Sony Group Corp

Ladies and gentlemen, it's time to begin our earnings announcement session for the first quarter of fiscal 2019. I'd like to introduce our speakers, Senior Executive Vice President, Chief Financial Officer Hiroki Totoki, Senior Vice President and Senior General Manager of Finance Department Corporate Planning, Naomi Matsuoka, and VP Senior General Manager, Global Accounting Division, Hirotoshi Korenaga, Today, Mr. Todoki will make the presentation, and that will be followed by question and answers. And altogether, we plan to spend 45 minutes. Mr. Todoki, please.

Today, I would like to explain two topics in the next 15 minutes. Fiscal 19 Q1 consolidated sales decreased 1% year-on-year to ¥1,925.7 billion and operating income increased ¥35.9 billion year-on-year to ¥230.9 billion. Operating income reached a record high for the first quarter. Net income attributable to Sony Corporation stockholders decreased 74.3 billion yen year-on-year to 152.1 billion yen. As is 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 and the estimated impact on these items on the tax expenses, net income would have increased 5.6 billion yen from the 148.8 billion yen of the previous year to 146.4 billion yen. Please refer to page six of our earnings presentation for the calculation impact on tax expenses. This slide shows the results by segment. And from this quarter, we have changed the name of the semiconductor segment to imaging and sensing solutions. I will explain the background and reasoning behind this change when I explain the results of this segment. This change has not resulted in any reclassification of businesses across segments. Next is the consolidated results forecast for fiscal 19. Consolidated sales are expected to decrease 200 billion yen compared with the previous forecast to 8 trillion 600 billion yen as a result of the reduction in the forecast for GNNS and EPNS segments. There is no change to the forecast for operating income, income before income taxes, and net income attributes. to shareholders. There is also no change to our forecast for operating cash flow excluding the financial services segment. We have changed the assumed forex assumption from the second quarter, 108 yen to the U.S. dollars and 123 yen to Europe. We plan to issue an interim dividend of 20 yen per share this fiscal year, compared to 15 yen per share for the interim dividend previous year. Dividend amount for the full year is currently undecided, but there is no change to our policy of continuing to increase our dividend in a stable manner over the long term. This shows the segment forecast. And we are monitoring developments and paying close attention to the geopolitical risks such as trade issues. And we are looking into various mitigation measures for advanced timing not to be delayed. We have incorporated into our forecast the impact of additional tariffs and export restrictions that have already been implemented or the implementation be decided. But we have not incorporated the impact of the items which have yet to be implemented, such as List 4 of Section 301 of the US Trade Act. Going forward, we will aim to reduce the impact on our business by quickly taking any action as necessary. Now, let me talk about business segment. First, gaming network services. First, although PlayStation 4 hardware sales and network service sales, including sales of PlayStation Plus increased year on year, overall segment sales decreased 3% to 457.5 billion yen due to a decrease in game software sales. Operating income decreased 9.6 billion yen year-on-year to 73.8 billion yen. This decrease was primarily due to the decrease in the contribution from the first-party game software compared with the same quota the previous year, in which God of War was a major hit. We have revised downward our forecast for fiscal 19 sales by 100 billion yen to 2 trillion 200 billion yen. We have not changed the operating income forecast, and that's 280 billion yen. PS4 hardware unit sales in the first quarter was slightly below our expectation because of the news regarding our next generation consoles. We have reduced the annual sales forecast by 1 million units to 15 million units. 3.2 million units were sold during the current quarter, essentially unchanged year on year, and we have reached 100 million cumulative units on a shipment basis. The fact that we plan to sell 15 million units in this fiscal year The seventh year since launch demonstrates that the PS4 platform is still garnering support from many users. We have revised downward our forecast for game software sales to be flat year on year due to a decrease in third-party game software, especially free-to-play games. We expect network services sales to be above the previous fiscal year. The goals for this segment this fiscal year are preparing for the launch of the next generation platform as well as maintaining and expanding the community we have built among users. As of the first quarter, we are on track to achieve these goals.

The first quarter sales increased 11 percent year-on-year to 202.3 billion yen. This significant increase was mainly due to higher sales for music publishing, resulting from the consolidation of EMI Music Publishing, as well as higher streaming revenues, partially offset though by lower visual media and platform sales. mainly caused by lower sales for of fate grand order a game application for mobile devices streaming revenues in the recorded music business grew 27 from last year mainly due to expansion of the market and contribution from releases such as little Real Nasdaq's Old Town Road, which is expected to be one of the biggest hit songs of the year. Operating income increased 6.2 billion yen year-on-year to 38.3 billion yen. We have made no changes to our April forecast for sales and operating income full year. Next, about pictures segment. The first quarter sales increased six percent from last year to 186-point-one billion yen. An operating profit of zero-point-four billion yen was recorded, compared to a loss of 7-point-six billion yen in the same quarter the previous year. Primarily due to the timing of motion picture releases, this segment has recorded a loss in the first quarter repeatedly in the past, but this quarter it recorded profit for the first time in five years. Although marketing expenses were incurred for Spider-Man for Far From Home, which was released at the end of June, our profitability continues to improve due to our channel portfolio reviews in media networks and other efforts. We have made no change to our April forecast for sales and operating income. Spider- Far From Home has exceeded one billion U.S. dollars of revenue at the global box office, surpassing Jumanji Welcome to the Jungle to become Sony Pictures Entertainment's highest-grossing, wholly owned film of all time. Due to the timing of its release, the film will not contribute significantly to financial results until the second quarter and beyond. Next is the EPNS segment. From this quarter, this segment includes what were the home entertainment and sound, imaging products and solutions, and mobile communications segments. But we continue to disclose the same product category sales that we disclosed in the past in our supplemental information. Primarily due to a decrease in unit sales of TVs and smartphones, sales decreased 15 percent to 483.9 billion yen compared to the previous year, and operating income decreased 7.6 billion yen year-on-year to 25.1 billion yen due to the decrease in sales and the negative impact of foreign exchange rates partially offset by a reduction in the operating expenses in mobile communications. Due to a reduction in the unit sales forecast for TVs and smartphones, our sales forecast has been changed to 2 trillion 160 billion yen. But we have made no changes to our April forecast for operating income, despite the decrease in sales due to a reduction in operating expenses. Next, I will touch on the TV business. Primarily due to the intensified price competition and lower demand compared to the prior year, when we benefited from the World Cup mainly in Europe and Latin America, TV unit sales in the current quarter decreased about 23% year-on-year. Thanks to actions we have taken, such as launch of new products and price reductions, sales have recovered since June, but we continue to pay close attention to changes in the market for panels and the trends of competitor pricing. And here I'm showing the new key products we have announced or put on sale recently. All of them have received positive feedback from a lot of our customers. Next is the imaging and sensing solutions segment. The first-quarter sales increased 14 percent year-on-year to 230-point-7 billion yen, and operating income increased 20-point-4 billion yen to 49-point-5 billion yen, mainly due to a significant increase in image sensor sales for mobile devices. demand for image sensors continues to be strong and our market share of image sensors for mid-range and high-end models of major smartphone makers remain high due to adoption of multiple sensors per camera and growing demand for high value-added sensors made using large die sizes and we are currently utilizing 100 percent of our internal capacity However, concerns about the impact of trade issues in the second half of the fiscal year remain. We have already been conservative when forecasting the impact of these issues, but because we want to evaluate the risk over the course of the first half of the fiscal year, we have as yet made no changes to our April forecast.

Now I would like to explain the background and reasoning behind the change in name of the segment. The portion of semiconductor segment revenue that comes from image sensors has been increasing every year and is expected to be approximately 85% of the segment this fiscal year and is expected to increase even more going forward. Image sensors are hybrids between analog and digital semiconductors. and in terms of technology and business model, differ from logic, LSI, and memory, which most people think of what they hear the word semiconductors. Compared with logic, LSI, and memory, which require frequent capacity upgrades to maintain competitiveness due to quickly evolving process miniaturization, image sensors do not require regular large capital investments because products can be differentiated through improvements in functionality and the addition of new features without having to upgrade production capacity. Moreover, since the image sensors business is focused on custom products that are differentiated through features and functionality, and because we have expanded our customer base the last several years and obtained large share of market, we have established a business model that experiences less impact from fluctuations in the market known as the Silicon Cycle. Over the last 10 years, we have achieved an extremely high level of compound annual sales growth at 17%, primarily from smartphone applications, and we have made significant investments to increase capacity as a result. However, we expect the investment requirements of this business to decrease significantly as the acute increase in demand transitions to a milder growth trajectory. The strategy for future growth in the I and SS segment is to develop AI sensors which make our sensors more intelligent by combining artificial intelligence with the sensors themselves. Developments of these sensors will require us to leverage not only the strength of the hardware technology in the I and SS segment, such as stacking of sensors on logic and copper-to-copper connections, but also the AI technology and diverse application technology in other parts of Sony. So our efforts in this area would span the entire Sony group. We think that AI and sensing will be used across a wide range of applications such as autonomous driving, IoT games and immersive entertainment. As such, we think there is a possibility that image sensors will evolve from the hardware They are today the solutions and platforms as visual data and sensing information is processed in a sophisticated manner inside sensors. The image sensor business is important because it is one of the pillars of the growth strategy of Sony Group. We changed the name of the segment this time to assist your understanding of the characteristics and future strategy of this business, which I just explained. Next, I would like to explain about the financial services segment. In the first quarter, financial services revenue was essentially flat year-on-year at 336.9 billion yen, and operating income increased 5.5 billion yen year-on-year to 46.1 billion yen. We have made no changes to our April forecast for financial services revenue and operating income. Next, I will discuss the new structure of the Board of Directors at Sony Financial Holdings, SFH. The new Board of Directors, which was formed at the Ordinary General Meeting of Shareholders this past June, is primarily comprised of external directors and members of management from Sony Corporation. Sony believes that this new structure will strengthen the governance of SFH and promote even greater focus on increasing shareholder value. The presidents of Sony Life, Sony Assurance, and Sony Bank, who each concurrently served on the board of directors of SFH in the past, would dedicate themselves to managing each of their business going forward and will concentrate on growing their businesses and strengthening their competitiveness. Sony would deepen its collaboration with the management team of SFH and proactively work to increase the value of our financial services business even more so than in the past. In conclusion, I would like to explain the efforts we are making to increase corporate value. In our first mid-range plan, which began in the fiscal year and ended March 31, 2013, we structured our businesses and strengthened our profitability and cash generation. This resulted in cash in each of our businesses attaining a high level of competitiveness and a steady level of profit and cash flow. As President Yoshida explained at the corporate strategy meeting in May, Sony now needs to take steps to grow its various businesses while creating synergy across businesses. Sony will aim to do this by leveraging the diversity in each of our business in the entertainment, electronics and DTC services. which includes financial services arenas. Technology is what supports the growth of these businesses and creates synergy across businesses. This is what makes Sony unique and strong. We aim to increase our corporate value in a sustained manner over the long term by further growing Sony as a creative entertainment company with a solid foundation in technology. Lastly, I would again show the results forecast for each of our segments. This concludes my remarks.