Sony Group Corp

It is now time for us to start Sony Corporation's fiscal year 2020 first quarter earnings briefing session. I will be acting as the MC. My name is Kato from Corporate Communications Department. This briefing is held for the media analysts and institutional investors who we have notified in advance. The audio and presentation materials can be viewed on our website. Today, first of all, from the Executive Deputy President and CFO Hiroki Totoki, we will give an explanation on consolidated financial results for FY2020 Q1 and the forecast for FY2020, and then have a question and answer session. It should last approximately 70 minutes. Totoki-san, please.

Today, I would like to begin by addressing the operating environment surrounding Sony. The spread of the new coronavirus disease, an increase in geopolitical risks such as the tension between the United States and China, and the frequent occurrence of natural disasters in recent years are just a few. They are things that are fundamentally changing society and economy, as well as people's values and lifestyles in a variety of ways. These changes will not be limited to short-term, and they are difficult to predict. There's a saying that it's not the strongest of the species that survives, nor the most intelligent, but rather the one most adaptable to change. Sony intends to adapt flexibly to the changes in the environment and increase the focus with which we manage each of our businesses. The fiscal year ending March 31, 2021, or Fiscal Year 20, is an important year in which we expect to both recover from the impact of the spread of COVID-19 and formulate a strategy to address the business environment in the aftermath of the spread of the virus. We intend to improve the resilience of the Sony Group by leveraging our advantage, which is the diversity of our personnel and businesses, adapt to changes and convert the crisis into an opportunity. Now I will explain the following. Fiscal 20 first quarter consolidated sales increased 2% compared to the same quarter of the previous fiscal year to 1,968.9 billion yen, and consolidated operating income slightly decreased to 228.4 billion yen from the same quarter of the previous year, which is a record high. Income before income taxes increased 88.9 billion yen to 319.9 billion yen partially due to an improvement in unrealized gains on securities investments in other income and expenses. Net income attributable to Sony Corporation stockholders for the first quarter increased 81.1 billion yen to 233.3 billion yen. Excluding extraordinary items, operating income would have increased 2.2 billion yen from last year to 225.2 billion yen. And this slide shows the results by segment for the fiscal 2020 for the first quarter. At the previous earnings announcement we held in May, we were unable to reasonably predict the impact of the spread of COVID-19, so our consolidated results forecast for fiscal 20 was undetermined. Today, we are disclosing the consolidated results forecast for fiscal 20. Consolidated sales are expected to be flat year-on-year at 8,300,000,000 yen, and operating income is expected to decrease 225.5 billion yen to 620 billion yen. Income before income taxes is expected to be 685 billion yen, and net income attributable to Sony's stockholders is expected to be 510 billion yen. Our forecast for operating cash flow excluding the financial services segment is 550 billion yen. Our current forecast for three-year cumulative operating cash flow excluding the financial services is approximately 2.1 trillion yen. We plan to issue 25 yen per share as an interim dividend this fiscal year compared to 20 yen per share in the previous fiscal year. We have yet to determine how much the annual dividend amount will be this year, but our policy is to increase dividends in a steady manner over the long term. The fiscal 20 forecast for each of our segments are shown on this slide. I will explain the details when I talk about each segment after this, but I first like to explain the operating loss in corporate and elimination. In the previous fiscal year, we recorded 31.5 billion yen in extraordinary gains, while this fiscal year, we expect to increase expenses for mid- to long-term growth initiatives and societal contributions, such as investments across the Sony Group to explore and develop new businesses, including artificial intelligence and robotics, as well as contributions to the Global Relief Fund for COVID-19. The fiscal 20 forecast includes an expectation that we will incur 25 billion yen in restructuring costs across the Sony Group. In addition to continuing efforts to reducing costs, we are taking action to adapt quickly to changes in the operating environment brought on by the spread of COVID-19. I will now explain the situation in each of our business segments. First is the GNNS segment. The first quarter fiscal 2020 sales increased 32% year-on-year to 606.1 billion yen, and operating income increased 50.2 billion yen to 124 billion yen. Sales for the fiscal year are expected to increase 26% compared to fiscal 2019 to 2,500 billion yen, mainly due to a significant increase in game software and hardware sales. operating income is expected to be 240 video name flat compared with fiscal 19 because the benefit of the increase in sales and an increase in profit from playstation plus are expected to be offset primarily by an increase in cost related to introduction of playstation 5. hardware software and networks network services all benefited in the current quarter from the positive impact of stay-at-home demand resulting from the spread of the virus. In the software space, First-party title The Last of Us Part II was a huge hit, and non-first-party titles, including free-to-play titles, contributed significantly. Ghost of Tsushima, which we released on July 17, sold through 2.4 million units in the first three days since launch, making it the fastest-selling in-house first-party new game software IP for the PlayStation 4. In the network services area, PS Plus subscribers have reached about 45 million as of the end of June, and at a time when the communication network environment was under pressure, the PlayStation Network did not falter or experience any other issues and is continuing to deliver high-quality entertainment experiences. We aim to continue to enhance and expand user engagement as we approach the launch of PS5 in the 2020 holiday season.

Next is the music segment. Fiscal 2020 Q1 sales decreased 12% year-on-year to 177.1 billion yen, and operating income decreased 3.4 billion yen to 34.9 billion yen. For full year, sales are expected to decrease 7% compared to fiscal 2019 to 790 billion yen, and operating income is expected to decrease 12.3 billion yen to 130 billion yen. In the recorded music space, revenue in most categories, including from package media and advertising-supported streaming services, is being negatively impacted by the spread of COVID-19. Overall, streaming revenue only grew 6% year-on-year on a U.S. dollar basis, during the quarter, but audio streaming revenue, of which paid streaming accounts for a large portion, grew 17%. In the music publishing space, revenue from all areas except for streaming, such as music licensing from movies and television, is being significantly negatively impacted by the spread of COVID-19. And in the visual media platform space, revenue is being significantly impacted due to a variety of factors, such as decrease in physical media production and the postponement and cancellation of live events, primarily in Japan. On the other hand, we are beginning to have success in initiatives expected to contribute to financial performance going forward, such as the launch of StageCrowd, a paid live video distribution service that serves as a one-stop shop for ticket sales, merchandise sales, and stage construction, and the strong sales of the mobile game app Disney Twisted Wonderland. Next is pictures. Fiscal 20 quarter 1 sales decreased 6% year-on-year to 175.1 billion yen, primarily due to a decrease in box office revenue in motion pictures and a decrease in advertising revenue in media networks, partially offset by an increase in license revenue in television productions. Operating income increased ¥24.4 billion year on year to ¥24.7 billion due to a significant decrease in marketing expenses in motion pictures. Primarily due to decrease in theatrical releases resulting from the spread of COVID-19, we expect fiscal 20 sales to decrease 25% compared to fiscal 19 to 760 billion yen. We expect operating income to be 41 billion yen, a decrease of 27.2 billion yen compared to last year, which benefited from the contribution of hit titles. Although we have resumed filming in some countries, the severe environment in motion pictures and television productions is continuing. If we can restart production, we think we can recover our position in the television production area relatively quickly because demand for content from digital distribution services is extremely high, and we think we can leverage our advantage as a major independent studio. As for theatrical, theaters are either closed or admittance is limited, and we expect the release calendar to be very crowded when they do reopen. Since motion pictures generate profit over multiple years, starting with theatrical releases, the impact on our financial results of not being able to release them is expected to last two to three years. On the other hand, digital sales of products we have released theatrically in the past are strong. For Sony, the importance of theatrical releases is not expected to change going forward. But in order to maximize the long-term value of our product, we will select the optimal distribution channel for our product based on the nature, scale, and timing of the product. Next is the EPNS segment. For this quarter, the sales decreased 31% year-on-year to 331.8 billion yen, primarily due to a decrease in unit sales of digital cameras and TVs. Operating income decreased a significant 34.2 billion yen year-on-year, and a 9.1 billion yen operating loss was recorded due to the impact of the decrease in sales despite a reduction in operating costs across the entire segment. For the full year, sales are expected to decrease 6% to 1,870,000,000 yen, and operating income is expected to decrease 27.3 billion yen compared to fiscal 2019 to 60 billion yen. Mobile communications recorded 11 billion yen in operating income during the quarter, and we expect it to generate a profit in the full fiscal year. The EPNS segment was the segment which was impacted by the spread of COVID-19 earlier and more significantly than any other segment, but the supply chain has almost fully recovered, and although progress varies depending on the product category and region, customer demand is beginning to recover as well. We are preparing for potential second and third waves of COVID-19 by transforming the structure of our business into a more resilient one, through an overhaul of our operations and further streamlining, as well as enhancement of our e-commerce distribution channels. This segment, which will inherit the Sony Corporation trade name on April 1, 2021, is further accelerating its efforts to unify the management of the business under its umbrella and is promoting the evolution of the business by deploying products and services that enable reality, real-time, and remote activity through our audio, video, and communications technologies.