Categories Consumer, Earnings Call Transcripts

Sony Corporation (SNE) Q1 FY20 Earnings Call Transcript

SNE Earnings Call - Final Transcript

Sony Corporation (NYSE: SNE) Q1 FY20 earnings call dated Aug. 04, 2020

Corporate Participants:

Masaru Kato — Corporate Communications Department

Hiroki Totoki — Executive Deputy President and Chief Financial Officer

Sadahiko Hayakawa — General Manager, Investor Relations

Noami Matsuoka — Corporate Planning and Control, Finance and IR

Analysts:

Inomata — NHK — Analyst

Kosuke Shimizu — Nikkei Newspaper — Analyst

Takahashi — Toyo Keizai — Analyst

Jada Nagumo — Nikkei Asian Review — Analyst

Nishita — — Analyst

Junya Ayada — JPMorgan — Analyst

Mika Nishimura — Credit Suisse — Analyst

Masahiro Ono — Morgan Stanley — Analyst

Yasuo Nakane — Mizuho Securities — Analyst

Ryosuke Katsura — SMBC Nikko Securities — Analyst

Presentation:

Masaru Kato — Corporate Communications Department

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 FY 2020 Q1 and the forecast for FY 2020, and then have a question-and-answer session. It should last approximately 70 minutes.

Totoki-san, please?

Hiroki Totoki — Executive Deputy President and Chief Financial Officer

Today, I would like to begin by addressing the operating environment surrounding Sony. The spread of the new coronavirus disease and 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 things that are fundamentally changing society and economy, as well as people’s values and lifestyles in a variety of ways. And these changes will not be limited to short-term and they are difficult to predict.

There is 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 of 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 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 JPY1,968.9 billion and consolidated operating income slightly decreased to JPY228.4 billion from the same quarter of the previous year, which is a record high.

Income before income taxes increased JPY88.9 billion to JPY319.9 billion, partially due to an improvement in unrealized gains on securities investments and other income and expenses.

Net income attributable to Sony Corporation stockholders for the first quarter increased JPY81.1 billion to JPY233.3 billion. Excluding extraordinary items, operating income would have been — would have increased JPY2.2 billion from last year to JPY225.2 billion.

And this slide shows the results by segment for the fiscal ’20 for the first quarter. After 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 JPY8,300 billion and operating income is expected to increase JPY225.5 billion to JPY620 billion. Income before income taxes is expected to be JPY685 billion and net income attributable to Sony stockholders is expected to be JPY510 billion. Our forecast for operating cash flow excluding Financial Services segment is JPY550 billion. Our current forecast for three-year cumulative operating cash flow excluding the Financial Services is approximately JPY2.1 trillion.

We plan to issue JPY25 per share as an interim dividend this fiscal year, compared to JPY20 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’d first like to explain the operating loss in corporate and elimination.

In the previous fiscal year, we recorded JPY31.5 billion in extraordinary gains. Well, this year, this fiscal year, we expect to increase expenses for mid- to- long-term growth initiatives and societal contributions such as investment across the Sony Group to explore and develop new businesses, including artificial intelligence and robotics as well as contribution to the global relief fund for COVID-19. The fiscal ’20 forecast includes an expectation that we will incur JPY25 billion in restructuring costs across the Sony Group.

In addition to continuing our efforts to reducing cost, 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 G&NS segment. The first quarter fiscal ’20 sales increased 32% year-on-year to JPY606.1 billion and operating income increased JPY50.2 billion to JPY124 billion. Sales for the fiscal year are expected to increase 26% compared to fiscal ’19 to JPY2,500 billion mainly due to a significant increase in game software and hardware sales.

Operating income is expected to be JPY240 billion, flat compared to 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 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, the 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 gaming software IP for the PlayStation 4.

In the network services, PS Plus subscribers have reached about 45 million as of the end of June. And at time when communication network environment was under pressure, the PlayStation network did not falter or experienced 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 PS 5 in the 2020 holiday season.

Next is the Music Segment. Fiscal ’20 quarter-one sales decreased 12% year-on-year to JPY177.1 billion and operating income decreased JPY3.4 billion to JPY34.9 billion. For full year, sales are expected to decrease 7% compared to fiscal ’19 to JPY790 billion and operating income is expected to decrease JPY12.3 billion to JPY130 billion.

In the Recorded Music space, revenue in most categories including from packaged 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 the US dollar basis during the quarter. But audio streaming revenue, of which page 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’re 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 a strong sales of the mobile game app Disney Twisted-Wonderland.

Next is Pictures. Fiscal ’20 quarter-one sales decreased 6% year-on-year to JPY175.1 billion primarily due to a decrease in box office revenue in Motion Pictures, and a decrease in advertising revenue in Media Networks, but partially offset by an increase in license revenue and television productions. Operating income increased JPY24.4 billion year-on-year to JPY24.7 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 JPY760 billion. We expect operating income to be JPY41 billion, a decrease of JPY27.2 billion 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 re-open. 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 EP&S segment. For this quarter, the sales decreased 31% year-on-year to JPY331.8 billion, primarily due to a decrease in unit sales of digital cameras and TVs. Operating income decreased a significant JPY34.2 billion year-on-year and a JPY9.1 billion operating loss was recorded due to the impact of the decrease in sales despite a reduction in operating cost across the entire segment.

For full year, sales are expected to decrease 6% to JPY1,870 billion and operating income is expected to decrease JPY27.3 billion compared to fiscal ’19 to JPY60 billion. Mobile Communications recorded JPY11 billion in operating income during the quarter and we expect to generate a profit in the full fiscal year.

The EP&S 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 other progress varies depending on the product category and region. Customer demand is beginning to recover as well.

Also Read:  Qudian Inc. (QD) Q2 2020 Earnings Call Transcript

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.

Next is I&SS, Image and Sensing Solutions. Fiscal ’20 quarter-one sales decreased 11% year-on-year to JPY206.2 billion and operating income decreased JPY24.1 billion to JPY25.4 billion. Fiscal ’20 sales are expected to decrease 7% to JPY1 trillion and operating income is expected to decrease JPY105.6 billion to JPY130 billion.

Now, I will explain the state of our Sensor business. Fiscal ’20 sales of image sensors for mobile products are expected to decrease compared to fiscal ’19, primarily due to a decrease in end-user product sales by one of our major customers, a deceleration of the smartphone market and a shift to mid-range and moderately priced models in that market resulting from the impact of the spread of COVID-19 and significant reduction in component and finished goods inventory by Chinese customer.

Profitability is expected to be impacted by a decrease in gross margins and an increase in depreciation and manufacturing-related costs associated with production equipment we purchased in the previous fiscal year when we expected growth as well as higher research and development costs.

We do not expect to grow sales of mobile sensing products compared to fiscal ’19 because adoption by smartphone makers has been slow and sales of flagship models, which already use our products, have decreased due to the shift in market conditions.

Sales of image sensors to AV have also decreased due to the contraction of the sensor market for digital cameras resulting from the impact of the spread of COVID-19. We expect the market to contract in one year as much as we had previously expected it would contract over the next approximately three years.

In order to respond quickly to the changes in the environment, especially for image sensors for mobile products, we will modify our strategy mainly in the areas of investment, research and development and customer base.

We have already significantly reduced investment in capacity to supply-demand in the fiscal year ending March 31, 2022 because we can supply that demand by stockpiling strategic inventory through utilization of our excess production capacity this fiscal year.

The forecast for cumulative capital expenditures for the three fiscal years began April 1st 2018, which we explained in the past, has been reduced JPY50 billion from approximately JPY700 billion to approximately JPY650 billion and we are carefully reviewing the timing of planned capital expenditures in fiscal ’21 and beyond.

We will review the projects and priorities for research and development spending as well to ensure that they fit with the recent trends in the smartphone market and changes in our major customers’ needs. However, in order to maintain and increase our future technological competitive advantage, we will not drastically reduce the number of projects or the budget.

We intend to more proactively expand and diversify our customer base, which we’re cautious to do previously due to production capacity constraints. Over the mid- to- long-term, we will work to expand the applications for image sensors and the market overall by introducing edge sensing products that use sensors equipped with AI processing functionality and we will steadfastly work to grow this business.

We plan to complete within approximately one year an enhancement of our business model to adapt to the recent changes in the environment and we expect to return the business to the profit growth from the second half of fiscal ’21.

Last is the Financial Services segment. Fiscal ’20 quarter-one Financial Services revenue increased 33% year-on-year to JPY446.8 billion, primarily due to a significant increase in net gains on variable insurance investments in the separate account at Sony Life. Operating income increased JPY1.1 billion year-on-year to JPY47.2 billion.

Financial Services revenue in fiscal ’20 is expected to increase 7% compared to fiscal ’19 to JPY1,400 billion and operating income is expected to increase JPY12.4 billion to JPY142 billion.

On July 13, we completed our public tender offer for the shares of Sony Financial Holdings, SFH, not held by Sony. The shares of SFH will be listed on August 31 and SFH will become a wholly owned subsidiary of Sony on September 2. The Financial Services business managed by SFH has a stable, high level of profit and is a core business of Sony that plays a role in our long-term growth strategy. By eliminating the listed subsidiary relationship between SFH and Sony, we intend to increase the speed of decision-making and enhance management optionality and further improve the value of the business.

In addition, by capturing the minority interest and realizing tax benefits, we expect to increase Sony’s consolidated net income by approximately JPY40 billion to JPY50 billion per year going forward. And that is expected to contribute to increasing earnings per share, EPS and return on equity, ROE. In order to deepen understanding of our Financial Services business, we are considering what key performance metrics to disclose.

Now, I will briefly discuss the minority investments we made in Bilibili and Epic Games this fiscal year. At a time when digitization of the entertainment industry is accelerating, we plan to leverage these investments to expand the customer touch-points for our diverse array of content as well as create new digital content and ways of enjoying that content that go beyond our business segments in partnership with these companies. Going forward, we intend to proactively pursue strategic investment opportunities to explore future growth.

Next, I will explain our enhanced segment disclosure. Historically, Sony has proactively enhanced disclosure of information about our businesses. And from this fiscal year, we have decided to disclose on a quarterly basis the information shown here and the G&NS and Music segments, which are of particular interest to the capital markets. At the same time, we have terminated disclosure of certain items in the EP&S segment. For more details, please see our supplemental information.

Today, we announced the establishment of a facility to repurchase up to JPY100 billion in shares of Sony during this fiscal year. Like in the past, we view share repurchases as a strategic investment and we’ll decide to execute them based upon a comprehensive assessment of a variety of factors, including the availability of other investment opportunities, our financial condition and price at which our shares are trading. We aim to maintain strict financial discipline and a healthy balance sheet going forward as we optimize our capital efficiency with a focus on EPS and ROE. We also plan to maintain sufficient liquidity at a time when the recent operating environment is uncertain, and we think it is important not to miss any growth opportunities.

In conclusion, I will show our capital allocation. This concludes my remarks.

Questions and Answers:

Masaru Kato — Corporate Communications Department

That was Totoki, Executive Deputy President and CFO. And from about 4:25, we will be conducting Q&A. The first 20 minutes will be dedicated to questions from the media and the following 20 minutes will be questions from the sell-side analysts. Those who have registered in advance to ask questions from the media and the sell-side analysts, please connect to the designated phone number in advance and those of you who have not registered in advance, you will be able to listen to the Q&A via webcast. Kindly wait a little while longer before we resume. We will commence the questions from the media shortly. Kindly wait a little while longer.

Thank you for your patience. We will now start the Q&A session with the media. The respondents are Executive Deputy President and CFO, Hiroki Totoki; Senior Vice President in-charge of Corporate Planning and Control, Finance and IR, Noami Matsuoka; VP, Senior General Manager, Corporate Communications Department Mami Imada.

[Operator Instructions] So, I’d like to take the first question. Inomata-san from NHK [Phonetic]. Inomata-san, please go ahead. Ask your question.

Inomata — NHK — Analyst

Thank you. Inomata, is my name. Am I coming through?

Hiroki Totoki — Executive Deputy President and Chief Financial Officer

Yes, we can hear you.

Inomata — NHK — Analyst

Thank you. Two questions. Firstly, the full year forecast that you’re announcing this time, the store recovery will start from the coronavirus situation in the second half, is that your assumption? Can you talk to us more about this? And also, the second question is, you’re preparing for the launch of PlayStation 5, but will you be in time for launch? Have you been affected by the situation?

Hiroki Totoki — Executive Deputy President and Chief Financial Officer

Thank you for the question. Firstly, concerning the full-year forecast, the impact of the coronavirus assumptions, what are they was the question. The earnings announcement we made in May, we used a general assumption for the whole company and did some simulation exercise. At this time, all the business segments have come up with their own figures and assumptions because businesses are different, the geographic areas are different, the nature of business is different this time, so we don’t have a unified assumption for the Group. And they are probably the most likely scenario that can be contemplated at this time.

And your second question about PS-5 preparations, and is there any impact on the production? As things stand now toward the holiday season, production is proceeding smoothly. And regard to the development of the game software, the first-party studio as well as third parties achieved their business. As again as things stand now, there are no major issues or problems that are bad at this point in time. Thank you.

Masaru Kato — Corporate Communications Department

Thank you. I’d like to move on to the next question from Nikkei, Shimizu-san, please.

Kosuke Shimizu — Nikkei Newspaper — Analyst

Yes, I am Shimizu from Nikkei Newspaper. I have two questions regarding image sensors. There is a trade friction between U.S. and China, so there is restriction on Huawei. So, you said that the sensor forecast is going to come down in terms of sales. So, what is the impact of this bilateral relationship?

And secondly, as your future policy for Huawei, the risk for Huawei, I think it’s going to remain. But are you going to make any changes to your partners? Do you have any policies regarding your partnership for supply — in the supply chain?

Hiroki Totoki — Executive Deputy President and Chief Financial Officer

Thank you for your question. For image sensor, for the full year, what is the reason for the decrease in sales? And also — and the second question is related to the supply chain. So first of all, for specific company, we refrain from making any comments. So, I do hope that you would accept and understand.

Also Read:  Usa Technologies Inc. (USAT) Q4 2020 Earnings Call Transcript

But having said that, currently the business environment surrounding us is deteriorating because of COVID-19, especially the high-end smartphone market is contracting. And that is going — shifting towards the mid- and- low-end zones, that’s a volume zone now. I think that is a change that is taking place currently.

And also, secondly, the friction between U.S. and China, there is an impact from that. So, from the risk perspective, our customer base needs to be expanded and diversified and we will continue to focus on that customer base aspect.

Kosuke Shimizu — Nikkei Newspaper — Analyst

Thank you.

Masaru Kato — Corporate Communications Department

Now, going on to the next question please. From Toyo Keizai, Takahashi-san [Phonetic]. Takahashi-san, can you ask your question.

Takahashi — Toyo Keizai — Analyst

Thank you. I am Takahashi from Toyo Keizai. So, first question about Game & Network Services, one quarter profit is JPY124 billion, which I think is quite high. And what about the contributing factors? Can you give me some details? Sales JPY600 billion. In ’19 Q3, end of the year, I think there is — are those factors, the holiday season. But compared to Q3, to what extent profit is much bigger and maybe has to do with advertising? So, what is the change is what I want to know. That’s first question.

Masaru Kato — Corporate Communications Department

If you have two questions. Can you ask the second one too?

Takahashi — Toyo Keizai — Analyst

Yes. Second question about sensors. So high-end smartphones, there is a shift to low and mid-range smartphones and that has impacted profit, you said. If it’s this year, 5G smartphones are going to increase. So, I’m wondering if high-end is going to be weaker, just the general feel, so can you explain what’s happening in a little more detail? That’s my second question. Those are my two questions.

Hiroki Totoki — Executive Deputy President and Chief Financial Officer

Thank you for those questions. So, Games, in the first quarter, the high profit and the factors behind that is I think what you are asking. Compared to the third quarter you said, the third — well, comparison with the third quarter is quite difficult.

So, compared to the year-on-year, if I may explain year-on-year, then we can say that due to COVID there is the stay-at-home demand, and for fourth quarter, new titles had an impact, so add-on and other software sales were contributing. And the first-party and third-party titles are both doing well. First-party, The Last of Us Part II, as I said before, is a big hit. And that’s with regards to Games.

About sensors, changes in the market, and how are the changes occurring? For one thing, all over the world, there is poor sense in the market, deterioration of the market, and that is impacting the sensor sales. And also, the higher priced products, well it’s — you could say shifting to the moderate — more moderate priced models overall. So, for our image sensors, especially the high-end image sensors that we sell, the high-end models are decreasing in sales. That’s impacting our business. That’s all.

Masaru Kato — Corporate Communications Department

Thank you. Next question, Nagumo-san from Nikkei Asian Review. Nagumo-san, please?

Jada Nagumo — Nikkei Asian Review — Analyst

Thank you. About image sensors, the first question is, you talked about the sales decline in the high-end models. In the industry, image sensing industry, what would you say are the long-term changes? What are the short-term changes? Can you talk to us about the difference?

And the second question also about I&SS, you will be selective of R&D topics. Can you be more concrete and specific about that?

Hiroki Totoki — Executive Deputy President and Chief Financial Officer

Thank you for the questions. The long-term versus short-term changes, requested what are our views. But currently, I think in the — whatever we see now, we don’t consider to be long-term trend because at certain time, this impact of the coronavirus will somehow be absorbed, so that the smartphone market, as a whole, is not declining all that large.

So, the transition, the shift that we’re seeing currently is only temporary we believe. But though they are temporary, for this year and for the next year, more mid- to- low-end products will sell, that’s for sure. Therefore, image sensors most optimal for that level of products would have to be our production. We have to make that switch. With that, there will be a change. Because there is a change in product mix, we have to make adjustment in our strategy and modify our production strategy.

But as far as the large trend is concerned, the phones — smartphones going larger and using multiple lenses, that will continue. The performance of the cameras required for smartphones, for video and the camera photos and the demand for the higher quality will continue. Therefore, we believe the demand should come back at sometime in the future.

Masaru Kato — Corporate Communications Department

Next question will be the last because we are running out of time. Nishita-san [Phonetic], a freelance journalist, please.

Nishita — — Analyst

Thank you. I am Nishita.

Masaru Kato — Corporate Communications Department

I can hear you.

Nishita — — Analyst

Thank you. Two questions. Regarding image sensor, once again, this year versus last year, there are increasing number of lenses, and that is favorable for Sony as it has been stated. But you said that high-end models are coming down. So, the trend for multiple lenses, is this slowing down temporarily? Or when you’re moving towards the mid- and- low-end, it’s still multiple lenses? Could you talk about that?

Second question, regarding EP&S business segment. You are in a recovery phase already, as you said. But especially, which is the genre in the market and geographical area that is having difficulties? And also, which are the product areas and the geographical areas that are doing favorably?

Hiroki Totoki — Executive Deputy President and Chief Financial Officer

Thank you. Regarding the first question, so multiple lenses is a positive for us. Well, high-end, and mid- and- low-end markets, what is the trend in terms of multiple lenses? In the mid- and- low-end markets, there is no change in the trend for increased number of lenses. They are multiple image sensors used in the mid- and- low-end models as well and that trend has not changed that much.

And for EP&S and also larger size, the trend has not changed. For EP&S, the areas that is having difficulties. Well, okay, let me talk about the area where there is a recovery already being observed. First of all, U.S., Europe and Japan — no, Japan is doing very well. So, those areas, it is in a recovery phase. And also, in Asia and Latin America, there is a slow recovery. So, emerging market is having a little bit of a struggle.

And by product, TV, because of the stay-at-home demand, I think there is a very good appetite for demand for TVs. But digital imaging is where there is a difficulty or challenge. But in May, we had a forecast at that time, but compared to that, the recovery itself is much faster. So, we have hopes for the future. That is all. Thank you.

Masaru Kato — Corporate Communications Department

Our time is now up, and therefore, we would like to close the session for Media. [Operator Instructions] And now, we will have to change the respondents and therefore we will start the analyst session at 4:50. Kindly wait a little while. We’ll start the analyst question session soon. Kindly wait a little while longer.

Sadahiko Hayakawa — General Manager, Investor Relations. Ladies

Thank you for your patience. We will now start the questions from the sell-side analysts. I will be acting as the MC. I am Hayakawa, in-charge of IR. The respondents are Executive Deputy President and CFO, Hiroki Totoki; Senior Vice President in-charge of Corporate Planning and Control Finance and IR, Naomi Matsuoka; Senior Vice President, Senior General Manager Global Accounting Division, Hirotoshi Korenaga.

[Operator Instructions] Ayada-san from JPMorgan, please.

Junya Ayada — JPMorgan — Analyst

Thank you. Ayada is my name, JPMorgan. Two questions please. Firstly, concerning games. In the first quarter, the third-party software and also micro transactions, they did very well, and for what reasons? And also, talk about the momentum. For instance, June PlayStation’s sales, and also Fortnite event, these sort of one-time events, whether the factor has pushed the results up or were there also significant stay-at-home impact as well? So, your sales were up, maybe difficult to break them down. But again, do you think that these results in the first quarter will continue with impact in the second quarter and onward?

And secondly, about — again, image sensors, Mr. Totoki earlier was talking about the second — toward the second half of next year, like to put the business back to the path for profit growth. But to the extent that you can, what will be the assumption that require for you to be able to return to the path for growth, image sensors to be more profitable? Except that the market will return with the strength of 5G and also high-end smartphone demand, do you think you will return and come back in the second half next year? Are they the requisite conditions or increasing the share and also reviewing the cost structure? Are they — in fact, that’s enough for you to be a bit more profitable next year? In other word, by making yourselves leaner, do you think you’ll be able to return to profitability, better profitability?

Hiroki Totoki — Executive Deputy President and Chief Financial Officer

Thank you for the questions. First point, concerning the first question is about the impact in the game business, the first quarter — first-party and third-party, there is a significant impact of the stay-at-home demand, and particularly, we had a good result in April. After May, it’s been more normalized, but still compared to last year and the same period last year basis, activity has been very high.

And in the first quarter, we’re lucky to have very strong first-party titles and third-party free-to-play titles also because of those events held, they are very active as well. I think those were the factors, but breaking this down, will be very difficult, but I hope you will understand.

But the image sensors, second half next year will be the time for profit growth. Yes, that would be our pursuit. But beyond second half next year, in terms of that time frame, currently especially, there is a slowdown in the high-end smartphones. But taking that long-term view, I think this trend will slow down. And another point is, currently at this point in time, mainly the Chinese customers, they have a large inventory and inventory adjustment will happen, that’s one aspect that — that’s been affecting our results this year.

Sadahiko Hayakawa — General Manager, Investor Relations. Ladies

I’d like to move onto the next question Nishimura-san from Credit Suisse, please.

Also Read:  Apogee Enterprises Inc (APOG) Q2 2021 Earnings Call Transcript

Mika Nishimura — Credit Suisse — Analyst

Thank you. I have a question — two questions regarding image sensors. For image sensor, the production capacity and the capacity factor and also the projection for second quarter, please give them. And then for this fiscal year, the operating income was decreased, but what was the impact of the capacity factor of the production facility?

Second question, in image sensing — mobile sensing, you were not able to grow as much as you expected. So, I think year-on-year, you are expecting a decrease in sales. So, is it just a delay or is it the users design is demanding you to review or revisit your plans, could you tell me about that?

Hiroki Totoki — Executive Deputy President and Chief Financial Officer

Thank you. So first of all, regarding image sensors, the capacity and the capacity factor, in the second quarter. So, the capacity for this quarter for fiscal 2020, at the end of this quarter, and that’s 133,000 per month that master price. And as of the end of second — of the second quarter 135,000 per month. So, we will gradually increase the capacity, that’s our plan.

And also, the number of wafers to be input, the first quarter, the actual figure is — the average three-months is 126,000 for mobile and also for digital camera and there were some adjustments made for production. And also, for the production for second quarter, for that, the simple average for a three-month is a 112,000, so for mobile and the digital camera I think there is going to be more production adjustment.

And then for sensing segment, the sales is expected to come down and what is the magnitude of the impact? Well, last year, actual was a little over JPY230 billion and it slumped to JPY130 billion. So generally, it’s like one-third of that is the reduction in sensors or sensing products, that’s one-third. So, a big point about that is that, as of last year, we thought that the growth can be expected. So, we made the capital investment and also we have increased our R&D expenditures, and that has been the impact. That is all.

Sadahiko Hayakawa — General Manager, Investor Relations. Ladies

Next question from Morgan Stanley, Ono-san.

Masahiro Ono — Morgan Stanley — Analyst

Thank you. Now, first question is about games. And second question is about pictures. Now games, naturally, there is the PS5 and I don’t think you’ll give us any details. But from before when you give guidance on games about PS5 price is not announced, and you give some guidance, there are a number of scenarios and the highest probability, one, the most likely would be looked at. And so, this fiscal year, in your plan towards best estimation in coming up with a range for price or for volume, quantities what kind of range do you have in your plans to the extent that you can give us a hint? I would appreciate that.

Second question about pictures, so theatrical release, there will be impacts over the next two to three years, as you mentioned. But what I want to ask you, so these are negative factors. But on the other hand, for example, the digital percentage will go up or there will be upside maybe on the TV side. So, in this segment, the risk-reward in terms of profit level in the next two to three years with the downside risk of theaters, what kind of changes do you see? For example, strategically you could raise the weight of digital and the risk-reward upside may not change that much or it will? So, if you could give me your comments on these points.

Hiroki Totoki — Executive Deputy President and Chief Financial Officer

Thank you for those questions. First of all, games, this fiscal year, the key points of our plan, I think that’s what you’re asking. And to the extent that I can talk about it, I will. That is, first quarter, very strong results. Second quarter and onwards, stay-at-home demand will settle down to an extent that’s how we view it. And also, PS5 introduction, marketing expenses, certain expenses will be incurred, that will be an assumption. But with regards to the volume and price right now, I cannot talk about that. So, you have upside and risk both sides. But at this point in time, we feel that this balance is good and we show a plan based on that.

And as for pictures, I think what you’re asking is, well, the theaters are shut down and you have that impact and then there is a possibilities of digital shifting, OTT players do have strong demand for content. So, putting that into consideration, what is the view is I think what you are asking. And that will be explained by Matsuoka-san.

Noami Matsuoka — Corporate Planning and Control, Finance and IR

So, as you say, right now, there is the impact of coronavirus, so that in terms of production and releases, there is an impact in pictures. But naturally, TV programs, well there, there is a good demand continuing and so we are an independent studio and therefore when responding to that kind of good demand, then the large movies, the release is being delayed and we believe we can catch up through the TV side, and then we will look at COVID spread situation. And in order to maximize value, see what should be the release and what should be the sales, what would be best.

So, strategically, by responding strategically, we would be able to respond to downside risk to an extent and we want to maximize value and profit by doing so.

Sadahiko Hayakawa — General Manager, Investor Relations. Ladies

Let’s proceed to next question. Nakane-san from Mizuho Securities.

Yasuo Nakane — Mizuho Securities — Analyst

Thank you. Nakane, speaking. Can you hear me?

Sadahiko Hayakawa — General Manager, Investor Relations. Ladies

Yes.

Yasuo Nakane — Mizuho Securities — Analyst

Hi. two questions about sensors. Firstly, the second half operations, Totoki-san said operation would be lower in the second quarter, because the — but you’re increasing strategic inventory. As that happens, June inventory was 200 — 2,000-strong. And what about the inventory in the second quarter? Can you give us some assumptions?

And secondly, related to Ayada-san’s question earlier, you would like to return to profitabilities second half next year, but Totoki-san said, the high-end model slowdown will stop and also inventory adjustment by Chinese customers also be over by then. So, demand will be more brighter by that time next year. Is your assumption that the capacity will not increase or the capacity will increase going forward next year? And also, about the cost, I think the cost to increase may too contain depreciation, so what are the measures for you to increase the profitability over cost?

Hiroki Totoki — Executive Deputy President and Chief Financial Officer

Two questions received, about the sensor’s second half, operations, and also inventory to the end of the year and the operation status, the end of the year. Speaking about inventory situation, firstly, in the first quarter 2,900-strong was the level of entry we had. But at the end of the year, I think, there will be a slight increase on top of this, that’s an assumption. But the level operations little bit less than 90% is the level of operation that we are assuming now. That relate to what I said earlier about increase in inventory.

And the profitability return in the second half, what are the assumptions? Is the assumption to see increase in capacity? Yes, a slight increase is within assumptions, but the timing of increasing of the capacity, I mentioned that in a speech, but we have to observe the demand situation going forward to adjust a time — at time which timing we should increase, at which timing we should operate capacity. But basically, this — I think that occupancy will increase.

Sadahiko Hayakawa — General Manager, Investor Relations. Ladies

Thank you. We have time constraints. So, the next question will be the last one. Katsura-san from SMBC Nikko Securities.

Ryosuke Katsura — SMBC Nikko Securities — Analyst

Thank you. Katsura speaking. Two questions. First one, in EP&S segment, and I’m sure the details will be given in the briefing separately. But in the presentation material, you had the unit sales volume in the forecast. And I think the impact of COVID-19 is coming down. But if you look back at first quarter compared to your expectations, how was it in reality and also going forward?

I think you have a JPY25 billion for budget, and so do you have any other comments that you can add to that? And also Slide 24, regarding capital allocation and you gave us an update, and 1 point — trillion yen or more of a strategic investment, so which one — how much have you executed so far and what is the remaining amount? If you could share the breakdown of that, the strategic investment? Thank you.

Hiroki Totoki — Executive Deputy President and Chief Financial Officer

Thank you for the question. Your first question in EP&S segment, first quarter and I’ll try to summarize that quarter. Well, there was some initial simulation that we have done in May. So, it’s difficult to be accurate in making comparison, but it was much less predictable in May. So, based on that simulation in May, actual performance of first quarter was much better, especially for TV because of the demand for stay-at-home. Actually, the recovery pace was much better than we expected. So basically, the online sales was increasing, and also once the stores were opened, the merchandise would be sold.

So, for the first quarter, it was actually difficult to sell. We were short of inventory. So, it was actually very good. But for digital allocation, most recently, there is a good recovery. So, I think if you compare to Lehman Brothers situation, compared to that time, at least, the situation is very different and I think the recovery is much faster. That is my impression. However, regarding restructuring, we want to strengthen our financial status. So, regardless of how we are going to prioritize ups and downs, I think we want to be resilient in what we do.

And also, regarding the capital allocation that you were asking about, so more than JPY1.4 trillion. The ones that we have executed is EMI wholly owned subsidiary and also SFH becoming also wholly owned subsidiary, that was JPY400 billion. And then also in this interim period, we have already repurchased JPY300 billion of our own shares share buyback.

So, just generally speaking, so, this year JPY300 billion is what we’re expecting, but it depends on what opportunities are we able to capture, so we are flexible about exactly what we do. But today, we have made an announcement about this repurchase operation that will be maximum by JPY100 billion.

Operator

[Operator Closing Remarks]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2020, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

COVID-19 drove retailers up the digital path years ahead than anticipated

Earlier we looked into how, during the COVID-19 pandemic, retailers saw changing trends in terms of their assortments and how the acceleration of online shopping led many of them to

Snowflake (SNOW) creates a record as the most successful software IPO ever; stock more than doubles

Data is at the heart of business innovation. Recognizing this trend, companies are seeking ways to transform their businesses by capturing, analyzing, and mobilizing data. The public cloud is becoming

Adobe (ADBE) sees new tailwinds as virtual shift gathers steam

The second half has been highly rewarding for design software maker Adobe Inc. (NASDAQ: ADBE) amid stable demand for digital content solutions. The company has remained unaffected by the virus-related

Top