Ladies and gentlemen, at this point we will begin the earnings announcement for the third quarter of fiscal 2018..

firstly, Executive Vice President and Chief Financial Officer Hiroki Totoki; and corporate executives, Senior General Manager, Finance Department, Atsuko Murakami; and Senior General Manager, Global Accounting Division, VP, Hirotoshi Korenaga..

Today, Mr. Totoki will give you a presentation on the results of the third quarter and also the full year forecast for the entire year. And after his presentation, there'll be time for questions and answers. And we plan to spend 45 minutes altogether..

Mr.

Totoki, will you please start?.

I would like to explain these 2 topics..

Fiscal '18 Q3 consolidated sales decreased 10% year-on-year to JPY 2,401.8 billion. The majority of this decrease in sales was due to lower Financial Services revenue. And consolidated sales, excluding the Financial Services segment, decreased 3% year-on-year..

Consolidated operating income increased 7% year-on-year to JPY 377 billion. A remeasurement gain of JPY 116.9 billion resulting from the consolidation of EMI Music Publishing was included in operating income..

Income before income taxes decreased 1% year-on-year to JPY 340.5 billion primarily due to the recording of a JPY 44.8 billion loss on the revaluation of equity securities in other incomes and expenses..

Net income attributable to Sony Corporation stockholders for the quarter increased 45% year-on-year to JPY 490 billion. The primary reason of this increase was JPY 154.2 billion reversal of valuation allowances against a portion of DTA in the United States.

As shown in this slide, there were several extraordinary items included in operating income for the current quarter and the same quarter previous year. Excluding these items, adjusted operating income decreased JPY 84 billion..

Adjusted income before income taxes, which excludes extraordinary items, is shown here.

We have not shown it on this slide, but adjusted net income, which excludes extraordinary items and also estimates and excludes the impact of such extraordinary items on the income taxes, decreased JPY 118.3 billion year-on-year from JPY 276.2 billion to JPY 157.9 billion.

Please see Page 5 of our earnings presentation for details of adjusted tax and net income for the quarter..

This slide shows the results by segment for Q3. This slide shows the cumulative results for the first 9 months of the fiscal year. Adjusted profit can be found on Pages 8 through 10 of our earnings presentation..

This slide shows the cumulative results by segment for the first 9 months of the fiscal year..

Next is the consolidated results forecast for fiscal '18. The consolidated sales forecast has been revised downward by JPY 200 billion from October forecast to JPY 8.5 trillion. And the consolidated operating income forecast remains unchanged at JPY 870 billion..

The income before income taxes forecast has been revised downward JPY 25 billion to JPY 950 billion, mainly reflecting the loss on the revaluation of equity securities recorded in the third quarter.

In addition, the forecast for net income attributable to Sony Corporation's stockholders was revised upward JPY 130 billion to JPY 835 billion primarily to reflect the reversal of a portion of valuation allowances against DTA in the third quarter..

Operating cash flow, excluding the Financial Services for the 9 months to date, was JPY 605 billion, and there is no change to our JPY 830 billion forecast for the fiscal year..

Assumed foreign exchange rates for the fourth quarters are JPY 111 to U.S. dollars and JPY 127 to the euro..

We plan to issue year-end dividend of JPY 20 per share, which when combined with the midterm -- interim dividend already paid, the full year amount will be JPY 35 per share..

The fiscal year forecasts for each segment are shown on this slide. In October, we incorporated JPY 20 billion contingency budget for All Other, Corporate and elimination; and we have not incorporated it this time. And I will explain to the situation for each business segment..

First, I will talk about Game & Network Services segment. Despite a decrease in sales resulting from the decrease in PlayStation 4 hardware unit sales, fiscal '18 Q3 sales increased 10% year-on-year to JPY 790.6 billion due to an increase in game software sales.

Despite the increase in sales of game software, operating income decreased the -- JPY 12.3 billion year-on-year to JPY 73.1 billion due to a decrease in sales of PS4 hardware and negative impact for ForEx..

Now I will discuss the business environment in Q3. Decrease in operating income in Q3 was due to aggressive promotional activities we undertook to sell PS4 hardware in an effort to expand the user base.

As a result of these efforts, we sold-in 8.1 million units of PS4 hardware in Q3, which was more than the same quarter last year but in line with our expectation for the sixth year of the platform..

Due to the expansion of the PS4, PlayStation Plus subscribers increased 4.8 million year-on-year to 36.3 million. And software sales increased significantly year-on-year..

Although we need to be cautious of potential volatility in profitability due to the console cycle going forward, we are working to mitigate the volatility by leveraging the more than 91.6 million units cumulative install base of PS4 to benefit from the new business model created with Network Services and add-on content sales.

And the full year forecast remains unchanged from October..

Next is Music segment. The third quarter sales decreased 4% to JPY 209.4 billion.

This decrease was due to a decline in Recorded Music sales mainly resulting from the impact of new accounting standards and a decrease in sales for mobile game application, which is partially offset by an increase in Music Publishing sales resulting from the positive impact of the consolidation of EMI..

Operating income was JPY 147.1 billion, an increase of 3.7x year-on-year, mainly due to the recording of JPY 116.9 billion remeasurement gains from the consolidation of EMI. And the full year forecast remains unchanged from October..

Next, talking about Pictures segment. The third quarter sales increased 6% year-on-year to JPY 276.7 billion. Although licensing revenues decreased in Television Productions section, Motion Pictures sales increased due mainly to strong performance of Venom..

Operating income increased JPY 1.1 billion year-on-year to JPY 11.6 billion, thanks to the increase in sales despite a recording of JPY 11.3 billion in costs associated with a portfolio review within Media Networks..

Some of the channels Sony Pictures operates around the world face challenges, including poor growth prospects going forward and a low profitability. And consequently, since taking over as Head of the Television businesses within the Pictures segment, Mike Hopkins has been conducting a concentrated review of each of the channels.

And during the current quarter, a decision was made to downsize or exit several channels, and this resulted in the recording of costs. And we expect the benefit of these actions to manifest from the fiscal year ending March 31, 2020, and onward. We will continue our efforts to improve profitability of the Pictures segment in the days ahead.

The full year forecast remains unchanged..

Next will be Home Entertainment & Sound segment. The third quarter sales decreased 10% to JPY 388.8 billion due to a decline in unit sales of televisions and the negative impact of foreign exchange..

Operating income increased JPY 1.3 billion to JPY 47.5 billion. And there was an impact of foreign exchange rates and the decrease in sales, which was substantially offset by a shift we made to high-value-added models and a decrease in indirect costs at sales companies..

At the time of our April forecast, we expected annual unit sales of televisions to decrease because in this particular segment we follow a strategy of not pursuing scale but instead to focus on profitability. And this decrease this quarter is in line, therefore, with our strategy. The full year forecast in this segment remains unchanged from October..

Next, talking about Imaging Products & Solutions segment. The third quarter sales increased 4% year-on-year to JPY 188.0 billion.

Although unit sales of digital cameras declined due to the impact of the market, segment sales increased, thanks to an increase in sales of high-value-added products such as interchangeable lens mirrorless cameras and lenses themselves..

Operating income increased JPY 8.3 billion to JPY 34.2 billion mainly because of the increase in sales of high-value-added products that I just mentioned..

The full year forecast was revised downward to JPY 670 billion due mainly to a downward revision in the unit sales forecast of compact digital cameras..

Despite the impact of the decrease in sales, the operating income forecast remains unchanged from October because of the shift we are making to high-value-added models..

Next segment is Mobile Communications. The third quarter sales decreased 37% year-on-year to JPY 137.2 billion due to a decrease in unit sales of smartphones.

Primarily due to this decrease in sales, an operating loss of JPY 15.5 billion was recorded in the current quarter compared to operating income of JPY 15.8 billion in the same quarter of the previous fiscal year..

The full year forecast. The sales forecast was revised downwardly to JPY 490 billion due to a reduction in the unit sales forecast for smartphones.

On the other hand, our forecast for the operating loss remains unchanged from October because the impact of a decrease in sales is expected to be substantially offset by operating cost reductions and other actions..

The plan that I outlined before to reduce operating costs incurred in the business in the fiscal year 2020 (sic) [ 2021 ], to approximately 50% of the level recorded in fiscal year 2017 is progressing according to the plan. And we will continue to implement it..

Next is the Semiconductors segment. The third quarter sales decreased 8% year-on-year to JPY 230.3 billion due to a decline in unit sales of image sensors for mobile devices. Operating income decreased JPY 14.0 billion year-on-year to JPY 46.5 billion.

This was primarily due to the impact of the decrease in sales, an increase in R&D and depreciation expense and the recording of JPY 6.7 billion gain on the sale of manufacturing equipment in the same quarter of the previous fiscal year..

We have revised downward our full year sales forecast to JPY 870 billion and operating income to JPY 130 billion. This downward revision is primarily due to a reduction in the unit sales forecast for image sensors resulting from deterioration in the smartphone market..

Although we do expect the difficult market environment for smartphones to continue going forward, we are seeing high-end sensors adapted in both high-end and mid-range models as smartphone makers seek to differentiate their products through camera functionality.

Consequently, there is no change to our view that demand for the high-end image sensors that Sony excels at making, will continue to increase due to the trend toward multi-lens cameras and larger die sizes..

There is also no change to the plan that I recently outlined to increase our production capacity to nearly the maximum that can fit into our existing facilities. However, as I have said in the past, if trends in demand change going forward -- if trends in demand should change going forward, we will modify things like timing in a flexible manner..

Next is Financial Services. In the third quarter, the Financial Services revenue decreased 56% year-on-year to JPY 163.6 billion due to the deterioration in investment performance in the separate accounts at Sony Life.

However, the impact of this change in performance on the operating income of Sony Life is limited because the majority of the losses for variable life insurance products in the separate accounts were borne by customers..

Operating income decreased JPY 18.4 billion year-on-year to JPY 37.9 billion due to the recording in the same quarter of the previous fiscal year of a gain on the sale of real estate held for investment purposes..

We have revised downward our full year forecast for sales to JPY 1,180 billion and the forecast for operating income to JPY 160 billion to reflect the impact of market environment..

That concludes my explanation on financial results, but before I close, I would like to say a few things about my view of the operating environment going forward..

We cannot be too optimistic about the future, since several macroeconomic and geopolitical risks have emerged since the second half of last year, including the smartphone market that I discussed earlier. As CFO, I have asked each business to increase their sensitivity to changes in the environment and to prepare for the risks.

Preparing for risks means a thorough review of the operations of each of our business and strengthening of each business to minimize potential damage. It also means preparing to recover quickly and go on the offensive once the environment improves..

In the first and second mid-range plans, we were able to transform Sony's business model and improve our profitability. In the third mid-range plan, we will continue to work to strengthen our operating efficiency to achieve steady growth over the long term..

This concludes my remarks. Thank you. .

Now the floor is open to your questions. Those of you with questions, please wait for the microphones to be brought to you, and please identify yourself by stating your name and affiliation before asking the question.

When questions are asked in English, there will be a consecutive interpretation into Japanese, and the answers will be given in Japanese. Please confine the number of questions to 2 per person.

Anyone with questions?.

Hirakawa, Merrill Lynch Securities. The first question, concerning Semiconductors.

The third quarter, what was the rate of operation? And also, for the first half of fiscal 2019, what do you think would be the rate of operation of the plant? And also, compared to the production reduction of smartphone manufacturers in 2015, I think your measures have improved, but how would you reflect the improved response to the management in fiscal 2019?.

In any case, as far as fiscal '19 is concerned, the market condition will be very tough, so we would like to be conservative and carefully manage the business in a steadfast manner. .

And also, compared to 2015, what's the likely profitability on our part?.

After 2015, we have continued to go through the process of selection and concentration. And also, our sensitivity towards the market demand has been improved. And we worked on that on a continuous basis, so on those 2 fronts the situation would lead to the improvement of operation of our business. .

The second point may sound ambiguous, but for the capital market members like ours, your potentiality and the -- there is a disparity between the stock value and the corporate value.

And for 2019, how would you communicate with the capital market to enhance the corporate value, disparity between the value and the sum of the total?.

Well, on our part, we place a high value on our communication with the capital market to have a good understanding on our business. So we will make sure to explain our strategy and direction to the fullest extent to the market so that we can enhance the corporate value. .

I'd like to invite next question, please. .

Ayada, Deutsche Securities. Two questions on game business. Firstly, during the third quarter, the level of profits, I'd like to ask for further explanation because you've made efforts to increase marketing, but it seems that's something you do every year.

In the meantime, the network and software, you're increasing the revenue, but the year-on-year profit is down. So I fail to understand this.

So if you've [ made ] budget for marketing, how much did you spend? And also, profits by category, can you give us some of the details by category? And also, in the fourth quarter, both top line and bottom line will be up, which is different to the regular seasonality.

So your view and position on fourth quarter, can you elaborate on that?.

First of all, about the third quarter results, particularly on profit levels. Last year, on a year-on-year basis, the sales of unit of hardware is down by 900,000. So the revenue was down, obviously reflected by that. But elsewhere, in terms of the promotional activities that we did in Japan, the price of PS4 was reduced by JPY 5,000 on October 12.

And also, at the year-end season, for PS4 standard model, there was a limited-time-only cuts on our price as well to increase sales. So in the third quarter, through these, we were able to increase the install base to 8.1 million for the month.

So the hope is that, in the fourth quarter and beyond, we'll be able to leverage this increase to further expand and increase revenues. So sales of digital hardware and software both contributed to sales of -- the increase of the revenue, and hope that will contribute to a positive performance.

For the fourth quarter, what's our view, you ask? So as far as the fourth quarter is concerned, last year, in the fourth quarter, there were onetime factors, some allowances and provisionings were made, but we don't have them this year. So that's the difference.

And also in the fourth quarter, mainly with the third quarter -- from third quarter's, strong titles are expected to be released. So we are looking at these factors in detail. But in terms of the figures for the fourth quarter, I think what we are giving you is our best estimate. .

A point for confirmation. In the additional document, digital software, add-on content sales, you have the increase of 12 -- JPY 120 billion year-on-year.

So you should have increased gross profits tax with this, but you've used all that increase in gross profits for marketing?.

Well, first of all, revenue, the sales increased, but -- in which the mix showed that there's a difference compared to last year. So even though revenues increased, profitability was different. And also, as you say, we have used a lot of gains for marketing purposes. So there are 2 factors. .

And second question I'd like to ask is mid- to long-term prospects of the game business. Taking a long-term view, there's a [ multi-planned ] transition of the games or the -- your [ competitors are using ], developing new platforms. Also, the games are going to the cloud.

So to the extent you can discuss now, please look at the 5 years from now, what are the risks and opportunities going forward. .

Thank you. So 5 years in the future, what are the risks and opportunities perspective? First of all, speaking about risks. Currently the open-platform free-to-play games are increasing in the market, which could be a fit for our business; and additionally, games going to the cloud.

For example, take an extreme example, people will not be using hardwares. Hardwares will become unnecessary, some would argue, but on this point I think that will take a -- much longer. The time required for games going to the cloud will take much long time -- much longer time. And also, the platforms -- trying to reduce the revenue share percentage.

For instance, some of our competitors are going to increase the rates that they are charging.

But as far as we're concerned, because we offer the rich and immersive experience on the platforms providing others -- therefore, third-party publishers are very much supportive of what we are offering, which means that what we can do is to continue to offer best immersive experiences so that we will not be affected by these risks, allowing us to continue to see growth in that business.

Now what about opportunities going forward? Well, the largest opportunity is in increasing Network Services and also from -- will come from recurring businesses. PS4 is held by 91 million users. The installation base is 91 million already. And also, monthly active users are now in excess of 90 million also, so it's a huge platform, the PS4.

So leveraging the strength of this PS4 will -- to continue to expand the business and continue to the -- generate profits from this -- based on this platform. .

The next question will come from the third row. .

Nakane from Mizuho Securities. I also have 2 questions. The first question is about games, and I may be repeating what the others have asked. Hardware promotion, I think it has been budgeted already, but the consequence was that you were able to increase the membership to subscribers -- the paid subscribers.

Is that the right understanding? And other than promotions, what about the other SG&A? Was it as you have assumed or planned? That's the first question. The second question is directed to Ms. Murakami. It's about cash flow. The third quarter, if you look at the segments.

And can you explain about the background of the Pages 31 to 34? And for the full year, if you add the seasonality of the fourth quarter, the figure looks somewhat weak.

Last year, the game cash flow was quite good, but of course there are changes, so can you talk about the cash flow level for the third quarter and the fourth quarter?.

Now the results, the consequences was not far away from what we had expected. In my earlier presentation, I have stated that, for the sixth year, the results were as we had hoped and expected. So the numbers do reflect that. Therefore, for the full year forecast, we have decided not to change our forecast. .

So the positive implications on software and networks were as you had expected?.

Assumed. Yes. .

The payables had been used to offset those numbers. Now during the next 3 months, the account receivables, there will be a further collection; and the change of the inventory level, but we will not expect the growth as we had experienced in last year.

Now why hasn't the account receivable not changed? If you look at the breakdown of the sales, the composition of the sales, game, the collection is quite fast; and that sales is increasing. You should look at the third quarter sales. So collection is rather done in a short period of time.

Now compared to game, branded hardware requires more time to recover or collect, TVs and [ mobiles ]. Low sales in the third quarter, decreased, so there is not much that has to be collected. Inventory compared to last year, there has not been a significant increase.

Therefore, overall in the final quarter, cash flow would not increase as we had experienced the previous year. JPY 830 billion, I think I feel comfortable with this number. I hope I have answered your question. It's not the fourth quarter is weak, but shall I say that the collection was at a higher level.

In other words, we were able to advance the collection. And much was done in the third quarter. .

Next question. [Foreign Language].

Ezawa of Citigroup. So the adjusted plan and look by segment. In some cases we need some explanation of fourth quarter numbers. The -- about games, you explained, but other aspects, for instance, Music segment and IP&S digital camera numbers.

Numbers appeared to be low or have you incorporated risks? Or any reason for further adjustment in the fourth quarter from January to March? Or for Semiconductors, in view of the current rate of operation and inventory, on a quarter-on-quarter basis the decline in profit is nearly JPY 40 billion.

Is it due to declining sales? And then the others and corporate and -- elimination, minus JPY 40 billion for the fourth quarter recorded. I think this negative number is very sizable. Is it -- it comes from the actual operation.

You said that the contingency reserve is not included, but what's the background behind?.

No. I'd like to answer one by one. First, on Music, during the fourth quarter. In the fourth quarter last year, fiscal 2017, there was a onetime factor of JPY 10.5 billion, the sales proceed of real estate. And excluding that, the operating income forecast is about the same level as the previous year. And that's Music.

And for IP&S, the first compact digital camera, centering on that, sales unit forecast is revised downward and the impact is incorporated. And also, for the broadcast equipment, especially due to the deceleration of Chinese economy, in the professional equipment we see some deceleration in -- from third quarter on to fourth quarter.

And there has been a deferred timing of the expense and also the year-end expenses and the onetime expenses, and that's how we came up with the fourth quarter IP&S number. And next, on Semiconductors. In case of semiconductors, basically the demand immediately around us is weakened.

As you know, the -- our image sensors -- it takes about 5 months from the introduction of wafer to shipment, the lead-time 5 months. Therefore, the level of inventory at the end of -- by -- in 2018 was a little heavy, even in view of the smartphone shipment in 2019.

We are taking measures to adjust the inventory to the appropriate level, but towards the year-end, in view of the immediate situation, inventory level appeared to be a little heavier. But the peak of the demand for the new model of the smartphone will be the second half of fiscal '19. Therefore, we will adjust the inventory towards that and use that.

And also, the headquarters expense or other, Corporate and elimination fourth quarter, we saw a major negative number during the fourth quarter last year also. And for the current fiscal year, there is no particular plan of having the extraordinary factor to increase it, but for the year-end there may be increase in R&D and other expenses.

And also, the expense for the event headquarters we have like Sony Open, and slight expense is incurred during the fourth quarter. Those are the main factors behind. .

Next question, please. .

Okazaki, Nomura Securities. Firstly, about Music business. Looking at the third quarter performance, except extraordinary items, the numbers are weaker than last year. The sales of mobile game is lower, so what's the background to this? And also your forecast outlook for the coming periods. .

Yes, the third quarter results for the Music business. One thing is Fate/Grand Order, compared to last year, the revenue was down. So that's the biggest part of the picture. .

Is it a temporary decline? Or has this title reached a peak already or peaked out already?.

Well, if we look at the third quarter in general, the number of users is not declining, but in terms of the amount used, the billing amount is somewhat lower. So as far as we're concerned, what we have to do most importantly is to continue to raise the lifetime value of this particular title.

And so we have to take a long perspective, and for this purpose, we will hold more user events, for instance, to enhance the business. .

The second business is the impact from the external environment. You talked about broadcasting professionals business being affected by slowdown in China, for instance, or due to geopolitical risks.

Have those risks manifested in terms of your businesses?.

Well, the -- in China, the branded hardware business, we feel that there is some slowdown in our business. And relatively speaking, this has been more -- manifest since December, but then again to some extent we had expected this slowdown to happen. So the change -- or so that is not anything that is beyond our earlier expectations. .

The next question would be the last question that we can take. .

Sugiyama from Goldman Sachs. I have one question about the Pictures business. The media network is being restructured or consolidated. And also, I am looking at the production of programs. The sales have decreased, but the capitalized cost has declined, which bothers me a little bit. But Motion Pictures, the box office income has increased or improved.

So will there be exiting? Or there'll be a restructuring cost that would incur just like the media network restructuring in the Pictures segment as well. .

The media network, we are talking about concentration, selection and focus. We will continue to do this effort and monitor the development. We booked some cost, expenses. Will there be a major expenditure in the fourth quarter. No. The answer is no, not in the fourth quarter.

But in programming -- program production this -- there has been a completion of the series for the digital network. And this is as we have assumed. It is not a major departure from our plan. Now the production of pictures -- motion pictures. I think we are blessed to have some very good films, blockbusters, slate film.

One picture, in its life, would generate profit. And that profit, that slate, would be improving year after year. So we'll be monitoring this with expectations. And also strategy by category, did you say? Pictures, Motion Pictures? We will take advantage of the existing IP.

As our CEO has stated on a number of occasions, we will capitalize on our IP portfolio and also would strengthen the lineup that will be appealing to the audience outside of the United States and in other parts of the world. Spider-Man, Spider-Man [ Verse ] would be some good examples. And those -- Venom is another example.

We'll be using their characters for motion picture production. Now TV programs production, there is an increasing diversity of how people view the TV programming and therefore the belief that the consumptions of the contents would only grow. Therefore, we would have a wide range of programming.

And also, we will strengthen relationship with promising or powerful creators. We will take full advantage that we are an independent entity and have good relationship with creators and strengthen our business. That's for TV. Media network, for the foreseeable future, we would continue a review of the channels. That will be our first focus. Thank you. .

With this, we'd like to conclude our session. Thank you very much for your participation..