Earnings Call: Q1 2020

Jun 30, 2019

Ladies and gentlemen, it's time to begin our earnings announcement session for the Q1 of fiscal 2019. I'd like to introduce our speakers: Senior Executive Vice President and Chief Financial Officer, Hiroki Totoki Senior Vice President and Senior General Manager of Finance Department and Corporate Planning, Naomi Masoka and VP, Senior General Manager of Global Accounting Division, Hirotoshi Korenaga. Today, Mr. Totoki will make the presentation, and that will be followed by question and answers. And altogether, we plan to spend 45 minutes. Mr. Totoki, please. Today, I would like to explain 2 topics in the next 15 minutes. Fiscal 2019 Q1 consolidated sales decreased 1% year on year to 1,925,000,000,000,925 point 7,000,000,000 yen and operating income increased 35,900,000,000 yen year on year to 230,900,000,000 yen Operating income reached a record high for the Q1. Net income attributable to Sony Corporation stockholders decreased 74 point 3,000,000,000 yen year on year to 152,100,000,000 yen As is shown on this slide, certain extraordinary items were recorded in both the current quarter and the same quarter of the previous fiscal year. Excluding these extraordinary items and the estimated impact on these items on the tax expenses, net income would have increased 5,600,000,000 yen from the 140,800,000,000 yen of the previous year to 146,400,000,000 yen Please refer to Page 6 of our earnings presentation for the calculation of the impact on tax expenses. This slide shows the results by segment. And from this quarter, we have changed the name of the semiconductor segment to Imaging and Sensing Solutions. I will explain the background and reasoning behind this change when I explain the results of this segment. This change has not resulted in any reclassification of businesses across segments. Next is the consolidated results forecast for fiscal 2019. Consolidated sales were are expected to decrease 200,000,000,000 yen compared with the previous forecast to 8,600,000,000,000 yen as a result of the reduction in the forecast for GNNS and EP and S segments. There is no change to the forecast for operating income, income before income taxes and net income attributable to shareholders. There is also no change to our forecast for operating cash flow excluding the Financial Services segment. We have changed the assumed ForEx assumption from the 2nd quarter, yen 108 to the U. S. Dollars and yen 123 to euro. We plan to issue an interim dividend of 20 yen per share this fiscal year compared to 15 yen per share for the interim dividend previous year. Dividend amount for the full year is currently undecided, but there is no change to our policy of continuing to increase our dividend in a stable manner over the long term. This shows a segment forecast. And we are monitoring developments and are paying close attention to the geopolitical risks such as trade issues. And we are looking into various mitigation measures in for advanced timing not to be delayed. We have incorporated into our forecast the impact of additional tariffs and export restrictions that have already been implemented or the implementation be decided. We have not incorporated the impact of the items we have which have yet to be implemented, such as List 4 of Section 301 of the U. S. Trade Act. Going forward, we will aim to reduce the impact on our business by quickly taking any action as necessary. Now let me talk about business segment. 1st, Game and Network Services. First, although PlayStation 4 hardware sales and network service sales, including sales of PlayStation Plus increased year on year, overall segment sales decreased 3% to 4 57,500,000,000 yen due to decrease in game software sales. Operating income decreased 9,600,000,000 yen year on year to 73,800,000,000 yen This decrease was primarily due to the decrease in the contribution from the first party game software compared with the same quarter the previous year in which God of War was a major hit. We have revised downward our forecast for fiscal 2019 sales by JPY 100,000,000,000 to JPY 2,200,000,000,000. We have not changed the operating income forecast and that's 280,000,000,000 yen PS4 hardware and its sales in the Q1 was slightly below our expectation because of the news regarding our next generation consoles. And we have reduced the annual sales forecast by 1,000,000 units to 15,000,000 units. 3,200,000 units were sold during the current quarter, essentially unchanged year on year, and we have reached 100,000,000 cumulative units on a shipment basis. The fact that we plan to sell 50,000,000 units in this fiscal year, the 7th year since launch, demonstrates that PS4 platform is still garnering support from many users. We have revised downward our forecast for game software sales to be flat year on year due to a decrease in the 3rd party game software, especially free to play games. We expect network services sales to be above the previous fiscal year. The goals for this segment this fiscal year are preparing for the launch of the next generation platform as well as maintaining and expanding the community we have built among users. As of the Q1, we are on track to achieve these goals. Next, explaining about the Music segment. The first quarter sales increased 11% year on year to 202,300,000,000 yen This significant increase was mainly due to higher sales for music publishing resulting from the consolidation of EMI Music Publishing as well as higher streaming revenues, partially offset though by lower Visual Media and Platform sales, mainly caused by lower sales for of FateGrand Order, a game application for mobile devices. Streaming revenues in the recorded music business grew 27% from last year, mainly due to expansion of the market and contribution from releases such as Real Nas X, Old Town Road, which is expected to be one of the biggest hit songs of the year. Operating income increased 6,200,000,000 yen year on year to 38,300,000,000 yen We have made no changes to our April forecast for sales and operating income full year. Next, about Pictures segment. The 1st quarter sales increased 6% from last year to 186 point 1,000,000,000 yen and operating profit of 400,000,000 yen was recorded compared to a loss of 7,600,000,000 yen in the same quarter of the previous year. Primarily due to the timing of Motion Picture Releases, this segment has recorded a loss in the Q1 repeatedly in the past, but this quarter, it recorded profit for the first time in 5 years. Although marketing expenses were incurred for Spider Man for Far From Home, which was released at the end of June, our profitability continues to improve due to our channel portfolio reviews in media networks and other efforts. We have made no change to our improved forecast for sales and operating income. Spider Man: Far From Home has exceeded USD 1,000,000,000 of revenue at the global box office, surpassing Jumanji's Welcome to the Jungle to become Sony Pictures Entertainment's highest grossing whole LA owned film of all time. Due to the timing of its release, the film will not contribute significantly to our financial results until the Q2 and beyond. Next is EP and S segment. From this quarter, this segment includes what were the Home Entertainment and Sound, Imaging Products and Solutions and Mobile Communications segments. But we continue to disclose the same product category sales that we disclosed in the past in our supplemental information. Primarily due to a decrease in unit sales of TVs and smartphones, sales decreased 15% to 483,900,000,000 yen compared to the previous year, and operating income decreased 7,600,000,000 yen year on year to 25,100,000,000 yen due to the decrease in sales and the negative impact of foreign exchange rates, partially offset by a reduction in the operating expenses in mobile communications. Due to a reduction in the unit sales forecast for unit sales forecast for TVs and smartphones, our sales forecast has been changed to 2,000,000,000,000 yen but we have made no changes to our April forecast for operating income despite the decrease in sales due to a reduction in operating expenses. Next, I will touch on the TV business, primarily due to the intensified price competition and lower demand compared to the prior year when we benefited from the World Cup, mainly in Europe and Latin America. TV's unit sales in the current quarter decreased about 23% year on year. As access to actions we have taken, such as launch of new products and price reductions, sales have recovered since June, but we continue to pay close attention to changes in the market for panels and the trends of competitor pricing. And here, I'm showing the new key products we have announced or put on sales put on sale recently. All of them have received positive feedback from a lot of our customers. Next is the Imaging and Sensing Solutions segment. The 1st quarter sales increased 14% year on year to 230,700,000,000 yen and operating income increased 20,400,000,000 yen to 49,500,000,000 yen mainly due to a significant increase in image sensor sales for mobile devices. Demand for our image sensors continues to be strong, and our market share of image sensors for mid range and high end models of major smartphone makers remain high due to adoption of multiple sensors per camera and growing demand for high value added sensors made using large die sizes. And we are currently utilizing 100 percent of our internal capacity. However, concerns about the impact of trade issues in the second half of the fiscal year remain. We have already been conservative when forecasting the impact of these issues. But because we want to evaluate the risk over the course of the first half of the fiscal year, we have as yet made no changes to our April forecast. Now I would like to explain the background and reasoning behind the change in name of the segment. The portion of semiconductor segment revenue that comes from image sensors has been increasing every year and is expected to be approximately 85% of the segment this fiscal year and is expected to increase even more going forward. Image sensors are hybrids between analog and digital semiconductors and in terms of technology and business model, differ from logic, LSI and memory, which most people think of what they hear the word semiconductors. Compared with logic, LSI and memory, which require frequent capacity upgrades to maintain competitiveness due to quickly evolving process miniaturization. Image sensors do not require regular large capital investments because products can be differentiated through improvements in functionality and the addition of new features without having to upgrade production capacity. Moreover, since the image sensors business is focused on custom products that are differentiated through features and functionality And because we have expanded our customer base the last several years and obtained large share of market, we have established a business model that experiences less impact from fluctuations in the market known as the silicon cycle. Over the last 10 years, we have achieved an extremely high level of compound annual sales growth at 17%, primarily from smartphone applications. And we have made significant investments to increase capacity as a result. However, we expect the investment requirements of this business to decrease significantly as the acute increase in demand transitions to a milder growth trajectory. The strategy for future growth in the eye and assess segment is to develop AI sensors, which make our sensors more intelligent by combining artificial intelligence with the sensors themselves. Developments of these sensors will require us to leverage not only the strength of the hardware technology in the I and SS segment, such as stacking of sensors on logic and copper to copper connections, but also the AI technology and diverse application technology in other parts of Sony. So our efforts in this area would span the entire Sony group. We think that AI and sensing will be used across a wide range of applications such as autonomous driving, IoT, games and immersive entertainment. As such, we think there is a possibility that image sensors will evolve from the hardware they are today to solutions and platforms as visual data and sensing information is processed in a sophisticated manner inside sensors. The image sensor business is important because it is one of the pillars of the growth strategy of Sony Group. We chase the name of the segment this time to assist your understanding of the characteristics and future strategy of this business, which I just explained. Next, I would like to explain about the Financial Services segment. In the Q1, Financial Service revenue was essentially flat year on year at 336,900,000,000 yen and operating income increased 5,500,000,000 yen year on year to 46,100,000,000 yen We have made no changes to our April forecast for our financial services revenue and operating income. Next, I will discuss the new structure of the Board of Directors at Sony Financial Holdings, SFH. The new Board of Directors, which was formed at the ordinary general meeting of shareholders this past June, is primarily comprised SFH and promote even greater focus on increasing shareholder value. The presidents of Sony Life, Sony Assurance and Sonibank, who each concurrently served on the Board of Directors of SFH in the past, would dedicate themselves to managing each of their business going forward and will concentrate on growing their businesses and strengthening their competitiveness. Sony will deepen its collaboration with the management team of SFH and for actively work to increase the value of our financial services business even more so than in the past. In conclusion, I'd like to explain the efforts we're making to increase corporate value. In our first mid range plan, which began in the fiscal year ended March 31, 2013, we structured our businesses and strengthened our profitability and cash generation. This resulted in cash in each of our business attaining high level of competitiveness and a steady level of profit and cash flow. As President Yoshida explained at the corporate strategy meeting in May, Sony now needs to take steps to grow its various businesses while creating synergy across our businesses. Sony will aim to do this by leveraging the diversity in each of our business in the entertainment, electronics and DTC services, which includes financial services arenas. Technology is what supports the growth of these businesses and creates synergy across businesses. This is what makes Sony unique and strong. We aim to increase our corporate value in a sustained manner over the long term by further growing Sony as a creative entertainment company with a solid foundation in technology. Lastly, I would again show the results forecast for each of our segments. This concludes my remarks. Now the floor is open to your questions. When questions are asked in English, there will be consecutive interpretation into Japanese and answers be given in Japanese. Please confine the number of questions to 2 per person. Thank you. Ono of Morgan Stanley, two questions. The first point concerning imaging sensing solution semiconductor, you have recorded high growth this time. Especially in image sensors, the sales increased by more than 20%. My question is that in terms of volume and price, how is the actual picture? And what's the background to this? And the second point, on year on year basis, the game, compared to the strong first party sales, the decline in sales, but you have achieved a good results, so to say. And you have been talking about the increase in the development cost for the next generation console in slightly excess of 3,030,000,000,000 yen And how is it incorporated in the Q1 results? And when you compare the first half and second half, what would be the impact? The first on I and SS, True, on a year on year basis, for the Q1, the results were very good. And when analyzed in terms of unit price and volume for unit price, improvement of the product mix. And so all in all, we have maintained a good unit price. And especially, 0.8 micron and 45 Mega, the demand is good and improving. And about the volume, especially the volume to the Chinese customers increased. And the background is that in the market, the multi sensor per camera is increasing. And also, the customer's smart phone production shift to a flagship model with multiple number of cameras. And also partly, as a countermeasure against the U. S. Export restriction, there may be advanced procurement. Next, on game. On year on year basis, on our part, we take a rather positive look. That is decline in the sales of software. In the course of Q1 last year, there was a major hit of God of War in Detroit, the first party. And this time, a title is weaker. And so we thought there may be a decrease, and so it is as expected. And about the impact of development expense, very different we do not talk about first half and second half, but the things are going as we expected for the time being. And also concerning hardware, for the full year, we said 16,000,000 and revised downward to 15,000,000. But the Q1, 3,200,000 unit, the same as the Q1 of the previous fiscal year. And we view we watch the trend of competitors in the industry, and we thought there may be some downward trend, but situation was maintained. And we have provided some information about next generation console. So we do not force the sales expansion of the current console, but achieve a profit and make a shift a smooth shift. And we will maintain the profitability forecast. Thank you. Other questions, please? Ezawa, Citigroup Securities. Two questions, please. Firstly, The other segments, profitability, EUR 400,000,000, It's not a significant negative. In other words, it's improving, it went over the last year. Why? And also for the full year, negative JPY 6,000,000,000, you haven't changed that. Why is that? Will there be any specific reason in the Q2 for this slight negative figure? And second question, the request from investors concerning changing in the business structure, In other words, suggesting spinning off of the semiconductors or divesting all the financial services. I think you've received such proposals from investors. Now in today's remarks by Mr. Toki, I would say that what you said today included answers to those questions. But can you formally clearly make some remarks in response to those requests by investors? First of all, the others segment, because of the license agreement, patent royalty revenues were there. But because we have parties to speak of, we like other to refrain from disclosing details. But please understand that there was a loyalty payment. But offsetting that, your question was whether there will be a negative factor in the second half. Nothing planned, but we are still in the Q1. So all in all, Instead of repeating minor changes, we decided to maintain the current full year forecast without any changes. Now the second question concerning business portfolio, let me state my conclusions first, whether my speech today included access to those proposals, not especially our view and policy on our business was, shall I say, restated today with my remarks. Now, it's true that there has been proposals from investors. Whatever proposals we see, we examine them very carefully and in-depth and sincerely. That's the position basically of the management team as well as the Board of the company. And it's true that we have received concrete proposals. So we are conducting in-depth examinations and thinking about those proposals currently. But beyond that, please allow me to refrain from making other comments. Okazaki from Nomura Securities. My question is about the fixed cost for semiconductors. You said that the revenue would increase, but so would the fixed cost. Therefore, the profit will not increase. But the Q1 saw the increase of operating profit. So has there been any different pattern in terms of the fixed cost. Another is the EP and S mobile communications improved, but TV apparently has deteriorated. You have mentioned this slightly, but can you talk about the background excluding mobile communication? As far as the sensor is concerned, I think your question is about fixed cost, how we recognize fixed cost. There has been an increased operating profit of 20,000,000,000 yen a major increase. This is due primarily to the increase of volume. But there has been fluctuations, changes in the inventory. Therefore, there has been the operating cost fluctuations, Depreciation and increase of R and D cost have been organized. This is as planned. But beyond that, I think we have enjoyed the increase of revenue. EP and S, as for the mobile communication, the Q1, yes, the bottom line has improved. If you do the reverse calculation, you will note that TV was a pro performer. But if you look at the overall direction, TV, Q1, both the top line and bottom line declined. This is because the volume has declined. It was 2,600,000 during the previous year. The Q1, there was a 23% reduction, 2,000,000. And also, there was a ForEx negative impact. Audio visuals, there has been some decline in the sales revenue, but operating profit remained flat versus the last year. The sales mix has changed slightly. Headphones did quite well. Digital Imaging, both the revenue and operating profit declined, not in any significant way. Digital cameras, consumer camcorders saw some declines. Operating profit, the product mix has improved, but it was affected by the foreign exchange market and the decline in the volume. But as far as additional imaging is concerned, we believe that we'll be able to launch some very attractive strong products. And we have hopes and expectations on those products. Professional solutions, it has been affected by the deterioration of the market environment in China. So that's how we see the overall situation. Thank you. Katada of Nikko. Semiconductor segment and also cash flow. The first quarter, the full capacity operation. And what is the state of operation in the second quarter and your plan? That's the first point. And the second point in connection with that, the operating cash flow excuse me, the CapEx concerning CapEx, you mentioned that there will be increased investment, which is What is the what is the update of the progress of midterm investment, including cash flow side? About the image sensors, capacity and input, Mr. Korenaga. The capacity installed and input, the first quarter, 100 ks production capacity and actual input operation was 100 ks full operation in the second quarter. About the capacity, 105 ks, that's our forecast in accordance with our original plan. And then the actual production in 105 ks, so full capacity operation. Next, about the CapEx. And including the new building and any changes or update. From fiscal 2018 to 2020, the cumulative investment in existing building is 600,000,000,000 yen and no change. And for new building, decision has not been taken yet. But in the course of this year, looking at the demand for fiscal 2021 onward, we like to take the decision. And in terms of the capacity, the end of fiscal 2020 on outward basis, we'd like to increase to about 130 ks, and this plan remains unchanged. About the cash flow, the operating cash flow forecast for the current fiscal year is 760,000,000,000 yen and this forecast remains unchanged. And so there's no plan of changing the cash flow picture. Thank you. Next question please. Nishimura, Credit Suisse Securities. Thank you. Firstly, about game business. In your presentation earlier, you talked about weakness of the 3rd party software, particularly free to play titles. Can you give us more details? What is the current situation? And so are we going to address these risks toward the second half of the year? And my second question is for Sony Financials. Financial Services. Thank you for your explanation earlier. And you will be more deeply involved in the management of the financial services operations more so than before. A while ago, I think you said that you wanted to pursue synergy with the Sony Corporation. And as a matter of fact, the results have not been visible so far, but what is the current situation and current view by more deeply being engaged in the management of the operations, how are you going to contribute to the growth of the business segment? Your first point, you're right. As you say, as far as the Q1 is concerned, the 1st party phone games where basically the results were basically as we'd expected and we have not changed our assumptions going forward. But for add on and free to play titles, there is a significant gap compared to our expectations, particularly free to play titles, the revenues are significantly lower. Therefore, we've revised downward our forecast. And also another point is about PS Plus. I think you are highly interested in PS Plus sales compared to March the number of subscribers is down a bit, but basically, it's been expected. So for the full year, we expect this segment to grow moderately. So having all these factors altogether, we've come up with the current forecast. And risks toward the second half, no outstanding risks observable and incorporated in our forecast, not yet. But to observe geopolitical risk as well as the actual sales situation, we'll do so very carefully. But thirdly is Financial Holdings, SFH. Yes, it's important for us to pursue the synergy with the Sony Corporation, but the company is under SFH holding structure by us getting more deeply involved in the operations of these companies, we should be able to contribute to the improvement of the value of these 3 companies. That's thinking now. But as to the concrete details of our engagement, I'd like to refrain from commenting on that. But through participation in the Board structure, we'd like to be more engaged in the operations. Nakane from Mizuho Securities. Thank you for the opportunity. I have two questions. What has been the impact of earthquakes on semiconductor, the earthquake in June, the sales, the inventory and operating margin. And also, you have the geography breakdown of the sales on Supplement Page 4. And I'm looking at this if you break it into hardware and non hardware, United States, Europe and Asia, Has there been any changes since February March? Have you learned or have you come to be aware of something different as compared to February March? And is there anything that we should be aware of? Are you talking about the demand trend by regions? You talked about hardware, software, services. You're one of the rare companies that cover both aspects. So you're talking about the overall Sony. Yes. Can you separate the hardware and non hardware? Yes. Thank you. Let me start with the whether there has been any impact of earthquake. I think you're referring to the Yamagata earthquake. Human physical, there has not been any significant adverse impact. Yamagata, a software operation for the security and safety, but it has been resumed. And there has been the product in process, but the impact has been minimal even if we had stopped the operation for a short period of time. Now about geographical breakdown, let me go 1 by 1. It's the United States that have increased year on year. Music and Pictures increased their revenue. China Semiconductor has registered increase of sales. Now to the contrary, Asia Pacific, Europe and others, Electronic Products and Services have seen the decline. Emerging market, other than China, Asia Pacific and other areas reduction surpassed that of the increase of China. Therefore, in net basis, it was a negative. The emerging market sales, the Q1 was 500,200,000,000 yen which is a minus of 28 0.29%, mainly due to the ForEx. Next question, please. Thank you for your presentation. Tsujiyama of Goldman Sachs. Two questions. What is the details of the change of forecast in game business? And the sales was revised downward by 100,000,000,000. That is affected by the hardware sales. But what about the exchange rate change and reduction in sales, but the profit remains unchanged. Are there any change in profitability or the expense and cost? 2nd point on Pictures. The marketing expense of Spider Man, including that, the positive turnaround was made. And also, the film cost increase, the motion picture production cost has increased according to supplemental information. Based or is it based on the success of Spider Man? Or has it been planned previously? Especially in picture business, are there any changes? Or is there any upside potential for the profit? First, concerning gain, ForEx impact is there and the sales unit decline and free to play decline and that would hit should hit the profit. That may be the perfect question. But to those changes, the management sensitivity is to cover that by better operation and there is flexibility of organization to cope with that. More specifically, when we think of the weaker demand for hardware, then that changed the promotion and also to reduce the OpEx to achieve the profit. And so for the profit forecast, including a partial reduction of expense, we've come up with what we have shown to you. And about the Pictures segment, upside potential, whether there is there. In terms of risks and opportunities, we think opportunities are larger. But we have only passed the Q1. And if when we have a release of major Tenpaul titles going forward, and it's just the Q1 is ended. So rather than changing the sales forecast, we think we should maintain that now. And whether there has been any change in sales and profit. As you know, last year, in the media network, there was a substantial restructuring spending, JPY 11,000,000,000 So this time, we are feeling the results of it in terms of the performance. And the performance in India was better than we expected. In addition to that, the entity like Fanimation, which is the distribution of animation, we see the increase in subscribers and we enjoy the growth. So all these combined reflecting on the results we forecasted. We're in shorter time, so the next one will have to be the last question. Hirakawa, Merrill Lynch. Two questions, please. Firstly, image sensors. About image sensors, earlier, you talked about smartphone makers of China. So the environment is fluid. Compared to the beginning of the year and currently, image sensors demand for smartphones, have you changed your views? And also, will there be factors to change your views going forward? Secondly, so microscopic sort of question, Mr. Totoki, you talked about level 4. If the tariff is actually introduced, what would be the impact on your results? Your thought on that currently I'd like to invite your view on that. First of all, about Sensory Business, Compared to original top of the year expectations, how do we stand currently? At the beginning of the year, the smartphone market in China will become more larger in size and also will use multiple lenses. That was our expectation. But at that time, looking at the demand for fiscal year 2019, we were very conservative that the actual demand for the Q1 is very strong and we believe this strength will continue in the Q2. And also repeating my point, there will be some advanced carry forward of the business. So that's why we've kept our full year forecast intact without any change. And also use of multiple lenses in each camera and also larger die size, the demand for that is faster and much larger, much more significant than we'd expected. So the demand is very strong and that situation remains unchanged. And the trade friction between United States, China, possible introduction of Level 4 tariffs? Ms. Masaka will answer that question. More supposing, hypothetically, the level 4 Chaiosai actually decided. So this is based on the assumption that it will take place. It will be up to the timing of that as well as a specific conditions attached. But suppose, Inge, we are not currently assuming that, but if this is actually invoked, what would be the impact? What we are foreseeing is that in game and network services, hardware business will be affected. So in EP and S, the camera business or audiovideo devices and projectors will probably suffer. But high tax on these products will actually impact distribution and employment and consumers in the United States will be a negative for the U. S. Economy as such. So our subsidiary working with the industry associations and the government associations approaching the government, we have sent other opinion letters to the government. And as of now, we are, of course, contemplating various actions based on the potential list for Level 4 and for all the products affected, for instance, the changing of the production sites or passing through of the prices to market or changing the continued sales structure. So we are considering this ahead of the curve actions if this happens. And once the decision is made to introduce number 4, all the contributor actions will be put to force to mitigate the negative impact. So if it happens, the impact on operating profit, we should be able to contain that to 2 digit Okuyan. And with that, we should like to conclude our session for today and thank you very much for your participation.