Welcome to the Sony Corporation Conference Call for Overseas Investors for the Third Quarter Ended December 31, 2014. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that the conference is being recorded. And I will now turn the call over to Casey Keister [ph].

Thank you very much for that introduction, John. And thank you, all, for joining us today, February 4, 2015, for a discussion of Sony's forecasted results for the third quarter ended December 31, 2014. We hope you have all enjoyed Music from One Direction's hits album Four while you were on hold. I am Casey Keister in the Investor Relations Department here in Tokyo. And with me on the conference call tonight is Kenichiro Yoshida, CFO of Sony Corporation; Kazuhiko Takeda, Vice President and Senior General Manager of Sony's Corporate Control Department; and Atsuko Murakami, Vice President and Senior General Manager of Sony's Finance Department. Thank you, all, very much for joining us. In just a few moments, we will review today's announcement, and then we'll be available to answer your questions. Please be aware that statements made during the following remarks and Q&A session with respect to Sony's current plans, estimates, strategies, press release and other statements that are not historical facts are forward-looking statements about the future performance of Sony. These statements are based on management's assumptions in light of the information currently available to it, and therefore, you should not place undue reliance on them. Sony cautions you that a number of important factors could cause actual results to differ materially from those discussed in the forward-looking statements. For additional information as to risks and uncertainties, as well as other factors that could cause actual results to differ, please refer to today's press release, which can be accessed by visiting sony.net/ir. Let me remind you that a webcast replay of the Investor Meeting held earlier today, along with the slides presented at that meeting and our detailed release, are available on our website for your access. Also, as we originally announced in January, the finalization of our financial results was delayed due to the impact of a cyber attack at our consolidated subsidiary, Sony Pictures. Due to this, we are presenting forecasted results for the Pictures segment and for Sony on a consolidated basis. However, we are presenting actual results for the other segments, which were not affected by the cyber attack. Sony plans to file its finalized results by March 31. Before turning to Yoshida-san for some remarks, please allow me to briefly give an overview of our forecasted results for the quarter and for the fiscal year. In the third quarter, consolidated sales are expected to increase 6.1% year-on-year to JPY 2,557,800,000,000. Consolidated operating income is expected to be JPY 178.3 billion, almost double the same quarter of the previous fiscal year. Net income attributable to Sony Corporation's stockholders is expected to be JPY 89.0 billion. For the full fiscal year, the forecast for consolidated sales has been revised upward by JPY 200 billion from the October forecast to JPY 8 trillion. After taking into account the relatively favorable third quarter results, our operating income forecast has been revised upward as well. We expect to record operating income of the JPY 20 billion, although we expect income before income taxes to be a JPY 5 billion loss and net income attributable to Sony Corporation stockholders to be a JPY 170 billion loss. In the Mobile Communications segment, fiscal year sales are expected to decrease JPY 30 billion from the October forecast due to a decrease in unit sales, primarily in the Asia Pacific region, despite the impact of an increase in sales from the depreciation of the yen. We have revised downward our operating results forecast in this segment by JPY 11 billion. This is primarily due to the negative effect of the appreciation of the U.S. dollar and the decrease in sales. In Game & Network Services, we have revised the full year forecast for sales upward by JPY 90 billion. However, we have only revised our forecast for operating income upward by JPY 5 billion due to the unfavorable impact of the appreciation of the U.S. dollar in this segment, and the fact that we are expecting to record approximately JPY 10 billion for the cost associated with the replacement of our Music distribution platform and losses related to the sale of Sony Online Entertainment as well as other restructuring charges. We have not changed our sales forecast for Imaging Products & Solutions, although we revised our forecast for operating income in this segment upwards by JPY 1 billion due to the favorable impact of foreign exchange rates and cost reductions. The forecast for sales in the Home Entertainment & Sound segment has been revised upwards by JPY 10 billion due to the favorable impact of foreign exchange rates and the forecast for operating income has been revised upwards by JPY 3 billion due to cost reductions in Audio and Video. In regards to the TV business, although Sony has recorded a cumulative profit through the third quarter of JPY 22.1 billion, we recorded a JPY 16.6 billion operating loss in just the fourth quarter of the previous fiscal year. So we are being relatively cautious in forecasting this category's results. In the Devices segment, we upwardly revised our full year forecast for sales and operating income because demand for image sensors for mobile devices remained strong. We also recently announced approximately JPY 105 billion in additional investment in image sensors to increase our total production capacity for image sensors from its current level of 60,000 wafers per month to 80,000 wafers per month by the end of June 2016. In the Pictures segment, we have revised upwardly our sales forecast for the fiscal year by JPY 30 billion due to the impact of the depreciation of the yen, but we have revised downward our forecast for operating income by JPY 4 billion, mainly due to a decrease in Media Networks sales and expenses associated with the cyber attack I mentioned earlier. In the Music segment, we have slightly revised our full year forecast for sales and operating income upward, mainly due to the favorable impact of foreign exchange rates and an increase in Recorded Music sales in Japan. In Financial Services, Sony Life continues to expand its policy amount in force and results in the current quarter exceeded expectation, causing us to raise our full year forecast in this segment. Financial Services revenue is expected to be JPY 50 billion above the October forecast, and operating income is expected to the JPY 14 billion above the October forecast. Now I would like to turn the mic over to our CFO, Kenichiro Yoshida, for some brief remarks.

Thank you, Casey. I just wanted to mention a few key points before we turn to Q&A. First, as we have already announced, our finalized financial results have been delayed due to the impact of the cyber attack at Sony Pictures. It is unfortunate that we can only show the latest forecast for the Pictures segment and for consolidated Sony as of today. We expect to be able to file our finalized results by the end of March. Second, I'd like to take a moment to talk about how I view Sony's recent performance. As Casey mentioned earlier, we expect to record over JPY 175 billion in the third quarter this year. Excluding the impairment charge that we recorded on our mobile business, we expect to have recorded approximately JPY 335 billion in operating income on a 9-month basis. This is an over JPY 200 billion improvement year-on-year. Our restructuring is progressing, and we believe that a little more than 30% of this JPY 200 billion is due to the benefit of restructuring. I have -- even though our results for the third quarter have improved significantly compared to the last year, our 7% operating margin for the quarter was no better than our recent historical average of 6.7%. We are also currently forecasting JPY 142.5 billion loss in fourth quarter, including JPY 92 billion in the restructuring-related cost. Due to these factors, I cannot say that we have finished our turnaround yet, and we must continue to follow through with our restructuring. Third, I'd like to touch on the targets for the Mobile Communications segment that we announced today. In the fiscal year ending March 2018, we aim to achieve JPY 900 billion to JPY 1.1 trillion in sales and an operating income margin between 3% to 5% in this business. We also decided to reduce headcount by a total of approximately 2,100 people in the mobile business, including the 1,000 people we already announced by the end of fiscal year ending March of 2016. Restructuring charge related to the headcount reduction are expected to be around JPY 30 billion. Through headcount reduction and other cost-saving efforts, we expect to reduce annual operating expenses from the fiscal year ending March 2017 by more than JPY 90 billion compared with the current fiscal year. Lastly, I'd like to inform you that we will be holding the corporate strategy meeting on February 18 in Tokyo. At the meeting, Hirai CEO, will explain our strategy after moving out of our current restructuring phase. Back to Casey.

Thank you, Yoshida-san. I am now going to turn things back over to John, so we can start the Q&A session. Thank you for your attention. John, would you please queue up the questions?

[Operator Instructions] Our first question is from Daniel Ernst from Hudson Square.

I have 3 categories. First on the Television business, I know you said you wanted to be conservative in your outlook and certainly for the fiscal year and going into the March quarter, that makes sense. But given the dramatic swing back to profits for TVs, how does that change your strategic view of that division, which I think many people had thought that maybe you might exit Television? Do you have any thoughts on the longevity of the TV business at Sony? And then second, in the games category where you continue to excel the last few months, since a large price reduction from your competitor, Microsoft, from roughly $500 for the Xbox to roughly $350, their sales have been slightly ahead of Sony's, at least in the West. And a few thoughts going into this second full year of the new console cycle, whether price reductions were part of the plan. And then also on the Games business related to content, where the launch of the Sony View, the commercial launch of their -- of your over-the-top television service was. And then third, given the relative success under difficult circumstances for The Interview on digital, what your thoughts were about further digital releases for new movies and the impact on the box office window.

Thank you for your question. Just to recap your 3 points, the first of which was has the recent performance of the television business changed our strategic view of that business? Also, the second question was about our pricing strategy in the Game business versus our competitors. And the third was regarding content, whether or not our experience with The Interview has changed our opinions about opening windows for film. So with that, I'll turn it over to Yoshida-san.

Okay, thank you very much. As for the first question about the TV, currently, we have no plan to exit from the Television business. As you know, currently, Television business is more stabilized. However, still the profitability is volatile. So although we have no plan to exit, we are always seeking strategic alternatives, such as do you have a joint venture with other companies. That is my first -- that is my answer for the first question. And for the second question about the Game, we are aware of the Xbox plans now. However, we have currently no plans to reduce the price. However, we, I think, the PlayStation team is now doing every efforts to promote the PlayStation 4, such as giving a coupon for free Game downloads, such kind of thing, et cetera. And as for the third point, you're right. There is an intended window for that change in the movie industry, and we are carefully -- we should carefully study the revenue stream from the on-demand streaming revenue. And that has a lot of implication to our business in the future. That is my answer.

Great. Thank you for the color. But also an update on when we might expect the commercial launch of Sony Vue, the television service for PlayStation?

Your question is when will PlayStation Vue be commercially launched?

Correct.

Currently, as you know, we are doing experimental services in New York City and followed by Chicago and Philadelphia. Our currently plan to start this PS Vue service by the end of March of this fiscal year -- of this year. Thank you.

Our next question is from Richard Kramer from Arete Research.

I want to ask questions one at a time to make it a little easier. On the first one, I'm a bit confused about the mobile business. The aim seems to be to get back to a level of profit, which is roughly equal to the amount of charges that you seemed to be suggesting you'll be taking this year. And equally, the guidance, even for this year in units, implies a very steep decline. Can you tell us what the plan is in terms of managing through this coming period? Maybe be a bit more specific about how you plan to reduce the cost in a way that allows you to lose 1/3 of your revenue, but still sustain a business over time that will be profitable. And then I'll get on to my next two questions.

Thank you for your question. Just to recap, your question was about how we view cost reductions in the mobile business and how we are going to adjust that business for potential future drops in revenue.

Thank you very much for the question. As you know -- as you may know, this year's initial unit target was 50 million units, and now we reduced that to around 40 million units. So this year at the initial stage, we actually increased the operation expense in the large scale. So what we have to do is to reduce the so-called operational expenses like including fixed cost, marketing cost, R&D and headcount. But those cost adjustments take some time and the sales reduction is much earlier than the cost reduction. So currently, what we have to do is to reduce the breakeven point by reducing the operating expenses by 30%.

Okay. Maybe to ask the next 2, and since Casey is recapping them. The next one is are you suggesting now that outside of mobile, your overall Electronics business restructurings would be complete by the end of this current fiscal year? And if we look at several of the divisions in Electronics, the current levels of a margin are above your long-term targets, for example, in imaging, and very specifically, Devices. So do you need to revise those long-term targets? Or are you suggesting the market will be more difficult as you see it in the future? And then, I guess, the last question is that we've started to see some impact of foreign exchange on the top line, but as we know, the impact on the bottom line, specifically in cost of goods sold and component sourcing tends to be somewhat delayed. Can you give us a sense of both hedging and your cost exposure in the Electronics business to dollar-based FX costs and how that might affect numbers going forward? Is one of the reasons why we can read into the guidance that operating profit will be under pressure in a number of divisions in Q4 due to your FX thinking?

Thank you for your questions. Just to recap, your first question was about whether or not we are truly finished with restructuring in Electronics outside of mobile in this year. And in light of our current relatively favorable performance, whether or not we are going to need to adjust our midterm targets for the Electronics business. And your second question was about our exposure to ForEx, and in particular, the U.S. dollar, in terms of how we hedge as well as what kind of cost exposure we have to the dollar as well.

First question, IPS -- IP&S. That was IP&S. Majority of the IP&S is Digital Imaging Products. And as you may know, Digital Imaging is a shrinking market. So in forecasting or in making a plan on midterm, we are quite conservative that this market is getting tough. However, the market itself -- although the market itself is shrinking, actually, our profitability is going up. So in the future, we may be pricing to the current target of the midterm plan. However, we just have finished the midterm plan. So right now, we have now no plan to change the target OP margin. And as for FX impact on profitability, I will ask Takeda-san to explain.

Hello. This is Kaz Takeda speaking. Thank you for asking about the foreign exchange impact. As you are quite right that we have -- we will have a negatively -- negative impact from the appreciation of dollars. Then because of the sudden sharp decline in the other currencies, so we do not have much action to take at this point of time because our hedging policy is just to make it one month ahead in our regular rolling and for hedging policy. So therefore, what we can do is that try to increase the sales in a local currency in the area of other than dollars currency territory. And also, try to seek for the alternative sourcing in the production component. So by doing that, I know we can try to eliminate the impacts from the appreciation dollar.

So I would like some -- I would like to add some of the hedging policies briefly. As Kaz Takeda mentioned, that we are normally hedging one month before the booking month. And the booking month and the settlement is always -- normally the hedging -- I'm sorry, the settlement date, the normal way, the 2 months after the booking month. So therefore, that we are normally hedging for the 3 months.

And can you comment like, maybe, finally on the Devices business. Again, it has margins which are substantially above your long-term target and it's a business that I imagine would also be very much affected by foreign exchange. Could you comment about the profit outlook, again, because it's implied that there would be a decline, a sharp decline in the margins in Q4 there?

Just to recap, your question is regarding our Devices segment and in light of the favorable performance, whether or not we are going to be able to maintain this current margin going forward.

Well, so as for Devices, actually, foreign exchange fluctuation or current and other situation is positive to the device business. And the reason that our projection is 2 points: One is we currently expecting some restructuring as well as a seasonality of smartphone shipment. And lastly, as I mentioned at this press conference, we have some kind of downward division phobia. So we are quite conservative in forecasting the -- I mean, financial forecast. Thank you.

And our next question is from Atul Goyal from Jefferies.

This was in a way difficult conditions, especially what Sony faced, given the hacking issue. So it's quite remarkable that the company stayed toward this focus and discipline, so congratulations. I've got 2 questions. First is about your adjusted profits. And the second one is about if you could please comment something about mobile phone strategy, even though more detail might come out later, but something along the lines that you have mentioned about the TVs. The first question is about the adjusted profits. Now you mentioned JPY 335 billion of operating profit in the first 9 months, excluding the noncash goodwill write-off. But if you were also to adjust the losses and the write-offs on discontinued business of PC, what are the first 9 months numbers look like? And are these the record profits of all time? Or are these record profits of last 20 years excluding one ? So that's the question on the adjusted numbers for the first 9 months. The second question is you briefly mentioned about TV that you would actively consider all options, including that of partnerships, et cetera. When I spoke to you earlier you had mentioned that just to breakeven is not the target, in fact, return in equity, return on -- generating enough returns to cover your cost of capital is an important issue. Now along those lines, do you think you also will be open to considering the joint venture and partnerships in smartphone business? So those are the 2 questions about adjusted profits and smartphone versus TV partnerships.

Thank you. Two of your question, your first question, just to recap, is that earlier we talked that we had approximately JPY 335 billion recorded in the first 9 months, excluding the goodwill impairment. Your question was if we take out the PC exit cost as well, what kind of a performance is that and is that a record number. And the second question was about our mobile strategy and whether or not breakeven is an appropriate target, and whether or not we are still considering, perhaps, other strategic partnerships or other options in this business.

Thank you very much for the question. As for the 9-month period, the PC exit-related cost is approximately JPY 30 billion. So if you added -- add that amount, the adjusted profit would be JPY 365 billion. I don't know if that is a record number or not, but probably not. In 2007, I think we had more operating profit than that. And as for the mobile strategy, we are not currently targeting a breakeven, but we want to have, say, 3 to 5 operating profit is our target. But we do not deny the future possibility to have a joint venture or partnership with other companies. That is the possible alternative. At this moment, we don't have any concrete plan. Thank you very much.

Can I ask one more follow up question on the first part? In the total adjustment that you did, you'd taken out the PC cost, which were the exit costs, but there are also ongoing losses from this discontinued business. I think that's about JPY 15 billion to JPY 20 billion. So all in all, is it closer, like JPY 380 billion of operating profits in the first 9 months? Or is my estimate wrong about the ongoing losses in the PC business. Just trying to understand that if we clearly take out just 2 things, which are one is mobile-related and other one PC-related, what are the numbers look like? So I'm trying to get an understanding on that one.

Just to recap, your question is what would those 9-month numbers look like if we not only removed the PC restructuring costs and exit costs, but also the ongoing operating loss as well.

Yes, in -- with regard to the JPY 30 billion associated to the exit cost of PC, that includes both restructuring cost and the operating loss incurred in this year. So total is JPY 30 billion. That's if we...

Our next question is from Samuel Aw [ph] from Eco Research.

I've got a couple of questions, the first one is on your Game business. I understand that you revised up your sales up here by JPY 90 billion, while operating profit was revised up by only JPY 5 billion. Could you maybe talk about what the reason why the OP was only revised up by JPY 5 billion and not bigger? And also here, if you look at the amount of one-off costs involved in this year, what kind of profitability do you think will be able to make next year? And my second question is on your cost reduction. Can you possibly talk about the progress of your cost reduction, whether the scale and the pace is in line with your expectation, or whether you have managed to find more opportunities, like to reduce your costs like by a larger scale and at a faster pace?

Thank you for your question. Just to recap, your first question was about our Game segment and how, in our recent announcement, we revised our sales upward by roughly JPY 90 billion, but we only revised our operating income forecast up by JPY 5 billion and what the gap there is. Also, what potential profit level there is for Game going into next year considering we have these one-off costs that we've talked about recording later on this year. Your second question was about how the progress of our cost-reduction efforts are progressing and whether or not there is any more opportunities for cost reductions.

Thank you very much. As for the first question, there are a couple of reasons. One point is currency. As you know, the -- basically, PS4 is -- that are determinate [ph] of cost. So the appreciation is clearly I think is the impact. And also, as you may now, we recently announced, what -- purchaser recently announced the purchase of Sony Online Entertainment. That will incur term loss from that deal. And third point is, again, this is also announced, we decided to change the music service platform to current one to Spotify. So the cost of the platform change is the third one. Also, we are expecting some restructuring cost in Game segment. Those are 3 reasons why we are quite conservative in this operating profit forecast. And for the second question about the next year level, although since we are going to announce the official results for the next fiscal year at the time of annual financial results announcement, which is scheduled late April or early May, we cannot comment on the specific number of the OP level. However, since this platform, PS4, as well as the number of subscriber for the PlayStation Network is quite -- have momentum. So I am quite optimistic in this business. That's the second point. And third point is about the progress of cost-downs this year. We already announced that the overall restructuring in both sales company as well as the headquarter and business segment. So at this moment, our cost-reduction effort is on schedule. And as I mentioned in this 9-month period, we actually recorded that almost JPY 200 billion of the improvement, excluding one-time loss of mobile segment would be a write-off. Around the JPY 200 billion of the improvement, approximately 30% -- I believe it was a 30% of the -- due to the cost-down impact. So bottom line is we -- our progress in cost activity is on track. And I think in the future -- current, our restructuring is so-called CEO-initiated our finished restructuring phase. Now our CEO is saying that we should change the year to the finished restructuring phase to the continuous cost-down phase. So still, we seek -- we have more opportunity to reduce costs. Thank you.

Great. Can I just ask one follow-up on the Game business. How much of your cost in the current fiscal year, which you consider to be a one-off, please?

Just to recap, your question is how much of the cost that we are occurring -- recording in the Game segment this year, would we consider one-time cost?

Well, approximately JPY 20 billion is the one-time cost. Thank you.

[Operator Instructions] And we have a question from Ben Lu [ph] from Moon Capital.

I wanted to get a little bit more clarity into your semi division. I think, recently, you guys increased your CapEx for your image sensors. Can you talk through a little bit about your outlook for your image sensor business? I know you gave a fiscal '17 target at your Analyst Day a few months ago and you just recently raised your sales target by about JPY 40 billion for this fiscal year. Can you talk about what is the outlook for that and what is the rationale behind that recent investment?

Thank you for your question. Just to recap, your question is about our investment in image sensors, and our outlook for that business and what we view as kind of the trends for sales in this business and the reasons for investment going forward.

Thank you very much for the question. As you know, we recently announced the additional capital investment for the image sensors, approximately JPY 100 billion. That is basically for sensors and sensor stacking production. And currently, the -- basically, there is a strong demand in mobile sensor. As you know, mobile market itself is quite volatile market. However, market itself is still growing. And also, the needs for high-end camera is increasing. Also, in the future, it is said that dual camera demand is expecting. So those are the -- our expectation for the market. So that's why we were quite positive and optimistic for the recent investment. Thank you.

Great. And as a follow-up to that, I think you guys had already gave out a target of about, let's call it, JPY 1.4 billion for your device sales, of which the eyeballed chart, image sense is about 55% of that or about JPY 630 billion sales versus JPY 450 billion that you guys are targeting this year. So we're talking about pretty impressive growth over the next 3 years. Can you talk about what is the split of, let's call it, resolution by 30 megapixel and above? Or what do you think is the penetration of the dual cameras. Just wanted to get a little bit more clarity into how you're image sensor sales guidance for fiscal '17, especially since you guys just raised guidance by JPY 40 billion this year?

Thank you for your quick question. Just a recap, you were asking about more detail in terms of where we think trends within semiconductors, particularly image sensors are going to go going forward. For example, in terms of megapixels, what kind of adoption rate there will be for dual cameras and how we think that will affect us.

And just some targets, specifically between what do you think the penetration is for dual cameras by fiscal '17? What you think will be the mix of megapixels, whether it's 8, 10, 13, et cetera, and basically what do you think the ASP trends are?

30 [ph] megapixel.

Thank you very much for the question. For the image sensor, there are several aspects of the functions. Of course, number of pixel is one of the important aspect features. But at the same time, the sensitivity is also very important as well as the speed to capture or speed to shutter. So those functions are also important. So in developing image sensor, it's not just the number of pixel, it's the only parameter to compete within the market. I believe that is -- I hope this is the answer for your question.

Okay. I was hoping that -- because you guys gave a pretty large [indiscernible] fiscal '17, I was hoping you have a little more details into how you arrived at the forecast, whether it's -- I know you talked about there's more dual cameras in the future, maybe if you can talk about what you think the penetration of dual cameras will be by fiscal '17. I know you talked about this different and more importance than, obviously, just resolution but also sensitivity, but, I think, image sense is already downsizing pretty sensitive levels. So was just curious if you could give a little bit more clarity, specifics how you get that number? Or maybe you can just talk about what's your sales target for '17? What you think is the split between smartphones versus your automotive business that I know you guys are targeting to go into as well?

Thank you very much. Again, what I can say is larger penetration of dual camera and more demand for high-end image sensor and as the application is increasing like auto, medical and IOTs, still, the largest portion is, by far, the -- in mobile. That's what I can say right now. Thank you.

Okay. And then my last question is also on your device business. I wanted to get any updates on the camera module side of the business. I know you didn't raise a -- I don't believe you raised the sales for camera modules. I think you're targeting about JPY 250,000,000,000 in sales for camera modules in fiscal '17. I think eyeballing your chart, it looks like probably around JPY 30 billion, JPY 40 billion fiscal '13. So we're talking about significant factor increase in camera module sales. Just curious how you plan on growing your camera module sales that much?

Thank you for your question. Just to recap, you would like to know why we believe that we can increase our camera module sales and if we have any granularity is as to why we think that's going to increase.

Yes, because it's almost -- the next increase in 4 years.

All right. Thank you very much for the question. Look, basically, Sony owe us not a big -- have been -- not a big player in the module business and actually, we are quite a newcomer in this area. And recently, we are expanding our module production facility, and we will continue to increase the capacity of the module, particularly for the dual camera area. So that is the main reason why we are aggressive in forecasting the module sales. Thank you.

As we're running out time, I'd like to turn the call back over to Casey Keister for closing remarks.

Thank you, John, and thank you, everyone, for your questions. This concludes today's conference call. Goodnight and thank you, all, again from Tokyo.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.