May 13, 2020
Unidentified Company Representative
[Foreign Language] It’s now time for us to start the Sony Corporation Consolidated Financial Results Briefing for Fiscal Year 2019. I am acting as the moderator.
My name is Kato from the Corporate Communications Department. This briefing is being held for the media analysts and institutional investors who have been informed in advance, and the audio and presentation will be posted on our company’s website.
Today, first of all, we will hear from Hiroki Totoki, who is our CFO and Senior Executive Vice President. He will be explaining the consolidated financial results for fiscal year 2019 and the forecast for fiscal year 2020, using the briefing materials that are posted on our website, and then after that, there will be a Q&A period.
We expect that it will take about 60 minutes in total. This time we are going to accept questions any time by email.
Those of you who have a question please send them in according to the method that we have informed you in advance, and it will be up to two questions per person and our time is limited. Therefore, it may be that we may not be able to answer all your questions.
Now to Mr. Totoki, please.
Hiroki Totoki
Thank you very much. We are holding this results briefing by a webcast in order to prevent the spread of the new coronavirus infections.
We apologize for any inconvenience and ask for your understanding as we continue to conduct business as Sony, we are prioritizing the safety of all our stakeholders, including our employees and their families as well as our customers. Today, I will explain the consolidated results for the fiscal year ended March 31, 2020 and the recent impact of the coronavirus.
At the corporate strategy meeting that we’ll be holding on May the 19th, our President, Mr. Yoshida will explain our strategy for managing Sony with a longer-term view.
For fiscal year 2019, consolidated sales decreased 5% compared to the previous year to JPY 8,259.9 billion and operating income decreased JPY 48.8 billion year-on-year to JPY 845.5 billion. Net income attributable to Sony Corporation’s stockholders decreased JPY 334.1 billion to JPY 582.2 billion.
Excluding extraordinary items, operating income would have increased JPY 4.6 billion year-on-year to JPY 814 billion and net income attributable to Sony’s shareholders would have been decreased JPY 28.2 billion year-on-year to JPY 550.3 billion. The extraordinary items that impacted net income are shown here.
The operating cash flow, excluding the Financial Services segment for the fiscal ‘19 was an inflow of JPY 762.9 billion, slightly higher than the previous fiscal year. And investing cash flow excluding the Financial Services was an outflow of JPY 363.1 billion.
Cash flow for each business segment is shown on this slide. The free cash flow was positive in all segments.
The fiscal ‘19 results for each business segment are shown on this slide. Now, I will discuss the estimated impact of the spread of the disease or the virus on the operating income of each segment for fiscal ‘19.
At the last earnings results briefing when speaking about JPY 40 billion upward revision in the operating income forecast for fiscal ‘19, I explained that the impact of the coronavirus might be large enough to eliminate this upward potential revision’s amount. We estimate that the actual impact exceeded the amount of the upward revision, but due to other factors which improved profitability, overall operating income was within the range that I mentioned.
The speed at which the impact of the coronavirus had and will appear and our results differs by business. The Electronics Products & Solutions or EP&S segment is seeing the impact of values and we expect the impact to expand to other segments going forward.
The impact on the results of the Pictures segment will take some time to become conspicuous, but it might last a long time. While most business segments will endure a negative impact, some of our segments such as Game & Network Services will see a positive impact on their results.
And later, I will explain in as much detail as possible, the recent impact on each of our businesses and the risks that we currently see for fiscal year 2020. I will now talk about the Game & Network Service segment for the fiscal ’19.
The sales decreased 14% to JPY 1,977.6 billion mainly due to a decrease in PlayStation 4 hardware sales, at game software sales as well as the negative impact of foreign exchange rates. Operating income decreased JPY 72.7 billion year-on-year to JPY 238.4 billion, mainly due to the decrease in game software sales and the negative impact of the foreign exchange, partially you know offset by an increase in sales from network services, including PlayStation Plus and the benefit of cost reductions, compared with the previous fiscal year, when we had major hit titles such as God of War and Marvel’s Spider-Man, the contribution from first party software free-to-play titles decreased.
Now, I will discuss the impact as the virus is having on the Game & Network Services segment. Although production of PS4 hardware has been slightly impacted by issues with the supply chain for certain components, we are meeting demand in the short-term with inventory and sales trending well.
Recently, network services revenue has increased significantly as game play hours on the PlayStation network have reached 1.5 times that of the Christmas season, and sales of game downloaded from network, as well as network subscriber numbers have increased significantly since March. As for PlayStation 5, there have been some challenges with the part of the testing process and the qualification, the production lines, primarily due to employees working from home, having to work from home and restrictions on international travel.
But we are addressing these issues and preparations are on track for the launch of the console during the holiday season of this calendar year. At this point in time, no major issues have risen in the game software development pipelines of either in-house games or those of our partners.
And next is the Music segment. For the year 2019, sales increased 5% to JPY 849.9 billion from the previous year and this increase was mainly due to a higher sales for Music Publishing, resulting from the consolidation of EMI Music Publishing is a wholly-owned subsidiary and higher streaming revenues in Recorded Music, partially the offset by lower sales of Fate/Grand Order, a game application for mobile.
Operating income decreased JPY 90.1 billion to JPY 142.3 billion, mainly due to the absence of a remeasurement gain resulting from the consolidation of EMI in the previous fiscal year, but partially offset by the impact of the increased sales. Including extraordinary items associated with the consolidation of EMI as a whole subsidiary, operating income would have increased JPY 15.2 billion year-on-year.
The profit contribution from game applications for mobile was in the mid-teens as a percentage of the operating income of this segment. Now we will discuss the impact that the coronavirus is having on the Music segment.
The release of new music is being delayed mainly because some artists are unable to record songs or music videos. The impact of the delays in new music is limited at this time in countries like the US, where the proportion of music that is streamed is high.
But in countries like Japan and Germany, where proportion of music that is streaming is relatively low, sales of CDs and other packaged media sales are decreasing due to restriction on outings. Ticket revenues, merchandise revenue and video revenues are decreasing, especially in Japan, where over 400 events have been postponed or cancelled since February through the end of May.
Due to a global reduction in advertising spending, revenues from advertising supported streaming services is decreasing and revenue from the licensing of music and TV commercials is decreasing a delay in production of motion pictures and TV shows is also causing a decline in music licensing revenue. Next is the Pictures segment.
FY ‘19 sales increased 3% year-on-year to JPY 1,011.9 billion due to an increase in Motion Pictures and Television Productions revenue. Motion Pictures released this fiscal year, included Spider Man: Far From Home and Jumanji: The Next Level.
These franchise films which leverage Sony’s IP performed better than expected. Operating income increased by JPY 13.6 billion year-on-year to JPY 68.2 billion, mainly due to the benefit of a channel portfolio review in Media Networks conducted in the previous fiscal year and improved profitability of catalog product in Motion Pictures, partially offset by program development costs and production costs on newly released shows in Television Productions.
Now, I will discuss the impact of the coronavirus on Pictures segment. Box Office revenue has been significantly impacted mainly due to the closure of movie theatres around the world.
At Sony, we are unable to release films that have been completed like Peter Rabbit 2: The Runaway. Due to restrictions on outings, the production schedule of new Motion Pictures and TV shows around the world, especially in the US has significantly delayed.
As a result, in Motion Pictures, theatrical revenue and revenue generated after theatrical release, including the rental and sales of videos are expected to decrease. On the other hand, digital revenue from Bad Boys for Life and Bloodshot, which we released in theaters prior to the spread of the coronavirus disease has been strong.
Revenue for Television Production is also being impacted due to delay in the delivery of shows to TV networks and digital distribution services. Due to the global reduction in advertising spending, advertising revenue in Media Networks is decreasing significantly, especially in India.
Next is the EP&S segment. FY ’19 sales decreased 14% year-on-year to JPY 1,991.3 billion mainly due to a decrease in unit sales of smartphones and TVs and negative impact of exchange rates.
Operating income increased JPY 10.8 billion year-on-year to JPY 87.3 billion mainly due to operating cost reductions in Mobile Communications, partially offset by the impact of the decrease in sales. Of all businesses, we expect the EP&S segment to be impacted the most from the coronavirus.
First, I will explain the supply side which includes manufacturing and procurement. Of the four major manufacturing sites for our TV business, we seized a production in stages from mid-March at the factory we own in Malaysia and at the factories we outsourced to, in Mexico and Slovakia pursuant to local government policy.
These three factories have returned to partial production, but a portion of supply continues to be unable to meet demand. In the camera and smartphone businesses, the factories we own in China and Thailand are currently operating as usual.
Some of our partners in Malaysia and the Philippines, who supply components to several of our businesses have reduced their operations, causing a delay in the production of some of our products due to component shortages. On the demand side, due to the closure and shutdown of retail stores globally, retail sales have decreased significantly.
The severity of the impact on a geographical basis is changing frequently, but deterioration of market conditions in Europe is currently the most severe. Our Television business is being significantly impacted in areas like India and Vietnam, whereas scale is significant as well as in Europe.
And sale and profit from digital cameras are being significantly impacted by a substantial slowdown in demand around the world. We can – we are concerned that this might continue for a long time.
Next is the Imaging & Sensing Solutions Segment. FY ’19 sales increased 22% year-on-year to JPY 1,070.6 billion mainly due to an increase in image sensors unit sales for mobile devices, and an improvement in product mix.
Operating income increased a significant JPY 91.7 billion year-on-year to JPY 235.6 billion mainly due to the impact of the increase in sales, partially offset by an increase in depreciation expenses and research and development costs as well as the negative impact of the foreign exchange rate. Due to several positive factors occurring simultaneously such as strong demand, acceleration of the shift to large size high value-added products and introduction of a highly competitive new product which fit those specification of the image sensor business products results that significantly exceeded our expectations at the beginning of the fiscal year.
Now, I will discuss the impact of coronavirus on the I&SS segment. As of today, there have been no major impact from the coronavirus on our manufacturing facilities in Japan, which are operating as usual.
Moreover, we understand that the factory operations and supply chains of our major mobile customers have been recovering. On the other hand, we believe that the decrease in shipments of our image sensors was relatively minor compared to the impact the coronavirus had on the manufacturing and sales of our mobile customers in the fourth quarter ended March 31st, 2020.
So there is a possibility that inventory in the supply chain of these customers has increased. In addition, we are monitoring how much the final outlet for our products the smartphone market may decelerate going forward.
Now, I would like to discuss the current state of our I&SS business. Considering the deceleration of the smartphone market due to the impact of the coronavirus, there is a possibility that image sensor sales this fiscal year will be flat year-on-year.
At this point in time, there is no change to our view that image sensors will drive improvements in the first functionality of cameras, which are a major differentiating factor for smartphones or our view as to the expansion of demand over the mid-term to long-term. Thus, we have already decided to invest more than 80% of the cumulative capital expenditure we plan to make over three years of our midrange plan.
However, given the uncertain operating environment, we will postpone as long as possible decisions regarding the remaining capital expenditures so we can make appropriate and timely decisions after gathering more market information. In addition, we will be disciplined in our prioritization of research and development spending, but we plan to maintain the current level of spending as we manage Sony for the mid-term to long-term.
Lastly is the Financial Services segment. FY ‘19 Financial Services revenue increased 2% year-on-year to JPY 1,307.7 billion, primarily due to higher insurance premium revenue mainly from single premium insurance, partially offset by a deterioration in net gains and losses on variable investments in the separate account, both at Sony Life.
Operating income decreased JPY 31.9 billion year-on-year to JPY 129.6 billion, primarily due to an increase in the provision of policy reserves related to variable insurance at Sony Life, reflecting a deterioration in market conditions towards the end of the fiscal year and valuation losses on certain securities held by Sony Bank resulting from a decline in prices mainly due to growing concerns about credit risk. Now, I will explain the impact of the coronavirus on the Financial Services segment.
Pursuant to the announcement of a state of emergency by the Japanese government, we have stopped all in-person sales activity of the life planners at Sony Life. If these conditions persist for a long period of time, there is a possibility that the profitability of Sony Life could be significantly negatively impacted, primarily because the acquisition of new insurance policies would decrease and expenses for provisions to account for this would increase.
Next, I will discuss the consolidated results for fiscal year ‘20. Since we cannot reasonably predict the impact of the threat of the coronavirus disease, including when it will diminish, our consolidated results forecast for FY ‘20 is undetermined at this time.
We plan to issue a consolidated results forecast for fiscal year ’20 when we announce the earnings for the first quarter in early August. The best we can do is make certain hypotheses regarding the trajectory of the coronavirus disease and estimate FY ‘20 operating income for each of our segments based on the assumptions you see here.
The estimated results are expressed as a percentage range of actual FY ‘19 operating income. Based on these assumptions, we estimate that consolidated operating income would decrease at least 30% compared to the FY ‘19 result.
These figures are merely an estimate based on certain assumptions and we are continuing to work to improve our profit level. Now, I will discuss operating cash flow, excluding the Financial Services segment and capital allocation through the end of fiscal year ‘19.
We generated approximately JPY 1.5 trillion of cumulative operating cash flow over the last two fiscal years. Approximately JPY 0.2 trillion in cash flow was generated from the sale of businesses and assets.
We prioritize using this cash to make growth investments such as increasing image sensor manufacturing capacity and acquiring EMI. In addition, as a strategic investment, we repurchased the total of JPY 300 billion of Sony’s stock.
We will update you on our forecast for FY ‘20 operating cash flow to include the impact of the coronavirus when we announce earnings for the first quarter. Lastly, I would like to explain the state of our balance sheet.
In order to reliably procure capital even when the financial markets are in turmoil, Sony has managed its balance sheet with a high degree of financial discipline, while closely monitoring our credit ratings. As of the end of March 2020, we maintained our strong financial underpinnings with a 42.8% equity ratio excluding the Financial Services segment.
No debt is coming due in FY ’20 and we had approximately JPY 960 billion of cash on hand as of the end of March 2020 for consolidated Sony, excluding the Financial Services segment. In addition, we have a total of approximately JPY 570 billion in committed lines of credit from major banking institutions inside and outside of Japan, and approximately JPY 1 trillion commercial paper facility and uncommitted lending facilities from several banks.
As of today, none of these facilities were being utilized. Thus, we believe that we have sufficient liquidity to continue to conduct business in a smooth manner even if the economic environment were to deteriorate conspicuously going forward.
There is no change to our policy of steadily increasing our dividend over the long-term. Moreover, we believe we are in a position to proactively consider strategic investments aimed at growth opportunities in the post-corona world.
This concludes my remarks.
Unidentified Company Representative
Thank you very much. So consolidated finance results – financial results briefing and the forecast for fiscal year 2020 were explained.
Now, let us go on to the Q&A session. In the first half 20 minutes, there will be questions from the media and in the latter half 20 minutes there will be questions from analysts and our institutional investors.
Questions can be asked at any time using email. So, kindly follow the method that has been informed to you in advance.
And the questions that we have received will be read as submitted. If the question is in English, then the interpreter will translate into Japanese and we will reply in Japanese.
So now, we’d like to entertain questions from the media. [Foreign Language] We have Mr.
Totoki, Senior Executive Vice President and Chief Financial Officer and Naomi Matsuoka, Senior Vice President and General Manager, Financial Department and Corporate Planning and Control Department and Mami Imada, Senior General Manager, Corporate Communications to answer your questions.
A - Unidentified Company Representative
The first question is received from Mr. [Shimizu] [ph] of Nikkei about novel coronavirus, the Game, Pictures, the Music businesses.
How do you think the consumer demand will change, because of the various impact and creative entertainment on the strength of technology of Sony, you are entertainment company, how are you going to overcome the difficulties such as delay in productions? The second question is about PlayStation 5.
What is your forecast for the demand in PlayStation 5 and actual number of deliveries? Will there be any quantitative impact due to the COVID-19?
A -Masaru Kato
Now it is time to close the briefing session. Thank you very much for your attendance.