Feb 1, 2019
Unidentified Company Representative
Ladies and gentlemen, at this point, we'll begin the earnings announcement for the Third Quarter of Fiscal 2018. Our speakers today firstly, Executive Vice President and Chief Financial Officer, Hiroki Totoki; and Corporate Executive and Senior General Manager of the Finance Department, Atsuko Murakami; and Senior General Manager of the Global Accounting Division, VP, Hirotoshi Korenaga.
Today, Mr. Totoki will give you presentation on the results of the third quarter and also the full year forecast for the entire year.
And after his presentation, will be time for question and answers. And we plan to spend 45 minutes altogether.
Mr. Totoki, would you please start.
Hiroki Totoki
I would like to explain these 2 topics. Fiscal '18 Q3 consolidated sales decreased 10% year-on-year to JPY 2,401.8 trillion.
The majority of this decrease in sales was due to lower financial services revenue and consolidated sales excluding the Financial Services segment decreased 3% year-on-year. Consolidated operating income increased 7% year-on-year to JPY 377 billion, a remeasurement gain of JPY 116.9 billion resulting from the consolidation of EMI Music Publishing was included in operating income.
Income before income taxes decreased 1% year-on-year to JPY 340.5 billion, primarily due to the recording of a JPY 44.8 billion loss on the revaluation of the equity securities in other incomes and expenses. Net income attributable to Sony Corporation's stock orders for the quarter increased 45% year-on-year JPY 490 billion.
The primary reason of this increase was JPY 154.2 billion reversal of valuation allowances against DTA in the United States. As shown in this slide, there were several extraordinary items included in operating income for the current quarter and the same quarter previous year.
Excluding these items, adjusted operating income decrease of JPY 84 billion. Adjusted income before income taxes which excludes extraordinary items is shown here.
We have not shown it on this slide, but adjusted net income which excludes extraordinary items and also estimates and excludes the impact of such extraordinary items on the income taxes decreased JPY 119.3 billion year-on-year you know from JPY 276.2 billion to JPY 157.9 billion. Please see Page 5 of earnings presentation for details of adjusted tax and income for the quarter.
This slide shows the result by segment for Q3. This slide shows accumulative results for the first nine months of the fiscal year.
Adjusted profit can be found on Pages 8 through 10 of our earnings presentation. This slide shows accumulative result by segment for the first nine months of the fiscal year.
Next is a consolidated results forecast for fiscal '18. The consolidate sales forecast has being revised downward by JPY 200 billion from October forecast to JPY 8.5 trillion and the consolidated operating income forecast remains unchanged at JPY 870 billion.
The income before income taxes forecast has been revised downward JPY 25 billion to JPY 950 billion, mainly reflecting the loss on the revaluation of equity securities recorded in the third quarter. In addition, the forecast for net income attributable to Sony Corporation's stockholders was revised upward JPY 130 billion to JPY 835 billion, primarily to reflect the reversal of portion of valuation allowances against DTA in the third quarter.
Operating cash flow excluding the Financial Services for the nine months to date was JPY 605 billion and there's no change to our JPY 830 billion forecast for fiscal year. Assumed foreign exchange rate for the fourth quarter are JPY 111 to U.S.
dollars and JPY 127 to the euro. We plan to issue year-end dividend of JPY 20 per share which when combined with the mid interim dividend already paid, the full year amounted JPY 35 per share.
The fiscal year forecast for each segment as shown in slide, in October, we incorporated JPY 20 billion contingency budget for all other corporate and elimination and we have not incorporated it at this time. Now, I'll explain to the situation for each business segment.
First, I will talk about Game and Network Services segment. Despite a decrease in sales, resulting from the decrease in PlayStation 4 hardware unit sales, fiscal '18 Q3 sales increased 10% year-on-year to JPY 790.6 billion, due to increase in game software sales.
Despite the increase in sales of game software, operating income decreased JPY 12.3 billion year-on-year to JPY 73.1 billion, due to decrease in sales PS4 hardware and negative impact for FOREX. Now I will discuss the business environment in Q3.
Decrease in operating income in Q3 was due to aggressive promotion activities we undertook to sell PS4 hardware in an effort to expand the user base. As a result of these efforts, we sold in 8.1 million units of PS4 hardware in Q3, which was lower than the same quarter last year, but in line with our expectation for the sixth year of the platform, due to the expansion of the PS4, Play Station Plus subscribers increased 4.8 million year-on-year to 36.3 million and software sales increased significantly year-on-year, although we need to cautious of potential activity in profitability due to the console cycle going forward.
We are working to mitigate the relativity by leveraging the more than 91.6 million units cumulative installed base of PS4 to benefit from the new business model creative and network services in add on content sales and full year forecast remains unchanged from October. Next is Music segment, the third quarter sales decreased 4% to JPY 9.4 billion.
This decrease is due to the decline in recorded music sales mainly returning from the impact of new accounting standards and a decrease in sales from mobile game application which especially set by an increase in music publishing sales resulting from the positive impact of the consolidation EMI. Operating income was JPY 147.1 billion, an increase of 3.7 times year-on-year mainly due to the recording of JPY 116.9 billion remeasured gains from the consolidation of EMI.
And the full year forecast remains unchanged from October. Next talking about Pictures segment.
The third quarter sales increased 6% year-on-year to JPY 276.7 billion, although licensing revenue decreased in television produce section, Motion Picture sales increased due mainly to strong performance of Venom. Operating increased JPY 1.1 billion year-on-year to JPY 11.6 billion, thanks to the increase in sales, despite a recording of JPY 11.3 billion in cost associated with a portfolio view within the media networks.
Some of the channels Sony Pictures operates around the world face challenges including growth prospects going forward and a low profitability. Consequently since taking over as Head of the Television business is within the Picture segment, Mike Hopkins has been conducting a concentrated review of each of the channels.
During the current quarter, decision was made to downsize or exit several of the channels and this resulted in the recording of costs. And we expect the benefit of these actions to manifest from the fiscal year ending March 31, 2020 and onward.
We'll continue our efforts to improve profitability of the Pictures segment in the days ahead. The full year forecast remains unchanged.
Next will be Home Entertainment & Sound segment. The third quarter sales decreased 10% to JPY 388.8 billion, due to a decline in unit sales of televisions and the negative impact of foreign exchange.
Operating income increased JPY 1.3 billion to JPY 47.5 billion and there was an impact on foreign exchange rates and the decrease in sales which was substantially offset by a shift we made to high value added models and a decrease in indirect cost at sales companies. At the time of our April forecast, we expected annual unit sales of televisions to decrease because in this particular segment, we follow a strategy of not pursuing scale, but step to focus on profitability and this decrease this quarter is in line therefore with strategy.
Therefore, forecast in this segment remains unchanged from October. Next talking about Imaging Products & solutions segment.
The third quarter sales increased 4% year-on-year to $JPY 188.0 billion. Although unit sales of digital cameras declined due to the impact of the market.
Segment sales increased, thanks to an increase in sales of high value added products, such as interchangeable lens, mirrorless cameras and lenses themselves. Operating income increased JPY 8.3 billion to JPY 34.2 billion mainly because of the increasing sales of high value added products that I just measured.
The full year forecast was revised downward to JPY 670 billion, due mainly to a downward region in the unit sales forecast of compact digital cameras. Despite the impact of the decrease in sales, the operating income forecast remains unchanged from October, because of the shift we are making to high value added models.
Next segment is Mobile Communications. The third quarter sales decreased 37% year-on-year to JPY 137.2 billion, due to a decrease in unit sales of smartphones, primarily due to this decrease in sales and operating loss of JPY 15.5 billion was recorded in the current quarter compared to operating income of JPY 15.8 billion in the same quarter of the previous fiscal year.
The full year forecast, the sales forecast was revised downwardly to JPY 490 billion, due to a rejection in the unit sales forecast for smart phones. On the other hand, forecast for the operating loss remains unchanged from October, because the impact of a decrease in sales is suspected to be substantially offset by operating cost reductions and other actions.
The plan that I've outlined before to reduce operating costs incurred in the business in the fiscal year 2020, it proximately 50% of the level recorded in fiscal year 2017 is progressing according to the plan and we'll continue to implement it. Next is the Semiconductor segment.
The third quarter sales decreased 8% year-on-year to JPY 230.3 billion, due to a decline in unit sales of image sensors for mobile devices. Operating income decrease JPY 14.0 billion year-on-year to JPT 46.5 billion.
This was primarily due to the impact of the decrease in sales and increasing R&D and depreciation expense and recording of JPY 6.7 billion gain on the sale of manufacturing equipment in the same quarter of the previous fiscal year. We have revised downward full year sales forecast to JPY 870 billion and operating income to JPY 130 billion.
This downward revision is primary due to a reduction in the unit sales forecasts for image sensors resulting from deterioration in the smartphone market. Although we do expect the difficult market environment for smart phones to continue going forward, we are seeing high end senses adopted in both high end and mid-range models as smartphone makers seek to differentiate their products through camera functionality.
Consequently, there is no change to our view that demand for the high end images sensors that Sony excels at making will continue to increase, due to the trend toward multi-lens cameras and larger dye sizes. There's also no change to the plan that I recently outlined to increase our production capacity to nearly the maximum that fit into our existing facilities.
However as I have said in the past, if trends in demand change going forward - if trends in demand should change going forward, will modify things like timing in a flexible manner. Next is Financial Services.
In the third quarter, the Financial Services revenue decrease 56% year-on0-year to JPY 163.6 billion, due to the deterioration in investment performance into separate accounts as Sony Life. However the impact of this change in performance on the operating income of Sony Life is limited because the majority of the losses for variable life insurance products in the separate accounts are borne by customers.
Operating income decreased JPY 18.4 billion year-on-year to JPY 37.9 billion, due to the recording in the same quarter of the previous fiscal year of the gain on the sale of real estate held for investment purposes. We have revised downward full year focused for sells to JPY 1.180 trillion in the forecast for operating income to JPY 160 billion to reflect the impact of marketing environment.
That concludes my explanation on financial results. But before I close, I'd like to say few things about my view of the operating environment going forward.
We cannot be too optimistic about the futures in civil macroeconomic and geopolitical risk since the second half of last year including the smartphone market that I discussed earlier. As CFO, I have asked each business to increase [indiscernible] to changes in the environment and to prepare for the risks.
Preparing for risks means a thorough review of the operations of each of our business and strengthening of each business to minimize potential damage. It also means preparing to recover quickly and go on the offensive once the environment improves.
In the first and second mid-range plan, we were able to transform Sony's business model and improve our profitability. In the third mid-range plan, we have continued to work on operating efficiency to achieve steady growth over the long term.
This concludes my remarks. Thank you.
A - Unidentified Company Representative
Now the floor is open to your questions. Those of you with questions please wait for the microphones to be brought to you and please identify yourself by stating your name and affiliation before asking the question.
When questions are asked in English, there will be consecutive interpretation into Japanese and the answers we given in Japanese. Please confine the number of questions to two per person.
Anyone with questions?
Unidentified Company Representative
With this, I would like to conclude our session. Thank you very much for your participation.