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Executives

Edward Reid

Yoshinori Hashitani

Atsushi Kobayashi

Analysts

Daniel Ernst - Hudson Square Research, Inc.

Jeff Loff - Macquarie Research

Kota Ezawa - Citigroup Inc, Research Division

Sony (SNE) Q1 2012 Earnings Call August 2, 2012 9:00 AM ET

Operator

Welcome to the First Quarter Fiscal Year 2012 Sony Corporation Conference Call for Overseas Investors. My name is John, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Edward Reid. Edward, you may begin.

Edward Reid

Thank you very much for that introduction, John, and thank you all for joining us today, August 2, 2012, for the discussion of Sony's first quarter results. We hope you enjoyed music from John Mayer's latest chart-topping album Born and Raised while you're on hold.

I'm Edward Reid from the Investor Relations department here in Tokyo. With me on the conference call tonight is Yoshinori Hashitani, VP, Senior General Manager, Investor Relations Division of Sony; Steven Kober, Executive Vice President and Chief Financial Officer, Sony Corporation of America; and Alex Kobayashi, from the Corporate Planning Department here in Tokyo. Thank you very much to you all for joining us.

In just a few moments, we will review today's announcement, then we 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. And additional information, please refer to today’s press release, which can be accessed by visiting sony.net/ir.

Let me remind you that a webcast replay of the Investor meeting held earlier today along with 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.

I will begin by explaining the consolidated results for the first quarter ended June 30, 2012. Consolidated sales increased slightly. This was primarily due to the full consolidation of Sony Mobile, which had been an equity affiliate in the same quarter of the previous fiscal year. Partially offsetting this impact was a significant decrease in sales of televisions, resulting from a decrease in unit sales.

Operating income decreased JPY 21.2 billion year-on-year to JPY 6.3 billion. This was primarily due to an unfavorable exchange rate and deterioration in the operating income from PC, which experienced greater competition; and of Sony Mobile, which recorded increased intangible asset amortization and royalty adjustments pursuant to its full consolidation.

Although operating income was below the same quarter of our May forecast for the previous fiscal year, due to profitability improvements in the TV business, it was greater than forecast. With JPY 11.3 billion of restructuring charges included in the operating results for the quarter, we are proceeding steadily with efforts to transform our business structure.

We recorded JPY 20 billion in income taxes during the quarter. This was primarily because we did not record any tax benefits for losses we recorded at certain tax filing groups due to the establishment of valuation allowances against deferred tax assets in prior fiscal years. Net loss attributable to Sony Corporation stockholders deteriorated JPY 9.1 billion year-on-year to JPY 24.6 billion.

We have changed our segment reporting from this quarter due to a change in our organizational structure, which became effective on the 1st of April this year. Please refer to the earnings release for a detailed discussion of the changes in segment reporting and for the results of each segment.

In the interest of time, I will just touch on the results of our digital imaging, Sony Mobile and television businesses. Sales and operating income of digital imaging, which is now contained in the Imaging Products & Solutions segment were essentially flat year-on-year. Sales of video cameras were flat as increased unit sales, a rebound from last year which was affected by the earthquake, were offset by price declines. Operating income decreased due to price declines and increase in promotional expenses and the unfavorable impact of exchange rates. But we continue to maintain a high level of profitability.

Compact digital cameras experienced a significant decrease in sales and profit year-on-year due to a decrease in unit sales resulting from a significant contraction of the market, mainly in Europe and the U.S., as well as the impact of unfavorable exchange rates. Interchangeable single-lens cameras experienced a significant increase in sales and an improvement in operating results year-on-year due to the expansion of the market, a rebound in supply after the Thai floods in the prior year and an increase in unit sales of high-value added products.

Next I will talk about Sony Mobile, which is now contained in the Mobile Products & Communications segment. On a pro forma basis, had Sony Mobile been fully consolidated in the same quarter of the previous fiscal year, Sony Mobile's sales would show an increase of approximately 40%. This was primarily due to an increase in average selling prices due to the shift from feature phones to smartphones, and increased unit sales of smartphones primarily due to strong sales of the Xperia series.

Since the May forecast, we have revised our annual unit sales forecast for smartphones up to 34 million units. Despite the positive impact of the increased sales, operating loss would have expanded primarily due to the impact of a favorable exchange rates.

Next is televisions, which is now contained in the Home Entertainment & Sound segment. Television sales decreased 35% year-on-year to JPY 157 billion because, as we explained at the earnings result announcement in November of last year, we are managing our business with an emphasis on profitability rather than unit sales, and we were impacted by price declines and unfavorable exchange rates.

Unit sales for the quarter decreased 27% year-on-year to 3.6 million units. Excluding restructuring charges, a JPY 6.6 billion loss was recorded, but this was an JPY 8.1 billion improvement year-on-year. This loss includes JPY 1.5 billion of impairment charges. As a result of our managing the business with an emphasis on profitability and our continuing to cut costs, unit sales and revenue of televisions for the quarter decreased year-on-year but operating loss improved to less than half the amount recorded in the same quarter of the previous fiscal year.

The loss was better than our May forecast, and we are making steady progress towards a profitable structure. For the rest of the fiscal year, we are taking a cautious view of the market, especially in Europe and China, and we have revised down with our unit sales forecast from the 17.5 million units announced in May to 15.5 million units. However, we have made no change to our May forecast for a full year operating loss of approximately JPY 80 billion because we expect profitability to improve.

Going forward, we plan to continue to improve our profitability structure as we aim to turn a profits in the fiscal year ending March 31, 2014. Lastly, I will explain our forecast for the fiscal year ending March 31, 2013. Assumed foreign currency exchange rates for the second quarter onward are approximately JPY 80 to the U.S. dollar and approximately JPY 100 to the euro.

Consolidated sales for the fiscal year ended March 31, 2013, are expected to be JPY 6,800,000,000,000, primarily down to downward revisions in annual unit sales forecast of key products resulting from deceleration of the economy and updated foreign exchange rate assumptions from the second quarter to account for the appreciation of the yen against the euro.

Consolidated operating income is expected to be JPY 130 billion, JPY 50 billion lower than the May forecast. The forecast for each business segment is as follows: sales and operating results of the IP&S segment, in which the annual unit sales forecast for compact digital cameras was revised downward; the Game segment, in which the annual unit sales forecast of portable hardware was revised downward; and the MP&C segment, in which the annual unit sales forecast of PCs was revised downward are all expected to be lower than the May forecast.

Sales of the HE&S segment are expected to be lower than the May forecast, but operating results are expected to remain unchanged from the May forecast. The forecast of operating income in the Pictures, Music and Financial Services segments are unchanged from the May forecast.

All Other and Corporate and Elimination are expected to improve compared to the May forecast, due to improvement in the operating results of businesses in All Other and cost improvements at headquarters.

That ends my discussion of our results and forecasts. Please note that our CFO, Mark Kato, is not available to be on the call today due to health reasons, and we apologize for his absence. I shall now turn the call over to Hashitani-san, Kobayashi-san and Steve in New York for Q&A. John, may I ask you to queue up the questions, please.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Daniel Ernst from Hudson Square Research.

Daniel Ernst - Hudson Square Research, Inc.

Two questions, if I might. Looking at the big picture reduction in sales forecast for the year, clearly, currency is not helping, the macro environment is not helping. But those 2 issues were present in May when we heard the forecast previously, and I'm wondering to what extent is the reduction in forecast also a function of product positioning relative to competitive products on the market? And then second question on the mobile phone, where you're actually raising your smartphone projections after, I think, a reasonably strong launch of the new Xperia line, I'm wondering if you have any color on what the sell-through of those products is that give you confidence that carriers will begin to reorder and give you that continued momentum to achieve the new raised guidance.

Yoshinori Hashitani

Yes. Of course, the biggest one of this is the reduction's impact to the top line based -- due to the currency movement. But I told you that maybe more than that, impact over the translation [ph] in the euro, in European markets also make a big impact to our results. And also, as we explained that the -- intentionally where -- to keep the profitability of TV business, we are accepting the reductions over the shares in the U.S. market or in European market for TV business. So that's also making a big impact to the reduction with the sales over the total products.

Atsushi Kobayashi

In addition to that, in the case of the business to come out in Europe especially in Europe over the Chinese market, of course, we can try to manage, maintain the market share. But the market itself is declining, so the top line is also in decline. And regarding the second question, already, or I could say this past quarter, we sold the -- sorry, 7.4 million units of smartphones, and especially the acceptance in the Japanese market is quite high. So this was the -- one of the reasons we achieved the -- sales of the smartphones in total for past quarter is better than what in line or better than our expectation. So that we decide to increase the total sales for this fiscal year.

Daniel Ernst - Hudson Square Research, Inc.

Understood. And just as a housekeeping item on a comparable like-for-like basis, what was smartphone sales for the combined Sony Ericsson for this period last year?

Yoshinori Hashitani

Wait a second, I'm checking the figures. Sorry, we don't have the figures for the quarter-by-quarter basis for last year's results. But for your information, last year's sales was say 8.2 million units including feature phones and smartphones.

Operator

And our next question is from Jeff Loff from Macquarie.

Jeff Loff - Macquarie Research

Just on the Imaging segment, you said that compact was weak but interchangeable cameras grew. I'm wondering can you talk about the trend between mirrorless and DSLR? And are you seeing DSLR slow as mirrorless grows?

Edward Reid

Jeff, it's Edward here. I'm afraid we don't give a breakup for the Alpha series of cameras between mirrorless and SLT type of cameras.

Jeff Loff - Macquarie Research

Okay. Shifting gears to the Game segment. It looks like portable units were down more than 20% year-over-year despite the launch of Vita. Is that Vita falling below expectations? Or is it PSP that's trending below expectations?

Yoshinori Hashitani

Sorry, this is also, we are not close -- disclose Vita and PSP separately. We just announce the total number.

Jeff Loff - Macquarie Research

Right. Even if you don't break it out, I mean obviously, it's clearly tracking below expectations because you lowered the full year target by 25%. So are you able to give any insight on where the weakness is if it's Vita or PSP, even if you can't give specific numbers?

Yoshinori Hashitani

For your reference, portable systems hardware as compared to last year, it increased almost double. And of course, compared with our last forecast, we revised the figure from 16 million units to 12 million units. And the decline in the forecast is from both the PSP and PSP Vita. And the -- as you know, the PSP Vita, we are -- have to make a huge investment for this hardware. Key chips are also outsourced or buying from our site, so that the reductions of this forecast are not making an issue, a big impact to the bottom line. The -- so the reductions of our forecast for the bottom line for the Game business is mainly due to the currency movement, not because of this forecast change for the forecast for the sales.

Jeff Loff - Macquarie Research

And then the last question is just on mobile handsets. Looks like there's still limited exposure in the U.S. despite the fact that you're putting more emphasis, I guess, on marketing, marketing spend there. How long do you think it'll take you to get a stronger presence in the U.S., and what do you think is the hang-up there?

Yoshinori Hashitani

Yes, I can't tell you how to -- how many years to achieve there some certain amount of market share, but we are trying to think about how to reach the higher market share. The first of all, we have to communicate with the carrier. And by utilizing the Sony's brand, we are going to increase market share. But it will take more than 1 or 2 years I think. Sorry, I just want to -- we don't have any concrete idea when we're going to make going to the U.S. market again in the large amount. At this moment, we haven't concentrated to the areas which we are not strong. We think we are having a strong market share like in Japan and Europe. And also, so that the -- through those expansions over those markets, we are going to achieve the current forecast. And so that if we decide to go at the time, we're not having concrete ideas. But the -- when we found it's a good chance, then we will decide. But at this moment, we don't have any concrete ideas.

Operator

And our next question is from Kota Ezawa from Citigroup.

Kota Ezawa - Citigroup Inc, Research Division

I have a question on the downward revision. I'd like to see if this action is realistic enough or it might have a further downside. In this downward revision in operating profits of JPY 50 billion, you mentioned that the currency impact is all the reason for this. So basically, currency impact is JPY 50 billion. And on the other hand, the having JPY 600 billion sales estimate cut off in this revision, how much do you see that marginal profit reduced by this sales shrink? And also, what is specifically the additional reason to cover this profit deterioration by sales reduced? And could you just specify those additional cost reduction or savings as many as possible, like personnel costs or advertisement and promotions? Or it might be an R&D cost, additional reduction and so on?

Yoshinori Hashitani

Yes, the currency impact is the figure which you described, so that the deduction with the top lines will be offsetted by the cost reductions and also the deductions of the cost side and also the sales under marketing cost side. And the -- so that's how we characterize it, the deduction of the operating profit at this moment for the forecast basis.

Kota Ezawa - Citigroup Inc, Research Division

Is that fair to say JPY 600 billion of sales reduction in the guidance brings like JPY 200 billion, like operating profit negative impact? And are you saying the same size of a JPY 200 billion cost reduction additionally you're nearly planning to?

Edward Reid

Just one moment while we calculate.

Yoshinori Hashitani

Okay. Let me put it this way. After the impact of the foreign exchange rate for the operating profit, it's around 5 -- a JPY 50 billion, and we are trying to offset to keep the price or to increase the price when the product itself is very strong. As for the sales reduction based on the deduction of the sales unit, we are going to cover their improvement of their operating cost reduction. We can't describe the amount itself right now, but that is the kind of the explanation.

Kota Ezawa - Citigroup Inc, Research Division

Sorry, any clarification about this cost -- additional cost reduction? Is it coming from which cost? Any color is fine.

Yoshinori Hashitani

Yes, a lot are R&D costs. And at the same time, the marketing costs or the costs are based on their manpower. So all the costs is one of their items we are going to reduce.

Operator

[Operator Instructions] And there's no further questions at this time.

Edward Reid

In that case, if you have no further questions, we're ready to end the call.

Operator

Okay. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Edward Reid

Thank you very much, John. We'd like to thank all of you for joining us today to discuss the announcement. Please feel free to contact our London, New York or Tokyo Investor Relations offices if you have any further questions. Thank you all for joining us, and good night from Tokyo.

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