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Q2 2020 · Earnings Call Transcript

Oct 31, 2019

Unidentified Company Representative

Thank you for waiting. We shall start the Earnings Announcement of Sony Group for the Second Quarter of Fiscal 2019.

I'd like to introduce our speakers today. We have Senior Executive Vice President, Chief Financial Officer, Hiroki Totoki; and Senior Vice President, Senior General Manager of Finance Department and Corporate Planning and Control Department, Naomi Matsuoka; Vice President, Senior General Manager, Global Accounting Division, Hirotoshi Korenaga.

Today Mr. Totoki will make the presentation first, and then we'll follow that with the question and answers.

Mr. Totoki, you have the floor.

Hiroki Totoki

Today, I'd like to explain these 2 topics. FY '19 second quarter consolidated sales decreased 3% year-on-year to ¥2,122.3 billion primarily due to the impact of exchange rates.

And operating income increased ¥39.4 billion year-on-year to ¥279 billion. Net income attributable to Sony Corporation stockholders increased ¥14.9 billion year-on-year to ¥187.9 billion.

Next is the consolidated results forecast for fiscal '19. Consolidated sales are expected to decrease ¥200 billion compared with the previous forecast to ¥8,400 billion, and operating income is expected to increase ¥30 billion to ¥840 billion.

I will explain the breakdown of sales and operating income for each segment later. Income before income taxes was upwardly revised to ¥800 billion, and the net income attributable to Sony Corporation stockholders up to ¥540 billion.

The forecast for operating cash flow excluding the Financial Service segment is ¥760 billion, unchanged from the previous forecast. As for the Forex assumption for the second half, the U.S.

dollar remains unchanged from the previous forecast ¥108 to the U.S. dollars, and the euro changed from ¥123 to ¥118 to the euro.

Now first, I will talk about Game & Network Services segment. Sales for the quarter decreased 17% to ¥454.4 billion due to a decrease in sales of PlayStation 4 Game software and hardware as well as a negative impact of the foreign exchange rate.

Game software sales decreased because of the absence of the major first-party hit title like Marvel's Spider-Man of the previous year and the significant year-on-year decrease in the contribution from the free-to-play games. Operating income decreased ¥25.6 billion year-on-year to ¥65 billion due to the impact of the sales decline.

And we revised downward our fiscal '19 sales forecast by ¥200 billion to ¥2 trillion and operating income forecast ¥40 billion to ¥240 billion. As we announced last week, we will postpone the sales of the first-party title, The Last of Us Part II, from February 2020 to May 2020.

As the result of this, this title will not contribute to the financial result of the current fiscal year and that's the primary reason for the downward revision of our operating income forecast. This slide shows the analysis of how our fiscal year operating income forecast compares with that of the previous year.

The 3 major reasons for the decrease in expected profit year-on-year are the decrease in first-party software sales resulting from the postponement of The Last of Us Part II and the decrease in third-party software sales due to deceleration of free-to-play titles and the negative impact of exchange rates. PS4 hardware profit increased slightly as a decrease in unit sales is offset by the hardware cost reductions.

Profit from Network Services, mainly PS Plus, is expected to increase significantly due to the steady increase in subscribers. Since fiscal year sales are expected to decrease, we plan to constrain various costs including marketing expenses to a level below that of the previous year.

However, operating expenses in aggregate are expected to increase due to an increase in development costs for the next-generation console, PS5. Now I will update you on the mid- to long-term strategy in the G&NS segment and the progress of the initiatives we explained on the IR Day in May this year.

First, I will discuss our efforts to strengthen the first-party content and IP. At the IR day, we mentioned the Sony strength lies in first-party content and IP.

With the aim of strengthening these, in August, we announced the acquisition of Insomniac Games, the game developer for Marvel's Spider-Man, which sold 13.2 million units worldwide. Through this acquisition, Insomniac Games will become SIE's 14th studio and will contribute to further enhancement of our first-party software development organization.

Going forward, we will continue to pursue growth investment opportunities that will enhance our own content IP. Next is a smooth transition to the next-generation console.

The other day, we announced that we will sell the PS5 from the year-end selling season of 2020. This is a most important step in strengthening the PlayStation platform.

Development of the PS5 is progressing according to plan, and we believe the development of game titles by our software development partners is progressing smoothly. We anticipate providing highly engaging gameplay experiences that both current users of the PS4 and the potential new users have come to expect.

Thirdly, about our content distribution strategy. In 2014, Sony launched the pioneering cloud gaming subscription service, PlayStation Now.

And to further strengthen content distribution strategy, we announced a renewal of the service this month. PS Now has become even more attractive due to global strategic price reduction and the addition of a limited time-only popular game titles such as God of War.

Since starting this, the service renewal, subscribers substantially increased and the total number of subscribers has already exceeded 1 million as of this month. This is a great step toward a target we mentioned on the IR Day of growing subscribers by an average of more than 50% per year.

Through this renewal, we are aiming to assess the potential of cloud gaming services. The impact of the renewal on the results of this fiscal year is expected to be minimal.

Lastly, let me describe the progress we're making on our cost management initiatives. Our streaming TV service, PlayStation Vue, has provided a differentiated TV viewing experience to customers in the United States since it began in 2015.

However, mainly due to diversification of viewing styles and in anticipation of the competition among pay TV services, we do not expect the operating environment for the business to improve going forward. As a result, we decided to terminate the service at the end of January 2020.

We aim to wind down the service in a deliberate manner to minimize any inconvenience to users. The impact of the termination of the service on the result for the fiscal year is expected to be minimal and is already incorporated into our forecast.

Next, the Music segment. The Q2 sales increased 8% year-on-year to ¥219.3 billion and operating income increased 19% to ¥37.5 billion.

This increase was mainly due to the consolidation of EMI Music Publishing in the Music Publishing business and higher global streaming revenues, partially offset though by the negative impact of exchange rates and lower sales of mobile games mainly in Japan. The streaming revenues in the Recorded Music business continue to grow at a high rate as they did in the previous quarter, increasing 17% year-on-year or 21% year-on-year if the impact of the conversion to the yen is excluded.

We revised upwards our full year sales forecast by ¥20 billion to ¥850 billion and our operating income forecast by ¥5 billion to now ¥140 billion. This upward revision was mainly due to streaming revenues exceeding our expectations.

Next, our Pictures segment. The Q2 sales increased 8% from last year to ¥260.6 billion and operating income increased a significant 67% year-on-year to ¥39.3 billion.

The increase in profit was mainly due to the contribution of Spider-Man Far from Home which, having exceeded USD 1.1 billion in global box office revenue, is the highest grossing film of all time for Sony Pictures Entertainment and an improvement in the profitability of Media Networks due to the benefit of portfolio review and improved profitability in India also contributed. Our fiscal '19 full year sales forecast has decreased ¥50 billion to ¥1.030 trillion mainly due to a decrease in the number of titles slated for release this year due to the change in the releasing timing of some of the titles.

On the other hand, we have revised upward our operating income forecast by ¥5 billion to ¥70 billion due to an increase in the profitability of Motion Pictures and Media Networks and the benefit of the overhead cost reductions, though partially offset by the impact of lower sales. I will now discuss the collaboration between the Music and Pictures segments in anime business.

The anime market outside of Japan has been growing at a rapid rate for several years, and Sony is expanding this business in this important growth area. Sony Music Entertainment Japan Inc.

has been very successful in the anime business in Japan and has begun distributing anime content outside of Japan. Sony Pictures Entertainment acquired Funimation Production, the Funimation, one of the largest anime distributors in the U.S.

in 2017. In order to further strengthen this area of business, we have decided to integrate the platform of the 3 companies within the Sony Group that distribute anime content.

Funimation will acquire the distribution rights for numerous Japanese anime titles on behalf of these companies, and each company now will then distribute the titles in their own -- their market. In addition, in order to improve the appeal of the platform, Aniplex, owned by Sony Music Entertainment Japan, is joining the effort by enabling each company to distribute on a limited time exclusive basis the first animated TV series of Fate/Grand Order, the major hit mobile game.

Through these actions, we are strengthening collaboration across the Sony Group and we are also aiming to contribute to the growth of the Japanese anime industry. Next is the Electronics Products & Solutions.

Sales for the quarter decreased 11% year-on-year to ¥493.5 billion mainly due to a decrease in unit sales of smartphones and TVs and the negative impact of exchange rates. Operating income increased ¥24.9 billion year-on-year to ¥41.4 billion.

This increase was mainly due to the benefit of the restructuring that is steadily progressing in Mobile Communications and reductions in operating expenses in the various businesses within the EP&S segment, partially offset by the decrease in sales and the negative impact of exchange rates. Mainly due to a reduction of unit sales of forecast for TVs, reflecting a deterioration in market conditions, our sales forecast for the full year has decreased ¥50 billion to ¥2.110 trillion, and our operating income forecast has decreased ¥10 billion to ¥111 billion.

Next, I will touch on the TV business. Due to a deterioration in the market for panels, the intensely competitive environment in the TV market continued in the second quarter.

Although our unit sales have decreased year-on-year, we're working to maintain our average selling price by focusing on large screen and high value-added models as well as by tightly controlling channel inventory. Since we expect this operating environment to continue through the fiscal year ending March 31, 2021, we plan to prioritize profitability through our supply chain and tightly manage costs.

Next is the Imaging & Sensing Solutions segment. Despite the negative impact of exchange rates, the second quarter sales increased 22% year-on-year to ¥310.7 billion mainly resulting from an increase in unit sales of image sensors for mobile devices and improvement in product mix.

Operating income increased ¥28.5 billion to a ¥76.4 billion due to the impact of the increase in sales, partially offset by an increase in research and development costs and depreciation expense. Both sales and operating income were the highest on record for the quarter in the I&SS segment.

We revised upward our full year sales forecast ¥50 billion to ¥1.040 trillion and our operating income forecast ¥55 billion to ¥200 billion. At present, we are maintaining a cautious view in our forecast for sales in the second half of the fiscal year when demand is usually lower than the first half of the fiscal year.

However, we plan to continue to operate at full capacity utilization in order to strategically stockpile inventory to meet demand next fiscal year. We expect demand for our image sensors to continue to increase from next fiscal year as well due to the adoption of multi-sensor cameras and larger-sized sensors by smartphone makers.

In order to sponsor this strong demand, we have further improved the efficiency of space utilization in our existing factories and have raised our production capacity target for the end of March 2021 from 130,000 wafers per month to 138,000 wafers per month. Moreover, we have decided to move forward in stages with the investment.

We had been considering to build new fabs at our Nagasaki facility to accommodate demand from the fiscal year beginning April 1, 2021. Through this action, we are working to continue growing the I&SS business so as to achieve the midrange targets we established on the IR Day this year, that is, 60% revenue share of the image sensor market and 20% to 25% ROIC in FY 2025 ending March 31, 2026.

Next, I will explain the Financial Services segment. The second quarter Financial Service revenue increased 7% year-on-year to ¥377.2 billion, mainly due to a higher insurance premium revenue reflecting an increase in policy amount in-force primarily from single premium insurance at Sony Life.

Operating income was essentially flat year-on-year at ¥38.8 billion. We have made no changes to our full year forecast.

In conclusion, I would like to update you on our capital allocation strategy. Sony considers and implements financial measures to enhance corporate value through a balanced and consistent approach to capital allocation.

Previously, we showed how we intend to allocate the operating cash flow we expect to generate during the current midrange plan. Going forward, we will show a more comprehensive allocation of our capital, which incorporates the cash generated from the sale of equity stakes, businesses and other assets such as the proceeds from this quarter's sale of common shares of Olympus Corporation.

Capital will be allocated in a manner designed to increase corporate value. There's no change to our policy of engaging in share repurchases in a flexible manner to increase ROE and earning per share, but we will continue to place a higher priority on M&As and organic investments such as capital expenditures and research and development spending.

Lastly, I will show you the results forecast for each of our segment. This concludes my remarks.

A - Unidentified Company Representative

Now the floor is open to your questions. [Operator Instructions].

When the questions are asked in English, they will be interpreted into Japanese consecutively and answers will be given in Japanese. Please confine the number of questions to two per person.

Anyone?

Unidentified Company Representative

Thank you. With that, we will conclude our earnings announcement session today.

Thank you for your participation.

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