Sony (SNE) Q1 2017 Results - Earnings Call Transcript

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About: Sony Corporation (SNE)
by: SA Transcripts

Sony Corp. (NYSE:SNE) Q1 2017 Earnings Call August 1, 2017 4:15 AM ET

Executives

Unverified Participant

Kenichiro Yoshida - Sony Corp.

Kazuhiko Takeda - Sony Corp.

Analysts

Mika Nishimura - Credit Suisse Securities Japan Ltd.

Junya Ayada - Daiwa Securities Co. Ltd.

Mikio Hirakawa - Merrill Lynch Japan Securities Co., Ltd.

Kota Ezawa - Citigroup Global Markets Japan, Inc.

Masahiro Ono - Morgan Stanley MUFG Securities Co., Ltd.

Masaru Sugiyama - Goldman Sachs Japan Co., Ltd.

Yu Okazaki - Nomura Securities Co., Ltd.

Ryosuke Katsura - SMBC Nikko Securities Inc.

Unverified Participant

Thank you for waiting. Ladies and gentlemen, this is the Earnings Announcement of the Consolidated Results for the First Quarter of the 2017. And thank you very much for being with us despite surely busy schedules.

And our speakers here today, first of all we have Kenichiro Yoshida, Executive Deputy President and CFO; and Corporate Executive, Corporate Planning & Control and Accounting, Kazuhiko Takeda, and Corporate Exec responsible for Finance and Corporate Development is Atsuko Murakami. Today, Mr. Yoshida will give you a presentation on the first quarter results for 2017, as well as a full-year forecast for the year. And then we have some time for questions and answers. All together, we plan to spend 40 minutes.

Now, Mr. Yoshida, would you please start?

Kenichiro Yoshida - Sony Corp.

I'm CFO, Kenichiro Yoshida. Today I would like to explain these two topics in the next 15 minutes. Consolidated sales for the first quarter of fiscal 2017 increased 15% year-on-year to ¥1,858.1 billion. Consolidated operating income was ¥157.6 billion, approximately 2.8 times as high as the same quarter of the previous fiscal year. Net income attributable to Sony Corporation's stockholders was ¥80.9 billion, about 3.8 times that of the same quarter previous year.

As is shown in this slide, the operating income in the first quarter of fiscal 2017 and the fiscal 2016 include many onetime gains and losses. In the first quarter of fiscal 2016, a negative impact from the Kumamoto earthquake and the impairment against the camera module long-lived assets were recorded. In the first quarter of fiscal 2017, gain from the sales of the manufacturing subsidiary of camera module business and insurance recoveries related to the earthquakes were recorded. Excluding these onetime items, operating income would have increased ¥11.4 billion, or slightly more than 10% year-on-year.

This chart shows the result of each segment. From the first quarter, we eliminated from Corporate -- Components segment and the business previously within the Components segment now included in All Other. The transfer of the battery business, which accounts for approximately 60% of the sales of the former Components segment, the Murata Manufacturing Company Limited is expected to be completed on September 1 of this year. Business that will remain in All Other includes Storage Media business.

Next is consolidated results forecast for the current fiscal year. Our consolidated sales forecast has been upwardly revised by ¥300 billion, primarily due to the impact of foreign exchange rate. The forecast for operating income, income before income taxes, and net income remain unchanged from the April forecast. Our foreign exchange assumptions have been changed to ¥110 to the U.S. dollar and ¥120 to the euro, as is shown here. And as for the interim dividend for fiscal 2017, we plan to pay ¥12.50 per share.

Next, you can see the forecast for the fiscal year by segment. As is shown here, we have changed the operating income forecast for the Imaging Products & Solutions, Game & Network Services, and Semiconductors segments. As is shown in the upper-right, we used ¥112 to the U.S. dollar and ¥120 (sic) [¥128] to the euro when formulating the forecast for each segment. There is an approximately ¥40 billion negative impact on operating income, which is included in the Corporate and elimination, resulting from the difference caused by our using the rates for the consolidated forecast, ¥110 to the U.S. dollars and ¥120 to the euro, as well as the impact of the emerging market currencies.

Now, I will turn to the situation in each of our businesses, and first I will explain Mobile Communications segment. Mainly due to a change in the product mix of smartphones, sales for the quarter decreased 3% year-on-year. Operating income increased year-on-year to ¥3.6 billion, primarily due to reduction in operating costs and research and development expenses.

Our sales and operating income forecasts for the fiscal year remains unchanged. We have maintained our ¥5 billion operating income forecast despite further increase in the prices of memory and other smartphone components above what we expected in April, because we expected to offset negative impact of these increases with cost reductions.

Next, talking about the Game & Network Services segment. Sales for the quarter increased 5% year-on-year. Operating income declined ¥26.3 billion year-on-year to ¥17.7 billion, because of the absence of a significant contribution from Uncharted 4, the first-party title that we had in the previous year the same quarter, and also from the impact of the price reduction on PS4 hardware. So Network revenue increased 34% year-on-year.

And forecast for full year, operating income was revised upward by ¥10 billion to ¥180 billion due to the appreciation of euro against the dollar. The ForwardWorks, which distributes game applications for mobile products, started to distribute its first game Everybody's Golf on July 4. It has been downloaded more than 2 million times, and we look forward to expanding the business going forward as we plan to distribute our first original content called Sora to Umi no Aida from the beginning of October.

Next, touch upon the Imaging Products & Solutions business. Sales for the quarter increased 27% year-on-year, mainly due to the absence of the negative impact that we experienced last year of the component shortages resulting from the earthquakes in Kumamoto. The increase in sales helped the operating income to increase by ¥15.7 billion year-on-year to ¥23.2 billion. Excluding the impact of the Kumamoto earthquakes, the underlying year-on-year increase in operating income would have been ¥6.1 billion, as shown on this slide.

In the digital imaging business, we launched the α9 in May, a full-frame mirrorless interchangeable single-lens camera, which has a high-rate burst capture feature. And this camera is being received very well not only by professional sports photographers, but also by news photographers. And our operating income forecast has been here revised upward by ¥12 billion to ¥72 billion, mainly due to the impact of the yen's depreciation.

Next, explaining about the Home Entertainment & Sound segment. Sales for the quarter grew 9% year-on-year and operating income increased ¥2.3 billion up to ¥22.6 billion. And we continue to improve the product mix, reflecting a shift to high value-added models such as 4K TVs. Sony's OLED TVs, which we launched in June, have superior picture and sound quality, as well as an excellent design, and their sales continue to be strong. Our operating income here, the forecast for the fiscal year remains unchanged.

Next a few words about Semiconductors segment. Sales for the quarter rose 41% and operating income of ¥55.4 billion was recorded, which is an improvement of ¥99 billion year-on-year. This increase in sales were primarily due to the increase in unit sales of image sensors for mobile products and the absence of the negative impact of the earthquakes that we had in the same quarter the previous year.

As I mentioned at the beginning of my remarks, there were onetime items including earthquakes – impact of the earthquakes and the camera modules. And excluding these onetime items, as is shown on this slide, underlying operating income would have increased ¥21 billion year-on-year. The main reason for the increase in underlying operating income was increase in unit sales of image sensors for mobile products that I mentioned before.

Our sales forecast has been revised down by ¥20 billion to reflect image sensor unit sales for mobile products, which are expected to be lower than the April forecast. The operating income forecast has been revised upward by ¥10 billion to ¥130 billion, benefiting from cost reductions previously undertaken, but partially offset by the negative impact of the decrease in sales.

Next I will explain the Pictures segment. Sales for the quarter increased 12% year-on-year and a ¥9.5 billion operating loss was recorded, an improvement of ¥1.1 billion year-on-year. The main reason for the operating results improvement was a contribution from the Television Productions business. There is no change to the forecast for the fiscal year.

As we announced this morning, we have decided to acquire Funimation, a distributor of anime content in the U.S. We plan to acquire 95% of the equity of the company for USD 143 million. As we also announced previously, Tony Vinciquerra became CEO of Sony Pictures on June 1. Tony has experience managing a variety of entertainment business and has accomplished much in his career. He is currently working with the management of each business to quickly assess the status and issues facing their businesses.

Spider-Man: Homecoming was released on July 7 and is recording a high level of box office revenue, mainly in the U.S. The movie will be released in Japan on August 11. We plan to release Venom, an offshoot of Spider-Man, in the fall of 2018. Like Spider-Man and Venom, there are hundreds of Marvel characters for which we have the filmmaking rights and we plan to proactively leverage that IP going forward.

Next I will explain the Music segment. Sales for the quarter increased 19% year-on-year, and operating income increased ¥9.5 billion year-on-year to ¥25 billion. Fate/Grand Order, a mobile game application, continues to contribute to financial performance. There is no change to the forecast for the fiscal year.

Lastly, I will explain the Financial Services segment. Revenues increased 30% year-on-year, but operating income decreased year-on-year to ¥46.2 billion. Revenue increased due to the improvement of investment performance in the separate account at our primary business, Sony Life, primarily reflecting a rise in the Japanese stock market in the current quarter. However, the impact of the improved investment performance had a limited positive impact on the operating income, because the improvement in investment performance is ultimately attributed to policyholders.

The year-on-year decrease in operating income was mainly due to the deterioration in net gains and losses from hedging of equity securities, which are classified as other securities for accounting purposes and a decrease of net gains on sales of securities compared with the same quarter of the previous fiscal year. There is no change to the forecast for the fiscal year. Finally, I will again show the forecast by segment.

So compared to the previous years, cash flow analysis and other data are in page 18 and 19 of the handout documents. As for the first quarter, there's a description on that as well. So please refer to that section on the first quarter as well. Thank you very much. This concludes my explanation.

Question-and-Answer Session

Unknown Speaker

Now the floor is open to your questions. Those of you with questions, please wait for the microphone to be brought to you and please identify yourself by stating your name and affiliation before asking the questions. When the questions are asked in English, there will be consecutive interpretation into Japanese and answers will be given in Japanese, and please confine the number of questions to two per person. Any questions, please.

Mika Nishimura - Credit Suisse Securities Japan Ltd.

Nishimura of Credit Suisse. Thank you for this opportunity. Two questions concerning Semiconductor business. The first point about image sensors for smartphones and the sales unit that was revised downward, what is the background to this? And also, the second half of the year and the next fiscal year, what is the situation about the inquiry of Semiconductors?

The second point, in the materials distributed this time, you talk about the improvement of cost of production as the element for upward revision, and in earlier days you talked about your emphasis on the reduction of production cost. What is the state of progress of this plan? I think it is going very well. And what would be the actual impact of it?

Unknown Speaker

Thank you. The first question has to do with the downward revision of the sales unit of image sensors for smartphones. As you know, the price of memory is increasing and the impact of that is felt in the sales of high-end smartphones as we see it. However, it's not that the major market trend is changing. We did make a downward adjustment that is compared to our estimate of the – the estimate or forecast we made at the beginning of the year and we are cautious about third quarter and fourth quarter. But for over – year-on-year, I think we will be able to achieve a two-digit growth. So the major trend of dual camera and also high functionality of front-faced camera, the image sensors, these major trend remain unchanged. And about the cost of production, improvement of yield, as well as the plant operating cost included, and we see a smooth progress in cost reduction.

Unknown Speaker

Next question, please.

Junya Ayada - Daiwa Securities Co. Ltd.

Thank you. Ayada, Daiwa Securities. I also like to ask two questions. One on Semiconductors and also about the upward revision you made on the overall results. First of all, image sensors, the first quarter factory operation, how are you doing? And also the wafer production, what is the situation? And also, in the second quarter unit price is going to rise according to your guidance. Is that still the case?

And the second question is about the assumption you used for the ForEx, the dollar and euro. You've made some changes here. In terms of your sensibilities, just by changing the ForEx assumptions, you should have revised the profitability upward a little more than you had done. On page 5, the Corporate and eliminations negative ¥32 billion is what I see. And what is the impact of the ForEx fluctuations out of this?

Kenichiro Yoshida - Sony Corp.

Thank you. Your first question, I will answer the question. The second point will be answered by Mr. Takeda. So the rate of operations in the first quarter, please think of it as a full operation basically. In terms of the input basis on average 87,000, and in the second quarter as well we maintained the same level of production. And the unit price, there's no major change in the unit price, but we expect there will be slight increase in the unit price.

Kazuhiko Takeda - Sony Corp.

About assumptions we use for ForEx and the numbers you see in the others column – others line, first of all, the ForEx assumptions, as we explained, for all the business segments, the dollar is ¥112 and euro is ¥120 (sic) [¥128]. That's the actual rates as of July 1. So those rates are used as assumptions in the business plans. But from a consolidated basis, we are conservative. The dollar is ¥110 and euro is ¥120, which is [ph] 1.09 the basis (19:47) between the two. There is a likelihood of fluctuations going forward, so we took a more conservative view. So the difference translates to ¥40 billion. The rest, the ¥70 billion, which is the business risk that the headquarter is now accounting for, compared to April it's not the case that the business situations have aggravated, but the business units have prepared their plans at a high end, more or less.

In the meantime, the cost of memory has increased. The competition is getting more severe. Demand is expected to decline, we think. And in Financial Services segment, the interest rates and fluctuation of stock markets are the factors that affect the results. So we decided to take more cautious assumptions, and these factors will affect the business units. And therefore, the business operational risk was added by the headquarters for ¥32 billion. And the – we made a downward revision to three businesses, that's why we introduced the numbers.

Unknown Speaker

So the person in front, please.

Mikio Hirakawa - Merrill Lynch Japan Securities Co., Ltd.

Hirakawa, Merrill Lynch. I have two questions about Music and then the dividend. First, Music, this time you increased revenue as well as profit markedly this time. But as to the revenue, sales, the image media they have ¥15 billion, the Music production the ¥10 billion. But if the profit increase was – it doubled into ¥9 billion. But anyway as to the ratio between the two, what do you think? And as to the fiscal year it's ¥75 billion and then in the first quarter it's ¥25 billion. But in the seasonality, the profitability should increase from the October to February. So what is your thought on the risk analysis? That's my first question.

The second part of my question is follows. Today, the first half, the dividend is ¥12.50, was indicated this is based upon the last year's pattern. It will be the same so that – in the latter half, so that the ¥25 per annum. In other words, that's the dividend payout ratio, it's about 10% or so. But as the recurring business, you are increasing the portion so that the dividend payout ratio is likely to go up maybe depending upon that. So as of now, could you please give us your philosophy, idea as to the dividend payout policy? Thank you

Unknown Speaker

Thank you very much. About Music and the second point is our dividend policy. So I would like to make a comment first, and after this next point, Mr. Takeda will give some additional comment on the first point. As to second, Ms. Murakami will give additional comment. As to the first question about Music, the category details are not really disclosed, so please forgive us. We are not disclosing that detailed breakdown, but generally speaking, the image ones especially, Fate/Grand Order is making a great contribution. That has been unchanged. Throughout the year we haven't changed the annual analysis that – we just ended the first quarter now. So in the future, in general, the market should change in a good way, but we are facing with fluctuation. Cost factors and demand are cautiously analyzed as well in coming up with assumption.

As to the dividend payout, we have a major fluctuation of the profit up and down, so we'd like to stabilize that operating income. So the word key – recurring business is a keyword emphasized by President Hirai, but that has not been realized, this emphasis on recurring business. ¥12.50 in the first half, then another half we haven't decided yet. Taking that into account, based upon that thought, how can we achieve the stable operating income and always revising upward is a challenge. But on the other hand, as to the balance sheet, we have to pay due respect to that as well. So that's my comment on Music and dividend ratio. So, I would like to hear the details.

As to the Music, yes, in the second quarter and later we are not assuming any major risk. Digital streaming market is expanding. And, of course, in Japan the Grand Order is very smoothly expanding. But as to the Fate/Grand Order, this is the third year, so in the second quarter and so on that we have, of course, a view on that too.

As to the dividend, the interim payout is ¥12.50. As to the end of the year payout, we have not decided yet. So the third quarter results, the one at the time of the announcement we will announce that, too. So we'd like to make a stable contribution to the profit and that – of course, that should be reflected in the dividend level. But we have to make investment for the future growth. And then financial structure should be strengthened and solidified in the future. So we'd like to strike a balance and we decide the eventual level of the payout ratio in the next phase of the mid-range plan, dividend policy and as a return to the shareholders, we will consider that aspect as well.

Unknown Speaker

Next question, please. Yes?

Kota Ezawa - Citigroup Global Markets Japan, Inc.

Thank you. Ezawa, Citigroup Securities. Two points. First point, in the first quarter, the operating income results, how different it was from the earlier assumption or what has been the forecast and the results, some explanation and other relevant factors in your view including ForEx impact? And also for some of the business group, the annual forecast has been revised upward. Is it because of the good results of the first quarter or does it have any effect or not?

The second point, you talked about Corporate and elimination and the risk amount ¥70 billion. And I don't know if it could be called as buffer, but compared to the previous years, this amount appears to be high. And as CFO, do you foresee any major risks for this year different from other years, so that the higher amount of risk buffer is incorporated or, at this point in time, you just happen to come up with this number, it's not that specific expectation is there about the possible risks?

Kenichiro Yoshida - Sony Corp.

The first point, I will ask Takeda-san to supplement me. About the initial assumption, I would refrain from making comment. It's not that we did not have any assumptions. But internally, the earlier numbers, we try to be conservative and it might be misleading. Therefore, we look at the trend and the comparison over the previous year in coming up with our analysis and forecast. About the buffers, size of buffers, it's not at this point in time we foresee any major or different type of risks coming.

And having said that, I like to ask Mr. Takeda to supplement me.

Kazuhiko Takeda - Sony Corp.

About the upward revision of our forecast and the background to it, and if I could refer to that a little. IP&S and Game & Network Services and Semiconductors, upward revisions were made. For IP&S, the brisk business of DI and absorbing the ForEx impact. And the Games & Network Services, ForEx impact is improvement factors, but competitive environment and title release schedule, some review, impact of review, and so the upward revision by ¥10 billion.

And Semiconductors, through the efforts to maintain prices level and also improvement of the cost of production efforts been made, but the change of the product mix for the smartphone manufacturing in Asia and image sensor business value might be affected. So for three segments, the positive aspect of ForEx impact is reflected on the upward revision.

Unknown Speaker

I'd like to invite the next question.

Masahiro Ono - Morgan Stanley MUFG Securities Co., Ltd.

Ono, Morgan Stanley. Thank you. So one major question on entertainment, particularly Pictures business. And the question, this year the Spider-Man, so hit titles are here. But in terms of external environment, recently Netflix is doing very well and increasing subscriptions there. In your case, in the case of your companies, as a content supplier and you are a content supplier, and also you're operating PS Vues, so there are various different implications on your business. But currently, the Pictures business, particularly centering on TV, what's your view of how the market is faring, should it be considered a risk? So in terms of timing, there is the question of business risk that you posted of ¥70 billion. And is that the risk that you have to consider, the risks associated with the Pictures?

Unknown Speaker

Thank you for the questions on Pictures business. As you correctly pointed out, Netflix and others, the OTT players are growing their business in a significant ways. So our view of these players is not simple. We cannot be simplistic, because in some ways they are our partners, but in other ways they are our competitors, and in other ways they are our customers or clients. And therefore, how to maintain our partnerships, how to maintain our relationship with them is very important. The how question is very important.

And Funimation that we talked about today, there is FunimationNOW, the OTT subscription service that they operate, the biggest platform for this is PlayStation Now. And so, we have a diverse entertainment range of businesses, all of which need to be enhanced. But the changes in the business is very rapid, and so we have to be nimble enough to be able to cope with and respond to those changes in the industry.

Unknown Speaker

Next question, please. So the last row, please.

Masaru Sugiyama - Goldman Sachs Japan Co., Ltd.

Thank you for your explanation. Sugiyama of Goldman Sachs. About gaming – or Game business and Music, so I have two questions. First off Game market, the business segment compared to last year, the in-house title or the first-party title has a very important role to be played in the last term. But E3 announcement, I think in the next term and later on you – do you have a first-party title or not? Because the decrease of this profit and revenue you mentioned is expected in the next term and later, but what is your outlook on this?

The second point is my question on Music segment. Because in terms of Music, the Fate – excluding Fate and others, relatively speaking album and others have impact, and which might push down or upward the performance. But what about the current streaming? There's a shift to streaming, so maybe organic growth of the business is likely to take place for Music. What do you think? Qualitative explanation is also appreciated. Thank you.

Unknown Speaker

First of all, the first point maybe I make some comment, and Murakami will give some additional comment. First, as to Game, games, the console trend, there is a certain trend of the console trend. So in the major trend flow what happens to the next fiscal year? Well, we are not in a position to talk about the next term or next year, but there is a general trend. So based upon the general trend, business performance will be linked to the general trend to a certain extent.

Yes. As we mentioned, there's a cycle. There's a hardware peak, was last year, and then year – or next year the peak of the software and profit is likely to take place. Based upon that cycle of the trend that we maintain, so we won't deviate from that. There is, different from the conventional business structure, console cycle and the peak might have impact upon us. We would have to stabilize the profit structure. And as of 2018, it's not a solid figure, so we refrain from making any specific comment on this.

As to the PS4, the first-party title the August this year, Uncharted: The Lost Legacy, as well the Everybody's Golf and Grand Turismo and Battle King (35:45) and all these things are scheduled to be launched, new releases. So that – I think that is this new expected schedule to title releases.

As to the Music also, the Music itself, the streaming is driving force for the growth in general. The packaged one, the business that sales is going down and downloading demand is going down as well. So streaming will be the main driver. Our partner and very good subscription members are the driving force for us to push up our growth of this Music business. They are the key factors to drive growth in Music.

Unknown Speaker

Next question, please. Yes, please.

Yu Okazaki - Nomura Securities Co., Ltd.

Thank you. Okazaki of Nomura Securities. Concerning the consumer electronics with TV or digital camera or mobiles, in the first quarter there has been a steady recovery of profitability. And the upward revision was for the exchange impact of digital camera only, but for other consumer electronics, what are you – what's your view? And including the market environment and other factors, you incorporate the risk buffers, but what's your view on that?

Unknown Speaker

For the consumer electronics you pose the questions, in the past several years, for one thing, the management of supply chain went rather well and we can say that we are getting bigger, especially we place emphasis on sell-out rather than sell-in, and this culture is taking root. And concerning the quality, in some product areas the cost of quality was higher, but now the cost of quality issues have been reduced substantially and a good impact is seen in the result of the first quarter.

Unknown Speaker

We're running short of time, so this next question will have to be the last one. Yes, please.

Ryosuke Katsura - SMBC Nikko Securities Inc.

Thank you. Just one point. Katsura, SMBC Nikko. And this will be the continuation of the previous question about the changes in consumer electronics, particularly the Mobile and IP&S. As far as the Mobile business is concerned, excluding Sony devices, I think it's negative, but still the profits will be increasing you say. And the – look at the unit volume for smartphones, again, there is an upside it seems, but the sales revenues declining. So the situation in the Mobile business, what's the situation? There are lot factors, some plus, some negative. So what is your general view of the situation and the state of affairs in the Mobile business?

And secondly, DSCs, the unit volume has been revised upward, the digital cameras. And as you said before, the upward revision is due to the review of the ForEx assumptions. But can you elaborate on the view about this situation?

Unknown Speaker

I will have my colleagues answer more on this, but there is a change in the timing of introduction for sales. So that's a factor that affects the results, but Mr. Takeda will explain this. But as far as DSC is concerned, the interchangeable lens cameras, the ILCs, particularly the full-frame models, α9 is launched, as explained before, and the strong and good momentum that we've been able to maintain, that's our general take for the market.

Yes. The mobile business for the first quarter – sorry, the smartphones business is concerned, we did not lose money. As far as the unit volume is concerned, compared to last year, there's a slight decline in the number of units. But there are premium product and there are so-called value products, the midrange products, and the mix between the two has changed somewhat. So that there's some decline in the premium models. But is this a situation that will continue to affect the profitability at the end of the year?

Unknown Speaker

No, we do not think so. But digital imaging, DI, has been explained. Our policy in consumer business is not to go after the volume necessarily. So the interchangeable (41:40) cameras and the premium model DSCs, the compact cameras, the high-end models did very well in the first quarter. The market situation is such that the market continues to shrink. But as far as we are concerned, our major field of play in the premium models position, we'll continue to work on further improving our position in the premium segment of the market. So results are very good in first quarter, but the year has just started, so we'll take a wait-and-see attitude to see how the year would end. Thank you.

Unverified Participant

And with this, we would like to conclude the session for today. I appreciate your participation today.