Feb 2, 2018
Executives
Kazuo Hirai - President and CEO Kenichiro Yoshida - Executive Deputy President and CFO Kazuhiko Takeda - Corporate Executive, in-charge of Corporate Planning & Control and Accounting Atsuko Murakami - Senior General Manager of Finance and Corporate Development
Analysts
Unidentified Analyst - SMBC Nikko Securities Inc. Masahiro Ono - Morgan Stanley Securities Unidentified Analyst - Citigroup Securities Yasuo Nakane - Mizuho Securities Unidentified Analyst - Credit Suisse Securities Masaru Sugiyama - Goldman Sachs Mikio Hirakawa - Merrill Lynch
Operator
Good afternoon. We would like to have a briefing on the new management structure of Sony Corporation.
I would like to thank for your kind attendance despite your busy schedule. I am from the IR and my name is Yeshu [ph] and I have the pleasure of serving CMC.
Let me introduce those on the stage. Kazuo Hirai, the CO and Representative Director and President; Executive Deputy President and CFO and he will become the CO and Representative Director present and he is Kenichiro Yoshida.
The appointment he will be serving in the position as of 1st of April. Both gentlemen will be speaking first and later would accommodate your questions.
We hope to spend half an hour to explain about the new management structure and after that we will have the Q3 2017 consolidated financial results briefing. Thank you.
Kazuo Hirai
Hello everyone I am Kazuo Hirai. Thank you for being here today despite the short notice.
As announced at 3 PM today current Executive Deputy President and CFO, Kenichiro Yoshida will be succeeding me as Sony President and CEO effective April 1st. I will offer my support to Mr.
Yoshida in the future Sony in my new role as Director and Chairman. Ever since my appointment as President and CEO in April 2012, over the past six years I have dedicated myself to transforming the company and enhancing its profitability.
I had been considering for some time when would be the appropriate time for me to step away from my role. The company is approaching a crucial juncture as we prepared to embark on the new mid range plan.
I decided this would be the ideal timing to pass the baton of leadership to a new management team for the future of Sony and also for myself to embark on a new chapter in my life. Towards the end of last year I informed Osamu Nagayama, Chairman of the Board and Chair of the Nominating Committee of my decision as well as Nominating Committee comprising mainly outside Directors had been regularly discussing management succession plans.
And Mr. Nagayama and I subsequently held several discussions following which he and those on the Board agreed to respect my decision.
I'm very grateful to Mr. Nagayama and the Board for their understanding and support.
Throughout my tenure as President and CEO I have stated that my mission is to ensure and continues to be a company that provides customers with candor and inspires and fulfill their curiosity. I have strived to lead the company accordingly.
At the time of my appointment the largest and the most pressing challenge was the turnaround of consumer electronic business working together with everyone to tackle this challenge head on and revitalizing the business operations so they could deliver stable profit. It was for me personally a deeply moving experience.
Do not pursue scale but instead pursue differentiation I took inspiration from this DNA and the words of our founders. Over the past six years I gave my all to driving the company forward.
There were of course many challenges -- challenging moments when I had to make difficult decisions that impacted our employees and stakeholders around the world, however, I took the decision in the belief that they were imperative in ensuring Sony's recovery and future growth. Even during such testing times I always try to lead the company in a way that would I applaud our spirit of innovation and our confidence to take on new challenges to move the company forward while always maintaining an awareness of what it means to deliver candor to our customers through our products and content and services.
I'm very proud that now in the third and final year of our current mid-range corporate plan we are expecting to exceed our financial targets and it excites me to hear more and more people enthuse that Sony is back again. I am extremely grateful for the continued support of our customers, business partners, shareholders, and investors around the world and I also greatly appreciate the guidance I received from the Board and dedication shown by my outstanding management team and of course the tireless effort of all the Sony Group employees who put their faith in me and the roadmap I laid out never giving up, however, daunting they challenge.
My successor Kenichiro Yoshida has supported me closely over the past four years contributing extensively beyond his unit as CFO and acting as valuable confidante and business partners as we took on the challenge of transforming Sony together. His many achievements and leadership qualities need no introduction and I believe his deeply strategic mindset brought perspective and experience across business -- diverse business areas together with his unwavering leadership strength make him ideally suited to lead Sony going forward.
The Nominating Committee had been regularly discussing potential management succession plans and I understand that in recent discussions in the committee Mr. Yoshida had emerged as the leading candidate to my potential successor.
At the same time when I informed the Nominating Committee of my decision to step down I also proposed that Mr. Yoshida would succeed me as CFO and I appreciate that the Board also unanimously supporting his appointment.
The company will now embark on a new mid range plan from April under the leadership of Mr. Yoshida and his new management team.
Although we have made significant progress in improving our financial results, the competitive landscape is changing as rapidly as ever and all of our businesses continue to face great challenges and Mr. Yoshida's leadership I expect the new management team to maintain an acute sense of vigilance and urgency as they emerge in our -- engage in our business operations.
While I look forward to continue my relationship within my role as Chairman but I'd like to take this opportunity to explain gratitude to all of you in investor and analyst community here today. Thank you all for your support over the past six years.
Operator
Next I will call up on Mr. Yoshida to speak.
Kenichiro Yoshida
Good evening ladies and gentlemen, I'm Kenichiro Yoshida. As announced today I have been appointed as President and CEO of Sony Corporation.
I am grateful Kazuo Hirai and the Sony Board for their trust and confidence in appointing me to this extremely important role and feel a great sense of responsibility as I take on this key position. Just over four years ago in December 2013 I returned to Sony from the ISP Company So-Net where I had spent the previous 14 years of my career.
Mr. Hirai offered me the opportunity to join him in revitalizing Sony and I was inspired by the way that he was addressing difficult issues head on and without delay.
Sony had provided me with many life changing opportunities and enabled me to pursue a varied and diverse career so I also saw this as a chance to give something back to the company that had given me so much. Since then I performed the role of CFO within Mr.
Hirai's management team. In this position I have strived to enhance the company's management accountability and contribute in any way possible to transforming Sony into a highly profitable enterprise.
I'm pleased that this year, at the final year of our second mid-term corporate plan we are able to forecast exceeding our targets and achieving our highest profit in 20 years. However at the same time this also signifies that as a company we have been unable to surpass ourselves for the past 20 years.
During this period the global business environment surrounding Sony has changed drastically. Although we are now able to forecast a return to record profit levels, our position in the global market is still very different to where we were 20 years ago.
Mr. Hirai and I both share a great sense of urgency regarding the need for us to enhance competitiveness as a global company.
I believe that Sony's greatest strength is the SONY brand that resonates with so many customers around the world, it has been and always will be our greatest asset. At Sony we have a diverse array of employees engaged in a diverse range of businesses.
How we go about maximizing this diversity to our advantage is one of our most pressing challenges. From April we will embark on our next mid range plan under a new management structure.
I'm also considering other executive appointments and organizational changes beyond those announced today. We will update you on these changes once they have been finalized.
I intend to present details of our future strategic direction at our next corporate strategy meeting scheduled to be held soon after our full-year earnings announcement. Together with my management team and all our employees I will devote myself, my full effort to creating a better Sony that captures the imagination of our many stakeholders around the world.
I hope I can count on your continued support going forward. Thank you for your attendance here today.
Operator
A bit earlier than scheduled but we would like to start the announcement of Q3 FY2017 consolidated financial results. Today we have the presenters here.
Executive Deputy President is here, representative of Corporate Executive Officer Kenichiro Yoshida, Corporate Executive, Corporate Planning and Control and Accounting, CIO, Kazuhiko Takeda; Corporate Executive in Finance, Atsuko Murakami. Today Mr.
Yoshida will make the presentation to be followed by Q&A session. In total we expect 35 minutes.
Mr. Yoshida please.
Kenichiro Yoshida
I am CFO Kenichiro Yoshida and today I would like to explain two topics in the next 15 minutes. Consolidated sales in the third quarter increased 12% year-on-year to 2 trillion 672.3 billion yen.
Consolidated operating income was 350.8 billion yen, approximately 3.8 times the same quarter of the previous fiscal year. Net income attributable to Sony Corporation’s stockholders was 295.9 billion yen.
As is shown in this slide, operating income in the third quarter of the previous fiscal year and the current fiscal year included certain extraordinary items. Excluding those items, operating income would have increased by 137.4 billion yen.
This chart shows the cumulative results for the first nine months of the fiscal year. Adjusted operating income increased by 263.7 billion yen, or approximately 65%.
This chart shows the results by segment for the third quarter. Please note that we have changed the order of the segments from this quarter.
This slide shows the results by segment for the first nine months of the fiscal year. Next is the consolidated results or forecast for fiscal 2017.
Consolidated sales remain unchanged from our October forecast at 8.5 trillion yen. We have revised upward our operating income forecast by 90 billion yen to 720 billion yen.
We have also upwardly revised our forecast for net income by 100 billion yen to 480 billion yen, partially due to the recording of a 13.8 billion yen gain in the third quarter resulting from the recent tax reform in the U.S. For several years, we have had valuation allowances recorded against our deferred tax assets in the United States.
As a result, the reduction in corporate tax rate brought about by the tax reform in the U.S. has not caused a one-time increase in income tax expenses.
The fiscal year results forecasts for each segment are shown on this slide. And as you can see, we have upwardly revised our operating income forecasts in the Music, Semiconductors and Financial Services segments.
At the time of our October forecast, we have incorporated a loss of 50 billion yen in Corporate and elimination as a contingency for business risk. But no contingency is included in the forecast this time.
Operating results are trending well but we recognize that these results are being supported by external tailwinds such as FOREX and a stronger global economy. We expect FOREX, one of the external tailwinds, to have an approximately 60 billion yen positive impact on the five electronics segments in total for the fiscal year.
And I will now turn to situation in each of our businesses. First I will talk about the Game & Network Services segment.
Sales for the quarter increased 16% year-on-year primarily due to an increase in PS4 software sales and the impact of FOREX. Network sales have increased 41% year-on-year and have exceeded 300 billion yen on a quarterly basis for the first time.
Operating income increased 35.3 billion yen year-on-year to 85.4 billion yen, primarily due to the increase in sales and the impact of foreign exchange rates. We had a strong holiday season with cumulative sell-through units of PS4 exceeding 73.4 million units as of the end of December of last year.
In addition, subscribers to PS Plus, our paid subscription service, exceeded 31.5 million as of the end of December of last year. We have reduced our forecast for fiscal year sales by 60 billion yen compared with the October forecast to 1 trillion 940 billion yen.
This is due to a change in the launch date of a certain software title, as well as an increase in sales of PS4 hardware at promotional prices during the holiday season. Our fiscal year unit sales forecast for PS4 remains unchanged at 19 million units.
Our forecast for operating income remains unchanged at 180 billion yen because the impact of the above-mentioned decrease in sales is expected to be offset by a reduction in SG&A expenses. Next, I will talk about the Music segment.
Third quarter sales increased 22% year-on-year and operating income increased 11.4 billion yen to 39.3 billion yen. The mobile game application “Fate/Grand Order” continued to make a significant contribution to financial performance.
Streaming revenue continues to grow, increasing 37% year-on-year. We have upwardly revised our forecast for sales by 50 billion yen to 780 billion yen from our October forecast to reflect the strong performance through the third quarter.
We also upwardly revised our forecast for operating income by 16 billion yen to 110 billion yen due to the increase of sales. Next, I will talk about the Pictures segment.
Sales increased 16% year-on-year and operating income improved 117.3 billion yen to 10.5 billion yen. This significant improvement in results was due to the absence of the abovementioned 112.1 billion yen impairment charge of goodwill recorded in the same quarter of the previous fiscal year.
Jumanji, which we released near the end of December, has been performing very well at the box office. There is no change to our fiscal year forecast for sales and operating income.
Although the above-mentioned Jumanji has been performing quite well, we expect its positive impact to be offset by the negative impact of lower home entertainment sales, including DVD and Blu-ray sales. Next is the Home Entertainment & Sound segment.
In the third quarter, sales increased 22% year-on-year and operating income increased 20.3 billion yen to 46.2 billion yen. The increase in sales and operating income was primarily due to a shift to high value-added models, primarily 4K televisions, and the positive impact of foreign exchange rates.
We have upwardly revised our forecast for operating income by 4 billion yen to 80 billion yen primarily due to an improvement in product mix in Audio and Video. Next I will explain the Imaging Products & Solutions segment.
Third quarter sales increased 8% year-on-year and operating income increased 4.9 billion yen to 26 billion yen. The increase in sales and operating income was primarily due to the positive impact of foreign exchange rates and a shift to high value-added models.
There is no change to our forecast for the fiscal year. Next I will talk about the Mobile Communications segment.
During the third quarter, sales decreased 13% year-on-year primarily due to a decrease in smartphone unit sales. Operating income decreased 5.4 billion yen to 15.8 billion yen.
This decrease was primarily due to the above-mentioned decrease in unit sales, and an increase in the price of key components and the negative impact of foreign exchange rates, partially offset by reductions in operating costs and a reversal of patent royalty accrual. We have lowered our forecast for annual smartphone unit sales by 1.5 million units from our October forecast to 14 million units.
As a result, we have reduced our sales forecast by 40 billion yen to 740 billion yen. The forecast for operating income remains unchanged.
We would like to generate a profit again this fiscal year primarily by offsetting the negative impact of the above-mentioned decrease in unit sales by reduction in operating costs. Next, I will talk about the Semiconductors segment.
In the third quarter, sales increased 7% year-on-year and operating income increased 33.4 billion yen to 60.6 billion yen. The increase in sales and operating income was primarily due to an increase in unit sales of image sensors for mobile products.
The sales for the third quarter include some revenue from fourth quarter shipments that were accelerated due to the timing of an upgrade of our supply chain management system. We have reduced our sales forecast by 30 billion yen compared with the October forecast to 850 billion yen due to a decrease in unit sales of image sensors for mobile products shipped to Chinese smartphone makers.
We have upwardly revised our operating income forecast by 5 billion yen to 155 billion yen primarily due to an increase in gains from asset sales and a reduction in expenses, partially offset by the decrease in sales. Short-term demand for image sensors for mobile products is fluctuating, but we expect growth to come from the adoption of dual-lens and sensing applications.
Moreover, our view that the market for image sensors will grow over the mid-to-long term is unchanged because we expect growth to come from other applications, such as automotive, as well. Lastly, I will explain the Financial Services segment.
Third quarter financial services revenue increased 17% year-on-year and operating income increased 27.3 billion yen to 56.3 billion yen. This increase in operating income was primarily due to the recording of a gain on the sale of real estate held for investment purposes and a decrease in net losses on derivative transactions to hedge market risk.
We have raised our forecast for financial services revenue and operating income to 1 trillion 250 billion yen and 175 billion yen, respectively. These upward revisions were due to the fact that results in the third quarter were higher than the October forecast.
Now I would like to discuss our assessment of the financial strength of Sony. First I will discuss cash flow.
This slide shows our consolidated cash flow excluding the Financial Services segment because the nature of the financial services business differs from our other segments. For the first nine months of the fiscal year through the end of the third quarter, the combination of operating and investment cash flow was positive 237.7 billion yen, as is shown at the bottom of this slide.
Cash flow has improved significantly compared with the same period of the previous fiscal year when it was negative 160.6 billion yen. This is primarily due to an improvement in profit.
Now I would like to discuss the state of our balance sheet. On the right side of this slide you can see our balance sheet excluding the Financial Services segment.
As of the end of December 2017, Sony Corporation’s stockholders’ equity was approximately 2.2 trillion yen. If we look back over the last ten years, stockholders’ equity decreased from a peak of approximately 3.3 trillion yen at the end of December 2007 to a low of approximately 1.4 trillion yen at the end of September 2012.
However, primarily due to improved operating performance since that time, equity has recovered somewhat. As I mentioned earlier, cash flow has significantly improved recently, but stockholders’ equity has just begun to improve.
Going forward, in order to make proactive investments for future growth, we want to enhance stockholders’ equity and our overall financial position a little further through continued recording of profit. This ends my presentation, thank you.
Operator
Thank you, we would like to take your questions. And of course Mr.
Yoshida will discuss the earnings, so please defer your questions about the earnings till then. We will bring the microphone to you therefore please identify yourself and your affiliation.
Since time is limited may I ask that you ask questions -- two questions per person and not more. Thank you.
Operator
Next question please.
Operator
The next question please.
Operator
I am afraid that the next question will have to be the last question. Let me go to this side.
Operator
Thank you and this will conclude the Q&A on the new management structure. From 18:55 I would like to start the Q3 FY2017 closely related financial results presentation.
So please we seek for your patience. Now the floor is open to your questions.
Those of you with questions please raise your hand.
Operator
The next question would be from this side in row one.
Operator
Next question.
Operator
This is going to be our last question in view of time constraint. So please.
Operator
This concludes the earnings announcement and thank you very much for your attendance.