Sony Corporation (NYSE:SNE)
F3Q11 Earnings Conference Call
February 2, 2012 3:30 AM ET
Masaru Kato – EVP and CFO
Howard Stringer – Chairman, CEO and President
Kazuo Hirai – Executive Deputy President and Officer in charge of the Consumer Products and Services Businesses
Hideki Yasuda – Economic Institute
Yasuo Nakane – Deutsche Securities
Eiichi Katayama – Merrill Lynch
Nico Yura – CNBC
Yuji Fujimori – Barclays Capital
Masahiko Ishino – Mitsubishi UFJ Morgan Stanley
Kota Ezawa – Citigroup Securities
Good evening, ladies and gentlemen, we should like to start the earnings announcement of Sony Corp., as well as the management meeting in conjunction with the new management structure announced yesterday.
So there are two parts to this session. The initial 40 minutes, we will cover the third quarter results as well as the full-year forecast, and the Q&A. And then the latter 40 minutes, the top management press conference and the session will be over at 7:10 p.m. Simultaneous interpretation services are provided, Channel one for Japanese and Channel 2 for English.
Now first, about the earnings announcement, I’d like to introduce the members on the stage. On the right-hand side, the EVP and Corporate Executive Officer, CFO, Masaru Kato; and next to him, EVP in charge IR, Yoshinori Hashitani.
Now Mr. Kato, please.
Thank you. But first, a summary of the consolidated results for the quarter. Sales decreased significantly year-on-year due to the impact of floods in Thailand, deterioration in the market environment in developed countries, and even greater relative impact of exchange rates. The floods in Thailand were one of the major factors behind the significant decrease in sales and deterioration in operating results for the quarter.
Several of our manufacturing facilities incurred direct damage, resulting in a halt in production, and the delayed launch of certain products. Moreover, the supply chain across the entire industry was impacted, and the demand decreased as companies we do business with were affected. The decrease in sales and significant deterioration in equity in net income of affiliated companies caused us to record an operating loss for the quarter.
The deterioration in equity in net income of affiliated companies was primarily due to an impairment loss on our shares in S-LCD which we transferred to Samsung to improve the cable business profitability and the recording of the – a valuation allowance on the deferred tax asset at Sony Ericsson.
Excluding extraordinary items, operating results in nearly every segment include compared with the November forecast, excluding equity in net income of our three companies and restructuring charges in LCD television asset impairment, operating income on an adjustment basis was ¥23.7 billion profit.
Now, let me explain income statement. Consolidated sales decreased 17% year-on-year. On a local currency basis, sales have decreased 12%. On a segment basis, sales of CPS and PDS segments decrease significantly. Consolidated operating results deteriorated ¥229.2 billion year-on-year to an operating loss of ¥91.7 billion. Equity net loss of affiliated companies recorded in operating income was ¥108.8 billion compared to a profit of ¥2.6 billion in the same quarter last year.
As I explained at the outset, contained within this loss was ¥63.4 billion impairment loss on our shares in S-LCD and the evaluation lower is on the DDA at Sony Ericsson, ¥33 billion.
The net effect of other income and expenses was expensed of ¥14.2 billion compared to expense of ¥6 billion in the same quarter of previous fiscal year. Gross before income tax was ¥105.9 billion compared to a profit of ¥131.5 billion in the same quarter of previous year.
During the current quarter, we recorded ¥28.9 billion of income tax expense. It is recorded despite a net loss before income tax due to Sony not recognizing the tax benefit associated with losses at Sony Corporation and its national tax filing will be in Japan with a valid allowance against a certain different assets and equity in net loss of affiliated companies, so as recorded, net over income taxes and income tax expenses recorded as the result of profit from overseas and in the Financial Services segment.
Reduction or the net loss applicable to Sony Corporation’s third quarter was ¥159 billion compared to net income of ¥72.3 billion in the same quarter previous year. Concerning the segment, result as we will explain?
First, I’ll explain the result of Consumer Products and Services segment, service and operating profit.
CPS segment sales decreased 25% due to the impact of the flooding in Thailand. Nearly every product category in the CPS segment was impacted by the floods. On a product category basis, if you look at the decrease in sales of LCD television, it was a major factor drop due to the price decline resulting from deterioration in market conditions in Japan, Europe and the North America. Operating loss was ¥85.7 billion compared to operating income of ¥63.5 billion in last year. This decrease was driven by deterioration in equity in net income of operating companies and a decreasing gross profit from losses, deterioration in cost of sales ratio even though this SG&A was improved.
Primary factors affecting are as follows. The excluding restructuring charges and impairment losses, the product category affected the LCD TV and the Game business. Sales in the TV business decreased 42% to ¥237 billion. This was due to a shifting of this unit sales expansion to profitability, price declines resulting from deterioration of operating environment and the impact of the flood. During the quarter, LCD TV unit sales decreased 24% to 6 million units.
Excluding restructuring charges and impairment losses, an operating loss of ¥33.5 billion was recorded. During the quarter, we recorded ¥65.5 billion impairment losses including a ¥53.4 billion of shares in LCD. Operating loss including all of these processes was ¥101 billion.
Operating loss excluding the impairment losses was better than our November forecast. And we believe we are making steady progress toward a steadily profitable structure. Digital Imaging business this category was also significantly impacted by the flood in Thailand because Thai flood and contraction of the market in Europe and the U.S. because unit sales of video camera decreased but because of cost improvement therefore as we continue to maintain high profit margin.
Now Game business, sales and operating income decreased year-on-year for the Game business. Although we achieved sales that were basically to our expectation for PlayStation retail which went on sale last year, Game business sales decreased due to the strategic price reduction of the PS3 hardware and decrease in unit sales of PS3 hardware.
Despite an increase in market expenses for network services and impact of the price change of PS3 hardware, we maintain consistent profitability. PS3 hardware unit sales were ¥6.5 million, tying the March 2010 fiscal year for the highest Q3 sales.
Professional Device & Solutions segment sales decreased 21%. This was mainly due to the decrease in sales of components and semiconductors which both suffered from a tie slot. And an operating loss of ¥14.8 billion was recorded in the quarter compared to the operating income of ¥9 billion last year. This was primarily due to the deterioration in the cost of sales ratio and decrease in gross profit resulting from lower sales.
Excluding restructuring charges, the product category that contributed most to the deterioration in operating results was semiconductors, which experienced a decreased in sales from the Thai flood and which had an increasing depreciation expense resulting from our proactive capital expenditures.
Now, actually we are trying to change our venue of production to make up for the capacity that was affected by the flood in Thailand and we are planning to start shipping image sensors and we aggressively developed technology like stacked CMOS. The total inventory for the CPS and PDS segments as of the end of December 2011 decreased 10.4% year-on-year to ¥571.8 million.
Next is the Pictures segment, sales increased 8% and operating income of ¥4.7 billion was recorded, a decrease of ¥4 billion year-on-year. Sales increased primarily due to the increase in theatrical revenue, reflecting year-on-year increase in a number of films released, and higher television revenues from U.S. network programs. Operating income decreased significantly, this was mainly due to an increase in marketing costs in support of the greater number of theatrical releases in the quarter.
Sales in the Music segment decreased 12%, and operating income decreased ¥4.2 billion year-on-year to ¥15.3 billion. Sales decreased primarily due to fewer new significant releases in the current quarter compared with the same quarter of the previous fiscal year, and the appreciation of the yen. Operating income decreased due to the lower sales, partially offset by lower marketing expenses.
Next is a Financial Services segment. Financial Services revenue increased 5%, and operating income was basically flat. Revenue increased primarily due to the increase in insurance premium revenue reflecting a higher policy among defaults, and an increase in net gain on sales of securities in the general account. Financial Services operating income was unchanged, as situation in operating results of Sony Bank, reflecting a foreign exchange loss of foreign currency denominated customer deposits compared to a gain in the same quarter of the previous fiscal year was offset by the increase in operating income of Sony Bank.
Sales at equity affiliates Sony Ericsson decreased 16% year-on-year, although sales of smartphones increased, sales of feature phones decreased. Profitability deteriorated due to changes in the product and geographic mix, intense smartphone price competition and restructuring charges. Sony reflected ¥33 billion or 50% of the valuation allowance Sony Ericsson recorded during the quarter under the U.S. GAAP in equity, in net loss of affiliated companies. As a result, Sony recorded equity in net loss from Sony Ericsson of ¥43.1 billion compared to equity in net income of ¥0.4 billion in the same quarter of the previous fiscal year. This ends the segment results.
Next, I’d like to explain our forecast revision for the fiscal year. Assumed foreign currency and exchange rates for the remainder of the fiscal are approximately ¥77 to the dollar and approximately ¥100 to the euro. Consolidated sales for the fiscal year ending March 31, 2012 are expected to be ¥100 billion below our November forecast. This change is primarily due to deterioration in the operating environment in developed countries.
Consolidated operating loss is expected to be ¥95 billion compared to ¥20 billion in operating income announced in November. The primary reasons for this downward region are the ¥63.4 billion impairment loss resulting from the sale of our shares in S-LCD, approximately ¥45 billion revision in expected impact from the Thai flood and approximately ¥20 billion in annuity impact from exchange rates. These factored figure total approximately ¥130 billion. You will find the factors leading to the revision of each segment on page 11 of the earnings release.
To touch on Sony Ericsson just a little bit more, due to the recording of a valuation allowance on certain deferred tax by the JV during the quarter, we recorded ¥33 billion equity in net loss of affiliates. This loss was not included in the November forecast. However, this loss will be offset by the increase compared to the November forecast of the non-cash gain we expect to report as a result of the full consolidation of Sony Ericsson scheduled for February. As a result, there will be no impact on our forecast for consolidated operating results.
Our forecast for income before income taxes and all other tier items have been revised in respect to change in operating income. I hope you will refer to the earnings release for details.
So the three quarters have passed. As I reflect back from the beginning of the year, in March there was a disaster, an earthquake, and in November there was a flooding in Thailand. And also, we continue to step up from a very strong yen.
So those three factors have adversely affected performance as indicated by the numbers that I have cited. Of course, as a management, we have to tide over those difficulties and surmount those challenges to different regions.
And I think we have some advances, improvements. For Strategic business, I think in November as Mr. Hirai has stated in front of you, we are implementing our measures steadily. The dissolution of S-LCD JV is one of the measures. We may have to record our one-time impaired loss, but I think for the future it is a positive step forward.
Indeed, during the first quarter we will be feeling the positive consequences of that decision. The reduced cost of the purchase of the panels, and also we will no longer suffer from the underutilization of facilities under the new arrangement with other partners. We will not suffer from such surplus capacity.
So throughout the year, in November, we announced that the figure for TV will be 175 billion, but we believe that we would improve by approximately ¥10 billion. This is separate from the impairment of the S-LCD, but a comparison to the number that have announced earlier.
And also, we are revisiting the business portfolio for small and medium-sized display, under the framework of Japan Display, we will be working on those panels in the form of joint ventureship or partnership,
Sony Ericsson Mobile space is an important space for us, therefore, we have decided to consolidate fully the Sony Ericsson Mobile business, so I think we made a good start.
And in the third quarter, we launched the PlayStation Vita. It’s an entirely new platform, and I believe that it will be a driver of Sony’s Game business in the coming months and years. The product is only available in Japan and few Asian countries. But in February, the product will be launched in other Western countries. For once, the business environment is quite harsh. We will conduct a rigorous effort to improve our profitability. Thank you very much.
Now I would like to entertain questions. Please raise your hand and if you receive a microphone, please identify yourself by name and affiliation. Since we have so many people, I would like to limit the one question to one person.
Hideki Yasuda – Economic Institute
Thank you very much for your present. I’m Yasuda from an Economic Institute. I’ve been involved in game but there is no – I think Vita’s unit volume is not included in the presentation. And I have an impression that it is not that selling very well, but I would like you to touch upon the sales volume of – and shipment volume of Vita?
Now the company has not publicly announced the shipping unit – unit of shipping and sales, at the appropriate time, we would do so. But as far as the sell-through, three weeks have passed and sell-through is 500,000. This was announced on the 10th of January. So as a start, I think we had a very – a good start.
Hideki Yasuda – Economic Institute
So no current, you’re not thinking any current problems in February? Things are going smoothly in February?
Yes. Including software and hardware, we are carrying out the sales promotions and we do it to boost the sales, and we do not think we have any problems.
Hideki Yasuda – Economic Institute
(Inaudible) from Morgan Stanley. Since you said only one question is permissible, my question is on TV. The actual results for the third quarter, the unit volume and profitability. How does it compare vis-à-vis your budget or assumptions? I think overall you have reduced inventory. What is the current situation of the inventory level of TVs? Of course, overall there has been a reduced inventory level, but what about the TVs?
The third quarter TV shipment, 6 million approximately. Earlier, we stated that we will not pursue the volume number, but we’ll put more emphasis on profitability. And I think based on that and vis-à-vis our plan, I think we’re proceeding as scheduled, as planned.
Now, I said we took the impairment of the S-LCD. Net of that impairment, I think the earnings or the profitability have improved more than we had hoped for. So I think we can give you this positive factor. Inventories, I think overall we have managed the inventory well. So I do not recognize any problem in terms of the inventory of TVs or other products as well. Even before the start of the Christmas season, we have managed the supply chain both with production and sales. Well, so I think we have managed pretty well the inventory level, so we do not have any pending or immediate problems vis-à-vis in this entry going forward.
Miso securities (inaudible). The impact of the flood in Thailand and how you look at that ¥25 billion was increased to ¥70 billion and there’s a cut-off area of evaluation. So thinking of the next fiscal year, a ¥45 billion further impact might be recorded next year or the reality has been changed?
This is a complicated issue, so that we give explanation once again. Because of the flood, there was a real damage, physical damage or opportunity of cost and we had the rather generous quality issues fortunately – insurance policies. And I mentioned, minus income receivables, insurance receivables we said the net is ¥25 billion but this was changed. First of all, the government itself or the impact of the floods increased and expanded when I was here on the 2nd of December. And compared to that, there is more damage felt.
And the timing of payment of insurance we have to have solid data to negotiate with insurance and we were expecting at the time of November that most of the insurance payout will be made in this fiscal year but the lion shares might be paid out in the next fiscal year. So there is an increase net to negative impact on this fiscal year’s profit and loss, but from April onwards, there will be, we can receive more insurance payout in the next fiscal year, so it’s going to be a positive factor.
Yasuo Nakane – Deutsche Securities
Nakano from Deutsche Securities. Next fiscal year, yen, dollar, euro foreign exchange impact, what changes do you expect? To what degree with the foreign exchange change and also what about the currencies of the emerging markets, what is your view about those currency levels next year?
Foreign exchange, of course. Since we are in the midst of putting together the budget, so we can only talk about our – based on the current foreign exchange. This fiscal year for dollar, the exposure has been balanced, so there’s very little, if any impact on income statement or P&L, that remains unchanged. For euro, one yen of move would affect 6 billion of operating income and that formula remains unchanged.
Next year, this structure will not be changed significantly for dollar. Our manufacturing, we have moved (inaudible) we can move to offshore, of course, there are some remaining tasks, but I think structurally, there will not be any major change. On euro, it’ll be an impact of ¥6 billion but we will take different actions hopefully but the options are limited in other words. As I have explained, the TV business is already worked so it’s very difficult to reduce cost in euro terms. So again, one year move will translate to ¥6 billion of impact. We may be able to reduce it somewhat but we can expect a major change.
Emerging market or emerging country currencies, since September there has been a real impact. We usually talk about dollars and euros but, of course, we are a global company having global presence. So since September, the depreciation of the emerging country currencies have accounted for a large percent of the foreign exchange, gains and losses – or losses rather.
So, next year we would be mindful of that. We try to be conservative as we put together the budget and as we determine the assumptions so we would give due regard to the current level of the currencies as we put together our budget.
Eiichi Katayama – Merrill Lynch
Katayama from Merrill Lynch. In the last meeting, you talked about the loss of the TV business next year will be half of this year like ¥8 million or ¥80 billion but because of the effect of the dissolution of S-LCD and there has been an improvement and I think we might have started procuring the materials for the next fiscal year’s operation. Are you cautious about the unit sales? For example, 10% below this year’s unit sales and do you expect ¥80 billion loss for next year? Or rather, you will expect the improvement compared to those figures?
In November, when Mr. Hirai, our Executive Deputy President explained various measures that includes TV business, yes, we are carrying those out and some of them have good effects as I have explained. As far as S-LCD, there was one-time cost and including that there’s a ¥50 billion impact that next year we do not have it. That’s the basic idea and we try to reduce fixed cost, and sales cost and headquarters’ costs have been reviewed to reduce them.
We are making a solid progress in those. Of course, it would take time to see the fruits of those effects – efforts and we cannot take those results in tens of billions of yen effect right away, but there are progress.
As far as the sales unit number is concerned, I cannot say anything publicly because we’re working on those numbers. But as an idea in the next fiscal year, we will not pursue the expression of unit sales. We will break them based on its own profitability.
As we said, ¥20 million this year and I am not thinking of reducing this number by far in the next fiscal year.
Of course, we will not increase the volume where we cannot enjoy any margin but it’s not that we will maintain 20 million forever. If we have a good profitable product lineup and if the markets are actually expanding, we might increase certain numbers on top of 20 million. We will not try to actually, achieve equilibrium by reducing the business.
Eiichi Katayama – Merrill Lynch
Is that ¥80 billion that means S-LCD effect was incorporated in this ¥80 billion?
In November, at that time, the contract of S-LCD, we were actually in the middle of negotiating the S-LCD contract so we could not tell you any concrete figures at that time, but at that time, we were thinking of this one-time cost and I think you can say that it was included in our forecast.
Nico Yura – CNBC
CNBC, Nico Yura, somewhat an abstract question. The end of the year, Christmas season of course, had been affected by Thai flood and the other factors, so how would you reflect back the performance of the end of the year Christmas season? And as you go towards the very end of the fiscal year, what are your prospects?
Christmas season, the different markets have different sets of conditions, competition and, of course, there was the supply side implication caused by Thai floods. So there were many factors intermingled. But consequently, what we thought would happen as we started the third quarter, we believe that the actual results were below what we had expected at the beginning of the third quarter caused by a multiplicity of factors. Digital cameras, for instance, we were quite hopeful because there were some award-winning models, but those models were affected where we had to delay the launch of new models so we could not capitalize on the Christmas shopping spree.
So overall, in retrospect, I believe the actual were below what we had expected to achieve, somewhat. The fourth quarter, I talked about for the entire year compared to the November forecast that we would downward revise our forecast by ¥100 billion. This is because of the poor economy in the advanced nations. Our products like PlayStation 3, the sales trend is quite firm, but it was nevertheless affected by the Thai flood. The destruction of supply chain adversely affected the PlayStation. So as is shown in your materials, we have reduced our forecast by 1 million units for the entire year. Other categories, VAIO, digital cameras, we are a little more conservative than we were before.
Nico Yura – CNBC
Geographically, do you think that the advanced nations are more or less all the same, or is it just Europe?
Mature markets, I think as a general statement, mature markets are doing poorly. Of course, different markets differ. In case of Japan, as you know, TV is the largest consumer in terms of sales unit. Compared to the past, there has been a decline. First quarter alone, the results were somewhat below our expectations. Europe, yes, the economy is stagnating.
Going to the United States, last Friday and the end of the year Christmas season, there has been an increased price competition. That is always the trend.
We choose to not engage in such a price competition, but emphasized on earnings. So thanks to that – or because of that, the volume decreased.
Nico Yura – CNBC
So what about China and other risks? Can you say that businesses in China will steady? China and other areas?
If you look at BRICS, the full market, all together, the growth continues. But as far as analysis, this is Brazil, India, we continue to see a double-digit growth. In the meantime, CIS has caught a cold. China I think has reached the plateau and therefore we cannot expect the figures for their growth.
Others, Latin America, South Americas, I think we can expect reasonable growth, a substantial growth. The economy is smarter, but again, in the Thai flood have caused disruptions in supply chain and we were not able to supply but we wanted to supply and those also, the implications on the business results.
And because of the time constraints, there’s one more question. This will be the last question.
Yuji Fujimori – Barclays Capital
Barclays Capital, Fujimori is my name. I’d like you to cite the numbers. The third quarter upside potential, what was the upside? And what were the factors behind the better than expected, the results by category and for the entire year, you revised forecast. Of course it’s difficult to foresee the effect of floods. But without this, it looks like you could have revised the full year forecast upwards? Is that true or not?
Okay. About the forecast, factors behind that – factors behind the change in forecast as you can see from this, in the third quarter, CPS, S-LCD, minus ¥63.4 billion; other business, improvement of ¥10 billion, PDS plus 50; and Music and Pictures, plus 50 and Financials, well, minus – sorry, Sony Ericsson; DA minus 330; plus 100 is others, costs by improvement and so on. So in total, minus 91.7 for the entire year. We told you last that there will be ¥20 billion and this time minus ¥9.5 billion. And we look at the breakdown, CPS totaled ¥990 billion, out of that ¥63.4 billion, it is rounded up figure but this is the impairment, the loss of S-LCD, PDS improvement of ¥10 billion, Sony Ericsson minus ¥5 billion; others minus ¥30 billion.
Usually, this is the end of the story but by factor, we have a breakdown by factors. This is not by category of products but there were I think one-time costs. So this is the analysis behind which factors contributed. S-LCD ¥63.4 billion, exchange rate ¥20 billion, Thai floods minus ¥45 billion. And we thought the ¥25 billion was the actual figure but it was ¥70 billion in total, so minus ¥45 billion. This is the disparity between now and the previous forecasts.
And special ¥5 billion, others ¥15 billion because of the improvement of the business. And in total, minus ¥95 billion. So, those are the revisions of the forecast and the factors behind the changes. It’s difficult to actually analyze by category so we prepared this sort of chart.
Yuji Fujimori – Barclays Capital
And thank you. We would like to close this earnings announcement. We will talk to you, briefing by the top management. So if you will bear with us, please stay in your seat.
Please wait for a little while
Thank you for waiting. We should like to start the management meeting in conjunction with the new management structure in Sony Group. On the right-hand side, Chairman, President and CEO, Howard Stringer; and next to him is the Executive Deputy President and President-to-be as of the 1st of April and CEO.
Now, Howard Stringer will explain to you the background behind recommending Hirai to be his successor, and Mr. Hirai to talk about his visions and directions. And they will entertain Q&A afterwards. And the whole session will be concluded at 10 after seven. And as we explained, channel one is for Japanese and channel two is for English.
Now, Mr. Howard, please.
Back in 2009, I began to work on succession. All companies should do that. Great companies do it smart and do it early. We believe we’re a great company and deserve no less. The first step was reorganizing the top management to bring in a new generation of young, globally-focused executives for the whom the Cloud is familiar territory and digital transformation is second nature.
I believe my ultimate successor would be among them, and I was right. Why now? Because he’s ready. That’s why I recommended him to the Board for the positions of President and CEO. We need him in charge as we redouble our efforts of recovering, and the stage is set for that recovery.
As one analyst said the other day, the worst is nearly over. And keep in mind just how much of this worst of times have been the result of disasters inflicted on us, not by us. That is not to say we have not made mistakes. Surely we have and hopefully we have learned from them all. But there can be no denying that were it not for all of those natural and unnatural events, we would be standing here revealing black ink and not red.
Yet even if those crisis had not occurred and we were profitable, we would still be here making this change because this is the right time and Kazuo is ready. And I’m ready to move forward with a succession that I have been preparing for these past three years.
And I am also happy to accept the recommendation of the Board to become its chairman in June, and I’m pleased to step back from the full measure of responsibilities I had and that a new leadership takeover. I know there are some who want to the back, to go back to the old way of doing things. But with all due respect, I think that is the wrong approach at least for Sony, and thankfully the Board agrees.
We are not shifting direction but we are shifting gears, and when you shift gears, you can go faster. Because now more than ever, it’s time to bring about a generational change. And I am happy to be an agent of change and thrilled that the symbol and reality of it will be my friend and colleague, Kaz Hirai. Change is good. It is healthy. And in a hyper-connected world, it is essential. So that’s why I am cheerful today. Kaz has the right combination of personal qualities, tough mindedness and leadership skills to lead Sony.
He will travel on that path that we’ve laid together to connect content and devices through networks that lets people enjoy entertainment seamlessly. He’s a convergence executive in a converging world. But he will also chart his own course, make his own mark and give you energy and the fresh approach to the challenges before us.
There is no question 2011 was one of the most trying periods in Sony history, one of the most trying period in my history. And even during these times of crisis this past year, we created still new opportunities to make progress in smartphones, tablets, television, gaming and cameras. The Sony Entertainment Network is now a reality and growing every day.
And finally, as I look back on the past seven years, despite the frustrations and the setbacks along the way, I’m proud of the reforms we made and the victories we achieved, winning the Blu-ray format war, launching the PlayStation Network, putting smart people in charge of Music & Pictures division, they’re well-run, profitable and integral to our strategy of convergence, growing the power of our software engineers to complement our hardware engineers.
And Sony United, growing Sony Financial Holdings into a profit powerhouse. Supply chain reforms and creating horizontal platforms to reduce costs and increase efficiency, all of which helped us recover from the Lehman shock in 2008 and survived the crisis of 2011.
Most of all, I am proud of the people of Sony with whom I’ve had the honor of working these years. All those wonderful engineers, who helped us through the disaster and who once played with the Sony Orchestra in a concert on the stage of Carnegie Hall.
I told my colleagues in a message to them yesterday that I had three great loves in my personal and professional life: my family, my work in journalism and my time at Sony, far more love than tears.
So I thank you, I’ve enjoyed my relationship with you all. And now, succeeding me here today as the head Sony, Mr. Kaz Hirai
Good evening, ladies and gentlemen, I am Hirai. I keenly feel the post of President and CEO of Sony Corporation that I will be assuming is indeed a very heavy responsibility. And at the same time I am confirming my resolve once again to overcome the current difficult situation we are facing and to drive a new growth towards the future by mustering all capabilities Sony has. I would like to ask for your encouragement and guidance through my undertaking.
Today, I would like to spend a few minutes sharing with you my basic idea about the new management structure, which will start from April 1. How I try to rebuild Sony and what we have to do for the solid future of Sony so I will have another opportunity to formally explain in detail my measures for rebuilding business and management policy and business strategy. But briefly, I’m trying to share my underlying review.
As you are all aware of the Japanese electronics industry is sluggish due to the commercialization and low prices of products caused by digitalization. There’s no doubt about it, and Sony cannot escape from this trend and environment, and I have a strong sense of crisis about the situation and the operating environment we are in.
Under the new structure, AVP Yoshioka in charge of Medical business and the promotion of bio-innovation, and AVP Saito who will assume the newly established post of CFO and myself, will closely work together with key management members in charge of business groups, technologies, strategy, marketing to make business decisions promptly. And under myself as CEO, decisions which were made will be automatically executed.
And in other words, I would like to set up a true one-management structure and I would like to ask for support from Mr. Howard, Chairman Mr. Howard. And I will further bring down internal spirals as Mr. Howard did, because I strongly believe that unless we work as one Sony and act speedly, we cannot win competition. I would like to fulfill my newly given responsibility with the strong conviction in mind.
For the last three years since April 2009, when I became President of the group in charge of network related products and services. I have worked to launch new products and services to the worldwide users and took various measures for organizational reforms in parallel. I will continue to strengthen products and carry out organizational reforms to really put our Electronics business back on track.
But in particular, I will focus on the following four measures. Those four measures will be identified as priority areas and I will certainly implement those. First is reinforcing core businesses. We will establish our number one position in Vertically Integrated Digital Imaging and Game business to make certain our profits and by capitalizing on the assets we’ve built in these sectors. We will strengthen the Mobile business that is expected to grow in the future because the Mobile business is a promising growth area in the future.
In Digital Imaging, we will further enhance Sony’s image signal and optical processing technology aggressively and try to build new and user-friendly services which will enable users to manage large volume of data shop on the network. We aim at creating a new future core business by developing innovative technology based on the technology we built in Digital Imaging and applying those to the medical area, to Military, to our future core business.
Regarding Game business, on the 22nd of this month, we will launch PlayStation Vita in the U.S. and Europe following the launch in Japan in December last year. PlayStation 3 is in its sixth year since the launch and it’s time for us to really reap the benefits. I would like to contribute to the profitability by leveraging those three platforms: PS3, PSP and PlayStation Vita.
And the most important point here is to apply these assets we have created in existing business which are strong to the mobile business with a view to developing unique mobile products only Sony can provide. This effort now has a momentum and will be accelerated because we acquired the similar business last year. Digital imaging, games and smart mobile devices will be our priority business areas we invest resources. And by combining games, cameras, camcorders, digital video distribution and telephony, we are not creating new products and new services.
Second point is pulling together our TV business. We believe that TVs will continue to be at the heart of home entertainment. On the other hand, LCD TVs have been commoditized and we cannot lose any more time to put this business back on track. We dissolved S-LCD joint venture last year and we will further pursue our asset light approach where it’s possible and we will be very selective about the use of resources and also consider potential cooperation with other companies in order to reduce design and fixed costs. This way we will rebuild this business by implementing investment cost minimizing measures.
While watching cost, we try to strengthen our products using Sony’s proprietary technology such as Crystal LED display and OLED so that we can develop products that can create value for our users.
Third is the transformation of the business portfolio. Sony has diverse businesses. Diversity has indeed enhanced dynamics of the businesses and significantly contributed to the increase of revenue sources although we failed to achieve complete focus and concentration, resulting in commoditized products and businesses.
We will engage in bold and fundamental and thorough review of all businesses. We will identify commodity products with our added value and businesses that will have a better potential through collaboration and integration with outside rather than captive growth. For those areas, we may choose to withdraw or promote outsourcing of rigorous asset-like strategy. We may also choose to set up alliances. We will in the very near future make the clear-cut decisions and put those decisions into actions.
As stated earlier, in TV business, we expect a saving of ¥50 billion of panel purchase cost that year by dissolution of S-LCD joint venture. Also as announced last year, for small and medium LCD panel, we will execute integration with others and aim for sustaining growth based on scale and technology.
Likewise, for some other businesses, we will revisit our strategies with a view for collaboration and integration with the others. We will not just make withdrawals if it is that – it is important. It’s that we invest into new businesses that would drive Sony’s growth in the future and that will constitute our core competencies.
That leads us to the fourth point, the innovation acceleration. Medical area is positioned as one of the future core businesses and I would ask Mr. Yoshioka to be in charge of the Medical business and promotion of innovations. He will be spearheading business incubation.
As I have said, in Medical space Sony has excellent technology that included sensors, signal processing, bells and display. By acquiring those technologies in endoscopy, x-ray diagnostic equipment, ultrasonic diagnosis, I’m sure we can create innovative technologies and products.
To facilitate new growth for Sony, alignments of R&D and business groups would also be strengthened comparable to the measures that I have described. I would emphasize close linkage and cooperation, and I would firstly take the lead in executing those decisions.
Since 2009, I have consistently aimed to provide truly Sony unique products, products that is truly worthy of Sony’s appeal as well as experiences for that true fact user experiences that will be rewarded with smiles of our customers. We are glad that we chose Sony.
So towards this goal, it is prerequisite that we first put our internal engineering resources and creative product development and design resources into the focus areas, and create wonderful products. And that group of hardware would be converged with software and contents and linked onto the network to create user experience. Furthermore, our desire is through such user experience change the lifestyle of a customer for the better. For that, we must steer into a new course.
During the process, Sony may confront many painful decisions and choices, and also executions. Those will be inevitable for Sony’s future. But we’re not being intimidated to advance, we will make undaunting efforts. Competitors and business environment will not wait for us. We cannot afford to spend much time. We recognize this reality with strong growth and determination and committed to put those implementation.
Sony will surmount difficulties and challenges we realized through transformation so that we may achieve our lofty goal to become a leading Japanese company in this globalized world of competition and demonstrate our value significant presence and power. Mr. Ando and Idei had worked so hard to enhance the brand value of Sony. This is one way to change and prepare for new era and Sir Howard also promoted Sony United.
I am committed to succeed such spirit and translate those values to create a new successful Sony. Thank you very much.
Now, we are – the floor is open to your questions. Please wait for the microphone. And when you ask the microphone please identify yourself by stating your affiliation and name. Since there are many here in this room, so please confine to one question per person. Yes on the left hand side of the room in the middle.
Masahiko Ishino – Mitsubishi UFJ Morgan Stanley
Mitsubishi UFJ Morgan Stanley, Ishino is my name. One question, to Sir Howard, when you became Chairman, what are the successes you can point to and what are the successes you are proud of? When you became Chairman, you emphasized the synergy and conversions between hardware and software, do you think it’s been achieved in the full items that Mr. Hirai listed they were not included there but how should we look at this?
In a way because he’d put the launch of the PlayStation Network, the launch of the Sony Entertainment Network and those are convergence animals which will deliver content. If you’re critical of the speed with which we’ve driven content to the products, but remember that we’ve only just completed network in all our hardware that so we said we would do it. We’ve just finished the creation of Sony Entertainment Network which will deliver content worldwide on our multiple devices.
And I think that’s in pretty good shape. We need to market it. We need to market video, Sony video services, the video network and we need to continue to PlayStation network and in the crisis of the recent six to seven months, our marketing budgets have not really generated enough income to create the excitement that we will do. And we’ve put some of the movie that we have on those products, but we will do that now that we can assume that the ghastly Mother Nature problems are in the past.
So I think it’s ready. I think we have done what mostly the Chairman said we would do. And so in that sense, the convergence is well underway. We have more assets than anybody else in the industry and more content than anyone else in the industry. But you would be right to say, well hurry up and give it to everybody and that will happen.
But the second part of your question, I forgot what it was. What’s the second part of the question? Is that enough? What? You want to do other successes? I’ll run through them all.
Masahiko Ishino – Mitsubishi UFJ Morgan Stanley
The second point was that the synergy of software and hardware, then Mr. Hirai, how would you carry that on and realize that?
Let me talk about contents first. Today, I talked about the future growth of Electronics business. And then I explained to you four priority directions. But the background of this, a backdrop of this is that even though I did not talk much about it because of time constraints but there are various types of experiences user would enjoy and we welcome which means that network service contents are there and services are there.
So they are the parts and puzzles of the hardware products. So that’s a mission and vision remaining unchanged. Even though I did not refer to that being four priority challenges, but it’s not the change in our position and direction. The hardware alone cannot provide user experiences, therefore the synergy is a prerequisite.
And on that basis, for instance, the case in point would be the Game business, Hardware and Software put together and the PlayStation business model is the example of it. And recently, in various regions, we have started Music Unlimited and Video Unlimited services.
So this kind of distribution services that we’ve started, know-how in the industry and content-sourcing power. And that related to Software business, Music, Film, Game business, well, Sony has been involved in that and carry out our business.
Therefore, we have positive assets coming from that. Therefore, in that sense, synergy and efforts are already there in sale, they will continue to have it. And one other point, Mr. Kitagawa, the – Sony Music of Japan, may often talked about this and you might have heard about this but – in Hard business, we think of contents and services.
The Software business people, what sort of deal and perception they have and what are their pains and difficulties they have in business? What’s sort of solution they seek for? So we should really allow that. In other words, the contact point of Hardware business and Software business. Well, in case of Sony, within the group, we have various Entertainment-related businesses and it is our strength indeed.
Just one telephone call, we know what’s going on and we can gather vital information, and the software colleagues of ours would know more about hardware technology we are working on, so this kind of free exchange of views is a strong advantage for us.
Put out a trailer, just a silly trailer, two-minute trailer of Men In Black, and this shows you the opportunity as well as the problem, and we put it out of the trailer and Will Smith, the actor, didn’t want to do it because he said, “Who’s going to see it on all your electronics products on your entertainment network?” and he said, “No I don’t want to do it.” Anyway, because he’s making a movie with us now, and he was in a good mood, we said, “Why don’t you run it, why don’t you, you can run the trailer on all your networks before you give it out to the movie theaters and anywhere else. And how many hits do we have of it? Hundreds of millions of hits. And Will Smith said, “Oh my God,” and now, he’s also thinking how does he get paid for it, but 100 million hits is – hundreds of millions of hits is just amazing.
And so we have got to cross that bridge, the same as we have to cross the bridge with 19 million customers on the PlayStation Network. They are sitting there, give me a quarter, each, and we are in business. So we – that’s something we have to fix this year. Last year was too difficult for us to get this orchestrated, but we have built a network, we have built a video entertainment, music entertainment options, and we can do this, and if Will Smith will do it, everybody will do it, and we could give a run for their money of all our competition.
Next question, please. Yes. There.
Watanabe. My question is directed to Mr. Hirai. Well you said that the selective focus on resources, but currently it appears as the PS Vita from Games and then the tablet from PC, and the smartphones from Sony Ericsson. So I think the resources are spread and distributed and inefficiently used. But now the current organizational setup, does it pose any obstacles?
And people talk about silo, and do you still have the adverse impacts of relaying silo? Now when you’ll become the President, what sort of reorganization would you be instituting or under that current organization, what sort of leadership would you be exerting to overcome the difficulties, a strategy or your sense of commitment?
Now concerning the point you made, in fact, already in terms of the organization or in terms of actual operation of the business, we do have a new organizational setup. What I mean by this is that last year we started the integrated user experience, integrated UX organization. So corporate layer of CPSG and we established that the new organization.
And the members concentrating that organization are their top class manager of the product planning of all the business units, and they are directly involved not a dotted line, but they report directly to the top of the integrated UX organization. Organizationally we have put in place that vision. Therefore, we see the continuous convergence of the products and the existing realization like Sony Computer Entertainment or VAIO and mobile or Sony Mobile Communication, PIMS, such business unit. This vertical organization of product planning is now transformed to horizontal organization. Looking at the customer-oriented UX, customer would enjoy, so this is the product planning approach in the horizontal manner. We have started this already.
So, the horizontal silo will no longer – the products will be developed this such way. When it comes to network-connected products, product planning will be changed with a different, effective and different perception, the organization has started as I mentioned. And once the organization started, there are since we should work and we should not work.
But including myself, and all the management team of CPSG and the President of business groups and the President of SCEE, Andy House, and Tim Schaaff the President of Sony Entertainment Network, we have this horizontal spread of the people covering, looking at the products and services for the future, otherwise we cannot put a unified Sony story and experience to our customers and users. We are in full agreement in our views so there are no difference in that kind of commitment amongst silos because of silos.
Eiichi Katayama – Merrill Lynch
Katayama from Merrill Lynch. I have a question to Mr. Hirai about the new management structure. Mr. Yoshioka and Mr. Saito we have announced that those two people only. So three of them, including yourself will be the core of the new management team. If that is not the case, what is your idea of creating new management structure?
Well, sometimes in the piece of (inaudible)...
Eiichi Katayama – Merrill Lynch
Time – you had a team of people with the same thought of thinking. But how are you going to create the team?
This time, I’ll announce myself and Yoshioka and Saito, not only the top management members of the team, but from now on the entire – I will think about – we will have a discussion on the entire new management structure. We started with this discussion but after panel discussion because the new structure will be – will start on April 1. So before that, we will have an opportunity to announce our management team members.
Another point is – this is my personal management – directed to my personal management staff, as much as possible, I would like to hear various, different opinions so that we can have good discussion. I would like to work in that sort of environment, because from those we can actually find the best direction and best policy.
So it is extreme if Hirai says, right, and not everybody else says right. Some people might say, left. Others say top or they say, down. I would like to form a management team which can have that sort of free discussion. Right now, CPSG’s management team and also, NBSG, has a similar type of management of the team.
I am talking about concept, but how are we going to actually translate them into specific ones? We have P meeting or President meeting once every week, or sometimes, biweekly, we have these President meetings, myself and heads of different business groups and Andy House and so on, get together.
So all the top management people get together and discuss issues of which we are facing in that week in a thorough manner and we arrive at conclusions and we will translate them into concrete actions right away. So horizontal alliance among top management members, that’s what we have done in concrete terms. And also, there are also some different opinions or a free flow of discussions right, left, and I will take the full responsibility at the end of the day to decide.
Don’t forget that he has PlayStation under control, which predecessors do not know, plus he has the smartphones under control, no longer the joint venture. So that alone is a big addition to his arsenal.
Eiichi Katayama – Merrill Lynch
A point of confirmation, Mr. Yoshioka and Mr. Saito, their role, you decided or your appointment?
Well, I was involved in the discussion and naturally, Chairman was taking initiative and leading to the decision, there were various stages of discussions, so concerning Mr. Yoshioka and Mr. Saito, we believe that they are the best appointments, and as the central core of the management team, they will show their commitment and achievement in the performance.
So our next is going to be the last question. So, please. Yes, please, in the center.
Kota Ezawa – Citigroup Securities
Yes. Ezawa, Citigroup Securities. One point. Mr. Hirai, you are not from the Electronics segment and the media reported as such. It may be a rather tough way of description but it means that the high level of hopes and expectation towards to you. So five years from now, if you have any idea or vision? What about the Sony Company? The Hardware, Electronics business and Networks Software, what would be the overall balance of such different types of business within Sony? And also, roughly maybe 50% of the profit coming from Hardware and Software, we’ve talked about the numbers.
Well, I cannot talk about the profit structure five years from now because various business models would undergo various changes. So this may not be a wise way to guess the profit-generating balances five years from now. But putting it in a conceptual manner, not just five years from now but earlier than that what we lacked we realized is that recent, the exchange – the example and point is that Sony Computer Entertainment, PlayStation business, people might ask you, is this the Hardware business or Software business but it’s no longer. So including Software, Hardware and Network, it is the business, the amalgamation of all these. And I think everyone takes that view.
However, when the size of a business is larger and because of various other factors, the people tend to look at hardware, software, separate from different types of business. But what we lack is – just as the case of PlayStation business, hardware, software, network, content converge into one, and form one business to spearhead. So, Sony lasted here, a company appears to be from outside or construed as such. So, we should nurture Sony in that way.
Thank you very much.
So this concludes Q&A and our session. Thank you very much for attending this session, the earnings announcement of the third quarter of fiscal 2011 as well as management meeting. Thank you.