Sony Corporation's (SNE) Q1 2016 Results - Earnings Call Transcript

| About: Sony Corporation (SNE)

Sony Corporation (NYSE:SNE)

Q1 2016 Earnings Conference Call

July 29, 2016 03:45 AM ET

Executives

Kenichiro Yoshida - Executive Deputy President and Chief Financial Officer

Kazuhiko Takeda - the Corporate Executive, Corporate Planning, Control and Accounting

Analysts

Junya Ayada - Daiwa Securities Co. Ltd.

Hiroyuki Miyamoto - Mitsubishi UFJ Morgan Stanley Securities

Masahiro Ono - Morgan Stanley

Hiroshi Taguchi - Deutsche Securities Inc.

Operator

Ladies and gentlemen, we’d like to have the presentation on Q1 Fiscal Year 2016 Consolidate Results of Sony Corporation. We like to thank for your attendance despite your busy schedule.

Let me introduce the representatives who are seated on the stage. First, Kenichiro Yoshida, the Executive Deputy President and CFO, the Representative Corporate Executive Officer. Next to him is, Kazuhiko Takeda, the Corporate Executive, Corporate Planning and Control and Accounting. And also we have Ms. Atsuko Murakami, the Corporate Executive, Finance Department.

First Mr. Yoshida will give the initial presentation and in the remainder of the time, we would accommodate your question. Overall, we intend to spend 45 minutes.

So to you Ms. Yoshida.

Kenichiro Yoshida

I am CFO, Kenichiro Yoshida. Today I would like to explain two topics in the next 15 minutes. Consolidated sales for the first quarter of fiscal 2016 decreased 11% year-on-year to 1,613.2 billion yen. Consolidated operating income decreased 42% year-on-year to 56.2 billion yen. We estimate that the negative impact of April Kumamoto earthquakes on the operating income of the first quarter was approximately 34.2 billion yen including opportunity losses.

Net income attributable to Sony Corporations stockholders decreased 74% year-on-year to 21.2 billion yen. In the same quarter of the previous fiscal year, we recorded several onetime items such as asset sales gains. Specific examples are shown here, a total of 35.1 billion yen in onetime profit was included in operating income and a total of 49.5 billion yen in onetime profit was included in other income of the first quarter of the previous fiscal year.

Next, I will turn to the result by segment. From this fiscal year, we have separated the Devices segment into two segments, a Semiconductor segment which was recently made into to a separate subsidiary and a Component segment, compared with same quarter of the previous year, and the improvement in the profitability of the Game and Network Services segment and the Mobile Communications segment contributed significantly to the result. On the other hand the profitability of the Semiconductors segment deteriorated significantly year-on-year.

Next is a consolidated result forecast for the current fiscal year. Consolidated sales forecast has been revised downward by 400 billion yen mainly due to the impact of the appreciation of the yen. Profit forecast remains unchanged for our May forecast. Foreign rate assumption has been changed to 103 yen to U.S. dollars and 114 yen to the euro. As they show in here, the negative impact of the change in the ForEx assumption from May forecast on the operating income of the six electronic segment is estimated to be approximately 48 billion yen including the impact which was realized during the first quarter. This negative impact takes into account not only U.S. dollar and the euro but also the impact of the immerging market currencies. For your reference, a negative ForEx impact on the operating income the six electronic segments compared with the previous fiscal year is estimated to be about 59 billion yen.

As we will be showing later, the negative impact of the earthquakes for the current fiscal year is expected to decrease by about 35 billion yen from May forecast. Moreover, there is a possibility that we might record a loss in connection with a transfer of our battery business to Murata Manufacturing Co., Ltd. regarding which we announce the execution of the memorandum of understanding yesterday. Such loss is not including in the July consolidated result forecast for fiscal ‘16.

Here you see the forecast for the fiscal year by segment. Here you can see the impact on operating income for full year of the earthquakes. Although this impact has been estimated based on the certain assumptions, the impact is expected to decrease by approximately 80 billion yen from the 115 billion yen we announced in May, thanks to the restoration of production at the Kumamoto factory which is preceding ahead of May forecast.

We had previously said, the full utilization on the wafer input basis was expected to be reached by the end of August but the timing has been advanced by one month to the end of July.

Now I will turn to the region of each of our businesses, first Mobile Communications segment. Due to a reduction in mid-range smartphone unit sales and downsizing of the business of profitable geographical areas, sales for the quarter decreased 34% year-on-year. Operating profitability improved by 23.3 billion yen and a 400 million yen operating profit was recorded. Despite the significant decrease in the sales, the earnings structure is improving because of improved profitability due to improved product mix reduction in operating cost and a decrease in restructuring charges.

While the sales in Japan are strong, we have reduced our smartphone unit sales forecast by 1million units mainly due to a lower than expected performance especially in Europe. We have revised downward a forecast for full year sales to 840 billion yen due to this reduction and the impact of the appreciation of the yen. Cost reduction has been progressing but the severe competitive environment in the smartphone space continues. We have made no change to our goal of achieving profit in this fiscal year by continuing to improve our earnings structures.

Next, I would like to explain the Game & Network Services segment. Sales for the quarter increased 14% primarily due to the strong performance of uncharted for first title that went on sales in May. Operating income increased 24.6 billion yen to 44 billion yen. Network revenue increased 38% year-on-year and accounts for 46% of the sales of the segment. Our operating income forecast for this fiscal year remains unchanged.

Next going to the Imaging Products & Solutions segment, sales for the quarter decreased 26% year-on-year due to the impact of the earthquakes, although the impact of the decrease in sales was partially offset by the improvement in product mix, cost reduction and other factors.

Operating income decreased 10.2 billion yen year-on-year to 7.5 billion yen. The impact on operating income from the earthquakes is estimated to have been approximately 7 billion yen for this quarter. We expect to be able to reduce the amount of the fiscal year impact of the earthquakes from the 45 billion yen forecasted in May to approximately 26 billion yen primarily because recovery at Kumamoto factory is progressing ahead of schedule. We made an upward revision to the operating income forecast by 6 billion yen to 22 billion yen primarily because of the reduced impact of the earthquake, additional cost reduction and increase in sale of interchangeable days was - such effect was partially offset by the negative impact of depreciation of yen.

Next, I would like to explain the Home Entertainment & Sound segment. Although the sales decreased 7% year-on-year, operating income increased 9.3 billion yen to 20.2 billion yen. Despite the decrease in sales from the negative impact of the foreign exchange rates, we were able to achieve an increasing operating income due to cost reduction and the shift to higher value added products. The fiscal year operating income forecast have been revised upward by 5 billion yen to 41 billion yen primarily due to the strong performance of televisions.

Next, I would like to explain the Semiconductors segment. Sales for the quarter decreased 23% year-on-year and an operating loss of 43.5 billion yen was recorded, a deterioration of 76.3 billion yen year-on-year. This decrease in sales was primarily due to the impact of the earthquake and decrease in demand for image sensors for mobile. The deterioration in operating profitability was primarily due to approximately 24.7 billion yen an impact from the earthquakes including opportunity rose 20.3 billion yen impairment against camera modules long-lived assets and 8.2 billion yen negative impact from the stronger yen.

Although we expect to be able to reduce the amount of fiscal year impact of the earthquakes from 60 billion yen forecasted in May to approximately 48 billion yen, we have downwardly revised our operating income forecast by 27 billion yen to a loss of 64 billion yen primarily due to the negative impact of the appreciation of the yen against the U.S. dollar.

Now, I will like to speak briefly about the current situations and the issues in the semiconductor business from the perspective of the - those listed on the slide. First is the unit sales of image sensors for mobile use, which account for large portion of our revenue. These sales are begun to trend upward after hitting the bottom in the fourth quarter of the previous fiscal year. And we expect them to exceed the level of the same period of the previous year from the second quarter of the current fiscal year.

The expansion of sales to the smartphone manufactures is progressing reasonably; some areas are stronger than the others.

Next is the impact of foreign exchange rates. Although yen denominated cost is quite large in the image sensor business, most sales are denominated in U.S. dollars which causes the business to endure a negative impact from the appreciation of yen. As I mentioned earlier, sales volume expected to increase significantly due to some expansion efforts that started last year. And even thought we anticipate on relatively small decline in average selling price on a U.S. dollar basis, a decrease in sales from the appreciation on the yen is having a large negative impact on operating income. We estimate that the foreign exchange rate specifically in the Semiconductor segment to be an approximately 3.5 billion yen negative impact on operating income for the year from a one yen appreciation against the U.S. dollar.

Next the production capital we have installed as of today including a portion which is outsourced has decreased from the 87,000 wafer per month we previous announced to 85,000 wafer per month. This decrease is due to a shift in production of certain image sensors for mobile use that were previously manufactured at our Kumamoto factory to our Yamagata factory in an effort to respond to the earthquakes.

Since we allocated equipment at our Kumamoto facility to the production of AV and surveillance camera sensors, our production capacity has decreased. Our current production footprint including orders to our outsourcing partner is 73,000 wafers per month.

Our President Hirai said at the corporate strategy meeting last month, we have not changed our view that the imaging sensor business is one with growth potential over the medium to long term. Going forward, we aim to improve profitability by increasing the ratio of customized products for mobile use via efforts to increase the adoption rate among our expanded customer base of higher value added image sensors including those for dual lens cameras into next fiscal y year. We also aim to improve profitability by improving our cost structure via efforts such as starting to internally produce logic.

Moreover, over the medium term, we believe that it is important to improve the business scale and profitability of image sensors other than for mobile such as for surveillance, factory automation and mobile.

Next I will explain the Components segments. These main products of the segment include batteries and recording media. Sales decreases and operating results deteriorated year-on-year and we recorded an operating loss of 4.7 billion yen. The fiscal year forecast for operating results has been revised downward by 9 billion yen to an operating loss of 12 billion yen mainly due to a downward revisions and projected sales of the battery business partially resulting from the stronger yen.

As I mentioned before, we announced the signing of a memorandum of understanding of Murata Manufacturing Co., Ltd. relating to the transfer of the battery business which is included in the segment. We reached the conclusion that transferring the business to Murata Manufacturing Co., Ltd. would enable the human resource and technological assets that we have accumulated in this business to be better utilized given the competitive environment of the battery business and our business portfolio strategy for the Sony Group as a whole. We are aiming to complete this transaction by the end of March 2017.

Next, I will explain the Pictures segment. Sales for the quarter increased 7% year-on-year and 10.6 billion yen in operating loss was recorded an improvement of 1.0 billion yen year-on-year. The main reason for the operating results improvement was a decrease in the Japanese yen based operating loss amount resulting from the stronger yen against the U.S. dollar.

The fiscal year forecast for sales and operating income have been revised downward due to stronger yen against U.S. dollar and operating income of 38 billion yen is expected to be recorded.

Next I will explain the Music segment. Sales for the quarter increased 9% year-on-year but operating income decreased 15.8 billion yen year-on-year to 15.9 billion yen. As was shown in the previous slide, the same quarter of the previous fiscal year included an 18.1 billion yen gain from the measurement of our stack in Orchard Media, Inc., excluding this impact, operating income increased year-on-year.

Like the Picture segment, this segment is negatively impacted by stronger yen against the U.S. dollar but this negative impact is expected to be offset by the profitability of hit titles in recorded music and the continued strong performance of our mobile game application. As a result there is no change to our sales and operating income forecast for the fiscal year.

Lastly, I will explain the Financial Services segment. Revenues decreased 17% year-on-year but operating income increased 2.6 billion yen year-on-year to 48.5 billion yen. Revenue decreased due to the deterioration of investment performance in the separate account at our primary business Sony Life, mainly reflecting a decline of the Japanese stock market in the current quarter. However the impact of the investment performance has a limited negative impact on operating income because the investment performance is attributed to policy holders.

Operating income increased year-on-year due to the recording of foreign exchange gains on foreign currency denominated customer deposit at Sony Bank resulting from stronger yen. Our revenue and operating income focused for the year remain unchanged.

This concludes my explanation. Thank you.

Question-and-Answer Session

Operator

Now the floor is open to your question. Those of you with question please wait for the microphone and please identify yourself by stating your name and affiliation before asking question. And please confirm the number of question to two per person. Anyone with questions please raise your hand. The person at the front row at the block there.

Junya Ayada

Ayada of Daiwa Securities. Two questions if I may. First question, the page 10, semiconductors and the first quarter results I like to ask about. And this time, we did aggravation by 76 billion yen in the first quarter and 68 billion yen decline excluding the ForEx impact and apart the breakdown of it, the camera impairment 20.3 billion yen and the Kumamoto earthquake burden 24.7 billion yen, so 45 billion yen as a factor and the difference is 23 billion yen, it come from decline in sales.

The impact of decline sales be about 10 billion to 15 billion yen which means excluding the primary factors, the decline in profit appears to be larger, is that in your other aggravation and for that mix in the first quarter compared previous year or the increase in cost, are there any supplementary factors you can talk about? That’s the first point.

And the second question, this time in some cases you changed the full year results and a cancellation for the headquarters increasing 30 billion. At the beginning of the year, exchange rate by segment in the whole there are differences and that accounts for 20 billion yen and opportunity 35 billion they were included. And how these were changes this time around in your full year forecast?

Kenichiro Yoshida

The first point about the semiconductor first quarter results, the volume and the high cost depreciation and Takeda will explain details.

And about the opportunity, what is our accounting, we increased the opportunities, which means that it is higher to achieve the results and Takeda will further supplement this.

Kazuhiko Takeda

The first point. Semiconductors segment, the aggravation of profitability over the previous year as I pointed out 24.7 billion yen impact of earthquake and the impairment of module 20.3 billion yen, in addition to that 7 billion yen impact of exchange rate. And the volume and sales related factors amounted to 9 billion and the remaining 10 billion increase in capacity starting from previous year and that pushed up the cost of depreciation along with that investment.

And the headquarter cancellation and the elimination as you pointed out, 20 billion yen. In May, we included as the ForEx risk buffer and at the time 30 billion yen opportunity was included. And in this regard, increasing 10, so we have the opportunity of about 45 billion yen and the business upside during the first quarter, there is - the TV business was boost game and network and music. In these business segments, we have an upside and in addition to that the insurance payment received about the earthquakes and for the company as a whole we would like to achieve that by improving the results and reducing the cost.

Operator

And we take the next question and please raise your hand if you do.

Unidentified Analyst

Thank you. Taichi Noda [ph] from Goldman Sachs. I have three questions, first about the game business, two questions about the game. PlayStation VR reservation seems to be very brisk, doing quite well. And I think you are getting addition reservations, but what is your production at plant, has there been any change made to the production plant versus the beginning of the year?

And the next is your first party title uncharted for title the number of unit sold and given this good performance, what would be the additional titles that may would come towards the end of the good such as Gran Turismo?

The third point is you are setting your battery business in transferring your businesses in the future, would there be a particular in-house standard that you will apply, is there any criteria such as if you are in for certain number of years that you decide to sell, so please explain?

Kenichiro Yoshida

First on the VR, the production plant of course reservations doing quite well, but we have the annual budget of the plant and we are not making any change to the overall volume. And uncharged for downloads and the number of units including the download. I am afraid we cannot give you the details on number but if I as to say that in the first week, we sold 2.7 million units, that’s the number that we have publically stated.

Gran Turismo and you commented on those other titles. At this point of time, it’s very difficult to really assume any but the volume is increasing and PS4’s volume is increasing. And I believe that the sales is on upward trend. And for the first part title, the profitability is high, therefore we have high expectations on the performance of such title.

About the transfer business, do we have any particular standard in making a decision on transfer? No, we are looking at each piece of business and are trying to make the best of the decision for any particular business. Thank you.

Operator

Yes, the person sitting next to the previous one.

Hiroyuki Miyamoto

Thank you very much for your discussion. From Mitsubishi UFJ Morgan Stanley Securities, Hiroyuki Miyamoto. First about semiconductor, the production platform, the current production platform you said that 73,000 wafers and in May the expectation was 71,000 or 70,000 that seems like you are going to increase the production in the midst of - increase the production the vendors towards an extend are requested for their customers and the second half they are facing tough times, is you could just explain the situation in a systematic manner, I would appreciate it very much. Now PS4, if you could please view, if you could update on the current situation PlayStation.

Kenichiro Yoshida

The first question will be answer Mr. Takeda and then I will take care of the second one.

Kazuhiko Takeda

Thank you for the question about the production platform. As you already know as of April, the production capacity was 70,000 wafers that was how we announced the situation to be. In addition, this time 75,000 is the number now that is to say Yamagata which was not used before a part of the facilities are being utilized and what you should be produced TEC Kumamoto a mobile sensor a certain mobile sensors have been transferred Yamagata. The mobile sensor, the mobile TEK lines which used to produce the mobile sensors, they are turned to the use of producing surveillance and AV sensors. Then as a result the wafer basis 85,000 was the wafers and out of which at this moment 75,000 are being produced at this moment.

Next for PS Vue, thank you for the question about PlayStation Vue. As you know most recently, contents line up ESPN, Disney, contents line up have increased. Also the hardware - compatible hardware is increasing and then the nationwide services being provided. The number of subscribers is started increasing. At the same time, I cannot disclose the detail numbers but the conversion rate is improving from trial to release, so we have a good feeling about this going forward. Thank you.

Kenichiro Yoshida

I earlier mentioned 75,000 but the 73,000 as of July in other supplementation, the demand trend itself shows improvement for CMOS sensors compared to May, is that the case. About the same expansion compared to the end of the previous year, we are very energetic about sales promotion and in some cases of customers there are differences positive and negative, but the sales expanse itself is going smoothly. So compared to the previous year, the fourth quarter previous year was the bottom in terms of volume and we’re starting first quarter there has been improvement.

Operator

Next question.

Unidentified Analyst

SMBC Nikko, Koji Kamichika [ph]. Two questions. The first quarter landing zone compared to internal budget that probably you do not disclose it and we understand. But in terms of the concusses including the impact of the earthquake we thought it was start as a negative but you had a very good results. So in terms of change from your original thinking, could you give us the hint of the process? And in this connection for the full year you maintained the numbers and unchanged and for corporate and elimination you mentioned hurdle has been raised but a buffer opportunity have been increases. And also you have transaction with Murata and that would incur negative results but way of thinking OP of 300 billion, you mentioned initially the hurdle was high but overall the first quarter with the operating revision, even though the negative impact of Murata transaction this would be achieve, is that the thinking?

And the second point about the battery business, and you divided the component and the batteries and other than that maybe part of the battery will be remain under out components but for Sony, what - how would you position this component business?

Kenichiro Yoshida

Thank you. The first point, based on the result of first quarter, how do we focus full year results and the second component business other than batteries. Basically for first quarter as you would realize every time we see operating results in the first quarter because of the budgeting process. Maybe the budge and the budge assumption maybe misleading so we do not talk about it or disclose it, but still the first quarter has been very sound and based on that the 300 billion yen will be for fiscal year to achieve as become a little bit more difficult because of the major negative impact of the ForEx as we talked about earlier.

And in addition to that this time we did not included but the battery business transfer and that may accompany the loss associated with the transaction. That is why it’s become a little bit more difficult to achieve the OP goal. And the component business other than batteries, the main would be the recording media or tapes, high end tapes as well as disc business. So we will continue our business in a solid way, but this is not the type of business we’ll pursue a greater volume.

Masahiro Ono

Ono from Morgan Stanley. Thank you for the opportunity. I have two questions. The six slide talks about mobile communication. And you have changed the unit forecasts, the volume forecast and yet you have not changed the forecast for the profit and you talked about these three positive factors, this is in May meeting and there also two other factors. So there are three positive factors, if you are going to put an order, how will those three factors compare in terms of the size of the magnitude of the influence?

And the next is about game which is on page seven, there has been increase of marketing expense which recognize as a negative factor. How big was that increase and how was it used, where was such an expense used? Thank you.

Kenichiro Yoshida

I think the first question had to do three positive factors that contributed to the mobile communication and which we can put an order into the sort of size or priority. And the next was on the increase of marketing cost for the mobile communication - the game.

Now on the mobile,100 billion yen, it was the revision that we have made. Now in terms of the size, they are almost comparable should I say. If you look at the numbers, we do not intend to chase after the sales of the volume, but when it appeal the added value, we are aiming for the higher added value of the price range. And we will continue to reduce cost. And there are also ForEx implications. And maybe by comparison ForEx implications are bigger. Now let me rephrase it, price, ForEx and the material or the cost reduction in this order.

The second question is about the marketing expenditure for games. The increase of the marketing expenditure for game is - I cannot disclose the concrete numbers which may have to do with the increase of marketing cost for the game, PS Vue advertising and promotion that was increased strengthened to prepare for the future expansion. SG&A there was an increase by 8 billion.

Masahiro Ono

SG&A increase you said 8 billion, is this that you have increase or the SG&A is 8 billion more than you have anticipated?

Kenichiro Yoshida

Point of confirmation mobile, the unit price went up. You have improved the product mix during the first quarter, so I trust that you have some hard facts that would substantiate the increase of the unit price. Yes, thank you.

Operator

Anyone? Yes, the next one please.

Hiroshi Taguchi

Thank you very much for your explanation. My Taguchi from Deutsche Securities. About pictures I have two questions at page 12. First, the first quarter landing, well I don’t think you have disclosed in numbers and figures but the landing, when you landed, how does it compared to your original expectations?

So in the operating income there was this decrease by 5.6 billion yen, is it all attributable to the currency hit or any other factors such as increasing the advertisement cost, any other items?

At the backdrop, 38 billion yen is it the lowest, how certain are you about this 38 billion yen as a lowest limit.

Kenichiro Yoshida

About the pictures - thank you very much for your question. In the first quarter to allows your extend, the movement was within what we expected. In the motion pictures, some didn’t reach the budget but some others went smoothly, so negative from the motion picture, the decrease by 5 billion basically that’s from the currency hit of exchange rate impact.

If you are asking whether there is a risk or not about 38 billion, the picture itself sometimes are big hits, sometimes no hits, so there are risks involved. The profitability volatility is relatively large in pictures. Thank you.

Operator

This is going to be one last question because of time constraint. The person in the middle of the room.

Unidentified Analyst

[indiscernible] [0:39:07] of Merrill Lynch, Nomura Securities. Two questions. The first question related earlier question about the battery business that there may be a loss associated with transfer, last year 30 billion yen impairment was recorded but still will there be another loss as a result of transfer of the business? And at the loss is it necessary to sell that business? And if the loss is to the tune of several tens then what was the meaning of impairment cost last year?

And the second question about the impact of earthquakes and the full year forecast and first quarter estimate you indicated, but what about the estimated size for the second quarter, if you have any forecast?

Kenichiro Yoshida

The first point, the battery business sales loss. And the second point, the second quarter impact coming from the earthquake. As you pointed out, impairment was recorded and that reduces the asset valuation and it is not definitive yet, we are still in negotiation and I would referring from making any specific comments but basically it all depends on the negotiated price.

Unidentified Analyst

The rationale reason of sales, at the major loss you decide to sell and why do you stay background of such decision and then based on the negotiation if it is decided to sell even at the loss, you will be selling the business and what’s the reason behind this?

Kenichiro Yoshida

In 1991, while we started the development of lithium-ion batteries, we are the developer and the pioneer. And as you know in the past several years, there has been rather unfavorable performance. And this is the type of business development investment and the capital investment for facility would be needed continues, so including Hirai and others we know that we have accumulated technology asset and the human resources and they should be fully made use of.

Therefore in the electronics parts industry, Murata is the top much excellent company, so under Murata the technology could be further pursued as well as the sales channels and business opportunities. And we thought that would be better for all.

And the second question has to do with the impact of the earthquake. And most likely the impact of the earthquake would be larger in the second quarter than the first quarter. For the second part, we will not see the specific impact of the earthquake to the extent of nine versus one. So the first have 90% and the second half 10%. So over the first quarter and second quarter not the major difference in amount but the second quarter has slightly larger negatively impact compared to the first quarter. This concludes my answer.

Operator

Thank you. And with this we like to conclude the earnings announcement session. Thank you very much for coming.

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