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.