Oct 30, 2018
Executives
Justin Hill – Head of Investor Relations Hiroki Totoki – Executive Vice President and Chief Financial Officer Atsuko Murakami – Corporate Executive and Senior General Manager of the Finance Department Hirotoshi Korenaga – Vice President and Senior General Manager of the Global Accounting Division
Analysts
Junya Ayada – Deutsche Securities Mika Nishimura – Credit Suisse Yasuo Nakane – Mizuho Securities Kota Ezawa – Citigroup Masaru Sugiyama – Goldman Sachs Ryosuke Katsura – Nikko Securities Kenji Yasui – Investment
Justin Hill
Thank you for waiting. At this point, we’ll start the session for the earnings announcement of Sony for the second quarter of fiscal 2018.
And I would like to introduce our speakers. We have Hiroki Totoki, Executive Vice President, Chief Financial Officer; and Atsuko Murakami is Corporate Executive and Senior General Manager of the Finance Department; and also, sorry, Hirotoshi Korenaga is Vice President, Senior General Manager of the Global Accounting Division.
So the results of the second quarter, the consolidated results and the full year forecast for the year will be presented. And that will be followed by time for question and answers, and altogether, we’re going to spend 45 minutes.
Mr. Totoki, you have the floor.
Hiroki Totoki
Thank you. I would like to explain these two topics in the next 15 minutes.
FY 2018 Q2 consolidated sales increased 6% year-on-year to JPY 2,182.8 billion, and consolidated operating income increased 17% year-on-year to JPY 239.5 billion. Net income attributable to Sony Corporation stockholders for the quarter increased 32% year-on-year to JPY 173 billion.
This slide shows the results by segment for Q2. This slide shows the results for the first half of the fiscal year.
This slide shows the results by segment for the first half of the fiscal year. Next is the consolidated results forecast for fiscal 2018.
The consolidated sales forecast has increased JPY 100 million from the previous forecast to JPY 8.7 trillion, and the consolidated operating income forecast has increased JPY 200 billion to JPY 870 billion. Despite a downward revision in the Mobile Communication segment, the overall consolidated forecast was revised upward, primarily due to the impact of the consolidation of EMI Music Publishing, which I will explain later, and upward revision in several segments, particularly the Game & Network Services segment.
In addition, income before income taxes was revised upward to JPY 975 billion, and net income attributable to Sony Corporation stockholders was revised upward to JPY 705 billion. For this quarter, we have started to disclose our forecast for operating cash flow, excluding Financial Services, and we expect it to be JPY 830 billion for this fiscal year.
And we have changed the ForEx assumptions for the second half to JPY 112 to the U.S. dollars and JPY 172 to the euro.
This fiscal year forecasts for each segment are shown on the slide, and we have incorporated JPY 20 billion contingency budget in All Other, Corporate and elimination. This amount was 90 – JPY 73 billion in the previous forecast.
After assessing the content and taking action regarding the risks identified last quarter, we have incorporated the risks related to smartphone business and component procurement into this – into the forecast for the applicable business segment. On the other hand, we are more concerned about the macroenvironmental situation, such as decline in equity markets, slowdown in Chinese economy and the currency fluctuations, especially in emerging market.
We have reflected the environmental changes into our forecast for each business but also decided to retain JPY 20 billion contingency budget for the entire company. I would now like to update you on the consolidation of EMI Music Publishing.
The closing process is progressing smoothly, and we expected to close it within this calendar year. As a result, assuming the transaction will close this calendar year, and the estimated impact on the Music segment and consolidated results and have reflected it in our forecast and approximately JPY 25 billion positive impact on sales and JPY 110 billion positive impact on each of the operating income, income before income taxes and net income.
This impact includes a recording of a non-cash setup – step-up gain on Sony’s 40% equity interest and impact on the post-closing financial statement for the fact that it changed from equity affiliate to the consolidated subsidiary. The impact of this transaction on income taxes is currently under review, and there may be possibility that this net income forecast may change.
Now speaking about the Game & Network Services, fiscal 2018 Q2 sales increased 27% from last year to JPY 550.1 billion, and operating income increased JPY 35.9 billion to JPY 98.6 billion, both mainly due to an increase in software sales. We have revised upward our sales forecast to JPY 2,350 billion and our operating loss forecast to JPY 310 billion.
billion. These upward revisions are primarily due to upward revisions in game software and PlayStation Plus sales as well as expected reductions for promotional and other costs related to PlayStation four hardware based on the record strong business momentum – based on recent strong business momentum.
For your reference, we have begun to disclose the number of PS Plus subscribers on a quarterly basis, starting from the fiscal year ended March 31, 2017, in our supplemental information document. Next, talking about Music segment.
Although streaming revenues increased, the Q2 sales this year decreased slightly year-on-year to JPY 230.9 billion, basically due to the impact of the new accounting standard. And operating income was essentially flat year-on-year at JPY 71.8 billion.
And we have revised upward our July forecast for sales and operating income to JPY 820 billion and JPY 230 billion, respectively. This revision – these revisions were primarily due to the impact of the consolidation of EMI Music Publishing that I mentioned before.
Next is the Pictures segment. The Q2 sales for this fiscal year declined slightly year-on-year to JPY 248.9 billion.
Although the sales of Television Productions and Media Networks increased, the sales of Motion Pictures decreased. In Motion Pictures, theatrical revenues declined significantly compared to the same quarter of previous year, which benefited from the contribution of Spider-Man: Homecoming.
However, television licensing revenues for our Motion Pictures increased primarily due to the contribution of films released in the previous fiscal year. An operating income of JPY 23.5 billion was recorded, an increase of about three times the same quarter of the previous fiscal year.
This increase in operating income was mainly due to an JPY 8.3 billion impact of the new accounting standard and increase in television licensing revenues in the Motion Pictures business. And we have revised upward our full year forecast for sales to JPY 1 trillion and for operating income to JPY 50 billion.
The primary reason for the upward revision were the strong performances of films released in the current year and higher-than-expected results from television licensing in the Motion Pictures business, partially offset by lower-than-expected sales of Media Networks. Sony Pictures box office revenues exceeded USD 1 billion from January through October of calendar year 2018.
This was the first time in four years that we achieved the USD 1 billion mark in October. We have bidding franchises such as Equalizer and Hotel Transylvania, and we are leveraging our Spider-Man IP like in Venom.
This is a result of a Motion Picture Group united under the leadership of Tom Rothman to transform the business. Next, about Home Entertainment & Sound business segment.
The Q2 sales declined 9% year-on-year to JPY 274.9 billion, mainly due to decrease in unit sales of televisions, reflecting a focus on profitability. Operating income of JPY 24.5 billion was recorded, essentially flat from last year as profitability improvements resulting from a shift to high value-added models were offset by the impact of foreign exchange rates and lower sales.
The full year forecast remains unchanged from July. And next, talking about Imaging Products & Solutions segment.
The Q2 sales for the fiscal year increased 5% from last year to JPY 163.9 billion. Although unit sales of digital cameras declined due to the impact of the market, segment sales increased mainly due to an increase in sales of high value-added products, primarily interchangeable lens, mirrorless cameras and lenses themselves.
Operating income increased JPY 2.9 billion to JPY 21.8 billion, mainly due to the increase in sales of high value-added products that I just mentioned. For the full year forecast, it was revised upward to JPY 680 billion for sales and JPY 81 billion for operating income, mainly due to an upward revision in the sales forecast for high value-added products.
Next, I will talk about the Mobile Communication segment. In fiscal year 2018, Q2 sales decreased 32% year-on-year to JPY 117.8 billion due to a decrease in unit sales of smartphones primarily in Europe.
Mainly due to this decrease in sales and the recording of an impairment charge of JPY 16.2 billion against long-lived assets resulting from a review of the future profitability forecast for the smartphone business, Q2 operating loss increased JPY 27.4 billion year-on-year to JPY 29.8 billion. We have downwardly revised our sales forecast to JPY 510 billion and our operating loss forecast to JPY 95 billion.
This downward revision was primarily due to a lowering of the forecast for smartphone unit sales to 7 million units and the recording of the impairment against long-lived assets in Q2. Now I would like to outline the plans we have to improve the profitability of the smartphone business.
After intense discussion regarding the future of this business, we concluded that it is necessary to further reduce scale in order to reduce business risk. To that end, we plan to reduce the operating cost incurred in the business in the fiscal year ending March 31, 2021, to approximately 50% of the level recorded in the fiscal year ended March 31, 2018.
At the IR Day in May, we said that we would reduce cost by 30%, but we now plan to alter the scope of our operations even more and make even more significant reductions quicker than planned. We will also proactively leverage the technology and business infrastructure of our Branded Hardware business.
We will improve product appeal at the same time, but since it will take time for these efforts to have an impact on our financial results and since our cost reduction efforts are continuing next fiscal year, we expect to record an operating loss in the fiscal year ending March 31, 2020. We take very seriously the fact that we expect operating loss to continue for three fiscal years, and we aim to implement the profitability improvement plan that will enable us to record a profit in fiscal 2020.
Next, I will talk about the Semiconductors segment. Q2 sales increased 11% year-on-year to JPY 254.4 billion, primarily due to an increase in unit sales of image sensors for mobile devices and an improvement in model mix.
Operating income decreased JPY 1.4 billion year-on-year to JPY 47.9 billion. This was mainly due to an increase in research and development expenses and depreciation and amortization expenses, particularly – partially offset by the impact of the increase in sales.
We have revised upward our fiscal 2018 sales forecast to JPY 910 billion and operating income to JPY 240 billion. This change is mainly due to an upward revision in the sales forecast for image sensors for mobile devices and the positive impact of foreign exchange rates.
The back-illuminated ToF sensor that we started to mass-produce from the second half of this fiscal year has started up smoothly. We expect that demand for image sensors will continue to expand for the next several years as multiple sensor cameras and larger-sized image sensors are adopted in smartphones.
In order to proactively adapt to this increased demand, we have brought forward a capital expenditure plan for image sensors in our third mid-range plan and begun to consider increasing the amount. As a result, we might increase our image sensor capital expenditures by about 20% above our previous plan, which will bring our production capacity to nearly a maximum that can fill in to our existing facilities by fiscal 2020.
We expect to be able to secure the funds for this additional investment through an expected increase in the operating cash flow for the Sony Group above the amount originally estimated in our current plan. However, we will make the actual decisions whether or not to invest after closely assessing recent and future demand trends.
By continuing to strike the right balance between investment and profitability, we plan to grow our image sensor business. Next, I will explain the Financial Services segment.
In Q2, our Financial Services revenue increased 27% year-on-year to JPY 353.5 billion, mainly due to an improvement in investment performance in the separate account and an increase in the policy amount in force at Sony Life. Operating income increased JPY 2.6 billion year-on-year to JPY 39.2 billion.
The full year forecast remains unchanged from July. Lastly, I will show the results on a segment basis again.
This concludes my remarks.
A - Justin Hill
Now 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 question is asked in Japanese, it will be – in English, it will be interpreted into Japanese consecutively, and the answer will be given in Japanese. [Operator Instructions] Yes, please.
Operator
Next question please. Yes please.
Justin Hill
With this, we’d like to close the earnings announcement session. Thank you for coming today.