Sony Corporation (SNE)
Q4 2008 Earnings Call Transcript
May 14, 2009 9:30 a.m. ET

Executives

Sam Levenson – Senior Vice President, Investor Relations
Nobuyuki Oneda – Executive Vice President and Chief Financial Officer
Robert Wiesenthal – Executive VP and CFO, Sony Corporation of America
Gen Tsuchikawa – Senior General Manager, Investor Relations

Analysts

Jason Mauricio – Arete Research
Daniel Ernst - Hudson Square Research
Shannon Cross - Cross Research
Daniel Malkoun (ph) - Moore Capital Management
Luke Moosan (ph) - Credit Alcacoa Asset Management
Arvind Bhatia - Sterne, Agee & Leach
Richard Kay (ph) - Cross Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Sony Corporation financial results announcement for the fiscal year ended March 31, 2009 conference call. My name is Dan and I''ll be your coordinator for today. (Operator Instructions) At this time all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. To enter the question queue at any time please press “*1”. If at any time during the call you require audio assistance please “*0” and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today''s call, Mr. Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America. Please proceed, sir.

Sam Levenson – Senior Vice President of Investor Relations

Thank you very much for that introduction, Dan. Thank you all for joining us today, May 14, 2009 for the discussion of Sony''s fiscal year results. I''m Sam Levenson, Senior Vice President, Investor Relations at Sony Corporation of America, and with me on the conference call here in Tokyo tonight is Nobuyuki Oneda, Corporate Executive Officer, EVP and CFO of Sony Corporation, Robert Wiesenthal, Group Executive, Corporate Development and M&A for Sony Corporation and EVP and CFO, Sony Corporation of America, and Gen Tsuhikawa, Senior General Manager of the Investor Relations Division. Thank you all very much for joining us.

Please be aware that statements made during the following remarks and Q&A session with respect to Sony''s current plans, estimates, strategies, press release and other statements that are not historical facts are forward-looking statements about the future performance of Sony. These statements are based on management''s assumptions in light of the information currently available to it and therefore you should not place undue reliance on them. Sony cautions you that a number of important factors could cause actual results to differ materially from those discussed in the forward-looking statements. For additional information as to risks and uncertainties as well as other factors that could cause actual results to differ, please refer to today''s press release, which can be accessed by visiting www.sony.net/ir. With that, I''m now going to turn to today''s announcement.

Consolidated sales for the fiscal year decreased 13% year-on-year to 7.730 trillion yen. 85% of the decrease can be attributed to exchange rates shifts and, on a local currency basis, the decrease in sales was 2%. Operating loss of 227.8 billion yen was recorded, a deterioration of 703.1 billion yen year-on-year. There was a 126 billion yen impact from lower results of equity affiliates, including Sony Ericsson, and an approximately 28 billion yen increase in restructuring charges year-over-year. Excluding the impact of equity affiliates and restructuring charges, our operating loss on an adjusted basis was 127.3 billion yen, a decrease of 549 billion yen year-on-year. Reasons for the 549 billion yen deterioration include approximately 279 billion yen from the appreciation of the yen, approximately 191 billion yen from a decrease in sales and deterioration of the cost of sales ratio in the Electronics segment, and approximately 54 billion yen from an expansion and loss in the Financial Services segment brought on by the significant decline in the Japanese stock market.

Non-operating income decreased 43% to 52.8 billion yen although net foreign exchange gain increased significantly year-on-year and 81 billion yen gain on change in ownership interest in subsidiaries and investees was recorded in the prior fiscal year as a result of the lifting of Sony Financial Holdings. Due to all these factors, loss before income taxes for the year was 175.0 billion yen compared to income before income taxes of 567.1 billion yen in the prior fiscal year.

With respect to income taxes, Sony recorded an income tax benefit amounting to 72.7 billion yen. This was mainly due to the recording of a loss before income taxes during the fiscal year and the reversal of 55.5 billion yen in deferred tax liabilities on undistributed earnings of foreign subsidiaries and affiliates made possible by the introduction of a measure in Japan to treat the dividends for overseas subsidiaries as non-taxable income. However, mainly due to the reversal of certain deferred tax assets for foreign tax credit at Sony Corporation and an increase in the valuation allowances recorded on deferred tax assets for net operating loss carry forwards in certain subsidiaries, the effective tax rate was 42%. As a result of these factors, net loss was 98.9 billion yen compared with net income of 369.4 billion yen in the prior fiscal year.

Next I''d like to briefly explain the results on a segment basis, first, Electronics. Sales in the Electronics segment decreased 17% year-on-year to 5.488 trillion yen. On a local currency basis sales decreased 6%. This decrease was primarily due to the global downturn in the economy in the second half of the fiscal year. On a product category basis, sales of LCD TVs increased due to an increase in unit sales, but sales of video cameras, compact digital cameras and PCs decreased significantly. The fact that we''ve completely exited the rear projection LCD TV business and the CRT TV business, the sales of which were contained in the prior fiscal year, contributed to the decrease in sales.

An operating loss of 168 billion yen was recorded in the Electronics segment compared to an operating profit of 441.8 billion yen in the prior fiscal year. The largest loss making product category was LCD TVs. The largest profit generating product categories were, in order of magnitude, video cameras, system LSI, and compact digital cameras. Operating income decreased because of unfavorable exchange rates, a deterioration in net income of affiliated companies, primarily Sony Ericsson, a deterioration in the cost of sales ratio resulting from price declines on LCD TVs, PCs and other products, decreased sales and an increase in SG&A.

I''ll now discuss the change in operating income on a product category basis. The categories which had the largest decrease in profit were compact digital cameras, PCs, LCD TVs, and video cameras. Price declines, unfavorable exchange rates and a slowdown in market growth caused sales of compact digital cameras to decline in all regions. While unit sales of PCs and LCD TVs increased, operating income decreased due to the impact of price declines, unfavorable exchange rates and other factors. Operating income of video cameras decreased mainly due to decreased unit sales in all regions, price declines and unfavorable exchange rates. Looking at the TV business, in the first half of the fiscal year sales in the TV business increased and loss decreased due to a significant increase in unit sales, but from the middle of September the rapid deterioration in the economic environment, intensification of price competition and the impact of unfavorable exchange rates caused a 7% decrease year-on-year in full fiscal year sales to 1.274 trillion yen and a deterioration in profitability excluding restructuring charges of 62 billion yen, resulting in a 127 billion yen loss for the fiscal year. Full year unit sales of LCD TVs increased 43% year-on-year or 4.6 million units to 15.2 million units, achieving the unit sales goal we had set for ourselves. Inventory in Electronics at the end of March was 629 billion yen, a significant decrease of 24% compared to the same time last year. We adjusted production in nearly every product category as a result of the downturn in the market in the middle of September.

Next, Sony Ericsson, Sony Ericsson sales decreased 19% year-on-year primarily due to lower unit sales as a result of the global economic slowdown. Loss before taxes of 633 million euro was recorded mainly due to the lower unit sales, the less favorable product mix, pricing pressure, unfavorable exchange rates and the recording of restructuring expenses. Equity net loss recorded by Sony for the fiscal year was 30.3 billion yen compared to equity net income of 79.5 billion yen during the prior fiscal year.

Next, the Game segment, sales in the Game segment decreased 18% year-on-year or 8% on a local currency basis. Of the 231.1 billion yen decrease, 132.3 billion yen was from exchange rates. Approximately 75% of sales came from hardware and accessories and the rest was software. Looking at hardware, overall hardware sales decreased due to unfavorable exchange rates and a year-on-year decrease in unit sales of PS2. This decrease was partially offset by an increase in unit sales of PS3 and PSP. Despite the severe market environment, PS3 unit sales reached our original target of 10 million by offering a comprehensive value to the consumer through introduction of the 80 gigabyte model and enhancement of the software lineup. Network services for the PS3 have also expanded, contributing greatly to the expansion of the PlayStation Network user base.

Unit sales of PSP trended well in the first half of the fiscal year, but due to the slowdown in the economy unfortunately did not meet our goal. While the 14.11 million units sold during the year were less than our original target of 15 million units, they were higher than the previous fiscal year. Sales of the PS2, which has entered its 10th year in the market, have passed the peak, but are still going strong in places like the Middle East and certain parts of Asia. Unit sales of PS2 decreased approximately 5.8 million units to 7.91 million units for the fiscal year. Looking at software, overall software sales decreased due to unfavorable exchange rates and a decrease in sales of PS2 software, although sales of PS3 software increased.