will optimize the scale of our sales company, headquarters and indirect functions, as well as the manufacturing operations that are relevant to our electronics business. And in terms of entertainment, I emphasized at the entertainment business briefing with investors and analysts held in Los Angeles and Tokyo last November that the entertainment businesses are essential to our overall growth strategy and that we will continue to strive to enhance our profitability. We explained earlier today we are currently undertaking initiatives to further grow each business and increase profitability towards fiscal 2015 and 2016.

In the electronics business, which we have 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. At the same time, we identified our 3 core businesses and focused on the most important aspect of these businesses: that is enhancing product competitiveness. These initiatives have resulted in tangible progress with the launch of products that customers are claiming as truly Sony-esque. We are truly proud and extremely proud of the consistent and positive feedback we have received from customers for our approach to product development, which doesn't just focus on the creation of highly functional electronic products, but also stimulates the creation of new content and services that connect with our customers on an emotional level. At the same time, we identified PC and TV as businesses for which profitably improvement would be a key priority and implemented various reform measures. As a result of which, the operational structure and product competitiveness of the TV business has significantly improved. However, despite these efforts, we anticipate our target of returning the TV and PC businesses to profitability will not be achieved within the current fiscal year. Given our expectation that the market environment for the PC and TV businesses will only become more challenging, we decided it was vital to execute further reforms, including greater urgency, and have decided to proceed with the following measures.

Let me first discuss the PC business. Today, we announced that Sony and Japan Industrial Partners Inc., JIP for short, have concluded a memorandum of understanding confirming the parties' intent for Sony to transfer our PC business currently operated under the 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 of 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 on smartphones and tablets. Sony and JIP will now proceed with due diligence and negotiate detailed terms and conditions of the business transfer, targeting the conclusion of the definitive agreement by the end of March 2014. As a part of the business transfer to JIP, Sony will cease the planning, design and development of PC products. Manufacturing and sales will also be discontinued after the global launch of the spring 2014 lineup. Even after Sony withdraws from the PC market, Sony customers will, of course, continue to receive aftercare customer services. Although Sony's PC business will be discontinued, we have great hopes that under the guidance and capital support of Japan Industrial Partners, the new company will revitalize the PC business and VAIO will continue to delight the customers who have shown such loyalty to the brand over the many years.

Next, I will discuss plans for the TV business. In November 2011, we announced a TV business profitability improvement plan, which aimed to return the TV business to profitability in 2 years. Due to this plan, losses from the TV business were successfully reduced by more than half in fiscal 2012. These losses are now anticipated to be reduced even further to JPY 25 billion in fiscal 2013. While we now anticipate our targeting that -- while we now anticipate our target of returning the TV business to profitability will not be achieved in the fiscal 2013 largely due to unexpected factors, such as the slowdown in emerging markets and declining currency rates, the reforms we have made within the TV business over the past 2 years are putting the business on a path to turnaround. We now plan to execute additional reform measures, with the aim of establishing a structure capable of delivering stable profits beginning in fiscal year 2014. First, we will further strengthen our 4K product lineup in order to reinforce our leading position in the 4K market and focus on increasing the proportion of sales from our high-end models, including 2K models. In emerging markets, Sony will aim to harness market expansion by developing and launching models that are tailored to specific local needs. Second, Sony will accelerate and broaden its ongoing cost reduction and operational improvement measures. In addition, to help transform this business into a more efficient and dynamic organization, optimized in size and structure for the current competitive business environment and with greater management autonomy and a clearer chain of responsibility, Sony has decided to split out the TV business and operate it as a wholly owned subsidiary. The targeted time frame for this transition is July 2014. TVs continue to play a vital role as the centerpiece of your home viewing experience and remain an important element of our overall strategy as we leverage the wealth of technological expertise and assets accumulated within this business across our entire product lineup. And by implementing these measures, we aim to secure a return to profitability for the TV business, as well as create a new world of home entertainment.

Since my appointment as CEO in 2012, I have worked to strengthen our core businesses and invest in new business, as well as implement structural reforms, such as realigning the electronics business portfolio, reducing cost and optimizing group-wide headcount. This have included painful measures, such as the reduction of global headcount by more than 10,000 last fiscal year. However, in view of these strategic decisions regarding the PC and TV businesses and the increasingly aggressive process of selection and focus being implemented across Sony's electronics business portfolio, we have determined that further reforms to the sale, manufacturing and headquarters/indirect functions that support these businesses are necessary. We aim to realize an overall cost reduction of approximately 20% by fiscal 2015 across our electronic sales company by identifying focused product categories for each specific country and region, rationalizing support functions and proactively implementing outsourcing and other efficiency measures. We will also further streamline Sony Corporation's 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 the TV and PC businesses, as well as Sony's sales, manufacturing and headquarters/indirect function, we are 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. In addition to all the measures that I have outlined today, we will also be accelerating our process of business portfolio realignment and refining our R&D project selection process across the electronics business.

Today, I have primarily discussed 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 electronics businesses and new businesses together with our entertainment and Financial Service businesses. While I have touched on some of these areas today, I plan to discuss our mid-term growth strategy in further detail at our next corporate strategy meeting, which we plan to hold after our full year earnings announcement.

Thank you for your attention.

Unknown Executive

Thank you, Hirai-san. That concludes our review. And now we'd like to turn it over to you and answer any questions which you might have. John, would you please queue up the questions?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Daniel Ernst from Hudson Square Research.

Daniel Ernst - Hudson Square Research, Inc.

Hirai-san, 3 questions, if I might. First, on the Television business, given, as you say, that it's still a center of the entertainment experience in most homes and that's unlikely to change, I think, that -- much like movie theaters, people thought they would go away when big-screen TVs came out. I think people still watch TV on -- in the living room. And so with that in mind and given that you want to keep TVs as part of a centerpiece of Sony, maybe we're thinking about it the wrong way. Maybe we can't get the profits in the actual hardware much like we rarely get the hardware profits on game consoles, but it's a gateway to the rest of Sony. And if you think about it, without the need to become profitable but as a gateway to make profits off of other content and services from Sony, it's a different way to look at the business. What are your thoughts on that? Secondly, on TV, to the extent that you do want to keep TVs as part of the Sony portfolio, given now that you're breaking it out as a subsidiary, doesn't the managing employees at subsidiary almost feel like discontinued ops and they look around in the corner at their friends at VAIO and think they're next to go. How do you motivate a group that almost looks like a lame-duck presidency? And then third, with the exit of the PC business, it places undue -- or the increased focus on the mobile business, and I wanted to know where you think Sony sits in mobile given that there is such competition at the low end of the market and margins are tough there, and there is really only 2 major players at the high end of the market, kind of where you see Sony fitting against the landscape of Mobile.

Kazuo Hirai

Okay. Thanks for the questions. I think I counted perhaps 3 questions, but let me try with just some of the questions you had. And then on the third question with regard to Mobile, I'm going to ask Kato-san to jump in as well. So first of all, on the TV business, I think that one of the things that we have been embarking on, not just with the TV business but certainly in the Mobile business and predominately in the PlayStation business, is an ecosystem where we're not just selling a device, but we're also selling content, as well as related network services. And I think the PlayStation business is the furthest to having that initiative. If you look at the PlayStation Plus and take-up rate of the PlayStation Plus services, especially with regard to the new folks that have come in with PS4, that's creating a new business model really for the PlayStation guys. On the TV side or other electronic devices, as you probably know, we have services like Video Unlimited, PlayMemories Online or Music Unlimited, and we're trying to differentiate the content that's available on those platforms, working through Sony Music or through Sony Pictures so that we have differentiated content, as well as differentiated, perhaps in some cases, time line of delivery. So you get some access to content earlier than other services, et cetera, to try to differentiate that TV experience as well. I also think it's important though to take a step back, especially as we see the 4K business growing quite aggressively, as you probably saw at CES with [indiscernible] entry into that business from a lot of non-Japanese companies. You probably know that we continue to have 60% to 70% market share in Japan for 4K TVs. We're neck and neck with our Korean competitors in the United States on 4K. And also, at the same time, due to the aggressive cost-cutting reductions that we've done, in 2 years, we unfortunately couldn't make it to break even, but the trajectory is definitely on the right path. So I can say that with the combination of continuing the aggressive things that we've been doing in the TV business, combining with some of the unique network services and also -- and I'll touch upon this as well, making sure that we have an agile organization, a wholly owned subsidiary going forward that we will be able to take the business into profitability for next fiscal year and beyond. With regard to your second question, are people going to be looking over the corner to see if the business is still going to be within the Sony organization? And I can tell you for a fact right now that the reason why we decided to take the business and make it into a wholly owned subsidiary is because, well, I wanted to make sure that they were given the right-sized organization with a new management structure. They're able to make management decisions as quickly as possible but still be a part of the One Sony story. Now that seems like asking for a lot, but if you take a step back and look at the way that Sony Mobile Communications, our Xperia business, it's set up as a separate corporate entity. The PlayStation business is set up with a separate corporate entity as Sony Computer Entertainment. And those 2, even though they are separate corporate entities, are very agile, and they are competing very aggressively in a very competitive market. And so I think that the same kind of attitude, if you will, is something that I'm looking for from the new TV business going forward from July. Lastly, as a follow-up with regard to the Mobile business, the important thing for Sony, as we talk about the mobile business, is that we are going to exit the PC business, but we want to double and make sure that we continue to be very aggressive in the smartphone space and in the tablet space. And that's very important to us because as part of the way consumers enjoy content, hopefully our content, between televisions, between our tablets and our smartphones and also making sure that we make services available to each of these devices, it's an integral part of that Sony experience and -- so we want to make sure that they are looked at as front and center, if you will, of our Mobile strategy. Mark, I don't know if you want to just address some numbers that we talked about on the Mobile space?

Masaru Kato

Yes, okay. Now I think some of you might be a little bit concerned that we have lowered our projections in terms of unit sales for this fiscal year from 42 million to 40 million. Now this are, as you had explained, in terms of our geographical expansion. Product-wise, no, we do -- no, the recent efforts, what we have put into our development, Xperia Z, Z1, its successors, its variation, it's all very well expected by the consumers. That is fine, but geographically, we did miss out on some of the markets, mainly China and some parts of Asia and some countries in Europe. So those were the areas that we fell short. Now even so, last year, we did 33 million; this year, 40 million. So we do have high expectations going forward. Our market share is not that big at the moment, well, in the smartphone area, 4%, give or take, in that range. So for it to grow much higher, I think we do have much more headroom going forward.

Operator

Our next question is from Atul Goyal from Jefferies.

Atul Goyal - Jefferies LLC, Research Division

Two questions. Firstly, just to keep it very simple, if you look at company's profits breakdown starting with the insurance business, SFH, this year, it's expected to generate about JPY 180 billion in operating profits, another JPY 20 billion coming from one-offs; just those 2 things together, JPY 200 billion. The rest, everything else put together, is destroying profits, not just this area. But if you aggregate it for last 3 years, 5 years, 10 years, whichever way you look at it, it's consistently been negative despite content, Music and movies both contributing positively. But this year, what is it in simple terms? Yes, there is restructuring, and yes, there is write-offs, but this is very bizarre. Additionally, JPY 30 billion of -- sorry. Net profit as well, you reduced from JPY 30 billion to minus JPY 10 billion. I'm sure there are some positive contributions for Sony Financial Holdings in the net profit level. There are some taxes, but what takes it down to minus JPY 110 billion? That is the first question, and there is another follow-up to do with the return on equity. I mean, your target about electronics business to breakeven, it's been there for like last 5, 6 years. Unfortunately, it has not materialized. Hopefully, it works out in the future. My concern is companies are rewarded when the return on equity is higher than cost of equity. Right now, it's negative. At breakeven, it goes to 0. At 2%, it's still not justifying even one-time spikes to book. When do you see companies generating enough profits from electronics overall, excluding the Sony Financial Holdings, the return -- ROE being higher than cost of equity? So those are the 2 main questions.

[Technical Difficulty]

Unknown Executive

This is Tokyo. We're back. I apologize for the inconvenience. We were momentarily disconnected. If possible, would you like to continue the call with our -- the question from Atul Goyal? So if -- Atul, if you're still connected, would you please be so kind to ask your question again?

Atul Goyal - Jefferies LLC, Research Division

No worries. Again, 2 questions. The first one is fairly simple. If you just look at this year, operating profit from Sony Financial Holdings alone is 100 -- roughly about JPY 180 billion for the full year. Another JPY 20 billion would come from one-off of -- from sale of assets. So that's JPY 200 billion. And yet, the full year is JPY 80 billion, which is -- which means the rest of the business is generating negative JPY 120 billion despite positive contribution from content, both in Music and movies. So what essentially is this? We know there is restructuring charge, and we do know there is write-offs. But isn't this just too large? And similarly, at the net profit level as well, definitely, there is positive contribution coming to -- from Sony Financial Holdings but, then again, at minus JPY 110 billion. Obviously, there are some taxes, but what exactly is happening? If we do the same math for this year, last 2 years, 3 years, 5 years, 10 years, it's the same story. It's only Sony Financial Holdings profit alone would exceed the rest of the Sony Group together. That's the first one. And the second one is more towards return on equity. Sony has been trying to target breakeven in quite a few businesses, unfortunately has not achieved. Hopefully, it works out in the future. But is breakeven the right target? Negative ROE right now, if it goes to 0 -- unless you get at least 6% to 7% ROE. How do investors reward the company for one-time price to book because at least -- you need at least the ROE to be equal to cost of equity to generate that much. So those are the 2 main questions.

Operator

[Operator Instructions] And we have a question from Alex Lee from BNP Partners.

Unknown Executive

One moment please, John. We're still just about -- we're just about to respond. One moment, please.

Operator

[Operator Instructions]

Unknown Executive

We had a little trouble. I'm sorry. We had a little trouble understanding you. Could you just try your question again one more time on the -- probably the next minute or 2?

Atul Goyal - Jefferies LLC, Research Division

Yes, sure.

Unknown Executive

Yes, a little trouble hearing with echo to what you're saying. Just repeat your question.

Atul Goyal - Jefferies LLC, Research Division

So firstly, very simple, Sony Financial Holdings, JPY 180 billion and one-off is JPY 20 billion. So that's JPY 200 billion. How do we get to JPY 80 billion only? Obviously, there's restructuring charge, JPY 70 billion, and there's one-offs, et cetera, et cetera. But this is a meaningful cut, which is not just this year if you look at last 2, 3, 5, 10 years, whichever way. It's always like that. Same thing is happening at net profit levels. So that's the first question. Can you respond to that? Then I will ask the second one, which is return on equity related.

Masaru Kato

Let me answer your question in this way. This is the CFO speaking. Now I'd like to kind sort out the number in a slightly different way than you have defined it. Now the operating forecast, last time, October forecast, we said operating profit is 70 -- JPY 170 billion. Now we're saying it's JPY 78.5 billion, which is roughly your JPY 80 billion. Now the difference here, roughly JPY 90 billion. We -- I cannot give you specifically the numbers in terms of the breakdown of this change, but what comprises is different. Let me explain it this way. Now the fourth quarter -- well, being a little bit better than we had initially anticipated in October time, there are other business groups that we feel we have to account for in making our projections for the full year. That's one element. The second is in the third quarter, we took impairment charges, which were not in the forecast in October. This is about JPY 50 billion. Also, we have announced restructuring measures to improve our profitability going forward. Now we have increased our restructuring charges for the current fiscal year from JPY 50 billion to JPY 70 billion. Now that's another JPY 20 billion of additional charges. And the last is we can't -- I cannot go out in detail is that we had some asset sales in our forecast last time. This time, we have reviewed them and effectively taken out most of them. So those are the components that brings down the JPY 170 billion operating profit forecast that we had last year to the current forecast of roughly JPY 80 billion.

Unknown Executive

Atul, you said you had one more question?

Atul Goyal - Jefferies LLC, Research Division

Yes, the -- I mean, I'll follow up for the first one later separately. Anyway, second one is return on equity related. This is -- the company has tried to target breakeven in certain businesses for the last 5, 6 years. It has not managed that yet, unfortunately. And hopefully, it works. It manages to break even in the future. But is breakeven the right strategic target for these businesses or for any business whatsoever? When investors reward -- or they want to invest in companies where return on equity should be higher than cost of equity. We haven't even reached to 0. It's a long way to get to 6 or 7. What is the long-term strategic plan for the electronics business? Is there idea? Is there plan to generate 6%, 8%, 10% ROE? And if so, how?

Kazuo Hirai

I'm having a bit of a trouble hearing the question, unfortunately. But if I understood your question to be talking about the future of the electronics business, I think that one of the things -- one of the main things that I have embarked upon once I became CEO back about 2 years ago now was really to, first of all, bring focus to the electronics business. And I always talk about the 3 core businesses, Mobile, Games and the network services and digital imaging because I truly believe that those 3 businesses and the businesses that support those 3 core businesses have the potential to grow further and to bring more profitability to the Sony electronics business. And one of the things, for example, is the strategy that we've embarked on the battery business, where, again, that's very additive and helpful to the mobile businesses in both the Games and in the, obviously, the Mobile space as well. The businesses that we do not consider to be core or, unfortunately, we don't see growth potential, we've gotten out of or we've made other arrangements. And unfortunately, we had to make that decision on the PC business. But definitely, I'd like to keep holding ourselves to a higher standard that goes beyond things, "Breakeven is good enough," because, again, I think that we have the potential with our product portfolio to do a lot better than that and then when we combine that with our entertainment and Financial Services that we can bring value back to our shareholders.

Operator

[Operator Instructions] And I have no further questions. I will turn it back over to you, Casey [ph], for any closing -- I'm sorry. We do have one from Damian Thong from Macquarie.

Damian Thong - Macquarie Research

It's Damian Thong with Macquarie. I just have one question. The record results in the Game segment in the December quarter seems like it's above target. Obviously, you've already announced a fairly strong sales of PS4. Could you give us an additional color as to the strength of the profitability in that quarter and where you see profits evolving in the March quarter and the June quarter?

Kazuo Hirai

Basically -- again, I'm a little -- I'm having a little difficulty understanding your question. We're hearing the question. Anyway, I'm sorry. But basically, I think it's with regard to our console sales. And as you probably know, we have had very strong sell-through of the PS4 and we're continuing to chase the market. And the last announcement that we made was that as of December 28, we had sold 4.2 million PS4s. And we actually have the launch of the PS4 coming up in Japan later this month on the 22nd, which will obviously further boost the number. We have always talked about a combined 15 million units between PS4 and PS3 for the fiscal year. And so obviously, PS4 is certainly doing above our expectations. I think as they -- a bit of an impact that we'll gain from that great sales number is the fact that our PS3 numbers are not as robust as we had originally anticipated. So basically, for the fiscal year, we're going to keep the 15 million for the combined number between PS3 and PS4. Obviously, based on some of the great results that we're seeing -- and we obviously see how the Japanese market goes, we're going to, obviously, look to grow the business further next fiscal year, but that's a part of the discussions that we will start to have with the Sony Computer Entertainment team as we start getting into the budgeting process for next fiscal year.

Damian Thong - Macquarie Research

How has PS Plus helped profitability in the third quarter? And where do you see that helping in the fourth quarter?

Masaru Kato

This is the CFO. I cannot give you straightforward numbers here. But just to give you a flavor of what's happening, PlayStation Network has accounts of about 150 million as of this date. Now with the introduction of PS4, that number is growing. And what is very encouraging is that a lot of the gamers, consumers are signing up for our PS Plus services. Now as you know, the PS Plus services is a paid subscription services, a revenue stream we did not have in the past platform. So this is a tremendous boost for us going forward. Now that number for the third quarter, I cannot disclose, but what is important is that with the very good takeoff of the PS4 globally, which is -- we have -- actually really very successful in broadening our revenue stream not just from our target sales, not just from download, sales of our gaming and others, music and video and whatnot. But with paid subscription services and other, what, new types of revenues, this is what is very promising for us. And I think that is what the success of the PS4 is for us going forward. Sorry, I cannot give you numbers, but we are very excited.

Kazuo Hirai

And I'll just add a little bit more color to that by saying that -- I'm going to just add a little more color by saying that all the 4.2 million PS4s that have already moved into the hands of consumers, more than half of the people that have now gotten their hands with the PS4 have actually signed up for PS Plus service, which bodes very well for us as well. And we'll obviously be sharing more details as the months go on.

Damian Thong - Macquarie Research

All right. I just have one last question. You've targeted JPY 100 billion cost reduction with your restructuring program. If you look at your PC business, that is losing 20 -- sorry, the Television business will lose JPY 25 billion this year. And I suppose your PC business will lose perhaps up to JPY 40 billion. So the JPY 100 billion cost reduction would apply, obviously, to parts of Sony outside of PC and TV, but I suspect a large chunk of that will also apply to the Television and the PC businesses as well. Is that correct?

Masaru Kato

Your understanding is correct.

Operator

Our next question is from of Tim Lash from Third Point.

Timothy Lash - Third Point LLC

One quick question on the smartphone business. As you look at your opportunity to grow there, you've talked about your market share that would seem to allow 2 [indiscernible] of upside. But do you have a specific -- do you see specific opportunities to expand distribution over the coming year? And if so, in which geographies offer the richest opportunities in terms of expanding distribution of Xperia devices? And then a second, a follow-up question. You recently reached an agreement to acquire the Renesas fab to expand your image sensor capacity. I'm just trying to -- help us understand expanding the capacity sort of in the context of sort of the weakness in the Devices business in the most recent quarter? Was that specifically due to battery? Or were there also weakness in image sensor? And can you help us understand what gave you confidence in making that investment in the image sensor capacity?

Kazuo Hirai

I'm going to try to address those 2. First of all, in terms of the size of the market then -- and therefore, having the most potential for us really is, first of all, the U.S. market and also the Chinese market. Having said that though -- again, those are very competitive markets, and I think that when you speak to the carriers, they see how strong Xperia products are, but they're also looking for commitments on the marketing side as well. And obviously, those marketing commitments can run into some very high numbers. So I think it will also be realistic by making sure that we're not trying to get into 2 large markets simultaneously in a big way, but also just trying to start out with small steps. As you probably know, we already started with T-Mobile, for example, in the U.S., and we expand -- we look to expand that further. I think there are other opportunities in some of the smaller Southeast Asian countries as well, where we have a very strong brand presence and where some of our competitors do not have the kind of sales and/or marketing strength that they may have in some of the other territories. So I think there is still a lot of opportunities out there for us, but I think it's also important to make sure that we further shore up, for example, the Japanese market, where it is one of the most profitable markets for the Xperia business. So it's making sure that we shore up the markets where we are strong in, look for opportunities in Southeast Asia, as well as, again, a considered entry into the U.S. and into the Chinese market. With regard to the image sensor investment, applying the Renesas manufacturing facilities up in Yamanashi, this is actually one where we believe that the image sensor business is -- sorry, up in Yamagata. The image sensor business, obviously, has a lot more growth potential in the portable space, i.e. in the smartphone business and also, obviously, in the tablet business as well. And I think that the demand for image sensors will continue to grow as the smartphone and tablet business grows as well. And I want to make sure that we are in front of that to take advantage of that growth and turn it into business opportunity for Sony, not our competitors.

Operator

Our next question is from Dan Malcolm [ph] from Viking Global.

Unknown Analyst

Just a quick question on the restructuring. Is there -- what's the cash portion of the restructuring charges that you guys announced today? And then on the PC business, the 250 to 300 employees that are transferring out of Sony, what was the total headcount in PC? And what happens to the rest of those employees today? Are they part of the headcount reduction that you've announced over the next couple of years?

Masaru Kato

This is the CFO. I'll get the first question. Now on the additional JPY 20 billion, additional restructuring charges, JPY 8.2 billion is the impairment charges that we took in the PC business. So this is not noncash. It's no additional cash outlay. The rest is headcount related. So eventually, this will translate into cash outlay. And also, the second portion of your question -- go ahead.

Unknown Analyst

So I just -- just to be clear, so the JPY 20 billion this year and the further JPY 70 billion in restructuring expenses, that's where -- that will be roughly equivalent -- there will be a cash charge roughly equivalent to the JPY 70 billion. Is that the way to think about it?

Masaru Kato

Yes. Your understating is correct because majority of the restructuring charge is going forward next fiscal year is headcount related.

Kazuo Hirai

And let me address the second part of your question. Right now, we need to, obviously, have further discussions with the folks over at JIP. But as we announced today, our expectation is that about 250 to about 300 employees that are currently predominantly involved in the VAIO business will be moving over to the new company. Roughly, in Japan, we have about 1,100 employees that are involved with the VAIO business, excluding sales and marketing. And so some of these folks will be given opportunities to find other positions within the Sony Group of Companies. And others, if they can't make the transition, we will make sure that we help them in finding employment with other companies. So we will try to, obviously, move as many employees as possible to a new company and ensure that we take care of the folks that are not moving over by offering positions and/or helping those who need help outsourcing those resources.

Operator

As we're running out of time, I would like to turn the call back over to Casey [ph] for any closing remarks.

Unknown Executive

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

Operator

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

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Source: Sony Management Discusses Q3 2013 Results - Earnings Call Transcript
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