索尼 (SONY) 2006 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Sony Corporation's fourth quarter and fiscal year ended March 2007 earnings call. [OPERATOR INSTRUCTIONS]. I would now like to turn the presentation over to your host for today's call, Mr. Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America. Please proceed, sir.

Thank you very much for that introduction, Michelle. Thank you all for joining us today for the discussion of Sony's results for the fiscal year ended March 31, 2007. I'm Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America. I'm joined this evening in Tokyo by Mr. Yuhara, Corporate Executive and Senior Vice President of Investor Relations for Sony Corporation, and by Robert Wiesenthal, Group Executive in charge of Corporate Development and M&A for Sony, and EVP and CFO of Sony Corporation of America. Thank you very much for joining us, Mr. Yuhara and Mr. Wiesenthal. In just a few minutes, I'm going to brief you -- give you a brief summary of today's announcement, then Mr. Yuhara and Mr. Wiesenthal will 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 www.sony.net/ir.

With that, I'm now going to turn to today's announcement. I will begin with a discussion of our consolidated results for the fiscal year ended March 2007, and then review our forecast for the year ended March 2008. For the full fiscal year ended March 31, 2007, consolidated sales increased 10% year-on-year, to achieve a new fiscal year record.

Although we recorded a JPY51.2b provision for charges related to the notebook computer battery pack recalls, and subsequent global replacement program, the Electronics segment showed remarkable recovery, with sales increasing 17%, and operating income increasing JPY149.8b. Profits in the Television business improved significantly, as we focused resources on LCD TVs, and took action to improve profitability. Our Bravia LCD TVs captured the number one global market share in terms of value for calendar year 2006. Our Cyber-shot digital cameras and Handicam video cameras produced a strong level of profit, and the Semiconductor business, which began shipping chips for the PS3, contributed to the large increase in profitability in Electronics.

In the Games segment, the PS3 went on sale in Japan, the U.S., and in Europe, and we achieved production shipments of 5.5m units for the year. While sales of PS3 increased, the segment recorded a large operating loss, due to the sale of the PS3 at a strategic price, lower than its production cost during the introductory period.

The Picture segment recorded a large increase in operating profit, from hit movies such as The Da Vinci Code and Casino Royale, among others. The Financial Services segment, on the other hand, posted a large decrease in operating profit, due to a decrease in valuation gains from investments in the general account, including valuation gains from convertible bonds.

Our equity affiliate, Sony Ericsson, recorded record unit sales, revenue and net income, as Walkman, Cyber-shot and other phones contributed strong sales. By tailoring its product portfolio to the needs and lifestyles of its customers, and by rolling out an attractive, mid-level product offering, the joint venture managed to grow its business in Europe, and in the growing markets of Latin America and Asia Pacific.

The Company ascended to the number four market share position among global mobile phone manufacturers, and it continues to target the number three spot, while focusing on profitable growth. I will now discuss each P&L line item.

Consolidated sales for the fiscal year increased 10%, year-on-year, to JPY8,295.7 trillion due to the strength of the Electronics and Picture segments. Operating income decreased by 68%, year-on-year, to JPY71.8b. Although Electronics and Pictures had significant increases in operating income, overall operating income decreased, due to losses recorded in the Games segment, as well as decreased operating income in Financial Services.

A JPY21.7b gain on the sale of a portion of the site of Sony's former headquarters, is included in this fiscal year's operating income. Operating income in the previous fiscal year included a one-time net gain of JPY73.5b, from the transfer to the Japanese government of the substitutional portion of Sony's employee pension fund.

Consolidated restructuring expenses, which are recorded under operating expenses, were JPY38.8b for the fiscal year, as compared with JPY138.7b in the previous fiscal year. Non-operating income decreased JPY29.6b, to JPY30.3b. This was mainly due to lower gain on change in interest, and an increase in foreign exchange losses. As a result of these factors, income before income taxes decreased 64% year-on-year, to JPY102b.

Equity and net income of affiliated companies increased, year-on-year, by approximately six times, to JPY78.7b. Sony Ericsson contributed equity and net income to Sony, of JPY85.3b, an increase of JPY56.3b, due to its continued strong sales. The joint venture with Samsung, known as SLCD, contributed JPY6.4b, an improvement of JPY13.6b. Sony BMG contributed JPY5b, a decrease of JPY0.8b, and MGM, on the other hand, yielded an JPY18.9b equity and net loss to Sony, a JPY2b increase in loss over the previous year.

As a result of these factors, net income increased by 2% year-on-year, to JPY126.3b.

Now, please allow me to compare our reported results for the year to the forecast we announced in January. Our consolidated operating income outperformed the January forecast by JPY11.8b. Improvements in the Game and Financial Services segments were the primary reasons that we exceeded our forecast. In Game, PS2 hardware and software sales exceeded our expectations, while in Financial Services, the stock market rose during the fourth quarter, causing us to record valuation gains on convertible bonds that exceeded expectations.

Now, I'd like to take a few minutes to discuss the results for the fiscal year ended March 31, on a segment by segment basis. First, Electronics. Sales in the Electronics segment increased 17%, or 13% on a local currency basis. Inter-segment sales increased significantly, mainly due to sales of PS3 semiconductors. Sales to outside customers increased 13%. By product, Bravia LCD TVs and Cyber-shot digital cameras had strong sales in all regions. VAIO PCs, which had strong sales of notebook PCs outside of Japan, also contributed to the increase in sales.

Operating income in the Electronics segment increased JPY149.8b. The largest contributing products were, in order of magnitude, video cameras, digital cameras, broadcast equipment, and PCs. The largest loss-making product was batteries, due to the provision for charges relating to the notebook computer battery pack recall and subsequent global replacement program.

In the Television category, overall sales in the Television category for the fiscal year were approximately JPY1,235 trillion, an increase of 32%, year-on-year. Operating losses were approximately JPY22.5b, an improvement of approximately JPY74b, year-on-year. Large screen, full HD models of LCD TVs sold very well, and we had shipments of 6.3m LCD TVs. However, the market for LCD rear projection TVs was difficult, and losses on those models increased. We aim to make the TV business profitable for the full fiscal year ending March 2008.

In the Semiconductor category, sales for the fiscal year were approximately JPY780b, an increase of 57% year-on-year. Operating losses were approximately JPY10b, an improvement of approximately JPY24b, year-on-year. Sales of chips for the PS3 contributed to the increase in sales, and decrease in loss. We also aim to make the Semiconductor business profitable for the full fiscal year ending March 2008.

Next, Sony Ericsson. Adjusting for Sony's fiscal year, which is from April to March, Sony Ericsson's sales increased 49% year-on-year, to JPY11.892b. Unit sales were JPY83.3m, an increase of 51%. An income of [more] income taxes increased approximately 2.5 times, to JPY1.509b. Walkman and Cyber-shot phones have now contributed to the improved results. Sony recorded JPY85.3b of equity and net income from the venture, an increase of almost three times.

Next, the Game segment. Sales increased 6% year-on-year, or 2% on a local currency basis. Approximately 70% of sales came from hardware and accessories, as compared with 66% in the previous year, and the rest came from software.

First, a look at hardware. There was an increase in overall hardware sales, due to the launch of PS3. PS2 sales decreased year-on-year due to a decrease in unit sales and a strategic price cut. Even though we have reached the seventh year since the PS2 went on sale, demand continues to exceed expectations, and production shipments for the fiscal year just ended reached 14.2m units, significantly more than our original forecast. For the fiscal year ended March 2007, the PS2 sold the most units of any home use game console.

PSP hardware sales decreased due to a decrease in unit sales. Because we prioritized clearance of channel inventory, production shipment units were only 8.36m units for the year. In Europe and the U.S. sales have been strong since the year-end selling season, and have increased even more since we cut the price in April. Penetration of the device is rebounding in all regions, as actual sales in Japan continue to exceed the previous year, due to an enhancement of the software line-up, with one title selling more than 1m units since the beginning of the year.

PS3 went on sale in Europe and the PAL territories in March, following a November launch in Japan and the U.S. While cumulative production shipments by the end of March only reached 5.5m units, due to production delays, all of the production problems have been resolved.

Because we did not have enough units when the device went on sale in Japan and the U.S., we did not have an ideal launch. However, in Europe, where we launched in March, sales have been strong because we had sufficient units, and we were able to deploy a strong software line-up. We are working to enhance our software line-up in every region.

Turning to software, PSP software sales increased as penetration of the platform increased. PS3 software sales made a contribution to overall software sales, due to the launch of PS3. PS2 software sales continued to make a large contribution to sales and profit, but decreased, year-on-year, due to a decrease in unit sales and price. As a result of the decrease in sales of PS2 software, overall software sales for the segment decreased.

Operating loss in Game was JPY232.3b for the year, compared to JPY8.7b of operating income in the previous fiscal year. By platform, losses were recorded from the sale of the PS3 at strategic price points, lower than the production cost for an introductory period, and the recording of other expenses associated with the launch of the PS3. JPY81.4b of these expenses were write-downs of in transit and component inventory.

While the PS2 business continued to be strong, exceeding our expectations particularly in Europe and North America, and contributing a large amount of profit, operating income from that business declined year-over-year due to decreased software sales. Operating income from the PSP business increased due to continued hardware cost reductions and increased software sales.

Next, let's look at the Pictures division. Sales increased 30% year-on-year, or 26% on a U.S. dollar basis. Motion picture sales increased significantly, due to higher worldwide theatrical and home entertainment revenue from films released in the current fiscal year. These films included The Da Vinci Code, Casino Royale, Click, Talladega Nights, The Ballad of Ricky Bobby, and The Pursuit of Happyness. Television revenues also increased, primarily from higher advertising and subscription sales, and from several international channels.

Operating income in the Pictures division increased 56%, to JPY42.7b. This increase resulted from the substantially higher revenue from films released in the current fiscal year. Partially offsetting the increase was a decrease in the profit of Television, resulting from the recording of production and marketing expenses [inaudible] our shows, combined with the absence of a licensing agreement extension for 'Wheel of Fortune' which was recognized in the previous fiscal year.

Now, Financial Services. Financial Services revenues decreased 13%, year-on-year, mainly due to a decrease in revenue at Sony Life. Although revenue from insurance premiums increased, revenue at Sony Life decreased by 15% to JPY545.1b, due to lower valuation gains in the general account and the separate account, when compared to the previous fiscal year, in which the stock market increased significantly.

Operating income in Financial Services decreased by 55% to JPY84.1b, due to a decrease in operating income at Sony Life. Net operating income at Sony Life declined by 57%, to JPY81.7b. This decline was due to a decrease in valuation gains from investments in the general account, including valuation gains from convertible bonds.

In the Others segment, sales decreased 11%, year-on-year, primarily reflecting the deconsolidation of Starting Life Holdings, a holding company that comprises six of Sony's retail businesses, following the sale of the majority of the stock in the company during the current fiscal year, as well as a decline in sales at Sony Music Japan. Sales at Sony Music Japan declined, mainly due to the transfer to another part of Sony, of the disc manufacturing activity that Sony Music Japan carried out during the previous fiscal year.

Operating income in the Others segment increased 58%, year-on-year. The improvement was mainly due to the recording in the previous fiscal year of a loss on impairment of assets, resulting from the sale of a U.S. entertainment complex.

And finally, Sony BMG. Adjusting again for Sony's fiscal year from April to March, sales at Sony BMG decreased 4% year-on-year, to $4.101b. Although the digital product sales increased, the physical market for music continued to decline. Income before income taxes decreased 10%, to $135m, mainly due to lower sales.

The decrease in profit was partially mitigated by lower overhead costs, decreased restructuring expenses, and a favorable impact of an industry-related legal settlement. Income before income taxes includes $140m of restructuring expenses, a decrease in restructuring expenses of $45m, year-on-year. As a result, Sony recorded JPY50b in equity and net income from Sony BMG.

Now, before we turn to the March 2008 forecast, I would like to describe the progress of our restructuring plan. Our progress to date continues to be ahead of plan. Excluding one-time charges, such as those from restructuring, and the provision made for charges relating to the notebook computer battery pack recalls, and subsequent global replacement program, we achieved our goal of a 4% operating income margin in the Electronics segment one year ahead of schedule.

By improving operating income in the product categories we eliminated or shrank, consolidated manufacturing facilities, and reducing administrative expenses, we managed to eliminate, by the end of the March 2000 fiscal year, JPY175b, or 88% of the JPY200b in costs we plan to reduce by the end of the next fiscal year. Since we had expected to achieve JPY160b, or 80% of the JPY200b by the end of the March 2000 fiscal year, we are JPY15b ahead of plan.

Although we are not announcing any additional manufacturing facility closures today, we plan to achieve our goal in this category during the fiscal year ended March 2008, and we have already achieved, as of the quarter ended December 2006, the 20% [model count] reduction, 10,000 person headcount reduction, and JPY120b asset sale goals we have set for ourselves.

Of the 15 product categories we intended to eliminate or shrink, 10 have already been announced, and today, we are announcing three additions to this list, computer display, CRT projection TV, and standard desktop computers. Finally, while continuing to manufacture and sell CRT TVs in countries and territories where demand remains, we are actively shifting focus in those areas to Bravia LCD TVs. As a result, we plan to cease manufacturing cathode ray tubes by March 2008, after we have stockpiled a sufficient quantity for future use.

We are currently deliberating what other product we will manufacture at our CRT facility in Singapore, after cathode ray tube manufacturing ceases there. We will announce details once we've made a final determination.

Finally, I'd like to cover our forecast for the March 2008 fiscal year. Our foreign exchange assumptions for the year are JPY115 to the dollar, and JPY150 to the euro. We expect to record JPY440b in consolidated operating income, a 5% operating income margin, for the year. Our equity and net income of affiliates is expected to increase, and we believe we can earn a record JPY320b in net income, as compared with JPY126b for the year just ended.

Our forecast, on a segment by segment basis, is as follows. In Electronics, we expect sales to increase due to the contribution of Bravia LCD TVs, and semiconductors, including those for the Game business. Segment operating income should increase significantly, due to improvements in the operating performance of Television and Semiconductors, and the absence of the JPY51.2b provision recorded in the March 2000 fiscal year, for charges relating to the notebook computer battery pack recalls and subsequent global replacement program.

In Game, we expect to record increased sales from the expansion of the PS3 in Japan, the U.S. and Europe. Operating loss of the segment should decrease significantly due to rapid production cost reductions of PS3 hardware and enhancement of PS3 software.

In Pictures, we believe sales will decrease, due to fewer film releases, but operating income should increase significantly, due to contributions from films released in the prior year, and motion picture library product.

In Financial Services, we expect sales and profit to increase, primarily as a result of expansion in business at Sony Life. No impact on gains and losses on investments associated with the stock market fluctuation in Japan are currently included in our forecast.

Before Mr. Yuhara and Mr. Wiesenthal take your questions, I would like to summarize the key points discussed today. During the fiscal year ended March 2007, the Electronics business achieved a meaningful improvement in its operations. Operating margin, excluding restructuring costs and the impact of the battery recall, was over 4%, achieving our goal a year ahead of plan.

Sony Ericsson capped an exceptionally strong year, and contributed significantly to the Company's earnings. In the Games business, we are seeing continued success with PS2, a resurgence in sales in PSP, and the launch of PS3. The Pictures business achieved strong year-over-year growth, and is poised to record even higher profits in the coming year, on the strength of the home entertainment pipeline. Finally, our Financial Services business continued to grow its core product areas. However, the results were muted by the tepid performance of the Japanese stock market.

As we look forward to the coming fiscal year, our expectation is for a 6% increase in revenue. Operating income is expected to grow six-fold, and operating margin is forecast to be 5%. At this time, we will be pleased to take your questions.

[OPERATOR INSTRUCTIONS]. And our first question comes from the line of Jason Mauricio of Arete. Please proceed.

Yes, good morning, good afternoon, good evening gentlemen. Just a few questions. Can you discuss, perhaps, PS3 and what your view is on sell-through to the end consumer is, and what the appropriate levels of channel inventories should be, going forward?

And also, the Game inventory that you've built up that you announced that you're keeping on the balance sheet, can you discuss what the makeup of this inventory is, i.e. components, work in progress, finished goods, etc?

And maybe one for you, Rob, in Pictures, Sony is calling for a decrease in sales this year. Obviously Spiderman 3 has been doing fairly well, plus a DVD's is coming out. Can you just discuss what the impetus of that sales decline is? You mentioned fewer titles, but is there a particular strategy behind that, i.e. a risk management strategy or just budget constraints? Just perhaps elaborate more on why we should see less titles this year than historically? Thanks.

Okay, this is Yuhara speaking, gentlemen. I am answering your question of Playstation 3, and this year as you know our production shipment was only 5.5m and our selling figure was 3.6m. So therefore, the 2m is our own inventory, because we have all changed the shipment from the air to the -- by air to the boat, so therefore this 2m are inventories, so -- on the other hand, they are on the water should be reasonable quantities.

Then [sell through] quantity, it's very difficult to say because the distribution is varied from region to region. Then obviously we see that the -- some quantities should be on the inventory in the distribution channels. And so far, we believe that the PS3 and the inventory channel is a reasonable quantities, I believe. And at the end of March this year, the Game inventory is about JPY200b in value. I have not disclosed the portion between the finished goods and the materials, but a significant portion is obviously in the finished goods.

Thank you, Yuhara-san.

And our next question comes from the line of Evan Wilson of Pacific Crest. Please proceed.

Michelle, hold on one second. We have one more question to answer.

Hi, it's Rob Wiesenthal from Japan. With respect to the Picture company and the outlook for this year, yes, the revenues we are forecasting to be not as high as this year, but we're really focusing on a more concentrated film slate with fewer, more profitable films. The Revolution deal is winding down. We're really focused that SP on profits, not revenues.

I won't call it a shift in strategy, but it's been more of an evolution where we are just much more efficient in terms of the green light process, more efficient in terms of marketing costs, and we're very optimistic in terms of profitability for the next year. Spiderman already, by the end of the day, will be at $650m worldwide, and probably about $400m of that internationally. So it's been a great showing by the Picture company and they're off to a great start.

Okay, Michelle, next question please.

Thank you, and our next question comes from the line of Evan Wilson of Pacific Crest. Please proceed.

Hello, thanks for taking the questions. It relates to the increase in PSP shipments in the upcoming fiscal year. Is that purely due to the recent price change, or have you factored in a future price decrease or a product refresh in the coming year?

Also, as it relates to the Electronics division, I think the gross margin disappointed versus a few of our models. You said in the press release it was due to price competition. Could you speak specifically in what element, or in what piece of the Electronics division did that gross margin disappointment come from?

And then finally if you could just speak to the channel inventory of LCD Television. Thanks.

Okay. The first, the PSP shipment, and as you know we had the price reduction, both in the U.S. and the European market, and it would make us [inaudible] of sales, and those are the -- this has been [inaudible]. In Japan there was the -- one of the -- million sales, the software was in Japan, so-called [inaudible], and this has also boosted the sales from PSP. So it was a good start, starting from January onwards. That's the reason why that we have some positive -- the production shipment quantities forecast for the fiscal year 2007.

Then I cannot discuss about the huge, surprising change since it is a very strategic issue. Then what is your second question, gross margin?

Gross margin in Electronics please?

What do you mean, gross margin of Electronics, it's operating profit margin or gross margin?

I guess the cost of sales of the gross margin in the division was disclosed in the press release to have been affected by price competition? I was curious what segment within Electronics was affected by that, and if you could give any details?

Well, in the Electronics segment there is the significant growth of sales in the flat TV market. And as you can see, we are increasing the sales of LCD TVs, particularly the last year and will continue this year. So as far as last year is concerned, and we could make a profit of the LCD TV business by increasing the gross margin, such as the flat side of LCD TV, and also the high definition TVs. So those are one of the positive -- the effect on the profit increase in our Electronics.

And the other typical product is the data camera and the camcorders, and these -- we could make the vast cost reduction, the program for this year such as the change of our products from site from Japan to China and such things, and because the quantity has increased, and we should have a good [volumes] of the material cost reductions there. So therefore, the gross margin of this, the data camera and camcorder [inaudible]. So we'd like to maintain those in the good operations for this. Your last question, the LCD TV channel inventories?

Yes.

Channel inventory, we just look at, say, a maximum eight weeks. That was what we see as a maximum, and if it's more than eight weeks, and we just obviously -- make it correct, the inventory level. And so far I don't see that any regional, or any products to exceed normal eight weeks.

Thank you very much.

Thanks.

And our next question comes from the line of Jessica Reif of Merrill Lynch. Please proceed.

Yes, I have a couple of questions. First is related to Pictures, the margin question. I'm just curious on what drove the margin down on the fourth quarter and talk about the next few years, what you think can drive the margins up?

Jess, you're going to repeat your question. Just speak up a little bit. We're having a hard time hearing you.

Okay. The fourth quarter margin was down a bit, and I'm just wondering what was going on there? And it sounds like margins will pick up as sales are down and profitability is increasing for '08. I'm just wondering if you could outline what the drivers are of margin improvement in coming years. That's the first question.

You can give us the other questions, we are taking notes.

Okay, how much of Spiderman's ultimate profitability will come into fiscal '08?

And then on home video, I was just wondering if you could discuss how many DVD units are sold per Blu-ray machine? Can you talk about wholesale pricing on the DVD units?

And then overall trends in DVD on new releases and catalogue. And within that, I wonder if you could discuss what your expectations are for the fourth calendar quarter of '07, given the crowded summer release schedule, what are your expectations for video sell through?

Alright, its Rob Wiesenthal. Hi, Jess, how are you?

Good, thanks.

The -- lets talk a bit -- take some of these questions one by one. In terms of the most recent quarter, we had a very heavy motion picture release. So obviously with the marketing costs on a quarter by quarter basis the profitability can get pretty lumpy.

Spiderman will obviously contribute in the third quarter when the home video comes out. We don't disclose the profitability by film. But in terms of the margin increases, as I said previously, we are being much more efficient in terms of marketing costs. The days of all the budgets being totally geared towards network primetime, and double [truck] Sunday newspaper ads are over. We take a look at what happened in Spiderman, a lot of the drive was things like Spiderman week in New York, and strong web [to web] presences, and very strong mobile presence as well. So we're being much more efficient and much more targeted and smarter about how we spend our marketing dollars.

And overall in terms of profitability, I think that Sony Pictures targets a margin of 10%. And I think that you'll be seeing over the next couple of years getting in that realm for sure. Quarter by quarter it's very difficult to take a look at the profitability, we look at it on an annual basis. But again, a more focused film slate, and much more efficient in terms of marketing and very strong distribution internationally. Jeff Blake has spent a great deal of time over the past couple of years, bolstering our international distribution. If you take a look at the kind of returns we are getting on -- in terms of revenues, and take a look at Casino Royale, the James Bond film, Da Vinci Code and Spiderman, we are really doing well in terms of international.

In terms of home video, specifically Blu-ray there has been over 1.2m units sold in terms of Blu-ray. I mention Casino Royale again. It was the first high definition unit to ship 100,000 units. And it was also the first time a Blue-ray title entered Amazon's bestseller list. So Blu-ray is becoming more and more important in terms of sales of home video to the Company.

And I think in terms of the format issues out there in the market, the public is speaking in terms of the software side. And in fact, the past year, of the top 20 DVDs the past year, 15 are exclusive to Blu-ray four of both HD-DVD and Blu-ray, and only one is exclusive to HD-DVD. So there is finally a pick up there.

And the pricing, you mentioned pricing before, remains strong at retail in terms of it being not very heavily discounted on Blu-ray. And hopefully as this transition continues, we are going to be able to maintain pricing.

Miss. Reif in answering your question about the fourth quarter's margin, yes it was down year on year slightly. But this is simply in the previous year we had the one-time license fee for the Wheel of Fortune, which is a TV program. This was a pretty significant amount within the previous year. So that's the reason why the [operating] margin is down. It's not [by operation].

Can you actually tell us how much that was, the Wheel of Fortune license agreement?

I don't think we've disclosed that Jess. But that's why the comps are bad going from that previous year. The Pictures profit was still over 11.5%.

Can I just ask one separate question? Can you -- on music, do you expect further restructuring charges for Sony BMG next year? And in general what are you expectations given global music market trends?

Listen, in terms of the music business it remains challenged. And we are still going to need to continue restructuring. I think that the -- having the kind of shared platform that we now have between all the multiple labels has proven to be a good move from our perspective in terms of profitability. But as the core business is shrinking you still have to take a really good hard look at overhead.

However, in terms of the core functions such as A&R marketing and promotion this is something that we really hold sacrosanct. And we are going to have to keep focusing because if we don't have hits there isn't going to be much of a business. So when we talk about restructuring it really isn't on the artist development side, marketing and promotion, it's really going to be in terms of shared services, overhead, distribution and such.

Thank you.

And our next question comes from the line of Colin Sebastian of Lazard, please proceed.

Good morning, thanks for taking my questions. I wanted to follow up briefly on the PlayStation segment. First, if you can provide a little more detail on the cost side of the PS3 production? And really it's what you mentioned in your opening remarks, what the timing is specifically for achieving some additional cost savings.

And then secondly, in terms of the unit guidance, 11m PS3's, that implies a fairly steady monthly production rate. So, it might be helpful to understand when you believe that production and shipments might be able to accelerate there? Thank you.

As you know, we plan to drastic cost reduction of PlayStation 3, and this is mainly caused by our -- the in-house, the device, such as the [sales] chips. As you know, we just move to the production process of a 90 nano to a 65 nano, and already product [import] has started back in January this year. Then by utilizing this, the chips, and you can see the drastic cost reduction of PlayStation 3 possibly the second quarter normal.

Then the -- next year we are planning to make 11m production shipments for PS3. And obviously we have a very heavy season towards the Christmas. So, therefore, production will be piled up such as September or at latest October. So we are making every effort to make those PS3s and not to miss the sales target for the [chips]. Then the -- that is what we are seriously looking at, the product planning for this year.

Okay.

Is that alright?

Thank you very much.

And our next question comes from the line of Brian Gagnon of Gagnon Securities, please proceed.

Thanks, hi, it's Ben Atkinson with Gagnon Securities. On your slide 10 where you go through the changes in operating income in the Electronics division, some of the increase in operating profit this year compared to fiscal year '05 was due to foreign exchange and a decrease in loss on sales disposal or impairment of assets. I am just wondering if you could tell us, for those two categories, do you expect much of the profit improvement in fiscal year '07 to come from either of these two categories?

Well the fiscal year 2006, as you mentioned, we had the contribution of a sales increase, and also the ForEx, particularly the euro, was quite favorable compared to the fiscal year 2005. So this year we assume that the foreign exchange rate will be neutral, which means that we consider the same level as the current exchange rate, which is JPY150 and also JPY150 for the euro, as Sam mentioned.

However, we assume that the outside sales for the Electronics increase another 4 to 6% in the next fiscal year. So, you could expect the margin [of those] to increase from the outside sales. And, moreover, we also plan to deliver the cost reduction program. So, therefore, cost of sales is also expected to [decrease]. Then lastly SG&A and this time and we don't think we would be increase that big amount. So, overall the items would be contributed to the increase that -- the operating profit for the Electronics fiscal year 2007.

Okay, great thank you.

Thank you.

[OPERATOR INSTRUCTIONS]. And our next question comes from the line of David Gibson of Macquarie Securities, please proceed.

Its Macquarie Securities, thanks for taking the question. I noticed that net debt had a dramatic improvement in the quarter versus end of December and versus the end of the fiscal period, I thought the order of improvement of some JPY340b with the repayment of short term debt. Can you just elaborate in terms of do you expect that to be sustainable going forward? And if so what your priorities are to allocation of looking like a very low geared balance sheet going forward.

David, which part are you talking about, JPY40b debt?

Just net debt, so taking reported long term plus your -- current proportion of short term debt less cash showed from quarter fiscal year end -- sorry, year end of December versus year end of March, an improvement of approximately about JPY340b, which appears to be predominantly the repayment of short term -- [accountable to] short term debt.

Oh, I see. I couldn't find that figure you are talking about, this is in the balance sheet?

If you are talking about the borrowing at the end of the calendar year, it's always higher due to year end receivables from the holiday.

Sure, but the change in the short term borrowings on the -- in the liabilities, as I said, is a pretty significant change, which means that your net debt position is exceedingly low for the full year. Your net debt is, that's [less than 1b].

Just to mention that our sales have a big seasonality. At the end of December, because of the high sales, we have the big accounts -- the accounts receivables. Then this would normally reduce towards the end of March. So therefore -- that's the reason why our net debt position is always reduced from third quarter to fourth quarter. And that is natural way.

Then, also this time in the [inaudible] around JPY120b, this was mainly caused the reduction of accounts receivables more than we expected. And also inventories were also reduced more than we expected at the end of December.

But last year, the change of December versus March '06, is only in the order of 35b.

But the third part.

In net debt improvement.

Well, maybe, David we should talk --

Maybe offline. Okay, than you. In terms of the allocation of cash going forward?

Is that alright?

Yes, what's your view on the allocation of cash going forward in terms of free cash flow? What's the priority, repay debt or what?

Could you repeat the question one more time?

Sorry, asking is if, given the operating performance is expected to be substantially improved for fiscal '08, what is the Company's priority of where to allocate its free cash in its balance sheet?

We have -- as you know we have a lot of businesses going on with different issues they are facing, some positive and some negative. We want to maintain our credit rating. We are going to be opportunistic about acquisitions. We have, we definitely have capital investment needs going forward. So it's kind of a mix of all of the above.

Thank you.

And our next question comes from the line of John Taylor of Arcadia, please proceed.

Hi, I've got a couple of question about the Games business, if I can? In your forecast for next fiscal year I am wondering if you expect the value of software to be up. In other words, I think you said revenues would be up about 6%, if I heard that right. I am wondering if you expect both hardware and software to be up in that. And within the mix of software value in yen, I am wondering if you can give us a rough breakdown of what the mix of PS3 might look like of the total, or I am looking for a mix of the three, if you can give me that detail.

So that's the first question, the second is, I think you told us what the inventory write-down cost was for the PS3 chips. Were there any other sort of major non-recurring charges that were taken in your last fiscal year that you might break out for us?

And then the third question is, within the games segment you talked about am improvement in the operating loss. I wonder how much of that, if you could -- of 100% of the improvement whatever it is, how much of that you think is going to come from improved margin on hardware versus a larger contribution of profitability from software. So any color on any of those would be great, thanks.

John let me just clarify one thing, the revenue of 6% was total Company. We've not given the increases by segment.

Okay, fine.

So obviously the revenue for the game is -- the increase is much, much more than the 6% in this year.

And hardware, software mix, is as I mentioned last year it was 70% is to hardware and accessories. And this year it's a little more I would say. So that is what we are expecting.

And we don't have a breakdown of the software 250m by platform. As you know the software for the PSP and the PS3 will be increased. And why is that PS software will be reduced. So then -- this is the mixture, okay?

Yes, if I could follow up on that. You are giving the units and because you have dramatically different average selling prices, I was wondering if we could get a rough breakdown in value if not units?

We don't disclose this breakdown, and maybe the other I just guided you about this, total quantity and also the trend. And you would find out the amount.

So the PS3 chips, yes, we did write down for the inventory. And as we mentioned that, which is the JPY106b is remained as the write down amount inventory for the March 2007. And we don't have any other non-recurring charges other than this, this write down.

Okay, great, very good. So did I hear you correctly you said that the mix would be more in favor of hardware than software in your next fiscal year?

Yes, as I said more but a little more, it's not to [inaudible] compared to the 2007 -- 2006.

Okay.

Yes, thank you.

And our next question comes from the line of John McPeake of Prudential, please proceed.

Thanks for taking my question. With the strong momentum that Blu-ray is seeing right now, it really looks like its going to win out. How do you guys think about the pricing dynamics between standalone Blu-ray players and the PS3?

As you've probably heard we have a version of a Blu-ray player standalone that is coming out this spring. And in terms of what we see in terms of the overall market, the PS3 is as you know not only a game machine but a Blue-ray player, and we are very, very optimistic about the uses of Blu-ray player.

I think right now our surveys are showing that about 85% plus of all the people purchasing Blu-ray -- excuse me, PS3's, are intending to use it as a Blu-ray player. As you may know the PS2 was instrumental in the launch of the DVD format when it was first released. The packaging of the PS3 with Talladega Nights in the U.S. and the James Bond film Casino Royale in Europe, really got people to start experimenting with it. And right now the HD penetration in the U.S. is still relatively low; there is a lot of upside there. And when people connect a Blu-ray player to a HD set, with a HD mike cable and see true high def for the first, it's relatively contagious. So we are very optimistic about it.

But again I think you've really got to look at the PS3 in your account as a Blu-ray player. It's really a duel function machine as opposed to a game machine that happens to have a unique capability.

And additionally I think you can expect hardware prices for Blu-ray players to obviously continue to decrease as all new products do in its early cycle. And on the software side we are actually pretty optimistic about how DVD pricing is holding in terms of Blu-ray versus standard definition. There is a lot of value there, a lot of interactivity, a lot of -- just extra value for the consumer and they are recognizing that in their purchases.

Okay, that's all we've got. I am sorry John you've got a follow up?

I was just going to say that in theory you would think that the standalone might price lower than the PS3.

I'm sorry, what is it? We couldn't hear you.

He said in theory you'd think the standalone player might price lower than the PS3.

Well obviously, again, I think it's competitive out there, we re getting smart about of manufacture these devices. The yields are improving on the lasers. So I think all over I think you are going to see much more competitive pricing across the board.

Michelle we've got time for one more question.

Thank you sir. And our last question comes from the line of [Helene Wu] of WR Hambrecht, please proceed.

Hi, thank you for taking my question. I was just wondering do you have any forecast for the PS3 unit for fiscal year 2008.

And also for 2007, do you see any possible price cuts or [volume] changes to the PlayStation 3?

We cannot discuss the possible production shipment or sales quantity over fiscal '08, but we assume it should be more than the 11m of the planned quantity for fiscal year 2007.

Okay that's good. Thank you.

Thank you.

Thank you very much. With that I'd like to conclude today's conference call. Thank you everyone for joining us, including Mr. Yuhara, Mr. Wiesenthal.

Finally, I'd like to take this opportunity to remind everyone of our investor relations contact information. In Tokyo IR can be reached at 813 5448 2180. In New York myself, [Justin Hill] and [Mickey Amura] can be reached at 212 833 6722. And in London Shinji Tomita is available at 44 207 444 9713. Again thank you very much for joining us and that concludes today's call.

Thank you very much.

Thank you.

Ladies and gentlemen thank you for your participation in today's conference call. This does conclude your presentation, and you may now disconnect. Have a great day.