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Q4 2017 · Earnings Call Transcript

Apr 27, 2018

Executives

Hiroki Totoki - Executive Vice President and CFO Kazuhiko Takeda - Corporate Executive, Corporate Planning & Control and Accounting, CIO Atsuko Murakami - Corporate Executive, Finance

Analysts

Kazuharu - SMBC Nikko Securities Yasuo Nakane - Mizuho Securities Junya Ayada - Deutsche Securities Yu Okazaki - Nomura Securities Masaru Sugiyama - Goldman Sachs

Operator

Ladies and gentlemen, it's time to start session to announce the results of Sony for Fiscal ’17 Q4. Moonies Hill [ph] of the IR of the [indiscernible].

I'd like to introduce our speakers, Vice President and Chief Financial Officer, Hiroki Totoki and Corporate Executive, Corporate Planning & Control and Accounting, CIO, Kazuhiko Takeda and Corporate Executive and charge of Finance, Atsuko Murakami. Today Mr.

Totoki will give you the results for fiscal ‘17 on a consolidated basis and also present you the forecast for fiscal ‘18. And then his speech will be followed by questions and answers and altogether we'll be spending 45 minutes.

With that, Mr Totoki, Please?

Hiroki Totoki

[Foreign Language]

Unidentified Company Representative

I am Hiroki Totoki. I assumed the role of CFO as of April 1st.

It's nice to meet you all. Today, I would like to explain these two topics in the next 15 minutes.

Fiscal ‘17 consolidated sales were 8 trillion 544 billion yen, an increase of 4% percent year-on-year and consolidated operating income was 734.9 billion yen, 2.5 times that of the previous fiscal year. Net income attributable to Sony Corporation stockholders was 490.8 billion yen, 6.7 times that of the previous fiscal year.

As a result, we were able to achieve the financial targets that we set at the corporate strategy meeting in February 2015 of 500 million yen or more operating income and 10% or more of ROE in fiscal ’17. As we announced earlier today, the fiscal ‘17 year end dividend will be 15 yen combined with the 12.5 yen interim dividend already paid.

The full year dividend amount per share is 27.5 yen. As is shown in this slide, there are several extraordinary items included in the operating income for fiscal ‘16 and fiscal ’17.

Excluding these items, operating income would have increased 237.6 billion yen, an increase of 50%. This slide shows the results by segment for the full fiscal year.

Next is the consolidated results forecast for fiscal ’18. Consolidated sales are expected to decrease 3% year-on-year to 8 trillion.

300 billion yen and operating income is expected to decrease 9% to 670 billion yen. In addition due to the public listing in April of in Spotify, a portion of its shares owned by one of our group companies and the sale of approximately half of their shares we owned from the listing date and we are now expected to record an approximately 100 million yen gain in other income, including both the unrealized valuation gain and realized gain net related expenses.

Net income attributable to Sony Corporation stockholders is expected to be 480 billion yen. Assumed Forex rates are 105 yen to the U.S.

dollar and 125 yen to the euro. We estimate that the year-on-year negative impact on the operating results of the five electronic settlements resulting from these Forex change will be approximately 38 billion yen, primarily due to the depreciation of emerging market currencies.

The fiscal year forecast for each segment are shown on this slide. Now I will turn to the situation of each of our businesses.

First, I will talk about the Game and Network Services segment. Fiscal ‘17 sales increased 18% year-on-year 1 trillion 943.8 billion yen, primarily due to an increase in PS4 software sales.

Operating income increased 41.9 billion yen to 177.5 billion yen, primarily due to increase in sales. We expect sales in fiscal ‘18 to decrease 2% primarily due to a decrease in daily sales of PS4 hardware.

But we expect operating income to increase 12.5 billion yen to 190 billion yen, primarily due to an increase in sales of PS4 software. From today we started to disclose the new information shown in this slide in the supplemental information for the consolidated financial results available on our IR website.

Next, I will talk about the Music segment. Fiscal ‘17 sales increased 24% year-on-year and operating income increased 52 billion yen to 127.8 point yen.

This increase in operating income was primarily due to the continued strength of the mobile game application Fate/Grand Order and an increase in streaming services revenue. Operating income of mobile game applications accounted for a little over 30% of the operating income of this segment and was double that of fiscal ‘16.

We expect sales in fiscal ‘18 to decrease 6%, primarily due to a change in accounting standards and the impact of foreign exchange rates. Operating income is expected to decrease to 112 billion yen, primarily due to the absence of 10.5 billion yen gain on the sale of real estate recorded in the previous fiscal year.

Kazuhiko Takeda

Next I will talk about the picture segment. In FY ‘17 sales increase 12% year-on-year and operating income improved to 41.1 billion yen due to the absence of among others of 112.1 billion yen impairment charges of goodwill that we recorded in the previous fiscal year.

And this is the first time since we began to disclose segment forecasts in the fiscal year ended March 31 2015 that this particular segment has achieved the forecast issued at the beginning of the year. Thanks to the hits like the Spiderman Homecoming and Jumanji welcome to the Jungle.

The profit from the film slight exceeded our original forecast. We are beginning to see the fruits of the Motion Picture Group's focus on content IT and financial discipline and the leadership of Tom Rothman, who has been running the Motion Pictures business since February of 2015.

Fiscal year 2018 sales are expected to decline by 5% mainly due to the impact of foreign exchange rates and operating income is expected to be 42 billion yen basically flat year-on-year. Next is the Home Entertainment and Sound segment.

FY 2017 sales increased 18% year-on-year and operating income increased 27.3 billion yen to 85.8 billion yen. The increase in sales and operating income was due to a shift we made to high value added models, such as 4K Bravia older TVs and also reduce the positive impact of foreign exchange rates and we expect sales to decline by 6% and operating income to be essentially flat year-on-year at 86 billion yen.

Next I’ll explain about the Imaging products and Solutions segment. In fiscal 2017 sales increased 13% from the previous year and operating income increased 27.7 billion yen to 74.9 billion yen.

The increase in sales and operating income was basically due to an enhancement of high value added products such as Alpha series and new other cameras and our interchangeable lens lineup. And also due to the positive impact of foreign exchange and the absence of the negative impact we had in the previous year of the Kumamoto earthquakes.

For fiscal 2018 we expect sales to be 660 billion yen and operating income will be essentially flat year-on-year 75 billion yen. Next it would be about the mobile communications segment.

In fiscal year 2017, sales declined by 5% from the previous year, down to 723.7 billion yen. Operating results deteriorated 37.8 billion yen to a loss of 27.6 billion yen due to the decrease in sales and the recording of 31.3 billion yet impairment charges against long lived assets in the fourth quarter of the year.

In light of the sales results of the smartphone business and changes in the business environment since January of 2018, we have the downwardly revised our future profitability forecast, As a result, the forecast for future cash flows has decreased and therefore recorded the impairment. We expect fiscal 2018 sales to decrease 12% because our smartphone unit sales forecast of 10 million units is significantly below the previous fiscal year due to our efforts to improve profitability, primarily due to the impact of these declines in sales, we expect to record an operating loss of 15 billion yen.

I would now like to say a few words about the importance of 5G Wireless Technology in the context of our strategy for smartphone business going forward. By enabling high speed communication, low latency and simultaneous connectivity 5G which is expected to be commercialized in the near future.

This is a technology which we view as having immense potential since it connect all portable devices to the cloud. In order to fully utilize this leading edge technology, we need to retain in-house fundamental research capability - and capability to create related applications.

By continuing to work on 5G smartphone business, we are aiming to develop 5G technology as a competency that can be used across the entire Sony Group.

Unidentified Company Representative

Next I will talk about the Semiconductor segment. Fiscal 2017 sales increased 10% year-on-year and operating results improved 171.8 billion to a profit of 164 billion yen.

The improvement in operating results was primarily due to the recording of several extraordinary items in fiscal 2016 and 2017 and an increase in unit sales of image sensors year-on-year. As is shown in this slide, adjusted operating income would have increased 76.3 billion yen.

We expect fiscal 2018 sales to increase 2% to 870 billion yen and operating income to be 100 billion yen. Although sales are expected to increase due to an increase in unit sales of image sensors for mobile values, we expect operating income to decrease primarily because extraordinary gains of approximately 43 billion yen were recorded in the previous fiscal year and we expect the yen to appreciate compared with the previous fiscal year.

Next I will explain the Financial Services segment. In fiscal 2017, financial services revenue increased 13% due to an increase in policy amount in force at Sony Life and operating income increased 12.5 billion yen to 178.9 billion yen.

This increase in operating income includes a gain on the sales of real estate held for investment purposes at Sony Life. We expect fiscal 2018 financial services revenue to be 1 trillion 270 billion yen and operating income to be 170 billion yen.

Although we expect revenue to continue to increase due to the expansion of policy amount in force, we expect operating income to decrease slightly primarily due to a decrease in gains on the sales of assets. Next, I would like to briefly explain my view on the current state of each of our businesses.

In the Game and Network Services business, the PS4 installed base [ph] expansion of network revenue has driven profit growth. As a result, it is important to further expand our stable network service business model, along with our current business model which is centered on hardware penetration and software high tie ratios.

We believe the Music business needs to leverage its strong industry position in the expanding music market, which is being driven by the penetration of streaming services and to convert it into a profit growth. We also believe that we need to continue to aggressively promote game applications for mobile devices, as a part of our strategy to leverage our animated IP.

The Pictures business had some success in fiscal 2017, as I mentioned earlier. But we recognized that its profitability is still lower than industry peers.

We will concentrate on improving profitability in conjunction with the new management team led by Tony Vinciquerra. We are calling the three segments shown in the slide branded hardware.

Their overall profitability has improved, as a result of our efforts to strengthen product appeal and to improve operations. Going forward, we aim to make this group even more efficient and stable cash flow generator by continuing their efforts each businesses undertaken to improve profitability and by strengthening cross business cooperation.

The semiconductor business has significant invested capital and should earn a high margin to justify its business risk. To do that, we believe it is important to concentrate on areas where we have competitive advantage and maintain a strong market position.

The rate of growth in demand for image sensors is likely to decline in the short term due to saturation of the smartphone market. But over the medium to long-term we expect further growth to come from expansion of new applications such as 3D sensing, security, factory automation and automotive.

We expect the financial services business to continue to contribute stable profit. In conclusion, I will discuss the state of our balance sheet.

As you can see from the presentation materials distributed among you, our cash flow excluding financial services has steadily improved from the previous fiscal year to this fiscal year. On the other hand, our stockholders security has just begun to improve.

Since we have invested a relatively large amount of capital in the semiconductor business, we plan to further enhance our stockholders equity with the standard of the semiconductor industry in mind. At the same time, we will strike the right balance with investments for future growth.

This concludes my remarks.

Operator

Now the floor is open to your questions. Those of you with a question please wait for the microphone to the brought to you please identify yourself by stating your name and affiliation before actually asking the questions.

When the question is asked in English it will be interpreted consecutively into Japanese and answers will be given in Japanese and the please confine can find the number of questions to two per person. Yes please.

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