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Sony Corporation (NYSE:SNE)
Q3 2019 Earnings Call
Feb 4, 2020, 3:15 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Sadahiko Hayakawa -- General Manager, Investor Relations

Ladies and gentlemen, we shall now start -- begin the Earnings Announcement Session for the Third Quarter of the Fiscal Year 2019. My name is Hayakawa, the IR -- the General Manager responsible for Financial Affairs.

I'd like to introduce our speakers for the day, we have the Senior Executive Vice President, Chief Financial Officer, Hiroki Totoki; and then, Senior Vice President, Senior General Manager of the Finance Department and Corporate Planning and Control Department, Naomi Matsuoka; and then VP, Senior General Manager, Global Accounting Division, Hirotoshi Korenaga. Mr. Totoki will make the presentation today first, and then we'll follow that with the question and answers, and we plan to spend 40 minutes altogether.

With that, Mr. Totoki, would you please start.

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

Before I explain our results today, I would like to speak a little about the spread of infection from the new coronavirus. First, we extend our condolences to the families of the people who have passed away, and send our thoughts to those who have been infected. Sony is very concerned about the spread of infection. At this time, it is difficult to fully grasp what is going on, but we are exerting all efforts to gather information and assess the situation and we are taking actions where possible.

Now, I will explain these two topics. Fiscal '19 third quarter consolidated sales increased 3% year-on-year to JPY2,463.2 billion and operating income decreased JPY76.9 billion year-on-year to JPY300.1 billion. Net income attributable to Sony Corporation stockholders decreased JPY199.4 billion year-on-year to JPY229.5 billion. As is shown on this slide, certain extraordinary items were recorded in both the current quarter and the same quarter of the previous fiscal year. Excluding these extraordinary items, operating income would have increased JPY16.5 billion to JPY276.5 billion. Also, excluding these extraordinary items, net income attributable to Sony Corporation stockholders would have increased JPY58.3 billion from JPY157.9 billion in the same quarter of the previous fiscal year to JPY216.2 billion.

Next is the consolidated results forecast for fiscal '19. Consolidated sales are expected to increase JPY100 billion year-on-year to JPY8,500 billion and operating income is expected to increase JPY40 billion to JPY880 billion. I will explain the breakdown of sales and operating income for each segment when I explain the segment results.

Income before income taxes was upwardly revised to JPY860 billion and net income attributable to Sony Corporation stockholders were revised upward to JPY590 billion. The forecast for operating cash flow excluding the financial services segment is JPY760 billion, unchanged from the previous forecast. The assumed foreign exchange rates for the four quarter are JPY109 to the US dollar and JPY121 to the euro.

As for the dividend, this fiscal year, we expect to issue year-end dividend of JPY25 per share, and when combined with the interim dividend already paid, the annual dividend will be JPY45 per share, JPY10 more than last fiscal year.

Now, I would like to discuss the impact of the spread of new coronavirus infection. I just explained the upward revision of our consolidated results, but that impact of the spread of the coronavirus is not included in that forecast. At this time, it is difficult for us to assess the impact on our results, but depending on how the situation evolves, the impact could be large enough to eliminate the entire amount of the upward revision. We think there could be a major impact on our manufacturing, sales and supply chain operations, especially in the I&SS and EP&S segment. Going forward, we will continue to gather information and assess the impact and take any necessary actions. Based on [Indecipherable] [00:04:45] that, if there is any material change to our forecast for the current fiscal year, we will disclose the change.

Now, I will explain the situation in each of the business segment. First, Game & Network Services. Sales for the quarter increased -- decreased 20% to JPY632.1 billion, primarily due to the decrease in PS4 hardware sales and software sales, as well as the negative impact of the exchange rates. PS4 hardware is in its 7th year since launch and partly because we announced the PS5 next-generation console, unit sales decreased year-on-year. The yen-based average selling price of the hardware decreased due to the negative impact of exchange rates and an increase in the proportion of units sold during the selling season. However, we were able to secure a margin on hardware, that was flat year-on-year, because we keep the promotional price at the same level as the last fiscal year, and because promotional costs were offset by year-on-year reduction in component cost, excluding this and decrease in the free-to-play titles, the impact of the exchange rate, software sales were essentially flat year-on-year.

Operating income decreased JPY19.6 billion to JPY53.5 billion, primarily due to the impact on the decrease of the third-party software sales, partly offset by the increase in the profit for the growth of the Network Services PS Plus. And revised downward our fiscal '19 sales forecast by JPY50 billion to JPY1,950 billion, and the opening income forecast by JPY5 billion to JPY235 billion. The revision in sales was due to a change in our forecast for third-party software sales, including the impact of postponement into next fiscal year of some of our Silver title sales. And despite the benefit of operating cost reductions, operating income was revised downward, mainly due to the decrease in software sales.

Our financial results, this fiscal year, are in a period of adjustment as we approach the transition to the PS5's new generation console and because the contribution of the free-to-play titles last fiscal year, that's quite large. On the other hand, when you look at our results over the mid- to long-term, you can see that our Game business is steadily growing, as evidenced by the growth of Network Services, such as PS Plus and we expect this growth to continue going forward. The proportion of Network Services revenue continues to increase, mainly due to the increase in PS -- the number of PS Plus subscribers. We aim to leverage this large community and network services revenue stream to effect a smooth transition from the current console generation to the next unlike in the past when profitability deteriorated significantly due to development and marketing costs incurred.

Next about Music segment. The third quarter sales increased 4% year-on-year to 269 point -- JPY216.9 billion, but operating income declined JPY110.8 billion year-on-year to JPY36.3 billion. This decrease was mainly due to the absence of remeasurement gain resulting from the consolidation of the EMI Music Publishing recorded in the same quarter of the previous year, and a decline in sales of mobile games in Japan. Excluding these items, our Music business is steadily growing, mainly due to the growth of the streaming market. Streaming revenue in our Recorded Music business continue to grow at a high rate increasing 16% year-on-year and 20% year-on-year excluding the impact of the conversion to the yen. And there is no change to our full-year forecast for sales and operating income.

Next is about Pictures segment. The third quarter sales declined 15% year-on-year to JPY236.0 billion and operating income decreased JPY6.2 billion to JPY5.4 billion. This decrease in profit was mainly due to the significant decline in Motion Picture revenues, partially offset by an improvement in profitability due to the benefit of a channel portfolio review in Media Networks. In the same quarter of the previous fiscal year, the major hit, Venom, was released at the beginning of October, significantly contributing to profitability throughout that quarter. But this fiscal year, the hit, Jumanji: The Next Level, was released only in mid-December, so that the majority of the contribution to profitability will come in the fourth quarter and beyond. Well, there were other releases that did not meet our expectations. All in all, I believe that our Motion Pictures business has been performing well.

The fiscal '19 sales and operating income forecast is unchanged. The global box office revenue for calendar year 2019 increased, led by growth outside of the United States. And similar to last year, Sony Pictures had the fourth highest market share of box office revenue in the United States in calendar 2019. However, while all the major studios except Disney experienced the decline in box office revenue. Sony Pictures share increased 1 percentage point, compared to the previous year, mainly due to the contribution of the major hit, Spider-Man: Far From Home. I think this success is due to our leveraging of IP such as Spider-Man and Jumanji to build strong franchises.

Next, let me discuss our EP&S segment. Sales for the quarter decreased 9% from last year to JPY650.4 billion, mainly due to a decrease in sales of smartphones and TVs and the negative impact of exchange rate. Operating income increased JPY14.1 billion year-on-year to JPY80.3 billion. This increase is mainly due to the benefit of restructuring of mobile communications and reductions in operating expenses in the various businesses within the EP&S segment, partially offset by the impact of the decrease in sales. In order to reflect the deterioration of market conditions, we have reduced our sales forecast for the fiscal year by JPY40 billion to 2,070 billion. The forecast for operating income remains unchanged, as the impact of the decrease in sales is expected to be offset by improvements in operating costs across the various businesses.

The competitive environment during the 2019 year-end selling season was primarily a test in the key product areas of TVs and the mirrorless cameras. But overall, we were able to control pricing, supply and inventory. Although competition in mirrorless cameras has increased, as other companies have entered the market in earnest, we maintained our share in major markets and produce results for overall digital cameras that are higher year-on-year. The intensely competitive environment in the TV market continued due to the deterioration in panel prices but we maintained high average selling price year-on-year by focusing on high value-added large screen models, and we have maintained inventory at an appropriate level.

On the other hand, our broadcast- and professional-use products business has seen a significant slowdown in China, an important market for the business, due to US-China trade friction. And the negative impact that it is having on the economy. To respond to the circumstances, we are taking a variety of actions, including a review of our business structure. Due to the benefit of restructuring that is ongoing, the mobile communications business continued to record a profit in the third quarter. In the fourth quarter, we intend to implement yet another fixed cost reduction plan and take other action to integrate the operations of this business with the other businesses in EP&S. We expect to record significant one-time costs, primarily due to these actions in the fourth quarter, but the transformation of the business is progressing steadily toward breakeven next fiscal year.

Next is the I&SS segment. Third quarter results increased 29% year-on-year to JPY298 billion, primarily due to the improvement in the product mix, and an increase in unit sales of image sensors for mobile devices. Operating income increased JPY28.7 billion year-on-year to JPY75.2 billion, mainly due to the impact of the increase in sales, partially offset by an increase in research and development costs, and depreciation expense. We revised upward our fiscal year '19 sales forecast by JPY50 billion to JPY1,090 billion and the operating income forecast by JPY30 billion to JPY230 billion. Demand for our image sensors in the fourth quarter continues to be strong. Also, production capacity is expanding according to plan and we continue to operate at full production capacity utilization, sales increasing due to strong near-term demand and that is preventing us from stockpiling strategic inventory as originally planned.

In addition, partly due to the introduction of a highly competitive new product this fiscal year, we have been able to maintain our overall margin, all of which has been enabled us to operate this business extremely well. There is no change to our view that demand would continue to increase over the mid- to long-term from next fiscal year. But in regards to next fiscal year in particular, we cannot be too optimistic due to the impact of the spread of infection from the new coronavirus, that I mentioned earlier, as well as competitive environment and various geopolitical risks. We will continue to closely monitor demand trends and external environment as we manage this business going forward.

Now, I would like to talk about the action we are taking over the mid- to long-term. Top [Phonetic] sensors, which we expect will be the next growth driver after image sensors have begun to sell well, although then size within the overall business is still small. We expect the adoption primarily in mobile devices to increase further from next fiscal year. Taking a longer-term view as we made a point of showcasing at CS last month, we are taking steps to expand the adoption of Sony's imaging and sensing technology in the mobility space and in a diverse industrial factory automation space. We plan to proactively invest even more in technology development to grow this business in the future, such as hiring of personnel, including algorithm and software engineers and the building of an office in Osaka to service design and development center for image sensors.

Lastly, I would like to explain the Financial Services segment. The third quarter Financial Service revenue increased significantly by JPY243.6 billion year-on-year to JPY407.2 billion. This increase was primarily due to a significant increase in the investment performance of variable life insurance products in the separate account as Sony Life resulting from the rise in the domestic and foreign stock markets during the quarter. Because a significant portion of the investment performance of the separate account is attributable to the owners of insurance policies, the contribution to operating income is minimal.

Operating income decreased JPY5.3 billion year-on-year to JPY32.6 billion. This decrease was primarily due to the deterioration of net gains and losses as a result of a decrease in the provision of policy reserves and appraisal losses from its hedging activity, both pertaining to minimum guarantees for variable life insurance resulting from strong stock market conditions.

We have revised upward our forecast for Financial Services revenue to JPY1,460 billion to reflect the current market environment. On the other hand, we have revised downward JPY10 billion our focus for operating income to JPY160 billion. This is primarily due to the third quarter results and the fact that increase in policy amount in force is slightly below our expectations.

Lastly, I would like to show the forecast for each overall segments. This concludes my remarks. Thank you.

Questions and Answers:

Sadahiko Hayakawa -- General Manager, Investor Relations

Now, the floor is open to your questions. Those of you with questions, please wait for the microphone and please identify yourself by stating your name and affiliation before asking your questions. When questions are asked in English, there will be consecutive interpretation into Japanese and answers to be given in Japanese. [Operator Instructions]

Now any questions?

Masahiro Ono -- Morgan Stanley -- Analyst

[Foreign Speech] Ono of Morgan Stanley. Thank you. Concerning I&SS segment, two questions. The operating income JPY230 billion upward revision and concerning top line, the -- what about the volume upside and the improvement of product mix in view of those aspects? Roughly speaking, what do you think had a greater impact on the outcome?

Second question, the increase in fixed asset and you've reduced this slightly. Is it because of the higher efficiency investment or are there any factors related to this?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

First on I&SS, the upward revision for annual forecast, what are the factors, volume increase or product mix improvement? On this matter, we explained this during the second quarter. The balance between unit increase and product mix improvement, the contribution is about more or less the same, and the increase in the fixed asset -- a decrease in the fixed asset increase of I&SS. Well, with the improvement of efficiency we could secure the assumed capacity without increasing capital expenditure. That was the factor behind it.

Sadahiko Hayakawa -- General Manager, Investor Relations

[Foreign Speech] Next question, please.

Mika Nishimura -- Credit Suisse -- Analyst

[Foreign Speech] Nishimura, Credit Suisse. Thank you. The first question is about I&SS. Talking about next year -- talking about competitive environment, you are not optimistic about the competitive situation. But looking at the supply and demand, the industry as a whole is enjoying a sort of a good situation. So what is your take of the risk?

And the second question is about the Game business. The free-to-play business is declining in the third quarter compared to the first and second quarter, the third quarter. What are the signs of the decline? And also over the next year the decline in free play revenue, is this just a temporary situation for this year and not be repeated next year?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

Well, the competitive impairment we explained that we are optimistic about the situation next year, but it's difficult to explain that quantitatively. But the image that I have in my mind is, yes, next year -- I think I said this at the previous last meeting, initially forecast was that the first half would be very strong, demand will be, so thinking about the balance, I guess, the production capacity, we were going to build a strategic inventory in the four quarter but as things stand currently most of the strategic inventory that we are going to deliver next year, it would have to be delivered this year. So whether we can meet the demand next year is still a problem.

0.8 million micro sensors, that's contributing to profitability. We are in the second year of production, but the catch up made by the competitors and also the fierce competition will become more severe in the secondary production. So this is a situation that we are forecasting. But needless for me to say, there is concerned about the coronavirus, we have not incorporated any impact of that in our numbers. So, as we learn more about the data, we'll have to create that results forecast.

Next about the Game business, the decline in free-to-play business, what were the situation in third quarter? How much decline did we experienced? So, as that decline completed this year or is it going to be repeated next year? Well, the so-called third-party softwares, the significant decline that we experienced, much of that is really to decline in free-to-play titles but for other software titles, the new titles and also the library of the existing titles, their business is basically flat. So, the free-to-play titles, it was very difficult to forecast the business and that was the experience this quarter as well. The difficulty of forecasting the business, but for other businesses there has been no significant change. So we'll have to advise methods of forecasting, particularly looking at the free-to-play titles.

Sadahiko Hayakawa -- General Manager, Investor Relations

Next question, please.

Mikio Hirakawa -- Bank of America Merrill Lynch -- Analyst

Hirakawa from Merrill Lynch. My two questions are on the Game business. The first is as follows: you discussed about PlayStation Plus. Now, in your previous statements, if there are major titles that would trigger the increase of the membership of subscribers. In that context, I saw that you will struggle during the October-December period. But nevertheless, that you were able to increase the subscription or the members base. What did you do to achieve this growth? And as you move on to the next generation, what would happen to your subscriber or the customer base?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

We have to steadily increase the membership for PS Plus. And how to increase the efficiency of retention? There are a number of plans and ideas. Of course, in August, there was a revision of the price. If you subscribe for the entire year, you enjoy a certain discount, and this has led to the increase of steady stable users. In providing such users would enjoy the online multiplay and free play and also 100 giga PlayStation 4 is also combined and also they enjoy the promotions for discount. And by combining different ideas, the users favored our stance [Phonetic]. And we were able to increase the membership. There is a trend of increasing the membership during the third quarter, but by improving the services and providing a variety of services we'd like to continue this trend and have a robust increase of the customer base.

Now, about the future generation. Of course, we would definitely like to increase the base to prepare for the next generation of the product, but there is very little that I can discuss about the future generation of the console today. But when the time is right, we will disclose the new product.

Mikio Hirakawa -- Bank of America Merrill Lynch -- Analyst

The PS5 is to be launched in the selling season toward the end of the year. So what would be the guidance -- the future guidance for March '21? You have not disclosed the price for PS5. So what would happen to the guidance that you will be releasing in April for the next fiscal year?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

It's very difficult to really discuss this timing-wise, but as of today, we will provide the guidance at a time period, which is comparable to the past. So we will not change the time schedule.

Sadahiko Hayakawa -- General Manager, Investor Relations

Next question, please. [Foreign Speech]

Kota Ezawa -- Citigroup -- Analyst

Ezawa, Citigroup. Two questions. First one concerning EP&S, the -- I wonder about the guidance of operating income for the fourth quarter, I understand that there will be a major loss. And you talked about the recording of one-time expense. But in the way of your break down what is the trend for each product and what sort of factors you foresee? Or what about the amount of one-time expense to be recorded? And for the coming fiscal year, to what extent the profit of EP&S business be improved, including the impact of one-time expense?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

Okay. During the fourth quarter, EP&S operating income would be in a deficit. And in my presentation I made a mention that structural reform of the mobile business and recorded a one-time expense and the impact of this is considerably large. But to what extent we can control this amount, is something we are scrutinizing at the moment, and we'd like to minimize the amount as much as possible.

And other categories of product, we do not think any expense would go or beyond the normal seasonality. The level of inventory as I mentioned, and during the third quarter, we could successfully control the level of inventory. And concerning TV, for the time being, as I mentioned during the last time earnings announcement, we are thinking of launching some products during the fourth quarter. And that plan remains unchanged. However, the current supply chain concern in China may surface. There may be some delay in ramp ups.

Kota Ezawa -- Citigroup -- Analyst

Do you have the factors for increase the profit next fiscal year?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

About the new fiscal year, we have not finalized our plan yet. But our plan intention are that in the course of fiscal -- next fiscal year, we'd like to make a good start so that we will not be drawn by the negative legacy and make solid plan.

Kota Ezawa -- Citigroup -- Analyst

One point of confirmation, the fourth quarter with sub-contracting [Phonetic], that is minus JPY35.8 billion and the restructuring budget for the fiscal year was increased by JPY20 billion and subtracting that what remains would be around JPY13 billion and that will go to mobile. And then would there be other deficit in other sectors than mobile will deduct [Phonetic] the JPY38 billion?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

Well, as you analyze, that may be a appropriate line of understanding. But we do not show the details in terms of individual breakdown.

Kota Ezawa -- Citigroup -- Analyst

And another point concerning the Game business, my second question. Third-party software performance was not very good. But what about the first party titles performance? To the extent possible, was it higher than or lower than the expected first party title performance over there any major titles?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

Basically, we cannot answer in terms of the amount compared to how we expected. So, I'd like to give you the impression observation, the -- about the third-party full game, our assumption of the other titles were lower and we could not reach it. And the first party full game, our assumption was -- our expectation was higher. And we did not quite reach that level. And concerning PS Plus and so forth along the line of our regional expectation and assumption.

Sadahiko Hayakawa -- General Manager, Investor Relations

[Foreign Speech] Please raise your hand if you have questions?

Yu Okazaki -- Nomura Securities -- Analyst

[Foreign Speech] Thank you. Okazaki, Nomura Securities. Firstly, about I&SS. You always disclose the actual product capacity end of December. And can you give us the figure again?

Sadahiko Hayakawa -- General Manager, Investor Relations

Mr. Korenaga, can you answer that question?

Hirotoshi Korenaga -- Vice President, Senior General Manager, Global Accounting Division

Yes. The Imaging & Sensing production capacity at the end of the third quarter, our capacity was 115,000. Our expectation is -- before it was 7,000 and there was some decline, but this is due to the change in process mix. So, this [Phonetic] capacity itself, there is no delay in setting up the capacity. At the end of fourth quarter, it's going to be 124,000, it's going to be 124,000. About input, the third quarter situation does full operation and for the fourth quarter, we expect to operate at the capacity fully as well.

Yu Okazaki -- Nomura Securities -- Analyst

The second question is about Pictures. You are enhancing the franchise business, you mentioned. Can you talk about inventory you made -- investment you made in October and December? The Game Show Network is the nature of investment is different. And I think you are working on non-profitable franchises, particularly. So what are you doing in terms of investment for the acquisition and plans?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

Well, the Game Show Network, we fully subsidiarized [Phonetic] this operation. Originally it was held by AT&T, we acquired 42% stake in that. And then made a full subsidiary. Sorry, we acquired AT&T's 42%. Originally, we had 58%. They have the original Game Show's distributed in US cable TV's. That's the nature of the business. And GSN and games -- online games are also provided. And this business unit for us, from this point of view, believe is profitable going forward. And therefore, in order for us to be able to make strategic decisions, and the first we're going to [Phonetic] we felt that making this 100% full subsidiary was a good idea and therefore, we did that.

Another point is about the Silvergate, I think this is for anime development in production for the children. Also, [Indecipherable] licensing. And SVOD, cable TV, we've prepared seven titles for them, original titles. So -- but was in this business is to get excellent talent and this business of the categories be attractive. There has been a view consistently and connect with titles and now that we found this opportunity for acquisition, we moved quickly to make the decision for acquisition.

Sadahiko Hayakawa -- General Manager, Investor Relations

We're going to take the next question. So please raise your hand.

Junya Ayada -- J.P. Morgan -- Analyst

[Foreign Speech] Thank you. J.P. Morgan. Ayada is my name. My question first is on I&SS, to reflect back the third quarter, there has been a product mix and increase of volume. Now, in the fourth quarter, what is the momentum for sales of increase per wafer? I think the second quarter, there was a better momentum, was it true for the third quarter?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

Now, also during the third quarter, was -- I think the inventory fluctuated and that resulted in a negative impact on P&L. Now, I&SS third quarter you're right in saying that most the mix and the volume increased. And the momentum per wafer, no. I think you are referring to the unit cost of wafer, which we are not disclosing. So I would like to refrain from making any quantitative statement. But as the wafer size enlarges, the yield would come down per wafer. And therefore, we have to make the average selling cost, which would offset and which will surpass that drop. That's the logic. Therefore, the sales per wafer and the sales cost or unit cost momentum should be maintained. And we are working on that. And also in the meantime, we are working on the betterment of yield. And for new products, we would like to make sure that the ramp-up would be very smooth because which would consequently improve profitability. So we will be focusing on those measures.

Junya Ayada -- J.P. Morgan -- Analyst

Now, the third quarter, the inventory fluctuation, what impact would it have on the P&L?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

The second quarter and the third quarter, if you compare the two quarters, the inventory declined by JPY7.8 billion, approximately, and this is true that it has pushed down the earnings -- the profit. Now, compare on a year-on-year basis, the difference is more than JPY10 billion.

Junya Ayada -- J.P. Morgan -- Analyst

Thank you. The second question is on the Game and Network Service, and please answer, if you can, to the best you can. Mr. Totoki said that you intend to have a smooth transition to the new generation. And as you do so, what are the factors that you can control such as marketing or development cost? Or there could be factors which are not visible, could be volume or price? So the best you can, can you discuss on what you can discuss and what is already visible?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

First, we must absolutely control the labor cost, the personnel cost. It must be controlled. And it leads to what should be recognized as a cost. We will definitely control that. And the initial ramp-up, how much can we prepare initially? We will work on the production and the sales. And we will have to prepare the right volume as we launch this. And what is not very clear or visible is because we are competing in the space. So, it's very difficult to discuss anything about the price at this point of time. And depending upon the price level, we may have to determine the promotion that we are going to deploy and how much costs we are prepared to pay. So, it's a question of balance and because it's a balancing act, it's very difficult to say anything concrete at this point of time, but when I said smooth transition, we mean that we will definitely choose the optimal approach and that we would try to have the best balance so that will be profitable in the life -- during the life of this product.

Sadahiko Hayakawa -- General Manager, Investor Relations

Next question?

Ryosuke Katsura -- SMBC Nikko Securities Inc. -- Analyst

Thank you. Katsura, Mitsubishi Nikko Securities. Concerning I&SS one point, in the slide you referred to the products other than image sensors. And what do you think of the contribution of these products from next fiscal year onwards?

And on the investment side, in your explanation you mentioned that probably you do not have to do as much investment as you expected, because of higher efficiency of the operation, including the use of outside capacity, probably you are thinking of the various ways. And you have the overall framework of JPY700 million in three years in MRP and what are the other factors?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

Other than -- the contribution by other than mobile image sensors, the sensing sensors one for FA [Phonetic] and automotive applications are the ones. So other than mobile application by 2025 we'd like to increase the contribution percentage up to 30%. That's what we have been talking about. And this target remains unchanged. And we will -- we are doing what is necessary to achieve that target right now. And short-term products or maybe the tough sensors for mobile with shorter lead time and by [Phonetic] we will be able to show the possible percentage from next fiscal year onward.

About top sensors, the -- it's not that we need the capital investment only dedicated for top sensors. So it has a high potentiality for business contribution. And we should be able to secure the appropriate margin on top sensors.

About the investment efficiency, about the decline investment by JPY15 billion, thanks to higher efficiency. But over the medium term JPY700 billion, this number, we do not foresee any major change. But next fiscal year, we will be looking at the next MRP from '21 to '23. So at that timing, we will look at the rate of investment over the coming three years for the next MRP. We should be able to show our view on such investment.

Sadahiko Hayakawa -- General Manager, Investor Relations

[Foreign Speech] Time constraint [Phonetic]. So this next one will have to be the last question.

Kenji Yasui -- UBS Securities Japan Co., Ltd. -- Analyst

Yasui, UBS Securities. On I&SS I have a question. The short-term question. Until the fourth quarter what will be the inventory situation, is it going to be less or greater the line of inventory? And, of course, it depends on the market demand. But what is your target? It will be more or less, the inventory for the fourth quarter?

The second part of the question is, October/December your business is very good. But your largest customer in the United States, I understand the change in the mix. The rest of the Company, it was effective notably because of this mix and there was a difference in results between the two and three sensors cameras. So there is an adjustment in the business in China starting in December. So, the consequence January to March, and also April to June, can you expect the demand sufficient to fill all your capacities and supply?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

Well, initially for the four quarter we had a plan to increase the strategic inventory to prepare for the next year. But what happened was a strong demand from the customers for the fourth quarter. Therefore, it was difficult for us to actually build up the strategic inventory for the future. We had to deliver whatever we had. But this impact of this coronavirus and it may not mean much for me to explain the decision, excluding that potential possibility, but there is a likelihood demand will slow down because of that. So, considering all this, altogether, the inventory will only slightly increase compared to the third quarter. So, we're not changed significantly in the fourth quarter. That's our current expectation. But then, again, nothing is definite now. I cannot say that for definite, but that's generally our view.

Kenji Yasui -- UBS Securities Japan Co., Ltd. -- Analyst

Well, if you may add this, the output basis, what is your plan for January-March period?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

The output or the shipment?

Kenji Yasui -- UBS Securities Japan Co., Ltd. -- Analyst

I think you gave us data output based on production capacity 100,000 for the first quarter. That's you're talking about capacity?

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

Well, it's still base an input and output, there are three elements: capacity is already installed; input is what you are putting; output is the result of that input. The shipment is not included in this. So the point of your question is, again, will January-March wafer shipment the production. What will be the amount? So we do not disclose output numbers, but the lead time is between five and six months. So, use that as a basis of calculation.

Sadahiko Hayakawa -- General Manager, Investor Relations

Thank you. Our time is up. And with this, I conclude this earnings announcement. Thank you for your attendance.

Duration: 49 minutes

Call participants:

Sadahiko Hayakawa -- General Manager, Investor Relations

Hiroki Totoki -- Senior Executive Vice President, Chief Financial Officer

Hirotoshi Korenaga -- Vice President, Senior General Manager, Global Accounting Division

Masahiro Ono -- Morgan Stanley -- Analyst

Mika Nishimura -- Credit Suisse -- Analyst

Mikio Hirakawa -- Bank of America Merrill Lynch -- Analyst

Kota Ezawa -- Citigroup -- Analyst

Yu Okazaki -- Nomura Securities -- Analyst

Junya Ayada -- J.P. Morgan -- Analyst

Ryosuke Katsura -- SMBC Nikko Securities Inc. -- Analyst

Kenji Yasui -- UBS Securities Japan Co., Ltd. -- Analyst

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