Oct 28, 2020
Masaru Kato
Ladies and gentlemen, it is now time to start the second quarter fiscal 2020 earnings announcement of the consolidated results. And my name is Kato from Corporate Communications, and I shall be serving as the emcee for this session.
This briefing is being held for the members of the media, analysts and institutional investors to whom we have invited. And the session is - can be viewed on the Internet through our investor website.
We have with us the Executive Deputy President and CFO, Mr. Hiroki Totoki, to talk about the consolidated results of the second quarter 2020 as well as the forecast for the full year 2020.
And then there will be a question-and-answer session. And we anticipate that this session will last for about 70 minutes.
So Mr. Totoki first, please.
Hiroki Totoki
Thank you. Major changes are occurring in society and economy as well as in people's lives, primarily due to the spread of the new coronavirus disease and an increase in geopolitical risks.
At Sony, the increased export restrictions the U.S. government has imposed on a certain major Chinese customer are having a significant negative impact on our image sensors business, while stay-at-home demand resulting from COVID-19 is having a positive impact, primarily on our Game business.
In an operating environment such as this where change is both rapid and broad, our diverse business portfolio augments the resilience of Sony and provides us an opportunity to expand new businesses. Now I'd like to explain the following topics, as you see here.
Fiscal '20 second quarter consolidated sales decreased slightly compared to the same quarter of the previous fiscal year to ¥2,113.5 billion, but consolidated operating income increased ¥38.8 billion year-on-year to ¥317.8 billion, which was a record high for the second quarter. Income before income taxes increased ¥37.5 billion year-on-year to ¥299.6 billion.
Net income attributable to Sony Corporation stockholders for the quarter increased ¥271.7 billion year-on-year to ¥459.6 billion. This significant increase in net income was primarily due to the improvement in operating income I mentioned and the ¥214.9 billion reversal of a portion of the valuation allowances recorded against deferred tax assets and the consolidated tax filing group in Japan.
For details of adjusted profit, excluding extraordinary items recorded in second quarter, please refer to Pages 4 through 7 of the presentation materials. Now this slide shows the results by segment for fiscal '20 quarter two.
Next, I will show the consolidated results forecast for fiscal 2020. Consolidated sales are expected to increase ¥200 billion compared with the previous forecast to ¥8.5 trillion, and operating income is expected to increase ¥80 billion to ¥700 billion.
We have also upwardly revised the forecast for income before income taxes to ¥765 billion and the net income attributable to Sony's Corporation shareholders to ¥800 billion. Our forecast for the consolidated operating cash flow, excluding the Financial Services segment, is ¥630 billion, an increase of ¥80 billion compared to our previous forecast.
Our assumed foreign currency exchange rate for the second half of the year is ¥105 to $1 and ¥123 to the €1. Now this slide shows our forecast by segment.
I will now explain the situation in each of our business segments. First, G&NS.
First, in the G&NS segment, Software and Network Services performed well in the second quarter, primarily due to our first-party software titled Ghost of Tsushima becoming a big hit and PlayStation Plus subscribers increasing as a result of stay-at-home demand. Sales increased 11% year-on-year to ¥506.6 billion with all categories increasing, except for hardware, which is anticipating the launch of the PlayStation 5.
Operating income significantly increased ¥39.9 billion to ¥104.9 billion, primarily due to an increase in software revenue. The fiscal 2020 sales forecast has been revised upward ¥100 billion compared to the previous forecast to ¥2.6 trillion.
And the operating income forecast has been revised upward ¥60 billion to ¥300 billion. Although it has leveled off compared with its peak in April, stay-at-home demand, which drove sales and profit in this segment in the first half of the fiscal year, continue to have a positive impact with total PlayStation user game play time in September up approximately 30% compared to the same month of the previous year.
We expect this level of stay-at-home demand to continue in the second half. Last month, we announced the price, release date and the software title lineup of the PS5.
The price we announced is the same one we incorporated into the fiscal forecast we disclosed at the last earnings announcement. This fiscal year, we are aiming to exceed the 7.6 million units we sold in the fiscal year of the launch of the PlayStation 4, which achieved a substantial market share and was a major success.
And for software for the PS5, we expect to have more titles than at any launch of our history, thanks to our high-quality first-party software that is exclusive to this PlayStation and to a collaboration with our publisher partners. We expect to launch the PS5 in great shape due to this appealing software lineup, the strength of the PlayStation brand, our preeminent game ecosystem and our cohesive gamer community.
Our strategy is to grow sales and profit through increased user engagement, driven by great gaming experiences on the PS5, and we aim to accelerate the growth of recurring sales and profit by expanding the reach. Next is the Music segment.
Fiscal year '20 Q2 sales increased 5% year-on-year to ¥230.9 billion, primarily due to an increase in streaming revenue and a hit album released by Kenshi Yonezu in Japan. Operating income increased ¥15.4 billion to ¥52.9 billion due to the impact of the increase in sales and a onetime gain resulting from the transfer of a business.
In the Recorded Music space, advertising-supported streaming, which was negatively impacted by COVID-19, is recovering. And streaming revenue during the quarter continued to grow at a high rate of 18% year-on-year.
Primarily because streaming revenue in Recorded Music is exceeding our expectations, fiscal year '20 sales are expected to increase ¥60 billion compared to our previous forecast to ¥850 billion, and operating income is expected to increase ¥22 billion to ¥152 billion. Demon Slayer, [indiscernible] which Sony co-produced and co-distributed, opened on October 16, 2020, and became the first film ever released in Japan to exceed ¥10 billion in box-office revenue in the 10 days after opening.
The TV series is being distributed outside of Japan via channels such as Funimation, which is also a Sony Group company, and it is extremely popular. We expect this IP to contribute even further to the enhancement of synergy across our entertainment businesses, not just the animation business we are focusing on.
Next is the Pictures segment. Fiscal year 2020 Q2 sales significantly decreased 26% year-on-year to ¥192.3 billion, primarily due to a significant decrease in theatrical releases resulting from the impact of COVID-19 compared to the same quarter of the previous fiscal year, in which the major hit, Spider-Man: Far from Home, was released as well as a decrease in advertising revenue in media networks.
Operating income decreased for Motion Pictures and other factors. Our forecast for fiscal year '20 sales has not changed, but the forecast for operating income has increased ¥7 billion to ¥48 billion to reflect the results of the first half.
While taking steps to prevent the spread of COVID-19, we have restarted motion picture and TV show production in stages since July. Box office revenue has begun to recover, but the closure of theaters in major cities in the U.S.
continues, and the major studios are postponing the release of large films. Once theaters reopen, there is a possibility that increased competition from a crowded motion pictures release schedule will cause the recovery of our sales and profit to be delayed.
The Motion Pictures business model is one where sales and profit are generated over multiple years, starting with theatrical release where hits are made, and progressing to successful windows such as home entertainment and TV and video-on-demand licensing. As a result, the negative impact on our financial results of not being able to release films into theaters will continue for several years going forward.
On the other hand, advertising revenue in the Media Networks business, which was significantly negatively impacted by COVID-19, is recovering. Next is the EP&S segment.
The second quarter sales increased 2% year-on-year to ¥504.7 billion, primarily due to an increase in unit sales of TVs. Operating income increased ¥12.6 billion year-on-year to ¥54 billion, primarily due to a reduction in operating costs and an improvement in the product mix and an increase in the unit sales of TV.
No change has been made to the forecast for fiscal year '20 sales. But primarily due to the favorable impact of foreign currency exchange rates, we increased the FY '20 operating income forecast by ¥7 billion compared to the previous forecast to ¥67 billion.
Although the segment was significantly negatively impacted by COVID-19 early from February of this year, it regained its stability in Q2, thanks to a stabilization of the supply chain, stay-at-home demand for home audio and video products and the recovery of demand for digital cameras and other products. Nevertheless, we are operating the business with extreme caution as recent signs of a resurgence of COVID-19 have proven that the unpredictable situation is continuing.
We are working to build a business that can generate a profit under even more severe circumstances by further accelerating management of the segment as one unity, improving the efficiency of our operations and optimizing our scale. Moreover, in order to bring reality real-time and remote value to our customers using Sony's technology, we will work diligently to sow the seeds of future growth.
Next is the I&SS segment. Fiscal year 2020 second quarter sales decreased slightly year-on-year to ¥307.1 billion, and operating income significantly decreased ¥26.5 billion to ¥49.8 billion.
Sales for fiscal year '20 are expected to decrease ¥40 billion to ¥960 billion, and operating income is expected to significantly decrease ¥49 billion to ¥81 billion. Even accounting for the decrease in operating income in fiscal year 2020, we expect the difference between the total of operating cash flow and investing cash flow for the segment over the 3 fiscal years that began in April 2018 to be positive.
Pursuant to export restrictions announced by the U.S. government on August 17, 2020, we terminated product shipments to a certain major Chinese customer as of September 15.
The forecast disclosed today for the second half of this fiscal year does not include any shipments to that customer. In addition, the operating income for the quarter includes an approximately ¥17.5 billion write-down of finished goods and work-in-process inventory for that customer recorded at the end of September.
Based on this situation, we are further revising the business strategy I explained at the previous earnings announcement from the perspective of capital expenditures research and development and customer base. We are further postponing the timing of capital expenditures with cumulative capital expenditures for the 3 fiscal years that began April 2018, expected to be reduced ¥40 billion from approximately ¥650 billion I explained the last time.
We do not think it is prudent to prematurely reduce research and development spending because we want to meet the needs of a wide range of smartphone customers as well as maintain and increase our future technological competitive advantage. We have had some success expanding and diversifying our customer base for fiscal year '21.
The financial impact on our business in fiscal year 2020 is limited. But we do think it is possible to recapture in fiscal year 2021 a large portion of the market share on a unit basis we lost this fiscal year.
However, we expect that it will take a long time for other customers to follow the trend to higher functionality and larger die size smartphone cameras that the Chinese customer was leading. Thus, we expect the substantial recovery of profitability driven by those high value-added products to take place in the fiscal year ending March 31, 2023 by recapturing market share in fiscal year 2020.
Through an increase in sales of commodity sensors and by recouping our business profitability in fiscal year 2022 through more high value-added products, we aim to return the mobile image sensors business to growth. In addition, there is no change to our mid- to long-term strategy of growing our business through expansion of applications that use HAI and 3D sensing capabilities as well as through starting up automotive sensors in earnest.
Last is the Financial Services segment. Fiscal year 2020 second quarter Financial Services revenue was essentially flat at ¥373.9 billion.
Operating income increased ¥4.9 billion to ¥43.7 billion, primarily due to an improvement in valuation gains and losses on securities held at Sony Bank and the decline in the loss ratio for automobile insurance at Sony Assurance. We expect fiscal year 2020 Financial Services revenue to increase ¥60 billion compared to our previous forecast to ¥1.460 trillion, primarily due to an increase in net gains on investment in the separate account related to variable insurance products at Sony Life.
We expect operating income to increase ¥13 billion to ¥155 billion, primarily due to the decline the loss ratio for automotive insurance at Sony Assurance. Sony Financial Holdings became a wholly-owned subsidiary of Sony Corporation on September 2, 2020.
Going forward, we will disclose the information shown here pertaining to the Financial Services segment on a quarterly basis in our supplementary information. Lastly, I would like to discuss the outlook of our businesses into next fiscal year.
This slide shows our current view as to the momentum for each business from today through the next fiscal year and beyond. As I have explained today, we're incorporating a negative impact on the financial results of the I&SS segment relating to a certain major Chinese customer.
But there's no change to the mid- to long-term growth momentum of business overall. And we are gaining confidence that it is possible to strengthen and grow our business despite the COVID-19 pandemic.
We aim to grow even more in the future by returning to the past profit growth from the next fiscal year, which is when we start the next medium-range plan. Thank you very much.
Masaru Kato
That was CFO, Hiroki Totoki, making the presentation. The question-and-answer session will be starting at 4:20, 20 minutes past four.
In the first 20 minutes, we'll receive questions from the media, and in the next 20 minutes, we'll be receiving questions from the investors as well as analysts. [Operator Instructions].
So please wait for a while before we start our Q&A session.
A - Masaru Kato
Ladies and gentlemen, thank you for waiting. We would like to now open the questions from the media.
The questions will be answered by Hiroki Totoki, the Executive Deputy President and CFO; Naomi Matsuoka, the Senior Vice President in charge of Corporate Planning and Control, Finance and IR; as well as Mami Imada, the VP and Senior General Manager in charge of Corporate Communications. [Operator Instructions].
The first question, Takahashi-san [ph] from Mainichi Newspaper, please. From Financial Times, Inagaki-san, please.
Financial Times, Inagaki-san, please. That's - please ask your question.
Inagaki-san, can you hear us? Sorry for that.
Due to the connections, I think we need to move on to next person in line. From Bloomberg, Furukawa-san, please.
Sadahiko Hayakawa
Thank you. Ladies and gentlemen, the time has come up to close this earnings announcement by Sony Corporation.
Thank you very much for your participation.