Jul 31, 2018
Executives
Hiroki Totoki - Senior EVP and CFO Atsuko Murakami - SVP, Senior General Manager, Finance Department Hirotoshi Korenaga - VP, Senior General Manager, Global Accounting Division
Analysts
Kota Ezawa - Citigroup Masaru Sugiyama - Goldman Sachs Yasuo Nakane - Mizuho Securities Junya Ayada - Deutsche Securities Ryosuke Katsura - SMBC Nikko Securities
Unidentified Company Representative
At this point, we’ll start the Earnings Announcement for the First Quarter of Fiscal Year 2018. I’d like to introduce our speakers today.
We have the Executive Vice President and Chief Financial Officer, Hiroki Totoki; and corporate executives, the Senior General Manager of Finance Department, Atsuko Murakami; and VP, Senior General Manager of Global Accounting Division, Hirotoshi Korenaga. Today, Mr.
Totoki will give you the consolidated financial results for the first quarter of fiscal '18 as well as the forecast for the full year fiscal 2018 to be followed by time for questions and answers, and we should be spending some 40 minutes altogether. Mr.
Totoki, will you please start.
Hiroki Totoki
Thank you for your time today. Today, I would like to explain these two topics in the next 15 minutes.
Fiscal '18 Q1 consolidated sales increased 5% year-on-year to 1 trillion 953.6 billion yen and consolidated operating income increased 24% year-on-year to 195 billion yen. Net income attributable to Sony Corporation’s stockholders for the quarter was 226.4 billion yen, approximately 2.8x that of the same quarter of the previous year.
As is shown in this slide, operating income in the same quarter of the previous year included certain extraordinary items. Excluding these extraordinary items, adjusted operating income would have increased 74.2 billion yen from the 120.8 billion yen of the previous year to 195 billion yen in the current quarter.
This slide shows income before income taxes, excluding certain extraordinary items. During the current quarter, a total of 112.8 billion yen was recorded in non-operating income for unrealized and realized gains on shares of Spotify.
Excluding these extraordinary items, adjusted income before income taxes would have increased 87.2 billion yen from the 112.1 billion yen of the same quarter of the previous year to 199.3 billion yen in the current quarter. This is not shown in this slide, but if the impact on income taxes of these extraordinary items was approximated using the effective tax rates of each quarter, then excluding these extraordinary items, adjusted net income would have increased 83.3 billion yen from the 57.5 billion yen of the same quarter of the previous fiscal year to 140.8 billion yen in the current quarter.
This slide shows the results by segment for Q1. Next is the consolidated sales forecast for fiscal '18.
The consolidated sales forecast has increased 300 billion yen to 8.6 trillion yen as a result of upward revisions, primarily in the Game & Network Services segment. There is no change to the consolidated operating income forecast from April.
Primarily, because the amount of unrealized and realized gains on the shares of Spotify that I mentioned earlier exceeded the amount in our April forecast, we have revised upward our forecast for income before income taxes to 760 billion yen and our forecast for net income to 500 billion yen. And we have changed the assumed foreign exchange rates for the nine months ending March 31, 2019 to 110 yen to the U.S.
dollar and 127 yen to the euro. We expect to issue an interim dividend of 15 yen per share.
The fiscal year forecasts for each segment are shown on this slide. As you can see, we have changed the forecasts for several segments, and I will explain each when I discuss segment results in a moment.
We have incorporated 73 billion yen contingency budget in all other, corporate and elimination. In addition to general risks, such as those related to the economy, the competitive environment and changes in foreign exchange rates, we believe there are risks related to our smartphone business, which I will explain later, and risks related to component procurement, especially multilayer ceramic capacitors which were used in a variety of electronics products.
I will now turn to the situation in each of our business segments. First, I will talk about Game & Network Services segment.
Fiscal '18 Q1 sales increased 36% year-on-year to 472.1 billion yen and operating income increased approximately 4.7x year-on-year to 83.5 billion yen. This significant increase in sales and operating income was primarily due to an increase in the sales of PS4 software, including through the network.
We have revised upward our sales forecast to 2 trillion 180 billion yen and our operating income forecast to 250 billion yen. The upward revision in forecasted sales is primarily due to an upward revision in PS4 software sales, the impact of foreign exchange rates and an upward revision in unit sales of PS4 hardware.
We revised upward PS4 software sales to reflect the fact that our first-party title God of War and other third-party titles are significantly exceeding our expectations, and the titles we announced at E3 are receiving strong feedback. We revised our PS4 hardware unit sales forecast to reflect recent strength in annual sales.
Primarily due to the impact of the increase in sales, we revised upward our operating income forecast. Next, I will talk about the Music segment.
Fiscal '18 first quarter sales increased 8% from previous to 181.5 billion yen. Despite the negative impact of a change in accounting standards, sales increased mainly due to an increase in streaming revenue and continued strong performance of mobile gaming applications, such as Fate/Grand Order.
Operating income increased 7.1 billion yen year-on-year to 32.1 billion yen. Due to an increase in one-time expenses, equity in net loss for EMI, which operates a music publishing business, was recorded in the current quarter compared to equity in net income in the same quarter of the previous fiscal year, but impact of the increase in sales resulted in an increase in overall segment profitability.
And we have revised upward our April forecast for sales and operating income to 760 billion yen and 115 billion yen, respectively. We also revised upward operating income mainly due to an expected benefit of cost improvements and positive impact of foreign exchange rates, partially offset by the deterioration of equity in net income that I just mentioned.
Today, we announced the Nile Acquisition LLC, a consolidated subsidiary which owns some 40% of EMI, has become a wholly-owned subsidiary of ours. In addition to this, if we are able to close our previously announced transaction to acquire the remaining 60% interest in EMI, EMI will become a wholly-owned subsidiary of Sony and that will make Sony one of the world’s largest music publishers, administering over 4 million songs.
We aim to continue to capitalize on the growth of the music publishing business resulting from the growth of streaming services, among others. Next, talking about the Pictures segment, the fiscal 2018 first quarter sales dropped 15% year-on-year to 175.1 billion yen.
This decline in sales was primarily due to lower licensing revenue from U.S. television series compared to the same quarter of the previous fiscal year and a decrease in advertising revenues in the Media Networks business compared to the same quarter from the previous year when we had the broadcast rights for the Indian Premier League cricket competition.
An operating loss of 7.6 billion yen was recorded. Despite the impact of the decrease in sales, loss decreased 1.9 billion yen compared to the same quarter of the previous year in which advertising costs were recorded for the July 2017 release of Spider-Man; Homecoming.
Due to the impact of foreign exchange rates, we have revised upward the fiscal '18 forecast for sales to 990 billion yen and operating income to 44 billion yen. Next, talking about Home Entertainment & Sound segment, for the quarter, sales increased 6% year-on-year to 272.1 billion yen and operating income declined 5.2 billion yen to 17.4 billion yen.
This increase in sales was primarily due to an increase in unit sales of televisions, mainly in Europe, and an increase in sales of audio products, mostly headphones. Operating income declined primarily due to an increase in the allocation for indirect expenses incurred by sales companies, despite an increase in sales.
The full year forecast remains unchanged from April. We expect to record the same level of operating income as we did last year.
During the quarter, we began selling four lines of new 4K BRAVIA TVs, including OLED TVs. Thanks to Sony’s proprietary, high-performance image enhancement engine, these TVs render superb images which make you feel like as it you are really there by leveraging the unique characteristics of OLED and LCD.
In addition, our OLED TVs continue to use the acoustic surface technology which creates sound by vibrating the screen. We aim to differentiate our products using these proprietary technologies and continue to bring high value-added products to our customers.
Next is about Imaging Products & Solutions segment. For the quarter, sales increased 6% from the previous year to 164.2 billion yen and operating income increased 2.9 billion yen to record 26.1 billion yen.
The increase in sales and operating income was mainly due to an increase in sales of high value-added products, primarily interchangeable lens mirrorless cameras and lenses themselves. The full year forecast was revised upward to 670 billion yen for sales and 78 billion yen for operating income primarily due to the impact of foreign exchange.
On June the 28, we announced the world’s lightest, large aperture super-telephoto lens with a 400 millimeter focal length and maximum large aperture of F2.8, which is designed for the 35 mm format. Aside from the high-quality images that this G master lens can render, its light weight and maneuverability meets the high-level demands of professional photographers not only when shooting sports and the news, but also when capturing wildlife.
Once we start selling this product, we will have 29 full-frame interchangeable E-mount lenses. We will continue to expand our lens lineup in order to meet the diverse needs of professionals, and we will work to solidify our position in the full-frame mirrorless camera market.
Next, I will talk about the Mobile Communications segment. FY18 Q1 sales decreased 27% year-on-year to 132.5 billion yen due to a decrease in unit sales of smartphones, mostly in Europe and Japan.
An operating loss of 10.8 billion yen was recorded in the current quarter compared to a profit in the same quarter of the previous fiscal year, primarily due to the impact of the decrease in sales. We have revised our sales forecast downward to 610 billion yen and our operating loss forecast to 30 billion yen.
This downward revision is primarily due to the negative impact of foreign exchange rates and a reduction in expected unit sales of the smartphones, primarily in the first half of the fiscal year, reflecting recent sales results. Since there is a risk that the competitive environment will become even more severe, we have begun to assess the impact on smartphone unit sales in the second half of the fiscal year and the countermeasures we will implement if the risk becomes a reality.
As a result of this assessment, there is a risk that we will have to revise our forecast downward further for the current fiscal year and revise our mid-range plan. Next, I will talk about the Semiconductors segment.
The Q1 sales were essentially flat year-on-year at 202.2 billion yen. Although insurance recoveries related to the Kumamoto earthquakes were recorded in the same quarter of the previous fiscal year, sales of image sensors primarily for mobile devices increased.
Operating income decreased 26.3 billion yen year-on-year to 29.1 billion yen. As is shown in this slide, several extraordinary items were contained in the same quarter of the previous fiscal year.
Excluding these items, adjusted operating income would have increased 7.9 billion yen. This increase was mostly due to the increase in sales of image sensors for mobile devices.
We have revised our FY18 sales forecast upward to 890 billion yen and operating income to 120 billion yen. This change is mostly due to the positive impact of foreign exchange rates.
On July the 23, we announced the release of an image sensor which has an ultracompact pixel size of 0.8 microns, making it possible to pack 48 effective megapixels into a 1/2-type unit. 0.8 micron is a world first, and 48 mega pixels is the highest pixel count in the industry.
One of our strengths is our unparalleled ability to develop cutting-edge technology that also has a practical use, well ahead of our competitors. We aim to continue this advanced product development going forward.
Next, I will explain the Financial Services segment. In Q1, Financial Services revenue increased 11% year-on-year to 335.2 billion yen, primarily due to an increase in the policy amount in force at Sony Life.
Operating income decreased 5.6 billion yen to 40.6 billion yen. This decrease was primarily due to an increase in operating expenses and the recording of a valuation loss on investment securities in the general account at Sony Life, as well as a change from a foreign exchange gain on foreign currency denominated customer deposits at Sony Bank in the same quarter of the previous fiscal year to a foreign exchange loss in the current quarter.
The FY18 forecast remains unchanged from April. Lastly, I will show you the results on a segment basis again.
This concludes my remarks.
Unidentified Company Representative
Now, the floor is open to your questions. Those of you with questions, please wait for the microphone and please identify yourself by stating your name and affiliation before asking the questions.
Please confine the number of questions to two per person.
Unidentified Company Representative
This concludes our session for the earnings announcement. Thank you very much for your participation.