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Executives

Sam Levenson - IR Contact

Nobuyuki Oneda - EVP and CFO

Robert Wiesenthal - Group Executive, Sony Corporation; and EVP and CFO, Sony Corp. of America

Analysts

Evan Wilson - Pacific Crest

Jessica Reif Cohen - Merrill Lynch

Daniel Ernst - Hudson Square Research

Heath Terry - Credit Suisse

Ben Atkinson - Gagnon Securities

Melissa Otto - American Century

Tuna Amobi - Standard & Poor's

Sony Corporation (SNE) Q3 FY07 Earnings Call January 31, 2007 8:30 AM ET

Operator

Good day, ladies and gentlemen. Thank you very much for your patience, and welcome to the Sony Corporation Consolidated Financial Results for the Third Quarter-Ended December 31, 2007. My name is Bill, and I will be your conference coordinator for today. At this time, all of our participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. [Operator Instructions].

I would now like to turn the presentation over to your host for today's conference call, Mr. Sam Levenson, Senior Vice President of Investor Relations for Sony Corporation of America. Please proceed, sir.

Sam Levenson - Investor Relations Contact

Great. Thanks so much for the introduction, Bill, and thank you all for joining us today, January 31, 2008, for the discussion of Sony's results for the quarter-ended December 31, 2007. I'm Sam Levenson, Senior VP of Investor Relations of Sony Corporation of America, and I'm joined this evening in Tokyo by Nobuyuki Oneda, Corporate Executive Officer, EVP, and CFO; and by Robert Wiesenthal, Group Executive, Corporate Development and M&A for Sony Corporation, and EVP and CFO of Sony Corp. of America. Thank you both very much for joining us. In just a few moments, I'm going to give a brief summary of today's announcement. Then, Mr. Oneda and Mr. Wiesenthal will be available to answer your questions.

Please be aware that statements made during the following remarks and Q&A session with respect to Sony's current plans, estimates, strategies, press release, and other statements that are not historical facts are forward-looking statements about the future performance of Sony. These statements are based on management's assumptions in light of the information currently available to it, and therefore you should not place undue reliance on them. Sony cautions you that a number of important factors could cause actual results to differ materially from those discussed in the forward-looking statements. For additional information as to risks and uncertainties as well as other factors that could cause actual results to differ, please refer to today's press release, which can be accessed by visiting www.sony.net/IR. With that, I'm now going to turn to today's announcement.

I'll begin with a discussion of our consolidated results and segment results for the quarter-ended December 31, and then review our revised forecast for the year-ended March 31, 2008. Consolidated sales, income before income taxes, and net income all set new quarterly records, as did equity and net income of affiliated companies. Consolidated sales increased by 10% year-on-year to 2.859 trillion yen. Consolidated operating income increased by 6% to 189.4 billion yen, largely due to the significant improvement in the Game segment. Other income and expenses improved 98.2 billion yen. This was mainly due to the recording of a gain of 81 billion yen from the global IPO of Sony Financials Holdings.

Equity and net income of affiliated companies increased by 9% year-on-year to 46.9 billion yen. The contributions of the major affiliates are as follows. Sony Ericsson contributed 30.4 billion yen, Sony BMG contributed 11.5 billion yen, and our joint venture with Samsung, S-LCD, contributed 3.1 billion yen. As a result of these factors, net income increased by 25% to 200.2 billion yen.

Now, I will take a few moments to discuss the quarterly results on a segment-by-segment basis. First, Electronics, sales in Electronics segment increased by 10% setting a record for quarterly sales. Sales to outside customers increased by 14%. By product, BRAVIA LCD TVs, VAIO PCs, and Cyber-shot Digital Cameras contributed to the sales increase. On the other hand, LCD rear-projection televisions, which suffered from a shrinking market, had a decrease in sales. Operating income in Electronics segment was the second highest quarter on record, a decline to 7% from last year's record quarter. While sales increase in this segment enjoyed a positive impact from the depreciation of the yen against euro, price declines exceeded cost improvements. The products, which generated the largest amount profit in the quarter, were digital cameras, video cameras, PCs, disk manufacturing, and broadcast and professional equipment.

Looking more specifically at the TV and semiconductor categories, overall sales of the television category for the quarter were approximately 508 billion yen, an increase of 20% year-on-year. Operating income was approximately 4 billion yen down 9 billion yen from last year. Due to the shrinkage of the market for LCD rear-projection TVs, we have decided to exit that business around March of this year and we'll focus on the fast growing LCD TV and OLED TV businesses.

In the Semiconductor category, sales for the quarter were approximately 231 billion yen, a decrease of 9%. Operating income was approximately breakeven, down 13 billion yen from last year. Profit decreased because of decreased system LSI sales as well as bringing forward from the fourth quarter to the third quarter certain one-time charges. As we said in October, we aim to make the semiconductor business profitable for the full fiscal year ended March 2008.

Next, Sony Ericsson. For the December quarter, Sony Ericsson posted an 18% year-on-year increase in unit sales to 30.8 million units. Sony Ericsson continues outpace industry growth, and during calendar 2007 they grew market share around 2 percentage points to reach slightly over 9% market share for the full year. And they continue to pursue their goal of being one of the top three players in the industry.

As a result of strategically increasing the proportion of lower priced handsets, revenue for the quarter was relatively unchanged at 3.771 billion euros. Income before income taxes was also relatively unchanged at 501 million euro. Walkman and Cyber-shot phones continued to contribute to the results. As I mentioned earlier, the equity and net income recognized by Sony was 30.4 billion yen.

In the Game segment, sales increased 31%. Approximately three quarters of sales came from hardware and accessories and the rest from software. Overall, hardware sales increased due to the contribution from PS3. Looking at each of the hardware platforms, first PS2, PS2 has reached its eighth year-end selling season, and although unit sales decreased year-on-year, PS2 sale continued to exceed the previous year in Eastern Europe, Middle East, and Asia, and we expect the console to continue to contribute to our business. As a result of the strength in the PS2 business, we are revising our unit forecast upward for the second time this year, and we now expect to sell 13 million units during the current fiscal year. This compares with our initial forecast of 10 million units and our more recent forecast of 12 million units.

Next PSP, PSP hardware unit sales increased significantly year-on-year. The console gained popularity among a wide user base after the introduction of the new model, expansion of the software offering, and an enhancement of the mobile entertainment experience through the addition of features such as TV viewing. Having reached a record for year-end selling season sales, we'll further expand the software offering and features and services associated with the device accelerating expansion of the platform. As a result of the strength in the PSP business, we're also revising our PSP unit forecast upward for the second time this year, and we now expect to sell 13 million units during the current fiscal year. This compares with our initial forecast of 9 million units and our more recent forecast of 10 million units.

Finally PS3, after the introduction of a new model and the reduction in sales price last fall, the expansion of the PS3 platform reached a new level as sales increased significantly. The world of PS3 entertainment is expanding as the cumulative number of disc based software titles released for PS3 at the end of December exceeded 250, and as a wide variety of downloadable titles have also been distributed. Although we feel very optimistic about the future of PS3, with unit sales in the third quarter reaching close to 5 million and sales increasing since the introduction of the new model, sales in the second half may not reach the level necessary to cover the likes in the first half of the fiscal year. And we have therefore revised downward our fiscal year unit sales forecast from 11 million units to 9.5 million units.

Next, turning to software. Although PS2 and PS3 software sales declined due to a decrease in units, overall software sales for the segment increased due to contributions from PS3.

So turning to operating results for the Game segment, they improved by 67.1 billion yen year-on-year to a profit of 12.9 billion yen, posting the first quarterly profit in two years. Although PS2 profit decreased year-on-year, both hardware and software for that platform contributed significantly to the profit of the segment. Strong sales of the new PSP model contributed to an increase in profit from that platform, and as a result of hardware cost reductions and significant software sales, losses in the PS3 business decreased significantly.

Turning to the Picture segment, sales decreased by 25% year-on-year primarily due to lower revenues from films released in the theatrical and television markets. Theatrical revenues decreased because there were fewer films released during the current quarter and none of these films were comparable to the highly successful films, Casino Royale and Pursuit of Happiness, released during the same quarter of the previous year. Home Entertainment revenues in the quarter were consistent with the strong performance in the same quarter last year. Spiderman 3 and Superbad contributed significantly to Home Entertainment revenues this quarter.

Operating income for this segment decreased by 50% to 13.2 billion yen. This was due to the relative underperformance of films released theatrically in the current quarter as compared to those released in the same quarter last year as well as the lower revenue from films released in the TV market.

Next, looking at Financial Services, Sony Life recorded an increase in premium revenue, reflecting an increase of insurance-in-force. However, the increased insurance premium revenue with Sony Life was more than offset by deterioration of the net valuation gains from convertible bonds and an impairment loss on equity securities as well as the deterioration in net gains from investments in the separate account, all brought on by the decline in the Japanese stock market. As a result, revenue for this segment decreased 21% and an operating loss of all 4.2 billion yen was incurred for the segment.

All Other, sales for All Other increased by 2% compared to the same quarter last year, primarily due to the consolidation of the US music publishing company, Famous Music, which was acquired by Sony/ATV Music Publishing and higher fee revenue from broadband connection services at Sony Entertainment Corporation. Our increase in trademark royalty income from the Sony Ericsson also contributed to the increase in sales. On the other hand, sales at Sony Music Entertainment Japan decreased, mainly as a result of decreased album and animation DVD sales. Operating income decreased from 12.3 billion yen to 10.3 billion yen, primarily due to a decreased income at Sony Music Japan.

Sales of Sony BMG were essentially flat year-on-year. Although there was continuing decline in the worldwide fiscal music market, the favorable sales of several recent releases and a favorable impact of exchange rates on sales outside the US offset this decline. Income before income taxes at Sony BMG decreased by 4%. This was primarily due to the recording of a benefit for an industry-wide settlement in the same quarter last year. Cost reduction at Sony BMG remained on target during the quarter. As a result, Sony recorded 11.5 billion yen in equity and net income from the joint venture.

Next, I’d like to review our forecast for the fiscal year ended March 2008. Our third quarter consolidated operating income, particularly in Electronics, exceeded our last forecast. For the full fiscal year, our current forecast is for a nearly six-fold increase in operating income and nearly a tripling of net income year-over-year. In fact, we expect this fiscal year's net income to be the highest on record. More specifically, our forecast has an increase in net income of 10 billion yen and a decrease in operating income of 40 billion yen, primarily due to external factors.

The factors leading to the change in operating income were the following. First, we revised our foreign exchange rate assumptions to reflect the appreciation of the yen compared with our October assumptions. Our foreign exchange rate assumptions for the fourth quarter are approximately 105 yen to the dollar and approximately 155 yen to the euro. This is a 10-yen to the dollar and five yen to the euro appreciation of the yen compared with our previous assumptions. Second, the result of Sony Life during the third quarter deteriorated compared with our October forecast due to valuation losses recorded as a result of the drop in the Japanese stock market. Finally, as a result of the deterioration in the financial markets, we expect to record lower gains of asset sales in the fourth quarter than originally anticipated in our last forecast.

Regarding other income and expenses, we forecast an increase in the gain from foreign exchange contracts compared to the October forecast as the yen has been appreciating more than anticipated. Also, in connection with the IPO of Sony Financial Holdings, the exercise of the Greenshoe Option, which was not included in our last forecast, occurred after the listing thereby resulting in a larger gain than originally anticipated. We also raised our forecast for equity and net income of affiliated companies by 10 billion yen due to the stronger performance of Sony Ericsson compared with our October projections. As a result of these factors our new forecast is for 8.980 trillion yen in consolidated sales, 410 billion yen in operating income, 490 billion yen in income before income taxes, and 340 billion yen in net income.

Before we turn to your questions, I would like to make an additional comment about the performance of our Financial Services segment. Our forecast is based on the market price of the portfolio of our Financial Services segment as of December 31, 2007. As a result, we caution you that risks such as the recent drop in the stock market could cause actual results to differ materially from the forecast. According to a hypothetical sensitivity analysis based on the portfolio of convertible bonds held at Sony Life on December 31, a fluctuation of 10 percentage points in the topics index could create an impact on consolidated operating income of approximately 16 billion yen. However, actual profit or loss could differ materially from this analysis because of a variety of reasons, which we've outlined in the press release.

With respect to CapEx, depreciation, and R&D, we've reduced our forecast for capital expenditures by 30 billion yen, primarily in the semiconductor area. There is no change from our October forecast for depreciation or R&D expenses.

Before Mr. Oneda and Mr. Wiesenthal take your questions, I would like to summarize the key points discussed today. Consolidated results for the third quarter outperformed our October forecast. More specifically, results in the Electronic segment exceeded our October forecast with particular strength in digital cameras, video cameras, PCs, disc manufacturing, and business and professional. As a result, we achieved the second highest quarterly results for Electronic segment in our history with over 75% of our Electronic sales coming from outside the U.S.

The Game segment posted a profit as continued strength in PS2 and PS3 propelled profits along with the reduction in the production cost of the PS3. PS3 software sales were also a significant contributor to the results year-over-year.

The Picture segment results continue at pace with our expectations for the full year, and the results of the Financial Services segment were impacted by weakness in the domestic stock market. However, the performance of the underlying businesses continues to be good. As I mentioned a moment ago, our current forecast is for nearly six-fold increase in operating income and three times the net income of last year.

With that, we would be very pleased to take your questions.

Question and Answer

Operator

Thank you very much, sir. [Operator Instructions]. Our first question comes from the line of Evan Wilson of Pacific Crest. Please proceed.

Evan Wilson - Pacific Crest

Hi, there. A question on the PS3, so you sold about 6.9 million PS3s to date in this fiscal year. The forecast for the fiscal year is 9.5 million units, leaving 2.6 million in fiscal Q4. Last year with the European launch you sold 1.9 million in fiscal Q4. Could you gauge the level of confidence around your ability to achieve that 9.5 million unit target that you have just set? And I have got a follow-up.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Yes, I think that we are very confident to achieve more than 9 million, 9.5 million, particularly the… reviewing the third quarter result, which is almost five million sets within the three-month period, and because of the more availability of the games soft, I think that the... we could achieve that level of numbers.

Evan Wilson - Pacific Crest

And is there any chance that that new 9.5 million unit target assumes any changes in the pricing or the skew plan for the PS3 overall?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

At this moment, we cannot comment anything about the price adjustment, but what I can say now is that we could supply more software available toward the end of this fiscal year.

Evan Wilson - Pacific Crest

Great, and just one final question. You said that sales in Electronics were up 14% outside customers. I was hoping if you could give us sales on a constant currency basis? Thank you.

Sam Levenson - Investor Relations Contact

Can you repeat the question please?

Evan Wilson - Pacific Crest

Sure. I was hoping for sales in consumer electronics on a constant currency basis.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Local currency basis, it was 14% up. This is primarily because of the better than expected sales of the LCD television. That is one of the big increases compared to our original forecast.

Evan Wilson - Pacific Crest

Sam said earlier that sales were up 14% outside customers; it's also up 14% in total on local currency basis?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

It's probably the… yen basis or local currency basis, there is no big difference.

Evan Wilson - Pacific Crest

Okay. Thank you.

Operator

Thank you very much. Ladies and gentlemen, your next question comes from the line of Jessica Reif Cohen of Merrill Lynch. Please proceed.

Jessica Reif Cohen - Merrill Lynch

Hi, I had a couple of entertainment related questions. Rob, could you just you talk about the writer's strike and what effect it... when... how long will it... just have to go on before it affects your own business? What are your expectations on fab? And as a result of the current strike, are there any changes in your cost structure… any fundamental changes in your cost structure going forward?

Robert Wiesenthal - Group Executive, Sony Corporation; and EVP and CFO, Sony Corp. of America

All right. Hi, Jess. I think right now our divisions continue to operate without substantial interruption. Obviously, it is devastating for the rank and file in the community where we are relatively optimistic the top piece to be going well. I think we probably... there is probably less impact on us versus other integrated companies because, while TV is very important to Sony Pictures, we are much broader than that and we obviously… don't obviously own a network. But right now, we are not undertaking any type of restructuring related to the strike.

Jessica Reif Cohen - Merrill Lynch

Okay. And can you talk about expectations on the actors. And then a completely separate question, what impact will Warner Brothers moving to Blu-ray have on the overall business, do you think?

Robert Wiesenthal - Group Executive, Sony Corporation; and EVP and CFO, Sony Corp. of America

In terms of... let me take the… in terms of Blu-ray, obviously when Warner decided to go exclusive to Blu-ray, that coupled with PlayStation 3 really picking enough steam with the price cut and also the consumer is really accepting a PlayStation 3 not only as a game machine, but as a home server and a Blu-ray… a great Blu-ray player. It definitely gave us a lot of momentum on the software side.

In the week ending January 20, post the announcement, 19 out of the top 20 next-generation disc sales in terms of ranking were Blu-ray. Only one of the top 20 that week was HDTV and that one was from Nielsen. So there is a lot of tremendous momentum.

In terms of how it attacks the numbers, I think that clearly Blu-ray title DOM next generation titles are enjoying a premium at retail in terms of pricing because the consumer is really appreciating the... not only the high resolution, the extra content, these are 50-gigabyte discs and there is a lot of value on this discs, not including interactive features that are starting to trickle out. So I think over the long-term you'll see some type of enhanced march on the video side on a per unit basis on Blu-ray versus a standard definition, but overall a lot of momentum with respect to Blu-ray and the hardware side seems to be even better.

Jessica Reif Cohen - Merrill Lynch

Can you comment on any payment that Warner may… or marketing support Warner may have received?

Robert Wiesenthal - Group Executive, Sony Corporation; and EVP and CFO, Sony Corp. of America

Warner Brothers I think recognize the fact that the consumers really started to make a choice in terms of which one makes sense, and I think that's a combination of the Brodmann titles, the PlayStation 3 being part of the install base, and the incredible capacity of Blu-ray. It just started to make sense to the consumer and I think Warner did a good job of kind of getting the industry in the right direction in terms of building momentum for one format rather than the kind of war that's been going on. And I think retail has been starting to follow too. I've been very, very impressed with all the retailers in terms of the focus on Blu-ray as a next-generation hardware platform of choice.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Let me have the… some statistical data that is available now. The hardware sales ratio before Warner Brothers announcement was 50-50 in U.S. market. Recently, the ratio is 66% versus 34%, roughly speaking, [inaudible] type ratio. And in the case of software, before Warner announcement, Blu-ray was 65 and HD was 35, now it’s over 80% and 20% ratio.

Robert Wiesenthal - Group Executive, Sony Corporation; and EVP and CFO, Sony Corp. of America

So, you’re looking 4 million players… Blu-ray players including PS3 in the U.S. a lot.

Jessica Reif Cohen - Merrill Lynch

A question on music, Rob, can you give us an update on your thoughts on what the music industry will look like in '08 and your focus on the music publishing, you can comment both on the recorded music side and also music publishing?

Sam Levenson - Investor Relations Contact

Can you repeat the last past of that question?

Jessica Reif Cohen - Merrill Lynch

If you could comment on your outlook for music for '08 and then also your focus on music publishing, will there be more... would you like to make more acquisitions? How will you grow that business?

Robert Wiesenthal - Group Executive, Sony Corporation; and EVP and CFO, Sony Corp. of America

Yes. Looking at Sony music right now, we had a pretty solid quarter. While the industry was down 10%, our revenues were flat due to weaker dollar. And we had a lot of success with Alicia Keys and Leona Lewis, which was only in the U.K., but it's now coming in March.

I think looking forward right now we have Natasha Bedingfield hitting stores, the new Michael Jackson, Thriller, 25th Anniversary Edition is starting to gather steam, and there are a lot of great artists who've contributed to that album. Listen, I think it's tough business.

Our operating income was up year-over-year. I don't think EMI and Warner can say that. So I think the combination of a lot of restructuring, a very strong focus on digital, the topline is declining slightly, but I think there is more EBIT to squeeze out of this business. I don't see much in the way of real progress going forward as an industry in terms of really impacting numbers, but the revenue line is so big. Digital continues to grow. I think over the next couple years it's going to be challenging. There is no question. So I think we will continue to watch our cost structure. We are going to keep redeploying our capital to more being our function, as well as the other parts of the business and focus on digital and hopefully we can keep increasing that. But it is a very difficult business. It will continue being difficult for the next couple years.

In terms of publishing, in many ways, a music publishing company is better equipped to be a music company in the future than a record label is, and I think there is a lot cross-fertilization between both publishing and the recorded music side. There is a lot of corporation, and the publishing side being very smart in terms of digital, lot of deals have been done there, acquisitions are expensive. As you know, we bought Famous Music. That integration has been going well. Leiber Stoller, which had the Elvis catalogue, very strong acquisition.

I don't see a lot out there in the acquisition side. Obviously, we are going keep looking. We will be opportunistic, but the prices are still expensive. Hopefully, because of the difficulties in the financing markets, we won't be competing with private equities much. So if something comes up we will be taking a look at it. I think we have a he great management team in there with Marty Bandier and others, and Jody Gerson who just came in. So I think it's a good… it's a very good business and I think we are going to continue to invest in the future.

Jessica Reif Cohen - Merrill Lynch

Thank you.

Sam Levenson - Investor Relations Contact

Can we have the next question please?

Operator

The next question comes from the line of Daniel Ernst of Hudson Square Research. Please proceed.

Daniel Ernst - Hudson Square Research

Yes, good evening… good morning, I mean in your perspective here. Thanks for taking the call. Three questions if I might. On the TV operating profit, can you give me a sense of what that magnitude of the rear-projection loss component within that was? And then, on the PS3, can you discuss where the cost down reduction is going? It took production cost at launch to where it is today. What has been the per-unit reduction you have been able to achieve?

And then last question, you discussed on the Tokyo call this morning a 5.2% target for the current fiscal year. You backed out the external factors, and they walked through that math kind of quickly and the translation was a little rough and I want you to give that math again? Thanks.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

The TV operating profit on rear-projection is… within this fiscal year could be over $100 million below. But as you know that the… we already announced to stop these businesses. So starting from now on, the lot will be quickly reduced.

Dan, your second question, PS3 cost update, since the introduction the cost has drastically decreased. How much I cannot disclose it. However, we can expect that sometime in late fiscal year '08, the cost to be equal to the selling price. Currently, the cost is higher than the price, but toward the second half the fiscal year '08 we could catch up.

5.2% operating profit is… if we exclude the extraordinary negative impact of the stock market, which is about 250 [inaudible] and drastic appreciation of yen, that will be… impact our total number 230 [inaudible], plus the… because of the subprime issues, our expected sales of the... some of the assets may be deteriorating, that is over 100 [inaudible]. So overall, the impact of those environment related issues generated over 600 [inaudible]. But on the other hand, our operation results… our profit would be increased about 200 [inaudible]. So therefore, if we exclude those extraordinary items, our bottom number would be 5.2% rather than the 5% we announced at the end of the October.

Daniel Ernst - Hudson Square Research

Okay, thanks. Just two follow-up questions. The 10 billion yen from the expected asset sale, is that asset… did not sell?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

I couldn't say… disclose the specifics of the assets we're trying to sell because of the very sensitive timings.

Daniel Ernst - Hudson Square Research

Okay, understood. And then back to TV just quickly for a second. You discussed on the call in Tokyo this morning a faster reduction in… like-for-like reduction in prices. But can you give me a sense of what the blended price decline or not was? You factored the mix of larger screen sizes and mix of '08 screen models. Thanks.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Well, as I explained this morning... this afternoon, the price deterioration of the big screen size is somewhere around 25% to 30%, and the mid to lower side is 20% to 25%, so that the average could be… mixed, blended average trailing decline is probably 25%. But a point is the… that price deterioration actually happened earlier than we expected. Now… the annualized basis it's 25%, but that came a little bit earlier than we expected.

Daniel Ernst - Hudson Square Research

Understood. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from line of Heath Terry of Credit Suisse. Please proceed.

Heath Terry - Credit Suisse

Great, thank you. Given this... given what seems like the incredibly positive impact on PS3 sales from the aggressive holiday ad campaign, do you intend to sustain that level of advertising, particularly as we go into a part of the year where you’ve got a lot of software support?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Yes, but to strengthen the PS3 platform we will continue to invest in this platform, either the advertisement, either the increase of the software promotions, yes, we would do.

Heath Terry - Credit Suisse

And at the same level as what we see during the holiday season?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Well, as you know, the biggest promotion period is the Christmas season so that the magnitude of the promotion cost may be smaller than the third quarter… I mean in fourth quarter compared to the third quarter. But the big expenses could be anyway invested. But the magnitude is smaller than the third quarter.

Heath Terry - Credit Suisse

Of course. There has been a lot of anecdotal discussion as we go into the television selling season pre-Super Bowl. I was wondering if you could give us an idea of what… understanding how initial it would be what you are seeing within the U.S. market as far as television and other electronic demand going into this important weekend?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Even though in the U.S. market itself the consumption is somewhat deteriorating, but in the case of the LCD probably because of the Super Bowl, because of the Olympic Year, the LCD... the market distribution is not so much deteriorating.

Heath Terry - Credit Suisse

Great. Thank you.

Operator

Thank you very much. Ladies and gentlemen, your next question comes from the line of Ben Atkinson of Gagnon Securities. Please proceed.

Ben Atkinson - Gagnon Securities

Hello. Thanks for having the call. First question is, could you just clarify... I want to make sure I heard correctly. When you were talking about TV losses of $100 million so far this year, in fact is that the number and was that entirely due to rear-projection?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

My answer… the previously announced 100… yes, this over $100 million worth of loss, it was created by the rear-projection... the product line, yes.

Ben Atkinson - Gagnon Securities

Okay. Thank you. Why was the tax rate up so much? And what is a reasonable tax rate to think about for this year… for the full year and for the next year?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Usually, the normal tax rate for… the Sony consolidated number is about 41%.

Ben Atkinson - Gagnon Securities

Okay.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

But this year because of the sales of the Sony Financial Holding stock that was sold by Sony Corporation and Sony Corporation's book value of the Sony Financial Holding is lower than the book value of the consolidated book. In other words, on a consolation basis the Sony Financial Holding's value of the stock has increased whenever it created the profit in their operation year-by-year. But on the other hand, on the Sony Corporation's book, those... the profit was not reflected because of the Japanese regulation. So the tax is imposed based upon the lower book value of Sony Group... Sony Corporation, but the consolidated accounting basis, the profit base is relatively small, but the tax is higher because Sony Corporation's book value is lower.

Ben Atkinson - Gagnon Securities

Okay.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

A little bit complicated.

Ben Atkinson - Gagnon Securities

Thanks. I got that. On the... sorry. For the next mid-term plan, when do you think we're going to hear what your thoughts are there?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Well, we didn't decide that kind of... that date yet, but I'm sure that if there is… the mid range... the announcement it could be sometime... the announcement would be 2008 budget numbers.

Ben Atkinson - Gagnon Securities

Okay. And on inventory, it looks like Electronics inventories are up about 5% year-over-year. It looks like they are in pretty good shape. Could you just give us a little color on Electronics and overall company inventory?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Yes. I think that the inventory level is normal and definitely stabilizing at this moment.

Ben Atkinson - Gagnon Securities

And finally, on the Gaming division, your target for fiscal year '08 to March '09 year is to be breakeven or profitable, is that correct?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Yes. That is… we are expecting.

Ben Atkinson - Gagnon Securities

Okay. Great, thanks so much.

Sam Levenson - Investor Relations Contact

Thank you.

Operator

Thank you very much. Ladies and gentlemen, your next question comes from the line of Melissa Otto of American Century. Please proceed.

Melissa Otto - American Century

Hi, yes. Thank you for the call. Just a question on software for the Games sector, would you give us a little more color in terms of what games did particularly well and just some details around what you expect for Games software going forward?

Robert Wiesenthal - Group Executive, Sony Corporation; and EVP and CFO, Sony Corp. of America

I think there are a bunch of anticipated titles that are going on sale in Japan such as Devil May Cry 4, which is going on sale by Capcom. And there is another important title by Sega. I think you are going to see a lot of promotions of the platform emphasizing that software line-up and also Metal Gear Solid 4: Guns of the Patriots has been a very big boost for us, which is a Q1 title, and I think that also later this spring you'll see a lot of the online services come in to bear, the PlayStation 3 network is already doing a lot of business in terms of downloads, both for kind of games that give you a sense of the game’s promotional value and then also downloads for more kind of quick action games. Gran Turismo 5 Prologue is another important title that is doing very well.

So I think they are starting to come on line. I think the important part is that the titles that you are seeing now are the first ones that are really taking advantage of the full horsepower of the PlayStation 3. We've said on these calls in the past that in year one people were just starting to learn the platform. Some titles weren’t in full HD, a lot of them were taking advantage of interactive features, but right now I think that the number of titles that we are having, 67 in Japan, 105 in the US, and 86 in Europe… and this is to what period, by the end of December. Those would be the new titles that would be coming on stream.

Melissa Otto - American Century

Great. Thank you very much.

Robert Wiesenthal - Group Executive, Sony Corporation; and EVP and CFO, Sony Corp. of America

Welcome.

Operator

Thank you very much, ma’am. Ladies and gentlemen, your next question comes from the line of Tuna Amobi of Standard & Poor's. Please proceed.

Tuna Amobi - Standard & Poor's

Thank you very much. It's Tuna Amobi from S&P Equity Group. My first question is on Blu-ray. I'm trying to understand, perhaps if you can quantify your aggregate marketing and promotional spending on the Blu-ray technology to date, and if you can provide some color on how that's accounted for, whether it’s allocated to the various products, what portion of that spending perhaps is capitalized as opposed to expense, that would be helpful.

Robert Wiesenthal - Group Executive, Sony Corporation; and EVP and CFO, Sony Corp. of America

We don't give that kind of detail in terms of Blu-ray promotion. Obviously, Blu-ray promotion is not only in the hardware group, from the player side also, PlayStation and also the Picture company, and we even have the music company participating in Blu-ray ray for artistes, but you are talking about a level of detail that is way beyond the scope of our disclosure.

Tuna Amobi - Standard & Poor's

Okay. Let me then rephrase it perhaps as a general question on that topic. Can you perhaps… putting all these together provide some indication of how much of those expenses or how much of those costs are capitalized as opposed to expensed at least that would be helpful, without getting to the nitty-gritty that you've mentioned.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

I think most of the investments into the Blu-ray is expensed. There is no... you know the… capitalized the project. I'll give you some… the indication. We are still losing money from the hardware business because of the... still the very early stage of this business, and the quantity is not so big. So therefore, our operation from the hardware BD [ph] business is negative, let's say, over 100 to 150 [inaudible]. But we are also making some profit from the Blu-ray disc itself.

Tuna Amobi - Standard & Poor's

Okay. Well--.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

The Blu-ray… the software disc itself we are making money, but the bare disc itself we are losing money. So overall, still it's a negative bottom number overall ***BD business in concerned.

Tuna Amobi - Standard & Poor's

All right, fair enough. Let me switch gears to the film division. Can you talk a little bit about your upcoming pipeline? And in that regard, if you can comment specifically as well on Spiderman 4, any potential details, time frame, thoughts, et cetera for that title?

Robert Wiesenthal - Group Executive, Sony Corporation; and EVP and CFO, Sony Corp. of America

In terms of the upcoming title, for the remainder of the fiscal year, Vantage Point with Forrest Whitaker, Dennis Quaid, and Matthew Fox; we are very excited about 21, which was the title that we obtained during the MGM transaction with Kevin Spacey, that's going to be in March at the end of the fiscal year, that's about the MIT students who went to Vegas and made a fortune playing Blackjack. And then going on, our big film for the remainder of this new fiscal year; Adam Sandler has a great comedy, You Don't Mess With the Zohan; we have our big summer pic in July, which is Hancock with Will Smith; and then obviously, you've probably seen the announcement for this fall on November, we just named the new Bond 22, Quantum of Solace, with Daniel Craig. And then Angels & Demons has obviously been pushed to May '09.

In terms of Spider… the next-generation Spiderman, Spiderman 4, we really haven't given any color on that yet, but obviously it's one of the most valuable franchises. Spiderman 3 was the biggest of all three so far, and we are looking forward to a lot more activity with that franchise, both in terms of film and television.

Tuna Amobi - Standard & Poor's

Is it reasonable to expect that 4 could happen by 2010 or 2011, at the farthest?

Robert Wiesenthal - Group Executive, Sony Corporation; and EVP and CFO, Sony Corp. of America

I sure hope it would happen by then, but we haven't given any date yet.

Tuna Amobi - Standard & Poor's

All right. And lastly, if you can provide some color as to which markets that most evidently adversely affected your PS3 sales to kind of lead to this downward shipment revision, that would be helpful, between Europe, North America, and Asia etcetera?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Roughly speaking, the PS3 sales volume of, let’s say, 900 to… the 10 million units, it is probably 1 for Japan and 4 in Europe and 4 in United States… or 4.5 something like that ratio.

Robert Wiesenthal - Group Executive, Sony Corporation; and EVP and CFO, Sony Corp. of America

In terms of sales to date.

Tuna Amobi - Standard & Poor's

Okay, that's helpful. Thank you very much.

Robert Wiesenthal - Group Executive, Sony Corporation; and EVP and CFO, Sony Corp. of America

One just quick follow-up to the gentlemen who asked about the PlayStation 3 software, the two titles we talked about that we are excited about, both… the ones Sega in March and Metal Gear Solid 4: Guns of the Patriots, those are exclusive to the PlayStation 3.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Luc Mouzon of Credit Asset Management [ph]. Please proceed.

Unidentified Analyst

Hi. Good afternoon. It is Luc Mouzon calling from Credit Asset Management. Question with regards to your regional exposure and especially on the negative trend that you are now experiencing in Japan and in the US. So my question is, did you see a real turning point in the quarter, I mean December especially seems to be... seems to have been a very weak month? And how do you see the trends for the ongoing quarter? What I mean is do you anticipate the US sales to be to very much depressed on the first quarter, and as well for the Japanese trend that was from my point of view bit weakened in the last quarter?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Okay. The... our forecast at the end of October, the yen-dollar, 150 yen equal to $1, and in the case of euro, one euro is equal to 160 yen. That was our original forecast at the end of October. Because of the recent appreciation of the yen, we have now revised the fourth quarter forecast as follows; $1 equal to 150… 105, and euro is 115, in other words… 155. So therefore, in the case of euro 5 yen stronger and in the case of the dollar is 10 yen stronger. Trend maybe… continue for a while I think.

Unidentified Analyst

Okay. But with regard to the local trends, I mean the trends in local currencies and especially in the Japanese market, do you see the drop that we experienced in the third quarter to continue on?

Sam Levenson - Investor Relations Contact

The question he is asking is about current sales trends geographically. So are you seeing a significant slowdown in the US market or are you seeing a significant slowdown in the Japan market?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

The sales trend as of this moment, there is no drastic decline in either market yet. But we are cautiously watching the slowdown, particularly in the United States and in Japan market.

Unidentified Analyst

Okay.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

As of this moment, there is no drastic decline in both the Japan and the U.S. market.

Unidentified Analyst

Okay, thank you.

Sam Levenson - Investor Relations Contact

I think we have time for one more question.

Operator

Certainly, sir. Your last question comes from the line of Ben Louy, Friedman [ph]. Please proceed.

Unidentified Analyst

Hi, guys. Thanks. I just have three quick housekeeping questions. Can you talk about what was the LCD TV's profits for this quarter? I know it was a loss of $10 billion last quarter? Also, last quarter you took inventory reserve for your gains of about $71 billion. Was there any reversals on the inventory side this quarter?

And lastly, as I go through the math in terms of the impact from the stock market decline, the subprime, and FX you said was about 58 billion yen for the full year. You guys reduced your full year OP by 40 billion. So if we fact that out, is that implicitly suggesting that your core business would have actually improved by 18 billion?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

The LCD TV profit in third quarter is the 70 [inaudible]… about 70 [inaudible] profit in third quarter. The reversal of the inventory result for the PlayStation 3 in this quarter is over 900 [inaudible]. What was the third question?

Sam Levenson - Investor Relations Contact

The third question he was asking was… when you looked at the FX decline and the impact of the stock market and the lower assumption on gain on sales, it would appear that the underlying performance of the operating businesses were actually better than expectation, is that correct?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Yes.

Sam Levenson - Investor Relations Contact

Do you have… did you have any other questions then?

Unidentified Analyst

No, that's it. Thank you so much.

Sam Levenson - Investor Relations Contact

Okay, ladies and gentlemen. Thank you all for joining us on our call today. I’d like to remind you of the contact information for the Investor Relations department. In Tokyo, IR can be reached at 813-6748-2180, in New York, our team can be reached at 212-833-6722, and in London the team can be reached at 44-207-444-9713.

Again, thank you all very much for joining us. That concludes today's call.

Operator

Thank you very much, Mr. Levenson, and thank you, ladies and gentlemen, for your participation in today's conference call. This concludes your presentation for today, and you may now disconnect. Have a good day.

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Source: Sony Corp. F3Q07 9Qtr. End 12/31/07) Earnings Call Transcript
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