Welcome to the Sony Corporation conference call for overseas investors for the fiscal year ended March 31, 2016. My name is John, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded..

And I would now turn the call over to your host, Justin Hill. .

Good morning, good afternoon, and good evening. Thank you all for joining us today April 28, 2016, for a discussion of Sony's results for the fiscal year ended March 31, 2016. We hope you enjoyed our hold music, songs from the Arc of Life by Yo-Yo Ma and Kathryn Stott. I am Justin Hill, General Manager of Investor Relations at Sony Corporation.

Tonight, here in Tokyo, I am joined by Kenichiro Yoshida, Executive Deputy President and CFO of Sony Corporation; Kazuhiko Takeda, Corporate Executive, Corporate Planning & Control and Accounting; Atsuko Murakami, Vice President, Senior General Manager, Finance Department; and Steven Kober, Executive Vice President and CFO, Sony Corporation of America.

In just a few moments, Yoshida-san will make some short remarks. Then Takeda-san will provide you an explanation of our results and forecast. After that, we will take your questions..

Please be aware that during the following remarks and Q&A, statements made 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.

Let me remind you that a webcast replay of the investor meeting, which we held earlier today, along with the slides presented at that meeting and our detailed earnings release, are available on our website for your access.

From this quarter, we have also made available on the website a written translation of the speech Yoshida-san made in Japanese at that investor meeting earlier today. .

I will now turn things over to Yoshida-san. .

first is the impact of the earthquakes in Kumamoto; second is the reason why we have not issued forecast for our 5 Electronics segments today; third is a summary of our corporate results for the fiscal year ended March 31, 2016. After that, Takeda-san explains the results and forecast for our business segment..

First, let me say that we extend our deepest sympathies to all those affected by the earthquakes in Kumamoto and Oita; also, some of Sony's employees and their families living in evacuation centers. We have confirmed the safety of everyone. Sony has 4 semiconductor manufacturing facilities in Kyusyu.

Immediately following the earthquakes, we temporarily suspended operations at 3 of them, but we quickly restarted production at 2 of the 3. .

Kumamoto Technology Center or Kumamoto TEC. Kumamoto TEC is extremely close to the epicenter of the largest -- the earthquake that happened on April 16. It is a primary manufacturing site for image sensors for digital cameras and security cameras as well as for the micro displays that go into projectors.

Kumamoto TEC has a bilayer structure with clean rooms in each layer. The clean rooms in the lower layer contain our wafer processing equipment, and the clean rooms in the upper layer contain our testing equipment, camera module production equipment and other equipment.

The clean rooms in the lower layer and the production equipment inside these clean rooms have not obtained significant damage. Since yesterday, we have begun to start up the equipment in those clean rooms, and we expect to resume production in these rooms around the end of May.

On the other hand, the upper layer clean rooms did sustain damage, and we are not able to say yet when we will restart operations. Damage to Kumamoto TEC's finished goods inventory is limited, and we are currently inspecting the status of its work-in-progress inventory. .

In the Devices segment, we expect there to be direct physical damage to Kumamoto TEC, and we expect to incur expenses primarily for recovery and reinforcement work.

In addition, there is a possibility that large opportunity losses will be incurred, mainly in the Devices and Imaging Products & Solutions segments due to suspension of production at Kumamoto for a certain period of time.

Further, there is a possibility that results of the Mobile Communications, Game & Network Services and Home Entertainment & Sound segments will be adversely affected by the suspension of production at Kumamoto TEC and by the possibility that the supply of components might be interrupted due to the fact that certain vendors are located in the earthquake zone.

Since this is the case, we have decided to postpone today's announcement of the forecast for the 5 Electronics segments and full consolidated results..

The last point I want to make about the earthquake pertains to insurance.

Although Sony does have earthquake insurance that covers such things as direct physical damage and opportunity losses from lost sales, the maximum amount of compensation we can receive after our deductible is JPY 20 billion, and there is a possibility that this amount will not cover the full amount of losses from the earthquakes. .

Before turning to our results for the fiscal year ended March 31, 2016, I want to emphasize the fact that we are working to assess as quickly as possible the impact of the earthquake on Kumamoto TEC and our suppliers while we are simultaneously working to minimize the negative impact on the business.

We are currently creating a schedule to assess the impact on our results. And as of now, we believe it will be possible to inform you of our forecast for the 5 Electronics segments and consolidated results around May 24..

Turning to the actual results for the fiscal year ended March 31, 2016. I am pleased to report that the recorded JPY 294.2 billion in consolidated operating income, which was 4.2x as high as the previous fiscal year. Net income attributable to Sony Corporation's stockholders was JPY 147.8 billion.

This is the first time that we recorded net income in 3 years since the fiscal year ended March 31, 2013, when we recorded JPY 41.5 billion due to approximately JPY 280 billion in onetime gain. And if we exclude that year, it is the first time we recorded net income in 8 years.

This is also the first time in 5 years that we recorded operating income for the total of 5 Electronics segments..

I'll now ask Takeda-san to explain the results and forecast for each segment. .

Thank you, Yoshida-san. First is the Mobile Communications segment. During fiscal year '15, segment sales decreased 20% year-on-year, and operating loss was JPY 61.4 billion. Compared to the previous fiscal year, operating loss decreased JPY 156.1 billion. .

Our restructuring efforts have exceeded the target we initially set, and we were able to reduce our operating expenses in fiscal year '15 by approximately JPY 80 billion compared with fiscal year '14..

Headcount at Sony Mobile has decreased from approximately 7,100 people as of October 2014 to approximately 4,500 people as of April 2016..

Looking forward to fiscal year '16, our target is to record a profit. A portion of the image sensors used in our smartphones and a portion of camera modules used in our smartphones are made at Kumamoto TEC. And there is a possibility that the status of these production lines might have an adverse impact on the results of this business..

Next is the Game & Network Services segment. Both sales and operating income of the segment significantly increased year-on-year due to the strong momentum of PS4. Operating income was JPY 88.7 billion. Also, network sales increased by more than 50% year-on-year..

In fiscal year '16, we expect the strong momentum of PS4 to continue. However, due to the impact of the earthquakes, there is a possibility that the supply of components from certain vendors might be affected.

But even with that impact, at this point in time, we think that in fiscal year '16, we can exceed the 17.7 million units of PS4 hardware that we sold in the previous fiscal year. Currently, we are considering a variety of ways to minimize the impact of the earthquake on the results of this business..

Next is the Imaging Products & Solutions segment. In fiscal year '15, sales decreased, but operating income increased year-on-year to JPY 72.1 billion. We succeeded in shifting to high value-added models at the time when the camera market shrank. Operating income increased significantly by JPY 30.4 billion year-on-year. .

Relatively, many of the products in this segment have been adversely impacted by the suspension of production of components at Kumamoto TEC. As a result, we were -- we are unable to provide a forecast for this segment at this time..

Next is the Home Entertainment & Sound segment. In fiscal year '15, sales decreased, but operating income increased year-on-year to JPY 50.6 billion. The operating income of the television business, which is included in this segment, was JPY 25.8 billion for the fiscal year.

The strong results of this segment are attributable to a shift to high-value added models and improvements in operations, including at sales companies, made over the last several years. .

As we look forward to fiscal year '16, there is a possibility that the supply of components from vendors for certain model of Blu-ray recorders will be affected due to the impact of the earthquakes. We expect the impact of the earthquakes on the production and sales of TVs to be negligible..

Next is Devices segment. An operating loss of JPY 28.6 billion was recorded in fiscal year '15, a significant deterioration of JPY 117.6 billion compared to the previous fiscal year. As we announced last week, we recorded JPY 59.6 billion impairment charge against fixed assets in the camera module business in the fourth quarter. .

We first entered the camera module business in the latter part of fiscal year '13. However, our ramp in manufacturing has been slower than expected, and we recorded a large impairment charges as a result. We thought that we could increase yields and profit margin through automation of the assembly process.

But precisely because we did increase automation, we have limited ability to adapt to change in specifications and demand. Currently, we are reconsidering the optimal size of this business..

In the battery business, which is also contained in Devices segment, we recorded large impairment charges in both fiscal year '13 and fiscal year '15. The basic performance of our smartphone batteries was below that of our competitors. .

Going forward, we expect to accelerate the shift to the high-power lithium type batteries, where we were more competitive, and we will continue to work to improve the functionality of our smartphone batteries. .

In the image sensor business, which account for the majority of sales and profits in the Devices segment, we are currently expanding our sales efforts, primarily to Chinese smartphone manufacturers. And orders are strong, but demand is not expected to record in earnest until the second half of the fiscal year '16.

As Yoshida-san mentioned, we are not yet able to formulate a forecast for the Devices segment for fiscal year '16 because of the impact of the earthquakes..

Next is the Pictures segment. Sales increased and operating income decreased for fiscal year '15 year-on-year, and operating income was JPY 38.5 billion. For fiscal year '16, we expect higher sales and operating income. Of the 3 categories in this business, the biggest challenge is the Motion Pictures business.

We regard fiscal year '16 as a transition year during which the turnaround of this business will be conducted under the new management team, which started in spring of last year..

Next is the Music segment. Sales and operating income for fiscal year '15 increased year-on-year, and JPY 87.3 billion in operating income was recorded. We recently announced our decision to make Sony/ATV, our music publishing business, into our wholly owned subsidiary by acquiring our joint venture partner's stake.

Music publishing is one of our recurring revenue businesses, and this strategic investment was aimed at enhancing that part of our business. .

We expect to record JPY 63 billion in operating income in fiscal year '16. Operating income is expected to decrease year-on-year. But this is because we had a remeasurement gain in the prior year. Fiscal year '16 is expected to be negatively impacted by appreciation of yen.

And the segment has a larger allocation of the corporate and other cost down the prior year..

Next is the Financial Services segment. For fiscal year '15, sales and operating income decreased year-on-year. JPY 156.5 billion of operating income was recorded, a decrease of JPY 36.8 billion year-on-year.

The decrease is operating -- the decrease in operating income was mainly due to the decline in the long-term interest rates and a decline in the Japanese stock market. .

We expect to record JPY 150 billion yen in operating income in fiscal year '16. We believe that the underlying operation of Sony Life are strong because new policies are continuing to increase..

With that, I would turn things back over to Justin. .

Thank you very much, Yoshida-san and Takeda-san. I'm now going to turn things over to John so we can begin the Q&A session.

John, would you please queue up the questions?.

[Operator Instructions] And our first question is from Larry Haverty from GAMCO. .

Could you -- just for purposes of clarification, the impairment charges were, I gathered the way the accounting works, included in the operating income.

Could you perhaps give us a total in yen of how much the various impairment charges were last year?.

Yes. Thank you for asking. Total impairment charge included in operating income in last fiscal year was JPY 90 billion. That consists of battery business and the camera module business. Thank you. .

Okay. Now the -- and then in the Game business, the Network Services, the revenue was up 50% last year. This business is -- I understand that you spend a lot of money on servers, and then you collect the revenues over time. So there's a very high incremental margin on incremental revenue.

Are we in this business still at the period where the capital spending has peaked? And are we looking at revenue growth anywhere near that? Or is the business so good that we're going to have to have more CapEx in order to service the future demands?.

Just to confirm, Larry, you're asking if we've gotten to the point where revenue growth is exceeding the amount of investment in the business?.

Yes. That's correct. .

Well, I appreciate the question. As for the capital spending for the Network Services business, that will not -- in proportion to the sales growth. So the portion of the capital investments compared to the growth, we see reduced in the future. .

And we have a question from John Litschke from TIAA. .

Yes. Just a quick question on CMOS. You mentioned that orders are strong. Can you provide any more details on -- if that's primarily for smartphone across the board? And Kumamoto TEC doesn't seem to have much impact to the smartphone supply chain for CMOS.

So if some of these orders are related to smartphones, just wondering, are you seeing any concerns there, any cancellations or your market positioning in that space? Any risks there?.

So John, just to confirm, you're interested in how are -- if we can provide any additional orders -- excuse me, any additional color on the orders that we've been getting for our imaging sensors in the smartphone space and then what the impact of the Kumamoto TEC suspension in operations is having on -- did you say smartphones in particular?.

Yes. I don't think Kumamoto really has much impact, but wanted to confirm that and your positioning in the market if that's intact. .

Thanks for the question. As you may know, Kumamoto factory is mainly for the image sensors for audio-visual use like digital, security cameras. And so the major supply chains of the smartphone image sensors are in Nagasaki as well as Yamagata. So we have no negative impact from the current suspension of Kumamoto TEC. Thank you. .

Can you comment on the order situation? You mentioned that orders were strong and you're expecting a second half full recovery. .

As for the -- yes. Currently, we are getting good orders from the customers and smartphone manufacturers in China. But at the same time, last year, as you may know, we lost some major customers because -- due to the supply constraint.

So for the first half, acquisition of new customer and those last customer have actually offset first half of the fiscal year. So thus far, we are saying that we can see the expansion of sales in earnest in the second half of fiscal year. Thank you. .

Okay. And on the Games space, you know there's lot of anticipation for virtual reality offering there. I believe you've opened up the preorders in the U.S. Can you talk about any of the initial interest in the PS VR, maybe what the retail channel is thinking? I know it's still early in the year.

And then as far as your preparations in the supply chains for production of the product, how is that going? And if demand is extremely strong, are you worried about any supply limitations?.

So John, that was 2 questions. I think the first one was on the status of preorders for VR. And the second was about our supply chain for VR, if we anticipate any kind of limitations on our ability to supply the market. .

That's right. .

Well, as for preorder reaction, I have seen [ph] quite positive reaction in United States. However, the quantity is quite limited. So anyway, that is not a big number. As for the supply chain constraint, there's no significant supply chain constraint.

However, we are currently running a not right [ph] number of VR units this fiscal year because this is the year of the start-up of the VR scheduled for our customers. So anyway, there's no big negative supply chain constraint. Thank you. .

Okay. And my last question, if I may, is about the guidances withheld.

Can we talk about the Pictures segment? Could you provide a little bit more granular update on the subsegments, how those are each going, TV, networks and films?.

This is Steve Kober. Let me respond to that question. As we have told you over the last year, we're -- we've changed management in the Motion Picture division. So last fiscal year and in this upcoming fiscal year, we're rebuilding our Motion Picture slate. On the positive side, television had another excellent year.

As you can see from the results, that continues to do very well. It's also very strong in the fourth quarter. So that's doing well. In Media Networks, we have a lot of channels all over the world. India is the biggest market, and that continues to do well. And we expect growth next year in the Media Networks business as well. .

[Operator Instructions] And I'll now turn the call back over to Justin for any final remarks. .

Thanks very much, John. I think we're out of questions, so we're going to end the call here. Thank you all for participating. And I encourage you to call the Investor Relations offices in Tokyo, London and New York if you have any follow-up questions. Thank you very much. Good night. .

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect..