Sony Group Corp

Thank you for waiting. We shall start the earnings announcement of Sony Group for the second quarter of fiscal 2019. I'd like to introduce our speakers today. We have Senior Executive Vice President, Chief Financial Officer Hiroki Todoki, and Senior Vice President, Senior General Manager of Finance Department and Corporate Planning and Control Department, Naomi Matsuoka, The Vice President is Senior General Manager of the Global Accounting Division, Hirotoshi Korenaga. Today, Mr. Todoki will make the presentation first, and then we'll follow that with the questions and answers. Mr. Todoki, you have the floor.

Today, I'd like to explain these two topics. FY19 second quarter consolidated sales decreased 3% year-on-year to 2,122,300,000,000 yen primarily due to the impact of exchange rates and operating income increased 39.4 billion yen year-on-year to 279 billion yen. Net income attributable to Sony Corporation stockholders increased 14.9 billion yen year-on-year to 187.9 billion yen. Next is the consolidated results forecast for fiscal 2019. Consolidated sales are expected to decrease 200 billion yen compared with the previous forecast 8 trillion 400 billion yen and operating income is expected to increase 30 billion yen to 840 billion yen. I will explain the breakdown of sales and operating income for each segment later. Income before income taxes was upwardly revised to 800 million yen and net income attributable to Sony Corporation stockholders up to 540 billion yen. The forecast for operating cash flow excluding the financial service segment is 760 billion yen unchanged from the previous forecast. As for the forex assumption for the second half, the U.S. dollar remains unchanged from the previous forecast, 108 yen to the U.S. dollars, and the euro changed from 123 to 111 yen to the euro. Now, first I will talk about gaming network services segment. Sales for the quarter decreased 17% to 454.4 billion yen due to a decrease in sales of PlayStation 4 game software and hardware, as well as the negative impact of the foreign exchange rate. Game software sales decreased because of the absence of the major first-party hit titles like Marvel's Spider-Man of the previous year, and a significant year-on-year decrease in the contribution from the free-to-play games. Operating income decreased 25.6 billion yen year-on-year to 65 billion yen due to the impact of the sales decline. And we revised downward our fiscal 2019 sales forecast by 200 billion yen to 2 billion yen, and operating income forecast 40 billion yen to 240 billion yen, as we announced last week. We have postponed the sales of the first-party title, The Last of Us Part II, from February 2020 to May 2020. As a result of this, this title will not contribute to the financial result of the current fiscal year, and that is the primary reason for the downward revision of our operating income forecast. And this slide shows the analysis of how fiscally operating income forecast compares with that of the previous year. The three major reasons for the decrease in expected profit year-on-year are the decrease in first-party software sales resulting from the postponement of the last of part two and a decrease in third-party software sales due to deceleration of free-to-play titles and the negative impact of exchange rates. PS4 hardware profit increased slightly as a decrease in unit sales is offset by the hardware cost reductions. Profit from network services, mainly PS Plus, is expected to increase significantly due to the steady increase in subscribers. Since fiscal year sales are expected to decrease, we plan to constrain various costs, including marketing expenses. to a level below that of the previous year. However, operating expenses in aggregate are expected to increase due to an increase in development costs for the next generation console, PS5. Now, I will update you on the mid to long term strategy in the GNNS segment and the progress of the initiatives we explained on the IR Day in May this year. First, I will discuss our efforts to strengthen the first party content and IP. At the IRL Day, we mentioned the Sony strengths lies in our first-party content and IP. With the aim of strengthening these, in August, we announced the acquisition of Insomniac Games, the game developer for Marvel's Spider-Man, which sold 13.2 million units worldwide. Through this acquisition, Insomniac Games will become SIE's 14th studio and will contribute to further enhancement of our first-party software development organization. Going forward, we will continue to pursue growth investment opportunities that will enhance our own content IP. Next is a smooth transition to the next-generation console. The other day, we announced that we will sell the PS5 From the year-end selling season of 2020, this is the most important step in strengthening the PlayStation platform. Development of the PS5 is progressing according to plan, and we believe the development of game titles by our software development partners is progressing smoothly. We anticipate providing highly engaging gameplay experiences that both current users of the PS4 and potential new users have come to expect.

The thirdly about our content distribution strategy, in 2014, Sony launched the pioneering cloud gaming subscription service PlayStation Now, and to further strengthen our content distribution strategy, we announced a renewal of the service this month. PS Now has become even more attractive due to a global strategic price reduction and the addition of a limited time only popular game titles such as God of War. Since starting this, the service renewal, subscribers have steadily increased and the total number of subscribers has already exceeded 1 million as of this month. This is a great step toward a target we mentioned on the RDA of growing subscribers by an average of more than 50% per year. Through this renewal, we are aiming to assess the potential of cloud gaming services. The impact of the renewal on the results of this fiscal year is expected to be minimal. Lastly, Let me describe the progress we are making on our cost management initiatives. Our streaming TV service, PlayStation View, has provided a differentiated TV viewing experience to customers in the United States since it began in 2015. However, mainly due to a diversification of viewing styles and an intensification of competition among pay TV services, we do not expect the operating environment for the business to improve going forward. As a result, we decided to terminate the service at the end of January 2020. We aim to wind down the service in a deliberate manner to minimize any inconvenience to users. The impact of the termination of this service on the result for the fiscal year is expected to be minimal and is already incorporated into our forecast. Next, the music segment. The Q2 sales increased 8% year-on-year to 219.3 billion yen, and operating income increased 19% to 37.5 billion yen. This increase was mainly due to the consolidation of EMI music publishing in the music publishing business and higher global streaming revenues, partially offset, though, by the negative impact of exchange rates and lower sales of mobile games, mainly in Japan. Streaming revenues in recorded music business continue to go at a high rate as they did in the previous quarter, increasing 17% year-on-year or 21% year-on-year if the impact of the convergence of yen is exceeded. We revised upward our full-year sales forecast by 20 billion yen to 850 billion yen and our operating income forecast by 5 billion yen to now 140 billion yen. This upward vision was mainly due to streaming revenues exceeding our expectations. Next, about pictures segment. The Q2 sales increased 8% from last year to 260.6 billion yen, and operating income increased a significant 67% year-on-year to 39.3 billion yen. The increase in profit was mainly due to the contribution of Spider-Man Far From Home, which, having exceeded US$1.1 billion in global box office revenue, is the highest-grossing film of all time for Sony Pictures Entertainment, and an improvement in the profitability of media networks due to the benefit of portfolio review and improved profitability in India also contributed. Our fiscal 19 full-year sales forecast has decreased 50 billion yen to 1 trillion 30 billion yen mainly due to a decrease in the number of titles slated for release this year due to the change in the releasing timing of some of the titles. On the other hand, we have revised upward our operating income forecast by 5 billion to 70 billion yen due to an increase in the profitability of motion pictures and media networks and the benefit of the overhead cost reductions, though partially offset by the impact of lower sales. I will now discuss the collaboration between the music and picture segments in anime business. The anime market outside of Japan has been growing at a rapid rate for several years and Sony is expanding this business in this important growth area. Sony Music Entertainment Japan Inc. has been very successful in the anime business in Japan and has begun distributing anime content outside of Japan. Sony Pictures Entertainment acquired Fanimation Productions one of the largest anime distributors in the U.S. in 2017. In order to further strengthen this area of business, we have decided to integrate the platform of the three companies within the Sony Group that distribute anime content. Fanimation will acquire the distribution rights for numerous Japanese anime titles on behalf of these companies, and each company now will then distribute the titles in their own marketplace. In addition, in order to improve the appeal of the platform, Aniplex, owned by Sony Music Entertainment Japan, is joining the effort by enabling each company to distribute on a limited time exclusive basis the first animated TV series of Fate Grand Order, the major hit mobile game. Through these actions, we are strengthening collaboration across the Sony group, and we are also aiming to contribute to the growth of the Japanese anime industry.