Sony Group Corp

We shall now begin the earnings announcement session for the third quarter of the fiscal year 2019. My name is Hayakawa, the IR, the general manager responsible for financial affairs. I'd like to introduce our speakers for the day. We have the Senior Executive Vice President, Chief Financial Officer Hiroki Totoki. And then Senior Vice President, Senior General Manager of the Finance Department and Corporate Planning and Control Department, Naomi Matsuoka. And then we have VP, Senior General Manager, Global Accounting Division, Hirotoshi Korenaga. Mr. Todoki will make the presentation today first, and then we'll follow that with the question and answers, and we plan to spend 40 minutes all together. With that, Mr. Todoki, would you please start? Thank you.

Before I explain our results today, I would like to speak a little about the spread of infection from the new coronavirus. First, we extend our condolences to the families of the people who have passed away and send our thoughts to those who have been infected. Sony is very concerned about the spread of infection. At this time, it is difficult to fully grasp what is going on, but we are exerting all efforts to gather information and assess the situation, and we are taking actions where possible. Now I will explain these two topics. Fiscal 19 third quarter consolidated sales increased 3% year-on-year to 2,463,000,000,000 yen, and operating income decreased 76,000,000,000,000 yen year-on-year to 3,000,000,000,000 yen. Net income attributable Sony Corporation stockholders decreased 199.4 billion yen year-on-year to 229.5 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, operating incomes would have increased 16.5 billion yen to 276.5 billion yen. Also, excluding these extraordinary items, net income attributable to Sony Corporation stockholders would have increased 58.3 billion yen from 157.9 billion yen in the same quarter the previous year. Next is the consolidated results forecast for fiscal 2019. Consolidated sales are expected to increase 100 billion yen year-on-year to 8 trillion 500 billion yen and operating income is expected to increase 40 billion yen to 880 billion yen. I will explain the breakdown of sales and operating income for each segment when I explain the segment results. Income before income taxes was upwardly revised to 860 billion yen, and net income attributable to Sony Corporation stockholders were revised upward to 590 billion yen. The forecast for operating cash flow excluding the financial services segment is 760 billion yen unchanged from the previous forecast. The assumed foreign exchange rates for the fourth quarter are 109 to the US dollars and 121 yen to the euro. As for the dividends this fiscal year, we expect to issue year-end dividends of 25 yen per share, and when combined with interim dividends already paid, the annual dividend will be 45 yen per share, 10 yen more than last fiscal year. Now, I would like to discuss the impact of the spread of a new coronavirus infection. I just explained that for the revision of our consolidated results, but that impact of the spread of the coronavirus is not included in that forecast. At this time, it is difficult for us to assess the impact on our results, but depending on how the situation evolves, the impact could be large enough to eliminate the entire amount of the upward revision. We think there could be a major impact on our manufacturing, sales, and supply chain operations, especially in the INSS and EPNS segment. Going forward, we will continue to gather information, assess the impact, and take any necessary actions. Based on that, if there is any material change to our forecast for the current fiscal year, we will disclose the change. Now I will explain the situation in each of the business segments. First, game and network services. Sales for the quarter decreased 20% to 632.1 billion yen, primarily due to the decrease in PS4 hardware sales and software sales, as well as the negative impact of exchange rates. PS4 hardware is in its seventh year since launch, and partly because we announced the PS5 next-generation console, unit sales decreased year on year. The Yen-based average selling price of the hardware decreased due to the negative impact of exchange rates and an increase in the proportion of units sold during the selling season. However, we were able to secure a margin on hardware that was flat year-on-year because we kept the promotional price at the same level as the last fiscal year and because promotional costs were offset by year-on-year reduction income component costs, excluding the significant decrease in the free-to-play title, the impact of the exchange rates. Software sales were essentially flat year-on-year. Operating income decreased 19.6 billion yen to 53.5 billion yen. primarily due to the impact on the decrease of the third-party software sales, partly offset by the increase in the profit for the growth of the network services PS Plus.

And we revised our fiscal 19 sales forecast by 50 billion yen to 1,950 billion yen, and the operating income forecast by 5 billion yen to 235 billion yen. The revision in sales was due to a change in our forecast for third-party software sales, including the impact of postponement into next fiscal year of several types of sales. And despite the benefit of operating cost reductions, operating income was revised downward, mainly due to the decrease in software sales. Our financial results this fiscal year are in a period of adjustment. as we approach the transition to the PS5's new generation console, and because the contribution of a free-to-play titles last fiscal year was quite large. On the other hand, when you look at our results over the mid to long term, you can see that our game business is steadily growing as evidenced by the growth of network services such as PS Plus, and we expect this growth to continue going forward. The proportion of network services revenue continues to increase, mainly due to the increase in the number of PS Plus subscribers. We aim to leverage this large community and network services revenue stream to affect a smooth transition from the current console generation to the next, unlike in the past when profitability deteriorated significantly due to development and marketing costs incurred. Next, about music segment. The third quarter sales increased 4% year-on-year to ¥216.9 billion, but operating income declined significantly. 110.8 billion yen year-on-year to 36.3 billion yen. This decrease was mainly due to the absence of remeasurement gains resulting from the consolidation of EMI music publishing recorded in the same quarter of the previous year. and a decline in sales of mobile games in Japan. Excluding these items, our music business is steadily growing, mainly due to the growth of the streaming market. Streaming revenue in our recorded music business continues to grow at a high rate, increasing 16% year-on-year and 20% year-on-year, excluding the impact of the conversion to the yen. There is no change to our full-year forecast for sales and operating income. Next is about pictures segment. The third quarter sales declined 15% year-on-year to 236.0 billion yen, and operating income decreased 6.2 billion yen to 5.4 billion yen. This decrease in profit was mainly due to the significant decline in motion picture revenues, partially, though, offset by an improvement in profitability due to the benefit of a channel portfolio review in media networks. In the same quarter of the previous fiscal year, the major hit Venom was released at the beginning of October, significantly contributing to profitability throughout that quarter. But this fiscal year, the hit Jumanji, the next level, was released only in mid-December, so that the majority of the contribution to productivity will come in the fourth quarter and beyond. While there were other releases that did not meet our expectations, all in all, I believe that our motion pictures business has been performing well. The fiscal 2019 sales and operating income forecast is unchanged. Global box office revenue for calendar year 2019 increased led by growth outside of the United States. Similar to last year, Sony Pictures had the fourth highest market share of box office revenue in the United States in calendar year 2019. However, while all the major studios except Disney experienced a decline in box office revenue, Sony Pictures' share increased one percentage point compared to the previous year, mainly due to the contribution of the major hit Spider-Man Far From Home. I think this success is due to our leveraging of IPs such as Spiderman and Jumanji to build strong franchises. Next, let me discuss our EPE and S segment. Sales for the quarter decreased 9% from last year to 650.4 billion yen, mainly due to a decrease in sales of smartphones and TVs and the negative impact of exchange rates. operating income increased 14.1 billion yen year-on-year to 80.3 billion yen. This increase is mainly due to the benefit of restructuring of mobile communications and reductions in operating expenses in the various businesses within the EPNSS segment, partially offset by the impact of the decrease in sales. In order to reflect the deterioration of market conditions, we have reduced our sales forecasts for the fiscal year by ¥40 billion to ¥2.7 trillion. The forecast for operating income remains unchanged as the impact of the decrease in sales is expected to be offset by improvements in operating costs across the various businesses. The competitive environment during the 2019 year-end selling season was primarily intense in the key product areas of TVs and mirrorless cameras, but overall were able to control pricing, supply and inventory. Although competition in mirrorless cameras has increased as other companies have entered the market in earnest, we maintained our share in major markets and produced results for overall digital cameras that are higher year-on-year. The intensely competitive environment in the TVs market continued due to the deterioration in panel prices, but we maintained a high average selling price year-on-year by focusing on high value-added and large screen models, and we have maintained inventory at an appropriate level.

On the other hand, our broadcast and professional use product business has seen a significant slowdown in China, an important market for the business, due to U.S.-China trade friction and the negative impact that it is having on the economy. To respond to these circumstances, we are taking a variety of actions, including a review of our business structure. Due to the benefit of restructuring that is ongoing, the mobile communications business continued to record a profit in the third quarter. In the fourth quarter, we intend to implement yet another fixed cost reduction plan and take other action to integrate the operations of this business with the other businesses in EPNS. We expect to record significant one-time cost primarily due to these actions in the fourth quarter, but the transformation of the business is progressing steadily towards break-even next fiscal year. Next is the INSS segment. Third quarter results increased 29% year-on-year to 298 billion yen, primarily due to an improvement in the product mix and an increase in unit sales of image sensors for mobile devices. Operating income increased 28.7 billion yen year-on-year to 75.2 billion yen, mainly due to the impact of the increase in sales, partially offset by an increase in research and development costs and depreciation expense. We revised upward fiscal year 2019 sales forecast by 50 billion yen to 1 trillion 90 billion yen, and our operating income forecast by 30 billion yen to 230 billion yen. Demand for image sensors in the fourth quarter continues to be strong. Although production capacity is expanding according to plan and we continue to operate at full production capacity utilization, sales are increasing due to a strong near-term demand and that is preventing us from stockpiling strategic inventory as originally planned. In addition, Partly due to the introduction of a highly competitive new product this fiscal year, we have been able to maintain our overall margin, all of which has enabled us to operate this business extremely well. There is no change to our view. that demand would continue to increase over the mid to long term from next fiscal year. But in regards to next fiscal year in particular, we cannot be too optimistic due to the impact of the spread of infection from the new coronavirus that I mentioned earlier, as well as competitive environment and various geopolitical risks. We will continue to closely monitor demand trends and external environment as we manage this business going forward. Now I would like to talk about the action we are taking over the mid to long term. Tox sensors, which we expect will be the next growth driver after image sensors, have begun to sell well, although their size within the overall business is still small. We expect their adoption, primarily in mobile devices, to increase further from next fiscal year. Taking a longer term view, as we made a point of showcasing at CS last month, we are taking steps to expand the adoption of Sony's imaging and sensing technology in a mobility space and in a diverse industrial and factory automation space. We plan to proactively invest even more in technology development to grow this business in the future, such as hiring of personnel including algorithm and software engineers and the building of an office in Osaka to serve as design and development center for image sensors. Lastly, I would like to explain the financial services segment. The third quarter financial service revenue increased significantly by 243.6 billion yen a year to 407.2 billion yen. This increase was primarily due to a significant increase in the investment performance of variable life insurance products in the separate account at Sony Life. resulting from the rise in the domestic and foreign stock markets during the quarter. Because a significant portion of the investment performance of the separate account is attributable to the owners of insurance policies, the contribution to operating income is minimal. Operating income decreased 5.3 billion yen a year to 32.6 billion yen. This decrease was primarily due to the deterioration of net gains and losses as a result of a decrease in the provision of policy reserves and appraisal losses from its hedging activity, both pertaining to minimum guarantees for variable life insurance resulting from strong stock market conditions. We have revised upward our forecast for financial services revenue to 1 trillion 460 billion yen to reflect the current market environment. On the other hand, we have revised downward 10 billion yen our forecast for operating income to 160 billion yen. This is primarily due to the third quarter results and the fact that increase in policy amount in force is slightly below our expectations. Lastly, I would like to show the forecast for each of our segments. This concludes my remarks. Thank you.

Now the floor is open to your questions. Those of you with questions, please... Please wait for the microphone and please identify yourself by stating your name and affiliation before asking your questions. When questions are asked in English, there will be consecutive interpretation into Japanese and answers will be given in Japanese. In view of time constraint, please confine the number of questions to two per person.

Now, any questions? Ono of Morgan Stanley, thank you.

Concerning INSS segment, two questions. The operating income, 230 billion yen, upward revision. And concerning top line, the What about the volume upside and the improvement of product mix in view of those aspects? Roughly speaking, what do you think had a greater impact on the outcome? Second question, the increase in fixed assets, and you've reduced this largely. Is it because of the high efficiency investment or are there any factors related to this? First, on INSS, the upward revision for annual forecast, what are the factors, volume increase or product mix improvement? On this matter, we explained this during the second quarter. The balance between unit increase and product mix improvement, the contribution is about more or less the same. And the increase in the fixed asset decrease in the fixed asset increase of INSS, well, with the improvement of efficiency, we could secure the assumed capacity without increasing capital expenditure. That was the factor behind.

Next question, please.

Thank you.

Nishimura, Credit Suisse. Thank you. The first question is about INSS. Earlier, talking about next year, talking about competitive environment, you are not optimistic about the competitive situation. Looking at the supply and demand, the industry as a whole is enjoying a sort of good situation. So what is your take on the risk? And the second question is about the game business. Free-to-play business is declining in the third quarter, compared to the first and second quarter. In the third quarter, what were the signs of the decline? And also, for the next year, the decline in free play revenue, is this just a temporary situation for this year and not be repeated next year? Well, the competitive environment, we explained that we're not optimistic about the situation next year, but it's difficult to explain that quantitatively. But the image that I have in my mind is this. Next year, I think I said this at the previous last meeting, initially forecast was that the first half would be very strong demand. So thinking about the balance against the production capacity, we were going to build a strategic inventory in the fourth quarter, but as things stand currently, Most of the strategic inventory that we are going to deliver next year would have to be delivered this year. So whether we can meet the demand next year is still a problem. And 0.8 million micron sensors, that's contributed to our productivity. We are in the second year of production. But the catch-up made by the competitors and also the price competition will become more severe in the second year of the production. So this is the situation that we are forecasting. But it is for me to say. This concern about the coronavirus, we have not incorporated any impact of that in our numbers. So as we learn more about the data, we'll have to repeat that in our results forecast. And next about the game business, the decline in free-to-play business. What was the situation? Is it very quarter? How much decline did we experience? And also, has that decline completed this year or is it going to be repeated next year? Well, the so-called third-party sell-fares, the significant decline that we experienced, much of that is really to decline in free-to-play titles, but for other software titles, new titles and also the library of existing titles, the business is basically flat. So the free-to-play titles are... It was very difficult to forecast the business, and that was the experience this quarter as well, the difficulty of forecasting the business. But for all other businesses, there has been no significant change. So we have to devise methods of forecasting, particularly looking at the free-to-play titles. Next question, please.

My two questions are on the game business. The first is as follows. You discussed about PlayStation Plus. Now, in your previous statements, if there are major titles, that would trigger the increase of the membership of subscribers. In that context, I thought that you would struggle during the October-December period. But nevertheless, you were able to increase the subscription or the members base. What did you do to achieve this growth? And as you move on to the next generation, what would happen to your subscriber or the customer base? We have to steadily increase the membership for PS Plus and how to increase efficiency of retention there are a number of plans and ideas of course in August there was a revision of the price if you subscribe for the entire year you enjoy a certain discount and this has led to the increase of steady stable users in providing such the users would enjoy the online multiplayer and free play and also 100 giga PlayStation 4 is also combined and also they enjoyed the promotions for discounts and by combining different ideas the users favoured Stance and we were able to increase the membership. There is a trend of increasing the membership during the third quarter, but by improving the services and providing a variety of services, we'd like to continue this trend and have a robust increase of the customer base. Now, about the future generation. Of course, we would definitely like to increase the base to prepare for the next generation of the product, but there's very little that I can discuss about the future generation of the console today. But when the time is right, we will disclose the new product. The PS5 is to be launched in the selling season towards the end of the year. So what will be the guidance, the future guidance for March 21? You have not disclosed the price for PS5. So what would happen to the guidance that you'll be releasing in April for the next fiscal year? It's very difficult to really discuss this timing-wise, but as of today, we will provide the guidance at a time period which is comparable to the past. So we will not change the time schedule. Next question, please. Next question.

It's our city group. Two questions. First one concerning EPNS. What about the guidance of operating income for the fourth quarter? I understand that there will be a major loss. and you talked about the recording of one-time expense. But in the way of breakdown, what is the trend for each product, and what sort of factors you foresee, or what about the amount of one-time expense to be recorded? And for the coming fiscal year, to what extent the profit of EPN as a business be improved? including the impact of one-time expense. During the fourth quarter, EPNS operating income would be in deficit. And in my presentation, I made a mention that structural reform of the mobile business and we coded a one-time expense and the impact of this is considerably large but to what extent we can control this amount is something we are scrutinizing at the moment and we like to minimize the amount as much as possible. And other categories of products, we do not think any expense would go beyond the normal seasonality. The level of inventory is, as I mentioned, and during the third quarter, we could successfully control the level of inventory. And concerning TV, for the time being, As I mentioned during the last time earnings announcement, we are thinking of launching some products during the fourth quarter. And that plan remains unchanged. However, the current supply chain concern in China may surface. There may be some delay in ramp-ups. Do you have the factors for increased profit next fiscal year? About the new fiscal year, we have not finalized our plan yet. But our plan intention are that in the course of fiscal, next fiscal year, we like to make a good start so that we will not be drawn by the negative legacy and make a solid plan. One point of confirmation, the fourth quarter of subcontracting, that is minus 35.8 billion yen, and the restructuring budget for the fiscal year was increased by 20 billion yen, and subtracting that, what remains would be around 13 billion yen, and that would go to mobile, and then... Would there be other deficits in other sectors than mobile, which would add up to 38 billion yen? Well, as you analyzed, that may be an appropriate line of understanding, but we do not show the details in terms of individual breakdown. And another point concerning the game business, my second question. Third-party software performance was not very good. But what about the first party titles performance? To the extent possible, was it higher than or lower than the expected first party title performance? Were there any major titles? Basically, We cannot answer in terms of the amount compared to how we expected. So I'd like to give you the impression observation. About the third party full game, our assumption of the order of titles were lower and we could not reach it. And the first party full game, our assumption was our expectation was higher and we did not quite reach that level. And concerning PS Plus and so forth, along the line of our original expectation and assumption.

Please raise your hand if you have questions. Thank you, Okazaki and Nomura Securities. Firstly, for the ANSSS. You always disclose the actual production capacity at the end of December. Can you give us the figure again? Mr. Kotonaga, can you answer that question? Yes, the emissions production capacity at the end of the third quarter, the capacity was for 115K, 115,000. Our expectation before was 7K, and there was some decline, but this is due to the change in process mix. So the established capacity itself, there's no delay in setting up the capacity. The end of fourth quarter, it's going to be 124K. It's going to be 124,000. about input the third quarter situation does full operation and for the fourth quarter we expect to operate the capacity fully as well the second question is about pictures you are enhancing the franchise business you mentioned and can you talk about inventory you made investment you made in October and December particularly the game show network is the The nature of the investment is different. And I think you are working on non-profitable franchises in particular. So what are you doing in terms of investment for the acquisition plans or the game show network? We fully subsidized this operation. Originally, it was held by ATT. We acquired 42% stake in that and then made a full subsidiary. Sorry, we acquired ATT's 42%. Originally, we had 58%. They have the original game shows distributed in U.S. cable TVs. That's the nature of the business. And GS and games, online games are also provided. And this business unit for us from this point of view we believe is profitable going forward and therefore in order for us to be able to make strategic decisions in a flexible manner we felt that making this 100% full subsidiary was a good idea and therefore we did that another point is about the super gate I think This is for anime development and production for the children. And also for digital licensing. And S-Bot and Cable TV, we've prepared seven titles for them, original titles. So our purpose in this business is to get excellent talent. And this business category is very attractive. That's been our view consistently. And we've conducted these dialogues. And now that we've found this opportunity for acquisition, we moved rather quickly to make the decision for acquisition.

We are going to take the next question, so please raise your hand.

Thank you.

JP Morgan. Ayata is my name. My question first is on INSS. To reflect back to that quarter, there has been a product mix, an increase of volume. Now, in the fourth quarter, what is the momentum for sales of increase per wafer? I think... The second quarter, there was better momentum. Was it true for the third quarter? Now, also during the third quarter, I think the inventory fluctuated, and that resulted in a negative impact on P&L. Now, INSS third quarter, you're right in saying that both the mix and the volume increased. And the momentum per wafer? No. I think you're referring to the unit cost of wafer, which we are not disclosing. So I would like to refrain from making any quantitative statement. But as the wafer size enlarges, the yield would come down per wafer. And therefore, we have to make the average selling cost which would offset and which would surpass that drop that's the logic therefore the sales per wafer and the sales cost or unit cost momentum should be maintained and we are working on that and also in the meantime we are working on the betterment of yield and for new products we would like to make sure that the ramp-up would be very smooth, which would consequently improve profitability. So we will be focusing on those measures. Now, the third quarter, the inventory fluctuation, what impact would it have on the P&L? The second quarter and the third quarter, if you compare the two quarters, the inventory fluctuation, declined by 7.8 billion approximately. And this is true that it has pushed down the earnings, the profit. On a year-on-year basis, the difference is more than 10 billion. Thank you. The second question is on the gaming network service. And please answer, if you can, to the best you can. Mr. Totoki said that you intend to have a smooth transition to the new generation. And as you do so, what are the factors that you can control, such as marketing or development cost? Or there could be factors which are not visible, could be volume or price. So that best you can, can you discuss on what you can discuss and what is already visible. First, we must absolutely control the labor cost, the personnel cost. It must be controlled. And it leads to what should be recognized as a cost. We will definitely control that. And the initial ramp-up, how much can we prepare initially? We will work on the production and the sales. And we will have to prepare the right volume as we launch this. What is not very clear or visible is because we are competing in the space. So it's very difficult to discuss anything about the price at this point of time. And depending upon the price level, we may have to determine the promotion that we are going to deploy and how much cost we are prepared to pay. So it's a question of balance. And because it's a balancing act, it's very difficult to say anything concrete at this point of time. But when I said smooth transition, we mean that we will definitely choose the optimal approach and that we would – try to have the best balance so that will be profitable in the life, during the life of this product.

Next question. Thank you. Katsuda Mitsubishi Nikko, Securities. Concerning INSS, one point. In the slide, You refer to the products other than image sensors. And what do you think of the contribution of these products from next fiscal year onward? And on the investment side, in your explanation, you mentioned that probably you do not have to do as much investment as you expected because of higher efficiency of the operation, including the use of outside capacity. Probably you are thinking of the various ways. And you have the overall framework of 700 billion yen in three years in MRP. And what are the other factors? Other than the contribution by other than mobile image sensors, the sensing sensor is one for F-ray and automotive applications are the ones. So other than mobile applications, by 2025, we'd like to increase the contribution percentage up to 30%. That's what we have been talking about. And this target remains unchanged, and we are doing what is necessary to achieve that target right now. And the short-term products, or maybe the tough sensors for mobile with a shorter lead time and buy-and-buy, we will be able to show the possible percentage from next fiscal year onward about tough sensors. It's not that we need a capital investment only dedicated for top sensors, so it has a high potentiality for business contribution. And we should be able to secure the appropriate margin on top sensors. About the investment efficiency, about the decline in investment by 15 billion yen, thanks to higher efficiency, But over the medium term, 700 billion is the number. We do not foresee any major change. But next fiscal year, we will be looking at the next MRP from 2021 to 2023. So at that timing, we will... look at the way of investment over the coming three years for the next MRP. We should be able to show our view on such investment.

Time is limited, so this next one will have to be the last question. Yes, the UPS securities. But I have a question, a short-term question. For the fourth quarter, whether the inventory fluctuation is going to be less or greater amount of inventory? Of course, it depends on the market demand, but what is your target? Will it be more or less the inventory for the fourth quarter? The second part of the question is, October, December, your business is very good. At the United States, there was a change in the mix of the company. It was affected negatively because of this mix. There was a difference in results between the two and three sensors and cameras. And also there's an adjustment in the business in China starting in December. So the consequence, January to March and also April to June, can you expect demand sufficient to fill all your capacities and supplies? Well, initially, for the fourth quarter, We had a plan to increase the strategic inventory to prepare for the next year, but what happened was a strong demand from the customers for the fourth quarter. Therefore, it was difficult for us to actually build up the strategic inventory for the future. We had to deliver whatever we had. But there's an impact of this coronavirus. And it may not mean much for me to explain this issue in excluding that potential possibility, but there is a likelihood that demand will slow down because of that. So, considering all this altogether, the inventory will only slightly increase compared to the third quarter. So, will not change significantly in the fourth quarter. That's our current expectation. But then again, nothing is definite now. I cannot say that for definite, but that's generally our view. Well, if you may add this, in an output basis, what is your plan for January-March period? the output of the shipment I think you gave us data output based on production capacity 100K for the first quarter. You're talking about capacity. Install base and input and output, there are three elements. Capacity is already installed. Input is what you're inputting. Output is the result of that input. The shipment is not included in this. So the point of your question is, again, January, March, wafer, shipment, the production, what will be the amount? So we do not disclose output numbers. But the lead time is between five and six months. So use that as a basis of calculation. Thank you. Our time is up. And with this, I'd like to conclude this earnings announcement. Thank you for your attendance.