Apr 26, 2019
Kenichiro Yoshida
Thank you for waiting. At this point, we'd like to begin this earnings announcement session for the fourth quarter of fiscal '18.
I'd like to introduce our speakers: Executive Vice President and Chief Financial Officer, Hiroki Totoki; corporate executives, Senior General Manager of Finance Department, Atsuko Murakami; and VP, Senior General Manager of the Global Accounting Division, Hirotoshi Korenaga. Mr.
Totoki will present the financial results of fiscal fourth quarter and also give you the outlook for the fiscal '19. And 20 minutes will be spent for speech to be followed by 15 minutes Q&A.
Altogether, we will spend 45 minutes. Mr.
Totoki?
Hiroki Totoki
I will talk about these two topics. The fiscal '18 consolidated sales increased 1% year-on-year to ¥8,665.7 billion and operating income increased ¥159.4 billion to ¥894.2 billion.
As is shown in this slide, adjusted operating income excluding extraordinary items increased ¥99.7 billion to ¥809.3 billion. Income before income tax has exceeded ¥1 trillion for the first time in our history, reaching ¥1,011.6 billion.
Net income attributable to our shareholders increased to ¥425.5 billion to ¥916.3 billion. Consolidated operating cash flow excluding Financial Services segment for the fiscal year was ¥753.4 billion.
We have begun to disclose cash flow by segment from this earnings announcement. Excluding the Music segment, in which we acquired EMI Music Publishing in fiscal '18, all the business segment generated positive net cash flow.
And the Game & Network Services segment and the total of the three segments included in the Electronics Product & Solutions segment, which was created on April 1, made significant contributions. This slide shows these results by segment.
Now next is the consolidated results forecast for fiscal '19. Consolidated sales is expected to increase slightly year-on-year to ¥8,800 billion.
Operating income is expected to decrease ¥84.2 billion to ¥810 billion. But adjusted operating income in the previous fiscal year was ¥809.3 billion.
And assuming no extraordinary item in the current fiscal year, adjusted operating income is expected to be flat year-on-year. Net income attributable to Sony shareholders is expected to decrease ¥416.3 billion to ¥500 billion.
Consolidated operating cash flow excluding Financial Services segment is expected to be ¥760 billion. And FY '19 forecast for each segment is shown here, is in that year-on-year increase in loss in All Other, Corporate and elimination is primarily due to an increase in expense for future growth including AI and robotics.
Now I will explain situation in each business segment. First, the Game & Network Services, and the sales were ¥2,310.9 billion.
Although, PlayStation 4 hardware sales decreased, overall sales increased 90% year-on-year, mainly due to an increase in game software and network services revenue. Operating income increased ¥133.6 billion to ¥311.1 billion due to the impact of the increase in sales.
Sales in fiscal '18 are expected to be ¥2,300 billion. Despite a decrease in unit sales of PS4 hardware and the impact of foreign exchange rates, sales are expected to be essentially flat due to an expected increase in game software sales.
Operating income is expected to decrease ¥31.1 billion to ¥280 billion. Despite PS4 hardware cost reductions, we expect operating income to decrease due to the increase in development expense for the next generation console and low contribution from the first-party game software title, like God of War last year.
Now I'd like to introduce the initiative SIE is implementing in gaming space, which is attracting much of the attention. SIE currently operates PS Now in this area.
And today, I will explain the current status of this service at the corporate strategy meeting in IR day next month, we will discuss our vision and strategy in this space. SIE is committed to the vision of making PlayStation the best place to play by delivering users the best content in the best manner possible.
Game streaming is one important way to achieve that. SIE made a deliberate strategic move back in 2012 when it purchased Gaikai, because SIE anticipated that the future would involve game streaming.
At that time, Gaikai was a potential competitor, because it was operating game streaming service and SIE decided to acquire it in order to capture technology and their intellectual property. Five years have passed since PS Now is launched in the United States in 2014.
This is a subscription model and charges $19.99 per month. This year, we added 9 countries in Northern and Southern Europe, bringing the total number to 19 countries.
The average annual increase in paid subscribers has exceeded 40% since the service was launched. And the number of users has increased around the same amount every year, reaching approximately 700,000 today.
We have leveraged our strong relationship with the publishers to provide over 750 PlayStation 3 and PlayStation 4 titles to our subscribers. And this number is more than 3x that of the second largest game subscription service provider.
Now PS Now is also an all-you-can-play subscription service. For users who want to enjoy gameplay without worrying about the network connections, SIE released download feature in September 2018 for PS4 titles.
Since the launch of this download service, gameplay time per user has grown significantly to the point of where the gameplay time on downloaded PS4 title is double that of streamed titles, contributing to higher user engagement and the retention of the PS Now service. In this way, SIE has accumulated wealth of expertise in the game streaming space and plan to leverage this expertise to provide ultimate game user's experience for both consoles and game streaming space.
Next is Music segment. The sales increased 1% to ¥807.5 billion and this increase is due to an increase in streaming of music and impact of consolidating EMI, substantially offset though by a decrease in physical sales in recorded music due to the impact of new accounting standard.
Operating income increased ¥104.7 billion to ¥232.5 billion and operating income this year included ¥105.3 billion of net extraordinary item related to the acquisitions of EMI. And in the last fiscal year, we also had a gain on the sales of real estate.
Operating income generated from mobile game applications accounted for an additional of 20% of operating income of this segment and was essentially flat year-on-year. Sales in fiscal '19 are expected to increase 3% to ¥830 billion.
We expect sales to increase mainly due to the impact of full year consolidation of EMI and an increase in streaming revenues, partially offset though by a decrease in sales from mobile game applications and physical and digital download sales in recorded music. Operating income is expected to decrease ¥97.5 billion to ¥135 billion.
This decrease is due to the absence of the gain from the acquisition of EMI recorded in the previous fiscal year. Next, about Pictures segment.
The sales decreased 2% to ¥986.9 billion. Despite the strong performance of Venom and Hotel Transylvania in fiscal '18, theatrical revenues decreased compared to the previous fiscal year when we had Jumanji and Spider-Man as well as due to decrease in Media Network sales.
Operating income increased ¥13.5 billion to ¥54.6 billion. This significant increase was due to an improvement in the profitability of Motion Pictures, partially offset by the recording of ¥12.8 billion in expenses relating to the portfolio review for Media Networks.
Sales in fiscal '19 are expected to increase 9% to ¥1,080 billion. The increase is due to the expected increase in sales of Motion Pictures driven by sequels to major releases and from Television Productions.
Operating income is expected to increase ¥10.4 billion to ¥65 billion. This increase is due to the absence of ¥12.8 billion in expenses recorded in fiscal '18 for the portfolio review of Media Networks and also because of expected benefit of the review to be felt in fiscal '19 results.
Next is about Home Entertainment & Sound segment. The sales for the year decreased 6% year-on-year to ¥1,155.4 billion.
This decrease is due to decrease in unit sales of televisions resulting from a strategic decision to focus on profitability and also negative impact of foreign exchange. Operating income increased ¥3.8 billion to ¥89.7 billion.
Despite the negative impact of foreign exchange and the decrease in sales, we were able to increase profit due to the shift to high value-added models. Next is Imaging Products & Solutions segment.
The sales for the year increased 2% to ¥670.5 billion, due mainly to an increase in sales of high value-added products, including mirrorless single-lens cameras and interchangeable lenses. Operating income increased ¥9.1 billion to ¥84 billion.
This increase was due mainly to the increase in sales of value-added products and reduction in operating cost. Next is Mobile Communication segment.
The fiscal '18 sales decreased 31% to ¥498 billion due to a decrease in unit sales of smartphones. Operating loss increased ¥69.5 billion to ¥97.1 billion despite a reduction in operating expenses and a decrease in impairment charges against long-lived assets, loss increased due to the aforementioned decrease in sales.
And our plan to reduce operating expenses by about 50% compared with the fiscal year ended March of 2018, in an effort to turn a profit in fiscal year ending in March 31, 2021 or fiscal '20 . This plan is progressing according to the plan.
We have accelerated our plan to cease production at our Beijing factory. And we have excited -- exited several regions such as the Middle East and Central and South America.
We believe we can turn a profit in fiscal '20 by launching products like Xperia 1, which we announced recently, differentiated by Sony's technologies in important regions of East Asia, including Japan and Europe. Now turning to fiscal '19 forecast for Electronics Products & Solutions segment, which we formed in April to create new value and improve management efficiency in the three electronics business segments.
We expect sales to decrease 3% to ¥2,240 billion and operating income to increase ¥44.5 billion to ¥121 billion. Sales to outside customers of the Mobile Communications business within this segment are expected to decrease 16% to ¥410 billion.
And operating loss is expected to shrink from ¥50.1 billion to ¥47 billion. We will continue to disclose the financial results of the Mobile Communications business for the time being.
Next is Semiconductors segment. The sales for the year increased 3% to ¥879.3 billion.
And image sensors sales increased 10% year-on-year, primarily due to an increase in demand from mobile devices. Operating income decreased ¥20.1 billion to ¥143.9 billion.
And as you see on this slide, the operating income of the previous fiscal year included some extraordinary items and adjusted operating income increased, therefore, ¥23.5 billion. This increase in adjusted operating income was due mainly to an increase in sales of our image sensors, partially offset though by an increase in research and development and depreciation costs.
Sales in fiscal '19 are expected to increase 13% to ¥990 billion. The increase is due to expected increase in image sensors sales for mobile devices.
On the other hand, operating income is expected to be ¥145 billion, essentially flat from last year. And this is due to continued increase in depreciation expenses and R&D expenses.
In October of last year, I explained our plan to invest about ¥600 billion in the 3 years through fiscal '20 and to increase image sensor production capacity to about 130,000 wafers per month on a 300-millimeter wafer basis. As of today, there is no major change to this plan, but we will pay close attention to trends in demand and make decisions regarding the execution of the investment in stages.
Already as we look out to fiscal year ending March 31, 2022, and beyond, we expect demand for smartphones to continue to increase due to the trend to a larger sensors and multi-lens cameras. We are currently deciding whether to construct a new building to meet this increased demand.
And if we decide to construct a new building in fiscal '19, capital expenditure through -- to fiscal '20 might increase by about ¥100 billion, and demand for image sensors is expected to increase at a relatively slower pace from fiscal year ending March 31, 2023, and we expect the amount of our capital expenditures to decrease. As we consider investments going forward, we are continuing to prioritize capital efficiency and are working to increase ROIC.
And we'll provide more details on this point at the IR Day meeting next month. Next, I would explain the Financial Services segment.
In fiscal year '18, Financial Services revenue increased 4% to ¥1,282.5 billion. This increase was due to higher insurance premium revenue by Sony Life.
Operating income decreased ¥17.5 billion year-on-year to ¥161.5 billion. This decline was primarily due to the absence of a gain on the sale of real estate held for investment purposes recorded in the previous fiscal year as well as a loss on the valuation of investment securities recorded in the current fiscal year.
Financial Services revenue is expected to increase 4% to ¥1,330 billion and operating income is expected to increase ¥8.5 billion to ¥170 billion. These increases are mainly due to an increase in insurance premium revenue at Sony Life.
Today, Sony Financial Holdings announced a new management team and the new candidates for its Board of Directors. The changes are meant to strengthen the Sony Financial Holdings governance function as a holding company and to further grow its business under SFH umbrella.
Sony fully supports these changes. By increasing the number of outside directors and directors from Sony, we aim to strengthen management of the company from the perspective of a shareholder and contribute to an increase in the corporate value of SFH as a listed company.
In fiscal year '18, we recorded a second year historically high operating income, income before income taxes and net income attributable to stockholders. We expect to maintain high level of profit in fiscal year '19.
Moreover, we were able to record a third-year profit in the fourth fiscal quarter. I think that our ability to generate stable profit is a result of our efforts to increase a proportion of recurring revenue and strengthen our profit foundation.
This concludes my explanation of our financial performance. I would now like to explain our decision to cease providing mid-range operating income guidance by segment going forward and our decision to withdraw the fiscal year '20 operating income targets for each segment that we announced in May of last year.
We are managing Sony Corporation from a long-term perspective and have established a cumulative three-year consolidated operating cash flow excluding the Financial Services segment and ROE as our key performance indicators for the period of the mid-range plan which lasts through fiscal year '20. We also announced operating income targets for each business segment in fiscal year '20, the final year of our mid-range plan, because we thought that these targets would enhance investor understanding of the direction of the businesses.
However, because the operating income targets by segment are only an estimate of a single point in the future, and we are also concerned that they cannot accurately reflect our long-term trends and direction of our businesses. Moreover, despite only one year having passed since we announced the targets last year, the operating environment for each of our businesses has significantly changed and the gap has risen between the actual state of certain segments and the targets that we announce for those segments.
Consequently, we are restoring the targets and we will cease providing guidance for operating income by segment for the final year of our mid-range plan. We will continue to update you on the status of cumulative three-year consolidated operating cash flow excluding the Financial Services segment which is one of our mid-range targets.
We would also continue to disclose our operating income forecast by segment for each fiscal year. We ask for your kindness and understanding as we focus on managing Sony for the long-term and we are in a conversation with capital markets towards the long-term.
In conclusion, I would like to explain the current status of our consolidated operating cash flow excluding the Financial Services and capital allocation policy. At this point in time, we expect 3-year cumulative operating cash flow to exceed ¥2,200 billion.
As for the use of the cash that is generated, we plan to continue to prioritize growth investment that contribute to the increased corporate value. Most fiscally, we plan to spend approximately ¥1,100 billion on capital expenditure primarily for image sensors.
And we decide to construct the new building in the semiconductor segment that I mentioned earlier. This amount might increase to ¥1,200 billion.
Strengthening our content IP and supplementing technology not found in the Sony Group will continue to be the focus of our strategic investments. In this way, we will also be an option depending upon the status of our free cash flow and the stock price.
We plan to continue to increase the amount of dividends in a steady manner over the long-term. Last year, we mentioned strengthening our balance sheet as one of our goals of our capital allocation strategy.
But due to our improved financial results, we now think that we have recovered to the point where we'll have sufficient financial strength. Going forward, we would aim to increase our corporate value through growth investments while maintaining a healthy balance sheet.
Thank you.
Operator
Now we'll move on to Q&A session. Those of you with questions, please wait for the microphone and please identify yourself by stating your name and affiliation before asking the question.
When the questions are asked in English, the interpreter will interpret the question into Japanese and the answers will be in Japanese. And please, two questions per person.
Any questions, please?