Sony's Management Discusses F4Q11 Results - Earnings Call Transcript

May.10.12 | About: Sony Corporation (SNE)

Sony Corporation (NYSE:SNE)

F4Q11 Earnings Call

May 10, 2012 9:00 am ET


Edward Reid – Investor Relations

Masaru Kato – Corporate Executive Officer, Executive Vice President and Chief Financial Officer

Yoshinori Hashitani – Vice President, Investor Relations Division


Daniel Ernst – Hudson Square Research

Jeff Loff – Macquarie Capital Securities

Shannon S. Cross – Cross Research LLC


Good day ladies and gentlemen and welcome to the Fourth Quarter Fiscal Year 2011 Sony Corporation Conference Call for overseas investors. My name is Keisha and I will be your operator for today. At this time all participants are in listen-only mode, later we will conduct a question-and-answer session (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I will now like to hand the conference over to Mr. Edward Reid from Investor Relations Department of Sony Corporation. Please proceed.

Edward Reid

Thank you very much for that introduction, Keisha. And thank you all for joining us today, May the 10th 2012 for the discussion of Sony’s fiscal year results. I’m Edward Reid from the Investor Relations Department here in Tokyo. And with me on the conference call tonight is Masaru Kato, CFO of Sony Corporation, Robert Wiesenthal, Group Executive, Head of Corporate Development and M&A Sony Corporation, Executive Vice President and Chief Financial Officer of America; and Yoshinori Hashitani, VP, Senior General Manager, Investor Relations Division of Sony. Thank you all very much for joining us.

In just a few moments, we will review today’s announcements, then we will be able to answer to 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 the 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 or visiting

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. With that, I’m now going to turn to today’s announcement.

First, I would like to explain the consolidated results for the fiscal year end March 31, 2012. Consolidated sales decreased 9.6% year-on-year, primarily due to the unfavorable impact of foreign exchange rate, the impact of the great East Japan earthquake, the floods in Thailand, and deterioration market conditions in developed country.

Consolidated operating loss was ¥67.3 million, compared to operating income of ¥199.8 billion in the previous fiscal year. This deterioration in our operating results was primarily due to lower sales, I just mentioned and a significant deterioration in the equity results are affiliated companies. Although a ¥102.3 billion remeasurement gain was recorded due to fully consolidating Sony Ericsson.

During the current fiscal year, we recorded ¥315.2 billion of tax expense, primarily due to the recording of a non-cash charge of ¥260.3 billion to establish a valuation allowance against deferred tax assets, predominantly in the U.S.

Net loss attributable to Sony Corporation’s stockholders was ¥456.7 billion, compared to net loss of ¥259.6 billion in the previous fiscal year. I encourage you to refer to the earnings release for a deep discussion of the results of each segment. However, I do want to touch on our TV, Digital Imaging, game and semiconductor businesses.

Sales in the TV business decreased 28% year-on-year to ¥840 billion. This decrease was due to our scaling back bank operations and not pursuing volume in an effort to secure a stable foundation for profitability. It was also due to price declines, resulting from deterioration of the operating environment and due to the impact of exchange rates.

During the fiscal year, LCD TV unit sales decreased 13% year-on-year to 19.6 million units. Excluding restructuring charges and S-LCD impairment losses and operating loss of ¥148 billion was recorded. This is ¥73 billion worth in the previous year; however, it is ¥27 billion better than our forecast of ¥175 billion, which was made when we announced profitability improvement plan in November of last year, because we are already enjoying the benefits of having dissolved the S-LCD joint venture.

We recorded ¥60 billion in losses associated with the sale of our equity stake in S-LCD this fiscal year, including this loss operating loss was ¥208 billion. The profitability of the TV business improved faster than expected in the fiscal year ended March 31, 2012. And we are making steady progress towards improving our profitability structure as we aimed to return a profit in the fiscal year ending March 31, 2014.

Next is the Digital Imaging business. This category suffered a decrease in sales and profit year-on-year due to the impact of the earthquake and Thai floods. Sales and profit of video cameras decreased year-on-year due to the natural disasters, a decrease in unit sales and price declines. However we continue to maintain a stable level of profitability through cost reduction. Compact digital cameras experienced a decline in sales and profits due to the natural disasters, a decrease in unit sales and unfavorable exchange rate.

We are now producing some of the models we used to produce in Thailand, in China and Japan. The impact of the Thai floods on our interchangeable lens digital camera business was extremely severe. As sales decreased significantly due to unit sales declines and delays in new product launches and unfavorable exchange rates. Despite this, loss was less than the previous fiscal year.

Next is the game business, which includes the network service business. PS3 continues to maintain sales around the 40 million unit level and is selling well as a software. PS3 to achieve unit sales of 1.8 million as of the end of March. As for the network service business, the amount of content, the number of countries in which we are active and the number of compatible devices are all expanding steadily. However, overall game sales decreased due to unfavorable exchange rates and the strategic price reduction of PS3 hardware.

Operating income decreased year-on-year, due to the impact of the sales decline and an asset impairment in the network service business. Next is the semiconductor business. Semiconductor business sales decreased, due to the impact of the earthquake and the Thai flood.

Operating income was essentially flat, primarily because increased image sensor sales were offset by the sales decrease of the category and an increase in fixed costs from an increase in production capacity. Lastly, I would like to explain our forecast for the fiscal year ending March 31, 2013.

Consolidated sales are expected to increase 14% year-on-year to ¥7.400 trillion. Operating results are expected to improve from the previous fiscal years loss to a profit of a ¥180 billion. Equity and net loss contained within an operating result is expected to be approximately ¥5 billion, significantly less than the loss recorded in the previous fiscal year.

Net profit attributable to Sony’s stockholders is expected to improve significantly through a ¥30 billion profit. Next, I shall explain the forecast reach business segment. First is consumer products and services. We expect LCD Television sales to decrease due to our intension to not pursue volume and to run the business with an emphasis on improving the profitability structure.

On the other hand, we expect overall segment sales to increase significantly, due to an expected recovery, primarily in the digital imaging and PC businesses from the effects of the earthquake and Thai flood. We expect to record a significant decrease in operating loss for the overall segment, primarily due to recovery after the natural disasters and an expected significant decrease in LCD television losses, when we announced our profitability improvement plan for the television business in November last year, we said that we expected the loss in television to be ¥175 billion for the fiscal year ended March 31 2012, that we were aiming to reduce the loss in the fiscal year ending March 31 2013 to half the ¥175 billion amount and also that we were aiming to turn a positive into the fiscal year ending March 31 2014.

As I mentioned earlier compared to the original predictions loss excluding the impairments on the S-LCD and restructuring in the fiscal year ending March 31 2012 was ¥27 billion better than expected, ¥148 billion due to the benefit of the dissolution of S-LCD. Loss in the fiscal year ending March 31 2013 is expected to be around ¥80 billion, less than half the ¥175 billion.

Our television profitability improvement program is progressing according to plan. We expect sales in the Professional Device & Solutions segment to increase year-on-year because a low sales of the semiconductor category are expected to decrease due to the sale of the small and the medium sized display business. We expect to recover from the effects of the earthquake and floods primarily in the component category. For the same reasons, we expect operating results in the Professional Device & Solutions segment to improve significantly from the loss of the previous fiscal year and for a profit to be recorded.

Imaging sensors are expected to continue to maintain a high level of profitability and lead the segment in the fiscal year ending March 31 2013. Picture segment sales are expected to increase year-on-year due to a greater number of major releases, which will include The Amazing Spider-Man, Men-in-Black III and Skyfall, the next James Bond movie, also expected to contribute an increase in television revenue and an increase in advertising revenue from television networks.

Operating income is expected to increase, primarily due to the increase in sales. Music segment sales are expected to be essentially flat, by causing expected expansion of digital revenue will likely be offset by an expected continued decline in the physical market for music.

Operating income is expected to be essentially flat as well, primarily due to higher digital revenue and a decrease in the restructuring charges being offset primarily by one-time profitability relating to the recognition of digital license revenues recorded in the prior year.

We expect financial services revenue to increase due to the continuing steady expansion of the business. we expect operating income to decrease year-on-year, primarily due to our not incorporating any gains on the sale of securities investment, similar to those recorded in the previous fiscal year into our forecast for the fiscal year ending March 31, 2013.

But we are expecting this segment to continue to contribute a high level of profit. We expect sales of Sony mobile to increase significantly, due to the full consolidation of the business. Despite ongoing severe competition in the smartphone market on an operational basis, we expect a significant decrease in operating losses primarily due to improvements in the product mix and cost reductions. However, for the overall segment, due to the recording of the large remeasurement gain in the previous fiscal year, we expect operating results to deteriorate significantly compared to the previous fiscal year.

That ends my discussion of our results and forecast. I will now turn it over to [Kato], Rob and Hashitani for Q&A. Keisha, may I ask you to queue up the questions, please.

Question-and-Answer Session


(Operator Instructions) Your first question will come from the line of Daniel Ernst with Hudson Square Research. Please proceed.

Daniel Ernst – Hudson Square Research

Yes, good evening and good morning. Thanks for taking my call. Three question if I may. First, Hirai (inaudible) has had the new role of CEO for about 40 days now, so wondering if you could provide kind of a survey first 40 days of report card on what the mode at Sony is, how it’s progressing, any thoughts you can give us on the changing leadership and how Sony is feeling about it?

Two, on the game division, some of the publishers here are starting to talk about their investment in the next-generation consoles and I know you don’t want to announce any price, but see if you can comment on where you kind of think we are in the cycle with the PlayStation 3 having margin global installed base, now profitable and what your strategy is about harvesting that base now relative to going on building new platforms?

And then three on the Sony Mobile division, Android competition, no one have gotten more competitive, but seems that there’s been consolidation of leadership among one or two and some of the early guys like Motorola and HTC have really struggled in product and innovation and could you sort of comment on what you think the prospects are for Sony Mobile in the Android space as we progress through the year? Thanks.

Masaru Kato

Hi, this is Kato speaking. Our answer to the first question about, how is it doing in the first 40 days, I’ll sum it up in saying it’s very kind of what enthusiastic get up to for the team together and turnaround the company.

Well (inaudible) announcement early in February, we know the management team has constantly been discussion now to see what the problems are with the company, how to realign the organization, make appropriate assignments in personnel, all those things we put in place during the two months since he has been in office.

and I think during the strategy meeting that took place on April 12, I think a lot of the, maybe audience, the market could feel a sense of a purpose here, not that we lacked it in the past, but a more kind of our step up, geared up energy within the company. That’s my comment of today.

next, your question about the gaming business, next-generation console, as you said, I cannot touch upon anything about the next-generation console today, but as you rightly said, PS3 in its current stage of the life cycle, still I think are in kind of mid-stream, the life of the platform, the momentum is still very strong, we sold about 40 million units last year.

this year’s projections for home consoles is about the same outlook, 16 million this year. This includes the PS2 console categorizing this has a home console category, and the numbers are 16 million. So as the installed base grows as you know we make a lot of money on the software side and I think this trend will go on for another hopefully several years. .

So we’re not in kind of desperate need mode to have a next-generation coming to the business. But as I said, I cannot touch upon new generation at this point in time. If we do have anything to discuss, I think the people at SNE will deliver that message to you.

Third one, mobile, here Kuni Suzuki has been assigned for this business together with other parts of the mobile business that we have, mainly in tablets and in PCs. Now what he is trying to do is to kind of concentrate all the resources in terms of technology marketing et cetera to revitalize the business that we have in smartphones.

Now I think you can appreciate that in the past, we had a joint venture with Ericsson, which was a good joint venture, I would say. But in terms of product development, sharing technology joint ventures always have some limitations. Now with that limitation gone, we can go a full ahead and putting together all the technology resources that we have within the company. Also combined that with the network business resources and other content starting from games to music to movies and putting all those things together to make our offering in smartphone an attractive option for the consumer. That is the kind of the Board’s strategy of looking at the moment. I must say that in the first fiscal year this year, we turnaround more in the smartphone business and hope this business will turnout profit from the next fiscal year. Does that answer your question, I hope.

Daniel Ernst – Hudson Square Research

It does, thank you for the color, I appreciate it.


(Operator Instructions) Your next question comes from the line of Jeff Loff with Macquarie. Please proceed.

Jeff Loff – Macquarie Capital Securities

Hi, thanks for taking the question. So within the gaming business for the network services portion, can you tell us how much revenue was from the business in the first quarter and then given an update on your targets and progress there.

Masaru Kato

Network business is on an increase yes, but as we recall last year, we did have an unfortunate incident with a hacking, which did impact our business to somewhat. We do have all our customers returned to our service because I think some of the games that we offer are (inaudible) for our customers that nonetheless in order to get our security systems up and et cetera, the development of the system and the product offering has been somewhat delayed. So in that sense we are a little bit behind in the sales projection for the last fiscal year, but year-on-year we are on a continuous rise at the moment.

Now coming into this fiscal year, we hope this trend to continue as the installed base of the adaptable product are increasing, in PS3, PSP (inaudible) et cetera, so slightly behind in our projections since last year, but still on a very firm foundation to the business.

Jeff Loff – Macquarie Capital Securities

What was the number of sales for last year?

Yoshinori Hashitani

Okay, in terms of revenue ¥66 billion, that was the revenue for fiscal year ending March 2012.

Jeff Loff – Macquarie Capital Securities

Okay, and then just staying on the games business, for the portable devices you gave the target of 16 million units. Are you able to breakout the expectation for PSP and Vita?

Yoshinori Hashitani

Of the 16 million, approximately 10 million is Vita, the rest PSP.

Jeff Loff – Macquarie Capital Securities

Okay. Great, thank you very much.


You next question comes from the line of Shannon Cross with Cross Research. Please proceed.

Shannon S. Cross – Cross Research LLC

Thank you, very much and good evening. I have two questions, the first is, could you talk in little bit more detail about what you are seeing in terms of end demand for consumers on a geographic basis. And I’m specifically interested in Europe but also other geo, just about what the end demand is as well as if you had any change in terms of inventory levels with the distributions, your distribution partners on a whole. And then I had a second question.

Yoshinori Hashitani

Specifically what product category or segment are you taking, is it electronics that you are interested in?

Shannon S. Cross – Cross Research LLC

Yeah, electronics, just your consumer products, so whether on the PCs, the TVs, just sort of in general, I’m curious as to the health of sort of the consumer from your standpoint.

Unidentified Company Representative

Okay. We do have broad range of products, but talking in very general terms, if we divide our global marketing into let’s say, developed countries and emerging markets. I would have to say that the sales in the developed countries are kind of stable, not growing that much. For example, if you take the Japanese market in TVs, we switched from analog to digital last year, meaning that most of the consumers kind of bought the new digital TVs already. So this year, our sales have been in a very steep decline to TVs. this is not a economic situation, but rather switchover already accomplished done (inaudible).

Now if you look at markets in the United States and Europe, we’ll have to say it is not in a state that we enjoy the business at the moment. It is stable, but very competitive and in terms of growth not much. however, the bright side is that the emerging markets, BRIC countries, Latin America, Southeast Asia, in general, for us a very nice business, very high growth. So, if you look at the breakdown of our consumer electronic sales, last fiscal year ending March 2012, the split between mature markets and emerging markets was like 50/50. This split for us would shift more towards the emerging markets in the new fiscal year.

Shannon S. Cross – Cross Research LLC

Okay, great, thank you. And then my second question is on the Smartphone side, I’m curious, there has been a lot of discussion specifically around subsidies, if the carriers are willing to pay some discussions, some in Europe are pushing back on the amount that they are willing to basically fund. And so I’m curious as Sony looks it. And this business clearly getting very involved in this business, and how you are thinking about subsidies and pricing over the next couple of years?

Unidentified Company Representative

I’m sorry, I cannot discuss subsidies and pricing for particular product or [LVS]. But just talking in general, if you look at our smartphone business, we were strong in Europe, today maybe a little bit weaker, but we need – no we hope to regain our momentum in the European region.

In North America, our existence is very – I would say light slim – so here you have a lot of ground to cover. In Japan, we have enjoyed very nice business, so we’d like to continue. So on a geographical basis, I think they are in a lot of room for us to grow if we do our – Jeff, right again I’m sorry I cannot discuss subsidies and pricing at the moment.

Shannon S. Cross – Cross Research LLC

Okay, thank you very much.


There are no further questions in queue at this time. I will now like to hand the conference back over to Mr. Edward Reid for any closing remark.

Edward Reid

Thank you very much, Keisha. We would 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 question. Thank you all for joining us and good night from Tokyo.


Thank you for your participation in today’s conference. This concludes the presentation you may now disconnect your line. Good day.

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