Feb 4, 2020
Unidentified Company Representative
Ladies and gentlemen, we shall now start -- begin the Earnings Announcement Session for the Third Quarter of the Fiscal Year 2019. My name is Hayakawa [ph] the IR, the General Manager responsible for Financial Affairs.
I'd like to introduce our speakers for today. We have the Senior Executive Vice President, Chief Financial Officer, Hiroki Totoki; and then Senior Vice President, Senior General Manager of the Finance Department and Corporate Planning and Control Department, Naomi Matsuoka; and then we have VP, Senior General Manager, Global Accounting Division, Hirotoshi Korenaga.
Mr. Totoki will make the presentation today first and then we'll follow that with question-and-answers and we plan to spend 40 minutes altogether.
With that, Mr. Totoki, would you please start?
Hiroki Totoki
Before I explain our results today, I would like to speak a little about spread of infection from the new coronavirus. First, we extend our condolences to the families of the people who have passed away and send our thoughts to those who have been infected.
Sony is very concerned about the spread of infection. At this time, it is difficult to fully grasp what is going on, but we are exerting all efforts to gather information and assess the situation and we are taking actions where possible.
Now, I will explain these two topics. Fiscal 2019 third quarter consolidated sales increased 3% year-on-year due to ¥2,463.2 billion and operating income decreased ¥76.9 billion year-on-year to ¥300.1 billion.
Net income attributable to Sony Corporation stockholders decreased ¥199.4 billion year-on-year to ¥229.5 billion. As shown on this slide, certain extraordinary items were recorded in both the current quarter and the same quarter of the previous fiscal year.
Excluding these extraordinary items, operating income would have increased ¥16.5 billion to ¥276.5 billion. Also excluding these extraordinary items net income attributable to Sony Corporation stockholders would have increased ¥58.3 billion from ¥157.9 billion in the same quarter of the previous fiscal year to ¥216.2 billion.
Next is the consolidated results forecast for fiscal 2019. Consolidated sales are expected to increase ¥100 billion year-on-year to ¥8.5 trillion and operating income is expected to increase ¥40 billion to ¥880 billion.
I will explain the breakdown of sales and operating income for each segment when I explain the segment results. Income before income taxes was upwardly revised to ¥860 billion and net income attributable to Sony Corporation stockholders were revised upward to ¥590 billion.
The forecast for operating cash flow excluding the Financial Services segment is ¥760, billion unchanged from the previous forecast. The assumed foreign exchange rates for the fourth quarter are ¥109 to the U.S.
dollars and ¥121 to the euro. As for the dividend this fiscal year, we expect to issue year-end dividend of ¥25 per share and when combined with the interim dividend already paid, the annual dividend will be ¥45 per share, ¥10 more than last fiscal year.
Now, I would like to discuss the impact of the spread of new coronavirus infection. I just explained the upward revision of our consolidated results.
But that impact of the spread of the coronavirus is not included in that forecast. At this time, it is difficult for us to assess the impact on our results, but depending on how the situation evolves the impact could be large enough to eliminate the entire amount of the upward revision.
We think there could be a major impact on our manufacturing sales and supply chain operations especially in the I&SS and EP&S segment. Going forward, we will continue to get information, assess the impact, and take any necessary actions.
Pursuant to that, if there is any material change to our forecast for the current fiscal year, we will disclose that change. Now, I will explain the situation in each of the business segments.
First, Game & Network Services. Sales for the quarter increased -- decreased 20% to ¥632.1 billion, primarily due to the decrease in PS4 hardware sales and software sales as well as the negative impact of the exchange rates.
PS4 hardware is in its seventh year since launch and partly because we announced the PS5 next-generation console, unit sales decreased year-on-year. The yen-based average selling price of the hardware decreased due to the negative impact of the exchange rates and an increase in the proportion of units sold during the selling season.
However, we were able to secure a margin on hardware that was flat year-on-year because we keep the promotional price at the same level as the last fiscal year and because promotional costs were offset by year-on-year reduction in component costs. Excluding the decrease in the free-to-play titles and the impact of the exchange rates, software sales were essentially flat year-on-year.
Operating income decreased ¥19.6 billion to ¥53.5 billion, primarily due to the impact on the decrease of the third-party software sales, partly offset by the increase in the profit for the growth of the network services PS Plus. We revised outward our fiscal 2019 sales forecast by ¥50 billion to ¥1.950 trillion and the operating income forecast by ¥5 billion to ¥235 billion.
The revision in sales was due to a change in our forecast for third-party software sales including the impact of postponement into next fiscal year of several types of sales. Now, despite the benefit of operating cost reductions, operating income was revised downward, mainly due to the decrease in software sales.
Our financial results this fiscal year are in a period of adjustment, as we approach the transition to the PS5's new-generation console and because the contribution of free-to-play titles last fiscal year was quite large. On the other hand, when you look at our results over the mid to long term, you can see that our Game business is steadily growing as evidenced by the growth of network services such as PS Plus and we expect this growth to continue going forward.
The proportion of network services revenue continues to increase mainly due to the increase in PS the number of PS Plus subscribers. We aim to leverage this large community and network services revenue stream to affect a smooth transition from the current console generation to the next, unlike in the past when profitability deteriorated significantly due to development and marketing costs incurred.
Next, about Music segment. The third quarter sales increased 4% year-on-year to ¥216.9 billion, but operating income declined ¥110.8 billion year-on-year to ¥36.3 billion.
This decrease was mainly due to the absence of remeasurement gain, resulting from the consolidation of EMI Music Publishing recorded in the same quarter of the previous year and a decline in sales of mobile games in Japan. Excluding these items, our Music business is steadily growing, mainly due to the growth of the streaming market.
Streaming revenue in our recorded music business continued to grow at a high rate increasing 16% year-on-year and 20% year-on-year, excluding the impact of the conversion to the yen. And there's no change to our full year forecast for sales and operating income.
Next is about Pictures segment. The third quarter sales declined 15% year-on-year to ¥236.0 billion and operating income decreased ¥6.2 billion to ¥5.4 billion.
This decrease in profit was mainly due to the significant decline in motion picture revenues, partially though offset by an improvement in profitability, due to the benefit of a channel portfolio review in Media Networks. In the second quarter of the previous fiscal year, the major hit Venom was released at the beginning of October, significantly contributing to profitability throughout that quarter.
But this fiscal year, the hit Jumanji: The Next Level was released only in mid-December, so that the majority of the contribution to productivity will come in the fourth quarter and beyond. While there were other releases that did not meet our expectations, all-in-all, I believe that our Motion Pictures business has been performing well.
The fiscal 2019 sales and operating income forecast is unchanged. Global box office revenue for calendar year 2019 increased, led by growth outside of the United States.
And similar to last year, Sony Pictures had the fourth highest market share of box office revenue in the United States in calendar year 2019. However, while all the major studios except Disney experienced a decline in box office revenue, Sony Pictures share increased one percentage point compared to the previous year, mainly due to the contribution of the major hit Spider-Man: Far From Home.
I think this success is due to our leveraging of IP such as Spider-Man and Jumanji to build strong franchises. Next, let me discuss our EP&S segment.
Sales for the quarter decreased 9% from last year to ¥650.4 billion, mainly due to a decrease in sales of smartphones and TVs and the negative impact of exchange rate. Operating income increased ¥14.1 billion year-on-year to ¥80.3 billion.
This increase is mainly due to the benefit of restructuring of Mobile Communications and reductions in operating expenses in the various businesses within the EP&S segment, partially offset by the impact of the decrease in sales. In order to reflect the deterioration of market conditions, we have reduced our sales forecast for the fiscal year by ¥40 billion to ¥2.070 trillion.
The forecast for operating income remains unchanged as the impact of the decrease in sales is expected to be offset by improvements in operating costs across the various businesses. The competitive environment during the 2019 year-end selling season was primarily intense in the key product areas of TVs and mirrorless cameras, but overall, we were able to control pricing, supply and inventory.
Although competition in mirrorless cameras has increased as other companies have entered the market in earnest, we maintained our share in major markets and produced results for our overall digital cameras that are higher year-on-year. The intensively competitive environment in the TV market continued due to the deterioration in panel prices, but we maintained high average selling price year-on-year by focusing on high value-added large-screen models, and we have maintained inventory at an appropriate level.
On the other hand, our broadcast and professional use products business has seen a significant slowdown in China an important market for the business due to U.S.-China trade friction and the negative impact that it is having on the economy. To respond to these circumstances, we are taking a variety of actions including a review of our business structure.
Due to the benefit of restructuring that is ongoing, the Mobile Communications business continued to record a profit in the third quarter. In the fourth quarter, we intend to implement yet another fixed cost reduction plan and take other action to integrate the operations of this business with the other businesses in EP&S.
We expect to record significant onetime costs primarily due to these actions in the fourth quarter, but the transformation of the business is progressing steadily towards breakeven next fiscal year Next is the I&SS segment. Third quarter results increased 29% year-on-year to ¥298 billion, primarily due to an improvement in the product mix and an increase in unit sales of image sensors for mobile devices.
Operating income increased ¥28.7 billion year-on-year to ¥75.2 billion, mainly due to the impact of the increase in sales partially offset by an increase in research and development costs and depreciation expense. We revised upward fiscal year 2019 sales forecast by ¥50 billion to ¥1.090 trillion and the operating income forecast by ¥30 billion to ¥230 billion.
Demand for image sensors in the fourth quarter continues to be strong. Although production capacity is expanding according to plan, and we continue to operate at full production capacity utilization sales is increasing due to the strong near-term demand and that is preventing us from stockpiling strategic inventory as originally planned.
In addition, partly due to the introduction of a highly competitive new product this fiscal year, we have been able to maintain our overall margin all of which has been – enable us to operate this business extremely well. There is no change to our view that demand would continue to increase over the mid to long term for next fiscal year.
But in regards to next fiscal year in particular, we cannot be too optimistic due to the impact of the spread of infection from the new coronavirus that I mentioned earlier, as well as competitive environment and various geopolitical risks. We will continue to closely monitor demand trends and external environment as we manage this business going forward.
Now, I would like to talk about the action we are taking over the mid to long term. ToF sensors which we expect will be the next growth driver after image sensors have begun to sell well, although their size within the overall business is still small.
We expect the adoption primarily in mobile devices to increase further from next fiscal year. Taking a longer-term view as we made a point of showcasing at CES last month, we are taking steps to expand the adoption of Sony's imaging and sensing technology in the mobility space and in the diverse industrial and factory automation space.
We plan to proactively invest even more in technology development to grow this business in the future, such as hiring of personnel, including algorithm and software engineers and the building of an office in Osaka to service design and development center for image sensors. Lastly, I would like to explain the Financial Services segment.
The third quarter financial service revenue increased significantly by ¥243.6 billion year-on-year to ¥407.2 billion. This increase was primarily due to a significant increase in the investment performance of variable life insurance products in the separate account at Sony Life resulting from the rise in the domestic and foreign stock markets during the quarter.
Because a significant portion of the investment performance of the separate account is attributable to the owners of insurance policies the contribution to operating income is minimal. Operating income decreased ¥5.3 billion year-on-year to ¥32.6 billion.
This decrease was primarily due to the deterioration of net gains and losses as a result of a decrease in the provision of policy reserves and appraisal losses from its hedging activity both pertaining to minimum guarantees for variable life insurers resulting from strong stock market conditions. We have revised upward our forecast for Financial Services revenue to ¥1.460 trillion to reflect the current market environment.
On the other hand, we have revised downward ¥10 billion our forecast for operating income to ¥160 billion. This is primarily due to the third quarter results and the fact that increase in policy amount in force is slightly below our expectations.
Lastly, I would like to show the forecast for each of our segments. 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 microphone and please identify yourself by stating your name and affiliation before asking your questions.
When questions are asked in English, there will be consecutive interpretation into Japanese and answers to be given in Japanese. In view of time constraint, please confine the number of questions to two per person.
Now, any questions? [Operator Instructions] Ono of Morgan Stanley.
Thank you.
Unidentified Company Representative
Thank you. Our time is up.
And with this, I'd like to conclude this earnings announcement. Thank you for your attendance.