Nov 1, 2016
Executives
Kenichiro Yoshida - Executive Deputy President and Chief Financial Officer Kazuhiko Takeda - Corporate Executive, Corporate Planning, Control and Accounting Atsuko Murakami - Corporate Executive in Finance and Corporate Development
Analysts
Junya Ayada - Daiwa Securities Mika Nishimura - Credit Suisse Securities Masaru Sugiyama - Goldman Sachs Hiroyuki Miyamoto - Mitsubishi UFJ Morgan Stanley Masahiro Ono - Morgan Stanley Kazuharu Miura - SMBC Nikko Securities
Operator
At this time, I’d like to start this session to announce the Consolidated Results for the Second Quarter for Fiscal 2016. My name is Hill.
I’ll be your MC today. And I’d like to introduce the speakers.
Executive Deputy President and CFO, Representative Corporate Executive Officer Kenichiro Yoshida, we have Kazuhiko Takeda, Corporate Executive, and responsible for Corporate Planning, Control and Accounting; then we have Ms. Atsuko Murakami, Corporate Executive in Finance and Corporate Development.
Mr. Yoshida will make the presentation first.
And that will be followed by questions and answers. Altogether we shall spend 45 minutes.
Mr. Yoshida, would you please start.
Kenichiro Yoshida
Thank you. I am Kenichiro Yoshida, CFO of Sony.
First I would like to say a few words about the wrongful conduct that occurred, Sony LSI Design Incorporated, which we announced on Friday of last week. As we said in the announcement we have discovered that certain former executives and employees of Sony Field Company illegally paid out company money and misappropriated part of the money for themselves.
At this point and time, we estimate that ¥900 million in damages were incurred by LSI due to this wrongful conducted which was repeated over a period of some 4.5 years. Sony is considering lodging criminal charges and pursuing civil liability claims against those individuals responsible for this conduct.
It is immensely regretful that this has occurred. And I would like to profoundly apologize to all the parties concerned.
We are working to further enhance our internal control and supervise the systems so as to prevent the occurrence of incident of this kind. Now, to explain the two topics in the next 15 minutes.
As we announced yesterday, we signed a definitive agreement with Murata Manufacturing Company related to transfer of battery business. And due to the recording of loss related to this transfer of the business, we have downward revised our consolidated results forecast for the fiscal year.
In the second quarter ended September 30, 2016, we recorded a ¥32.8 billion operating loss and ¥4.5 billion of income tax and related to this transfer of business. And at this point in time, we expect that these amounts will constitute essentially all of the losses that we will incur as result of this transaction.
And primarily due to the incorporation of these losses we have revised our forecast for consolidated operating income downward by ¥30 billion and a forecast for net income attributable to Sony’s third quarter downward by ¥20 billion. And now I will present the second quarter results.
Consolidated sales for the second quarter decreased 11% year-on-year to ¥1,688.9 trillion. Consolidated operating income declined by 48% year-on-year to ¥45.7 billion.
We estimate that the negative impact from the April earthquakes in Kumamoto on the operating income of the second quarter which ended on September 30, 2016 was about ¥13.7 billion including opportunity losses. Net income attributable to Sony’s stakeholders’ decreased by 86% year-on-year down to ¥4.8 billion.
And this next chart shows the consolidated results for the first half cumulatively of the year. And this chart shows the result for each segment.
The operating results of the semiconductor segment and component segment including the battery’s business significantly deteriorated year-on-year. On the other hand, the Pictures and Mobile Communication segments which recorded losses in the same quarter of the previous year had a significant improvement in operating results.
And this chart shows the results for the first half of fiscal ‘16 by segment. Next is the consolidated results forecast for the current fiscal year.
As I mentioned before and sales remain unchanged from the forecast we made in July. Operating income was downward revised by ¥30 billion to ¥270 billion.
But our improvements in other income saw that the net income attributable to Sony’s stockholders’ was downward revised by ¥20 billion down to ¥60 billion. Our foreign exchange rate assumptions for the period are ¥101 for the U.S.
dollar and ¥130 to the Euro. As it is shown here, the noted impact of the Kumamoto earthquakes on the annual operating income is expected to decrease to about ¥53.5 billion from ¥80 billion that we announced earlier in July due to a faster rehabilitation of our Kumamoto factory.
And here you see the current fiscal year forecast by segment. We downward revised the operating income forecast in the components including battery’s business and Pictures segment compared with the July forecast.
On the other hand, we upwardly revised the income forecast for the imaging products and solutions, semiconductors and home entertainment and sound segments. Now I will explain the current situation in each segment.
First; the mobile communications segment, this fiscal year, we’re reducing mid-range smartphone model unit sales and downsizing the scale of the business in unprofitable regions. Sales for the quarter decreased 40%year-on-year due to these initiatives and an underperformance of sales in Europe where we have a large number of unit sales.
The primary reason for the sales underperformance was that our product line-up launched this spring did not meet the needs of the market. Operating results improved ¥24.3 billion year-on-year to ¥3.7 billion in operating income due to the improvement in the profitability of the business mainly resulting from cost reductions.
We have downwardly revised our sales forecast for the fiscal year by ¥60 billion due to a downward revision of our annual smartphone unit sales forecast by 2 million units to 17 million units mainly resulting from the underperformance in Europe that I mentioned earlier. Our operating income forecast for this fiscal year remains unchanged mainly because the impact of the lower sales is expected to be offset by our ability to ship our flagship model in line with expectations, fixed cost reductions and a positive impact from exchange rates.
Although we recorded operating profit in the first half, the business is subject to significant risks such as market environment volatility and recent underperformance in Europe that we are conservatively forecasting our performance. In the second half, we aim to achieve operating profit for the full-year.
Next, the games and network services segment. Sales and operating income for the current quarter decreased year-on-year and ¥19 billion of operating income was recorded.
The year-on-year decrease in sales was mainly due to the appreciation of the yen. During the current quarter, our hardware was changing due to the launch of a new model of PS4 in September.
The year-on-year decrease in operating income was mainly due to the price cut of the new PS4 model. The negative impact on operating income of the price-cut was partially offset by continued cost reductions but operating income for the segment decreased due to the residual impact of decreases PS3 software sales.
However, the strong momentum of the business continues as it’s shown in the 31% year-on-year increase in network revenues. The sale of PSVR which was launched in October, are on-track.
Furthermore this month, we plan to launch the PS4 Pro, a high-value add-up model. Our operating income forecast for this fiscal year remains unchanged.
Next, the imaging products and solutions segment. Sales for the quarter decreased 25% year-on-year.
Although the impact of the decrease in sales was partially offset by an improvement in product mix, cost reduction and other factors, operating income decreased ¥8.2 billion year-on-year to ¥14.9 billion mainly due to the negative impact of the stronger yen. The negative impact on operating income from the Kumamoto earthquakes is estimated to happen about ¥3 billion for the quarter.
We have upwardly revised our operating income forecast by ¥12 billion to ¥34 billion from the July forecast. The revision was mainly due to an increase in the supplier image sensors due to a quicker than expected recovery from the earthquakes.
We’re working to maximize profitability by allocating the additional image sensors to high value-added products. Next, the home entertainment and sound segment.
Although sales decreased 19% year-on-year, operating income increased ¥1.8 billion to ¥17.6 billion. Despite the decrease in sales from the negative impact of the stronger yen, we were able to continue to achieve an increase in operating income due to shift to higher value added products and cost reductions.
Fiscal year operating income has been revised upward by ¥6 billion compared with the July focus to ¥47 billion, mainly due to the strong performance of the television business in the first half of the fiscal year. Next, the semiconductor segment.
Sales for the quarter decreased 5% year-on-year and an operating loss of ¥4.2 billion was recorded, a deterioration of ¥38.2 billion year-on-year. The significant decrease in operating income was mainly due to a ¥19.7 billion negative impact from the struggling yen and ¥9.4 billion of inventory write-downs on certain image sensor models.
The write-down was on inventory of certain models, we decided to stop by last fiscal year. And about ¥20 billion remains after write-down.
But we think we can liquidate that inventory going forward. We are forecasting a loss of ¥53 billion, a reduction in loss of ¥11 billion compared with the July forecast, mainly due to strong demand from Chinese manufacturers and a smaller negative impact from the Kumamoto earthquakes than had been anticipated.
Now, I will like to briefly explain my view of the operating environment in the semiconductor business. First, in regards to image sensors for mobile use, which is our core business.
Some of the product that we had expected to ship slipped into the third quarter but demand recently has been quite strong including from Chinese manufacturers. Price on a dollar basis is stable.
On the whole orders going into the next year are strong. In addition, we expect the proportion of dual-lens cameras to increase above the level we expected at the beginning of the year.
However, since the market for smartphone sensors changes very quickly, we continue to monitor the market trends very carefully. In the first half of the fiscal year, image sensors for applications other than smartphones like AV and surveillance cameras, was significantly impacted by the earthquakes.
Going forward, we are working to improve our profitability while focusing on the high-value added part of the market. Growth continues to be strong in the surveillance and drawn segment.
As for automotive, Densa [ph] Corporation announced the other day that it would use our automotive sensor. But we think that it will take time for the market to expand meaningfully.
Next I would like to discuss the issues facing management. This fiscal year, there were several factors that are negatively impacting the results, such as approximately ¥30 billion in impact from the earthquakes that of insurance recoveries, approximately ¥30 billion in expenses related to the exit from high-functionality camera modules and inventory write-downs on certain models that I have mentioned earlier.
However, the biggest challenge that will continue into the next fiscal year is how to respond to the appreciation of the yen, which is expected to have an approximately ¥63 billion negative impact on operating income this fiscal year compared to the previous fiscal year. What we can do on the sales front is to increase the proportion of high unit price custom products for smartphones, and increase sales of relatively higher margin sensors for AV and surveillance applications.
Now, in the meantime, what we can do on the cost front is internalize the manufacturing, a proportion of the logic process and cut other costs across the entire company including R&D expenses. These are the challenges management needs to overcome to improve the profitability of Sony Semiconductor Solutions which began its operation as a separate subsidiary in April this year.
Next, I would like to discuss the component segment. Sales for the quarter decreased 24% year-on-year due to the impact of the stronger yen and a decrease in sales of battery business.
A ¥32.8 billion operating loss related to the transfer of the battery business was recorded as I mentioned earlier. As a result, ¥36.6 billion operating loss was recorded for the segment.
The fiscal year forecast for the operating results has been revised downward by ¥36 billion to an operating loss of ¥48 billion, due to the loss related to the transfer of battery business and the downward revision in the forecasted sales. We plan to complete the transfer of the battery business in the beginning of April 2017.
We aim to transfer the business smoothly through close cooperation between both companies. Next is the Pictures segment, sales for the quarter increased 5% year-on-year mainly due to an increase in surgical revenues of motion picture titles.
Operating income of ¥3.2 billion was recorded compared with a ¥22.5 billion loss in the same quarter of the previous fiscal year due to the impact of the increase in sales. The fiscal year forecast for operating income has been revised downward by ¥9 billion to ¥29 billion.
This was primarily due to lower than expected surgical revenue and lower than expected media networks revenues compared to the level of the July forecast. The turnaround of motion pictures, the most challenging of three business categories in the Pictures segment is progressing.
But it takes time for the benefit to be realized. And therefore we believe that there is a possibility that we may not meet the operating income target we gave for the next fiscal year at the IR Day in June.
While continuing to strengthen our marketing outside of the United States and augmenting IP, we plan to work with a new CFO of Sony Pictures entertainment who, will join in July to further enhance its financial discipline. Next, is the Music segment.
Sales operating income increased year-on-year and ¥16.5 billion of operating income was recorded. The performance of Fate/Grand order a mobile game application and of recorded music continued to be strong.
There is no change to our sales and operating income forecast for the fiscal year. Lastly, I would explain the financial services segment.
Revenues increased but operating income decreased year-on-year and ¥33.6 billion of operating income was recorded. Revenue increased due to the improvement of investment performance in the separate account of Sony Life primarily affecting arise in the Japanese Stock Market in the quarter compared to a decline in the same quarter of the previous fiscal year.
However, the impact of the improved investment performance has a limited positive impact on operating income, because improvement in investment performance is attributable to policyholders. Operating income decreased year-on-year primarily due to the absence of large foreign exchange gains on foreign currency denominated customer deposits at Sony Bank since foreign exchange rates was essentially unchanged from the beginning to the end of the current quarter, while foreign exchange gains were recorded in the same quarter of the previous fiscal year resulting from the appreciation of the yen.
There is no change to the forecast for the fiscal year. In conclusion I would like to show the results forecast for each of our business segments.
This concludes my explanation. Thank you.
Operator
At this point I’d like to open the floor to your questions. Our staff will be bringing microphone to you.
So please state your name and affiliation before asking your questions. And please limit your questions to two each.
Now I’d like to invite your questions. Please raise your hand if you have questions.
Operator
Thank you, next question. Yes, please.
Operator
We’re going to take the next question.
Operator
I’d like to invite another question.
Operator
Anyone else? Yes please.
Kenichiro Yoshida
Thank you. With that we conclude our earnings session.
Thank you very much for your visit today.