Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Sony (NYSE:SNE)

Q1 2015 Earnings Call

July 31, 2014 9:00 am ET

Executives

Casey Kuester -

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

Steven E. Kober - Chief Financial Officer and Executive Vice President

Hiroki Totoki - Senior Vice President of Business Strategy, Corporate Development & Transformation and Corporate Executive Officer

Analysts

Daniel Ernst - Hudson Square Research, Inc.

Richard Kramer - Arete Research Services LLP

Kota Ezawa - Citigroup Inc, Research Division

Eric Smith

Lawrence J. Haverty - Gabelli Multimedia Trust Inc.

Richard Doherty

Operator

Welcome to the Sony Corporation conference call for overseas investors for the first quarter ended June 30, 2014. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Casey Kuester. Mr. Kuester, you may begin.

Casey Kuester

Thank you very much for that introduction, John. And thank you all for joining us today, July 31, 2014, for a discussion of Sony's results for the first quarter ended June 30, 2014. We hope you have all enjoyed Jack White's hit album, Lazaretto, while you were on hold.

I am Casey Kuester in the Investor Relations Department here in Tokyo. And with me on the conference call tonight is Kenichiro Yoshida, CFO of Sony Corporation; Hiroki Totoki, Senior Vice President; Kazuhiko Takeda, Vice President and Senior General Manager of Sony's Corporate Control Department; and Steven Kober, Executive Vice President and Chief Financial Officer, Sony Corporation of America. Thank you all very much for joining us.

In just a few moments, we will review today's announcement, and then we'll be available to answer your questions.

Please be aware that statements made during the following remarks and Q&A session with respect to Sony's current plans, estimates, strategies, press release and other statements that are not historical facts are forward-looking statements about the future performance of Sony. These statements are based on management's assumptions in light of the information currently available to it, and therefore, you should not place undue reliance on them.

Sony cautions you that a number of important factors could cause actual results to differ materially from those discussed in the forward-looking statements. For additional information as to risks and uncertainties, as well as other factors that could cause actual results to differ, please refer to today's press release, which can be accessed by visiting 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.

Before turning to Yoshida-san for some remarks, please allow me to briefly give you an overview of our results for the quarter and our forecast for the fiscal year.

Consolidated sales, operating income and net income were all up year-on-year. Sales increased 5.8% to JPY 1,809,900,000,000. Operating income increased 96.7% to JPY 69.8 billion. And net income was 8.6x that of the same quarter of the previous fiscal year at JPY 26.8 billion.

Most of our business segments demonstrated an improvement in operating results, with the Game & Network Services segment exhibiting the biggest improvement.

The forecast for the current fiscal year that we announced in May for consolidated sales, operating income and net loss remains unchanged. Although we have revised our operating income forecast for the Mobile Communications segment down to breakeven, we have upwardly revised our operating income forecast for the Devices and the Game & Network Services segments.

The Mobile Communications segment recorded a JPY 2.7 billion loss in the quarter, primarily because an increase in marketing and R&D expenses did not yield the expected increase in unit sales, primarily in our midrange. For the full year, we have lowered our forecast from 50 million units to 43 million units. However, going forward, we are going to continue to pursue cost reductions in order to offset the impact of this revision as much as possible.

The Game & Network Services segment posted nearly double the sales of the same quarter of the previous fiscal year, and operating results improved JPY 20.7 billion. In the Network Services area, more than half of the people who have bought a PS4 have subscribed to PlayStation Plus, our fee-based network service, and we see this trend continuing. We have upwardly revised the full year operating income forecast for this segment by JPY 5 billion due to the strong sales of PS4 and PS4 hardware cost reductions.

In the Imaging Products & Solutions segment, although sales for the quarter decreased, operating income increased year-on-year, mainly due to reductions in SG&A. We revised downward the full year forecast for sales by JPY 10 billion, but operating income is expected to remain unchanged from our May forecast.

In the Home Entertainment & Sound segment, the TV business recorded a profit for the quarter. Sales of that business were JPY 205.0 billion, and operating income was JPY 7.9 billion. Although we have revised our unit sales forecast for TVs downward to 15.5 million units, we believe we can offset this impact through cost reductions.

We have revised the operating income forecast for the Devices segment upward, as demand for image sensors and smartphones, including from Chinese manufacturers, has increased from the second quarter.

We have made no change to our forecast for the Pictures segment. We are continuing to invest in the Media Networks business within this segment, most recently by announcing the acquisition of CSC Media Group in the U.K. CSC is a cable and satellite TV channel company with a diverse set of entertainment channels.

We have also made no change to our forecast for the Music segment. Although physical media sales in Recorded Music continued to shrink, we saw an increase in Music Publishing and Visual Media and Platform sales during the quarter.

Lastly, we made no change to the forecast for the Financial Services segment. We continue to see steady expansion of policy amount in force at Sony Life.

With that, let me turn things over to Yoshida-san for a brief statement before we get into Q&A.

Kenichiro Yoshida

Thank you, Casey. I wanted to take a few minutes to touch on 4 key points and make an announcement before we turn to Q&A.

First, although all of the consolidated metrics, sales, operating income and net income, for the first quarter increased year-on-year, we continue to be cautious about the outlook for the fiscal year.

If you subtract the operating income of the Pictures, Music and Financial Service segments from consolidated operating income, as well as a gain we recorded from the sale of real estate this quarter, we actually generated a consolidated operating loss. This is due to Electronics and corporate expenses. We continued to have a strong sense of urgency regarding the turnaround of Electronics, and we plan to aggressively implement our restructuring plan.

Headquarters and sales company restructuring is being in earnest, and the bulk of expenses will be incurred in the fourth quarter. There is no change to our forecast for JPY 135 billion in cost for restructuring and as a business transformation initiative.

As Casey explained -- second, as Casey explained, we have revised downward our full year forecast for Mobile Communications. Based on the current quarter's financial performance and the downward revision in the full year forecast, we have began our review of the midrange trough for this business in July. It is possible that this review might result in important impairment charges against goodwill and fixed assets.

Going forward, we will deploy country-specific strategies, maintain strong relationships with carriers and strengthen our position as a premium brand, all in an effort to build a profitable business model. We have already began to review our product lineup and the number of models in our portfolio. We will also prioritize profitability over scale so as to reduce the risk associated with this business.

Third, while we are happy that we recorded a profit in the TV business in the first quarter, we also recorded a profit in the first quarter of last fiscal year and then ended the year with a loss. So we continue to closely monitor this business. Chasing scale is not a priority for us, and I have requested the new TV company's management to avoid delaying on strategic goals. We will work, improve our profitability by adapting to the environment of each market in which we do business.

Fourth, I am happy to report that during the quarter, we paid off some bonds and a syndicated loan, reducing our debt level by JPY 230 billion compared with the end of March. We will continue to strengthen our financial structure going forward.

In conclusion, please let me inform you that we are planning to hold an Electronics Investor Day in Tokyo in late November. Thank you for your attention. Back to Casey.

Casey Kuester

Thank you, Yoshida-san. I am now going to turn things back over to John so we can start up the Q&A session. Thank you again for your attention. John, would you please queue up the questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Daniel Ernst from Hudson Square.

Daniel Ernst - Hudson Square Research, Inc.

I have 3, if I might. First, on the Mobile segment, you discussed the review of the midrange products and potentially taking some impairments in that category. I'm wondering, just thinking out of it, given that everyone is having problems with the mid- and low-end phone and profits, including Samsung, is there an opportunity for Sony to do what you've done with the TV business and just move to the high end of the business, as in not going for scale but in going for a higher-profit, lower-volume segment? Two, regarding the profits in the Game division. I know for the full year, the forecast factored investments in upgrading the PlayStation Network as well as investments in content for the services you provide there. I wonder if you could give us an update on where we are on those costs and upgrades of the PlayStation Network. And then third, on the Pictures segment. Speaking to the recent announcement that's the next Amazing Spider-Man, I guess, 3, is moving from 2016 to 2018, I'm wondering if you could give us some color on why that move is being made, but also if you could talk about what that means for the Pictures slate and the number of tent poles that you have to support the group beyond Spider-Man and James Bond.

Kenichiro Yoshida

Thank you very much for the questions. Let me answer the questions. First question, about the Mobile. Your question was the -- if you have the -- having problems in low end. And you're right, we have the problem in low-end and midrange products in the first quarter. Originally, Sony -- the Xperia smartphone is the high end or flagship product. And actually, this is the year [ph] we started to expand our product range to the middle end. After -- during the course of reviewing the current midterm problem [ph], probably, we should reevaluate the product line strategy. Maybe you should more focus on the high-end side. That is my answer for the first question. And second question, about the Game business. Yes, our forecast included the investment in Networks. As you know -- as you may know, currently, almost 52 million unit users a month. So -- and as you know -- again, as you may know, PS4 has a so-called social function, which doubles or triples total traffics and sessions. So that requires the Network investment as there are further investments to handle those kinds of tremendous sessions and the traffics. And as for the progress of the investment, we have been investing, so -- and -- but we are forecasting quite significant increase in the latter half of the year, during the year-end season in November and December. So actually, investment in the Network side will be increased in the latter half of this fiscal year. And question number three, Spider-Man is -- I'm going to ask -- you answer the question.

Steven E. Kober

Sure. The question was, with Spider-Man moving from 2016 to 2018, what does that mean and what other tent poles do we have? Spider-Man, Amazing Spider-Man 3, took in over $706 million, which we're very pleased with. It was down a little bit from the last film, so we've decided to delay the next one, but instead, we're going to make Sinister Six, which is a spinoff from the Spider-Man series. So we've announced that for 2016, and we'll look forward to that film taking its place for the time being. We also have other franchises that we've been very successful with, such as the Jump Street series. 22 Jump Street just had a terrific quarter. The Men in Black series performs well for us, and there are other franchises in the making. Thank you.

Daniel Ernst - Hudson Square Research, Inc.

If I could just follow up on the PlayStation investment question. You mentioned that there'll be a significant uptick in that spending in the second half, but shouldn't Network investments precede when you expect the traffic to pick up with the holidays?

Kenichiro Yoshida

Yes. We should prepare for the increased traffic, so definitely before the holiday season.

Operator

Our next question comes from Richard Kramer from Arete Research.

Richard Kramer - Arete Research Services LLP

Three brief questions, if I may. On Mobile, the review you mentioned, does it go as deep as questioning whether Mobile should remain one of the 3 key focus areas for Electronics, alongside Game and Imaging? Second question, in Game, can you tell us the rough split or the precise split between PS3 and PS4 shipments so that we can understand how the new platform is performing? And third, just on the cash flow and balance sheet position for the Sony business, excluding Financial Services, it looks like there was some cash outflow there. And I'm just wondering, with restructuring charges coming over the course of the year, will Sony core business, excluding Financial Services, generate or consume cash in fiscal year 2014?

Kenichiro Yoshida

Thank you very much for the question. Okay. Yes, currently, Mobile business, one was [ph]-- 3 key business periods in the Electronics business. And currently, yes, that is absolutely the core business of Electronics. One reason is smartphone absorbed many functions of Sony's product lineup, [indiscernible] and Walkmans and some part of Games. So we have to phase the deal with this smartphone business anyway. However, of course, the vision of the company, which President Hirai-san provide us, which is kando, you've experienced, we've not changed, but what is the core business in Electronics business is a kind of a strategy issue. And strategy may change in accordance with the change in business environment. So in the future, we may change this current strategy or the definition of core business. If that will occur, the timing will be the next corporate strategy meeting scheduled in May next year. Thank you very much. And as for the second question, we can't provide the breakdown of our PS3 and PS4, sorry. And as for the third question, Totoki-san will answer the question.

Hiroki Totoki

All right. About the cash flow, excluding Financial Services sector, fiscal year '14, we estimate breakeven cash flow, and even including disruption in charges. Thank you.

Operator

Our next question comes from Kota Ezawa from Citigroup.

Kota Ezawa - Citigroup Inc, Research Division

Two quick questions for Yoshida-san, and one is the question regarding the handset future profit. You mentioned the potential write-off, the asset in mobile handset. I'm curious, what's sort of the business trend in your mind for the future Sony Mobile? I know it's too early to ask this question, but it just -- I'd like to share your brief mind [ph]. Now given that the goodwill write-off you mentioned is now possible on the Sony Mobile, that means the Sony Mobile will not be able to recoup cash or profit in the future once you lose this year with the restructuring -- possible restructuring. Is this correct to assume you're now thinking you will have a larger scale downward, the revision in handset business segment run by write-off, and that will remain lower cash flow, a lower profit situation next year and then after? That's question number one.

Casey Kuester

Go ahead and ask your questions all at once, if you would be so kind.

Kota Ezawa - Citigroup Inc, Research Division

Okay. My second question is about the -- the CFO mentioned about IR Day. Now what is the principle purpose for this IR Day you are planning to do, and what are you expecting for this event? Will that be more like we can discuss about the business strategy in division management?

Kenichiro Yoshida

Thank you very much for the question. As for the Mobile, as I explained, we just started review of the midterm plan, so it's too early to tell about the possibility of the scale of write-off. We can't tell it happen or not, and so we can't predict or mention any numbers at this moment. And as for the second question, IR Day, the main purpose is to push the business group, to push accountability to each business group, and to enhance accountability is good for this company. And each session has 1 hour or 50 minutes, and we're going to have enough Q&A timeframe and so you can have a good communication with each business segment management. Thank you.

Kota Ezawa - Citigroup Inc, Research Division

Okay. Quickly, a follow-up on the first question. The fact that you had quoted in the presentation that might be your -- the asset write-off in your Mobile handset business. And if that's the case, this means then you're not going to make profit or cash flow with the business for -- at a certain time in the future. And is that -- does that stand on those principles? In case [indiscernible]...

Steven E. Kober

This is Steve Kober. Let me just answer that from an accounting perspective. When you do an impairment review with a complicated calculation, looking at all future cash flows, residual values and then its present value back to the date of the testing, that does not mean we will not make any profit or cash flow in the future. An impairment is just an impairment of the carrying value of the goodwill, but that takes into account certain growth rates, residual values, discount rates, tax rates. So if, in fact, they determine an impairment is necessary, that will not signify that there will not be any future profits or cash flow.

Operator

[Operator Instructions] Our next question comes from Eric Smith from Strategy Analytics.

Eric Smith

My first question would be -- well, one of your competitors has plans in place for the Chinese console business following the lifting of the ban there. Are you able to provide any color on your plans for the Chinese market for PlayStation? And second, about the TV business. You've pivoted to the high-end market recently. So to what extent could you say that ultra high-definition TVs are a priority compared to regular high-end HDTVs?

Kenichiro Yoshida

Well, I recognize that we -- one of our competitors has run the game business in China and -- but we also recently made a joint venture with a Chinese partner and called -- a Chinese partner, and we are going to release a game business in China. As for the actual sales timing, we haven't decided yet, but we already established a joint venture with a Chinese partner. And the second question, yes, we intend to enhance our TV ASPs. In that sense, we are -- more priority -- has more priority in ultra HD, so for [Japanese] -- 4K TVs compared to 2K TVs.

Eric Smith

Great. If I could follow up on the first question, are you at least able to say whether or not 2015 is in the works for a Chinese market entrance?

Kenichiro Yoshida

We haven't announced that launch schedule yet.

Operator

Our next question comes from Larry Haverty from GAMCO.

Lawrence J. Haverty - Gabelli Multimedia Trust Inc.

In the Game division, a couple of questions. One, could you perhaps share with us the order of magnitude of the investment in the servers? And then second, would it be possible to break out the revenue of Network Services? You get companies like EA in the business, the stocks have responded very positively to them breaking out their digital revenues, which has a very, very high incremental margin and is tended to be valued very heavily by investors.

Kenichiro Yoshida

Well, as for the first question about the investment in Network, that is quite -- has a magnitude. But at the same time, the magnitude is almost the same level as the payment fee level. As you know, on the Network side, we have to incur the payment costs, such as the actual bid [ph] cash, as there are the Mobile from payment. That kind of a payment fee is almost equivalent to the total network cost. It's my first answer. And as for the second question, as for the Network revenue, we are -- currently, we are making 1.5x revenue compared with the same period of last fiscal -- last year, same period of last year, [indiscernible] rate range.

Operator

[Operator Instructions] We do have a question from Richard Doherty from Envisioneering.

Richard Doherty

It seems that Sony seems to have a unique position in high-resolution audio, both through network distribution and your catalogs. And I wonder if you could expand a little bit on your ambitions for this category, for it being a success for Sony now and in the future.

Kenichiro Yoshida

Yes. We have a very high expectation for the so-called high-resolution audio. Last year, we launched the high-resolution-ready Walkman, which could store [ph] approximately 700 data [ph], approximately, and that sells tremendously well, and we are currently gradually expanding our lineup of the high-reso products. Thank you very much.

Operator

Our next question comes from Dan McCohen [ph] from Viking Global.

Unknown Analyst

Just a question on the Mobile Communications division. Two questions. The first is just in terms of the amount of goodwill or intangibles that -- on the balance sheet that would have to -- that could potentially be written down, I guess. How much is assigned to the Mobile Communications division out of the JPY 683 billion that you've got in goodwill and the JPY 654 billion in intangibles on the balance sheet in total? And then the second question is, when you look at the Mobile Communications business overall now, if you think about the strategy and not having as much success kind of moving downmarket, what do you think the strategy looks like now going forward for Mobile Communications? And that is, what markets do you think you play in? Where do you take market share? And then how do you grow units over time in terms of high end, low end and midrange, North America, Europe, Asia, China, et cetera?

Kenichiro Yoshida

Well, what I can tell you about the first question is the amount of the goodwill in Mobile -- allocated to Mobile Communication business segment is JPY 175 billion -- JPY 176 billion. That is the amount allocated in Mobile Communications. And yes, as for the strategy of the Mobile, we tried to reduce a portion of middle-range product line, and as well as we tried to concentrate on the profitable countries and telecom carriers, such as we do in Japan. Thank you.

Unknown Analyst

Understood. And so just a follow-up to that then. Do you -- I know your plans before had been to expand into the U.S. market. Do you still plan -- but -- and I know that part of the debate on that, obviously, was the cost of expanding into the U.S. market, where marketing spend, comarketing dollars for the carriers tend to be higher than in some of the other markets. Is the plan still to try to expand into the U.S. market? Or is the new strategy to forego markets like the U.S. and just focus on markets like Japan?

Kenichiro Yoshida

We do still have a plan to expand into the U.S. market, and that's kind of an incremental way. And we are currently are feeding our ability to collaborate with our other division, such as the Game division. And currently, U.S. telecom carriers want to enhance their data ARPU. So what we are trying to provide is streaming music as well as the streaming game functions, combined with the Xperia smartphones. In such a way, we try to persuade or approach the telecom carriers in the United States. So my answer is, yes, we still have plans to expand. Thank you.

Operator

We have no further questions at this time. I'd like to hand the call back over to Casey Kuester for closing remarks.

Casey Kuester

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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sony (SNE) Q1 2015 Results - Earnings Call Transcript
This Transcript
All Transcripts