Sony Group Corp

It is 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 16 minutes in total. This time we are going to accept questions anytime 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, Mr. Totoki, please.

Thank you very much. We are holding this results briefing via webcast in order to prevent the spread of the new coronavirus infection. We apologize for any inconvenience and ask for your understanding. As we continue to conduct business at 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 will be holding on May 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 8,259,000,000 yen, and operating income decreased 48.8 billion yen year-on-year to 845.5 billion yen. Net income attributable to Sony Corporation stockholders decreased 334.1 billion yen to 582.2 billion yen. Excluding extraordinary items, operating income would have increased 4.6 billion yen year-on-year to 814 billion yen. Net income attributable to Sony's shareholders would have decreased 28.2 billion yen year-on-year to 550.3 billion yen. The extraordinary items that impacted net income are shown here. Operating cash flow excluding the financial services segment for the fiscal 2019 was an inflow of 762.9 billion yen, slightly higher than the previous fiscal year, and investing cash flow excluding the financial services was an outflow of 363.1 billion yen. Cash flow for each business segment is shown on this slide. Free cash flow was positive in all segments. The fiscal 2019 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 40 billion yen 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 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 in our results differs by business. The electronics production solutions or EPNS segment is seeing the impact of others and we expect the impact to expand to other segments going forward. The impact on the results of the picture 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 and 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 gamer network service segment. For the fiscal 2019, the sales decreased 14% to 1,977,000,000 yen, mainly due to a decrease in PlayStation 4 hardware sales and game software sales. as well as the negative impact of foreign exchange rates. Operating income decreased 72.7 billion yen year-on-year to 238.4 billion yen mainly due to the decrease in game software sales and the negative impact of the foreign exchange, partially though 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 that 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 are trending well. Recently, a network service's revenue has increased significantly as gameplay hours on the PlayStation Network have reached 1.5 times that of the Christmas season and sales of games downloaded from network as well as network subscriber numbers have increased significantly since March. As for PlayStation 5, there have been some challenges with part of the testing process and qualification production lines, primarily due to employees 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 arisen in the game software development pipelines of either in-house games or those of our partners. Next is the music segment. For the year 2019, sales increased 5% to 849.9 million yen from the previous year, This increase was mainly due to higher sales for music publishing resulting from the consolidation of EMI Music Publishing as a wholly owned subsidiary and higher streaming revenues in recorded music partially offset by lower sales of Fate Grand Order, a game application for mobile. Operating income decreased 90.1 billion yen to 142.3 billion yen 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 the extraordinary items associated with the consolidation of EMI as a full subsidiary, operating income would have increased 15.2 billion yen 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 and music videos. The impact of the delays in new music is limited at this time in countries like the U.S., where the proportion of music that is streamed is high, but in countries like Japan and Germany, where the proportion of music that is streamed is relatively low, sales of CDs and other packaged media sales are decreasing due to restrictions on outings. Ticket revenues, merchandise revenue, and video revenues are decreasing, especially in Japan, where over 400 events have been postponed or canceled. 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 in 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 picture segment. FY19 sales increased 3% year-on-year to $1,011,900,000. due to an increase in motion pictures and television production revenue. Motion pictures released this fiscal year included Spider-Man Far From Home and Jumanji The Next Level. These franchise films, which leveraged Sony's IP, performed better than expected. Operating income increased 13.6 billion yen year-on-year to 68.22 billion yen, 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 picture segment. Box office revenue has been significantly impacted, mainly due to the closure of movie theaters 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 U.S., 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 EPNS segment. FY19 sales decreased 14% year-on-year to ¥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 ¥10.8 billion year-on-year to ¥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 production in stages from mid-March at the factory we own in Malaysia and at the factories we outsource 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. A television business is being significantly impacted in areas like India and Vietnam, where our 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 are concerned that this might continue for a long time. Next is the imaging and sensing solutions segment. FY19 sales increased 22% year-on-year to 1 trillion 70.6 billion yen, mainly due to an increase in image sensors unit sales for mobile devices and an improvement in product mix. Operating income increased a significant 91.7 billion yen a year to 235.6 billion yen, 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-sized, high-value-added products, and the introduction of a highly competitive new product which fit those specifications, the image sense of business products results that significantly exceeded expectations at the beginning of the fiscal year.